In a major setback to the auditors, the National Company Law Tribunal Friday rejected Deloitte's and BSR's applications challenging the tribunal's jurisdiction to ban them from business for five years for their omissions and commissions in the ILFS Group scam.
This is the second setback for these foreign audit firms as earlier the tribunal had allowed the corporate affairs ministry to prosecute them along with 21 others in the same case, though the implementation of the same has been stayed after they sought time to challenge the order at the appellate tribunal NCLAT.
The ministry had in June moved NLCT seeking a five-year on them on these auditors in the IL&FS saga.
However, the tribunal said it will hear the ministry's application seeking a five year ban on these auditors afresh on September 5.
The auditors--the local arm of the England-based Deloitte Haskins & Sells, which is one of the big four accounting firms, and BSR & Associates, which is the local affiliate of another big four, the US-based KPMG--had challenged the jurisdiction of the NCLT to ban them under Sec 140(5) of Company's Act.
They had challenged the jurisdiction of the NCLT to ban them, saying section 140(5) of the Companies Act pertains to auditors who are still auditing the company in question while they have already resigned from the service and thus cannot be banned under the given provisions.
It can be noted that while Deloitte had stopped auditing IL&FS Group, which owes over ₹95,000 crore to lenders and other financial institutions, by the end of FY18, BSR was the statutory auditor of IL&FS Financial Services (IFIN) and resigned only in June this year-nine months after the company was sent to the bankruptcy court.
The BSR counsel Darius Khambata and Deloitte's counsel Janak Dwarakadas had also argued that before banning them, the tribunal has to pass a final order in the matter which establishes that fraud was indeed committed by the auditors.
The ministry move to ban them came in after the Serious Fraud Investigation Office (SFIO) in its investigation found them guilty of painting a rosy picture of IFIN despite being aware of the poor financial health of the company.
The counsels of the auditors had said merely based on an investigation by SFIO is not sufficient to ban them.
The SFIO, in its report alleged that these auditors were aware that IFIN was lending to defaulting companies through group companies so that they could suppress their NPAs and not provide for the bad debt.
Meanwhile, NCLT approved the appointment of auditors to recast accounts of IL&FS and its subsidiaries.
The ministry had on Thursday proposed Borkar & Mazumdar & Co and MM Chitale & Co for IL&FS and IFIN respectively; and GM Kapadia & Co and CNK & Associates for IL&FS Transportation Networks to recast account of IL&FS and its subsidiaries.
Terming the ruling "unfortunate", Deloitte in a statement said they "will review the order and decide on the future course of action shortly.
"We remain committed to high standards of audit quality and ethical conduct in our professional practice. We have faith in the country's regulatory and judicial processes and will continue to cooperate fully with the authorities," a Deloitte spokesperson said in a statement.