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The Supreme Court on Friday issued a notice to the government on various pleas led by Deloitte Haskins and Sells LLP, seeking review of its May judgment that allowed the Serious Fraud Investigation Office (SFIO) to resume criminal proceedings against it and BSR & Associates LLC, the two being former auditors of IL&FS Financial Services, for their alleged role in financial irregularities at the beleaguered firm.

Similar pleas were filed by their chartered accountants Kalpesh J Mehta, Udayan Sen and others.

A Bench led by Justice M.M. Sundresh and S.V.N. Bhatti sought response from the Ministry of Corporate Affairs, SFIO, the Maharashtra government and others.

The apex court had on May 3 directed the National Company Law Tribunal (NCLT) to decide the government’s plea for imposing a five-year ban on the auditors for failing to red-flag problems at the lender.

The financial affairs of IL&FS Group came under scrutiny in 2018 after it defaulted on short-term and long-term debt obligations to the tune of Rs 91,000 crore.

IL&FS Financial Services (IFIN) was audited by BSR, a KPMG-affiliated firm, in FY19 and jointly by BSR and Deloitte in FY18. Deloitte was the sole auditor of the firm in FY16 and FY17.

Deloitte in its review petition told the SC that the May decision failed to consider the provisions of the limited liability partnership (LLP) Act which says no vicarious liability can be fastened on the other partners in the case of alleged fraudulent acts. It further stated that its only three partners and a total team of 18 persons were involved in the IFIN audit and any default on their part cannot result in action against the entire firm, which has approximately 150 partners and employs around 4500 persons. Thus, in case of fraud or abettment or collusion in fraud, it is only the CA concerned who alone can be subjected to the bar of five years and not the entire LLP/firm.

The SC had omitted to consider the distinction between a firm that had ceased to be statutory auditor by operation of law in view of the bar under Section 139 of the Companies Act, 2023 and an auditor who has subsequently resigned, thus resulting in grave error of law in the application of Section 140(5) of the Act, the review petition stated.

The May order in its entirety, has equated the appeals of BSR, who resigned subsequent to the filing of the petition under Section 140(5) and Deloitte (who rotated out by operation of law one year prior to the filing) and treated both as relating to firms/LLPs that have resigned subsequently, it said, adding that the final direction that such proceedings will be maintainable even after the auditors have resigned cannot apply to Deloitte as it had never resigned at all.

The SFIO had filed a criminal complaint against 30 parties in the IL&FS case, including Deloitte and BSR, accusing these auditors of colluding with officials of IFIN to conceal facts and fraudulently falsifying the books of accounts, and thereby financial statements from FY14 to FY18. The SFIO had claimed that audit firms had acted in breach of auditing standards and had failed to detect financial inconsistencies at IL&FS.

  • Published On Mar 16, 2024 at 10:34 AM IST

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