Rein in er­rant au­di­tors

The MCA move to ban IFIN au­di­tors is wel­come

The Hindu Business Line - - THINK - MO­HAN R LAVI

It is clear that The Min­istry of Cor­po­rate Af­fairs (MCA) is an­noyed with a few au­dit firms. On May 5, the Sec­re­tary to the Min­istry of Cor­po­rate Af­fairs said that they are not ex­pect­ing au­di­tors to find a nee­dle in a haystack but they should cer­tainly be able to find an ele­phant in the room.

On June 10, the MCA moved the NCLT to ban a cou­ple of au­dit firms for a pe­riod of five years for not do­ing their job prop­erly dur­ing the au­dit of IL&FS Fi­nan­cial Ser­vices (IFIN). The MCA has also filed a caveat (right to be heard) in both the High Court and the NCLT just in case the au­dit firms in ques­tion cross-file a case against the NCLT.

Com­pa­nies Act

The ap­pli­ca­tion to ban the au­di­tors was moved un­der Sec­tion 140(5) of the Com­pa­nies Act. The Sec­tion says that if the tri­bunal, ei­ther suo motu or be­cause of an ap­pli­ca­tion moved by the gov­ern­ment or any per­son con­cerned, is sat­is­fied that an au­di­tor of a com­pany has acted fraud­u­lently or abet­ted/col­luded in any fraud, it may, by or­der, di­rect the com­pany to change its au­di­tors.

In case the tri­bunal passes an or­der bar­ring the au­di­tors for five years, the MCA has made the In­sti­tute of Char­tered Ac­coun­tants of In­dia, the Re­serve Bank of In­dia and the Se­cu­ri­ties and Ex­change Board of In­dia re­spon­dents in the case, so that they can ex­e­cute the or­der swiftly.


In its com­plaint, the SFIO has al­leged that the au­di­tors were aware that IFIN was lend­ing to de­fault­ing bor­row­ers through group com­pa­nies so that they could sup­press their non-per­form­ing as­sets (NPAs) and not pro­vide for the bad debt. More­over, it al­leged that the au­di­tors failed to ver­ify the end-use of bank fi­nances and money raised through non-con­vert­ible deben­tures (NCDs) de­spite it be­ing manda­tory to do so.

The com­plaint goes on to say that the au­di­tors fal­si­fied books of ac­counts and fi­nan­cial state­ments of the com­pany from FY14 to FY18 and did not re­port the neg­a­tive net owned funds, as well as its neg­a­tive cap­i­tal to risk (weighted) as­sets ra­tio (CRAR) re­sult­ing in loss to those who had in­vested in the com­pany’s NCDs.

The au­dit com­mit­tee mem­bers col­luded with the man­age­ment and over­looked the many im­pair­ment in­di­ca­tors in con­tra­ven­tion of the ac­count­ing stan­dards and prin­ci­pals of pru­dence. Un­doubt­edly, the pro­posed ban will have a sig­nif­i­cant im­pact on the au­dits of listed com­pa­nies. These firms op­er­ate through a com­plex network of firms and at first blush it ap­pears that not all the firms in the network are pro­posed to be banned. It re­mains to be seen if SEBI per­mits other firms in the network to au­dit en­ti­ties whose au­di­tor has been banned — though, as things stand, this ap­pears to be a re­mote possibilit­y.

Since too few firms han­dle the au­dit of too many listed en­ti­ties, the tem­po­rary exit of two of these is bound to put pres­sure on the re­main­ing firms to han­dle many more au­dits in com­pressed time­frames.

The ban pro­vides an op­por­tu­nity for mid-size In­dian firms to bid for some of the au­dits that are up for grabs.

There has been a con­cern ex­pressed in some quar­ters that if smaller firms get the au­dit of big en­ti­ties, au­dit qual­ity would suf­fer re­sult­ing in fur­ther fa­tal ac­count­ing ac­ci­dents.

Go­ing for­ward, this should not be a con­cern at all be­cause the pro­posed ban sends out a loud and clear mes­sage to the au­dit­ing fra­ter­nity — shape up or ship out.

The writer is a char­tered ac­coun­tant

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