The auditors -- the local arms of the Big Four global firms Deloitte Haskins & Sells and KPMG which has BSR & Associates as an affiliate here-had challenged the jurisdiction of the NCLT to ban them.
In a major setback to auditors Deloitte and BSR, the National Company Law Tribunal on Friday rejected their pleas challenging the tribunal's jurisdiction to ban them for their alleged omissions and commissions in the IL&FS Group scam.
This is third 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 implementation of the same has been stayed after they sought to challenge it at the appellate tribunal NCLAT.
In a second setback, the NCLT had on Thursday allowed the government to restate the books of the IL&FS group and its subsidiaries and allowed four new Mumbai based auditing firms to do so.
The ministry had on June 23 moved the NLCT seeking a five-year ban on them in the IL&FS saga.
Dismissing their petitions challenging the jurisdiction of the tribunal to ban them, the NCLT however, said it will hear the ministry's application seeking a five-year ban on these auditors afresh on September 5.
The auditors -- the local arms of the Big Four global firms Deloitte Haskins & Sells and KPMG which has BSR & Associates as an affiliate here-had challenged the jurisdiction of the NCLT to ban them under Section 140(5) of Company's Act which to auditors who are still on doing the job for the company in question and not past auditors.
In the present case they resigned from the auditing 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 Rs 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) resigned only in June this year--nine months after the company was sent for bankruptcy.
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 a probe by the Serious Fraud Investigation Office (SFIO) has 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 on Friday 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.
Reacting to the development, BSR said it will challenge the NCLT order.
"Based on the advice of our legal advisors, we will be appealing against the NCLT order.
“We believe we are entitled to receive the benefits of the due process of law and will continue to defend our position in accordance with the law," BSR said in a statement.
Photograph: Francis Mascarenhas/Reuters