IL&FS Crisis Triggers Turbulence in Auditing Industry

The Infrastructure Leasing and Financial Services (IL&FS) debacle has led to a turbulence in the Indian auditing industry, as the central government has sought the National Company Law Tribunal (NCLT) to ban two major auditing companies for five years. The ban request follows the allegations of a nexus between the two companies- Deloitte Haskins Sells and KPMG-affiliated BSR & Associates-  and the IL&FS management in committing financial irregularities.

Deloitte audited IL&FS Financial Services (IFIN) for 10 years from 2008 to 2018 and BSR, along with Deloitte, did a parallel audit of IFIN for 2017-18.

NCLT has asked the auditors to reply by June 19 in this matter and the next hearing is scheduled on June 21. If the ban is approved, as many as 342 listed companies will need to find new auditors, which involves a massive transition inside the country’s auditing industry. While Deloitte and KPMG networks are two of the ‘Big Four’ auditing groups, another company, PwC Group, is already under a two year ban till 2020 imposed by the Securities and Exchange Board of India (SEBI), for its involvement in the Satyam Computer Services fraud. The credibility of EY Group, the remaining one of the ‘Big Four’, has also come under question as the Reserve Bank of India (RBI) has recently put a ban on one of its affiliate companies, SR Batliboi, from auditing commercial banks.

KPMG Group firms audit 175 listed companies, with a large share by BSR, while Deloitte and EY Group audit 167 and 133 listed companies, respectively, as per Prime Database.

Also read: Banks Can Now Declare Defaulting IL&FS Accounts as NPAs: NCLAT Order

As per section 447 of the companies act, the Tribunal can impose a ban of upto five years for auditor companies alongside a penalty nearly 10 times the size of the fraud.

Several investigations into the IL&FS scam have found fault with the two auditors of IFIN, a non banking financial company. While the Institute of Chartered Accountants of India (ICAI) and the government appointed board of IL&FS raised doubts on these auditors’ role, a forensic audit by Grant Thronton and a separate probe by Serious Fraud Investigation Office (SFIO) have found serious discrepancies with the auditors’ role including concealing of information and overriding accounting standards.

The Grant Thronton forensic audit has found IFIN fraud to the range of over Rs 13,000 crore.

Both Deloitte and BSR, in separate statements have said that they are confident in defending their position with the Tribunal.

Also read: IL&FS Fraud a Manufactured Loot: Forensic Audit

The murkier affairs of IL&FS began emerging in September last year, when the group companies were not able to meet their debt obligations, prompting the central government to replace the IL&FS board with a new one under Uday Kotak’s chairmanship in October. As of October 2018, the Group had an outstanding debt of over Rs 94,000 crore and the new board is working out a resolution plan to meet the same.