IL&FS fraud case: Supreme Court allows SFIO to prosecute auditors

It also directed the National Company Law Tribunal (NCLT) to decide the government’s plea seeking a five-year ban on the auditors for failing to red-flag problems at the lender.

Setting aside the Bombay High Court April 2020 judgment that quashed criminal prosecution initiated against the two firms and their chartered accountants, a bench led by Justice MR Shah said the SFIO can proceed with its 2019 criminal complaint before a Greater Mumbai court on its own merits.

The bench said auditors are answerable for accounts statements signed by them even if they resigned later.

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 said that its term as an auditor ended in 2018, while BSR said it resigned from its role just days after the government moved the ban plea.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.

While upholding the constitutional validity of Section 140(5) of the Companies Act 2013 that deals with the removal and resignation of auditors, the apex court held the provision is not discriminatory, arbitrary, or violative of Articles 14, 19(1)(g) of the Constitution (right to carry on their profession), thus rejecting the stand of the firms.

However, it clarified that it has not expressed anything on the merits of the allegations against the auditors and it is ultimately for the NCLT to pass a final order.