In a significant development, the Supreme Court of India has cleared the way for the prosecution of two former audit executives of Infrastructure Leasing and Financial Services (IL&FS). The Bombay High Court had earlier quashed the Serious Fraud Investigation Office (SFIO) probe against audit firms BSR & Associates and Deloitte Haskins & Sells, which were former auditors of IL&FS Financial Services, over alleged financial irregularities. However, the apex court has now allowed the appeal of the SFIO and the Centre against the high court verdict, thereby upholding the validity of section 140(5) of the Companies Act, 2013.
The provision deals with the removal and resignation of auditors and imposes a five-year ban on an auditing firm that is proven to have “acted in a fraudulent manner” or to have “abetted or colluded in any fraud.” The Supreme Court has also observed that section 140(5) of the Companies Act, 2013, is neither discriminatory nor arbitrary and does not violate Articles 14 and 19(1)(g) of the Constitution of India. The bench of justices M R Shah and M M Sundresh, while delivering the 103-page judgment, has set aside the high court judgment which had quashed the proceedings against the audit firms under section 140(5) of the Act on the ground that the auditors had resigned.
The judgment is a major setback for the audit firms, which had earlier contended that the SFIO could not take action against them under section 140(5) of the Companies Act as they had resigned before the allegations of financial irregularities came to light. The apex court has held that the application/proceedings under section 140(5) of the Act, 2013 is maintainable even after the resignation of the concerned auditors. The National Company Law Tribunal (NCLT) is now expected to pass a final order on such applications after holding an enquiry in accordance with the law.
The IL&FS crisis had come to light in 2018 when its subsidiary IL&FS Financial Services defaulted on several debt repayments. The Serious Fraud Investigation Office (SFIO) had later initiated an investigation into the affairs of the group, which resulted in the arrest of several top executives, including former chairman Ravi Parthasarathy. The SFIO had also alleged that the auditors had colluded with the management of IL&FS in covering up the financial irregularities.
The Supreme Court judgment is likely to have far-reaching implications for the auditing profession in India. It sends a strong signal that auditors cannot escape responsibility by simply resigning from their positions. The judgment is expected to enhance the accountability of auditors and promote good corporate governance practices in the country. The auditing profession will now have to be more vigilant and proactive in their approach to detect and report financial irregularities, failing which they could face severe penalties and sanctions.
The Supreme Court judgment is a significant step in India’s fight against corporate fraud and financial irregularities. The IL&FS case has been one of the biggest financial scandals in India, and the apex court’s decision is likely to set a precedent for future cases of corporate misconduct.
The judgment is also a welcome move for investors who have suffered losses due to corporate frauds. The accountability of auditors is a critical component of investor protection, and the Supreme Court’s decision will help to restore investor confidence in the Indian capital markets.
However, the judgment may also have some unintended consequences. The auditing profession in India is already under immense pressure due to the increasing complexity of financial transactions and the need for greater transparency and accountability.
Moreover, the judgment could also lead to a situation where auditors are hesitant to resign from their positions even if they uncover financial irregularities. This could result in auditors being reluctant to take on new clients or work with existing clients who have a history of financial misconduct, thereby reducing the availability of auditing services in the market.
