Why the government is justified in asking for a 5-year ban
If the Indian government has its way, then Deloitte Haskins Sells (DHS) and BSR could be the first instances of auditors getting a 5-year ban. The government has already moved a petition in the NCLT, which has since been challenged by DHS and BSR. While the auditors have raised technical objections, the government has a strong case and must prevail to protect the integrity of Indian markets!
Auditor objections
While both the auditors have challenged the government petition on a number of technical grounds, there is no denying the poor quality of audit done by the two auditors. For example, DHS had contended that it had ceased to be an auditor when the proceedings seeking a ban were initiated and the remedy was only available against existing auditors. DHS also contended that since the rules only pertain to existing auditors, they would be out of the definition. BSR, the other auditor, has also raised a similar objection saying that they had ceased to be auditors when the said proceedings had been initiated. The auditor’s counsel has also contended that Section 140 does not allow the NCLT to change the basic definition and interpretation of Section 140, under which the state has filed the petition. That power is only available to the High Court and the Supreme Court of India. Hence both auditors have sought to quash the ban on purely technical grounds.
The MCA contention
The MCA which filed the petition has its own justifications. The MCA counsel has contended that considering the systemic risk posed by IL&FS the focus should be more on protecting the integrity of the financial system. Also, the SFIO had noted the lapses back in November 2018 and hence the concept of deemed removal was not valid. Also, in past cases, the Supreme Court had allowed the expansion of the above definition to allow remedial measures against auditors. The MCA has also drawn on the concept of natural justice to justify why the auditors should be banned.
Why MCA has a valid point
For a long time, the audit professionals have tried to take umbrage behind their sole accountability to the ICAI, which is a statutory body in itself. That has been largely diluted with recent orders passed by SEBI. But the point is much deeper. It is high time the auditors (and also the rating agencies) are held accountable for such cases, which appear to be a case of lapse and connivance. Auditors should not be allowed to hide behind the veil of technicalities. The bottom line is that had the auditors applied better due diligence the IL&FS fiasco could have been prevented. That is where the auditors have failed as a watchdog. The MCA must make the punishment in this case exemplary, considering the larger systemic losses caused by IL&FS!
