Why an auditor should be held accountable for a business failure is the most sought-after question asked by many after knowing that the Mumbai bench of the National Company Law Tribunal (NCLT) has reiterated its jurisdiction to decide on imposing a ban on audit firms Deloitte and BSR Associates.
Whether the IL&FS downfall is a business failure or management failure (this being one of those companies run by professionals) or serious fraud (while Serious Fraud Investigation officer has done his duty of filing charge sheet) can never be answered with ease.
The name in question being big four another questions arises is do India only has rubber stamp auditors or they actually apply their mind or do there exist internal financial controls or they are just on paper or payment to the auditor by the company for their audit makes them interested party or Indian promoters (whether professional or otherwise) are too strong to be challenged by a complex process called audit completed in a span of 10-15 days every quarter or Is he a watchdog for Investors & bankers money or is he supposed to draw a line to differentiate black from white.
There can be many other questions but the moot point is how the audit should be done to avoid such actions against the auditor?
Section 143 of the Companies Act defines the power and duties of auditors and auditing standards which are so exhaustive in nature that can never be verified in 10-15 days’ time that too when the operations are spread out across the country. Moreover, there is a huge difference between verifying the accounts as they stand or analyze every transaction done in a company to smell a rat. Even if that is done will it be an audit or the mere exercise of finding fault in management which is actually a race of survival. The audit can never be made subjective also as long as it fulfills the criteria laid down by law it should be given due weightage.
Section 140 subsection under which the NCLT has exercised its power reads as under:
(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suomotu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors:
Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place:
Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447.
The catch here is the final order that too by NCLT which is not a criminal court to decide on the charge sheet filed by SFIO before relevant authority. The final order here should be given importance from the perspective of the competent court who will decide whether fraud has actually taken place or not. The NCLT order shall get finality only when the highest court of land decides on a subject so till the time the right to appeal remains with auditors they should not be banned.
NCLT order at best could be to remove or replace an auditor and unless the final court of law decides against the auditor by holding them responsible for fraud, it seems premature on the part of NCLT to take such step of banning Deloitte and BSR associates.
One great philosopher once said that if you start telling truth about people on their face, its high chance that you will be left with no friends. The same is true with auditors that if you start telling Indian promoters as to what is right and wrong it’s a high chance that you will be left with no audit.
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Disclaimer: The views expressed above are personal in nature and not a legal advice having no bearing on the outcome of the pending matter.
