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July 23, 2020

NFRA bars ex-Deloitte CEO Udayan Sen for 7 years, slap penalty 25 Lakh for his role Fraud hit IL&FS Know Highlight of Order

by Mahesh Mara in Compliance Law, SEBI

NFRA bars ex-Deloitte CEO Udayan Sen for 7 years, slap penalty 25 Lakh for his role Fraud hit IL&FS Know Highlight of Order

The National Financial Regulatory Authority (NFRA) has barred former Deloitte Haskins and Sells LLP chief Udayan Sen from auditing for seven years and imposed a monetary penalty of Rs 25 lakh for auditing lapses at Infrastructure Leasing & Financial Services Ltd (IL&FS). NFRA has found Sen guilty of professional misconduct and not maintaining independence and quality in auditing accounts of the financial company. The order is effective post 31st July, 2020.

What is the role of NFRA?

The NFRA is a body constituted under the provisions of Section 132 of the Companies Act, 2013. The NFRA has the following responsibilities:

  • Make recommendations on the foundation and laying down of accounting and auditing policies and standards
  • Monitor and enforce the compliance of the accounting standards and auditing standards
  • Oversee the quality of service of the professionals (such as auditors, CFOs, etc) and suggest measures required for improvement in the quality of service
  • Perform such other functions related to the above.

What was the IL&FS case?

  • IL&FS was a systemically important Core Investment Company with the RBI and was engaged in the business of giving loans and advances to its group companies (and holding an investment in such companies). IL&FS has a large number of group companies across various sectors such as Energy, Transportation, Financial Services etc.
  • In July 2018, the road arm of IL&FS was facing difficulty in making repayments due on its bonds.
  • In September 2018, one of the subsidiaries of IL&FS Group was unable to repay a short-term loan of Rs. 1,000 crore taken from SIDBI.
  • Also, certain group companies defaulted in repayments of various short and long-term deposits, inter-corporate deposits, and commercial papers.
  • IL&FS failed continuously to service its debt which led the Central Government to move an application under Sections 241 and 242 of the Companies Act, 2013 before the NCLT, Mumbai Bench which sought the immediate suspension of the Board of Directors of IL&FS and the appointment of specified new directors, on the ground of massive mismanagement of public funds by the erstwhile Board. It was also alleged that the affairs of the company were being conducted in a manner prejudicial to the public interest.

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Role of ICAI in the IL&FS case

  • Due to considerable allegations in respect of the financial statements of the said companies, the Institute of Chartered Accountants of India (ICAI) suo motu sought to consider the performance of the statutory auditors of the said companies. 
  • Pursuant to an enquiry conducted in respect of the statutory auditors of the IL&FS Group Companies, the ICAI found that there were key lapses, shortcomings, and manipulations on the financial statements by the statutory auditors of the said companies. 
  • The condition of the said companies as a result of mismanagement reflects upon the statutory auditors of the said companies.
  • The ICAI held the statutory auditors of the said companies prima facie guilty of professional misconduct.

Investigation by Serious Fraud Investigation Office (SFIO)

  • The SFIO started an investigation in the matter as there were huge procedural lapses at the NBFC.
  • On April 2, 2019, former vice-chairman of IL&FS, Hari Sankaran, was arrested by SFIO in Mumbai for granting loans to entities that were not creditworthy and thereby causing loss to the company and its creditors.
  • The initial SFIO probe revealed that there were major lapses in Deloitte’s audit of the IL&FS.
  • SFIO investigation found it guilty of painting a rosy picture despite being aware of the poor financial health of the company, triggering the ministry to seek a ban on the auditors.
  • On August 16, 2019, the Enforcement Directorate (ED) filed its first chargesheet in the IL&FS money laundering case.
  • The prosecution complaint was filed in a special court of the Prevention of Money Laundering Act, charging former senior management personnel of IL&FS – Ravi Parthasarathy, Ramesh Bawa, Hari Sankaran, Arun Saha, and Ramchand Karunakaran along with Aircel founder C Sivasankaran.
  • The ED also made provisional attachment of bank accounts and immovable property to the tune of Rs 570 crore held by these people.
  • The chargesheet pointed out that the senior management had falsified the accounts and indulged in circuitous transactions.
  • This was done to maintain the credentials of IF&LS, in order to continue receiving high remuneration and to artificially boost the balance sheet of IL&FS group. However, these activities led to further losses.

Role of NFRA in the IL&FS case

  • The IL&FS crisis had left a hole of Rs 1 lakh crore in the financial markets. The role of the two auditors – Deloitte and KPMG affiliate, BSR and Co. Llp, had come under the scanner during the debt crisis.
  • The investigative authorities were quick to question the auditors in an attempt to uncover the discrepancies.
  • NFRA has the power to impose a monetary penalty and bar a firm from both internal and external audit under Section 132(4) of Companies Act 2013.
  • Udayan Sen, a former CEO of Deloitte India was the main engagement partner for Deloitte Haskins and Sells that was the auditor of IFIN (IL&FS Financial Services Ltd) 
  • Sen was issued a show cause notice in January 2020 by NFRA for professional misconduct under section 132(4).
  • Sen had filed a writ petition in the Delhi High Court after NFRA issued a show cause notice in January. 
  • In the writ petition Sen said that NFRA wasn’t even formed when the audit of IFIN was conducted. He argued that any penalty on him would be “retrospective” because a regulator and regulations formed afterwards doesn’t have jurisdiction over an event that occurred earlier.

Contention of NFRA pertaining to Udayan Sen

  • NFRA found Udayan Sen guilty of professional misconduct for gross negligence as he failed to:-
  • disclose material facts in financial statements known to him
  • report material misstatement in IL&FS accounts
  • exercise due-diligence
  • obtain sufficient information necessary for expressing an opinion
  • to invite attention to material departure from acceptable audit procedures
  • NFRA observed that there was a serious lapse in the discharge of duty by Sen and the independence of statutory auditor had been totally compromised
  • Since Sen has been managing partner and CEO of Deloitte for several years he should have been especially conscious of and sensitive to anything that could have impacted his and his firm’s independence.
  • In the year 2017-18, IL&FS had actually incurred a loss but it was reported as a profit. It did this by assigning a value of Rs 184 crore to put option of TTSL (Tata Teleservices) shares which resulted in loss being reported as a profit.
  • Sen went along with the fraudulent presentation of financial statements.
  • IL&FS was also not complying with capital to risk weighted average ratio and net owned funds leading to misstatement of financials.
  • The auditor also failed to evaluate management’s assessment of IL&FS being a going concern.
  • Auditor ignored the fact that there is a consistent reduction in profits of IL&FS since March 2014.
  • The decline in profits was substantial and a sharp decline in cash and cash equivalents in 2016-17 and 2017-18.

Order of NFRA

NFRA debarred Udayan Sen for a period of seven years from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. A penalty of Rs 25 lakh was imposed for his role in the audit of fraud hit IL&FS Financial Services Ltd (IFIN).

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