Investigation by Serious Fraud Investigation Office (SFIO) Archives

NFRA bars another Big4 auditor for 5 years with Rs 15 lakh fine in case of IL&FS

The National Financial Regulatory Authority (NFRA) has barred has barred another auditor for five years for alleged professional misconduct and lapses in the statutory audit of IL&FS Financial Services Ltd (IFIN) for 2017-18. The watchdog has also slapped a fine of Rs 15 lakh on Shrenik Baid, who was a partner in the statutory audit. The order is effective post 31^st 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.

Subscribe to Whats App Update

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.
NFRA in its earlier orders had imposed a Rs 25 lakh fine and seven-year ban on former Deloitte CEO, Udayan Sen and a Rs 5 lakh fine and five-year ban on Rukshad Daruvala, who was the engagement quality control reviewer in the IFIN audit.

Contention of NFRA pertaining to Shrenik Baid

In its charges of professional misconduct against Baid, NFRA said the chartered accountant was grossly negligent and did not exercise due diligence through failure to disclose facts and material misstatements known to him in the financial statement.
The order stated that while Udayan Sen was the engagement partner (EP), through responsibilities delegated to him ShrenikBaid was the ‘de facto’ EP
ShrenikBaid was supervising key aspects of the audit on a daily basis, violating the requirement of a single EP.
This led to a loss of accountability and a total disregard of the principles of quality control.
Baid contended that he was a partner in the engagement and responsible for overseeing certain aspects of the audit rather than the EP.

Contention of NFRA that certain services being provided by Deloitte in violation of section 144

In violation of section 144 of the Companies Act, Deloitte was found to have, either directly or indirectly, provided prohibited services to the auditee or its holding company without prior approval of the audit committee of IFIN.
Statutory auditors are prohibited from providing certain non-audit services to auditees in order to maintain independence, which includes management services.
However, Baid argued that the audit firm merely provided advice to assist the management in discharging its responsibilities but did not undertake any decisions on behalf of the management, which did not constitute management services.
In its rebuttal, the NFRA said this argument equated management services with management responsibilities. Whereas the former implied services rendered to the management, the latter meant functions undertaken by the management.
NFRA noted with shock the unprofessional method resorted by the experienced CA in interpreting statutes to support his unjustified claims.

Order of NFRA

NFRA debarred Shrenik Baid for a period of five 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 15 lakh was imposed for his role in the audit of fraud hit IL&FS Financial Services Ltd (IFIN).

The series of punitive actions by the authority has put the entire industry on high alert. All eyes are now on the Delhi High Court’s (HC) decision, which will determine whether the NFRA orders take effect or not.

Subscribe to Whats App Updates