The national regulator for auditors has fined and barred from practice for seven years a professional auditor who led the audit of IL&FS Financial Services (IFIN) in 2017-18.
IFIN is a subsidiary of IL&FS which ran into deep financial trouble after running out of cash in 2018.
What action has been taken in this case?
The action by the National Financial Reporting Authority (NFRA) on Wednesday (July 22) to fine Udayan Sen, the former CEO of Deloitte Haskins and Sells, Rs 25 lakh for lapses in the audit, and to bar him from auditing activities for seven years, is the first order of its kind by NFRA.
The authority was set up on October 1, 2018 by the Government of India under The Companies Act, 2013, specifically to investigate the role of auditors in frauds in listed and large public interest entities. ( Deloitte)
Previously, only the Institute of Chartered Accountants of India (ICAI) was able to bar chartered accountants from being appointed as auditors for a company, while the Securities and Exchange Board of India (SEBI) was permitted to bar CAs from auditing listed companies. ( Deloitte)
On what grounds can auditors be barred?
Auditors can be barred for professional misconduct including not exercising due diligence, or for gross negligence in their duties.
The role of an auditor is to report on whether a company’s financial statements have been reported in line with accounting standards, and to raise red flags in case the auditor notes any concerns regarding the statement of accounts or in any financial transactions entered into by the company. ( Deloitte)
Auditors are also required to ensure that there is no conflict of interest in their own appointment. The Companies Act prohibits audit firms from providing certain non-audit services to clients that they are auditing.
The NFRA noted that Deloitte was providing such non permitted services to companies related to IFIN, including the group holding company IL&FS.
What kind of action has been taken against auditors earlier?
In 2018, SEBI barred the audit firm PriceWaterhouse from auditing listed companies for two years, and barred auditors Srinivas Talluri and S Gopalakrishnan from auditing listed companies for three years, for professional misconduct in the Rs 7,800 crore scam at Satyam Computers, which came to light in 2009.
The Securities Appellate Tribunal (SAT), however, quashed the order in September 2019. SEBI has appealed against the order by the SAT in the Supreme Court.