On Wednesday, the Supreme Court (SC) set aside the Bombay High Court (HC) order to quash all prosecution against BSR; Associates, LLC (BSR) — a KPMG India affiliate — and Deloitte Haskins and Sells (Deloitte), both former auditors of IL& FS Financial Services (FS Financial). This is a setback for the two firms. The SC upheld the constitutional validity of Section 140(5) of the Companies Act 2013, which allows the government to enquire and act against auditors. It allowed the tribunal to proceed with its enquiry and any subsequent action against the former auditors of IL& FS Financial. The Section deals with the removal and resignation of auditors and imposes a five-year ban on an auditing firm that is proven to have “acted fraudulently” or to have “abetted or colluded in any fraud.”
“The order (Bombay HC) setting aside the Serious Fraud Investigation Office (SFIO) prosecution is quashed. Section 140(5) is neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India, as alleged,” the court observed.
The SFIO, a multi-disciplinary organization under the Ministry of Corporate Affairs (MCA) that detects and prosecutes or recommends for prosecution of white-collar crimes/frauds, had initiated criminal proceedings against both firms for their role in the alleged financial irregularities at the now-bankrupt Infrastructure Leasing & Financial Services Group. The MCA had sought the removal of both firms as auditors of IL& FS Financial.
The firms argued that they had already resigned as auditors of IL& FS Financial much before the ministry sought their removal. They also challenged the constitutional validity of Section 140 (5) of the Companies Act 2013.
