The Bombay High Court has quashed complaint filed by the Serious Fraud Investigation Office (SFIO) against Deloitte Haskins and Sells LLP and KPMG arm BSR & Associates in connection with the IL&FS Financial Services (IFIN) fraud case, says a report from Bar & Bench
A division bench of chief justice BP Dharmadhikari and justice Nitin Borkar, says, "... disqualification stipulated in second proviso to section140(5) cannot be construed as a second punishment for same misconduct & it also does not attract the principle of double jeopardy. As legislative mandate of disqualification in second proviso to section 140(5) is not a punishment either for the misconduct or the offence, obviously it is added as a measure to achieve a laudable goal stated supra."
The Court further held that when chartered accountants (CAs) defraud a company but have completed their term and left, they could not be charged and hence were not amenable to Section 140(5).
"Even when company proposes to pass a special resolution for removing its CA under section 140(1), the CA can avoid it by putting in a resignation. The scheme of S. 140 itself interposes 'resignation' procedure between the decision of company to move such special resolution & further processing thereof. The Parliament has placed sub-sections (2) and (3) regarding the resignation between sub-sections (1) and (4) of section 140 and there is nothing in law to demonstrate that the CA against whom the special resolution of “removal” is initiated, can not resign. Such resignation does not lead to any debarment or disqualification in his practice as CA," the report says.
Earlier in January this year, the National Company Law Appellate Tribunal (NCLAT) had asked the ministry of corporate affairs (MCA) to clarify whether civil proceedings, as sought by the ministry against the audit firms, can be carried out on the basis of a criminal report.
The ministry has cited the interim report of the SFIO alleging collusion by the auditors with the IFIN management in concealing information, among other charges. The ministry had sought freezing of the assets of the audit firms based on the report.
Interestingly in December 2019, the National Financial Reporting Authority (NFRA) had said Deloitte Haskins and Sells did not comply with the standards of auditing in the crisis-ridden IFIN.
In its audit quality review (AQR), NFRA said that the quality control systems and processes of Deloitte were found to be "severely inadequate and ineffective".
"The AQR has disclosed that DHS (Deloitte) has failed to comply with the requirement of the SAs (standards of auditing). The instances of failure noticed are of such significance that it appears to NFRA that DHS did not have adequate justification for issuing the audit report asserting that the audit was conducted in accordance with the SAs," the report said.