Stand firm against rogue IL and FS auditors

India’s Ministry of Corporate Affairs (MCA) is seeking to ban two of the world’s biggest audit firms, Deloitte and KPMG, for five years for their role in covering up Infrastructure Leasing & Financial Services’ (IL&FS) bad debt portfolio. Last August, IL&FS, earlier seen as a blue-chip group, began defaulting on loan repayments, triggering a liquidity crisis. Fearing a full-blown financial contagion, the government took over control of its management in October last.

As per the petition filed by the MCA against the auditors before the National Company Law Tribunal (NCLT), it has been pointed out that the companies “actively connived” with the IL&FS management and failed to report fraudulent activities and diversion of funds. A ban under Section 140 of the Companies Act would bar the companies from auditing in India for five years.

We never seem to learn from the past. Ten years ago Satyam Computer Services’ B Ramalinga Raju was arrested after he manipulated accounts to show excess revenues of over Rs 14,000 crore. It was also revealed that auditors Pricewaterhouse-Coopers (PwC) were complicit in the cover-up. As penalty, after nine years of adjudication, SEBI handed PwC a ban from auditing listed companies for two years and a ‘disgorgement’ of Rs 13 crore.

In the IL&FS case, there has been repeated connivance in fraudulent practices by the two audit firms. So the Centre’s proposal for a five-year-ban is totally justifiable. In this context, the move by the US to tangentially defend these American companies has to be viewed with suspicion. The US government has said that a ban on Deloitte and KPMG would disrupt businesses and capital inflows into India. It has also urged the Indian government to impose a stiff monetary fine instead.

The monster fraud in the IL&FS case—a non-disclosure of over Rs 91,000 crore in piled-up debt—is far larger than anything we have seen. The crisis that the defaults triggered have still not subsided, and it is about time deterrent justice was meted out to these auditors. The government should stand firm on its course for a five-year-ban.