Forum

Please or Register to create posts and topics.

AUDITORS CANNOT ESCAPE PROBE EVEN IF THEY RESIGN: SC

AUDITORS CANNOT ESCAPE PROBE EVEN IF THEY RESIGN: SC

While setting aside an order of the Bombay High Court (HC), the Supreme Court clarified that resignation does not mean that proceedings against an auditor before the national company law tribunal (NCLT) under Section 140(5) will end. The HC had quashed a complaint filed by the serious fraud investigation office (SFIO) against Deloitte Haskins and Sells and KPMG unit BSR & Associates, the two auditors of Infrastructure Leasing & Financial Services (IL&FS).

The bench of justice MR Shah and justice MM Sundresh says the HC erred in holding that the resignation of the auditor meant that proceedings against the auditor before NCLT would end. "If such a position is taken, auditors, whenever they face proceedings, will resign and that this could not have been the legislature's intention."
"There must be a final order passed by tribunal irrespective of his resignation to see if he has colluded or acted in a fraudulent manner," the bench says.
The apex court stressed that auditors play a vital role in the affairs of a company and have to act in the larger public interest, adding that an auditor acting in a fraudulent manner, directly or indirectly, is very serious misconduct.

However, the bench says automatic disqualification of auditors and the entire firm, including partners, for five years to become an auditor of any other company is highly disproportionate and it is ultimately for the legislature and Parliament to provide the debarment.

The SC also noted that on the principle of joint and severe liability, the auditors and the entire firm, including partners, shall be liable and, therefore, can be subjected to Section 140(5) and the consequences mentioned in Section 140(5) of the Companies Act.

In an order in April 2020, the Bombay HC 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).
"... disqualification stipulated in the second proviso to Section 140(5) cannot be construed as a second punishment for same misconduct & it also does not attract the principle of double jeopardy. As the legislative mandate of disqualification in the 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," the HC had said.

However, the apex court says the intention of the legislature behind Section 140(5) is very clear that, irrespective of the other provisions of the Act, the NCLT is vested with the power to see if the auditor acted in a fraudulent manner. "...Section 140(5) cannot be called to be an excessive or arbitrary use of power by NCLT to determine offences of grave nature and stated that the ample opportunity shall be given by NCLT before passing a final order."

http://www.startupstreets.com, http://www.intellexcfo.com, http://www.buzpals.com