The big 4 dominated with the market capitalisation of the companies audited by them being 67% of the total market capitalisation of all companies listed at NSE during 2018-19. Out of which Deloitte and KPMG groups audit more than 250companies that make up 40% of the market capitalisation of listed Indian companies. Therefore, there are high chances of concentrated risk since majority of the audit work is in their hands and unfortunately they have abused their position which the government wants CCI to investigate.
Well, the root cause of chaos in big 4 arises when IFIN defaulted in repaying the bank loan (principal+interest) and Deloitte & BSR (KPMG arm) unable to find that loan of 1922 crore given with negative spread which were vivid by just looking at the statements but auditors still ignored them. SFIO also identified that they were gross negligent since whenever they had any doubt while auditing they ask for management explanation and relied on that but as per law these explanation cannot be regarded as conclusive evidence instead it’s a supportive audit evidence. Moreover, SFIO stated that professional skepticism was lacking in Deloitte.
Furthermore, Deloitte is not only the auditor of IFIN but it’s an auditor of many other subsidiaries of IL&FS and in a year it charges fees of 13-14 crore for statutory audit. Apart from that, it also provides consultancy services. This thing raises question on the independence of auditor.
Government stated that it was an organisation crime of fraud of 99000 crores in which auditors playing a role of team player. Furthermore, it was found in Investigation that there are 22 matters in which auditing standards not followed while auditing books of IL&FS and it’s subsidiaries. Moreover, Deloitte was providing accounting services which a statutory auditor cannot provide as per the provisions of section 144 of the Companies Act 2013. Therefore, it became ineligible to continue as auditor as per section 141 and it would have been led to casual vacancy but this was not happen. In this regards also there is a contravention of law.
In nutshell, auditor had deliberately given clean opinion, that is, financial statements were not free from material misstatements. Even, fraudulent activities were not reported in audit report. Thus, auditors miserably failed to fulfill the duties entrusted to them.
Now, the board of IL&FS issued show cause notices to Deloitte and KPMG asking why they should not be removed for allegedly failing to highlight the shortcomings while reviewing the books of subsidiaries of IL&FS. Therefore, auditor is required to prove that they have conducted audit in accordance with Standards of auditing and relevant laws and regulations. For this, they have to show audit documentation to prove that they have applied audit procedures properly, obtained necessary audit evidence and conclusions drawn on the basis of evidence obtained.
MCA is of the view that provision of section 140(5) of the Companies Act 2013 shall be applied in this case. It gives power to tribunal to remove the auditor. Its first proviso gives power to Central Government to apply for removal of auditor and auditor have to be removed within 15 days of such application. Now, the same auditor cannot become statutory auditor for next 5 years. According to second proviso, penalty of section 447 shall also be applicable in such case.
Moreover, stringent norms in the Companies Act are also suggested in this regard to check Independence and issues of conflict of interest. Since, investors do not rely on the statements audited by internal auditor but they have faith on the audit report signed by these brands. Also, as a developing economy all the investors not only from India but from all over the world have eyes on our companies. The Government is also trying to ban tax advisory service offered by statutory auditor, that comprises approximately one-fourth of these brands.