Examining the role of IL&FS auditors long overdue
Auditors knew there were hundreds of subsidiaries in which debt was parked but never highlighted this.
The government has done well to tell the National Company Law Tribunal (NCLT) that it plans to reopen the accounts of IL&FS since it suspects large auditor lapses; whether these were genuine or not remains to be seen. The probe by the Serious Frauds Investigation Office (SFIO), the government said, indicated that the accounts were fraudulent. In a parallel probe, the CA institute (ICAI) has sent a formal notice to the partners of three audit firms to begin an investigation into their audits. The problem here, of course, is that while ICAI can penalize the members who did the audit, it can take no action against the firms under whose banner they work. Given that the auditor fees paid by IL&FS rose from Rs 4.5 crore in FY15 to Rs 15.9 crore in FY17, before falling to Rs 13.7 crore in FY18, it is truly worrying that the auditors never flagged issues at IL&FS for all these years.
A large part of the problem stems from the fact that the Indian law allows too many layers of subsidiaries; IL&FS had 347 entities that were held via four levels of step-down subsidiaries and there were 142 entities at Level 4. The modus operandi seems to have been to keep the parent accounts clean while keeping the debt in the subsidiaries. Nor, so far, has the government agreed that one entity audit the accounts of the entire group, including subsidiaries; presumably this will be seen to be favoring the bigger audit firms as only they have the manpower to audit really big firms with a large number of subsidiaries. In which case, chances are the first line of defense of the audit firms will be that they didn’t audit the accounts of the subsidiaries and so cannot be held accountable for the gaps in those accounts.
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