The dispute between Adani Ports & Special Economic Zone (SEZ) and audit firm Deloitte has highlighted the tense relationships between companies and auditors in recent times. Deloitte, which resigned as the auditor for Adani Ports, had earlier quit as auditor of Byju’s after the edtech company failed to file its annual financial results in time for the 2022 financial year. In June this year, the National Financial Reporting Authority stated that quitting audit assignments will not absolve an auditor of their responsibility if any fraud is detected during their tenure at a later stage.
Interestingly, statistics compiled by tracker primeinfobase.com reveal that Deloitte’s exit from Adani Ports comes amid a decline in the number of auditors leaving before their tenure ended. A total of 38 auditor resignations before the completion of tenure were reported in 2022-23, down from 46 exits in 2021-22. The highest number in recent years was the pandemic year of 2020-21, which saw 65 such exits.
Auditors have become extremely cautious following a Supreme Court order on 4 May this year. The Court permitted the National Company Law Tribunal (NCLT) to proceed with its inquiry and any subsequent action against Deloitte and BSR and Co, a KPMG affiliate, auditors of the bankrupt firm IL&FS Financial Services. “No one wants to take any risk now,” said a Mumbai-based auditor, asking not to be quoted.
The government had petitioned the NCLT in 2019 to bar IL&FS Financial Services’ former auditors—Deloitte Haskin and Sells and BSR and Co—for five years, citing lapses in their audit. The Supreme Court order followed the government’s move against a lower court ruling in 2020, which stated that any action against auditors was not applicable if they resigned. The government’s goal was to disqualify erring entities from serving as auditors in any company for five years.
The Supreme Court suggested that the legislature should establish penalties for auditors’ misconduct. “The penalty of automatic disqualification of auditors, and their firm, including partners, for a period of five years from being the auditor of any other company, is a matter for the legislature/the Parliament to decide.” The Court emphasised auditors’ joint and severe liability with their firms under Section 140(5), underscoring the seriousness of fraudulent behaviour.
The Court also addressed concerns about the right to practice, affirming that fraudulent conduct by an auditor constitutes grave misconduct with consequential actions.
Regarding arguments of discrimination, the Supreme Court clarified, “Auditors’ roles cannot be equated with directors and/or management.” The Court stressed the vital role of auditors in the public interest and the importance of the “Audit and Auditors” chapter in the Act. Therefore, Section 140(5) does not violate Article 14 of the Constitution of India.
The Companies Act mandates auditors to report fraud to the Central Government under Section 143(12). However, in the IL&FS case, the auditors fell short of this duty, leading to action by the government. Earlier, Price Waterhouse, another Big 4 audit firm, was also embroiled in the Satyam accounting scandal in 2009.
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