The Ban on Deloitte: An Analysis of Poor Audit Practices in the ILFS Case

Deloitte, one of the Big Four auditing firms, is under scrutiny for alleged poor and deficient audit practices, leading to a potential ban under section 1405 of the Companies Act.

Background and Implications

The proposed ban on Deloitte is rooted in the firm's role in auditing the infrastructure leasing and finance services (ILFS) group. Over a period of time, Deloitte allowed grossly irregular transactions to go undiscovered, raising questions about the effectiveness and integrity of their audit procedures.

The Likelihood of a Ban

The government of India is considering banning Deloitte under section 1405 of the Companies Act. This decision, if made, would not only affect the company but also its employees, who may face severe repercussions.

Section 1405 of the Companies Act

According to section 1405 of the Companies Act, if a tribunal passes a final order against an auditor, the auditor will be ineligible to be appointed as an auditor for a period of five years. The section also states that the auditor will face actions under section 447, which carries severe penalties.

Details of the Ban

Section 1405 of the Companies Act:

If the government is satisfied that an auditor has acted fraudulently or abetted or colluded in any fraud, they can direct a company to change its auditors. The auditor, whether an individual or a firm, who has been given a final order by a tribunal under this section, will be ineligible to be appointed as an auditor of any company for five years from the date of passing the order. The auditor will also be liable for actions under section 447, which carries penalties including imprisonment and fines.

Whistleblower Allegations

A whistleblower report has alleged that senior Deloitte functionaries were aware of the irregularities within the ILFS group. The firm allegedly benefitted from this collusion through massive fees and large contracts.

Internally, several audit opinions were watered down, making the audit process susceptible to legacy positions and financial misreporting. As a result, the group compensated Deloitte with additional fees for consultancy services, fostering a mutually beneficial relationship.

Consequences and Future Implications

The potential ban on Deloitte highlights the stringent measures that regulatory bodies take to ensure the integrity of financial audits. Other Big Four firms, such as PwC, have faced similar punishments in the past, underscoring the severity of the consequences for companies that engage in poor audit practices.

While the ban has not yet been announced, it represents a serious indictment of Deloitte's actions. The government expects auditors to adhere to the highest standards, ensuring transparency and accountability in financial reporting.

As the ILFS case unfolds, it serves as a cautionary tale for auditing firms across the industry. The proposed ban, if implemented, will likely prompt a thorough reassessment of audit practices and corporate governance across the board.