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Post the Infrastructure Leasing & Financial Services (IL&FS) making such noting in the financial statements absolves the
fiasco, the Serious Fraud Investigation Office (SFIO) has auditors of any responsibility in future. This aspect needs to
alleged that the company auditor overlooked window- be looked into by MCA and appropriate regulatory provisions
dressing of bad loans being done by IL&FS Financial Services should be introduced to ensure that an auditor's
Ltd (IFIN) and never cross-checked the 'end use' certificates responsibility is not extinguished merely by making such
used by the company to mislead lending banks. It further noting.
alleged that the auditors connived with the company
officials in falsifying books of accounts. The Ministry of Such incidents leads one to think as to what can be the
Corporate Affairs (MCA) has also set into motion the process reasons for such financial disasters.
against the auditors and the audit partners under Section
140(5) of the Companies Act, 2013 that deals with debarring Companies sometimes inflate earnings to prevent violation
an audit firm for 5 years. of loan agreement covenants to avoid penalty. The auditors
are thus paid handsome amounts to do window dressing.
In the case of PMC Bank, it was a whistleblower who blew There is another motivation for the companies to indulge in
the lid off the financial crisis brewing inside the Bank. This misreporting of their financials. Investors invest in companies
raises a pertinent question as to what the bank's auditors with the hope of getting handsome returns. In case the
were doing all these years. The suspended MD of the bank company shows poor financial performance, it may tempt
has alleged that the auditors were only 'superficially' the investors to withdraw their investment.
checking the bank's books. The Mumbai Police's Economic
Offences Wing (EOW) even arrested two auditors who had This motivation to indulge in manipulation of financial
served as Statutory Auditors during the period of the scam statements is prevalent to a greater degree in case of listed
and were suspected of playing a key role in covering up the companies because the better the financials are, the higher
irregularities involving top officials of the bank. is the share price and more are the chances of fresh
investments in the company. Companies, sometimes, also
The PMC Bank crisis was sparked by default from Housing vest call options with their executives as part of their
Development & Infrastructure Ltd (HDIL) which was lent compensation plan. Vesting of call options with the company
about 73 percent of the bank's total assets. The default by executives also can lead to the risk of executives reporting
HDIL led to their auditors' role also coming under the inflated financials to maximize the profit earned on
scanner. The auditors at HDIL, in their report for FY18, exercising the option. This moral hazard, however , can be
stated that one of the units of HDIL, Guruashish Construction controlled to a large extent by incorporating the 'Claw back'
Pvt. Ltd, was referred to bankruptcy court by its lenders. In provision in the compensation plan which enables the
view of the above, the auditor made the following noting: company to recover the bonuses paid in case the
manipulation of financials is detected in future.
"As a result, the ability of Guruashish Construction Pvt Ltd
to continue as a going concern is dependent upon its
performance in terms of the resolution plan to be approved
by National Company Law Tribunal(NCLT). However, in view
of the large amount of debt of Housing Development &
Infrastructure Ltd (HDIL), we are unable to express an
opinion as to the extent of repayment of the aforesaid debt
of the company. The consequential effect of the above, on
the consolidated financial results for the period ended 31
March 2018 cannot be determined".
Now, in the wake of the crisis that unfolded at PMC Bank
and HDIL, a question that arises is as to whether merely
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