Uday Kotak, non-executive chairman of the newly constituted board of infrastructure lender IL&FS. Photo: AFP

The investigation into a series of defaults by India’s largest shadow banker Infrastructure Leasing & Financial Services (IL&FS) has brought the reputations of leading auditing firms such as Deloitte Haskins and Sells (DHS) and BSR and Co, a unit of KPMG, under a cloud.

The government-appointed board of IL&FS, headed by well-known banker Kotak Mahindra, which took over after the crisis spooked Indian markets last year, has said the two companies failed to issue warnings about shortcomings while auditing the books of IL&FS Financial Services (IFIN), one of the 169 subsidiaries of the shadow banker. It has submitted its report to the federal Corporate Affairs Ministry.

Earlier, the Corporate Affairs Ministry’s investigation wing, the Serious Fraud Investigation Office (SFIO), had found that DHS failed to carry out proper due diligence while auditing IFIN books.

Both the SFIO and the IL&FS board want the government to invoke certain sections of the Companies Act, which could lead to barring of the two companies for five years.

IFIN had granted loans to companies under stress and in many instances, this was done in violation of guidelines laid down by the country’s central bank, the  Reserve Bank of India.

While DHS has been associated with IL&FS since its inception, BSR audited IFIN’s books in the 2018-19 fiscal year. The crisis in IL&FS first came to light in July 2018, when its roads unit was facing difficulty making repayments due on bonds.

If the two firms are barred, it will be the second such instance in the country’s history, after Price Waterhouse was nailed in the Satyam Computer Services accounting scam, which rocked India’s corporate world in 2009.

In January 2018, the country’s stock-market regulator the Securities and Exchange Board of India banned Price Waterhouse from providing audit services to listed companies and market intermediaries for two years.

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