Madras High Court Quashes SFIO Case Against Deloitte Partner In Subhiksha Fraud Probe

The Madras High Court on Wednesday has quashed criminal proceedings initiated by the Serious Fraud Investigation Office (SFIO) against Deloitte Haskins & Sells partner and statutory auditor M.K. Ananthanarayanan over his audit of Subhiksha Trading Services Limited (STSL).

The SFIO had accused him of failing to verify the retailer's sales, purchases and related-party transactions, and of not reporting its non-compliance with prescribed accounting standards.

Justice Sunder Mohan held that, even if those allegations were accepted as true, they did not make out the offences alleged against him under the Companies Act, 1956.

The court said the allegations, even if accepted as true, suggested only a lack of due care and caution and dereliction of duty. They did not indicate a wilful default, which was necessary to sustain the prosecution.

The court observed: "...the allegations against the petitioner that he had failed to make the necessary enquiries and that he did not state in his report that the company did not comply with the prescribed accounting standards, in the facts of this case, at the most, suggest only lack of due care and caution and dereliction of duty, even if the allegations are accepted to be true and do not suggest that the lapse or non-compliance or the default was wilful."

The SFIO alleged that STSL and its Managing Director siphoned funds, falsified books of account and presented a misleading picture of the company's financial position during the financial years 2004-05 to 2006-07. It claimed the auditor failed to verify sales, purchases and related-party transactions.

According to the complaint, he also did not make the necessary enquiries and failed to state in his audit report that the company had not complied with prescribed accounting standards. Based on these allegations, the SFIO invoked Sections 628 read with 211 and Sections 227 read with 233 of the Companies Act, 1956.

Appearing for the auditor, Senior Advocate J. Sivanandaraaj argued that the provisions invoked did not apply to a statutory auditor. He submitted that the petitioner had merely expressed an audit opinion based on the records made available by the company. Even if there had been any lapse, he argued, it could not amount to a "wilful" default attracting criminal liability.

The court first examined whether the auditor could be prosecuted under Section 211 of the Companies Act, which governs the form and contents of a company's balance sheet and profit and loss account. It held that liability under the provision is confined to the managing director, manager, directors, officers, employees or any person specifically entrusted with ensuring compliance.

"It is not the case of the respondent that the petitioner has been charged with such a duty by the Company. Therefore, the petitioner, who is not the Director or employee or any person specified under Section 209(6) or 211(8), cannot be prosecuted for the offence under Section 211 of the Act," the court held.

The court next examined Section 628, which punishes making false statements or knowingly omitting material facts in documents required under the Act. It found that the complaint did not allege that Ananthanarayanan himself had made any false statement in his audit report or had knowingly omitted any material fact. Instead, the allegation against him was that he failed to report the company's non-compliance with prescribed accounting standards.

"Therefore, any alleged failure or dereliction of duty of the statutory Auditor, would not amount to an offence under Section 628 of the Act and therefore, prosecution for the said offence cannot be sustained against the petitioner," the court said.

Turning to Section 233, the court noted that criminal liability under the provision arises only if the auditor's default is wilful. It found that the complaint merely alleged that the petitioner failed to make the necessary enquiries and failed to state in his audit report that the company had not complied with prescribed accounting standards. The complaint, however, did not allege that those lapses were wilful.

"...unless there is an allegation that the lapse on the part of the petitioner was wilful, it cannot be inferred that the violation was wilful, especially in the light of the observations/adverse remarks made by the petitioner about the company's accounts in his Audit Report," the court held.

Holding that none of the penal provisions invoked by the SFIO could be applied to the petitioner, the court quashed the criminal proceedings against him.

For Petitioner: Senior Advocate J Sivanandaraaj, Advocates Aditya Vikram Bhatt and S. Sakthivel

For Respondent: Advocates ARL Sundaresan, ASG and K. Subbu Ranga Bharathi, Special Public Prosecutor