Fraud Prevention and Auditors’ Resignation: Indian Evidence

Abstract

Detecting accounting fraud is challenging for auditors due to its inherent class imbalance between detected and non-fraud cases and the “partial observability of fraud”. Corporate India has witnessed en masse statutory auditors’ resignations in the past few years. On 3 May 2023, the Supreme Court upheld section 140(5) of the Companies Act, 2013 and observed that the subsection neither volatiles Articles 14 nor 19(1) of the Indian Constitution. The Court rules that the subsequent resignation of an auditor does not lead to the quashing of proceedings under section 140(5). Resultantly, the National Company Law Tribunal’s finding that the auditors of IL&FS have acted fraudulently remains open for further investigation. Such observation highlights the significance of audit independence and an auditor’s statutory duty to detect and prevent fraud during an audit. Furthermore, this judgement paves the way for the Indian auditing regulator, the National Financial Reporting Authority, to determine the jurisdiction of auditing the auditors.