A multi-agency clampdown has begun on shell companies to tackle the black money menace wherein the role of auditors has come under the scanner for alleged connivance in facilitating illegal transactions.
The auditors' role is under scrutiny for not raising the red flag as several cases have come to the fore, including at listed companies, for alleged mismatch in financial statements, sharp erosion in net worth, siphoning off funds to group and promoter entities, sources said.
Stepping up the vigil, the ministry of corporate affairs along with SEBI and other regulatory authorities are keeping a close tab on activities carried out by shell companies.
The regulatory agencies are closely watching the functioning of auditors in various companies, especially those that have not been carrying out business for long. After a detailed analysis, the authorities would decide on the next course of action, sources added.
Auditors, who have greater responsibilities under the Companies Act, 2013, are required to ensure that financial statements of a company are proper and can red flag dubious transactions.
The ministry, which is implementing the Companies Act, has identified professionals, chartered accountants, company secretaries and cost accountants associated with the defaulting companies. An official release on September 12 stated that," (people) involved in illegal activities have been identified in certain cases and the action by professional institutes such as ICAI, ICSI and ICoAI are also being monitored". The statement also said that more than 1.06 lakh directors would be disqualified for their association with shell companies.
As part of larger efforts to fight illicit fund flows and tax evasion, the ministry has already struck off names of over two lakh companies from the records and further action is expected. SEBI has taken action against 331 listed entities that are suspected shell companies. While the regulator had imposed strict trading restrictions on these scrips, curbs have been eased in some cases after the companies went on appeal against SEBI's move.
Separately, the authorities are looking at all possibilities of having a stricter scrutiny of global auditing firms to make them more accountable, with such auditors coming under the lens in various corporate misdoings.
Earlier, an official said that the big area of concern pertains to the big guns seeking to wash off their hands whenever their names crop up in any accounting wrong doings. While the existing legal framework provides stringent regulations over auditing activities, there is no specific system in place when it comes to overseas audit firms.
The ministry is already examining the recommendations of the 3-member expert panel on various issues related to audit firms. The expert panel, headed by chairman of The Energy and Resources Institute (TERI), Ashok Chawla, submitted its report in March, 2017.