First, the statutory auditors resign claiming the company did not provide satisfactory answers to their queries. Then the company’s shares nosedive. Now the company is suing the auditors for false claims and damaging the company’s reputation. This is the story between Price Waterhouse & Co (PwC) and Reliance Capital, a company within the Anil Ambani led Group. The claim for damages? Rs 10,000 crore! Not just that, some shareholders of the company are separately taking on the world-renowned audit firm with a class action suit for the loss the auditors’ actions and statements have caused them.

Reliance Capital claims it has obtained opinions from its current auditor as well as independent legal firms that there was no wrongdoing on its part and that the irregularities in its books as pointed out by PwC do not exist. It appears Reliance Capital had sent these opinions to the auditors to respond but got no reply. This is the reason for this legal suit for damages.

The story began in June this year when PwC sent a letter to the Ministry of Company Affairs that they are invoking the provisions of section 143 (12) of the Companies Act and are quitting as auditors of two companies, Reliance Capital and Reliance Home Finance. Now, this particular clause implies that the company has committed some financial irregularity and when the auditors asked for details or explanations, the management did not provide them a satisfactory reply.

Subsequently, Reliance Capital sought a legal opinion and has managed to receive the opinions in its favour as stated above. The company’s board has since met and decided to haul PwC to court and ask it to pay Rs 10,000 crore as compensation for the damages caused. The wordings used are “defamation, reputation loss and also a massive loss to shareholders of the company”.

The class action suit under section 245 of the Companies Act 2013 is being planned by some section of the shareholders of both the companies and the promoters can become parties to that suit later. They are claiming that the shares of Reliance Capital and Reliance Home Finance fell 48% and 58% respectively, as soon as the auditors resigned. Now, if the auditors’ version is being proved as false then the shareholders will argue that the loss they incurred on the bourses were deliberately caused by the auditors.

It is also learnt that both sides have engaged some top law firms to fight the legal battle.

The IL&FS fiasco has opened up a can of worms as far as the audit firms are concerned. All the big four, viz. KPMG, PwC, Deloitte and EY appear to be involved in one way or the other in hiding the financial misdemeanours of the companies and not flagging such irregularities in their audit reports.  #casansaar (Source - The News Mint)