MUMBAI: The government-appointed board of Infrastructure Leasing & Financial Services has proposed punitive action against Deloitte Haskins & Sells (DHS) and BSR & Co, part of the KPMG network, said people with knowledge of the matter.In its report to the Ministry of Corporate Affairs (MCA), the board said it had found the two firms failed to issue warnings about shortcomings while auditing the books of IL&FS Financial Services (IFIN), a subsidiary of IL&FS.Earlier, the Serious Fraud Investigation Office (SFIO), the investigation wing of the MCA, had in its ongoing probe allegedly found that DHS failed to exercise due diligence.Sources added that both the board and the MCA are of the view that action must be taken against DHS and BSR, including the possibility of invoking Section 140(5) of the Companies Act, which allows barring an auditor for a period of five years, and also Section 147, which deals with punishment for contravention of rules.IL&FS group chief communication officer Sharad Goel declined to comment, as did Deloitte and KPMG.IFIN GAVE LOANS TO COS UNDER STRESSDeloitte had told ET last week that it was in compliance with auditing norms.“The investigations on the company (IFIN) are in progress and we are cooperating fully,” a Deloitte spokesperson had said in an email. “We reaffirm that we have conducted our audits in accordance with the standards on auditing and the applicable laws and regulations.” IFIN gave loans to companies under stress, said one of the persons cited above.“As the auditors, the firms were duty bound to highlight the loans to companies that were in financial stress themselves,” he said. “Also, the probe has found instances of loans being granted in violation of RBI (Reserve Bank of India) guidelines.”These firms were required to tell the company that its loans were violating the provisions.The firms failed to raise the repeated rollovers of loans by IL&FS and IFIN, he added. It also failed to query the quality of collateral secured against loans made by IFIN, he added.While DHS been associated with IL&FS since inception for more than a decade, BSR audited IFIN’s books in 2018-19. The crisis in IL&FS first came to light in July 2018, when its roads unit was facing difficulty in making repayments due on bonds. Erstwhile IL&FS CMD Ravi Parthasarathy resigned on July 21, 2018.“Both the MCA and the board are of the view that the firms should be dealt with stringently including exploring the possibility of invoking the provisions of the Companies Act that allows punitive action including the possibility of debarring a firm for a period of five years,” said the official cited above.Some of the anomalies that the auditor failed to note were also mentioned in the 166-page interim report by audit firm Grant Thornton India. It had identified 16 instances in which loans amounting to Rs 1,922 crore were apparently sanctioned on a negative spread (average cost of borrowing rate minus lending rate), or limited spread, for companies in financial distress. In seven of these cases, the loans provided have either been written off or are related parties of the companies for which loans were written off. In five out of these 16 cases, loans were approved even after negative assessments by the infrastructure financier’s risk team.