On second thoughts

The decision by Financial Technologies India Ltd’s (FTIL) auditor to withdraw its audit opinion on the company’s financial statements for 2012-13 a good four months after they signed off on them raises serious questions relating to investor interest and the precedent it sets for the auditing profession. The auditor, Deloitte Haskins & Sells, may now have its reasons for believing that FTIL’s financial statements are not to be “relied upon”. But what about the investors and other stakeholders who dealt with the company over the last few months on the basis that the audited accounts were true and fair?

Deloitte has cited the Standard on Auditing 560 (SA 560) to retract its opinion. But a reading of the Standard shows that its intent is far from allowing auditors to withdraw their opinions on financial statements after they have been signed and circulated. SA 560 defines ‘subsequent events’ as those occurring between the date of the balance-sheet (March 31, 2013 in this case) and that of the audit report (May 30). If an event that materially affects a company’s financials occurs before the auditors prepare their report, they can ask the management to amend the accounts to reflect it. In the event of refusal, the auditors can ask the public ‘not to rely upon’ the published numbers. But in FTIL’s case, the ‘event’ that made Deloitte backtrack — allegations of fraud in the company’s subsidiary, the National Spot Exchange Limited — came to light on July 31, well after the auditor’s report. It is true that audit firms work with the numbers they are given; also, the fraud in NSEL lay not so much in cooked books, but in the unregulated operations that finally did it in. Nevertheless, the options for Deloitte, or any other audit firm in a similar situation, are two-fold. Stand by the earlier report in the event they are convinced that due diligence was exercised in conducting the audit. Or, provide investors and stakeholders in the company a detailed explanation of how exactly its financials were compromised. Given that FTIL is a publicly-traded company, disclosures about its true financial position cannot be put on hold until the next financial period or until the company releases restated numbers.

Deloitte’s unprecedented withdrawal decision deserves the full attention of the Institute of Chartered Accountants of India, the self-regulatory body for auditing professionals, as well as the capital markets regulator, SEBI, which is tasked with investor protection. The scope of SA 560 must be clearly laid out, if not reviewed. And the auditor must be asked to make a public statement about why the audited accounts were wrong, an explanation that goes beyond the sketchy remark that the company’s statements are unreliable. We need a guideline that lays down, in black and white, what public disclosures an auditor must make in the event of corporate fraud surfacing after financial statements are finalised and published.

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