SEBI raises the exit barrier for auditors

As part of its efforts to rid Corporate India of scams and frauds fuelled by financial opaqueness, SEBI is turning up the heat on auditors by making them more accountable. Financial auditors of a company will now not be able to casually resign without finalising the audit report for the full year if they have signed previous quarterly reports. Besides, the auditors will have to provide proper reason for resignation and would have to state if the company was not sharing proper financial numbers for audit purpose.

All these proposals are part of a consultation paper that SEBI put out on Thursday for public comments. This comes amid a spate of exits by auditing companies. Recently, BSR & Associates, part of global accounting firm KPMG’s network in India, had resigned as an auditor of IL&FS Financial Services, which is being probed for alleged financial irregularities. PwC too had resigned as the auditor of Reliance Capital and Reliance Home Finance and Deloitte Haskins and Sells LLP had tendered resignation as the auditor of Fortis Healthcare.

Enhancing public disclosures

“The changes proposed will certainly help in enhancing public disclosures required in case of resignation by auditors,” said Moin Ladha, Partner, Khaitan & Co. “It will also lay down a procedure in case the auditors’ resignation is triggered by significant concerns about a company.”

SEBI has proposed that if an audit firm of a listed entity proposes to resign and has signed the audit report for all the quarters of a financial year, except the last quarter, then it shall finalise the audit report for the said financial year before such resignation. In all other cases, the auditor shall issue limited review/audit report for that quarter before such resignation (i.e. previous quarter in reference to the date of resignation). SEBI has also come out with a proposal on strengthening and clarifying the role of the audit committees.

Detailed reasons for the resignation, a declaration by the auditor that there are no other material reasons other than those provided, and in case of any concerns, efforts made by the auditor prior to resignation need to be compulsorily mentioned in the prescribed format. If information is not furnished by the company, the auditor has to provide details on the information requested, reason for the inability to provide the information, assessment of the severity of the information, etc. In case of concerns about the management such as its non-cooperation, the auditor shall approach the chairman of the Audit Committee directly and immediately.

“This will stop rampant resignation and prevent auditors from escaping from their responsibilities at the last moment,” said Deepika Sawhney, Partner, Corporate Professionals.

“These suggested norms are fairly timely in as much as they have been issued in the backdrop of number of resignations from statutory auditors of the prominent companies that were in midst of financial scams and were facing corporate governance issues. The proposed guidelines indicate that such cases would be scrutinised more closely by regulators and will require significantly enhanced disclosures to the investors,” said Vaibhav Kakkar, Partner, L&L Partners.

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