Markets

Why auditors must mark their entry & exit with bourses

KS Badri Narayanan Chennai | Updated on June 08, 2018 Published on June 08, 2018

SEBI should classify communications from auditors as price-sensitive information

It is the season of exodus of auditors at India Inc. The exits, however, are causing huge financial harm to investors in those companies.

A few days ago, shares of Manpasand Beverages crashed following the resignation of its auditor Deloitte Haskins & Sells.

Similarly, shares of Atlanta plunged as its statutory auditor for financial year 2017-18, Price Waterhouse Chartered Accountants LLP, resigned on May 29. Price Waterhouse had also resigned from Vakrangee in April due to lack of information about its election books, bullion and jewellery business, according to reports.

Reports quoting Prime Database, a primary market tracker, say that 32 auditors have so far resigned in 2018; the number of exits stood at 36 in 2017-18 and just 18 in 2016-17. The reasons behind the auditors’ exits have ranged from lack of adequate information on the company’s businesses, revenues and tax observations to mutually agreed upon exits.

When Price Waterhouse stepped down from Atlanta, it said the infrastructure engineering firm did not share “significant information” and “significant observations by tax authorities” as requested.

Price-sensitive information

Some exits were also because of “health concerns” and other “preoccupations”. In some other cases, the firm simply ceased to exist, says Prime Database.

The exit of auditors cause fluctuation in share prices, as the past few weeks bear out. So, should SEBI’s classification of price-sensitive information include auditors’ communications too?

According to SEBI, price-sensitive information means any information that relates directly or indirectly to a company, which if published is likely to materially affect the price of the securities of the company.

Disclosure to exchanges

Information such as financial results of the company; intended declaration of dividends (both interim and final); issue of securities or buyback; expansion plans or execution of new projects; amalgamations, mergers or takeovers; disposal of the whole or a substantial part of the undertaking; and significant changes in policies, plans or operations of the company are classified as price-sensitive, according to SEBI.

Since auditors’ actions also have a material impact on stock prices, all communications between the auditor and a company, be they routine in nature or serious observations, should be disclosed to the exchanges. Besides, exchanges should also have a separate window/format such as the one they have for pledged shares, SAST, insider trading, and so on, so that companies can share material information immediately with the public.

SEBI can strengthen cooperation with government agencies for exchange of information in cases related to listed entities.

Exit window

Also, auditors should be allowed to exit from the company only in the first month or few days of a financial year, so that whoever steps in can have a reasonable length of time to handle the accounts in the ensuing fiscal.

Published on June 08, 2018

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