Auditor resignations: Prevention is better than cure

The recent resignation of Deloitte as the auditors of Adani Ports and the appointment of MSKA Associates as the succeeding auditors has made headline news. The reason given in the resignation letter is “We are not the statutory auditors of a substantial part of other group companies”. The press has reported that there have been “Differences with company management over several transactions”.

Similarly the auditors of Byju’s resigned citing a delay in submitting financial statements. It is time that one takes a hard look into these audit resignations and analyse their causes and impact. There is a broad similarity in the reasons for resignations in the last year or so.

Likewise a recent 67-page resignation letter by an Independent Director (ID) of Modulex Construction Technologies Ltd also made news.

There have been likewise several resignations of IDs in the recent past causing apprehension to existing and prospective IDs.

According to regulations, the incoming auditors have to take obtain a “no objection” from the outgoing auditor before taking up the assignment. Also in the case of listed companies the outgoing auditors have to report clear reasons for resigning which goes to the regulator. In the case of IDs too there is a requirement to spell out reasons for resigning rather than take safe protection under “personal reasons” “health reasons” etc.

A dispassionate assessment shows that promoters and persons in charge of management are not spending sufficient time with auditors and IDs. In the past, the MD or promoter would call the auditor to discuss issues on a boring Sunday. Today he spends that time with a prospective investor or customer as time spent in the market and customers seems more worthwhile.

Dealing with compliance and the regulatory framework has taken a heavy toll in the time allocation of the management. Priorities have naturally shifted since relationships have also become transactional. The downside is the disruption caused by sudden resignations and the new incumbent coming in this backdrop. The other reason is probably auditors are biting more than they can chew. Too many audits and cluttering of all meetings at the same time has made life difficult.

Complicated transactions are discussed via emails and WhatsApp messages. This is no substitute to thrashing them out well in advance via in person meetings and well before the deadline. The process of taking up the audit entails enough diligence undertaken via the process called “Client Acceptance”. If a feeling of mistrust creeps in, in the first year of the audit, then there is a problem with the diligence process itself. The situation is similar for an ID.

The solution

The answer lies in fixing the preventive part. The mistrust factor has to be dealt with, the key part being communication.

As corporates invest huge sums of money, sudden resignations by auditors and IDs not only vitiate the atmosphere but also derails the growth engine.

It will be worthwhile for an independent working group to go into the specific cases of audit and ID resignations in the last say 18 months and come up with preventive steps.

One solution is to provide protection to the auditor/ID for at least three years through regulation. The manner of protection can be worked out to avoid the disruptions caused through resignations. We should move to a regime where resignations should be an exception and not a rule.

The writer is a Chartered Accountant

COMMENT NOW