Before auditors quit

Mohan R. Lavi | Updated on July 22, 2019

SEBI wants them to give convincing reasons


In the first decade of 2000, auditors went by the motto: “When in doubt, disclose it in the notes to accounts”. This was the decade when Enron and Satyam happened. Hence, for a good part of the next decade, auditors went by the motto: “When is doubt, qualify the audit report or put an emphasis of matter”.

As this decade is coming to an end, the motto has suddenly shifted to “When in doubt, resign”.

Reliance Capital, Reliance Home Finance, Atlanta Ltd, Manpasand Beverages, Fortis Healthcare, Vakrangee Ltd and Bhushan Steel Ltd are some companies where auditors have resigned rather abruptly. The Companies Act, 2013, has detailed provisions for rotation of auditors — they may soon have to think of provisions for abrupt resignation of auditors.

The Securities and Exchange Board of India has been quick to react. It has come out with a ‘Consultative Paper’ on policy proposals with respect to resignation of statutory auditors from listed entities. The Consultative Paper has been drafted with the twin purposes of strengthening disclosures to investors and fortifying and clarifying the role of the Audit Committee. SEBI did not like the reason given by auditors for resignation, namely, ‘preoccupation’.

The Paper recommends that if an auditor of a listed entity proposes to resign, and if he has signed the audit report for all the quarters of a financial year except the last quarter, then the auditor shall finalise the audit report for the said financial year before resigning. In all other cases, the auditor shall issue a limited review/audit report for that quarter.

With respect to an unlisted subsidiary of the listed entity, the auditor shall issue the limited review/audit report for that financial year/quarter, as applicable. If the reason for the auditor’s resignation is the entity not providing information, the auditor shall provide a disclaimer in the audit report.

Time has proved that the ideal way to force a person to communicate in India is to develop a ‘form’. SEBI has done exactly that, by introducing a form for the auditor to communicate his resignation. In addition, he is to provide detailed reasons for resignation and a declaration that there are no other material reasons other than those provided. In case of any concerns, the efforts made by the auditor prior to resigning (including approaching the Audit Committee) are to be stated.

The Paper empowers the auditor to approach the Audit Committee at any point during the audit, and not necessarily at the time of the quarterly review. The auditor shall bring to the Audit Committee’s notice all the concerns with respect to such resignation, along with relevant documents. In cases where the resignation is due to non-receipt of information/explanation from the company, the auditor shall enlighten the Audit Committee of the details of information/explanation sought and not provided. The Audit Committee shall deliberate on the matter and communicate its views to the management and the auditor.

While the form may provide some additional reasons for resignation, audit firms would be extremely careful in providing any information that could be confidential or backfire on the work done in past years for the same client. Hence, the wording in the ‘reasons for resignation’ should say something, but give away nothing. “We resigned due to non-receipt of critical information on certain significant transactions, which could have enabled us to comment on their impact on the financial statements” – could be one such reason.

The writer is a chartered accountant

Published on July 22, 2019

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