The SEBI diktat on auditor resignations is welcome

Implementing its proposals from its July discussion paper, the Securities Exchange Board of India (SEBI) has issued a circular that aims to discourage auditors of listed companies from abandoning their posts midway, when faced with the task of revealing uncomfortable truths about the financials they are auditing. Auditors of listed firms who put in their papers mid-term will now have to ensure that they present an audit opinion either for the preceding or forthcoming quarter (depending on the time of their resignation). Where they’re unable to continue owing to uncooperative management, the company’s audit committee is expected to intervene. SEBI has also mandated detailed disclosures from resigning auditors on the exact nature of the missing information and its materiality to the finances. These steps will help ensure that stakeholders in listed companies aren’t left groping in the dark when statutory auditors abruptly quit.

While these new rules address situations where investors in listed firms face an information vacuum after auditor resignations, a remedy is yet to be found for the many errors of commission and omission that statutory auditors commit during their continued engagement with both listed and unlisted companies. Business failures that have rocked the financial system in the last couple of years have shone a harsh light on statutory auditors failing to uncover glaring holes in financials — whether it was the gold-plating of assets at IL&FS or concentrated lending in violation of RBI norms at PMC Bank. Several mid-sized listed companies are under a cloud for cooking up their headline numbers. While the Ministry of Corporate Affairs has been quite tardy at following up such cases, SEBI has been more proactive, cracking the whip on auditors found negligent in cases such as Satyam Computers. But SEBI’s efforts recently received a significant setback after the Securities Appellate Tribunal (SAT) overturned its embargo on PwC in the Satyam case. Taking the controversial view that SEBI can act against auditors of listed firms only if it unearthed evidence of deliberate intent to defraud, it questioned SEBI’s jurisdiction in cases that merely involved negligence. This has lobbed the ball to ICAI (Institute of Chartered Accountant of India) — a professional body that has tended to be quite soft on its erring members.

The Centre’s move last year to operationalise the National Financial Reporting Authority (NFRA) as an umbrella regulatory agency for the auditing profession, amid stiff opposition from the ICAI, is a welcome move. The NFRA is presently tasked with overseeing audit quality for listed companies and large unlisted firms alone. If it proves more effective than the ICAI in reforming the profession, its oversight should be extended to other unlisted firms as well. Given the number and complexity of issues it is likely to be called to handle, it needs to be equipped with adequate infrastructure, resources and technical expertise at the earliest.

COMMENT NOW