SEBI’s Consultative Paper: A Step towards a Stricter Regime for Auditor Resignation

[Shreshtha Mathur is a fourth year law student at National Law University, Jodhpur]

A statutory auditor is appointed by a company according to the statutory requirement, in order to inspect and form an opinion about the fair presentation of a company’s accounts. Section 139 of the Companies Act, 2013 mandates that every company must appoint an individual or a firm as an auditor at its first annual general meeting who shall hold office till the conclusion of its sixth annual general meeting.

Practice of resignation by auditors

Recently, Price Waterhouse & Co. resigned as the statutory auditor of Reliance Capital and Reliance Home Finance in June, 2019 while citing a vague reason that unsatisfactory responses were given to certain observations made by it during the audit for fiscal 2018-19. Auditors usually resign due to concerns over the integrity of the management and to absolve themselves of responsibility. However, it must be noted that such resignation compromises investor confidence in the concerned company.

The procedure for resignation by an auditor has been laid down under section 140(2) of the Act. According to it, the auditor who has resigned from the company is required to file a statement within thirty days in a prescribed format with the company and the Registrar of Companies. In the case of government companies, the auditor shall also file such statement with the Comptroller and Auditor General of India, citing reasons and other facts relevant to its resignation. The auditor is expected to file a statement in Form ADT-3 when it resigns from the company, as per rule 8 of the Companies (Audit and Auditors) Rules, 2014

SEBI’s Consultative Paper

The Securities Exchange Board of India (SEBI) released a “Consultative Paper on policy proposals with respect to resignation of statutory auditors from listed entities” on 18 July 2019. It proposes the following changes to the law on auditor resignation:

  • Insertion of sub-regulation 33(9) in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2009: Conditions prior to resignation: If the auditor of a listed entity/ material unlisted subsidiary of the listed entity proposes to resign, following conditions have to be met:

1. If the auditor of a listed entity has signed the audit report for all the quarters of a financial year, except the last quarter, then the auditor shall finalize the audit report for the said financial year before such resignation. In all other cases, the auditor shall issue an audit report for that quarter before such resignation.

2. The auditor of a material unlisted subsidiary of the listed entity shall issue the audit report for that financial year/ quarter, before such resignation.

3. The auditor must provide an appropriate disclaimer in the audit report of any information that has not been provided.

  • Format of resignation: Upon resignation by a statutory auditor before the completion of the term, the auditor should be required to submit details in a prescribed format which includes detailed reasons for resignation and a declaration by the auditor of efforts made by the auditor prior to resignation, amongst other details. The resignation letter must adhere to the format prescribed. Also, the listed entity or subsidiary is obligated to disclose the resignation letter to the stock exchanges.
  • Disclosure of views of the Audit Committee and the Board of Directors: There is a recommendation that the views of the audit committee and the board of directors must be submitted to the stock exchanges along with the disclosure of the resignation letter of the auditor. There is no specific procedure laid down in the Regulations to be followed by the auditor or the audit committee, when there are significant concerns leading to the auditor resignation. In order to strengthen the role of the audit committee in the matter, a proposal was made to amend the Regulations, specifying a procedure to be followed in such cases.

a. The auditor shall approach the chairman of the audit committee in case of any concerns with the management such as non-availability of information or any non-cooperation by the management, without waiting for the quarterly meetings to take place in order to raise such concerns.

b. The auditor shall bring all the concerns it has with respect to such resignation, along with relevant documents to the audit committee’s notice.

c. The audit committee shall deliberate on the matter and communicate its views to the management and the auditor. The listed entity shall also ensure the disclosure of the audit committee’s views to the stock exchanges.

Conclusion

Maintaining investor confidence is crucial for listed companies as their capital, which ensures that their growth and survival is provided by outside investors. These outsiders do not have an inside track into the functioning and accounts of the company. Hence, when auditors abandon an audit without completing it, that leaves them in a state of apprehension and shakes their faith in the company. Auditors are already facing broader concerns with calls for an overhaul and redemption of the profession.

Section 147(2) of the Act lays down a penalty of Rs. 25,000 which may extend to Rs. 5 lakh rupees for the auditor who contravenes certain provisions. The 2017 Report of the Kotak Committee on Corporate Governance opined that this is not a strong enough deterrent and needs to be increased. It was recommended that a penalty of Rs. 1 crore on an individual auditor and Rs. 5 crores on an audit firm should be imposed in case of repeated violations. In addition to that, Institute of Chartered Accountants of India (ICAI) should disclose actions taken against members to increase transparency and act as a deterrent. An enforcement team should be established pertaining to listed entities in order to reduce the time for disciplinary proceedings. Another team must be there to analyse the reports of proxy advisors on audit related matters of listed entities and take appropriate action.

An auditor is expected to evaluate the scope and the resources available diligently before the acceptance of an engagement. They should consider resigning from an engagement when it is conclusive that the requirements envisaged by the Code of Ethics cannot be fulfilled and there is no other option but to resign.

The Implementation Guide on Resignation/Withdrawal from an Engagement to Perform Audit of Financial Statements released by the ICAI lays down situations where the auditor cannot complete the engagement, which include:

  • when the auditor cannot legally continue as an auditor;
  • when the firm obtains an information, which causes it to decline an engagement ;
  • when there is an unavoidable circumstance beyond the control of the firm.

Barring such circumstances, auditors must not resign. It is concluded that resignations by auditors must take place in a sparse manner after careful consideration.

– Shreshtha Mathur 

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