Sebi mulls stricter disclosures for auditor resignation

In light of a spate of resignations by auditors and many not stating the reasons for such decisions, markets regulator Sebi on Thursday put out a consultation paper on policy proposals with respect to resignation of statutory auditors from listed entities, asking for suggestions on the new framework.

The Securities Exchange Board of India (Sebi) has proposed that if the auditor of a listed entity has signed the audit report for all the quarters of a financial year, except the last quarter, the auditor shall finalise the audit report for the said financial year before such resignation. In all other cases, the auditor shall issue limited review/audit report for that quarter before such resignation.

With respect to the auditor of a material unlisted subsidiary of the listed entity, the auditor shall issue the limited review/audit report for that financial year/quarter, as applicable, before such resignation.

Sebi further proposes that if the reason for the auditor’s resignation is the entity not providing information, the auditor shall provide an appropriate disclaimer in the audit report to that extent and the disclaimer as specified in this clause may be in accordance with the Standards of Auditing as specified by ICAI.

The proposals come at a time when several auditors continue to resign before fulfilling their responsibilities of completing the assignments for the quarter, half year and year. “This leaves the investors and stakeholders with lack of reliable information for making better financial decisions,” the regulator said adding that the framework is being proposed in order to enhance responsible behaviour of auditors and strengthen the disclosures to investors and stakeholders.

Sebi has also put out the proposed format to be followed for the resignation which would include detailed reasons for resignation, declaration by the auditor that there are no other material reasons other than those provided, in case of any concerns, efforts made by the auditor prior to resignation including approaching the audit committee. Further, details of the information requested by the auditor which was not provided are proposed to be among other requirements for such resignations.

Companies listed on stock exchanges will also be required to provide disclosure of such resignation letter to the stock exchanges, among other requirements that they are proposed to adhere to. In the last three years, a total of 115 auditor resignations have been reported, according to data sourced from Prime Database. Of these, so far in 2019, 17 resignations have been recorded versus 70 in the whole of 2018 and 28 in 2017.

Commenting on the proposed framework, industry experts said, that at present there seems to be a trend where auditors are resigning stating personal issue or company not providing with requisite information, however, companies are saying that auditors are asking irrelevant information, which is creating confusion. Pavan Kumar Vijay, founder, Corporate Professionals Group said, “With this consultative paper, Sebi has outlined what should auditors do before resigning from the company. However in our opinion auditors should not be appointed by company as there will be conflict of interest, but by some other agency like ICAI”.

Some of the recent auditor exits in the recent past include PriceWaterhouse &Co resigning as the auditor of Vakrangee due to lack of information about its election books, bullion and jewellery business. Earlier, the company had stepped down as an auditor of Atlanta stating lack of disclosures from tax authorities. Bhushan Steel’s audit firm Mehrotra and Mehrotra had also resigned from the company in May. Earlier this year, Manpasand Beverages stock took a massive hit when Deloitte Haskins and Sells quit as the firm’s auditors.