It seems that adding notes to accounts and qualifying the financial statements are no more a sufficient safety net in the minds of the statutory auditors. There has been a significant rise in the number of instances of abrupt and untimely resignation of statutory auditors from listed entities in recent times. In most of the cases, the statutory auditors have suddenly resigned without completing their assignments for the financial year. Reliance Capital Limited ("RCL"), Reliance Home Finance Limited ("RHFL"), Manpasand Beverages Limited ("MBL"), Fortis Healthcare and Bhushan Steel Limited are some of the major companies where statutory auditors have resigned recently.
One of the major resignations this year was of PricewaterhouseCoopers ("PwC") from RCL and RHFL. PwC had been appointed for a term of 5 consecutive years. However, within a span of 2 years, PwC disputed that they had not been receiving substantive responses to their queries from RHFL. Citing lack of cooperation and adverse working atmosphere, PwC eventually resigned in June this year.
Even more recently, about a month ago, Batliboi & Purohit became the third auditor to step down as the statutory auditor of MBL within a period of 1.5 years. This is after 2 other auditors - Deloitte Haskins & Sells (India) and M/s. Mehra Goel & Co. resigned in May last year and August this year respectively. The cited reason behind the same was that, they too had to deal with lack of expected co-operation from the company in respect of sharing significant data with the auditors.
Abovementioned, are only few instances of tussles between listed companies and their respective statutory auditors which makes it extremely necessary to have detailed disclosures and a specified set of rules and regulations for resignation of statutory auditors. The same is also important in light of the recent financial frauds and irregularities wherein the role of statutory auditors has been seriously questioned and doubted.
A recent circular dated 18th October 2019 bearing reference no. CIR/CFD/CMD1/114/2019 issued by Securities and Exchange Board of India ("SEBI") addresses the abovementioned concerns to a certain extent ("the Circular")1.
The said Circular primarily seeks to achieve a two-fold objective namely – (i) to provide some clarity as to the course of action to be adopted in situations of 'non-cooperation' and 'non-receipt of information' (which have been the most common reasons cited by auditors for their resignation); and (ii) to ensure that the auditors compulsorily perform some of their obligations and finish their assignments during the current financial year.
The issue of resignation of auditors is inter alia covered under the Companies Act 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Circular also intends to bolster up the existing legal framework in this regard by providing for some more disclosure related compliances.
The spurt in the resignations of statutory auditors of listed entities has not been taken too kindly by SEBI. As the regulator of the securities market, SEBI is rightly concerned about the protection of investors and other stakeholders who are likely to be misled and confused by such sudden resignations.
Clause 6A of the Circular lays down the following:
(i) If the auditor resigns within 45 days from the end of a quarter of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for such quarter;
(ii) If the auditor resigns after 45 days from the end of a quarter of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for such quarter as well as the next quarter;
(iii) Notwithstanding the above, if the auditor has signed the limited review/ audit report for the first three quarters of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for the last quarter of such financial year as well as the audit report for such financial year.
Therefore, SEBI has made its stand very clear that the auditors
cannot avoid their duties simply by resigning whenever they want
and wriggle out of their official obligations during the course of
Clause 6B of the Circular tries to deal with the problem of 'non-cooperation' and 'non-receipt of information'. It states that in such scenarios, the auditors must report the same to the audit committee of the company. If the company in question is not mandated to have an audit committee, then the board of directors of the said company shall comply the provisions of the Circular.
Thus, it is now compulsory for the auditors to approach the audit committees before they propose to resign. Simultaneously, SEBI has also put the onus on audit committees to directly and immediately address the concerns raised by the statutory auditors. The audit committees have to deliberate upon all the concerns raised by the auditors with respect to their resignation as soon as possible, but not later than the date of the next audit committee meeting.
Further, the listed entities and even their material
subsidiaries have to ensure that the aforementioned provisions are
duly incorporated and reflected in the terms
of appointment / reappointment of their auditors.
ADDITIONAL OBLIGATIONS OF LISTED ENTITIES & SUBSIDIARIES
As mentioned earlier, for the purposes of strengthening the existing legal framework in respect of statutory auditors, the Circular also provides for the following:
(i) The annexure to Circular contains a specific format for obtaining information from the statutory auditors upon their resignation. The listed companies and their material subsidiaries have to ensure that the same is duly obtained and disclosed to the stock exchanges.
(ii) The listed companies and their material subsidiaries have to continue to provide all the documents necessary for limited review/audit report during the period from when the auditor proposes to resign till the auditor submits the report for the respective quarter or financial year.
(iii) Upon the resignation of a statutory auditor, the audit committee has to meet and communicate its views to the management and within a period of 24 (twenty-four) hours from the date of such meeting, the said views of the audit committee have to be disclosed to the stock exchanges.
SEBI has taken the issue of the recent surge in auditor resignations of listed entities seriously and intends to put a brake on the same. The Circular will definitely help in providing some stability and more information to the investors and other stakeholders in relation to the audits and financials of listed entities. At the same time, such strict regulatory requirements will also put the statutory auditors in some dilemma as to whether the audit of potentially problematic clients is worth taking the risk or not. The said Circular is already in effect from 18th October 2019. However, we note that the Circular per se is silent on any penal or contravention provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.