SEBI’s New Rules For Auditor Resignations

After a spate of mid-term and sometimes mid-quarter resignations by statutory auditors, across companies such as Manpasand Beverages Ltd., Talwalkars Better Value Fitness Ltd., Dewan Housing Finance Corporation Ltd. and Reliance Capital Ltd., the Securities and Exchange Board of India has issued new rules to regulate the process of resignation of auditors.

The SEBI circular follows a discussion paper issued in July and contains new rules that will apply to all listed companies and their material subsidiaries, effective today. The circular prescribes obligations of the auditors and audit committees of listed companies. In absence of an audit committee, the compliance on behalf of a company must be done by the board of directors.

In setting out these new rules, the market regulator has noted that resignation of auditor before completion of audit can hamper investor confidence and hence the need to regulate the process.

Here are the key changes prescribed by the market regulator:

Appointment And Reappointment Of An Auditor

The circular says that if an auditor resigns within 45 days of completion of a quarter, he/she must issue limited review or audit report for such quarter. Similarly, the auditor must issue the limited review or audit report for the next quarter as well if he/she resigns post 45 days from the end of a quarter.

An auditor would be obligated to issue an audit report for the full financial year if he/she has signed limited review or audit report for first three quarters of a financial year.

Other Provisions

To ensure quick resolution of any concerns, such as lack of information or non-cooperation of management, the auditor must approach the chairman of the company’s audit committee immediately. The audit committee should receive such concern without waiting for next committee meeting.

In the event of a proposed resignation, all concerns should be communicated by the auditor to the audit committee and the committee’s views to the management.

If the listed company or its material subsidiary does not provide information required by the auditor, an appropriate disclaimer should be made in the audit report, as per audit standards prescribed by ICAI/NFRA.

An auditor resignation must be deliberated on by the audit committee as soon as possible, not later than its next meeting. The committee must then share its views with the company’s management and these views should be shared by the listed company with the stock exchanges as soon as possible but not later than twenty-four hours after the date of such audit committee meeting.