SEBI Looks To Bring More Transparency In Auditor Resignations, Audit Committee Processes 

After a spate of resignations by statutory auditors, the market regulator is looking to strengthen disclosures to bring more transparency and to strengthen audit committee processes.

The Securities and Exchange Board of India proposed changes to the Listing Obligations and Disclosure Requirements, 2009 that will require an auditor to complete and sign the audit report before resigning, and give details of information not provided by a company, among other things.

The regulator released a discussion paper seeking public comments by Aug. 8. SEBI said the paper also aims to clarify the role of the audit committee in a listed company.

Here are the key proposals in the discussion paper:

Signing Of The Audit Reports By The Auditor

The paper proposes to lay down conditions to ensure completion of ongoing obligations by a resigning auditor. It aims to achieve this by ensuring that a resigning auditor:

• Signs the audit report of a financial year before resignation if the auditor has signed the audit report for three quarters in a year.
• Provides a limited review or audit report of the company for the quarter in which the auditor resigns.
• Auditors of material unlisted subsidiary must issue the limited review or audit report for the previous quarter or a financial year in which they resign.

Declarations By A Resigning Auditor

In many recent instances, statutory auditors have resigned from listed entities citing lack of disclosure by a listed entity as the reason for their resignation. The current proposal from SEBI aims to make it mandatory for a resigning auditor to add an appropriate disclaimer on such lack of disclosure in the audit report.

The proposal states that a resigning auditor who resigns citing lack of information being made available by the company must specify the following information in its disclosure to SEBI:

• Details of information which was requested by the auditor from the management of the company and was not provided and whether such information was material and will impact the financial performance of the company.
• Reasons for the inability to obtain information from the company. A statement regarding whether such limitation was due to a limitation imposed by the management or for any other reason.
• Steps taken by the auditor to communicate the matter to the company or its audit committee and the extent of review work performed by the auditor prior to its resignation.

Detailed Reasons For Resignation

The paper proposes to make it mandatory for every resigning auditor to submit certain details in a specified format of a resignation letter. The resignation letter must include

• Reasons for its resignation and a declaration by it to the effect that there are no material reasons for its resignation.
• Efforts made by the auditor to address any existing concerns.
• Extent of audit work performed by the auditor prior to its resignation.

Disclosure By Listed Entities

The paper aims to ensure that a listed entity shall disclose the statement of resignation by the auditor to the stock exchanges.

Role Of Audit Committee

Presently, the LODR regulations do not specify a procedure to be followed by an audit committee where there are significant concerns which lead to an auditor’s resignation. To overcome this, SEBI aims to amend the LODR regulations or issue a circular to specify a detailed procedure. The paper proposes to lay down a procedure which will be binding on the audit committee and the auditors.

The proposed procedure specifies that:

• An auditor must approach the audit committee immediately in case of any concerns.
• An auditor must communicate all existing concerns to the audit committee which are a reason for its resignation, along with the relevant documents.
• An audit committee must comply with LODR regulations in communicating its views to the management and the auditor.

The deadline for comments by public is Aug. 08, 2019.