Auditors resigning from any company before their term ends is a very serious issue. There may be a need to distinguish between auditors who are resigning in their first year of appointment and those who are resigning after having been the auditor for multiple years and giving a clean report in those years.
In most cases, auditors are resigning invariably due to concerns over the integrity of the management. While it may absolve them of responsibility, this weapon of resignation is like capital punishment. It should be applied only in the rarest of rare cases. It leaves the entire shareholding community guessing and leads to considerable uncertainty among the investors. It also leaves the future of the company uncertain. Consequently, interests of employees and other stakeholders are adversely affected.
What are the probable solutions to this? Stakeholders understand that the auditors must be in an extreme situation to take such an extreme step.
1. The general confidentiality clause between the client and the auditor should not apply at this time. Therefore, they should be asked to make a full disclosure of the facts and circumstances leading to the resignation.
The Companies Act, 2013 already provides for the resigning auditor to file reasons with the Registrar of Companies while filing his resignation.
This will virtually be like a charge sheet on the company, without any ambiguity. The law could further be amended to protect the resigning auditors from any legal actions by the company and its management.
2. Can the mere want of information be sufficient ground for the auditors to resign? It could be that they are aware of a very large issue coming up, and in order to avoid disclosure, are taking such a step.
If the auditors are not in their first year of audit and have given clean reports in the past, it is ideal that they pursue and provide a report with suitable qualifications/disclaimer as the case may be rather than step down, making it convenient for the management and leaving other stakeholders in the lurch.
3. Should not the auditors continue with the engagement and give a report explaining the irregularities/impropriety which can then be measured for depth and materiality?
- Is it not better to have an audit conclusion rather than an audit anticipation? Would that not help the investors to come to a conclusion?
- When the auditors who have vetted financial statements of the same company in the past, resign suddenly, they put everybody in difficulty.
- While several standards may provide for withdrawing from the engagement, the withdrawal at the time of final accounts is serious. And if they have been the auditors for more than a year, it is only fair to expect them to continue the audit and provide a qualified opinion or disclaimer of an opinion, so that the shareholders get a clear verdict.
4. If it is the same auditor who had been engaged in the audit in the past, his role in the past quarters and past years have to be examined. Has he brought this issue or any other issue involving integrity of the management to the attention of the audit committee/members? If they have given a clean report, the company cannot, all of a sudden, come to a situation where the auditors have to take an extreme step.
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The auditor should be required to continue the audit and give an appropriate report. They should be asked to make a full disclosure including the management letters they have given to the company with the Securities and Exchange Board of India, and SEBI should then decide to relieve the auditor or direct them to proceed with the audit with the available information and give a report.
If SEBI agrees with the resignation of the auditor, it should appoint the new auditor. That should not be left to the management.
This will protect the interest of all stakeholders, including the regulator, and ensure the independence of auditors. SEBI should call for an investigation if the subsequent report is clean as this endangers the investors and other stakeholders. Going after such auditors who accept such engagements would bring clarity on issues which have been raised by the outgoing auditors and whether these have been appropriately addressed by the incoming auditor fairly.
The responsibility of company management and the audit committee is absolute and they should ensure that all information sought is provided. The board should be seriously concerned about this. There cannot be a situation where the board is right and the auditor is wrong or vice versa. With reference to the investors, the board should clearly take a stand and explain the circumstances with full facts and figures.
Santhanakrishnan S is the Managing Partner and Founder of PKF Sridhar & Santhanam LLP.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.