The Securities and Exchange Board of India (Sebi) has done well to propose a regime in which auditors can’t resign without spelling out the real reasons for such a decision.
In the wake of IL&FS auditors, Deloitte Haskins & Sells and BSR & Associates, facing regulatory action after the company started defaulting on its debt—IL&FS has a total debt of Rs 106,000 crore—and it was found that the auditors didn’t red-flag the problems in time, there have been a spate of resignations by auditors from a host of companies where the ability to service borrowings has come under cloud. Auditors have walked out abruptly from their contracts with Reliance Capital, Manpasand Beverages, Fortis, and Bhushan Steel, among others, recently. While, in many cases, auditors have cited preoccupation with other work, primarily, as the reason for this, it does seem as if the resignations are related to the authorities turning up the heat on auditors. In some cases, it is true, auditors have flagged entries in the books that don’t look kosher or even cited the hindrances in accessing relevant information to audit the financial statements of a company. But, largely, auditors haven’t been forthcoming about the real reason for resigning, and this has left investors in the lurch.
The Securities and Exchange Board of India (Sebi) has done well to propose a regime in which auditors can’t resign without spelling out the real reasons for such a decision. Sebi, in a consultation paper, recommends that if an auditor of a listed company wishes to resign, and has completed the audit for all quarters of a financial year except the last, then the auditor will have to finalise the audit report for the entire financial year before walking out. In case the auditor wants to walk out during any quarter other than the last, a limited audit for that quarter has to be submitted. These provisions will also hold for any unlisted subsidiary of the listed entity. And, if the auditor is resigning because the entity isn’t providing the required information, the auditor must provide a disclaimer in the report and, more important, give details of what information was sought—in which case, investors will have a better idea of just how bad things are in the organisation. The auditor also has to give detailed reasons for resignation and state that there are no material reasons other than those provided. Sebi has done well to bring the company’s audit committee into the process; so, if an auditor is not getting information, this has to be brought to the attention of the audit committee.
The financial jugglery that firms with dodgy accounting indulge in, it is true, makes gleaning of facts extremely difficult—a recent report by REDD details how such hard-to-detect masking has been done in some cases—but, the role of the auditors is to uncover this and report it; and, if that is not possible, then at least to flag potential problem areas. That said, meaningful action against corporate fraud will also need the regulators to up their surveillance game and also to bring to book lapses in corporate governance of the kind that happened at IL&FS; the company’s risk-management committee, for instance, met just once in four years (the consolidated debt around doubled during this period). Not allowing the auditor to evade its responsibility is welcome, but more needs be done to prevent another IL&FS. In that matter, both RBI and Sebi were caught napping.