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THEIR FAILINGS, OUR LEARNINGS

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EXIT, SMOKESCREENS AND REALITY

Context:

The foreign subsidiary of a leading chemical company saw its auditors resign. Auditors resign for several reasons. However, resigning for want of capacity is not normally heard of. Was it a case of biting more than one can chew?

  • On October 8, 2020, one of the big 4 audit firms resigned as Auditors of a material subsidiary of a large listed Indian Company. The Indian sub-licensee of the big 4 firm is the Auditor of the parent Company.
  • On October 14, 2020, the material subsidiary informed the parent Company about the Auditor’s resignation.
  • On October 15, 2020 late evening, the parent Company informed the Stock Exchanges about the same, but did not disclose any details.
  • On October 16, 2020, the shares of the Company fell by almost 10%.
  • On the same day, the Company sent a clarification to the Stock Exchanges, and attached the resignation letter of the Auditor. The Indian sub-licensee continued to be the Auditor of the parent Company, and its Indian subsidiaries.
  • The resignation letter cited the reason for the resignation to be ‘‘to reorganize audit process and improve productivity’’. The letter did not disclose any detailed reasons, and was not in the prescribed format. Also, it was not by any partner or authorized representative of the audit firm, but only mentioned the name of the firm.
  • On October 16, 2020, to control the damage, the parent Company’s promoter CEO, in a media interview, stated that the Company had asked the Auditor to resign. However, the Auditor was to remain the Company’s global Auditors, including in India. He stated that the Auditor firm had a small presence in the country where the material subsidiary is situated, and so it was unable to close the accounts on time, because appropriate resources were not available to close accounts of more than 100 subsidiaries.
  • On October 22, 2020, Stock Exchanges sought further details with respect to resignation of the Auditor.
  • On October 27, 2020, the Audit Committee of the Company met to review circumstances relating to resignation of the Auditor. As per the response that the Company filed with the Stock Exchanges, they were of the following view –
    1. The Auditor had stated that there are no circumstances that according to them should be brought to the notice of members of the Audit Committee.
    2. Reason for change in Auditors was to reorganize the audit process and improve efficiency. The auditor had been advised by the Company to resign.
  • On October 29, 2020, in response to details required by the Stock Exchanges, the Company stated that in a letter dated October 28, 2020, from the Auditor who had resigned, it was stated that the Auditor was governed by the laws of the other country, and the firm was therefore unwilling to share details or anything else in addition to what was already provided, as it did not consider it obligatory on its part to provide the information, and it could not sign any document to be submitted to an authority outside of its country, as advised by their risk management team.