A Statutory Auditor is a person authorised to review and verify the accuracy of financial statements of a company and to inter alia ensure that the company complies with the prescribed Accounting Standards. He/ She has the responsibility of assuring the stakeholders, especially the shareholders, that the financial statements represent a true and fair picture of the state of affairs of the company. This underlying trust, in assigning this responsibility to the Auditor, needs to be preserved by him/her by his/her diligent discharge of duties associated with such a responsibility.

An Auditor should accept an audit assignment not merely as a professional commitment, but with a sense of pride for safeguarding the interests of stakeholders. With the passage of time, business practices are becoming complex and business environment has become increasingly more challenging. Accounting Standards now require stringent compliance mechanisms, which demand more time and attention of the Auditor, and cost more in enforcement.

In the light of the important role performed by them, resignation of Auditors became a matter of great concern when numerous mid-term resignations were reported in the year 2018. The stated reasons behind these ranged from lack of adequate information provided by the management on the company’s businesses, revenues, and tax observations to exits without giving any reasons. Some other reasons given were “health concerns", “pre-occupation" or “re-evaluation of continuing with a client as per internal policies of the firm”.

ICAI’s Auditing Standards (SA-705) inter alia state that in a situation where the possible effects on the financial statements of undetected misstatements are both material and pervasive, such that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the Auditor can resign.

Financial scams such as those in Satyam, IL&FS etc., have put the role and accountability of Statutory Auditors under increased scrutiny. In the case of Satyam, PwC, the Statutory Auditor, was banned in 2018 by SEBI from auditing listed entities for two years. RBI, in June, 2019, banned SR Batliboi & Associates LLP from auditing commercial banks for one year, starting April 1, 2020, citing lapses in statutory audits conducted by them. NFRA, in 2020, barred three auditors of Deloitte Haskins and Sells (Deloitte) for professional misconduct in the audit of IL&FS Financial Services. SFIO also filed a criminal complaint against BSR & Associates and Deloitte in IL&FS Financial Services’ case.

Many auditors fear reputational risk as they do not want themselves to be associated with dubious companies. In the last couple of years, auditors have witnessed increasing attention of the Regulators, in the event of any lapses. Their role has come under scanner due to several business failures and financial frauds. The Chartered Accountants Act, 1949 and the Companies Act, 2013 provide for stringent consequences if an Auditor is found guilty of not discharging his/her role properly. NFRA was constituted w.e.f October 1, 2018, with an aim to assist in the framing and enforcing of legislations relating to accounting and auditing, and improving investor and public confidence in the financial reporting of an entity.

SEBI, after noticing the significant number of instances of abrupt resignations by Statutory Auditors of listed entities, floated a consultation paper on July 18, 2019. Post receiving comments, SEBI, vide its communication dated 18th October, 2019, issued a circular regarding the subject. This circular gave details regarding steps to be taken and disclosures to be made in the event of the resignation of an Auditor. The key highlights of the circular are-
a) It has expanded the role of an Auditor in case he/she resigns mid-term. This includes his/her role to give a limited review/ audit report for some quarters, depending on when during the FY, he/she chooses to resign. The intent is to prevent disruption because a new Auditor would take some time to settle down, and to provide a report. The entity too has been told to cooperate with the Auditor during this period.
b) The Auditor has to approach the Chairman of the Audit Committee (AC) about any concern(s) with the management of the listed entity/material subsidiary, such as non-availability of information/non-cooperation, which may hamper the audit process. AC in turn has to receive such concerns directly and immediately, without specifically waiting for the quarterly AC meetings.
c) If the Auditor proposes to resign, all concerns with respect to the proposed resignation, along with the relevant documents, have to be brought to the notice of the AC.
d) Where the proposed resignation is due to non-receipt of information/explanation from the company, the Auditor is to inform the AC of the details of information/explanation sought and not provided by the management.
e) On receipt of such information from the Auditor relating to the proposal to resign, the AC or the Board has to deliberate on the matter, and communicate its views to the management and the Auditor.
f) In case the listed entity/its material subsidiary does not provide information required by the Auditor, to that extent, the Auditor can provide an appropriate disclaimer in the Audit report, which must be in accordance with the Standards of Auditing specified by ICAI/ NFRA.
On the resignation of the Auditor,
a) SEBI LODR Regulations, 2015 already require that detailed reasons for the resignation of the Auditor are to be disclosed to the Stock Exchanges as soon as possible, but not later than 24 hours of receipt of such reasons from the Auditor.
b) Also, the listed entity/ material subsidiary is to obtain some specific information from the Auditor. These inter alia include detailed reasons for resignation; in case of concerns by the Auditor, the efforts made by him/her, such as approaching the AC / Board, along with the date for the same; in case the information requested by the Auditor was not provided, then was it due to management imposed limitations or circumstances beyond the control of the management, whether lack of such information would have a significant impact on the financials, whether the Auditor performed alternative procedures to obtain appropriate evidence, and whether this lack of information was prevalent in the previous year’s audit and if so, the basis on which that report had been issued. The Auditor is also to certify that there are no other material reasons for his/her resignation.
c) Upon resignation of the Auditor, the AC is to deliberate on all the concerns raised by him/her, with respect to the resignation, as soon as possible, but not later than the date of the next AC meeting and communicate its views to the management.
d) The listed entity is to ensure that the AC’s views are disclosed to the Stock Exchanges as soon as possible, but not later than 24 hours after the date of such AC meeting.
The intent of SEBI is to encourage Auditors to disclose the true reasons for their resignation. This was introduced to help investors and Regulators to see early warning signs. This also gives an opportunity to the AC and the management to interact with each other, as well as the Auditor, regarding any concerns that the latter may have, before it is too late. SEBI could have also considered mandating a formal process by which the management’s views too could be sought and disclosed, as it is the primary stakeholder in this process, and therefore should have the right to present its view for complete transparency and fairness.

A point that has not got adequate attention in this circular and otherwise is that the appointment of an Auditor is approved by the shareholders at a General Meeting. The real clients of the Auditor therefore are the shareholders. In case, an Auditor wishes to resign before the completion of his term, he/she should be held accountable by the shareholders, and should therefore provide them a clear reason for the same. To this end, the Auditor should be allowed to be present at the next General Meeting to directly address the shareholders, and explain to them the reason of the resignation.

Resignation should be the last step taken by any Auditor. Instead, he may give a report with qualification, reservation, adverse remark or disclaimer. Further, adequate disclosures on the circumstances that have resulted in such a report should be mentioned.

The present business environment has become more volatile, uncertain and complex, and the role of Auditors has gained more importance in recent times. Before exercising the right to resign, an Auditor should explore the possibility of a discussion with the management and/or with the AC to ease out any stresses that may exist. Management and AC too on their parts should be open to such a dialogue. This would help strengthen the process of audit in companies.

- Prerna Mohan