SEBI, RBI Propose to Stop Auditors’ Resignations Citing Preoccupation

Reverberations of the Infrastructure Leasing and Financial Services (IL&FS) debt repayment default continue in India’s audit world, although 11 months have passed since the Group’s financial mess came to light.

In fact, the situation has worsened in the last two months with several auditors resigning, due to allegations of non-cooperation by companies which the auditors denied. Sometimes companies went to the extent of even indicating legal action against their immediate past auditors.

At the other end, after closely watching the developments, the statutory authorities – Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI) – are making their intent to fortify the regulatory mechanism for auditors clear.

What is, perhaps, more significant is that the role of even audit committees, which are arms of the board of directors of listed companies, is coming under the scanner. According to senior auditors, the reach of the fortified regulatory framework is likely to extend to audit committees, who are concerned with the accounts, to ensure that their accountability is well-defined.

Pressure began to mount on the big four of India’s audit world – Deloitte, PwC, Ernst & Young and KPMG – after investigations in the financial bungle in IL&FS and two of its subsidiaries brought to fore instances of negligence and evidence of connivance between auditors and the group management.

Also read: Looming Uncertainty in India’s Auditing System

Meanwhile, rubbing salt into the wounds came the mammoth 70,000-page charge sheet filed by the Serious Fraud Investigation Office under the Union Ministry of Corporate Affairs. The charge sheet involves 284 individuals and entities contributing to the huge financial mismanagement, including large-scale diversions, in the Bhushan Steel case, which has since been acquired by Tata Steel.

In the prosecution complaint filed before a special court at Dwarka in New Delhi, SFIO has alleged that not only did the statutory auditors connived with the ex-promoters Brij Bhushan and Neeraj Singhal, but also the audit committee simply okayed the financials without bothering to record the “the qualifications” in the audit report.

The present thinking of the authorities to also fix the accountability of audit committee members stems from the Bhushan Steel and some other examples, according to informed quarters. It’s too glaring, they add.

Two more examples corroborate the present thinking of the statutory authorities. In the third week of July, RBI issued a direction to the effect that audit firm partners who are facing disciplinary proceedings will be barred from signing the balance sheet of any bank or even engage in the audit process. RBI also pursues a consultative interactive process with bank auditors every quarter to supplement the regulatory actions.

Now, SEBI has recently come out with a consultative paper on policy proposals. An significant restriction proposed is on resignation by company auditors citing ‘preoccupation’. Further, auditors are found resigning before fulfilling their responsibilities of completing assignments for a quarter / half year / year. This leaves investors and stakeholders without access to reliable information for making informed financial decisions. The securities market, as a whole, is deprived of unbiased, timely disclosure of information, notes the SEBI consultation paper.

It has, therefore, proposed that in the case of a listed company, if the auditor has signed the audit report for all the quarters of a financial year except the last quarter, “then the auditor shall finalise the audit report for that financial year” before quitting.

For a key unlisted subsidiary of a listed company, the auditor has to issue review/limited audit report for that year/quarter as applicable before quitting. Clarifying with example, the paper notes that if the auditor decides to resign in February 2020, audit report for financial year ended March 31, 2020, has to be submitted by it. Therefore, an auditor just cannot give up responsibility citing ‘preoccupation’.

SEBI also wants an accountable role for the audit committee whose members are drawn from among the directors. If the management does not provide the required information or there are reasons to infer that the management is simply not cooperating, the auditor shall “immediately and directly approach the chairman of the audit committee without waiting for quarterly meetings to take place” for conveying its concern.

The audit committee then studies the complaints, forms its views, and communicates the same to the management and the auditor. The company, on its part, informs stock exchanges about the audit committee’s views.

Also watch: Frauds and Friends: How Auditors Are Enabling Crony Capitalism

The latest to resign is Deloitte from DHFL. Earlier, the auditors of Eveready Industries and Anil Ambani’s Reliance Home Finance and Reliance Capital had quit. This group, citing independent law firm’s opinion, has refuted auditor’s complaints of violations by the management and given indications that it may move courts against its erstwhile auditor.

Corporate watchers do not rule legal battles on auditors’ comments regarding inter-corporate deposits, extending advances to group companies, roll-over of loans and other ways of diverting funds, which often results in auditors raising doubts as to whether the company can continue.

Reverberations of the Infrastructure Leasing and Financial Services (IL&FS) debt repayment default continue in India’s audit world, although 11 months have passed since the Group’s financial mess came to light.

In fact, the situation has worsened in the last two months with several auditors resigning, due to allegations of non-cooperation by companies which the auditors denied. Sometimes companies went to the extent of even indicating legal action against their immediate past auditors.

At the other end, after closely watching the developments, the statutory authorities – Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI) – are making their intent to fortify the regulatory mechanism for auditors clear.

What is, perhaps, more significant is that the role of even audit committees, which are arms of the board of directors of listed companies, is coming under the scanner. According to senior auditors, the reach of the fortified regulatory framework is likely to extend to audit committees, who are concerned with the accounts, to ensure that their accountability is well-defined.

Pressure began to mount on the big four of India’s audit world – Deloitte, PwC, Ernst & Young and KPMG – after investigations in the financial bungle in IL&FS and two of its subsidiaries brought to fore instances of negligence and evidence of connivance between auditors and the group management.

Also read: Looming Uncertainty in India’s Auditing System

Meanwhile, rubbing salt into the wounds came the mammoth 70,000-page charge sheet filed by the Serious Fraud Investigation Office under the Union Ministry of Corporate Affairs. The charge sheet involves 284 individuals and entities contributing to the huge financial mismanagement, including large-scale diversions, in the Bhushan Steel case, which has since been acquired by Tata Steel.

In the prosecution complaint filed before a special court at Dwarka in New Delhi, SFIO has alleged that not only did the statutory auditors connived with the ex-promoters Brij Bhushan and Neeraj Singhal, but also the audit committee simply okayed the financials without bothering to record the “the qualifications” in the audit report.

The present thinking of the authorities to also fix the accountability of audit committee members stems from the Bhushan Steel and some other examples, according to informed quarters. It’s too glaring, they add.

Two more examples corroborate the present thinking of the statutory authorities. In the third week of July, RBI issued a direction to the effect that audit firm partners who are facing disciplinary proceedings will be barred from signing the balance sheet of any bank or even engage in the audit process. RBI also pursues a consultative interactive process with bank auditors every quarter to supplement the regulatory actions.

Now, SEBI has recently come out with a consultative paper on policy proposals. An significant restriction proposed is on resignation by company auditors citing ‘preoccupation’. Further, auditors are found resigning before fulfilling their responsibilities of completing assignments for a quarter / half year / year. This leaves investors and stakeholders without access to reliable information for making informed financial decisions. The securities market, as a whole, is deprived of unbiased, timely disclosure of information, notes the SEBI consultation paper.

It has, therefore, proposed that in the case of a listed company, if the auditor has signed the audit report for all the quarters of a financial year except the last quarter, “then the auditor shall finalise the audit report for that financial year” before quitting.

For a key unlisted subsidiary of a listed company, the auditor has to issue review/limited audit report for that year/quarter as applicable before quitting. Clarifying with example, the paper notes that if the auditor decides to resign in February 2020, audit report for financial year ended March 31, 2020, has to be submitted by it. Therefore, an auditor just cannot give up responsibility citing ‘preoccupation’.

SEBI also wants an accountable role for the audit committee whose members are drawn from among the directors. If the management does not provide the required information or there are reasons to infer that the management is simply not cooperating, the auditor shall “immediately and directly approach the chairman of the audit committee without waiting for quarterly meetings to take place” for conveying its concern.

The audit committee then studies the complaints, forms its views, and communicates the same to the management and the auditor. The company, on its part, informs stock exchanges about the audit committee’s views.

Also watch: Frauds and Friends: How Auditors Are Enabling Crony Capitalism

The latest to resign is Deloitte from DHFL. Earlier, the auditors of Eveready Industries and Anil Ambani’s Reliance Home Finance and Reliance Capital had quit. This group, citing independent law firm’s opinion, has refuted auditor’s complaints of violations by the management and given indications that it may move courts against its erstwhile auditor.

Corporate watchers do not rule legal battles on auditors’ comments regarding inter-corporate deposits, extending advances to group companies, roll-over of loans and other ways of diverting funds, which often results in auditors raising doubts as to whether the company can continue.