RESIGNATION OF AUDITORS BY LISTED ENTITIES

1. RESIGNATION OF AUDITORS BY LISTED ENTITIES CA RASIK SINGHANIA FCA, IP, DISA, FAFD

2. 32 auditors at listed firms have resigned in the last 5 months According to market tracker Prime Database, between January and May, 32 auditors have resigned midterm, while for 2017-18 the number of exits stood at 36. Graphic: Mint

3. SHOCKING FACTS • Since January 1, 2018 to July 17, 2018, auditors of 204 listed companies have resigned as per filings in the MCA 21 registry," Minister of State for Corporate Affairs P PChaudhary told the RajyaSabha in a written reply. Read more at://economictimes.indiatimes.com/articleshow/67147623.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4. Some more facts • 14 firms quit so far in 2019 till 13th June 2019 • The year 2018, when some of the PwC affiliates were banned by Sebi for two years in the decade-old Satyam scandal case, saw the highest number of auditor resignations in five years, according to nseinfobase.com data. • In 2018, auditors quit 48 NSE-listed companies, four times more than in 2017 and 2016. • Auditors including Price Waterhouse & Co, Deloitte Haskins and BSR & Associates have ended their roles as auditors of 86 NSE-listed companies in the last five years.

5. Some of the Exits

6. Price Waterhouse & Co Chartered Accountants has resigned as the statutory auditor for Anil Ambani-led Reliance Capital and Reliance Home Finance, with effect from June 11. It cited unsatisfactory response to “certain observations” made by the two companies as part of the ongoing audit for fiscal 2018-19. Here are some other companies that saw their auditors resign

7. Deloitte Haskin and Sells stepped down as auditor of Manpasand Beverages last year, just a few days before the declaration of annual results. As per reports, the auditor made the move due to lack of cooperation from the company in sharing documents to support costs, revenues and capital expenditure at the company, things that are required to be submitted to the auditors as per regulations.

8. Later that year, the auditing firm also tendered its resignation as the statutory auditor for Fortis Healthcare since the company’s largest shareholder Malaysian firm IHH prefers to align its auditors on a group wide basis. 

9. Price Waterhouse & Co resigned as the auditor of Vakrangee Ltd in April last year due to lack of information provided by the company about its election books, bullion and jewellery business.

10. The auditor also stepped down from the same position vis-a-vis construction and infrastructure company Atlanta Ltd on 29 May last year after it refused to share details of an ongoing tax investigation, lack of disclosures about ‘significant observations by tax authorities’ and the resignation of an independent director. 

11. On 29 May last year, audit firm Mehrotra and Mehrotra resigned from Bhushan Steel Ltd.

12. In June last year, three coporates in Coimbatore, Kovai Medical Center and Hospital Ltd (KMCH), Pricol Ltd and LGB Forge informed the stock exchange about the resignation of their statutory auditor. Incidentally, all three of these companies had appointed Haribhakti & Co LLP as their statutory auditor.

13. Consequence of the mid-term resignations of auditors on share prices • Vakrangee has been in a free fall. The stock has hit lower circuits for 28 sessions, falling 83.8% during the period. In 2018, the stock has so far lost 91.5%, after a gain of 208% in 2017. • Manpasand Beverages hit the lower circuit for six sessions to fall 55.24% after Deloitte Haskins and Sells quit.

16. Liar, Liar.....Accounts on Fire So who should Shareholders believe? The Auditor of the Companies?

17. What To Make Of The Auditor Resignations At Vakrangee And Manpasand Beverages • It is uncommon for auditors in India to resign halfway through an audit. Even more uncommon for them to quit just before the finalisation of annual accounts. But it’s happened twice On 27.04.2018, Price Waterhouse & Co resigned as auditor of Vakrangee Ltd. and on 26.05.2018, Deloitte Haskins & Sells resigned as auditor of Manpasand Beverages Ltd. • In both cases the auditors resigned just days before signing off on annual accounts. • In both cases the reason for resignation was inadequate information. • In both cases the companies’ statements sidestep the auditors’ concerns. • The surprising feature is that Deloitte has been auditor of this company in the preceding years as well and its reports have been unqualified, both on financial matters as well as on internal financial control reporting. So one definitely would like to know as to what provoked it to resign. • PW had been the auditor for Vakrangee for less than one year, its resignation may not be very surprising if it found certain things which were not desirable.

18. What PW Said, What Vakrangee Heard • In its resignation letter Price Waterhouse said:it asked the management for “information on several matters pertaining to election books, bullion and jewellery businesses”. The management’s responses were inadequate or contradicted earlier explanations. In the absence of adequate and relevant information and explanations, the fundamental objective of an audit cannot be achieved. • Now read what Vakrangee said in its statement to the stock exchanges: The company has provided all the information with respect to business and affairs of the company to the auditor and the audit committee. The company is fully compliant with the Ind-AS accounting standards the audit committee has also reviewed the financial statements and has been fully satisfied with all the information and explanations provided by the Company. • Vakrangee’s response makes no mention of the specific issue raised by PW, that of “several matters pertaining to election books, bullion and jewellery businesses”. Nor does it bother to explain why the auditor found the company’s responses inadequate and contradictory. PW makes no mention of Ind-AS in its letter, yet Vakrangee asserts its compliance with the Indian accounting standards and the satisfaction of the Audit Committee.

19. What Deloitte Said, What Manpasand Heard • In its resignation letter Deloitte said:Significant information requested by it at various points in time was not provided. There has been no further progress with respect to the pending information, evidences and explanations. Therefore, it is unable to complete the statutory audit for the year ended March 31, 2018 • Now read what Manpasand said in its statement to the stock exchanges: It is very unfortunate that we had to part ways with our long-term associate. That the decision was “taken by the management after due consultations” and is in the best interests of shareholders. That “the timing of this event is purely coincidental and has no direct correlation”. That “this is just a minor hiccup” and doesn't represent any long-term business impact. • Manpasand’s statement makes no mention of the “significant information” that Deloitte had requested and not received. Instead the company claims it took the decision to part with its auditor, whereas Deloitte’s letter clearly states it resigned as auditor. Manpasand lost the auditor it had since it did an IPO in 2015, and yet it described the event as a “minor hiccup”. The resignation came just days before the announcement of the financial earnings and Manpasand says the “timing of this event is purely coincidental”. The companies’ reactions are general and vague...(and) clearly not adequate.

20. What Reliance Capital says

21. The REAL problem • The resignation of an auditor before completion of the audit of the financial results seriously hampers investor confidence • leaves investors with "a lack of reliable information for taking their financial decisions

22. Reasons of Resignation as cited by Auditors • lack of adequate information on the company’s businesses, revenues, tax observations • non-cooperation from the management • mutual exits • health concerns • pre-occupation

23. No auditor would like to resign from an assignment unless the issues are material. • In the absence of information, the resigning auditors need to take a call on how specific they want to be, keeping in mind the fact that the company may sue for defamation if certain statement damaging to the company is made without the underlying information. A balance has to be struck between the disclosure required by law, and the risk of making or hinting at an allegation which may turn out to be unfounded.

24. Concern where valid • A new auditor, who finds serious issues and does not get supporting documents, may very well decide to report the matter to the MCA and tender resignation. This may have been the case with a few companies which had new auditors.

25. Way Forward • In cases where the resignation is due to non-receipt of information or explanation from the company, the auditor shall enlighten the audit committee of the details of information sought and not provided by the management. 

26. https://www.youtube.com/watch?v=TY-2Cs06aYk Video Link

27. What ROC is doing: • The registrar of companies (RoC) has recently tightened norms by asking auditors to explain the specific reasons for tendering resignations as ambiguous reasons like ‘pre-occupation’ are untenable. • Under the provisions of Companies Act, 2013, an auditor who finds during an audit that fraud has been committed by the company or its employees should report the matter immediately to the central government.

28. Market regulator Sebi wants to tighten audit processes for listed companies • Sebi wants to ensure auditors act responsibly and their resignation does not hurt investor sentiment • Sebi has sought public comments on the proposals till 8 August • The regulator also said an auditor that has audited three quarters of a financial year should not resign before completing the final quarter's audit report • NFRA

29. What ICAI is doing? it as extraordinary movement and decided to form a group to “examine the circumstances leading to the resignation of auditors” examine the circumstances leading to the resignation of auditor and would also suggest a suitable mechanism to address the issues/ concerns for guidance of the members

30. Possible Solution 1 • Auditor’s report to the shareholders is a powerful weapon. The auditor should use it fully to bring out the problems in the company’s financial reporting and controls. • A better option in such cases would be to qualify the opinion, or even issue an adverse opinion. Auditors must publicly announce their precise reasons for quitting, otherwise there will be unhealthy speculation. 

31. Possible Solution 2 • 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. • If SEBI agrees with the resignation of the auditor, it should appoint the new auditor. That should not be left to the management.

32. Possible Solutions 3 The Hindu, Jul 15, 2019 Amarjit Chopra, former ICAI President says, SEBI or CAG should appoint statutory auditors in listed companies

33. Thank You Rasik Singhania Mob: 94331 46020/93326 89898 Email : rasik.singhania@gmail.com