Business

Around 200 auditors resigned in 2018 but how many followed the procedure?

Updated : December 31, 2018 12:18 PM IST

In 2018, around 200 auditors have resigned and in Mumbai region alone, the numbers range around 60.

Major mid-term resignations witnessed this year in listed companies include Mapasand Beverages, Vakrangee and Atlanta which also resulted into erosion of market cap of these entities.

Resignation is a powerful tool in the hands of auditors which has to be used judiciously. Auditors resign when they do not agree with the management and an amicable consensus of audit issues is not reached. In an antagonistic turn of events, the auditors may decide to disengage themselves from the engagement and which is perceived by others as hanging the company and stakeholders out to dry. While the questions should be asked to management but the reality is that auditors are expected to provide the answers.

In 2018, around 200 auditors have resigned and in Mumbai region alone, the numbers range around 60, according to a Financial Express report published on September 19. Major mid-term resignations witnessed this year in listed companies include Mapasand Beverages, Vakrangee and Atlanta which also resulted into erosion of market cap of these entities. The shareholders had no clue of what they should do and had no option but to wait.

The Companies Act, 2013 contains the provisions regarding the procedure to be followed by the auditor in case of resignation and the Code of Ethics issued by ICAI requires auditor to resign from an engagement when requirements established by the Code of Ethics cannot be met.

In response to the questions being raised on auditors that they have resigned instead of appropriately reporting on the issues or resigning without providing specific justification to the various stakeholders, the Institute of Chartered Accountants of India (ICAI) reacted by issuing ‘Implementation Guide on Resignation/ Withdrawal from an Engagement to Perform Audit of Financial Statements’ on November 30. The guide refers to Standards on Auditing (SAs), Standard on Quality Control (SQC) -1 and Code of Ethics which are mandatory for members to follow and therefore, compliance with this guide by the members of the institute becomes mandatory.

What does the Guide mandate?

This guide is applicable in case of audits of companies (including listed entities and private companies) and is not applicable to audit of partnership firms and LLPs. In case of audits of banks, insurance companies and other corporate entities, guidance to be followed (to the extent applicable).

Guidance applicable in case of all companies:

Overall guidance about withdrawal/resignation from an existing engagement, auditor’s responsibilities and professional obligations to be complied with by an auditor.

Unless there are circumstances that are covered in SA, SQC- 1 and the Code of Ethics where resignation is the only available alternative, the auditor should complete the engagement accepted. Apart from above, auditor has to ensure communication with the appropriate level of management for consideration and conclusions reached.

If substantial audit is completed, the auditor may decide to complete the audit to the extent possible, disclaim an opinion and explain the scope limitation within the Basis for Disclaimer of Opinion prior to withdrawing.

Auditor has to give the circumstances while giving the reasons for resignation instead of mentioning ambiguous reasons such as other pre-occupation/ personal reasons/ administrative reasons/ health reasons/ mutual consent/ unavoidable reasons.

It also provides the matters to be included in the letter of resignation e.g. reason for the inability to obtain sufficient and appropriate evidence, possible effects on the financial statements, the fact that circumstances which led to resignation were communicated to appropriate level and their response, last audit/limited review report issued prior to resignation etc.

Outgoing auditor has professional obligation to respond to the request made by the new auditor seeking the reason for resignation.

Specific guidance in case of listed companies:

If limited review or audit is carried out in a financial year, except the last quarter, then the auditor has to finalise the audit report for the said financial year before resignation.

In other cases, the auditor should resign after issuing limited review/audit report for the previous quarter with respect to the date of resignation.

To the extent information is not provided to the auditor or the management imposes a scope limitation, appropriate disclaimer has to be given in the audit report.

To sum it up

The implementation guide is introduced with an aim to put a check on the powers of auditor which was originally put in place as an avenue of last resort. The guide indirectly strengthens the arm of the auditor as management will have to put full efforts to resolve the issues and option of asking auditors to step down is not available. If the rational of the guide is seen in correct perspective, it will certainly protect all stakeholders’ interest and it will eventually increase confidence in auditors without adversely impacting the goodwill of the client.

Milan Mody is partner and Samir Parmar is manager at N A Shah Associates LLP.

Around 200 auditors resigned in 2018 but how many followed the procedure?

You May Also Like

Eight of top 10 valued firms lose Rs 1.57 lakh crore in market valuation

RIL's retail arm receives Rs 7,500 crore from Silver Lake for 1.75% stake sale

Positive pay system for cheque payments to come into effect from Jan 1: RBI

Trending on CNBC-TV18

recommended for you