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:
Specific guidance in case of listed companies:
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.
First Published: IST