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ICAI wants SEBI to review proposed norms for auditor resignations


ICAI wants SEBI to review proposed norms for auditor resignations

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ICAI wants SEBI to review proposed norms for auditor resignations 

 

Brief Background

 

There have been a significant number of instances of abrupt resignation of Statutory Auditors from listed entities in recent times. In most of the cases, the statutory auditors have suddenly resigned without completing their assignments for the year, generally citing ‘pre-occupation’ as the reason for resignation.

 

Auditors play a significant role in ensuring unbiased, accurate, complete and timely disclosures of various information to investors and other stakeholders in the securities market. The investors in listed entities rely on the audited financial results for taking their investment decisions.

 

Resignation of an auditor due to reasons such as pre-occupation before completion of the audit of the financial results for the year seriously hampers the investor confidence and leaves the investors with lack of reliable information for taking their financial decisions.

 

Current Requirement when Auditor Resigns 

 

Under Sec 140(2) of the Companies Act, 2013, the auditor who has resigned from the company is required to file a statement in the prescribed form with the company and the Registrar within 30 days from the date of resignation. The reasons for resignation are also required to be disclosed in the prescribed form for resignation which is required to be filed by the auditor under the Companies (Audit and Auditors) Rules, 2014.

 

Based on the recommendations of the Kotak Committee, amendments have been made to SEBI LODR Regulations requiring listed entities to disclose to the stock exchanges, detailed reasons for the resignation of auditor, as given by the auditor, within 24 hours. These amendments are effective from April 1, 2019.

 

ICAI’s auditing standards (SA-705)

 

ICAI’s auditing standards provide for situations under which an auditor may qualify the opinion, resign from the audit, disclaim an opinion, etc. The relevant extract is reproduced below:

 

“If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the implications as follows:

 

(a) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion; or

 

(b) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall: (Ref: Para A13-A14)

(i) Resign from the audit, where practicable and not prohibited by law or regulation; or

(ii) If resignation from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements.

If the auditor resigns as contemplated by paragraph 13(b)(i), before resigning, the auditor shall communicate to those charged with governance any matters regarding misstatements identified during the audit that would have given rise to a modification of the opinion. (Ref: Para. A15)”

 

What as per SEBI is the problem?

 

1) It is seen that the commonly cited reason by the auditors while resigning is ‘pre-occupation’.

 

2) Further, several auditors continue to resign before fulfilling their responsibilities of completing the assignments for the quarter/half year/ year. This leaves the investors and stakeholders with lack of reliable information for making better financial decisions.

 

What are Changes propose at the time of auditor resignation?

 

Conditions prior to resignation: If the auditor of a listed entity/ material unlisted subsidiary of the listed entity proposes to resign:

 

With respect to auditor of a listed entity-

If the auditor has signed the audit report for all the quarters (limited review/ audit) of a financial year, except the last quarter, then the auditor shall finalize the audit report for the said financial year before such resignation.

 

In all other cases, the auditor shall issue limited review/audit report for that quarter before such resignation (i.e. previous quarter in reference to the date of resignation).

Illustration: If the auditor of a listed entity makes a decision to resign in August 2019, the auditor shall issue the limited review/audit report for the quarter ended Sep 30, 2019 before such resignation.

 

With respect to the auditor of a material unlisted subsidiary of the listed entity, the auditor shall issue the limited review/audit report for that financial year/ quarter, as applicable, before such resignation (i.e. previous financial year/ quarter in reference to the date of resignation).

Illustration: If the auditor of a material subsidiary of the listed entity makes a decision to resign in Feb 2020, the auditor shall issue the audit report for the financial year ended Mar 31, 2020 before such resignation.

iii. If the reason for the auditor’s resignation is the entity not providing information, the auditor shall provide an appropriate disclaimer in the audit report to that extent.

 

 

New format of Resignation of Auditor and information asked from Auditor

 

On resignation by a statutory auditor of a listed entity/ its material unlisted subsidiary before the completion of the term, it is proposed to require the auditor to submit details in a prescribed format which would include:

1)Detailed reasons for resignation;

2) Declaration by the auditor that there are no other material reasons other than those provided (similar to the requirement in case of resignation of independent directors);

3) In case of any concerns, efforts made by the auditor prior to resignation (including approaching the Audit Committee).

 

 

The following information is also proposed to be included in the format if the auditor’s resignation is because information was not made available to the auditor:

  1. Details of the information requested by the auditor which was not provided;
  2. Whether the inability to obtain sufficient appropriate audit evidence was due to a management-imposed limitation or circumstances beyond the control of the management;
  3. The auditor’s assessment of the materiality - whether the lack of information would have significant impact on the financial statements/results.
  4. Whether the auditor could have performed alternative procedures to obtain appropriate evidence for the purposes of audit/limited review;
  5. Whether the auditor communicated the matter to the Audit committee / board (where Audit Committees are not mandated), as applicable before resignation;
  6. Whether the lack of information was prevalent in the previous reported financial statements/results. If yes, the basis of issuing previous audit/limited review ;
  7. The extent of audit/limited review work performed by the auditor prior to resignation.

 

 

Why ICAI wants SEBI to review proposed norms for auditor resignations?

 

Sebi wants to curb abrupt resignations in listed companies and has proposed that auditors should give precise reasons for quitting, including if the auditor discovered any fraud and explain what action was taken. It also wants an auditor should continue for another quarter after the resignation, among other things. 

 

Experts feels “There is a focus on auditors and making it mandatory for auditors to disclose exact details of issues to the government would only put the auditor in trouble. If the auditor discovers a fraud, no one wants to question the company, as we have seen in several cases in last few months, but just the auditor”

 

Further many Auditor are worried how they will provide following information

 

1) Whether the auditor could have performed alternative procedures to obtain appropriate evidence (from the company) for audit or limited review

2) Whether the auditor communicated the matter to the audit committee

3) Whether the lack of information was prevalent in previous financial statements 

 

All the above three points can make life of auditor difficult as some of the points are not practical. SEBI should surely review the above proposed disclosure requirement by auditor

 

Download CONSULTATIVE PAPER ON POLICY PROPOSALS WITH RESPECT TO RESIGNATION OF STATUTORY AUDITORS FROM LISTED ENTITIES

RESIGNATION OF STATUTORY AUDITORS FROM LISTED ENTITIES-20190808045410.pdf

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