Since last year, with the outbreak of the PNB scam, eyebrows are being raised at the work ethics of the auditors of the company. The finance minister had also lashed out at the auditors for not be independent and losing integrity. Also last year on CA day, the PM also had some strong words for the auditor fraternity.
Since the Nirav Modi bank fraud case, auditors of about 15 prominent companies have written to the Ministry of Corporate Affairs (MCA) citing lack of full disclosures among other issues from the companies. Auditors are required to report to the government in case they suspect any wrongdoing in the company, as per section 143(12) of the Companies Act.
As per the report released by Prime Database, 32 auditors have resigned during January-May period, with 15 of them in May alone. The resignations in 2017-18 were 36. The number of resignations in 2016-17 stood at 18 which are almost half of than that in the first five months of 2018. The fear of stringent action from authorities is also being cited as a reason for resignation of auditors from their respective companies, without completing their full term.
The MCA had meetings with the Institute of Chartered Accountants of India (ICAI), the regulatory body of CAs, along with Institute of Company Secretaries of India (ICSI) and Institute of Cost Accountants of India to scan and understand the situation. The ministry has said that it will review the recent spate of exits by auditors of prominent listed companies. The ministry has said that it is inquiring about the details of the complaints from auditors asking them to give full reasons for exit.
As per the secretary of the ministry -“Wherever the conduct of the auditor is not clear and they have not given clear answers, we give them polite letter first to seek information. The government has enough powers under the Act to take action, including prosecution for imprisonment, in such cases”.
The complaints include and have ranged from lack of adequate information on revenue sources, tax observations to fraud and public interest, lack of sufficient information regarding the business of the company or for not getting reasonable assurance about the financial statements being free from misstatement. Some auditors have given health concerns as the reason for resignation, while some auditors resigned mutually. Fear of being caught for breach of company’s law may lead to some more resignations in the near future.
The MCA is also aware of the nature of the complaints filed by the auditors. In case of the company, the ministry may take stringent action against the companies violating the companies law.
If we take a look at some of the incidents:
Deloitte Haskins and Sells, the auditor of Manpasand Beverages, have resigned stating company did not provide significant information sought by it.
The auditors of Reliance Naval and Engineering Ltd raised doubts about the company’s ability to continue as going concern.
Price Waterhouse &Co resigned as the auditor of Vakrangee Ltd due to lack of information about its election books, bullion and jewellery business.
Price Waterhouse &Co, also the auditor of Atlanta Ltd, resigned due to lack of disclosures about significant observations by tax authorities.
Mehrotra and Mehrotra, auditors, also resigned from Bhushan Steel Ltd.
the auditors of Jet Airways Ltd and Hindustan Construction Company have qualified their reports as going concern.
Are we reading too much between the lines?
Let’s be honest. It is not the first time that the auditors are resigning. There have been resignations before. There have been qualified reports, opinions before. Simply put, these companies, despite weak financials, will remain in operations and will not be forced to liquidate until they default or are referred to NCLT or IBC. Then, why so much spot light on it now?
One of the reasons that I can comprehend is the current economic situation in our country. In last 1 year or so, there have been massive scams unearthed and people have fled with thousands of crores leaving, sending the banking system into shock. The banking system has been reeling under the stress of under capitalization, which is a result of bad debts eroding the capital of the banks.
Another reason according to me is implementation of stringent laws and rules. NCLT and IBC have been making defaulting promoters run for their money.
Although the major reason for such spot light is psychological. There is a proverb – Once bitten, twice shy.
The enormous amount of focus that these incidents have received has left a mark in the mind of people. To support this, you can track the share price of the companies. Most of them had a good run in 2017. But since the news of auditor resignation, the share prices have plummeted losing much of the growth of 2017.
The change is- now there is greater scrutiny of auditors. Auditors are also wary of facing impact on reputation and the also wary of the stringent action taken by regulators against PWC. The regulators have definitely set an example here.
Market experts and advisors think that this is a good thing as this was long due and was resulting into inorganic growth. Actions like these will lead to more transparency. They also wish the auditors to disclose in greater detail, the reasons for their disassociation with the company.
Ajay Bodke, CEO and chief portfolio manager PMS, Prabhudas Lilladher Pvt. Ltd says – “Mutual funds or institutional investors have more accessibility to the companies, but it is common investor holding, a few 100 or 1,000 shares, which rely on disclosed information”.
Though this is a part of our financial cycle, the cases of resignations might be recurring. The motive is that auditors need to disclose more so as to avoid unhealthy speculation over the investors’ money. Resignation or qualified opinion is the auditors’ choice, but the questions on the integrity of an auditor invariably question the integrity of the financial market.
