Auditor exits mount at listed SMEs as scrutiny increases after IL&FS crisis

Eight out of twelve auditors exited mid-term in 2019; one analyst says "spotlight" on them has increased.

Small and medium enterprises (SMEs) account for an increasing share of instances of mid-term auditor exits among listed companies. They accounted for around 8 per cent of such exits in 2016. This has risen to over 66 per cent in the first five months of the year.

The share of such exits in 2019 shows them accounting for eight out of the twelve auditors as of May 16, shows a collation of such resignations accessed from corporate tracker Prime Database.

The share was 25 per cent last year (12 out of 48 exits). It was also 25 per cent in 2017 (three out of twelve exits). It was 8.3 per cent in 2016 (one out of 12 exits). The share is also higher than for the same period in previous years. It was 36.8 per cent in 2018 in the same period. It was lower, at 16.7 per cent in 2017.

Pranav Haldea, managing director of capital market tracker Prime Database Group, said that the pace of auditor resignations overall may well increase. Scrutiny on auditors has only been rising after the Infrastructure Leasing & Financial Services Limited (IL&FS) crisis which has resulted in significant pressure on its auditors after alleged irregularities came to light.

"The spotlight and liability on auditors is only increasing. And rightly so. For a long time, the focus has only been on independent directors." he said.

Auditor resignations had come in focus around mid-2018. Abrupt resignations by auditors in consumer goods company Manpasand Beverages had resulted in the company losing around half of its market capitalisation after the resignation. Other companies including construction and engineering firm Atlanta and technology venture Vakrangee has also seen auditor resignations. Stocks of the companies had been under pressure.

The SME firms which saw mid-term cessations include Surani Steel Tubes, Art Nirman, Sikko Industries, Silgo Retail, Latteys Industries, Zota Health Care, Spectrum Electrical Industries and Kritika Wires. The other four (non-SME) firms which saw mid-term cessations include Sumeet Industries, Talwalkars Healthclubs, Den Networks and Thiru Arooran Sugars.

Surani Steel Tubes, Kritika Wires and Spectrum Electrical Industries saw exits because of ineligibility or disqualification. Den Networks’ auditor resigned due to conflict of interest. The majority of others cited preoccupation or personal reasons, showed data from Prime.

Emails were sent to the twelve firms which saw auditor resignations. None replied. The NSE did not comment.

Auditors can choose to end their association for a number of reasons. Increased scrutiny has resulted in many choosing to exit when they feel discomfort with regard to the company, according to Pavan Kumar Vijay, founder and managing director at legal and financial consulting firm Corporate Professionals India.

“Issue of resignation can be non-transparency in operations, failure to provide financial information or documents supporting them, lack of assurance from management on financial numbers etc.,” he said.

Haldea added that companies would also thinking twice about cooking their books. An auditor resignation can have a severe impact on stock price as previous examples have shown. Promoters would want to avoid such pain.

"Promoters are the biggest shareholders and they would want to avoid such incidents," he said.