Auditor resignations continue to trickle in with 15 exits since April

On average, one auditor of a listed company has prematurely resigned every two weeks this financial year; pace seems to have picked up in September with 5 departures

On average, one auditor of a listed company has prematurely resigned every two weeks this financial year.

There have been 15 exits since April, shows a Business Standard analysis of data from corporate tracker primeinfobase.com. While this is still lower than the 2.3 resignations seen per fortnight on average in 2019-20 (FY20), the exits reflect the stresses that auditors continue to find themselves under, according to those watching the space.

The exits seem to have picked up pace in recent times with five of them coming since September. Companies which saw exits most recently include TGB Banquets and Hotels, AKG Exim, Asian Hotels (West), Value Industries and Videocon Industries.

Increased scrutiny from various regulatory authorities have played a role in making auditors more careful about their assignments in general, according to Shriram Subramanian, founder and managing director of InGovern Research Services, a corporate governance advisory firm. There is an increased regulatory onus on auditors who sign off on financial statements in the last few years.

He pointed out that the National Financial Reporting Authority (NFRA) had observed deficiencies when they conducted an audit quality review of IL&FS Transportation Networks Limited (ITNL). The NFRA, which monitors audit and accounting standards and ensures compliance with the same, came out with the observations in September. This resulted in the resignation of ITNL's auditor SRBC & Co. (October 5).

Separately, the Reserve Bank of India (RBI) had barred Haribhakti & Co. from auditing RBI-regulated entities for two years, announced on October 12th, on failure to comply with specific direction issue by the RBI without elaborating furthre.

Auditors would rather exit a company and let go of the fee than face regulatory action suggested InGovern’s Subramanian. "All these are pressures," he said.

The NFRA report observed, among other things, that ITNL’s financial exposure to subsidiaries, associates and joint ventures worth Rs 3,346 crore was not properly valued, and the company’s losses were understated by Rs 2,021 crore in 2017-18.

“The instances discussed in this…(report)…are of such significance that, in NFRA’s view, the..(audit firm)… did not have any justification for…asserting that the audit was conducted in accordance with the SAs (Standards on Auditing),” it said.

The audit firm resigned as ITNL auditor following the NFRA report, stating that it discharged ‘duties in good faith, in a bona fide manner, and in compliance with applicable laws and standards.’

“This action has been taken on account of the failure on the part of the audit firm to comply with a specific direction issued by RBI with respect to its statutory audit of a Systemically Important Non-Banking Financial Company,” said the RBI direction barring Haribhakti & Co.

A lot of audit firms have been asking for higher fees in recent times. Differences of opinion over the amounts to be charged may also be a factor in some exits, according to Amit Tandon, founder and managing director of Institutional Investor Advisory Services India (IiAS). The firm advises investors on governance issues.

The top four audit groups standalone audit fees has increased by 30.5 per cent over the last three years to touch Rs 405.2 crore in 2019-20, shows data from primeinfobase.com. Tandon added that while he’d like to believe that greater scrutiny and better checks and balances has improved the quality of data available to investors, it may be too soon to say so definitively.

“I’m not sure I’d jump to the conclusion…” he said.  

Commercial reasons figured in five out of the fifteen mid-term cessations so far in 2021-22 (FY21). Other reasons given for exit include preoccupation, delay in submission of financial results to auditors, disqualification by chartered accountancy regulator, the Institute of Chartered Accountants of India (ICAI).

Except SRBC, companies and auditors mentioned in the story did not immediately respond to a request for comment.