Spate of auditor resignations showing signs of tapering, shows data

45 mid-term cessations since August last year, but only nine since January

The people engaged to ensure that companies’ financial statements are accurate and above board resigned in large numbers around this time last year. Such auditor resignations seem to have tapered off a year later.

There had been sixteen mid-term cessations in August 2019. There have only been two in August 2020 so far, shows data from corporate tracker primeinfobase.com. The rolling three-month average number has declined from as many as nine last year to one or less in recent months (see chart).

A mix of more stringent regulation and auditors being more careful in vetting companies before signing on may have contributed to the decline, according to experts.

Auditors may well prefer to lose a client than take on unnecessary risk, suggested Shriram Subramanian, founder and managing director of domestic proxy advisor InGovern Research Services who serves on the technical advisory committee of the audit regulatory body National Financial Reporting Authority (NFRA).

“They’re conscious about their own reputation now,” he said.

Pranav Haldea, managing director at Prime Database said that there was a rush to grab market share after auditor rotation rules were tightened. The idea behind mandatory auditor rotation was to avoid having the same auditor checking a company's financials for too long. Nearly all companies in the listed space had to compulsorily change their longstanding auditors as a result.   This resulted in a number of new auditors signing on new clients in a hurry only to uncover problems later. Resignations followed. Such large spikes in resignations are less likely with auditors being more careful now while picking up new assignments. Recent regulatory actions against auditors have also contributed to this. Many large audit firms have announced that they would not offer audit services to clients where other non-audit work is also being done, in order to avoid conflict of interest noted Haldea.

“This may contribute to a few exits going forward as portfolios are realigned,” he said.

Auditors provide reasons for resignation. They have varied from unsatisfactory response to the queries raised, commercial considerations, health reasons, conflict of interest, personal reasons, and because of restructuring.

A total of 45 companies have seen midterm auditor cessations since August last year. Only nine of them have happened since January.

Better auditing standards have been associated with positive effects for companies too, according to a July 2017 International Journal of Auditing study from authors Muhammad Nurul Houqe, Kamran Ahmed and Tony van Zijl entitled, ‘Audit Quality, Earnings Management, and Cost of Equity Capital: Evidence from India.’ Companies can raise money at lower rates and see lower manipulation of earnings, though it can vary depending on the nature of the organisation, noted the study.

“Our results show that companies employing a high‐quality auditor have a lower degree of earnings management and lower cost of equity capital. The results also show that companies belonging to business groups have a lower degree of earnings management and lower cost of equity capital than do stand‐alone companies but that they benefit less from employing a high‐quality auditor,” it said. 

Month	Rolling 3-month average of midterm cessations
44062	6.7
44093	9
44123	8.3
44154	5
44184	3.7
43850	3.7
43881	2
43910	1.3
43941	1.7
43971	1.7
44002	0.7
44032	0.7
44063	1