ICAI may review rules to stop auditor exits

The central government is considering a review of auditing standards to plug loopholes in the wake of the recent spate of resignation by auditors, many of them exiting listed firms abruptly or ahead of quarterly results.

Auditors in as many as 204 listed companies have resigned between January 1 and July 17 this year, as per the filings on MCA-21 software, sparking fears among investors.

The shares of many of these companies have taken a huge beating, some falling 20-60%, over the abrupt exits by auditors.

The reasons behind the exodus range from non-cooperation by the companies causing the lack of adequate information regarding business to inconsistencies in revenues, government sources said.

While the Ministry of Corporate Affairs (MCA) is examining the matter and has so far ordered a probe (inspection) under Section 206 of Companies Act against about 10 listed companies, it feels that there are also issues with the audit standards that need to be plugged.

As part of the ongoing cases, "we have noticed that we require a review of the auditing standards for auditors. Otherwise, people will just resign, saying there is non-cooperation from the company. The circumstances should come out clear while putting resignation. We want to make it specific," a top government official said.

The government feels that the "audit standards are too generalised and too open ended, allowing such resignations to be justified. We find that audit standards very specifically permit them to resign in the event of non-cooperation. That also has to be relooked into," said the official.

The ministry may soon ask the Institute of Chartered Accountants of India (ICAI) to look into the matter and suggest ways to deal with it. Auditing standards are framed by the ICAI, which functions under the administrative control of the MCA. "We will review it. The loopholes will have to be plugged," said another official, adding that this should not become an excuse for an exit route.

The government feels that there are some statutory duties which the auditor has to perform. "Statutory auditors have a lot of empowerment under the ICAI Act. So they should use their authority. They should ask for documents, complain to the audit committee. They are just running away," said another official.

The MCA will be able to tighten the noose around the auditors with the proposed changes in the standards. Auditors are required to comply with the auditing standards under section 143(10) of the Companies Act, 2013.

Experts feel that the auditor if not been left with any other choice than to resign should indicate in the resignation letter detailed reasons such as the efforts made by the auditor, including approaching the audit committee, and also give his own assessment as to why information is being withheld.

"Auditors resigning from the companies should be specific about the reason. They should make adequate disclosures. Markets do not like uncertainty. The recent resignations of auditors have led to huge corrections in stock prices," says Pranav Haldea, managing director, Prime Database.

THE RED LINE

• 204 listed firms have seen auditor exits between January 1 and July 17 
   
• 20-60% Drop in stock prices 

What the Centre prescribes 

• The government feels there are some statutory duties which the auditor has to perform
   
• It feels they should ask for documents, complain to the audit committee

Experts’ take 

• Auditors resigning from the companies should be specific about the reason
   
• They should detail the efforts made to get information from the company
   
• They should make adequate disclosures