Auditor resignations – An Investor perspective

It is not uncommon for Auditors of Companies to resign in between an audit. It is not uncommon too for them to resign just days or weeks before the finalisation of the annual accounts.

But when these incidents suddenly start happening in frequent regularity, it is certainly uncommon.

The resignation of the top auditors from some listed companies just days before signing off on the annual accounts has been in top news since some time. It is not just Manpasand Beverages or Vakrangee or Atlanta which are hogging the headlines, some reliable database has shared that since the beginning of this calendar year, more than 30 audit firms have resigned as auditors of companies, midterm.

These news-makers haven’t been reflecting good signs on the share prices of these Companies which have been plummeting down, losing money for the investors and shareholders.

Ironically, in most of these midterm resignations, the auditors have raised concern of inadequate information being provided to them and the Company’s response has conveniently sidestepped these in-explicit concerns raised by the Auditors.

The surprising feature in these developments is that in most of the cases, the same audit firm has been auditing the books of accounts of the Company in the preceding years as well and have been submitting relatively unqualified reports.

If there had been no qualifications by the auditors in the earlier years either on financial matters or on internal financial control reporting, how did the auditors suddenly discover the information provided by the Companies as inadequate is something both the regulatory authorities as well as the investor community would need a valid explanation.

The provisions of the Companies Act provide that if an Auditor resigns, he needs to file a statement with the Company and with the Registrar of Companies, giving “the reasons and other facts as may be relevant with regard to his resignation”. In the case of Manpasand and Vakrangee, both the Auditors have certainly done that, but with absolutely limited information.

If the reasons are not specific, it may look like just allegations. The resignations based on inadequate information definitely need to be material. It is not just the regulators, even the shareholders have the right to know the exact reasons and hence the auditors are duty bound to express the reasons for their resignation very specifically.

While the auditors of the former Company just mentions that “significant information” was not provided, the latter’s Auditors just goes a little further to state that the inadequate information was with respect to their “election books, bullion and jewellery business”. Sadly, neither of them state specifically how material the “inadequate information” was in respect to the financial earnings or profits of the Company.

From the perspective of the Companies too, they need to be specific in their response to the Auditors’ concerns. The former company’s statement makes no mention of the “significant information” that the Auditors had requested and not received while the latter company’s response makes no mention of the specific issues raised by the auditors or tries to provide any plausible explanation about why their initial responses were not inadequate and contradictory, as alleged by the auditors.

As much as the reasons provided by the Auditors do not clarify the exact nature of the information that hasn’t been provided to them, the Companies’ reactions too are general and vague and clearly not adequate.

The shareholders are certainly in a dilemma on whom to believe; the Company or the Auditors. With neither the Auditors providing specific details of the nature of inadequate information nor the Company providing a justifiable reply, as of now, it seems that both sides have taken refuge in the vague.

The conclusion is that it just leaves the shareholders and investors clutching at straws.

All said and done, when auditors resign before completing their audit assignment, it is not just an issue for the Company but a major loss to the investors and shareholders too, as we have witnessed in the recent cases.

The negative impact on the stock market resulting from delayed board meetings and announcement of financial results leads to the share prices dropping drastically and the overall stock market facing negative sentiments and negatively impacting the investor community have their money riding on the market.

There is a need to have some stringent laws in place so that auditors are also held responsible to the shareholders for their actions which impact the share prices, more particularly when they had indicated financially strong results for the same companies in the preceding years.

Auditors assume an onerous authority and their reports are often considered as the basis for financial decisions of investors, they being considered as “principal gatekeepers” or “conscience keepers” responsible for providing them credible and reliable financial information for making investment decisions. Hence the Ministry of Corporate Affairs (MCA) as well as SEBI would have to play a more pro-active role in such situations to put proper regulations in place, as investor confidence is fundamental to the successful operations of the stock market.

The recent move by the MCA to send notice to the resigning auditors asking them to explain their sudden decision to resign certainly seems to be positive sign in the right direction.

When the uncommon happens, it leads to speculation…and when speculation thrives, it results in crash of stock prices and it is the shareholders who suffer.

There are regulatory authorities who have the acumen to deliver an objective conclusion on this matter. It would take them some time to investigate, but till then, the books of accounts are on fire. It is imperative that we separate fact from fiction and refrain from spreading or believing unsubstantiated rumour as they have the potential of throwing the market into a tizzy.

It is the unsuspecting shareholders and investors who have been caught unawares in this inferno. Sadly, it is the investors’ money which is going up in flames.

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