Is your Auditor thinking to leave the office?

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It is important to analyze the reasons for Auditor's resignation.

“Auditors are the watchdog of financial statements of companies” is not an old proverb in the financial world. But what if these auditors fail to serve their purpose?

In a recent trend of the resignation of some heavyweight auditors of Indian companies, many financial pundits are clueless as to what has been the reason behind their “go” from the office.

The resignation of Deloitte from Manpasand Beverage and Pricewater House Cooper from Atlanta are the two most coveted cases wherein Auditors resignation attracted the market attention.

On 27 April, Price Waterhouse Cooper had resigned as the auditor of Vakrangee Ltd due to lack of information about its election books, bullion and jewellery business. It had also stepped down as an auditor of Atlanta Ltd on 29 May due to lack of disclosures about ‘significant observations by tax authorities’, and from Edelweiss Financial Services on 23 May on a mutual agreement.

On 26 May, Deloitte Haskin and Sells stepped down due to lack of documents to support costs, revenues and capital expenditure at the company.

As a consequence of the mid-term resignations of auditors, share prices of the companies suffered the most. For instance, Vakrangee has been in a free fall. The stock has hit lower circuits for consecutive sessions, falling almost 80% during the period. In 2018, the stock has so far lost 91.5%, after a gain of 208% in 2017. Meanwhile, Manpasand Beverages hit the lower circuit for six sessions to fall 55.24% after Deloitte Haskins and Sells quit.

More than 50 firms have resigned from the Audit appointments in the last 3 months clearly pointing to the fear from regulatory authorities regarding compliance.

So who should shareholders believe? The auditors or the companies?

Technically, the auditor appointed under Section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the central government in that behalf in the prescribed manner.

It is needless to mention that Auditors work independently. Their resignation points to something gruesome building within the organization.

What are the challenges faced by an auditor who is appointed in the middle of a financial year?

Firstly, the very circumstances in which the new auditor is appointed may raise a red flag in terms of the work to be undertaken by the new auditor. Secondly, the fact that the auditor is appointed in the middle of the financial year means the company has most likely missed or is likely to miss the filing deadlines.

This adds pressure in terms of the time available for the new auditor to perform all the requisite procedures.

Onboarding a new company as an audit client involves substantial work in the first year since there are specific procedures required to be performed, particularly around whether the auditor is satisfied with the opening balances which were subject to audit by the predecessor auditor.

In addition, there are certain other roadblocks, where it may be possible to address using alternative methods, for example, the new auditor may not be in a position to undertake certain year-end work such as physical inventory verification on the reporting date and may need to do considerable rollback procedures. These, again, are likely to involve substantial time and efforts.

“Where not enough information is made available, resignation may be the only option left”.

Author | Kshitij Chitransh