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An auditor is responsible for evaluating the validity and reliability of a company or organization’s financial statements. The shareholders of the company place very high trust on the auditor’s report. What would shareholder, the stock market, Regulatory body, Government make out if the auditor quit just before the finalisation of annual accounts? Since January 2018 more than 30 firms have resigned as auditors of companies just days before signing off on the annual audit of financial statements. On May 26, Deloitte Haskins & Sells resigned as auditor of Manpasand Beverages Ltd after 8 years and Manpasand shares dropped 55% from Rs431 to Rs192.90 per share from 27 May until end of trade on 4 June.  It leads to the speculations and often results in stock price crash which is a loss to investors. It also affects other similar stocks too. Just as companies are answerable to their shareholders, auditors should be held responsible too as their actions impact the stocks and the overall financial standing of the company, even if past records have indicated that the companies are financially strong and debt-free. 

Resignation of the Auditors

Since January 2018 more than 30 firms have resigned as auditors of companies just days before signing off on the annual audit of financial statements. For example

  • On Apr. 27, Price Waterhouse & Co resigned as auditor of Vakrangee Ltd after 1 year
  • On May 26, Deloitte Haskins & Sells resigned as auditor of Manpasand Beverages Ltd after 8 years

In both cases,

  • the auditors resigned just days before signing off on annual accounts.
  • the reason for the resignation was inadequate information.
  •  the companies’ statements sidestep the auditors’ concerns.

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

PW and Vakrangee Auditor resignation

In its resignation letter Price Waterhouse said:

  • it asked the management for “information on several matters pertaining to election books, bullion and jewellery businesses”.
  • the management’s responses were inadequate or contradicted earlier explanations.
  • in the absence of adequate and relevant information and explanations, the fundamental objective of an audit…cannot be achieved.

Vakrangee in its statement to the stock exchanges said

  • the company has provided all the information with respect to business and affairs of the company to the auditor and the audit committee.
  • the company is fully compliant with the Ind-AS accounting standards
  • the audit committee has also reviewed the financial statements and has been fully satisfied with all the information and explanations provided by the company.

Vakrangee’s response makes no mention of the specific issue raised by PW, that of “several matters pertaining to election books, bullion and jewellery businesses”. Nor does it bother to explain why the auditor found the company’s responses inadequate and contradictory.

PW makes no mention of Ind-AS in its letter, yet Vakrangee asserts its compliance with the Indian accounting standards and the satisfaction of the audit committee.

Manpasad Beverages  and Deloitte Auditor resignation

On 27 May, Manpasand Beverages said Deloitte Haskins and Sells resigned as its statutory auditor.

The auditor’s letter to the company said it would not be able to complete the audit of financial statements for 2017-18 since Manpasand had not provided “significant information” sought by it.

Deloitte declined to disclose what information it had sought from the Manpasand management
Deloitte declined to offer a comment, citing client confidentially.

A Manpasand spokesperson dismissed claims of any wrongdoing and said the company has not received any query from either Sebi or MCA. Manpasand director Abhishek Singh said: “We have been providing all required information as and when required by them. While there could have been some delays, we have never denied sharing any information with them ever.”
The surprising feature is that Deloitte has been auditor of this company in the preceding years as well and its reports have been unqualified, both on financial matters as well as on internal financial control reporting. So one definitely would like to know as to what provoked it to resign,

When Auditors resign

When auditors resign from companies before completing the annual audit, it not only leads to a multitude of issues for the company, but also for shareholders, investors and as seen in the recent examples, affects the entire stock market – board meetings and announcement of financial results are delayed, share prices drop drastically, the overall stock market facing negative sentiments – especially in the small/mid cap segment, and the future of the companies involved looks uncertain. This negatively impacts a lot of people who have their money riding on the market.
In none of the cases has the regulatory authority found any irregularities with the companies in question? In fact, some of these companies – like Manpasand Beverages, for example – have even had the same auditors for the last 8 years and have been given a clear report each year by the auditors, and the company has shown a very strong financial performance year after year.

Making Auditors responsible

Investor confidence is fundamental to the successful operation of the securities market and it depends on investors having credible and reliable financial information when making decisions about capital allocation. Auditors, merchant bankers, rating agencies, cost accountants and valuers are often considered as “basis of most of the investment and financial decisions of the investors”, and these entities are seen as “principal gatekeepers or conscience keepers” and there must not be any lack of efforts in flagging lapses or potential risks. So Ministry of Corporate Affairs and SEBI are planning to rein in erring auditors, valuers

Move by Ministry of Corporate Affairs to question the auditors asking them to explain their reason for departure from the companies is a positive move.

Stock market regulator Sebi is considering a new set of norms for auditors and other third-party fiduciaries in the securities market under which defaulters will face stringent penal actions, including ban on issuance of audit or valuation reports and disgorgement of unlawful gains and their fees. The proposed move assumes significance as the role of auditors and valuers has come under scanner in a number of high-profile cases such as the Satyam and Kingfisher frauds, as also the PNB scam, WhatsApp leak and the Fortis matter in the recent past.

Audit in India

An audit is the inspection of an individual, business or organization’s accounts, and is traditionally completed by an independent individual or firm with specialized skills and knowledge of auditing procedures in the country in question

Objectives of Audit are

  • Helping investors know the financial health of the company
  • Assuring the government that the company is properly discharging its legal duties
  • Helping lenders evaluate the credibility of the company
  • Drawing management’s attention to any shortcomings in the company’s business operations
  • Helping management improve business efficiency

Audits of company accounts have been compulsory in India since the passing of the first Companies Act in 1913. Since then, the Institute of Chartered Accountants of India (ICAI), a statutory body established under the Chartered Accountants Act, 1949, has regulated the profession of chartered accountants in India and ensured the maintenance of India’s accounting standards, Audit and Assurance Standards Board (AASB).

Types of Audits

Basic audits in India are generally classified into two main types:

  • Statutory Audits: Statutory audits are conducted to report the current state of a company’s finances and accounts to the Indian government and shareholders. Such audits are performed by qualified auditors working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government agency
    • In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:
      Tax Audits, Company Audits
  • Internal Audits Internal audits are conducted at the behest of internal management in order to check the health of a company’s finances and analyze the organization’s operational efficiency. Internal audits may be performed by an independent party or by the company’s own internal staff.

In India, every company whose shares are registered on the stock exchange must have an internal auditing system in place. A company whose shares are not listed on the stock exchange, but whose average turnover during the previous three years exceeds INR50 million, or whose share capital and reserves at the beginning of the financial year exceed INR5 million, must also have an internal auditing system in place. The statutory auditor of the company must additionally report on the company’s internal auditing system of the company in the final report.

Ensuring a company’s balance sheet provides a true and fair reflection of its current state of affairs requires an auditor who, after completing the audit process, will express their opinion of the company’s financial statements via an auditor’s report. These financial statements should include:

  • Balance Sheet
  • Profit & Loss Account
  • Cash Flow Statement
  • Notes to Accounts

YouTube Video on Audit

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