According to data from Prime Database, a primary market tracker, between January and May, 32 auditors have resigned midterm, while for 2017-18 the number of exits stood at 36. The number of exits in 2016-17 was at 18.
The reasons behind the auditor exits have ranged from lack of adequate information on the company’s businesses, revenues, tax observations to ‘mutual exits’. Some exists were also because of “health concerns" and “pre-occupation". In some other cases, the firm simply ceased to exist.
In cases where the auditors have exited due to lack of adequate information, or for not getting ‘reasonable assurance about the financial statements being free from mis-statement’, the concerns were conveyed to the ministry of corporate affairs (MCA), said an auditor, who did not wish to be identified.
“A new auditor, who finds serious issues and does not get supporting documents, may very well decide to report the matter to the MCA and tender resignation. This may have been the case with a few companies which had new auditors," said Amit Mantri, managing partner, 2Point2 Capital Advisors LLP. For instance, Mantri had raised concerns about the fundamentals of Manpasand Beverages in his blog in 2016.
MCA has also taken cognisance of the recent spate of auditor exits under Section 143(12) of the Companies Act, and may examine the companies for alleged breach of the companies law, said a regulatory official.
“It is a healthy trend that the auditors are willing to give a pushback to the management. However, they can be a little more forthcoming with their disclosures," said Amit Tandon, chief executive at proxy advisory firm Institutional Investors Advisory Services (IiAS).
On 27 April, Price Waterhouse &Co 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. On 29 May audit firm Mehrotra and Mehrotra resigned from Bhushan Steel Ltd.
“Auditor’s report to the shareholders is a powerful weapon. The auditor should use it fully to bring out the problems in the company’s financial reporting and controls. Resignation cannot be normally justified except when the auditor has a serious health problem or faces an extreme situation such as criminal intimidation," said R. Narayanaswamy, professor of finance and control at the Indian Institute of Management, Bangalore.
In certain cases, such as the ones involving Jet Airways Ltd, Reliance Naval and Engineering Ltd, and Hindustan Construction Company (Lavasa), the auditors have qualified their reports as 'going concern'. Simply put, these companies, despite weak financials, will remain in operations and will not be forced to liquidate.
“A better option (instead of resignation) in such cases would be to qualify the opinion, or even issue an adverse opinion. Auditors must publicly announce their precise reasons for quitting, otherwise there will be unhealthy speculation. Reasons such as preoccupation with other work are disingenuous, or too clever by half," said Narayanswamy.
According to Pranav Haldea, managing director, Prime Database, it is, however, a positive sign, which was lacking in India. “Now, there is greater scrutiny of auditors. Auditors are also wary of names of companies that they are getting associated with because it can result in not just reputational impact, but they may also be banned like in case of PWC."
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 28 sessions, falling 83.8% 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. Kotak Institutional Equities, which had a ‘buy’ rating on the company, suspended its rating, citing lack of disclosures on Deloitte’s exit. Motilal Oswal Securities Ltd has also putting its rating on Manpasand ‘under review’ until further clarity emerges.
“We have seen the markets sell-off in case auditors resign mid-way. Therefore, it is incumbent upon the auditors to disclose, in greater detail, the reasons for their disassociation with the company. This will lead to more transparency. Mutual funds or institutional investors have more accessibility to the companies, but it is common investor holding, a few 100 or 1,000 shares, which rely on disclosed information," said Ajay Bodke, CEO and chief portfolio manager PMS, Prabhudas Lilladher Pvt. Ltd.