It’s too early to call it a trend. But of late, some companies—admittedly not big ones—are reporting that their auditors have resigned and this has taken place just before their results were due.

When auditors resign mid-way through their tenure it is unusual, but when they do so just before the annual results, then it raises a definite red flag. Its impact on the shares of the companies concerned has been telling. Companies are being put on notice. Shareholders have called for an entire board to be evicted, they are voting with their feet on resolutions, and even investigations of high-flying company chiefs is no longer taboo.

So, when an auditor says not on my watch, shareholders fear the worst. Since 28 May, Manpasand Beverages Ltd’s shares have hit the lower circuit every day, after its auditors Deloitte, Haskins and Sells resigned just before its annual results were to be announced. Its shares have lost 48% over its 25 May price. On 30 May, Atlanta Ltd said Price Waterhouse Chartered Accountants Llp had resigned as the statutory auditors, again on the eve of its results. Its shares fell by 19.97% on Thursday, hitting a lower circuit. Earlier, in end-April, Vakrangee Ltd said Price Waterhouse and Co. Chartered Accountants Llp resigned and its shares too have tumbled.

The auditors’ main reasons appear to be not getting adequate information required to complete their statutory audit. In another case of Fortis Healthcare Ltd, the auditor flagged an inter-corporate loan given by the company to entities which later turned out to be related to the promoter group. The explanation that they were unrelated when the loans were given (but became related later) did not wash. Even if on paper, the auditors could have ticked the audit box, they chose to look further. That’s an important role that auditors can play.

Is it a coincidence that so many cases of auditors resigning are cropping up now? Or are auditors taking note of the changing environment in which listed companies operate?

Investors are getting vocal and organized. Proxy firms are asking tough questions. The government and regulators are keen that company financials are squeaky clean. Market regulator Securities and Exchange Board of India had imposed a two-year ban on Price Waterhouse for audits of listed companies, in the Satyam Computer Services Ltd case, which was later modified on appeal to allow it to audit existing clients till 31 March 2019. That memory must be fresh too.

A changed climate and public anger when scams break out may have made auditors realize that their position has changed. Their name on the annual report makes shareholders implicitly trust the financials, rightly or wrongly. If that were not the case, these companies’ shares should not have fallen in this manner, because other things remain the same.

It also comes back to the conflict posed by the majority shareholder (the owner/promoter) also being the manager. While all shareholders together approve the auditor’s appointment, in reality it is the owner-manager who decides the appointment. That results in a conflict where they are having to audit the work (as reflected in the financial statements) of the same people who appointed them.

It is heartening to see that auditors are finally refusing to toe the management line. If it happens in more companies and even lesser-known auditors forego business rather than compromise on the audit, the corporate world will be cleaner. And, if auditors hold their bigger clients also to these same standards, where the stakes are much higher, things will really improve. This can well be a turning point in improving the quality of financial reporting among listed companies. Or it may just be a coincidence.

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