Sebi chairman Ajay Tyagi. (MINT)
Sebi chairman Ajay Tyagi. (MINT)

Market regulator Sebi wants to tighten audit processes for listed companies

  • Sebi wants to ensure auditors act responsibly and their resignation does not hurt investor sentiment
  • Sebi has sought public comments on the proposals till 8 August

MUMBAI : Markets regulator Securities and Exchange Board of India (Sebi) has proposed stricter norms to strengthen audit processes and curb abrupt resignations of auditors in publicly traded companies.

The role of the audit committee and disclosures to investors must be strengthened to ensure that statutory auditors act more responsibly and resign only on genuine grounds without hurting investor sentiment, Sebi proposed in a consultation paper on Thursday.

“Several auditors continue to resign before fulfilling their responsibilities of completing the assignments.... This leaves the investors and stakeholders with lack of reliable information for making better financial decisions," said the Sebi paper.

The market watchdog proposed that the auditor of a listed entity (or its material unlisted unit) must finalize the audit report of the listed firm for the corresponding fiscal before resigning, especially if the auditor has already signed the audit report for all the three preceding quarters.

In all other cases, the auditor has to issue a limited review/audit report for that quarter before such a resignation (that is, previous quarter in reference to the date of resignation).

With respect to the auditor of a material unlisted subsidiary of a listed entity, the auditor has to issue the limited review/audit report for that fiscal/quarter before such resignation, Sebi proposed.

The reasons behind the exits of auditors have ranged from lack of adequate information on the company’s businesses and revenues to tax observations and “mutual exits". Some exits were also because of “health concerns" and “pre-occupation". In some other cases, the firm simply ceased to exist.

If the reason for the auditor’s resignation is the entity not providing information, the auditor has to provide an appropriate disclaimer in the audit report to that extent. In such cases, the auditor should provide the details of the information requested by the auditor that was not provided; and whether the inability to obtain sufficient audit evidence was due to a management-imposed limitation or circumstances beyond the management’s control.

The auditor should also clarify its assessment of the materiality to indicate whether the lack of information would have significant impact on the financial statements/results of the company or not.

The number of premature exits by auditors stood at 36 in the year ended March 2018, double that of the previous year.

“There have been a significant number of instances of abrupt resignation of statutory auditors from listed entities in recent times. In most of the cases, the statutory auditors have suddenly resigned without completing their assignments for the year, generally citing ‘pre-occupation’ as the reason for resignation," Sebi said.

Sebi has proposed that every auditor provide detailed reasons for resignation. Further, Sebi said the views of the company’s audit committee and the board must be submitted to stock exchanges, along with the disclosure of the resignation letter of the auditor.

“While the broad role of the audit committee of the listed entity is already specified… there is no specific procedure laid down that is to be followed by the auditor or the audit committee, when there are significant concerns leading to the auditor resignation," said Sebi.

In order to strengthen the role of the audit committee, Sebi proposed to issue a circular, amending the existing listing and disclosure regulations.

Sebi said the auditor should approach the chairman of the audit committee directly and immediately in case of any concerns with the management such as non-availability of information or any non-cooperation by the management.

The Sebi paper said: “The auditor shall not specifically wait for the quarterly meetings to take place in order to raising such concerns. The auditor shall bring to the audit committee’s notice, all the concerns the auditor has with respect to such resignation, along with relevant documents.

“In cases where the resignation is due to non-receipt of information or explanation from the company, the auditor shall enlighten the audit committee of the details of information sought and not provided by the management."

The market regulator said the company’s audit committee should deliberate on such matters and communicate its views to the management and the auditor. Subsequently, the company must disclose the audit committee’s views to the stock exchanges.

Sebi has sought public comments on the proposals till 8 August.

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