interview | Vishesh Chandiok Industry

‘Abrupt resignation of auditors not a new trend’

Vishesh Chandiok, National Managing Partner, Grant Thorton, India

Vishesh Chandiok, National Managing Partner, Grant Thorton, India   | Photo Credit: Kamal Narang

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Where not enough information is made available, resignation may be the only option left, says Grant Thornton India CEO

Abrupt resignation of auditors are making news these days though there have been such instances in the past also, says Vishesh Chandiok, CEO, Grant Thornton India LLP. He also says that the new accounting standards which have come into effect improve corporate governance and transparency by way of greater interaction between the management, board of directors and the auditors. Edited excerpts:

The recent past has seen a few instances of auditors resigning in an abrupt manner just ahead of quarterly results...

I do not believe this is either a recent or a new development. Such cases have always existed and perhaps, it is just that these happened to be high profile cases. If there are circumstances and events which are beyond the control of management and the auditor, particularly in cases where there is simply not enough information made available to the auditor to draw conclusions, resignation may well be the only option left.

These circumstances are envisaged by the standards on auditing which require the auditor to consider resignation (where possible), in these circumstances.

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 road blocks, 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 roll back procedures. These, again, are likely to involve substantial time and efforts.

Would it be right for the new auditor to trust the numbers/information provided by the company that was red-flagged by his/her predecessor?

In any case, the auditor is required to perform enough procedures to obtain sufficient appropriate audit evidence before drawing conclusions on any numbers or information provided by the company. As per the requirements in India, the incoming auditor does request the outgoing auditor to gain insight into the reasons for their disengagement.

The fact that certain areas were red-flagged will mean the incoming auditor needs to be cautious and of course, apply professional scepticism as necessary. Where the issues continue to exist — the incoming auditor does have the option of evaluating the impact on the auditor’s report and consider whether to modify or disclaim the audit opinion.

Increasingly, auditors seem to be flagging off issues such as firms not sharing significant information with the auditors....

Again, whilst this is not a new phenomenon and auditors have been flagging off issues like this in the past, what is new, is that the reasons for the auditor resigning is now available in the public domain. This is largely on account of the regulatory changes that have been set in motion since the Companies Act, 2013 [came into force]. The rules require the auditor to inform the MCA [Ministry of Corporate Affairs] the reasons for resignation. SEBI requires companies to file information regarding auditor change with the stock exchanges along with the reasons.

These requirements did not exist a few years ago, which makes it appear as if this is a new phenomenon.

The new auditing standards require a more detailed audit report...

The new auditing standards require the audit report to provide a lot more detail beyond a standard ‘true and fair opinion.’ This is a massive shift as compared to what is currently seen. Currently, in case of unmodified reports, there is no difference in the auditor’s report irrespective of the size, nature and complexity of companies. The new reports will include key audit matters in the auditor’s report. These are not necessarily matters that may have had an impact on the overall conclusion, however, these are matters that auditor spent significant time and efforts on during the audit. This will, in turn, require the management and boards to reassess and rethink the quality of disclosures in the financial statements. Overall — as seen with global experience around the new standards — it is expected that the new long form audit reports communicate a lot more about the company and the audit as compared to the past and if done well, will aid all users, management and auditors.

There would be a certain impact on the role of auditors as well with the new standards coming into force. Can you elaborate?

Whilst the new standards do not impose any new responsibilities on the auditors — they surely bring into focus the key areas of audit and the work done by the auditor in the public domain. This means the auditor is required to exercise considerable professional judgement, on what makes it to the auditor’s report. This will also require greater interaction between the management, board of directors and the auditors, which is again a healthy and much needed engagement. The new reports will invariably demonstrate one critical element — audit quality. Now, audit reports may well be the differentiating factor, which will demonstrate the quality of audit undertaken, the judgements made and conclusions drawn.

What are your views on the concept of auditor rotation?

I have always welcomed the concept of audit rotation and indeed any new step that will ultimately promote audit quality or the perception of enhanced auditor independence. Auditor independence underpins the quality of audit and rotation helps ensuring that long-standing relationships do not impair auditor independence or judgement.

The new SEBI LODR norms recently notified post the Kotak report related to disclosures on choice of auditor and their fees would further aid audit quality and audit independence, by reducing auditor change for ‘opinion shopping,’ or firing a firm when not convenient.

These norms ahead of rotation would have prevented deep discounting to win new work, but better late than never.

I hope MCA also adopts these SEBI norms by making them mandatory for all companies, not just listed ones.

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Printable version | Jan 28, 2020 6:09:33 PM | https://www.thehindu.com/business/Industry/abrupt-resignation-of-auditors-not-a-new-trend/article24247283.ece

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