SEBI circular on the resignation of statutory auditors (with Format of Information)

Amitav Ganguly 
on 21 October 2019


PREAMBLE

The Company jurisprudence in India enshrines statutory auditors who audit the accounts of a company as representatives of the shareholders who appoint them at every Annual General meeting {AGM} to look after the interest of the shareholders.

In a significant case of Deputy Secretary v S N Dasgupta, AIR, 1956 , Cal 414, it was held by a court that the auditor is the servant of the shareholders and whose duty is to examine the affairs of the company on their behalf at the end of a year and report to them what he has found. The auditors owe a number of duties to the company and its shareholders.

The duty of the auditors has taken a wider implication in as much that the authorities and the investing public depend upon their report regarding, inter alia, the true and fair view of the state of affairs of the company at the end of a particular financial year.

Due to such onerous position of the statutory auditors, their resignation obviously has a wide-ranging impact, particularly if that resignation takes place in the background of alleged financial and other related irregularities by a company. Spate of resignations in recent times has made the authorities consider regulating this aspect more stringently in addition to the provisions in the Companies Act 2013 and its Rules.

More particularly, in the case of listed companies and their material subsidiaries, Securities Exchange Board of India {SEBI} has very recently issued a circular bearing no. CIR/CFD/CMD1/114/2019 and dated October 18, 2019.

Given below in verbatim is the said circular, along with brief comments of the author .

BACKGROUND GIVEN BY SEBI

'Sub: Resignation of statutory auditors from listed entities and their material subsidiaries

1. Listed companies are required to make timely disclosures to investors in the securities market for enabling them to take informed investment decisions.

2. Under Sub-clause (2) of Clause A in Part C of Schedule II under Regulation 18(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI LODR Regulations"), the Audit Committee of a listed entity, inter alia, has to make recommendations for the appointment, remuneration and terms of appointment of auditors of a listed entity. Under Sub-clause (7), the Audit Committee is also responsible for reviewing and monitoring the independence and performance of auditors and the effectiveness of the audit process.

3. Further, Sub-clause (7A) inserted under Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations requires detailed reasons to be disclosed by the listed entities to the stock exchanges in case of resignation of the auditor of a listed entity as soon as possible but not later than twenty-four hours of receipt of such reasons from the auditor.

4. Regulation 36(5) of the SEBI LODR Regulations lays down certain disclosures to be made part of the notice to the shareholders for an AGM, where the statutory auditors are proposed to be appointed/re-appointed, including their terms of appointment.

5. Resignation of an auditor of a listed entity / its material subsidiary before completion of the audit of the financial results for the year due to reasons such as pre-occupation may seriously hamper investor confidence and deny them access to reliable information for taking timely investment decision.

6. In light of the above, the conditions to be complied with upon resignation of the statutory auditor of a listed entity/material subsidiary w.r.t. limited review / audit report as per SEBI LODR Regulations, are as under:

A. All listed entities/material subsidiaries shall ensure compliance with the following conditions while appointing/re-appointing an auditor:

Law:

(i) If the auditor resigns within 45 days from the end of a quarter of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for such quarter.

(ii) If the auditor resigns after 45 days from the end of a quarter of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for such quarter as well as the next quarter.

(iii) Notwithstanding the above, if the auditor has signed the limited review/ audit report for the first three quarters of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for the last quarter of such financial year as well as the audit report for such financial year.

COMMENTS:

The above provisions are meant to ensure that statutory auditors do not resign and leave a company without completing their statutory duties, otherwise a vacuum will be created, and confusion will prevail in auditing/ doing limited review of the specific period/s accounts of the company. Significantly, along with the listed company, it's material subsidiary as per the SEBI LODR Regulations, is also covered.

Law:

B. Other conditions relating to resignation shall include:

(i) Reporting of concerns with respect to the listed entity/its material subsidiary to the Audit Committee:

a. In case of any concern with the management of the listed entity/material subsidiary such as non-availability of information / non-cooperation by the management which may hamper the audit process, the auditor shall approach the Chairman of the Audit Committee of the listed entity and the Audit Committee shall receive such concern directly and immediately without specifically waiting for the quarterly Audit Committee meetings.

COMMENTS:

The Audit Committee of a company has been mandated under section 177 of the Companies Act 2013 and its Rules with, inter alia, the role, vis a vis, the statutory auditors which includes their terms of appointment, independence, performance, effectiveness of the audit process as well as examination of the financial statement and the auditor's report thereon. In view of this, it is but logical that in case of concerns raised by the statutory auditors, they should be mandated to approach the Chairman of the Committee seeking a resolution.

Law:

b. In case the auditor proposes to resign, all concerns with respect to the proposed resignation, along with relevant documents shall be brought to the notice of the Audit Committee. In cases where the proposed resignation is due to non-receipt of information / explanation from the company, the auditor shall inform the Audit Committee of the details of information / explanation sought and not provided by the management, as applicable.

c. On receipt of such information from the auditor relating to the proposal to resign as mentioned above, the Audit Committee / board of directors, as the case may be, shall deliberate on the matter and communicate its views to the management and the auditor.

COMMENTS

This provision takes into account a scenario where the statutory auditors have not yet resigned but are proposing to do so due to their numerous concerns. Moreover, the issue could be about non-receipt of information/ explanation from the company. With the relevant details brought to the notice of the Audit Committee by the statutory auditors, it has to deliberate all the aspects and communicate accordingly to the management as well as the statutory auditors. It may be possible that on the advice of the Audit Committee, their concerns are properly addressed to their satisfaction, and the matter of their resignation is avoided.

Law:

(ii) Disclaimer in case of non-receipt of information:

In case the listed entity/ its material subsidiary does not provide information required by the auditor, to that extent, the auditor shall provide an appropriate disclaimer in the audit report, which may be in accordance with the Standards of Auditing as specified by ICAI / NFRA.

COMMENTS

If ultimately the statutory auditors do not get the required information, they have to give an appropriate disclaimer in their report as per Auditing Standards. That will not only safeguard their position but also the proper status will be disclosed to the authorities/shareholders/investors and the others.

Law:

The listed entity/ material subsidiary shall ensure that the conditions as mentioned in 6(A) and 6(B) above are included in the terms of appointment of the statutory auditor at the time of appointing/reappointing the auditor. In case the auditor has already been appointed, the terms of appointment shall be suitably modified to give effect to 6(A) and 6(B) above.

The practicing company secretary shall certify compliance by a listed entity with 6(A) and 6(B) above in the annual secretarial compliance report issued in terms of SEBI Circular no. CIR/CFD/CMD1/27/2019 dated February 08, 2019.

COMMENTS

The requirement of having statutory conditions in the terms of appointment/reappointment of statutory auditors, by way of resolutions passed by the Audit Committee, Board of Directors and the shareholders, shall not only garner all statutory approvals but also disclose adequately to all, the statutory auditors' duties in this regard. This shall also legally bound them along with other terms. The practising company secretary has also to ensure that this compliance has been done.

Law:

C. Obligations of the listed entity and its material subsidiary:

(i) Format of information to be obtained from the statutory auditor upon resignation:

Upon resignation, the listed entity / its material subsidiary shall obtain information from the Auditor in the format as specified in Annexure A to this Circular. The listed entity shall ensure disclosure of the same under Sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations.

COMMENTS

This provision is mandated to bring about uniformity in disclosure so that all the relevant points are covered by all companies following the law. Moreover, the disclosure is made as soon as possible but not later than twenty-four hours of the receipt of the information.

(ii) Co-operation by listed entity and its material subsidiary:

During the period from when the auditor proposes to resign till the auditor submits the report for such quarter / financial year as specified above, the listed entity and its material subsidiaries shall continue to provide all such documents/information as may be necessary for the audit / limited review.

COMMENTS

This is a corollary to the provisions and ensures that the concerned company does not become non cooperative towards the statutory auditors who proposes to resign and continue to give the required data /material etc to them to enable them to complete the audit /limited review.

(iii)Disclosure of Audit Committee's views to the Stock Exchanges:

Upon resignation of the auditor, the Audit Committee shall deliberate upon all the concerns raised by the auditor with respect to its resignation as soon as possible, but not later than the date of the next Audit Committee meeting and communicate its views to the management. The listed entity shall ensure the disclosure of the Audit Committee's views to the stock exchanges as soon as possible but not later than twenty-four hours after the date of such Audit Committee meeting.

COMMENTS

The concerns raised by the resigning statutory auditors have to be considered by the Audit Committee without any delay, and the outcome of such deliberationsalong with its views have to be informed to the management. The disclosure to the public through stock exchanges, in time, is also of vital importance.

7. In case an entity is not mandated to have an Audit Committee, then the board of directors of the entity shall ensure compliance of this circular.

COMMENTS

In absence of Audit Committee, the Board of Directors of the company is to comply with this law.

Companies { Amendment } Act, 2017 mandates every listed public company and companies invoking rule 4 of the Companies { Appointment and Qualification of directors } Rules, 2014 to constitute an " Audit Committee" of the Board { subsection (1) read with rule 6 of the Companies (Meetings of Board & its powers ) Rules 2014.

Law:

8. The Stock Exchanges are advised to bring the provisions of this circular to the notice of all listed entities and their material subsidiaries and also disseminate it on their websites.

9. This Circular shall come into force with immediate effect.

10.In case the auditor is rendered disqualified due to operation of any condition mentioned in Section 141 of the Companies Act, 2013, then the provisions of this Circular shall not apply.

11.The Circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with regulations 18(3), 30(2) and 36(5) of the SEBI LODR Regulations and shall be in addition to the provisions of Companies Act, 2013.

Law:

Annexure A

Format of information to be obtained from the statutory auditor upon resignation

1. Name of the listed entity/ material subsidiary:

2. Details of the statutory auditor: a. Name: b. Address: c. Phone number: d. Email:

3. Details of association with the listed entity/ material subsidiary:

a. Date on which the statutory auditor was appointed:
b. Date on which the term of the statutory auditor was scheduled to expire:
c. Prior to resignation, the latest audit report/limited review report submitted by the auditor and date of its submission.

4. Detailed reasons for resignation:

5. In case of any concerns, efforts made by the auditor prior to resignation (including approaching the Audit Committee/Board of Directors along with the date of communication made to the Audit Committee/Board of Directors)

6. In case the information requested by the auditor was not provided, then following shall be disclosed:

a. Whether the inability to obtain sufficient appropriate audit evidence was due to a management-imposed limitation or circumstances beyond the control of the management.
b. Whether the lack of information would have significant impact on the financial statements/results.
c. Whether the auditor has performed alternative procedures to obtain appropriate evidence for the purposes of audit/limited review as laid down in SA 705 (Revised)
d. Whether the lack of information was prevalent in the previous reported financial statements/results. If yes, on what basis the previous audit/limited review reports were issued.

7. Any other facts relevant to the resignation:

Declaration 1. I/ We hereby confirm that the information given in this letter and its attachments is correct and complete.

2. I/ We hereby confirm that there is no other material reason other than those provided above for my resignation/ resignation of my firm

Signature of the authorized signatory

Date:
Place:
Encl:'

CONCLUSION

In view of the critical roles being played by statutory auditors, these provisions are certainly welcome, more particularly due to, inter alia, spate of financial irregularities being discovered in the working of many companies in recent times, and the auditors parting their ways from such companies.


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