The Securities and Exchange Board of India (SEBI) has formalized the proposals in a discussion paper it had floated in July relating to the issue of statutory auditors leaving their assignments in the middle of a financial year, as per a Business Standard report. This effectively means that auditors cannot simply walk away citing “personal reasons” for their quitting the auditor’s jobs. They will not only have to give a detailed explanation for the reasons behind their decision to resign, but will have to submit a review for the nearest quarter and highlight issues they have found.

There’s more. SEBI has now mandated that if an auditor signs the audit report for part of the year, they will have to submit the audit report for the whole financial year. The auditor should then add in their report if the company or its subsidiary did not provide information sought by the auditor, if such issues are there.

The existing provisions of the chairman of the audit committee of the listed company being approached in case of information not forthcoming from the management must also be exhausted.  

Included in the new guidelines from SEBI is a format for conveying the reasons for the resignation of auditors and details of information denied to them by the management. SEBI hopes these steps will correct a few lacunae in the present system. Statutory auditors appear to be quitting listed companies giving reasons ‘pre-occupation’. SEBI feels this leaves very little opportunity for the regulator or the shareholders to know if something went wrong that prompted the auditor to resign.

It has emerged that 48 auditors have resigned during the course of the year in 2018 and another 16 in 2019 so far. Auditors are chosen and appointed at the annual general meetings of companies and they are supposed to remain till the next AGM. Statutory auditors leaving in the middle of the year is generally seen as sign of friction between them and the management. SEBI believes the shareholders’ cause will be better served if auditors make public the reasons for their decision to quit in the middle of the year and bring out any anomaly that might have come to their notice during their tenure as the auditors of the company.

The only exception from this reporting rule are those auditors rendered disqualified as per the provisions of the Companies Act.