Auditor’s Resignation & Corporate Governance

Recently, in one of the professional groups of Chartered Accountants, someone posted a newspaper clipping saying “.. 204 listed firms say auditors have quit, Govt launches probe..”  

 Few questions –

i.                    Are these Auditing firms absolved from their ‘responsibility of reporting’ to the shareholders even if they quit?

ii.                  Is the resignation and no reporting a ‘breach of duty’?

What is a breach of duty?  A breach of duty occurs when one person or company has a duty of care toward another person or company, but fails to live up to that standard. A person may be liable for negligence in a personal injury case if his breach of duty caused another person's injuries.  (http://www.rotlaw.com/legal-library/what-is-breach-of-duty/)

In a simple way, Shareholders are the owners of a Joint Stock Company.  Since they can’t participate in day to day affairs of the company and collectively can’t keep the control of the company, they appoint Directors to conduct the business.  At the same time they also appoint Auditors to report back to them about the state of affairs of the company, as conducted by the Directors.

Interestingly, an article appeared few days back in Mint newspaper says:

 “Auditor’s report to the shareholders is a powerful weapon. The auditor should use it fully to bring out the problems in the company’s financial reporting and controls. Resignation cannot be normally justified except when the auditor has a serious health problem or faces an extreme situation such as criminal intimidation,” said R. Narayanaswamy, professor of finance and control at the Indian Institute of Management, Bangalore.

“A better option (instead of resignation) in such cases would be to qualify the opinion, or even issue an adverse opinion. Auditors must publicly announce their precise reasons for quitting, otherwise there will be unhealthy speculation. Reasons such as preoccupation with other work are disingenuous, or too clever by half,” said Narayanswamy.”

(Source https://www.livemint.com/Companies/BvJdOymz8CVc17oL6gGauO/32-auditorsatlistedfirmshave-resignedin-last-5-months.html)

Auditing or ‘assurance services’ process – right from the appointment till the reporting, is a well settled process and the guidelines are provided under the law, by the Institute of Chartered Accountants of India and other regulatory bodies.  Assurance service is an independent professional service, typically provided by Chartered or Certified Public Accountants or Chartered Certified Accountant, with the goal of improving information or the context of information so that decision makers can make more informed, and presumably better, decisions. Assurance services provide independent and professional opinions that reduce information risk (risk from incorrect information) https://en.wikipedia.org/wiki/Assurance_services.
If the Auditors find something is wrong with the affairs of the company or they don’t get the information in order to give their opinion, they should report the same to the shareholders for their (shareholders) further action.  They should not simply RESIGN!  Auditors are under the obligation to report their findings to the shareholders.  Resigning may mean that they know something but don’t want to report!!

They (Auditors) should insist the Board of the company to circulate their findings to the shareholders.  If required, they should also be present in the meeting of shareholders and explain why they think like that.  Resignation is not a proper discharge of Auditors’ duty and definitely, not a good decision for a better corporate governance.

To bring in better transparency and governance, the Auditors should -

• not quit their job mid way unless there is a health issue or other legal disqualification/obligation
• if at all they want to resign, they should convey the reason for resignation to the company’s shareholders;
• give complete download of the state of affairs of the company to the incoming new Auditor and the ‘handover report’ to be made available to the shareholders thru public disclosers.

Let’s build the confidence of investors thru a better Corporate Governance.