Auditor's Resignation: The Perils Of The Profession

What is the way ahead for CAs in the context of auditors' resignations in 2018 and the upheaval in the profession after the major scams and frauds in the banking industry. A moral dilemma is present as to what should be done. A lot of compliance requirements have been made by SEBI, MCA, RBI, creation of NFRA, etc.

Recent audit failures are bringing new scrutiny to the domain and business practices of the auditing firms. There is no denying the fact that there have been tragic missteps in the field of auditing over the past decade and allegedly auditors rarely seem to be held to account. But the recent changes in the Companies Act to hold entire audit firm accountable for the misdeeds of a single partner is a huge departure from the traditional norms. After such announcement, almost fifteen firms resigned shortly from the companies they were auditing.

Earlier this year, Securities and Exchange Board of India (SEBI) slapped a 2-year audit ban on PWC, preventing the firm from undertaking any audits of listed companies in India for the stated time period. Thirty-two auditors of listed companies have resigned midterm this year, some just before signing the audit reports. The Companies Act, 2013 provides for resigning auditors to file the reasons for such resignation with the Registrar of Companies (ROC)and the reasons that came were ambiguous, like- "health concerns", "pre-occupation" or "the firm ceased to exist", while many cited "for want of information" as primary reason. Stakeholders look for predictability, transparency, and unambiguity in the concerned company and its financials. The government of India is quite set to put in place a National Financial Reporting Authority (NFRA). NFRA was created under the new Companies Act, 2013 but its respective sections are not yet made applicable. Thus now is the time we take this wake-up call on audit issues seriously.

The most practical path toward better auditing in the short term is likely through using extended audit statements, which provide more information to the readers. The new auditing standards require the audit report to provide a lot more details along with a standard ‘true and fair opinion.’ This surely brings 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 judgment, on what makes it to the auditors’ report which will now rightly demonstrate the quality of audit undertaken and conclusions drawn.

Other method to improve the quality of audit is by increasing the regulatory asks from the auditor, for example incoming auditor getting a stated set of questions answered by the outgoing auditor along with the No Objection Certificate (NOC) which already is mandated by law to gain insight into the reasons for their disengagement. The fact that certain areas were red-flagged by earlier auditor will mean the incoming auditor needs to be cautious and of course, apply professional skepticism as necessary. In companies where the issues continue to exist, the incoming auditor does have the option of evaluating the impact on the auditors’ report and consider whether to modify or disclaim the audit opinion.