Big Four Fear Reputational Risk as Auditors Resigned Citing Unsatisfactory Responses
The ‘Big Four’ audit firms such as PwC, Deloitte, KPMG and EY are being increasingly concerned about the reputational risks as the regulators have been putting a lot of pressure on them in view of the several corporate failures that have been witnessed in recent times.
The auditors have resigned 10 times during the last one year highlighting that the companies have failed to give satisfactory responses to their queries. As per the data from the market research firm Prime Database, the reasons given by the Auditors for their resignations are briefly summarized as follows:
- Digjam - Deloitte pointed out in its resignation letter that the management has not performed impairment assessment pending insolvency resolution process.
- Vadilal Industries - Deloitte raised concerns in respect of dispute between two promoter directors.
- 8K Miles - Deloitte raised concerns regarding fraud and also pointed out issues relating to revenue recognition and many overrides of controls.
- Talwalkars - Audit firm MK Dandekar and Company did not receive a satisfactory response.
- Diwan Housing Finance Limited (DHFL) - Audit firm Chaturvedi and Shah issued disclosure of opinion stating that it did not receive satisfactory information.
- DHFL - Deloitte also issued disclaimer of opinion stating that it did not receive satisfactory information.
- Infrastructure Leasing and Financial Services Ltd. (IL&FS) - Audit firm BSR cited non-payment of audit fees and non-receipt of certain pending information pertaining to audit matters.
- Eveready - PwC issued disclaimer of opinion stating that it is not able to obtain sufficient audit evidence.
- Reliance Capital - PwC highlighted that it did not receive satisfactory responses to queries. Further, it also said that the company did not convene Audit Committee meeting within the expected timeline and they are no longer in a position to complete audit.
- Reliance Home Finance - PwC reasoned that it did not receive satisfactory responses to queries and was no longer in a position to complete audit.
In October 2019, SEBI had strengthened the framework around auditor resignation through a circular and said that before resigning, an Auditor must share his concerns by approaching the Audit Committee and apprising it about the relevant information which was sought by him and not provided by the management. The market regulator also mandated certain other things to be complied with by the resigning auditor to ensure that they do not resign for silly reasons or shun their responsibility. At the same time it has also been ensured that the audit committee and the board consider the reasons of resignation and intervene adequately.
In this respect, former PwC CFO opined that by resigning, the auditor is not doing justice to his fiduciary duty towards the shareholder. In case, the difference between the auditor and management cannot be reconciled then the auditor should report to the authorities to avoid any liability and may qualify the audit report without leaving the company.
Further, sudden resignation of an auditor puts enough burdens on the new auditor as he has to start afresh. However, a partner with a leading audit firm stated that if the resigning auditor gives detailed reasons for his resignation, there is nothing wrong in leaving the organization. SEBI guidelines also strengthened this disclosure process and also safeguarded the interest of the shareholders by enabling them to know what is happening in the company.
Moreover, since the emergence of the IF&FS crisis in October 2018, the big four accounting firm are under the regulatory lens. There were issues regarding their dominance in audit markets and conflict of interest. Henceforth, citing oligopoly, the Ministry of Corporate Affairs came out with a consultation paper in February 2020, suggesting separation of audit from non-audit services to improve audit quality. The recent surfacing of the Wirecard’s $ 2 billion accounting fraud in the UK has further put the onus back on the auditors.
Finally, as pointed out by another expert, in view of the present situation, it is advisable for the auditors to resign, rather than signing financial statements which they are not comfortable with as financial gain is not a consideration when their reputation is at stake.
