Auditors' exit: Institutional investors approach FinMin to resolve issue

Worried over the recent spate of resignations by auditors of listed companies, which led to a sharp drop in their stock prices, institutional investors have approached the finance ministry to resolve the issue.

According to industry sources, there will be a meeting with officials of the finance ministry, the Securities and Exchange Board of India (Sebi), the Institute of Chartered Accountants of India, and other related parties in the next couple of weeks. “This issue requires urgent attention. This requires a multi-party discussion, including (with) Sebi and the finance ministry. All stakeholders need to reach a common ground. There will be a dialogue very soon,” said Leo Puri, managing director, UTI Mutual Fund.

Since the resignation of auditors before the end of their term, many of these stocks have fallen significantly. Stocks like Manpasand Beverages, Vakrangee, Sri Adhikari Brothers Television, Atlanta and others have fallen 30-60 per cent.

Nilesh Shah, managing director, Kotak Mutual Fund, said, “Institutional investors are concerned with the sudden departure of auditors without adequate explanation. Since auditors are appointed by shareholders, they owe it to shareholders to explain in detail why they are moving out abruptly. Auditors’ abrupt departure hits valuations as it creates doubts about the numbers.”

Auditors can't simply resign and say they no longer owe anybody any explanation: Leo Puri MD, UTI Mutual Fund

Puri believes that a shareholder will be happier if auditors disclose and qualify the account instead of resigning. “You really want auditors to give information, and not simply say that since I do not have enough data, I am resigning. And I no longer owe anybody any explanation. Which is what has happened,” he added.

Industry sources say institutional investors have already had separate meetings with the auditors to understand the issues. They have also raised the red flag with Sebi officials. A committee has also been set up by the Confederation of Indian Industry to address this issue on a war footing.

On their part, auditors argue that if firms do not furnish enough information despite several requests, their situation is untenable. “The question is that whether an auditor can continue by compromising on his code of conduct. Also, revealing all the data to the public can do much more harm than otherwise,” said an auditor who did not wish to be named.

Sources in Deloitte, Haskins and Sells, Price Waterhouse, KPMG and EY claim that they have done their duty by informing Sebi and the ministry of corporate affairs before resigning. 

However, institutional investors argue that since they are representing the shareholders, and these shareholders are the ones losing all the money because of their abrupt decisions, they should be able to provide answers to them. Some investors also claim that in the case of smaller companies, there may have been collusion as well. And that is a bigger problem that needs to be dealt with because these are cases of malfeasance as well. “Ring-fencing malfeasance is extremely important so that it does not become a broader epidemic in terms of reaction,” said a fund manager.