Rising level of scrutiny: Auditors take guard on corporate breaches

The Centre has already proposed to establish an independent National Financial Reporting Authority for the auditing

In the past month, auditors of three listed companies – Manpasand Beverages, Atlanta and Vakrangee — have quit, citing potential violations. In another instance, Hindustan Construction Company (HCC), they have raised red flags. 

In the recent past, the role of auditors has come in for widespread criticism from government and regulatory agencies, including the Securities and Exchange Board of India (Sebi). This has led to auditors taking a stricter stance.

Experts say the recent Sebi verdict against global accounting giant Price Waterhouse (PW) in the Satyam Computer case has got the bigger auditors worried at the implications of negligence on their part. Sebi banned PW from providing any auditing services to listed firms for two years, though an appeal to the Securities Appellate Tribunal got it partial relief.

Interestingly, PW was the auditor for construction and engineering company Atlanta, a role it has now quit. Another big auditor, Deloitte Haskins & Sells, resigned as the auditor for Manpasand Beverages through a letter dated May 26. It stated the information it required for audit was not provided by the company.

“We are definitely seeing an improvement in the compliance standard, both from a technical and ethical point of view. Auditors quitting companies should not come as a surprise, as their fiduciary obligations are much more important than their business commitments,” said Manoj Fadnis, former president, The Institute of Chartered Accountants of India.

In fact, the recent action by auditors has hit companies hard. Manpasand Beverages has lost nearly half of its market value since the auditor resigned. Shares of Atlanta slumped 20 per cent on Thursday, after the company announced its auditor’s resignation. Similarly, shares of HCC have fallen 36 per cent since its auditors raised a red flag.

Infrastructure company Dilip Buildcon became an unexpected victim of the trend. Buzz about the resignation of its auditors led to a 17 per cent slump in its shares on Thursday. The stock recouped half the loss after both company and auditors said this was untrue.

“Any news around auditors and their role is having a huge impact on the stock prices of companies since investors are becoming very concerned about corporate governance issues. However, some of the nefarious elements in the market are also using rumours around auditors to drive down stock prices by scaring investors,” said J N Gupta, managing director at SES, a corporate governance advisory entity.

The central government has already proposed to establish an independent National Financial Reporting Authority (NFRA) for the auditing profession. The aim is to tighten the regulatory oversight over the role of chartered accountants.

Sebi has also approved recommendations from the Uday Kotak committee on corporate governance regarding the accountability of auditors. The panel said Sebi should have powers to act against auditors and other third-party fiduciaries with statutory duties. “This power should be provided in case of gross negligence as well,” it had said.