SEBI has, in a Consultative Paper dated 18 July 2019, proposed amendments to the SEBI (Listing Obligations and Disclosure Requirement) Regulations 2015 (LODR Regulations) with respect to resignation of auditors. Specifically, it has proposed disclosures to be made to investors and clarified the role of the Audit Committee in this regard. The proposals have been made in view of several instances of statutory auditors of listed entities resigning abruptly without completing the audit of financial results for the year, citing “pre-occupation” as the reason for doing so. As a result, investor confidence is hampered on account of lack of reliable information to base financial decisions on. The extant regulatory provisions on the subject under the Companies Act 2013, Companies (Audit and Auditors) Rules, 2014, LODR Regulations 2015 and the ICAI’s auditing standards (SA-705) do not address the aforesaid concern adequately. Hence, the paper makes the following proposals :

• A new sub-regulation 33(9) providing for ‘Conditions prior to resignation’, to encourage responsible behaviour on the part of auditors, that:
  • If the auditor of a listed entity proposes to resign and it has signed the audit report for all the quarters (limited review/ audit) of a financial year, except the last quarter, then the auditor shall finalize the audit report for the said financial year before such resignation. In all other cases, the auditor shall issue limited review/audit report for that quarter before such resignation (i.e. previous quarter in reference to the date of resignation).
  • If the auditor of a material unlisted subsidiary of the listed entity proposes to resign, the auditor shall issue the limited review/audit report for that financial year/ quarter, as applicable, before such resignation (i.e. previous financial year/ quarter in reference to the date of resignation).
• Format of resignation : In a prescribed format, the auditor is required to give detailed reasons for his resignation, a declaration that there are no other material reasons and the efforts made by it (to approach the Audit Committee) on any concerns. In case the resignation is for the reason that information sought was not made available, then details such as, whether this was due to a management imposed limitation, whether lack of information would have a significant impact on financial results, whether lack of information was existed in the previous reported financial statements etc, shall be disclosed
• Disclosure of resignation letter, views of the Audit Committee and the Board to stock exchanges : The listed entity shall disclose this letter to the stock exchanges. In case of a material unlisted subsidiary, the subsidiary shall disclose the resignation letter to the listed entity which in turn shall disclose it to the stock exchanges. Along with disclosure of resignation letter of the auditor, the views of the Audit Committee and Board of Directors of the listed entity/unlisted material subsidiary should also be submitted to the stock exchanges.
• Specific Procedure for Auditor/Audit Committee in such cases:
  • The auditor shall approach the Chairman of the Audit Committee directly and immediately in case of any concerns with the management, such as non-availability of information / non-cooperation by the management. The auditor shall not specifically wait for the quarterly meetings to take place in order to raise such concerns.
  • The auditor shall bring to the Audit Committee’s notice all the concerns it has with respect to such resignation, along with relevant documents. Where the resignation is due to non-receipt of information or explanation from the company, the auditor shall enlighten the Audit Committee of the details of information or explanation sought and not provided by the management.
  • The Audit Committee shall deliberate on the matter and communicate its views to the management and the auditor. In communicating its views, the Audit Committee shall ensure that it fulfils its role as specified under the SEBI LODR Regulations. The listed entity shall ensure the disclosure of the Audit Committee’s views to the Stock Exchanges.