A spate of auditor resignations points to India Inc’s problems with corporate governance

  • A number of auditors are ending their relationship with clients amid high scrutiny from SEBI.
  • According to the Ministry of Corporate Affairs, the auditors of as many as 204 companies have submitted their resignations in the year so far.
  • In January 2018, SEBI slapped a two-year ban and fine on PwC for failing to report the corporate malfeasance at Satyam Computer Services.
When it comes to corporate governance, India has seen its fair share of scams related to questionable business dealings, balance sheet discrepancies and embezzlement.

The most recent debacle that comes to mind is that of ICICI Bank, the country’s largest private sector lender. The bank’s CEO, Chanda Kochhar, is currently being investigated over allegations of conflict of interest and misconduct. She reportedly allowed the extension of loans to Videocon Group, the former chairman of which had a business relationship with Kochhar’s husband.

While India Inc has had a tenuous grasp of corporate governance standards, it has never seemed to be a problem for auditors who weren’t subject to very heavy regulatory scrutiny. Until now, that is.

At the beginning of the year, the Securities and Exchange Board of India (SEBI) slapped a two-year ban and a fine against the Indian unit of PricewaterhouseCoopers (PwC) for failing to report and facilitating the corporate fraud at Satyam Computer Services, founded by the now-imprisoned Ramalinga Raju, which was revealed in 2009.

While PwC is challenging the ban, the damage has been done. Auditors now have no choice but to recuse themselves in situations of corporate malfeasance for fear of reputational damage and punitive action.

A mass exodus

According to the data from the Ministry of Corporate Affairs, accounting firms of as many as 204 companies have submitted their resignations from the beginning of the year to 17 July. Around 75% of these resignations came in the corporate strongholds of Mumbai, Delhi, Kolkata and Ahmedabad. In comparison, only 16 auditors submitted resignations in 2017.

In a number of cases this year - such as the resignation of Deloitte as the accountant for Manpasand Beverages Ltd - the resignation came days before the annual accounts were scheduled to be released owing to inadequate information.

The resignations have not gone unnoticed by shareholders, based on the declining share prices of companies like Vakrangee Ltd, an IT services firm whose auditor PwC quit at the end of January 2018.

The Ministry of Corporate Affairs has initiated a formal investigation into this exodus and is looking to understand the underlying reasons. For its part, SEBI will continue its initiative to improve corporate governance standards across the country.

At its board meeting in March, the regulator agreed to a number of reforms including the separation of the posts of CEO and chairman in listed companies and increasing the importance of audit committees. Earlier this month, it also released a set of draft norms giving it clear authority to act against accounting firms in cases of corporate fraud.

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