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Auditors weigh quitting companies with dodgy a/c policies

Auditors weigh quitting companies with dodgy a/c policies

MUMBAI: The latest regulatory action against

Deloitte

,

EY

and

KPMG

, has seen

auditors

scampering to de-risk themselves and more differences between auditors and managements are likely to come to the fore in companies with dodgy accounting policies that fail to provide evidence and justifications for their decisions.

In some cases like Reliance Cap, Manpasand, Vakrangee, Fortis Healthcare, IL&FS Transportation Networks Ltd (ITNL), and in situations like Jet Airways, where the auditor-management tussle went on for a month, the incoming auditors had different interpretations of key issues and conflicts were laid bare.

Multiple insiders said at least a dozen audits firms are evaluating whether they should resign. These include both those amongst the big four as well as smaller firms who may choose to walk away from “risky audits.”

A flurry of resignations in sectors like real estate, infrastructure, non-banking finance companies (NBFCs) and gems and jewellery is set to come in next few months, said an audit partner with a major firm.

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Infibeam, the BSE-listed company based in Ahmedabad, on Tuesday appraised the ministry of corporate affairs (MCA) of its decision to sack SRBC and Co as its joint statutory auditor. This comes about a month after the company alleged that the auditor, part of the EY network, leaked sensitive information two years ago. The recent case involving Price Waterhouse & Co (PwC) may just be the beginning, say insiders.

On Tuesday, PwC resigned as Reliance Capital and Reliance Home Finance auditor and shot a letter to MCA alleging divergence of funds in the group companies. In the letter dated June 11, PwC partner Vivek Prasad also alleged that the company threatened legal action, impairing the ability of the auditor. The firm stated in the letter that it suspected fraud and raised red flags over some transactions involving Reliance Capital and Reliance Home Finance.

PwC did not respond to ET’s request for comment.

In this case, industry trackers point out, the company would have required a noobjection certificate of the old auditor had PwC been the only auditor. That could have complicated the situation. Even in this case, the joint auditor– Pathak H.D. & Associates—will have to opine on PwC’s allegations and may have to add qualifications in the audit report.

“Considering the current state of affairs, it would make more sense for companies to have joint auditors so that if one statutory auditor were to resign, the other could take over and complete the audit to meet timelines than follow the whole process of appointment of a new auditor. Unlike earlier, when auditors could resign merely by stating they are preoccupied, now specific reasons have to be given and any new auditor coming on board will have to comment on these specific issues,” said Jeenendra Bhandari, partner, MGB and Co.

Partners within the big firms now feel that a key reason why the bigger firms are under pressure is because during audit rotation they won a lot of new audits, which were for decades being handled by Indian firms with close relations to the promoters.

Now the bigger firms suddenly find themselves in a position where they have major differences of opinion on key matters on estimates in the balance sheet or profit & loss side, certain litigation impacts, or on the ‘going concern’ concept.

The incoming auditors aren’t buying management explanations or are asking for more information on different transactions, something that promoters or management teams are not used to. And if they are unsatisfied with the management explanations, auditors are actively qualifying their opinions in audit reports. This is leading to value erosion, increased shareholder scrutiny, and reputation loss for companies following dodgy accounting policies.

“Though most big companies rotated within the Big Four firms during audit rotation, each also ended up signing a bunch of clients serviced by smaller Indian firms. That brought in a level of risk that the firms are waking up to only now. Our smell tests should have been better,” said the head of audit of a Big Four firm, who requested anonymity given that he is not authorised to speak to the media. Now, each firm is taking a closer look at their ‘client acceptance policies.’

On matters of difference, the conversations between the auditors, audit committees and management sometimes are drawn over months as companies delay audit committee meetings, apply pressure or appeasement techniques, or force them to accept their version.


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