Summary: Statutory auditors play a crucial role in insolvency proceedings under India’s Insolvency and Bankruptcy Code (IBC) 2016, particularly during the Corporate Insolvency Resolution Process (CIRP). Their responsibilities include ensuring compliance with legal requirements, maintaining transparency, and assessing the going concern status of companies undergoing insolvency. Auditors face challenges in obtaining financial information from the Insolvency Resolution Professional (IRP) or Resolution Professional (RP), who manage the company during CIRP. They must also assess management representations, ensure audit reports are directed to the IRP/RP, and evaluate financial statements despite management changes. Furthermore, auditors must navigate uncertainties related to the company’s ability to continue operations and meet obligations during the insolvency process. Their professional skepticism and independence are vital in ensuring a successful resolution and maintaining stakeholder confidence throughout the process. The statutory audit’s role remains pivotal in corporate governance and managing insolvency efficiently under the IBC.
Overview
A major turning point in India’s attempts to handle the difficult problems of corporate insolvency and bankruptcy comes with the arrival of the Insolvency and Bankruptcy Code, 2016 (IBC). With a time-bound framework for handling troubled assets, this all-encompassing legislation seeks to simplify and unite the scattered insolvency resolution mechanism. Under the IBC, corporations go through the Corporate Insolvency Resolution Process (CIRP), so statutory auditors become extremely important in guaranteeing compliance with legal criteria, openness, and responsibility.
The several obligations of statutory auditors during bankruptcy procedures is investigated in this paper together with the difficulties they encounter and possible ways to negotiate this complex terrain. We will explore the main areas of concern, including the scope of audit, reporting obligations, going concern assessments, and auditor’s connection with the Insolvency Resolution Professional (IRP), sometimes known as Resolution Professional (RP).
Background and Contextual Framework
Aimed at addressing different complexity and challenges to achieve and sustain possible development levels, the Indian economy has seen major regulatory reforms recently. The growing Non-Performing Assets (NPAs) in the banking industry have been one of the most urgent issues since they seriously jeopardise the general economic stability. Reacting to this difficulty, the government passed the Insolvency and Bankruptcy Code, 2016 based on advice of the Bankruptcy Law Reform Committee under direction by Mr. T. K. Vishwanathan.
The IBC has acquired really great momentum since it was passed. Under pressure from the Reserve Bank of India (RBI), 12 significant defaulters representing roughly 25% of the Gross NPAs as of March 31, 2016, were referred to different benches of the National Company Law Tribunal (NCLT) to start the Corporate Insolvency Resolution Process. Then a longer list of about thirty-five companies was also shared.
The Economic Survey Report 2017-18 claims that by January 2018 NCLT had admitted about 630 cases involving CIRP. Many of these issues centre listed corporations or other designated companies obliged by the corporations Act, 2013 and SEBI rules to go through mandated audits or reviews. After the RBI’s circular of February 12, 2018, which essentially made CIRP the only alternative available to lenders by withdrawing all other debt restructuring plans, this number is projected to rise significantly.
The IBC is prone to several interpretational and practical problems even if it is a pioneering reform in India. One of the main areas of uncertainty is over the duties of statutory auditors throughout CIRP’s pendency. This paper attempts to clarify these uncertainties and offer direction on negotiating the difficulties experienced by auditors in this new regulatory environment.
Audit/limited review performance under statutory auditor’s direction
The appointment of an Interim Resolution Professional (IRP) or Resolution Professional (RP) causes the Board of Directors’ authority to be suspended when a firm starts the Corporate Insolvency Resolution Process. It is mandated of the IRP/RP to oversee firm operations over this duration. But this change in management begs numerous significant issues about the duties and scope of audit and engagement of the statutory auditor.
The main question is whether the IRP/RP has the power to restrict the extent of the audit or involvement. Section 28 of the IBC makes it abundantly evident that the IRP/RP cannot change the appointment or conditions of contract of statutory auditors without first permission (minimum 75% majority) of the Committee of Creditors. This clause guarantees that the legislative audit process stays free from influence by the insolvency procedures.
The auditor might therefore have practical difficulties gathering required data and documentation from the IRP/RP, who might not know the company’s past financial records. Under these circumstances, the auditor should request the IRP/RP’s help in granting access to pertinent data and fully notify them on the audit’s criteria.
Handling of Limited Review/ Audit Reports
Another issue of thought is whether the members of the firm, the IRP/RP, or the suspended Board of Directors should get the Audit Report or Limited Review Report. It is fitting for the Audit/Limited Review Report, which was formerly addressed to the Board of Directors, to now be directed to the IRP/RP since the IRP/RP takes over the obligations of the Board during the CIRP. Though customarily addressed to the company’s members, the Audit Report should nevertheless be read by the members since they are ultimately the company’s stakeholders.
Management Views
Usually during the audit process, the auditor calls for management representations. Under CIRP, the issue of whether these representations should come from the IRP/RP (since management vests with them under the Code) or any other person authorised by the IRP/RP surfaces. It is fitting for the IRP/RP to offer the required management representations since they oversee company operations during the CIRP. Nonetheless, the IRP/RP could have to rely on the knowledge and experience of important managerial staff members or other staff members with past awareness of the operations and financial situation of the organisation.
Valuation of Financial Statements
The Board’s powers being suspended during CIRP can cause conflicts between the Board and the IRP/RP on the acceptance and approval of financial statements. The Board might contend that it lacks the power to approve the financials, while the IRP/RP might be unwilling to answer for financial statements spanning a time before their appointment. Under such circumstances, the IRP/RP should either approve the financial statements themselves or assign important managerial staff the authority since they are vested with the powers of the Board during the CIRP.
Audit Fees and Resolutions of Insolvency Process Costs
Since the Insolvency Resolution Process Costs come first over other payments under the IBC, paying audit fees can present a major difficulty during CIRP. Nonetheless, under certain obligatory laws, statutory audits and quarterly restricted reviews are compliance requirements; the IRP/RP is thus obliged to ensure as per IBBI Circular No. IP/002/2018 dated January 3, 2018. Under Section 5(13)(c) of the IBC read with Regulation 31(e) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), 2016, there is a strong case for including audit fees under essential nature of these services.
Assuming Going Concern
The evaluation of the company’s capacity to be a going concern is among the most important facets of the statutory auditor’s responsibility during CIRP. The start of CIRP itself usually denotes financial difficulty and possible hazards to the company’s survival, therefore casting major question on the entity’s capacity to be a going concern.
SA 570(R) offers direction on how to report going concern related difficulties. But the auditor’s assessment of the going concern assumption mostly relies on the quality of management’s disclosures. For auditors, this presents a difficult scenario since they have to negotiate between the criteria of SA 570(R) and the particular conditions of a corporation going through CIRP.
The statutory auditor evaluating a company’s going concern assumption under CIRP should take these elements into account:
Given that auditors might not have access to the minutes of the Committee of Creditors meetings or decisions taken in such meetings, the degree of ambiguity connected with the result of the insolvency procedures is evident.
Given the size and complexity of the company, the result of CIRP would affect it to what degree.
The dependability of the need for the Resolution Professional to continue the business as a going concern, as envisioned under the IBC.
The accuracy of the proposed or approved Resolution Plan and if it supports the going concern assumption for the next foreseeable future.
The auditor needs to decide if a material uncertainty exists regarding events and situations that would seriously dispute the entity’s capacity to remain as a going concern and whether this has been sufficiently revealed in the financial statements based on the evidence acquired.
The result reached from the examination of the going concern may affect the auditor’s viewpoint. Depending on the particular situation and the degree of management’s disclosures, it could range from an unmodified view (should the going concern assumption be suitable) to a qualified, adverse, or disclaimer of opinion.
Section 20 of the IBC mandates the IRP/RP to enable all necessary measures to maintain the value of the company and conduct its operations as a going concern during the time of CIRP, which is 180 days from the insolvency starting date, extendable by 90 days. Still, the management’s going concern assumption should cover a reasonably future of not less than 12 months from the reporting date. Should the management’s evaluation span less than 12 months, the auditor should ask for an extension of the assessment term to at least 12 months, failing which the auditor could have to take qualifying their conclusion or issuing a disclaimer of opinion into account.
Audit Processes
Auditors may have to do extra actions to properly evaluate the going concern assumption and other important audit criteria during CIRP, such:
Examining the minutes of Committee of Creditors meetings (if accessible) or learning about important concerns discussed or major decisions taken in such sessions.
evaluating important decisions made by the IRP/RP or major events that happened during the resolution process.
Seeking the IRP/RP to support their presumptions and assessments in evaluating going concern outside of the CIRP’s 270-day span.
Enquiring about the future course of action of the IRP/RP to create necessary cash flows during the resolution process will help to keep consistency in operations and enable the organisation to remain going concern.
Examining the staff turnover rate across the CIRP era helps one evaluate the availability of pertinent data and any delays in the CIRP brought on by extensive retrenchment.
In circumstances whereby the Resolution Plan has been accepted by the Committee of Creditors and NCLT, gathering and evaluating the viability of the Management’s/Resolution Applicant’s Resolution Plan, cash flow projections, and other pertinent budget forecasts.
These processes are not all-encompassing and could differ based on the auditor’s assessment, the state of affairs of the firm, the level of development in the CIRP, and the results of the Committee of Creditors meetings. Auditors have to carefully consider the complexity of the whole process and change their audit approach and practices to reach a result backed by enough and suitable audit data.
In summary,
Under the IBC, statutory auditors have a both important and difficult function throughout insolvency procedures. Auditors have to negotiate difficult regulatory rules, evaluate going concern assumptions in uncertain situations, and keep their independence in face of possible financial limitations.
Examining the going concern assumption critically during CIRP calls for auditors to use reasonable due diligence prior to making any agreement. Auditors may find it difficult to decide whether a company’s revival plans are feasible or whether it will remain a going concern business or be driven into liquidation considering the time-bound character of assessment and revival strategies.
In this complicated situation, reporting has to be done carefully; depending on the state of completion of CIRP, different facts and conditions faced during CIRP, and most significantly, the availability of sufficient and suitable audit evidence, the approach may vary company to company.
Although not all companies are open to audits, statutory audits—mandated or voluntary—ensure better management and corporate governance regardless of this fact. If management responds to the warnings in their audit reports with the necessary action, they can significantly help to lower the risk of insolvency.
Statutory auditors have to change with the times as the IBC shapes the scene of corporate bankruptcy resolution in India. The success of the insolvency resolution process and the preservation of stakeholders’ interests depend on their participation in guaranteeing openness, responsibility, and compliance throughout the CIRP. Maintaining their independence, practicing professional scepticism, and negotiating the complexity of the IBC would help statutory auditors greatly help the efficient execution of this historic law and the general state of the Indian corporate sector.
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