SEBI has tightened its norms with respect to resignation of Auditors from listed companies and their material subsidiaries mainly due to:-
⇒ Resignation of Auditors from listed companies before completion of their term,
⇒ Resignation of Auditors due to lack of co-operation from the companies,
⇒ Increase in the number of financial frauds and irregularities.
SEBI opined that resignation of an auditor of a listed entity / its material subsidiary before completion of the audit of the financial results for the year due to reasons such as pre-occupation may seriously hamper investor confidence and deny them access to reliable information for taking timely investment decisions.
KEY TAKEAWAYS OF SEBI (LODR) REGULATIONS, 2015
> Under Sub-clause (2) of Clause A in Part C of Schedule II under Regulation 18(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”), the Audit Committee of a listed entity, inter alia, has to make recommendations for the appointment, remuneration and terms of appointment of auditors of a listed entity.
> Under Sub-clause (7), the Audit Committee is also responsible for reviewing and monitoring the independence and performance of auditors and the effectiveness of the audit process.
> Further, Sub-clause (7A) inserted under Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations requires detailed reasons to be disclosed by the listed entities to the stock exchanges in case of resignation of the auditor of a listed entity as soon as possible but not later than twenty-four hours of receipt of such reasons from the auditor.
> Regulation 36(5) of the SEBI LODR Regulations lays down certain disclosures to be made part of the notice to the shareholders for an AGM, where the statutory auditors are proposed to be appointed/re-appointed, including their terms of appointment.
In addition to the SEBI LODR Regulations all listed entities/material subsidiaries shall ensure compliance with the following conditions while appointing/re-appointing an auditor:
1. If the auditor resigns within 45 days from the end of a quarter of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for such quarter.
2. If the auditor resigns after 45 days from the end of a quarter of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for such quarter as well as the next quarter.
3. Notwithstanding the above, if the auditor has signed the limited review/ audit report for the first three quarters of a financial year, then the auditor shall, before such resignation, issue the limited review/ audit report for the last quarter of such financial year as well as the audit report for such financial year.
As per clause 6B of the circular other conditions relating to resignation shall include:
(i) Reporting of concerns with respect to the listed entity/its material subsidiary to the Audit Committee:
a. In case of any concern with the management of the listed entity/material subsidiary such as non-availability of information / non-cooperation by the management,
The auditor shall approach the Chairman of the Audit Committee of the listed entity
Audit Committee shall receive such concern directly and immediately without specifically waiting for the quarterly Audit Committee meetings.
b. In case the auditor proposes to resign,
All concerns with respect to the proposed resignation, along with relevant documents shall be brought to the notice of the Audit Committee
c. On receipt of such information from the auditor relating to the proposal to resign as mentioned above
The Audit Committee/board of directors, as the case may be, shall deliberate on the matter as soon as possible, but not later than the date of next Audit Committee meeting and communicate its views to the management and the auditor.
(ii) Disclaimer in case of non-receipt of information:
In case the listed entity/ its material subsidiary does not provide information required by the auditor, to that extent, the auditor shall provide an appropriate disclaimer in the audit report, which may be in accordance with the Standards of Auditing as specified by ICAI / NFRA.
At the time of appointing/re-appointing the auditor, the listed entity/ material subsidiary shall ensure that the conditions as mentioned in 6(A) and 6(B) of the circular are included in the terms of appointment of the statutory auditor. In case the auditor has already been appointed, the terms of appointment shall be suitably modified to give such effect.
Role of practicing company secretary.
The practicing company secretary shall certify compliance by a listed entity with 6(A) and 6(B) in the annual secretarial compliance report.
♦ In case the auditor is rendered disqualified due to operation of any condition mentioned in Section 141 of the Companies Act, 2013, then the provisions of this Circular shall not apply.
ADDITIONAL OBLIGATIONS OF LISTED ENTITIES & SUBSIDIARIES
(i) The listed entity / its material subsidiary shall obtain information about the Auditors resignation in the format as specified in Annexure A to the Circular. The listed entity shall ensure disclosure of the same under Sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations.
(ii) The listed companies and their material subsidiaries have to continue to provide all the documents/information as may be necessary for limited review/audit report during the period from when the auditor proposes to resign till the auditor submits the report for such quarter / financial year.
(iii) The listed entity shall ensure the disclosure of the Audit Committee’s views to the stock exchanges as soon as possible but not later than twenty-four hours after the date of such Audit Committee meeting.
SEBI through this circular has enhanced the role of Audit Committee. Further, investors will be able to take timely decisions as the circular intends to provide them more information regarding audits and financials of listed entities. The auditors will be in a strong position to report any of lack of co-operation faced by them from the management of listed entities.
CS Jaya Sharma (Author)
Ms. Sunita Chaudhary (Co-author)
Jaya Sharma and Associates, Practicing Company Secretary Firm, Mumbai.