Noose tightens for listed cos as auditors flag gaps
Net worth erosion, mounting losses, lack of disclosures put firms on watchlist
Auditors seem to be getting more vocal about financial gaps at listed companies, possibly due to an enhanced regulatory glare, as independent audit reports for a number of publicly-traded companies have begun flagging issues like net worth erosion and lack of necessary disclosures.
In some cases, the auditors have even begun quitting the audit mandate, while in many others they have expressed their reservations about whether their clients can continue operating on "going concern" basis with net worth turning negative, losses mounting and diminishing prospects of required revenue and cash flow generation.
The companies that have seen auditors flagging various issues include Jet Airways, L&T's shipbuilding arm, Manpasand Beverages, Vakrangee and Atlanta.
Experts believe this trend may get even more prominent going forward with several sectors facing financial difficulties at a broader level and also due to corporate governance related issues at individual levels.
Experts believe the recent move by auditors could also be due to regulatory glare on them that requires the audit community to show responsibility to broader stakeholders and not just the corporate clients. Among others, auditors of Jet Airways, L&T Shipbuilding and Reliance Naval and Engineering raised doubt whether these companies can continue as a "going concern".
The management of all these companies, on their part, have maintained that necessary initiatives are being taken to improve their finances and there were no major causes for worry.
In accounting parlance, the 'going concern assumption' means that the company will remain in business for the foreseeable future without being forced to halt operations and liquidate its assets. Moreover, Price Waterhouse quit audit mandate of Vakrangee and Atlanta, while Deloitte resigned as statutory auditor of Manpasand Beverages.
They discontinued their engagements with these firms on account of lack of requisite information sought by them from the management.
Both Price Waterhouse and Deloitte did not comment when asked about this emerging trend.
According to RSM Astute Consulting Group's Suresh Surana, auditors have become more vocal and explicit in terms of information requirements and do not hesitate in giving qualified opinion or disclaimers regarding going concern, assets impairment, non-provisioning, revenue recognition and legal contraventions.
The audit committees, independent directors, board of directors, investors and regulators have become more demanding in terms of audit expectations and reporting. Besides, the recent developments regarding non-performing assets and insolvency
resolution have also brought the role of auditors in sharp focus, Surana said.
"We feel the move by auditors will bring greater transparency but at the same time, all the stakeholders need to understand the scope and limitations of the audit process and that an auditor is not an insurer," he added.
Experts also feel that regulatory action against some auditors including in cases like Satyam scam may have led to the audit community going on an image makeover exercise.
Sushila Ram Varma, Chief Consultant at The Indian Lawyer & Allied Services, said that a correct auditor's report helps investors in deciding whether they would like to invest in the company.
Price Waterhouse quit the audit mandate of technology firm Vakrangee due to the company not providing "adequate and relevant information and explanations regarding the company's election books, bullion and jewellery businesses".
Besides, it withdrew from the auditing engagements of construction
Price Waterhouse quit audit mandate of Vakrangee and Atlanta, while Deloitte resigned as statutory auditor of Manpasand Beverages
and infrastructure company Atlanta as the firm allegedly did not share details of an ongoing income tax investigation and the resignation of an independent director.
Auditing major Deloitte Haskins & Sells resigned as statutory auditors of Manpasand Beverages as the fruit juice maker failed to provide them with "significant information" on the financial results for the year ended March 31, 2018.
The new Companies Act, 2013 contains elaborate provisions regarding liability of statutory auditors in case auditor has contravened the provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities.