All you need to know about the Resignation of Auditor

Auditors resigning from any company before their term ends is a very serious issue. In most cases, auditors are resigning invariably due to concerns over the integrity of the management.There has been significantly rise in the number of cases of untimely resignation of statutory auditors from listed companies. In recent past, corporate sector saw the resignation of auditors of PricewaterhouseCopers (“PwC”) with Reliance Capital limited (“RCL”) and Reliance Home Finance Limited (“RHFL”) and many more.

The reasons varies and may be due to lack of cooperation or lack of Information between Company and its respective statutory auditors which leads to unexpected Resignation of Auditor.

Legal Rules applicable on Resignation of Auditor

Applicable Section – Section 140(2) of Companies Act, 2013 deals with resignation of auditor and its related compliance.

Applicable Rule – Rule 8 of Companies (Audit & Auditors) Rules, 2014

Circular – On October 18, 2019 SEBI (Securities Exchange Board of India) issued circular on Resignation of Auditors from listed entities and their material subsidiaries.

Regulation – SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Documents required to be filed with ROC for resignation of Auditor

Contents of Form ADT-3

• Name of Auditor’s Firm or auditor
• Address of the firm
• Contact numbers of Auditor resigning and its firm’s.
• Email Address of the resigning auditor
• Permanent Account Number of the Auditor’s Firm
• Reason with adequate disclosure of Resignation.

Procedure for Resignation of Auditor

• The Auditor who has resigned from the company shall draft and submit a resignation letter to the company.
• Auditor is also required to file form ADT-3 with Registrar of Companies (ROC) within thirty days from the date of resignation of company.
• In case of Government Company its auditor shall file such prescribed documents to Comptroller & Auditor General of India (C&AG) indicating reason of Resignation.
• Subsequently, company will call board meeting and pass resolution to accept resignation of auditor.
• Then, Company shall fill Casual Vacancy as arise due to resignation of auditor.
• Proceed for the Extra – Ordinary General Meeting (EGM) and approve the appointment of new auditor.
• Mandatorily, file the form MGT-14 with the ROC within thirty days of Extra-Ordinary General Meeting (EGM).
• File Form ADT-1with ROC for the appointment of new auditor within fifteen days from the date of his appointment.

Non – Compliance

The Provisions relating to penal consequences for delay in filling of ADT-3 is given under section 140(3) of Companies Act, 2013. If Auditor fails to file Form ADT-3 within stipulated time then he will be liable to pay:
Penalty of INR 50,000 or amount equal to its remuneration, whichever is less  and in case of Continuing failure, Additional penalty of INR 500 per day during such default continues, but not more than INR 5,00,000.

Insights of SEBI’s Circular/Regulation on Resignation of Auditors

Observing that a lot of statutory auditors of the companies are abruptly resigning before completing their tenure either due to lack of cooperation or lack of information provided by the company, SEBI has taken the matter in its hand to strengthen the norms.

SEBI issued circular on Resignation of statutory auditors from listed entities and their material subsidiaries dated October 18, 2019 defining compliance to be followed by the listed entity and its material subsidiary while appointing or reappointing the auditors.

• This circular is applicable on listed entities as wells its material subsidiary including debt listed company.
• This Circular is not applicable, If auditor is disqualified under section 141 of companies act, 2013 (exception)
• The auditor is required to issue audit report or limited review report for such quarter before its resignation – within 45 days from the end of quarter of a financial year. For Example- If auditor resigns on August 10, 2020 then it is mandatory to submit such report for the quarter ending on September 30, 2020.
• If the auditor resigns after 45 days from the end of a quarter of a financial year, then auditor shall, before such resignation, issue the limited review/ audit report for such quarter as well as next quarter. For Example – If auditor resigns on August 10, 2020 then it is mandatory to submit such report for the quarter ending on September 30, 2020 and as well as December 30, 2020.

• If auditor has signed audit report or limited review report for first three quarters of a financial year then it is required to issue audit report/ limited review report for the last quarter of such financial year before statutory auditor resignation.
• Under regulation 30(2) of the SEBI (LODR) Regulations prescribes that the listed entity shall disclose detailed reasons of the resignation to the stock exchange within 24 hours of such resignation.

Our Comments

We can conclude from the above mentioned information that Auditors resigning from any company before their term ends is a very serious issue.In most cases, auditors are resigning invariably due to concerns over the integrity of the management. While it may absolve them of responsibility, this weapon of resignation is like capital punishment. It should be applied only in the rarest of rare cases. It leaves the entire shareholding community guessing and leads to considerable uncertainty among the investors. It also leaves the future of the company uncertain. Consequently, interests of employees and other stakeholders are adversely affected.
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