SEBI Proposed Strict Norms for Disclosure of Auditors of Listed Companies

Shailza Sharma

27 Aug, 2020

India’s biggest market regulator Security and Exchange Board of India (SEBI) has proposed stricter norms to strengthen audit process and restraint unexpected or sudden resignation of auditors in publicly listed companies. The reason behind this can be considered that SEBI wants to ensure that auditor’s act, responsibility, and their resignation does not affect the investors. A format for disclosing reasons when the auditor resigns, including details of the information which auditor fails to get from the company is also been purposed by SEBI. The reason of making strict norms for auditor SEBI explained, the resignation of auditor before completion of the audit of the financial year hampers investor confidence and leaves investor in dark with lack of reliable information for making their financial decisions.

What is SEBI?

Securities and Exchange Board of India was established on April 12, 1992, in accordance with the provisions of securities and exchange board of India, 1992. The basic function of SEBI^[1] is to protect the interests of the investors in securities and to promote the development of and to regulate the securities market and matters connected therewith or incidental thereto.

SEBI is a statutory regulatory body entrusted with the responsibility to regulates the Indian Capital Market. It works as a watchdog for the securities market, regulates new norms and all of above it protects the interests of the investors by enforcing rules and regulation. The main objective of SEBI is to ensure that the Indian capital market works in a proper systematic way and ensure that it will provide the investor with a transparent environment for their investments. The primary reason for the establishment of SEBI was to prevent the malpractices in the Indian capital market and development of the capital market.

What are the Powers of SEBI?

Security and Exchange Board of India has three min powers which are as follows:

• Quasi-Judicial

The SEBI is empowered with the power to conduct hearings and pass ruling judgment in case of unethical and fraudulent trade practices. With this power, SEBI ensures transparency, fairness, accountability, and reliability in the stock market.

• Quasi- Legislative

Under this power, SEBI is allowed to outline the rules and regulations to safeguard the interest of investors. Regulations are formulated by SEBI aims to keep any kind of malpractice and fraudulent trading activities out capital market working.

• Quasi-Executive

With this power, SEBI is authorized to file a case against any person SEBI found guilty in violating its rules and regulation. SEBI is also empowered to inspect account books and any other relevant document as well to inquire if finds any suspicious activity.

Who is the Auditor of Listed Company?

An auditor of the company is a person who is appointed by the company to execute a review and audit. A person should be certified by the regulatory authority of accounting and auditing or possess certain specified qualification. A person can be appointed auditors only if he is a CA. The auditor is hired for the term of 5 years.

Powers and Duties of Auditors

• Every auditor has the right to access to the books of accounts and vouchers of the company at any time required.
• For the purpose consolidation, the auditor of holding company has the right to access the records of the subsidiary company also.
• An auditor also has the right to receive notice of any general meeting.
• An auditor has the right to receive the information about the company which is required by him to perform his duties.
• He has the right to know whether a company makes loans against the proper security and the terms should be prejudicial to the interest of the company.
• One of the important works of his job is to check whether the assets of the company like shares, debentures, and other securities have been sold on the price less than purchase price.

Why SEBI wants to impose strict norms for Auditors?

As said above, we can see that auditors play a very important role in any company or organization. Section 139 of companies’ act 2013, deals with the appointment of auditor in its 1^st annual general meeting. The duties performed by him are directly linked to the accounts of where he makes financial reports and provide advisory for the investors. Auditors have to submit the review/audit report for fiscal/quarter year. SEBI by imposing strict rule for the disclosure of the listed company wants to ensure that auditors must act more responsibly and should resign only after performing its duties and resignation must be made on very genuine grounds, and the investor should not be hurt.

This leaves the investor and stakeholder with the lack of reliable information for making a better financial decision. Hence, SEBI has purposed that, the auditors have to issue the limited review /audit report for the fiscal/quarter before such resignation. The reason behind auditor’s resignation has ranged from lack of adequate information on companies business is not provided by the entity. The number of such premature resignation by auditor stood 36 in the year 2018, which is double from the year 2017. In order to avoid such disclosure of Auditors and to strengthen the role of auditors committee, SEBI has purposed to issue a circular, stating the amendment on current disclosure regulation.

SEBI has guided the auditors that if in case of unavailability of any information or management are not co-operating with the auditor, or any concern related to resignation than auditor shall approach audit committee directly.

Conclusion

Market regulator SEBI is highly concerned about the premature exit of auditors. Hence, now have issued the circular in connection with the Disclosure of Auditors. SEBI wants auditors to work seriously and should fulfill their responsibility of completing their assignments. Due to their unexpected resignations, investor and stakeholder lose their confidence in the company and lack of reliable information for making any further financial decision. With this regulation, SEBI believes to decrease the amount of such resignation of auditors, as it is the duty and power of SEBI to work in the interest of investors and stakeholders.

Also, Read: SEBI (Depository Participant Regulations), 1996