Whether Auditors’ Resignation Affects India’s Corporate Governance Standards: A Stricter Regime to Curb the Same?

Abstract

In the recent decades, India has witnessed huge number of corporate scandals which have severely endangered the economic progress of the country. The increase in corporate frauds poses questions on the effectiveness of present corporate governance regime and often calls for a complete overhaul and redemption of the system. The phenomenon of auditor resignation is not a new anomaly and unprecedented but the rate at which it is increasing is quite alarming. During the past few years, audit as a profession has faced several challenges in India. The audit failures had gone unnoticed but the innumerable auditor resignations and increased regulatory scrutiny have brought the issue into spotlight. The issue of auditor resignation is of sufficient interest to the legal community as accounting scandals adversely affects the entire stakeholder community including shareholders and investors. In response to recent spate in auditors’ resignation, the new Companies Act 2013, Securities and Exchange Board of India (SEBI) and National Finance Reporting Authority (NFRA) have taken up several measures to act against erring auditors and improve the overall audit system. However, as the clamour grows for strict action against the auditors, the profession finds itself at a crossroads hinting upon the weak regulations and enforcement strategies.

This paper focuses primarily on the issue of resignation of statutory auditors as there is a recent surge in the auditors’ resignation. The first part of the paper provides a background about the issue of auditor resignation and the law governing it. The second part focuses on the cases of auditor resignation in India and analyses the reasons behind such resignations. The third part engages in the critical analysis of the existing legal framework and the recent developments in terms of regulations and enforcement mechanism that have come in place to tackle and prevent such audit failures. The fourth part concludes the paper by giving plausible reforms and suggestions to redefine and structure the existing legal framework.

Keywords: Auditor Resignation, Corporate Governance, Auditor Independence, Audit Failure, Big Four, Audit Committee, Non-Audit Services

JEL Classification: M40, M42, G32, G18, K22