Auditors in a Round of Musical Chairs
Auditors are supposed to be the eyes and ears of the non-promoter investors who have otherwise no means of finding out what is cooking in any company which they have trusted their hard-earned savings with.
Equally, the regulators seek assurance from the certification by the auditors of due compliance with all laws applicable to any company.
Recently, at seminar, the chairman of the national financial reporting authority (NFRA), commented that the audit process should not just be a ‘ticking’ exercise but a ‘thinking’ one. In other words, the expectation of the audit process is not a mechanical and clerical verification of the business transactions but a deep dive to see if the actual state of the business is duly represented in the financial statements.
In order to achieve the above objective, there needs to be due independence in the way the auditor is appointed and functions. It is often noticed as an unwelcome fact that auditors somehow feel beholden to the incumbent management and tend to avoid countering and confronting them when they see a discrepancy between the facts and the financials.
There have been recent cases of controversies around the work performed by an auditor and the issue of resignation of auditors to avoid a direct confrontation with the management, thereby failing to perform the whistle-blower role that is expected of them.  
Against this background, the case of EKI Energy Services Ltd, which is in the business of climate change, carbon credit and sustainability solutions, merits some discussion for the manner in which it has been appointing and changing its auditors 
The company has been changing its auditors at the same frequency that a star of the 1950s, Elizabeth Taylor, would change her life partner!
The first elimination in this round of musical chairs is Anmol Bohra & Co Chartered Accountants (CAs). They were (re)appointed from FY19-20 to FY23-24, when the company was yet unlisted but a public limited company.
This firm signed the audit for FY19-20 vide their report dated 26 September 2020 and resigned on 4 November 2020 for reasons of other preoccupations. 
Maybe the same pen was used to sign and resign!
DN Jhamb and Co (CAs) entered the scene to fill the void and their appointment as statutory auditors of the company was confirmed at the annual general meeting held on 11 November 2020 and the appointment was for a term of five consecutive years commencing from 1 April 2019 to 31 March 2024.
There is no typographical error in the dates mentioned above as it is a verbatim reproduction of the contents of the notice!
This firm signed the accounts for incorporation in the prospectus that was filed with Securities and Exchange Board of India (SEBI) for the initial public offering (IPO), and also the annual reports for the FYs ended March 2021 and March 2022.
They had also completed the limited review for the results of the first half of FY22-23 which was approved the board meeting held on 4 November 2022. They had issued unmodified audit reports for all the periods audited or reviewed by them. 
DN Jhamb and Co tendered their resignation on 10 November 2022 for reasons of preoccupations in other assignments. 
Consequent to this resignation, the company brought in Walker Chandiok & Co LLP (WCC) to fill the casual vacancy and their appointment was approved by the extraordinary general body (EGM) for a period "till the conclusion of the ensuing 12th annual general meeting (AGM) of the Company and that they shall conduct the statutory audit for the financial year ended on 31st March, 2023."
WCC issued its limited review report in February 2023 for the third quarter results for FY22-23 and had incorporated the following qualification to their report.
"As detailed in note 3 to the accompanying Statement, we report that the Company has recognised revenue from contracts with few customers during the quarters ended 31 December 2022, 30 September 2022 and nine-month period ended 31 December 2022. However, based on our review, we could not obtain sufficient and appropriate evidence regarding satisfaction of performance obligation for delivering the verified carbon units. Accordingly, in our view recognition of revenues together with the corresponding cost to fulfil the performance obligations is not consistent with the accounting principles as stated in Ind-AS 115, Revenue from Contracts with Customers. Had the Company applied the principles of revenue recognition as per Ind AS 115, revenues would have been lower by Rs1,818 Lakhs, Rs10,162 Lakhs and Rs19,011 Lakhs, cost would have been lower by Rs1,140 Lakhs, Rs3,950 Lakhs and Rs7,971 Lakhs and the profit before tax would have been lower by Rs679 Lakhs, Rs6,212 Lakhs, and Rs11,040 Lakhs for the periods stated above."
The company, which is yet to publish the annual audited accounts for FY22-23 and the results for fourth quarter (Q4) of FY22-23, now seeks to remove the current auditor WCC vide the notice dated 21 July 2023 for convening an EGM.  
Since the notice can be accessed in the public domain, only the reasons for seeking the removal of the auditor are extracted for ease of reading-
“a) Absence of senior member in audit team;
 b) Inaccessibility and less involvement of Audit Partner and other team members;
c) Lack of understanding on business model of the Company;
d) Failure to prioritise the audit of the Company;
e) Sudden demand for granular information on June 27, 2023 out of which major information was already provided;
f) Loss of trust and faith
g) Unreasonable demand for exorbitant fees hike to Rs80 lakh which was originally agreed at Rs41.5 lakh;
h) Failure of submission of half-yearly RPT statement to stock exchanges and other compliances under Companies Act, 2013 due to non-conclusion of audit.” 
While the resignation of auditors has been more common, including the one that attracted significant attention recently in the case of Deloitte exiting BYJU, the removal of auditors under the Companies Act. 2013, which significantly tightened audit independence, is a rare phenomenon.
The subject may not have attracted attention but for the fact that the auditor under discussion is one among the leading firms with a global affiliation.
The removal of an auditor can be done only with the due approval of the Union government and little literature exists on how it would deal with such a case.
It is not clear if the management sought the resignation of the auditor before taking this unusual and drastic step. The reason for discontent is not far to seek as the auditor had expressed their reservation about the way the company was accounting the revenue from certain contracts which had a very significant impact on the profits accrued.
It is equally unusual to have an auditor stand its ground so firmly and force the company to remove it than resign by giving some specious excuse like what has been done by audit firms in earlier instances.
Or is this a unique situation where both parties find comfort in removal rather than resignation?
WCC would have an opportunity to state its case at the EGM and rebut the allegations with due evidence, as leaving them as it is may be quite detrimental to its professional image.
The puzzling aspect is the decision of WCC to accept this audit in the first place with two odd audit resignations in the immediate past. Unless it can be disproved with due data, given the profile of the earlier two firms, their reason for resignation as other preoccupations or lack of time, lacks any shred of credibility.
Even without much due diligence, WCC would have noticed that in FY21-22, for which the last annual audited accounts are available, the turnover zoomed to Rs1,800 crore from Rs191 crore and the profit before tax (PBT) jumped 20-fold to Rs515 crore from Rs25 crore!
Despite such resounding numbers, the cash-flow lacked punch and almost the whole of the post-tax profit was blocked in inventory and receivables.
The stock price, after touching a peak of Rs12,599.95 (!) in January 2022, fell sharply, and has now eased to about Rs450.
In the six months during FY22-23 (30 September 2022), the receivables went up from Rs141 crore to Rs314 crore. Nothing can be alleged about the credibility of the figures based just on these sharp increases, but the numbers somewhat tickle one’s scepticism, don’t they?
Maybe the business model is unique. But if a substantial part of the profits doesn’t sit as investment in treasury papers, both the auditors and the outside investors should worry; even bank fixed deposit (FD) receipts are not ex facie reliable anymore!
WCC, in the interest of protecting its image and assuaging the concerns of other clients, should hasten to clarify why it accepted a client with a troubled history of audit relationships and its stance with regard to the specific allegations made in the EGM notice extracted earlier in this article.
It will be interesting to see if the company appoints one of the earlier auditors so that the musical chairs end in a merry-go-round!
In the larger public interest, the Union government (ministry of corporate affairs—MCA) or NFRA should take this as a test case to get to the bottom of the facts and the merits or otherwise of each party’s position.
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies).
7 months ago
Brilliant analysis. Independence of Auditors is only on paper. Most of the small and medium firms molly cuddle with the management just to ensure their continuance. Wrong doings become a natural casualty affecting trust and faith. Those who stand up and refuse to budge are shown the door. Promoters continue to make merry. ICAI has failed in its duty to stand up for its members.
7 months ago
Superbly analysed. The ICAI has a lot of work to do. Members need to be more upfront with their views and communication to the shareholders. "preoccupation" is such an abused word!
7 months ago
The root problem lies in clash of interest between an auditor and the company which he is auditing. Since the company is paying him, the auditor cannot be absolutely neutral in his comments. To solve this problem, the auditor should be compensated by the Stock Exchange where the company's shares or debentures are listed. For companies which are not listed on the stock exchange, the company should pay the stock exchange a similar fee like that of a listing fee which can be passed on to the auditor. Only when an auditor does not depend on the company for his remuneration, can he be neutral. This is an idea which may be modified to suit the reality of our country.
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