MUMBAI: The controversy around agriculture-solutions company UPL’s Mauritius-based auditor first resigning and later refusing to officially engage with the Securities and Exchange Board of India has ended up creating confusion among Indian companies with global operations. They are now forced to ponder over a tricky compliance situation – how do they hold the auditor in foreign jurisdictions accountable to Sebi regulations on auditor resignations.
An auditor resignation can materially harm a company’s share price and Sebi has strict guidelines around such resignations.
KPMG Mauritius had last month resigned as the auditor of UPL’s Mauritius arm. Shares of the Mumbai-based company slumped as much as 9.40% the day after the announcement.
While Jai Shroff, UPL’s global chief executive, told the media that the company had asked the auditor to resign and everything was above board, its stock price continued to drop.
As per Indian regulations, audit firms must disclose the precise reasons why they were resigning from the audit. However, these regulations do not apply to a Mauritius-based audit firm, KPMG Mauritius in this case.
“Because of that Sebi or any Indian regulator has no locus standi to seek any explanation from the Mauritius firm. Imagine if tomorrow a Chinese regulator reaches out to Indian audit firms and seeks explanation, it will be impossible,” said the audit head of a large firm.
According to people with direct knowledge of the matter, KPMG Mauritius had resigned over operational issues and disagreement over the audit fee.
Speculations around the resignations increased after KPMG Mauritius refused to tell the Indian regulator the reason for its resignation.
Experts said this was a dangerous situation for India, at a time when many domestic companies were growing globally.
“The solution is that Indian companies insist on a clause in the engagement letter with overseas auditors, which specifically requires that the overseas auditor comply with the applicable Sebi regulations in this area,” said Jamil Khatri, a partner at BSR & Co.
After the IL&FS scam, Sebi had come out with a requirement that the main auditor of a company should review the audit work done at the components (such as subsidiaries and joint ventures) comprising about 80% of the total operations of the company.
“Probably Indian regulators may consider following the US example where a foreign auditor auditing a component of US financial statements is required to register with their audit regulator (Public Company Accounting Oversight Board) and needs to comply with the defined quality standards,” said Yogesh Sharma, BDO India’s deputy managing partner.
Indian auditing firm BSR audits the India and consolidated global operations of UPL.