Adani-Hindenburg row triggers audit quality concerns; study finds firms reluctant to share auditor details

The independence and quality of the audit firm plays an important role in the overall corporate governance level of a company but firms appear reluctant to share details related to the background and selection process of auditors.

The latest study on the corporate governance levels in some of the top listed companies has found that while the rules for disclosures have been strengthened over the years, companies continue to provide bare minimum details in many aspects related to the audit firm.

“Disclosures around auditor independence, competence, and experience continue to remain poor. While regulations have pushed for disclosure, most companies continue to provide sparse details on the auditors’ background of how they were selected,” stated a report by proxy advisory firm Institutional Investor Advisory Services or IIAS.

The report titled ‘Corporate Governance Scores 2022’ took into account companies that are a part of the BSE-100 index.

To be sure, boards of as many as 23 per cent of the companies that were analysed provided information about the independence, competence, and experience of the statutory auditors, which was a significant jump from two per cent in 2020 and eight per cent in 2021.

This assumes significance also because of the fact that the recent tussle between Adani Group and Hindenburg Research brought to the fore the issue of audit firms after the US-based short seller highlighted the fact that the auditor of Adani Enterprises – the flagship company of the diversified conglomerate – was a little-known firm called Shah Dhandaria & Co, whose partners were in their 20s.

“The recent battle between a short-seller and one of India’s largest business groups has once again brought the debate over audit quality to light,” stated the IIAS report, adding that “it raised pertinent questions regarding the audit quality”.

“Considered a best practice, audit committees must periodically test for auditor independence and audit quality. More so because auditors are no longer reappointed annually – they have five-year terms in case of companies and three-years in case of banks and NBFCs,” said the report.

While the government has established an audit regulator as well – the National Financial Regulatory Authority or NFRA – the watchdog has been “mired in controversy and has become a political hot-button,” stated the report.

Moving forward, we expect the establishment of an audit regulator to make a material difference to the audit quality for corporate India, it added.

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