Adani Ports: Attack Is The Best Defence For Indian Corporates To Avoid Scrutiny Over Corporate Governance 

Deloitte Haskins & Sells LLP resigned as the statutory auditor of Adani Ports and SEZ (APSEZ) on Saturday citing concerns around transactions involving the Adani Group company and three entities that the group claims are unrelated parties.  

Following the Hindenburg report from earlier this year that accused the Adani Group of corporate fraud, Deloitte had flagged its concerns around the short seller’s allegations in May. In its resignation letter, Deloitte mentioned that its move is prompted by the fact that it is “not statutory auditors of a substantial number of other Adani Group of companies”.  

In response to Deloitte’s exit, the audit committee of APSEZ issued a statement saying, “The Audit Committee (of Adani Ports) was of the view that the grounds advanced by Deloitte for resignation as Statutory Auditor were not convincing or sufficient to warrant such a move.”  

Deloitte had earlier asked APSEZ to conduct an independent external examination of the Hindenburg allegations to determine the impact of the same on the company’s standalone financial statements. However, APSEZ did not find the need for such an examination given the ongoing investigation of the matter by the Securities and Exchange Board of India (SEBI). 

The Indian unit of Deloitte Haskins & Sells was first appointed as statutory auditor of APSEZ in 2017 and its term was extended for another five years in July 2022. On Saturday, APSEZ announced that it has appointed MSKA Associates, a BDO International affiliate, as Deloitte’s replacement effective immediately. 

This year, it is neither the first case of an auditor exiting an Adani Group company nor of Deloitte resigning as auditor from an Indian firm. In fact, turbulent relations between auditors and Indian companies during moments of crises go a long way back. 

Recent Instances Of Auditor – Management Separations 

In June, Deloitte Haskins resigned from the role of statutory auditor of Byju’s citing delay from the edtech firm in furnishing its financials for FY2022. Back then, the audit firm claimed that it did not receive documents required for audit purposes from Byju’s management despite writing to the company board multiple times.  

The edtech firm has been embroiled in multiple controversies in the recent past related to its financial health and governance practices. Deloitte’s exit from Byju’s coincided with several board of the edtech also quitting the firm, indicative of the turmoil at the start-up. 

Ahmedabad-based Shah Dhandharia & Co LLP had exited as auditors of Adani Total Gas in May 2023, after the audit firm was mentioned by name in the Hindenburg report. Adani Group had denied all the allegations of wrongdoing, including that of accounting fraud, raised in the short seller report.  

In its report, Hindenburg had claimed that Shah Dhandharia was too small a firm and “hardly in a position to scrutinise and hold to account the financials of some of the largest companies in the country, run by one of its most powerful individuals.” In its resignation letter, the audit firm cited “increased professional pre-occupation in other assignment” as its reason for exit. 

Last month, EKI Energy Services Ltd removed Walker Chandiok & Co as its statutory auditor. The move came on the heels of the auditor expressing its concerns over the company’s financials, and flagging inconsistencies in the energy firm’s accounting records. 

In June, Tarun Kandhari & Co resigned as auditor of Atlas Jewellery, citing concerns over corporate governance practices. In its resignation letter, the audit firm wrote: “It has come to our attention that there is an imbalanced Board and absence of an audit committee within the company, which raises concerns regarding corporate governance and regulatory compliance.” 

What Happens When Auditors Exit? 

When auditors exit any of its clients before completing the agreed-upon term, it is often seen as reflective of serious issues within the company management. It can also result in loss of investor confidence as many a time companies heading into financial crises see their auditors exit after flagging their professional concerns. 

When Deloitte exited the crisis-hit DHFL (Dewan Housing Finance Corporation) in August 2019, its share price slumped over 10 per cent immediately and the company went on to lose its market value by around 40 per cent in the next two months. 

When auditors resign, they are mandated to submit a statement to the company and the Registrar of Companies (RoC) within 30 days, listing the causes behind their exit and other related details. Failure to notify the RoC within the time will result in penalty as prescribed under provisions of Companies Act, 2013. 

However, it is to be noted that resigning from audit engagement does not absolve audit firms from the consequences of not reporting a fraud, the National Financial Reporting Authority (NFRA) said in June.  

“Resignation does not absolve the auditor of his responsibility to report suspected fraud or fraud as mandated by the law. The statutory auditor shall exercise his/her own professional skepticism while evaluating fraud, and need not be influenced by legal opinion provided by the company or its management," the audit watchdog had said.