Why Did Deloitte Resign As Auditors of Adani Ports?

In a recent development, Adani Ports and Special Economic Zone (APSEZ) announced the appointment of MSKA & Associates, a member firm of BDO International (a top 6 global audit firm), as its new statutory auditor.

The announcement follows the news that Deloitte, which had been associated with APSEZ as its statutory auditor since May 2017, expressed a desire to resign.

Deloitte had been reappointed in July 2022 for an additional term of five years.

A media statement issued by Adani Group revealed that during a meeting between Deloitte and APSEZ's management, including the Audit Committee consisting solely of independent directors G. K. Pillai, Prof G. Raghuram, Mr. P. S. Jayakumar, and Nirupama Rao), Deloitte expressed concerns regarding their restricted audit role as they were not auditors for other listed Adani portfolio companies.

The Audit Committee responded by suggesting that Deloitte's reasons for wanting to resign were 'neither convincing nor sufficient'.

They also highlighted that APSEZ and its board don't have the authority to suggest appointments across the entire Adani Group as the listed portfolio companies operate independently with their own boards, executive teams, and minority shareholders.

Following these discussions, Deloitte decided not to continue as APSEZ's statutory auditor.

Both parties have mutually agreed to end their client-auditor relationship.

What Does the Law Say?

As per the Companies Act, 2013, the initial decision lies with the auditor, who must provide a written notice stating the reasons for resignation to the company.

Upon receipt, the company's board convenes a meeting to acknowledge it.

The onus then shifts to the company to inform the Registrar of Companies (RoC) within 30 days, a step mandated by Section 140(2) of the Act.

However, the auditor also independently communicates their decision directly to the RoC, ensuring transparency.

Interestingly, if the resignation occurs after one Annual General Meeting (AGM) but before the subsequent one, the auditor's reasons are elucidated in the latter.

The company might also have to quickly appoint a replacement if the resignation occurs mid-term. This board-appointed auditor requires shareholder ratification within three months.

Importantly, to keep shareholders informed, the Board Report should encapsulate the auditor's departure and its rationale. This intricate procedure, enshrined in the law, ensures transparency and bolsters corporate governance.

Speculation Over the Resignation

Following the announcement, various media outlets quickly published speculative pieces on Deloitte's departure as APSEZ's auditor.

Some alleged that Deloitte stepped down due to disagreements or potential qualified audit opinions. A few even drew connections to the previous Hindenburg report concerning the Adani Group.

Recent Significant Events

In their recent review report on Adani Ports, Deloitte highlighted an outstanding net balance of Rs 3,871 crore recoverable from a contractor engaged in providing EPC (Engineering, Procurement, and Construction) services.

Adani Ports maintained that this contractor was not a related party to the company. However, a twist emerged when the contractor was identified as a related party in a report published by short seller Hindenburg Research in January 2023.

According to Deloitte, the net balance with the contractor increased by Rs 122 crore sequentially in the June 2023 quarter.

As per the Annual Report of the Adani Group Companies, in a proactive measure, they had commissioned an independent review by a law firm to scrutinize its business practices and relationships.

The review apparently was aimed to ensure transparency and compliance in the wake of concerns raised in the public domain.

Adani Group says that the law firm's findings reinforced Adani's position, concluding that the group had maintained comprehensive disclosures in line with regulatory requirements. Furthermore, the annual reports also mention that the review confirmed that the conglomerate adhered to all prevailing laws.

The resignation

A reading of Deloitte’s resignation as Auditor highlights that the company resigned because they are not auditing other group companies of Adani Group.

However, several news portals hurriedly linked Deloitte’s departure to speculative reasons.

In an era of real-time information sharing, the damage caused by intentionally malicious or wrong reports can be immediate and far- reaching, affecting investor confidence and corporate reputations.