Decoding 2015 Statutory Audits Of The Banks

CA Amresh Vashisht 

A chartered accountant is mandated to conduct statutory and other audit of banking industries. This is in compliance of various statutes applicable to audits, there are kind of audits and there are many ways to appoint the auditors for the Banking Sector. The appointment procedure of Statutory Central Auditors and statutory Branch Auditors are undergone many changes in the past. The ideal system for appointing the auditors to the banking industries is still awaited in a way to serve the purpose of such audits in fullest.

With the new regime in power at Delhi, many changes were expected. Recently RBI has communicated to the President of ICAI on dated 6^th February 2015 having DBS.ARS. No. /08.91.008/2014-15  that Department of financial services, MOF, GOI has advised through their letter no. F No. 1/14/2004-BOA RBI that Govt. on dated 25^th November 2014 has decided that the work of selection and appointment of SCA is delegated to individual PSB for the year 2014-15 and onwards subject to prescribed selection criteria by RBI . Through the communication RBI has prescribed the selection criteria along with norms on eligibility & empanelment of statutory central auditors.

With this the ongoing tussle of granting autonomy to PSB as a good work or bad work taken its last breath. Now it’s a reality that PSB are as free as private banks to choose their own sweet will auditors. This has rested the speculation since 2006 that the freedom would lead to compromise of good practices in PSB. This move has certainly rested a major controversy in the auditing community. The move, which is part of an enhanced autonomy package for PSBs, is in contrast to the earlier system under which the Reserve Bank of India was the sole authority to make auditor appointments in 27 government-controlled banks.

Under the new system, banks would have to directly source the names of auditors from the panel available with the Comptroller and Auditor General (CAG) for SCAs while the names for branch auditors would have to be obtained from the Institute of Chartered Accountants of India (ICAI). Earlier, CAG would empanel the SCAs and send the list to RBI for appointment. For branch auditors, the RBI used to obtain the panel from the ICAI. However, the Finance Ministry has now stipulated that the bank board’s must obtain prior approval of the central bank before making the final appointment. The RBI would also continue to fix the norms and remuneration for SCA and branch auditors as well as their empanelment. ICAI has totally failed to impress the Govt. that the adoption of decision to grant autonomy to PSB may result in jeopardizing the future of banking sector.

The Govt. being a major stake holder to the Bank capital has forfeited its right to appoint the auditor and vested it to the management of the PSB. The old mechanism of appointment through Selection Committee constituted by Government of India in coordination with Reserve Bank of India is the history now. The office of Comptroller & Auditor General (C&AG) will provide the list of eligible auditors available with them and PSBs can make selection out of the list with the prior approval of RBI. The Road Map for operationalisation of managerial autonomy and procedure for appointment of statutory auditors in PSBs w.e.f 2008-09 is implemented finally but the efficiency of the new guidelines will be judged in a couple of years because it is known fact that pursuant to financial crisis, the Governments in the Western countries were considering whether the appointment of auditors should be done by the Government, instead of by the entity concerned. The merits of western policy change didn’t got any ears to the knowledge of the regulators to stick to their policy of appointment of auditors by C& AG/ RBI and which is also in line with the stand taken by the Institute.

The Norms on eligibility, empanelment and selection of Statutory Central Auditors in Public Sector Banks are the same as in operations since long. The procedure for appointment of statutory auditors in public sector banks is also the same going on in the Banking Industry since long. So only change in the new regulation is that Bank Management shall appoint the eligible auditors as per new norms, which is the same wine in new bottle.

The said communication does not prescribe anything about the STATUTORY BRANCH AUDITORS   and the old norms and procedures shall prevail. Statutory branch audit of PSBs may be carried out for all branches with advances of 20 Crore & above and 1/5th of the remaining branches covering a representative cross section of rural/semi-urban/urban and metropolitan branches, predominantly including branches which are not subjected to concurrent audit, so as to cover 90% of advances of a bank. CPUs/LPUs/and other centralized hubs by whatever nomenclature called would be included in the one fifth of the remaining branches every year.

Further Going forward, in mutual discussions with GoI and SCAs, based, inter alia, on the operational efficiency and robustness of CBS, system driven identification of NPAs, and integrity of MIS, managements of individual PSBs may decide on the threshold level of advances for the purpose of selecting branches for statutory audit. At present there is no indication from any PSB is going to reduce the threshold level of advances. As per policy progressively, the threshold level of advances may be increased so that the number of branches to be taken up for statutory audit is phased down over a period of time.

The phasing out of branch auditors is very much evident from the no of firms who secured the allotment as Statutory Bank Branch Auditors drastically. In the year 2009-10 , there were 19189 firms who undertook the branch audits for 56700 bank branches in comparison to the year 2013-14 ,where the number of firms reduced to 14178 and the audits were for 22310 bank branches. This trend will go on and on. From 2009-10 onwards those firms who have completed their one tenure of 4 years, very few firms got renewals of their appointment. There are only 33 centers approved by RBI as cooling centers and two year cool period is prescribed for them but the undeclared cooling is going on since 2009-10 onward. The ICAI has failed to read out the impact of reduction of Branches under audit and only added the mess up affairs suggesting the banks to carry the cooling in the name of gap period of audit by taking the details from the applicant through its MEF mechanism. The below table indicates the impact over the audit fraternity because in the five year span the empanelment has reached manifolds but availability of work is for only 1/3 of the empanelled firms. This table reflects the sliding trend of this professional opportunity.

Number of Audit Firms got allotment of Statutory Bank Branches.

There is an old saying; we cannot step into the same river twice. To put it another way, an opportunity lost stays lost forever. While I agree with the spirit of that saying but I have found that there are times when exceptions are granted and by carrying the consistent efforts for the opportunities, the same can be regenerated.

(About the Author- Author was Member of ICAI- Regional Research Committee 2013-14 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email amresh_vashisht@yahoo.com or on phone Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2 having office at 1 1 5, Chappel Street, Meerut Cantt, UP, INDIA)

Read Other Articles of CA Amresh Vashisht