CAAS Highlight RBI Audit and Banking Issues

Chartered Accountants Association, Surat (CASS), has addressed critical issues concerning the Reserve Bank of India (RBI) to the Finance Minister. The association high-lights irregularities in the independence of statutory bank audits, alleging that auditee banks manipulate audit allocations, compromising audit quality and independence. They demand that RBI or an independent agency use centralized automated software for audit allotment and retain control over auditor remuneration to ensure fairness. Another major concern involves unintelligible bank statements, which hinder transparency and accountability, facilitating financial fraud and money laundering. Current formats truncate essential transaction details, leaving account holders, auditors, and regulators unable to interpret transactions accurately. This undermines fundamental rights under Articles 21 and 19(1)(a) of the Constitution. The association demands that RBI enforce detailed and intelligible bank statements with fields like transaction date, particulars, and instrument details in separate columns. These measures aim to enhance financial accountability, public trust, and economic transparency. The representation calls for immediate investigation into malpractices and corrective actions to address these systemic issues.

Chartered Accountants Association, Surat

Ref: CAAS/Representations/2024-25/03

Date: 07-12-2024

To,

Finance Minister,
Ministry of Finance,
134, North Block,
New Delhi – 110011

Sub: Dereliction of Reserve Bank of India

Respected Madam,

We, are an Association of Chartered Accountants of Surat, who have time and again complained and infact appraised the Ministry of the ground realities and on the various burning issues under GST, Income Tax and Banking which are tabooed to be talked around. Our following representation needs a very careful look, since the negligence is grave and has a high and direct impact on eco-nomic transparency, financial accountability and public trust of national importance.

Our Representation:

1. Independence of Statutory Bank Audits:

Till date statutory bank audits are being allotted by the respective auditee banks to their desired auditors, though under the garb of automated software. It is learned that in some cases audits are allotted to the beneficiaries who opt for the following “Schemes”, where in the following monetary benefits which are required to be passed on through the intermediaries:

i. For Confirmed First Statutory Audit – 90-100% of the Audit Fees are asked as consideration to allot the statutory audit, that too in advance for the first year.

ii. For the second and subsequent years, Audit Fees upto 35-70% is asked to retain the ongoing statutory audit, wherein the ratio depends upon the leverage each party has.

Auditee banks, under the guise of automated systems through questionable practices which includes undue pressure from machinery of Ministry, Top management of Banks and their close relatives, selectively allot Statutory Branch Audit (SBA) as well as Statutory Central Audit (SCA) to some preferred firms fostering a culture of manipulation, conflict of interest, malpractices, which com-promise on independence and audit quality.

RBI which is the Central Bank and a Banker’s Bank, is responsible for issuing policy, appointment and fixing remuneration of Auditors, as well as overseeing the implementation of the said policy, now has resorted to dereliction. RBI works in India and does not work in isolation. Despite the above information known to all the bankers and the stakeholders, RBI has neglected to act upon or take punitive actions against the same. Till date no investigation has been ordered in such matters. Due to the same, genuine auditors are also painted in bad light. The vigilance of RBI is required the most to protect and preserve the independence of the auditors as well as a fair review of the affairs of cry-baby bankers, who later shift the blame game on to the Statutory Auditors. The stance of neglect by the RBI resembles that of Bhishma Pitamah at the time of disrobing of Draupadi, both of which are highly unfortunate.

A centralized automatic audit allotment software already prepared by ICAI is rusting and awaiting appropriate use. But instead of laying its hands on to the fair distribution arrangement, RBI has evaded to get involved and passed on the authority to allot audit to the respective auditee bank-ers. Also, now as per Sec.16 of the new Banking Regulation Amendment Bill, 2024, the said remuneration is proposed to be fixed by the Public Sector Banks, taking away the supervisory role of RBI. Now a very basic question which even an illiterate can understand is that when the appointer appoints a person, the appointed person puts the ap-pointer on a high pedestal. This erodes the independence of the person appointed to give any statement against the interests of his appointer. This mandates that the appointer should be an independent person. The present situation of appointment of auditors by the auditee banks is akin to payment of salary of an Income Tax Officer by the Assessee directly instead of CBDT. In such case, would the IT Officer independently assess the income of the assessee? The answer is No.

The situation is so worse, that in order to accommodate such elements, experienced and genuine audit firms are also not allotted any audits since years. Allowing new entrants is a welcome move, but not allowing the seasoned auditors amply clarifies the ill-intention of the auditee management to supress the key audit points and manipulate the independent audit process.

Demand:

Issue a direction to the RBI to investigate into the wrong-doings by the aforementioned persons for a probe period of last 10 years wherein the auditee bank management and the auditor have colluded to receive the gratification in the form of audit assignments.

Further, the audit allotment should compulsorily be made by RBI or any independent agency through centralized automatic audit allotment software. This would ensure that the auditors are sufficiently independent to carry out any audit assignments without any biases.

Further, since Statutory Audit involves uniform audit procedures and reporting requirements, in-volving same skillset, allowing respective banks to decide upon the remuneration would be counter productive to the audit quality and independence of the auditor, both of which are of para-mount importance, otherwise there should be no need of Statutory Audit at all. Thus, the remuneration should be continued to be decided by RBI or any other independent central authority like NFRA alongside independent allotment through automated software.

2. Promotion of Money Laundering and Opaqueness of transactions:

Banking in the terms of a laymen means having a bank account, and the first thing which a custom-er may get is a bank passbook or statement. This is a very basic and primary document which everyone (including illiterates) should understand.

RBI has failed to appreciate the very basic and naïve requirement of an intelligible bank statement and its role in countering money laundering. An intelligible bank statement means the one where the parties transacting can be easily discerned by even a laymen or illiterate person. This not only promotes transparency but also helps in unearthing transaction involving money laundering. Such intelligibleness is necessary both by an accountant managing finances of any person as well as by an auditor who is required by most of the laws of the land to inquire into the identity and genuine-ness of the transactions.

Even under GST the basic mandatory contents of a tax invoice are mentioned in the Rule 46 of CGST Rules, 2017 itself. Under Income Tax, the contents of a daily case register to be maintained by doctors, is already mention in Form 3C. However, till date, RBI has, although issued a Circular No. DBR.No.Leg.BC.76/09.07.005/2016-17 dt.22-06-2017, on the contents required in a bank statement, failed to oversee and monitor it’s implementation even after a passage of around 7.5 years. The result is unintelligible bank statement which are Greek and Latin for majority of Indian Population, and which serves no better than the waste papers used for eating road side eateries. The below is an example of such narrations which even the most educated person may fail to interpret at the time of filing his income tax returns:

Bank statements, a fundamental tool for transparency, are plagued with unintelligible and truncated narrations. This compromises the ability of account holders, auditors, and regulators to interpret transactions accurately, creating an environment conducive to money laundering and financial fraud.

It is pertinent to note that making available full information on transaction by one person with an-other is a right to life and personal liberty under Article 21. Similarly, right to have full information on one’s own bank transaction in a digital (but truncated) era is a right to have information linked to Article 19(1)(a), since, without access to information, a person cannot effectively exercise their freedom of speech or make informed decisions. So, when the record evidencing the said right is truncated, it tantamount to limitation on the said fundamental rights. Presently, the bank statements are barred by character limit, eating up valuable information necessary for a complete transparency and autonomy. Neither the accountant, nor the auditor may know what the auditee had transacted, which creates another limitation on the scope of the audit. Not only this, the per-son transacting may even not be knowing what and where has he transacted, and may file incorrect information under taxation laws under the erroneous belief that he is right.

This is a very basic requirement, which RBI could have suo-motu looked into for being followed by all the banks in India, as a part of its supervisory role to oversee the implementation of the existing policy on bank statements. However, RBI had chosen to evade the situation and till date continued the stone age format of bank statements when there was no UPI or IMPS and when the operating systems and databases supported only ANSI Characters. But in these fast-moving times when both the OS and databases now even has support for long field sizes and sup-port for UNICODE, such a disconnected approach of continuing old methods is thus promoting money laundering and opaqueness in India.

Demand:

We demand that a direction be made through RBI to the bankers specifically instructing the mandatory fields in a bank statement as separate fields/columns, instead of crowing it in in single column of limited space. This should include:

i. Transaction Date (with time)

ii. Value Date (with time)

iii. Transaction Particulars

iv. Instrument No. (Including number related to) Cheque No., RTGS, IMPS, UPI etc.

v. Name of the remitter / payee as per Account Name or PAN

vi. Mode of Transaction

vii. Amount

viii. Balance

ix. Name of Transferee Bank

x. Branch Name where transaction was initiated

3. Miser budget allocation for Concurrent Audits:

It is pertinent to note that Concurrent Audits are internal audits, but nevertheless function on the same footing as Statutory Audit when it comes to independence. At present Concurrent Audits are allotted by respective banks wherein there is a mandatory requirement of deputing full-time staff at the bank branch premises. However, when the remuneration of these banks is compared, it gives a miserly painted picture of spending on audit quality for ensuring accountability and transparency. Below is the list of banks and their

The above remuneration includes cost of staff, conveyance, supervisory manhours of Concurrent Auditor on professional basis as well as out of pocket expenses of remotely located branches and cost of meetings at regional or zonal offices. It is pertinent to note that in many cases the concur-rent audit requires that the auditor answers to a questionnaire which ranges up to 750 questions per borrower and which the concurrent auditor has to fill up every month in addition to the regular audit procedures.

As compared to remuneration of the auditor, the monthly remuneration of the auditee bank’s staff is as follows:

The above salary includes all kinds of perquisites and is inclusive of deductions of PF etc. However, without prejudice to the above, concurrent auditors who are not the employees of the bank but perform functions which carry much higher risk of material mistake at each stage of banking process reviewed by him going unnoticed and unreported and thus finally supervise the work and mis-takes of the branch staff are always at a higher role. Whenever there is a fraud unearthed in a bank, the actions of concurrent auditor are also put under scanner.

But does the math match up when the bank clerk who is being audited earns twice the audit fees? Or a Bank Manager who earns 4 times the monthly salary than the concurrent auditor’s remuneration. This has a direct bearing on the audit quality. Since, the auditors have to employ qualified and/or knowledgeable audit staff, the cost of audit increases, leaving a very meagre amount in costing of services which can be called surplus. In absence of adequate surplus, the audit quality is bound to degrade. And it is not the intention of the banks to appoint auditors just for sake of appointment but to contribute positively and constructively to bank’s accountability and transparency.

It is pertinent to note that vide RBI Circular No. DBS.CO.ARS.No.BC.01/08.91.021/2019-20 dt.18-09-2019, related to Concurrent Audit System, Para E of the said circular amply clears as follows:

“The remuneration to be paid to external concurrent auditors shall be decided by the Audit Committee of Board/ Local Management Committee of the bank. The remuneration shall be commensurate with the scope and coverage of audit, skill sets required, number of staff required and the time to be devoted for the audit”

When one compares what the RBI says and what percolates at the ground level, it is shocking to see the difference. When RBI lays down the policy, it considers the standards which the auditors have to follow, the documentation which he ought to prepare. But when it comes to implementation by the respective banks, the only criteria applied is Cost. This is not how quality is achieved, let alone reaching international quality.

Demand:

It seems RBI makes policy without having any intention of ensuring its implementation or taking punitive actions against the errant. Thus, we demand that the Ministry hereby direct RBI to ensure implementation of its policy on Concurrent Audit in letter and spirit.

4. Illegal freezing of accounts citing MHA Guidelines:

In a new frenzy to comply with law of the land and to stop online fraud, banks which are already under your supervision are blindly and religiously following instructions from NCRP Portal. In order to weed out the evil, the growth of whole crop is being affected. It is pertinent to note that, the account holder opens the accounts, manages the KYC, handles the compliances, deposits his genuine money whether with or without interest thereon, and later is informed that he is labelled as a fraudster, simply based on the reporting by any person or by accepting good faith monies which are not coloured. In such case whether such behaviour can be conducive of healthy banking?

The Cyber Crime department has been misusing the advisories by MHA and freezing accounts of innocent third parties on arbitrary basis. There is no specific circular from RBI in this regard to freeze accounts in case of online frauds, which has created a chaos. Bank account of one state is frozen by Police of another state, although the transacting parties are in the first mentioned state. The Police is invoking Sec.102 of CrPC (Seizure of Stolen Goods) read with Sec.190 of CrPC (Cognisance by Magistrate). Had there been curative intention of the Cyber Crime, they ought to not have acted in such high-headed manner in not transferring the case to respective state, or else there may be lack of trust on their courter parts in other state.

In order to freeze the account either the bank has to act on the directions of RBI or direction of any Magistrate. At present, the banks are freezing the accounts centrally based on information down-loaded from the CFCFRMS (Citizens Financial Cyber Fraud Reporting and Management System) of the NCRP Portal and neither the branch nor the account holder has any information related to such freezing of account. Neither a prior notice is given to the account holder or his branch nor a summon u/s 91 of CrPC of the fact that the account has been frozen has been given to the account holder, so that remedial action can be taken up by him. Most account holders are clueless as to the full blockage or partial blockage (or lien) on the accounts, how and where to remove the same. Al-so, the account holders are unaware as to which Magistrate has cognisance of the issue, due to lack of notice or summons u/s 91. Left with no other choice, the account holder has to somehow “meet” the Cyber Crime Officials, which is highly unacceptable.

Bank are the custodians of monies of depositors which they hold in trust from them. Not letting the accountholder know that he is labelled as a fraudster and freezing or lien marking his account under the garb of MHA guidelines without giving opportunity of being heard is not only violative of natural justice but also a breach of trust. RBI has been a mute spectator in this whole episode.

Demand:

We demand that the Ministry in co-ordination with MHA issue specific guidelines by or through RBI to ensure that genuine third-party accounts are not harassed by the Cyber Crime department un-der the garb of MHA guidelines. Specific guidelines should cover safeguards and conditions subject to which Cyber Crime can freeze accounts. Also notice and onward communication to the branch and the account holder affected u/s 91 of CrPC, along with remedial action for unfreezing or re-moving of partial lien should be made smooth, seamless and online in a time bound manner, so that the innocent third/fourth/fifth/nth party who has transacted in good faith is not harassed by making them run pillar to post for a negligible amount.

It is to woefully inform that Reserve Bank of India has failed to perform its duties and responsibilities which is its function to perform and at this juncture the Ministry has to intervene to bring the affairs of RBI on track. The above points may have meagre value and may not have been raised any time in the past, but has high impact on the economy of India and the outlook of transparency. Thus, we hope that you would take a prompt and concrete action in the above matter.

Thanks & Regards,

For Chartered Accountants Association, Surat.
President | Secretary

Copy to: –

(1) The Governor (Reserve Bank of India),

– for information and appropriate action

18th Floor, Central Office Building Shahid Bhagat Singh Road, Mumbai-400 001