Accounting regulator, Institute of Chartered Accountants of India (ICAI) has asked the private and public-sector banks to hire the services of qualified auditors instead of chartered accountants who render ‘compilation engagement’ services.
In a compilation engagement, a chartered accountant uses his accounting expertise as opposed to the auditing expertise to collect, classify and summarize financial information. The procedure employed in a compilation engagement does not enable the accountant to express any assurance on the financial information.
Uttam Prakash Agarwal, president, ICAI told FE, “We are soon going to send letters to all the private and public sector banks explaining them the need to adopt auditing instead of compilation engagement. What would be the importance of audit as the compilation done by a chartered accountant is not same as audit since this kind of an arrangement does not lend any assurance on the truth and fairness of the financial statements”.
Agarwal feels that there is a pressing need for creating awareness among banks on the difference between a compilation and an audit engagement done by a chartered accountant so that any misconceptions with regard to these can be done away with and both the banks and CAs can work towards better risk credit management, accountability and resilience in the banking industry.
“The institute has issued a whole suite of internationally benchmarked auditing standards and they are to be mandatorily complied by the chartered accountants undertaking the audit assignment,” said Agarwal.
A compilation engagement would include the preparation of financial statements, which may or may not be a complete set of financial statements.
According to the accounting regulator, a compilation engagement should not be regarded as providing assurance on the adequacy of the borrower’s internal control systems or on the actual incidence of fraud.
Neither does a compilation engagement carried out by the CA relieves the management of these responsibilities. The borrower continues to be responsible for taking reasonable steps to prevent and detect errors and frauds.
Talking particularly about the small and non-corporate borrowers, Agarwal said, “Small borrowers constitute a sizeable chunk of the banks lending and such borrowers normally seek the help of chartered accountants to help them compile their financial statements. They might not have the financial reporting systems to prepare their financial statements or their systems may not be of the desired level of maturity and quality”.