An open letter to Honourable Prime Minister of India Why Frauds happen in Banks – Auditor Perspective
After spending an almost 20 years of long career as independent Branch Auditor for various Nationalised banks, I feel the Annual Audit exercise has become a mere ritual rather than a true & Fair audit with value addition to the banks. The spirit of Audit is losing ground as the time is passing. The general perception that use of technology in banks has eliminated the chance of frauds is just an eye wash. The Nirav Modi case is just a tip of ice berg and day is not far when we will see the whole ice meltdown, if remedial steps are not taken and auditor is not allowed to discharge its responsibility with full independence . The major flaws in Annual Audit exercise are as under:
1. Independence: The Independent Branch Auditors are appointed by the management of the banks, which is very much against the basic principle of Auditor Independence. The Management appointing the auditors expect them to work in interest of Bank even in case of any negative finding, which defeats the very purpose of the Audit. Few years back RBI in consultation with ICAI was making an appointment, the system was discontinued, and bank management was given the power for the appointment of the auditors. In toto the auditor has lost Audit independence the most important factor to discharge his duties diligently and honestly. As the banks have greater social role to accomplish the auditor independence is of utmost importance.
2. Time Limitations: The Bank branch auditors are appointed at fag end of Financial year and given a week time to complete the audit. Again, lot of resistance and hurdles are brought in way of auditor to arrive at his fair and true opinion about the Financial statements and other reporting requirement of Reserve Bank of India. The Time given to audit the 365 days transaction of the banks with all kind of constraints is next to impossible task.
3. Auditor Meet: The Branch Auditor meeting is called for merely 30 minutes or so by the senior management of bank & central statutory auditor to tell the auditors that audit must be completed within given time line of 7 days whether the verification and all the necessary audit activities are carried out or not . The Auditors meeting agenda only revolves around the completion time & Non- Issue of MOC in name of materiality factor which is a subjective and individual opinion of branch auditor.
4. Trust Gap: Some of the Nationalized banks require Auditor to sign Declaration which is not required under any regulation or law, in wrong guise of independence of auditor. For E.g Banks requires the auditor to bring to notice of branch management before commencement of audit, Instances of any professional connection with the borrowers account, which is impossible task as how the auditor will come to know which borrowers of the bank with whom he has professional connections. This kind of requirement ultra-wires the norms set by the regulatory body (ICAI) and lead to the conclusion that bank perceive professional relation of Auditor with bank borrowers with suspicion and lead to trust Gap.
5. MOC Fever: The auditors of bank if manage to find inconsistencies and irregularities having a financial impact on true & fair view, the bank management uses all types of undue influence and resistance that auditor does not qualify his report and issue MOC. As soon as MOC is proposed by the Auditor all senior officials report the branch and try to pressurise the auditor to drop the MOC. Some officials go one step ahead and uses Auditors connection with external parties to threaten the auditors and bring undue influence. The act of resisting the auditors to express their independent opinion defeat the very purpose of the audit.
6. Poor Staff Orientation leading to resistance: The Branch management is not aware of their duties and responsibilities in accomplishing the Audit exercise, on the contrary they question the auditor rights and restrict access to important reports, data, information which have bearing on the Auditors opinion. Despite various reports generated by the system the branch management does not provide the same for audit. The data required by the auditor in database format to use analytical audit tool is not provided.
7. Credit reporting system: The very object of the Audit to ensure the bank’s assets is safeguarded. Advances in case of banks constitute a major asset which need to be verified and scrutinised properly for its performance and realisation. The Non-performance of the Advances must be determined as per Guidelines set by the RBI. But advances statements are last reports generated, a day before the audit completion deadline. Auditors are made to realise that system is well equipped to audit the bank advances and auditors need to blindly follow the system. Whereas the reality is that it’s a most grey part of banking system and most prone to manipulation. The Advance classification system override the Auditor perception, observation and opinion. Hence the most important objective of the audit is replaced by the System (prone to all kind of manipulations)
8. Restricted access and training: In CBS banking almost, every banking transaction was done through customised CBS Software. It is very important that the auditors should be given a proper orientation, access and understating of the CBS system to discharge their responsibility diligently.
9. Fair reporting Constraints: The very essence of any audit exercise is true & fair reporting by the auditor to stakeholders. In case of Bank Audit, branch auditor must report to central Auditor who in turn report to stakeholders and to central bank(RBI) about the affairs of the bank. Hence it is very important that the ground realities at the branch level is reported comprehensively so that consolidate true and fair view emerges for bank affairs. It ha been observed that with advent of digital signing, the banks have digitised the reporting part with all sorts of constraints and standardisation that cause hurdle in expressing comprehensive opinion of the branch auditor. Moreover, the limitations to the attachment of audit evidence which have a substantial bearing on reporting of bank as whole is not possible due to system constraints. In nutshell the auditor reporting is squeezed in pretext of digitisation.
1. Poor appraisal assessment of the advances leading to higher NPA’s and leading to fraud and misappropriation of funds.
2. The Nationalised Banks has become an extension to old Sahukari system in line with private bankers.
3. Credit is not channelized to the real entrepreneurs.
4. The Depositors are feeling scary to keep their hard-earned money in banks thereby diverting saving to non-priority sectors.
5. Commercial advances for purchase of agriculture product, leading to Perennial financing thereby worsening the condition of farmers.
6. Hybrid loans in form Assets back loans to non-priority sectors, making rooms for more corruptions & channelizing funds to non-productive purposes ultimately leading to inflation in economy.
Recommendation for making the Audit a fruitful and value addition exercise:
1. An oversight independent body under the RBI should be established to oversee the appointment and whole Audit Exercise without the interference of the bank management. The Oversight body should also impose best practise standard for auditors for delivering better results and stricter penal action for erring auditors.
2. The Auditor should be appointed well in time preferably 3 months before so that ample time is provided to them to carry out the Audit function with due diligence.
3. The Bank branch management should be made aware of the rights and duties of the auditor.
4. An Exhaustive system of bank reporting should be established to assess the macro level results of audit and accordingly improve the efficiency of audit exercise.
5. It should be ensured that, the overall objective of Audit is achieved to build the trust of people in baking system.
We urge to our dynamic forward looking Honourable Prime Minster to take necessary steps to clean out the system and save the country from un-imaginable catastrophe.
Jai Hind, Jai Bharat
CA Mohammed Lakkadsha
20th April ,2018