Guidelines for Appointment of Statutory Auditors of NBFCs (including HFCs)

This article is in respect to ‘Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs)’ issued by RBI vide DoS.CO.ARG/SEC.01/08.91.001/2021-22 dated 27/04/2021

The guidelines are issued for appointment/reappointment Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of

• Commercial Banks excluding Regional Rural Banks (RRBs);
• United Co-operative Banks (UCBs);
• NBFCs including Housing Finance Companies (HFCs),

However, this article only focuses on NBFCs.

1. What shall be the applicability?

• These guidelines shall be applicable to all the NBFs.
• However non-deposit taking NBFCs with asset size below > 1,000 crore have the option to continue with their earlier/ previous procedure.

2. What shall be the transactional period / last date to follow the guidelines?

• NBFCs shall have flexibility to adopt these guidelines from w.e.f., 1^stOctober, 2021.

3. Whether prior approval of RBI is required for Appointment of SCAs/SAs?

• No prior approval shall be required by NBFCs to be taken from RBI.
• However, NBFCs need to inform RBI about the appointment of SCAs/SAs for each year by way of a certificate in Form A(as per Annexure I) within one month of such appointment.

4. How many minimum audit firms to be appointed?

Here, audit firm shall mean Partnership firm and LLPs.

5. What shall be maximum number of audit firms to be appointed?

6. What shall be eligibility criteria for Audit Firms?

Basis Criteria

The definition of ‘FTP or exclusive association’ will be based on the following criteria:

• The full-time partner should not be a partner in other firm/s.
• She/He should not be employed full time / part time elsewhere.
• She/He should not be practicing in her/his own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice under Section 2(2) of the Chartered Accountants Act, 1949.

There should be at least one-year continuous association of Paid CAs with CISA/ISA qualification with the firm as on the date of shortlisting for considering them as Paid CAs with CISA/ISA qualification for the purpose.

Audit experience shall mean experience of the audit firm as Statutory Central/Branch Auditor of Commercial Banks (excluding RRBs)/ UCBs/NBFCs/ AIFIs. In case of merger and demerger of audit firms, merger effect will be given after 2 years of merger while demerger will be affected immediately for this purpose.

Professional staff includes audit and article clerks with knowledge of book-keeping and accountancy and who are engaged in on-site audits but excludes typists/stenos/computer operators/ secretaries/subordinate staff, etc. There should be at least one-year continuous association of professional staff with the firm as on the date of shortlisting for considering them as professional staff for the purpose.

Additional Criteria

• The audit firm, proposed to be appointed as SCAs/SAs for Entities, should be duly qualified for appointment as auditor of a company in terms of Section 141 of the Companies Act, 2013.
• The audit firm should not be under debarment by any Government Agency, National Financial Reporting Authority (NFRA), the Institute of Chartered Accountants of India (ICAI), RBI or Other Financial Regulators.
• The Entities shall ensure that appointment of SCAs/SAs is in line with the ICAI’s Code of Ethics/any other such standards adopted and does not give rise to any conflict of interest.
• The auditors for Entities with asset size above ₹1,000 crore should preferably have capability and experience in deploying Computer Assisted Audit Tools and Techniques (CAATTs) and Generalized Audit Software (GAS), commensurate with the degree/ complexity of computer environment of the Entities where the accounting and business data reside in order to achieve audit objectives.
• In case any audit firm (after appointment) does not comply with any of the eligibility norms (on account of resignation, death etc. of any of the partners, employees, action by Government Agencies, NFRA, ICAI, RBI, other Financial Regulators, etc.), it may promptly approach the Entity with full details. Further, the audit firm shall take all necessary steps to become eligible within a reasonable time and in any case, the audit firm should be complying with the above norms before commencement of Annual Statutory Audit for Financial Year ending 31st March and till the completion of annual audit.
• In case of any extraordinary circumstance after the commencement of audit, like death of one or more partners, employees, etc., which makes the firm ineligible with respect to any of the eligibility norms, RBI will have the discretion to allow the concerned audit firm to complete the audit, as a special case.

7. What shall be the procedure of appointment of SCAs/SAs?

• The Entities shall shortlist minimum of 2 audit firms for every vacancy of SCAs/SAs so that even if firm at first preference is found to be ineligible/refuses appointment, the firm at second preference can be appointed and the process of appointment of SCAs/SAs does not get delayed. However, in case of reappointment of SCAs/SAs by banks/UCBs till completion of tenure of continuous term of 3 years, there would not be any requirement of shortlisting and sending names of multiple audit firms to RBI while seeking approval to appointment.
• The Entities shall obtain a certificate, along with relevant information as per Form B(as per Annexure II), from the audit firm(s) proposed to be appointed as SCAs/SAs by the Entity to the effect that the audit firm(s) complies with all the eligibility norms prescribed by RBI for the purpose. Such certificate should be signed by the main partner/s of the audit firm proposed for appointment of SCAs/SAs of the Entities, under the seal of the said audit firm.

8. Who shall monitor and assess the independence of auditor and conflict of interest position in terms of relevant regulatory provisions, standards and best practices?

• The Board of Directors shall monitor and assess the independence of the auditors. Any concerns in this regard may be flagged by the Board to the concerned SSM/RO of RBI.

9. Whether Concurrent auditors of the Entity can be considered for appointment as SCAs/SAs?

• No

10. What shall be the time gap or colling period for appointment as SCAs/ SAs id he is conducting non audit works as per Section 144 of Companies Act, 2013 as well as work which normally result in conflict of interest?

• 1 Year

11. Whether Concurrent auditors of the Entity can be considered for appointment as SCAs/SAs?

• Entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year;
• NBFCs removing the SCAs/SAs before completion of three years tenure shall inform concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken;
• An audit firm would not be eligible for reappointment in the same Entity for six years (two tenures) after completion of full or part of one term of the audit tenure;
• There is no colling period provided like as provided in Companies Act, 2013, thus once six years (two tenures) are completed SCAs/ SAs cant be reappointed.

Notes:

• The SCAs/SAs shall be strictly guided by the relevant professional standards in discharge of their audit responsibilities with highest diligence.
• The Board of Entities shall review the performance of SCAs/SAs on an annual basis.
• Any serious lapses/negligence in audit responsibilities or conduct issues on part of the SCAs/SAs or any other matter considered as relevant shall be reported to RBI within two months from completion of the annual audit.

Annexure I

FORM A
Information to be submitted by the NBFCs regarding appointment of SCA/SA

1. The company has appointed M/s ______________, Chartered Accountants (Firm Registration Number ________________) as Statutory Central Auditor (SCA)/Statutory Auditor (SA) for the financial year ____ for their 1st/2nd/3rd term.

2. The company has obtained eligibility certificate from (name and Firm Registration Number of the audit firm) appointed as SCA/SA of the company for FY ____along with relevant information in the format as prescribed by RBI.

3. The firm has no past association/association for ______ years with the company as SCA/SA/SBA.

4. The company has verified the said firm’s compliance with all eligibility norms prescribed by RBI for appointment of SCAs/SAs of NBFCs.

Signature
(Name and Designation)
Date:

Annexure II

Form B
Eligibility Certificate from (Name and Firm Registration Number of the firm)

A. Particulars of the firm:

B. Additional Information:

(i) Copy of Constitution Certificate.

(ii) Whether the firm is a member of any network of audit firms or any partner of the firm is a partner in any other audit firm? If yes, details thereof.

(iii) Whether the firm has been appointed as SCA/SA by any other Commercial Bank (excluding RRBs) and/or All India Financial Institution (AIFI)/RBI/NBFC/UCB in the present financial year? If yes, details thereof.

(iv) Whether the firm has been debarred from taking up audit assignments by any regulator/Government agency? If yes, details thereof.

(v) Details of disciplinary proceedings etc. against firm by any Financial Regulator/Government agency during last three years, both closed and pending.

C. Declaration from the firm

The firm complies with all eligibility norms prescribed by RBI regarding appointment of SCAs/SAs of Commercial Banks (excluding RRBs)/UCBs/NBFCs (as applicable). It is certified that neither I nor any of our partners / members of my / their families (family will include besides spouse, only children, parents, brothers, sisters or any of them who are wholly or mainly dependent on the Chartered Accountants) or the firm / company in which I am / they are partners / directors have been declared as willful defaulter by any bank / financial institution.

It is confirmed that the information provided above is true and correct.

Signature of the Partner
(Name of the Partner)
Date: