If you have not read the latest and hotly discussed RBI guidelines on appointment of Statutory Central Auditors (SCAS)/Statutory Auditors of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) dated April 27, 2021, let me reproduce the same below for ready reference from RBI website.
Let us discuss the above guidelines in the light of recent happenings in Commercial banks which are vivid in the memory of any student of banking in the recent past.
A format in the form of Question and Answer may wet the intellectual curiosity of any banking student.
Questions and Answers
To whom do the guidelines applicable?
These guidelines will be applicable to the Commercial Banks (CBs) (excluding RRBs), UCBs and NBFCs including HFCs (hereinafter referred to as the Entities) for Financial Year 2021-22 and onwards in respect of appointment/reappointment of SCAs/SAs of the Entities. However, non-deposit taking NBFCs with asset size below ₹1,000 crore have the option to continue with their extant procedure. For UCBs and NBFCs flexibility to have them in second half of FY 2021-2022 has been given.
The CBs will have to get RBI approval for every year’s audit.
All NBFCs need to inform RBI (to the same office as applicable to UCBs) about the appointment of SCAs/SAs for each year by way of a certificate within one month of such appointment.
What about Number of SCAs / SAs and Branch Coverage?
The Entities should decide on the number of SCAs/SAs based on a Board/Local Management Committee (LMC) Approved Policy, inter alia, taking into account the relevant factors such as the size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, availability of other independent audit inputs, identified risks in financial reporting, etc. However, the following limits have been imposed:
|Sl. No.||Asset Size of the Entity||Maximum number of SCAs/SAs|
|1.||Upto ₹5,00,000 crore||4|
|2.||Above ₹ 5,00,000 crore and Upto ₹ 10,00,000 crore||6|
|3.||Above ₹ 10,00,000 crore and Upto ₹ 20,00,000 crore||8|
|4.||Above ₹ 20,00,000 crore||12|
Let me give the eligibility criteria for appointment as SCA/SA
I have given only for asset size of above ₹15,000 crore the relevant information. For others, one can easily refer to the RBI communication referred above.
Minimum No. of Full-Time partners (FTPs) associated with the firm for a period of at least three (3) years – 5
Out of total FTPs, Minimum No. of Fellow Chartered Accountant (FCA) Partners associated with the firm for a period of at least three (3) years – 4
Minimum No. of Full Time Partners/ Paid CAs with CISA/ISA Qualification – 2
Minimum No. of years of Audit Experience of the firm – 15
Minimum No. of Professional staff – 18.
Note 1 and Note 2 give the qualification to be a partner in a CA firm and CISA/ISA qualification which one can refer for serious consideration of the matter.
From note 3, the required audit experience is given below:
For Commercial Banks (excluding RRBs), audit experience shall mean experience of the audit firm as Statutory Central/Branch Auditor of Commercial Banks (excluding RRBs)/ AIFIs. For UCBs and NBFCs, 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.
Who is called professional staff?
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 empanelment (for PSBs)/ shortlisting (for other Entities) for considering them as professional staff for the purpose.
Independence of Auditors
This is the most hotly discussed topic among the leading auditors of Commercial Banks.
Before opening up our discussion, the information given by RBI deserve a serious and merited observance.
Under item no 6, the above topic is covered by RBI communication which is reproduced below for a discussion to be followed immediately:
“6.1 For Commercial Banks (excluding RRBs) and NBFCs, the Audit Committee of the Board (ACB)/ LMC shall monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices. Any concerns in this regard may be flagged by the ACB/LMC to the Board of Directors of the Commercial Bank (excluding RRBs)/NBFC and concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.
For UCBs/remaining NBFCs, the Board of Directors shall monitor and assess the independence of the auditors. Any concerns in this regard may be flagged by the Board of the UCB/NBFC to the concerned SSM/RO of RBI.
6.2 In case of any concern with the Management of the Entities such as non-availability of information/non-cooperation by the Management, which may hamper the audit process, the SCAs/SAs shall approach the Board/ACB/LMC of the Entity, under intimation to the concerned SSM/RO of RBI.
6.3 Concurrent auditors of the Entity should not be considered for appointment as SCAs/SAs of the same Entity. The audit of the Entity and any entity with large exposure6 to the Entity for the same reference year should also be explicitly factored in while assessing independence of the auditor.
6.4 The time gap between any non-audit works (services mentioned at Section 144 of Companies Act, 2013, Internal assignments, special assignments, etc.) by the SCAs/SAs for the Entities or any audit/non-audit works for its group entities should be at least one year, before or after its appointment as SCAs/SAs. However, during the tenure as SCA/SA, an audit firm may provide such services to the concerned Entities which may not normally result in a conflict of interest, and Entities may take their own decision in this regard, in consultation with the Board/ACB/LMC.
6.5 The restrictions as detailed in para 6.3 and 6.4 above, should also apply to an audit firm under the same network of audit firms or any other audit firm having common partners.”
Let us discuss.
6.1 indicates that audit committee shall monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices. From a study of any balance sheet of any big nationalized bank like Bank of Baroda, Canara Bank or State Bank of India, one hardly finds the actual work done by any audit committee and whether its membership includes any qualified Chartered Accountant who also emerges from independent auditor stream. The CMD also attends this committee and one can presume what type of discussions can take place in the presence of the powerful CMD. Most of the issues related to Audit firms that conduct thorough audit assignments hardly have any say on the working of big public sector banks or private sector banks resulting in massive diversion of funds of fraudulent transactions escaping the attention of top managements of these banks.
I would like these too big institutions to give the required authority to these audit institutions to have their say and comment extensively to the audit committee or to the Board, if need arises.
For obvious reasons, the concurrent auditors are ineligible to be appointed as SCAs/SAs.
I feel the prescription that during the tenure as SCA/SA, an audit firm may provide such services to the concerned Entities which may not normally result in a conflict of interest, and Entities may take their own decision in this regard, in consultation with the Board/ACB/LMC is to be taken seriously by the Board or relevant bodies since most of the big audit firms take assignments like reorganization of institutions with wide scope for enormous income or any assignments that may result in less importance to the statutory audit work of the auditors.
No balance sheet of any big bank does comment upon any of the developments related to above matter and contain any information.
Let us also discuss the tenure and rotation of auditors covered under item 8 which will be reproduced and also discussed thereafter.
“8. Tenure and Rotation
8.1. In order to protect the independence of the auditors/audit firms, 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. Further, Commercial Banks (excluding RRBs) and UCBs can remove the audit firms during the above period only with the prior approval of the concerned office of RBI (Department of Supervision), as applicable for prior approval for appointment, as mentioned at Para 3.2 of this circular. 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.
8.2 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. However, audit firms can continue to undertake statutory audit of other Entities.
8.3. One audit firm can concurrently take up statutory audit of a maximum of four Commercial Banks [including not more than one PSB or one All India Financial Institution (NABARD, SIDBI, NHB, EXIM Bank) or RBI], eight UCBs and eight NBFCs during a particular year, subject to compliance with required eligibility criteria and other conditions for each Entity and within overall ceiling prescribed by any other statutes or rules. For clarity, the limits prescribed for UCBs exclude audit of other co-operative societies by the same audit firm. For the purpose of this circular, a group of audit firms having common partners and/or under the same network, will be considered as one entity and they will be considered for allotment of SCA/SA accordingly. Shared/Sub-contracted audit by any other/associate audit firm under the same network of audit firms is not permissible. The incoming audit firm shall not be eligible if such audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.”
If big banks either in private sector or under public sector would have adopted the above prescription, the moot question of repetition of big frauds would not have arisen since during the long period of 6 years, the cover up of frauds under the same audit firm/firms would have been easier. Let us forget the emotional aspect of the matter but concentrate on the audit quality of the work expected of these audit firms which would have saved the wealth of all stake holders. This is a welcome move but RBI should not yield to any pressure to relax on this score.
Let us discuss also the audit fees and expenses to be paid to auditors.
Let me reproduce the relevant clauses and indulge in some discussion.
“9. Audit Fees and Expenses
9.1 The audit fees for SCAs/SAs of all the Entities shall be decided in terms of the relevant statutory/regulatory provisions. Public Sector Banks will continue to be guided by relevant RBI instructions in the matter.
9.2 The audit fees for SCAs/SAs of all the Entities shall be reasonable and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc.
9.3 The Board/ACB/LMC of Entities shall make recommendation to the competent authority as per the relevant statutory/regulatory instructions for fixing audit fees of SCAs/SAs.”
Most of the public sector banks do need to pay more audit fees and expenses like the private sector banks for the same work to produce the best audit work. This must be discussed with concerned audit firms or their association to improve the quality of audit work. The audit firms should be held responsible to look at the balance sheet of the commercial banks impartially and bring more professional standards. I do expect audit committee to play an active role by appointing qualified persons to improve the working of banks.
One may concur with item” 10. Statutory Audit Policy and Appointment Procedure” which emphasizes that the approved policy in this regard should be placed on the web site for clarity and transparency.
One can expect RBI to actively engage with commercial banks and other banks to ensure that they truly represent their actual financial position through their financial statements which are produced regularly to meet the needs of all stake holders. There is a misplaced conception among the bureaucrats that lesser the audit fees, the better for financial institutions. This must be removed and adequate fees and expenses of audit firms must be met to improve the health of the financial institutions.
The purpose of writing this article is to express appreciation for RBI to change with their old procedure and ensure adequate professional standards from qualified auditors who are doing a noble job of taking care of the financial needs of all stake holders including small people like yourself, myself and others. I do welcome the views of senior auditors who have been auditing these big institutions for so many decades and whether the new changes do meet the computer age banking.
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