File Photo of RBI Governor Shaktikanta Das
RBI Governor Shaktikanta Das on October 25 in his address to the probationers and officers at the National Academy of Audit and Accounts (NAAA), Shimla highlighted the role and importance of audit in maintaining the stability of the financial services system.
Here are the top five key highlights:
Role of Audit: According to Das, informative, accurate, reliable, and analytical audit reports are sine qua non for both financial stability and growth. The primary role of auditors is to resolve the Agency problems which arise due to information asymmetry. Auditors act as gatekeepers to solve this and the problem of unreliable information around quality and accuracy of information.
Audit for RBI Regulated Entities: Auditors play a vital role in maintaining market confidence on audited financial statements and the role is particularly relevant for financial stability. The statutory auditor also has a duty to report directly to the supervisor (RBI) on matters of material significance arising from the audit of regulated entities.
The central bank focuses on audit quality relating to the identification of gaps, assessment of asset quality, and the so-called innovative accounting practices, if any, which could have a major impact on the capital base of regulated entities and their viability as a going concern, Das said.
Audit Failure & Its Impact: Das highlighted that audit is the first external line of defence and its failure in supervised entities will adversely impact timely identification of major issues and risks. Under the Ind-As model, the expected credit loss approach allows the management to exercise discretion and judgement in determining the provisioning requirement for their financial assets.
According to Das, such flexibility and forward-looking nature of assessment pose the ‘model risk’ where it may rely on incorrect assumptions and could be far away from real-life scenarios. Auditors are expected to test the models used by the entities, challenge the management, and validate the model outputs, Das said.
Auditors also need to be tech-savvy to be able to see through the information technology to detect the real nature of hidden transactions.
Adoption of Technology & Good Governance: Auditors need to adopt technology tools such as Computer Assisted Audit Tools and Techniques (CAATTs) to bring in efficiencies in the audit. Das also said technology tools cannot replace professional judgement. Das said the RBI has been repeatedly emphasising the importance of a strong governance framework in banks and NBFCs. The audit community and financial sector regulators and supervisors have to work together and take proactive steps to ensure good governance.
Steps Taken by RBI: Governor Das highlighted the steps taken by RBI to strengthen the audit framework amongst regulated entities.
a. The RBI asked supervised entities about disclosures on the composition of regulatory capital so that stakeholders understand the quality of capital, details of the quality of advances with provisions held thereon, along with movement in non-performing assets (NPAs) and details of pending complaints, the major grounds for complaints and their disposal.
b. In September 2020, RBI had revised the format for Long Form Audit Report (LFAR) to increase its utility value by enhancing the coverage of the prudential supervisory requirements as per Basel Norms.
c. The Risk-Based Internal Audit (RBIA) system introduced in 2002 was further strengthened in January 2021.
d. In April 2021, RBI updated guidelines on Appointment of Statutory Auditors in Commercial Banks, UCBs, and NBFCs putting in place ownership-neutral audit regulations for ensuring the independence of auditors, avoiding conflict of interest in auditor appointments and improving the quality and standards of the audit.
While concluding his speech, Das said, the profile of tomorrow’s auditor will be that of a critical yet constructive challenger, with a clear focus on public interest and quality audits.