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Explained | How new RBI rules change the way auditors function in banks

The role of auditors has been questioned repeatedly whenever bank frauds have happened in the past, including during the infamous PNB fraud and YES Bank, IL&FS episodes.

April 29, 2021 / 03:12 PM IST

The Reserve Bank of India (RBI) has tightened norms for appointment and functioning of auditors in commercial banks and non-banking finance companies (NBFCs). The role of auditors has been questioned whenever bank frauds have happened in the past including the PNB scam, YES Bank, IL&FS and DHFL episodes.  The irregularities, in most cases, happened over a period of years and there is a view among experts that auditors are equally responsible for such events.

So, what do the RBI rules focus on?

The RBI rules primarily focus on key areas including the appointment process of auditors, the tenure, eligibility, independence among other aspects.

Which all entities will come under the new rules?

These guidelines will be applicable to the Commercial Banks, Urban Cooperative Banks (UCBs) and NBFCs, including housing finance companies for the financial year 2021-22. However, non-deposit taking NBFCs with asset size below Rs 1,000 crore have the option to continue with their extant procedure, the RBI said.

What about urban cooperative banks and NBFCs?

As RBI guidelines regarding appointment of SCAs/SAs (Statutory Central Auditors (SCAs)/Statutory Auditors) needs to be implemented for the first time for UCBs and NBFCs from FY 2021-22, UCBs and NBFCs will have time to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption, the RBI said.

What do the new rules say on auditors’ appointment process?

Commercial Banks and UCBs will be required to take prior approval of RBI for appointment or reappointment of SCAs/SAs on an annual basis in terms of the above-mentioned statutory provisions. For the purpose, they should apply to Department of Supervision, RBI before July 31 of the reference year, the RBI said. The public sector banks (PSBs) need to approach RBI within one month of receipt of list of eligible audit firms from RBI.

Do NBFCs also need to take prior approval for auditors' appointment?

While NBFCs do not have to take prior approval of RBI for appointment of SCAs/SAs, all NBFCs need to inform RBI about the appointment of SCAs/SAs for each year by way of a certificate in Form A within one month of such appointment, the RBI said.

How many audit firms can be appointed per institution?

According to RBI rules, for entities with asset size of Rs 15,000 crore and above as at the end of previous year, the statutory audit should be conducted under joint audit of a minimum of two audit firms, the RBI said.

What about the rest?

All other entities should appoint a minimum of one audit firm for conducting statutory audit. It should be ensured that joint auditors of the entity do not have any common partners and they are not under the same network of audit firms, the RBI said.

What do the rules say about the number of auditors?

If the asset size of the entity is up to Rs 5 lakh crore, maximum number of auditors can be four, for firms with asset size between Rs 5 lakh crore to Rs 10 lakh crore, the maximum number can be 6, for entities with asset size above that and up to Rs 20 lakh crore maximum number of auditors can be up to eight and for those above Rs 20 lakh crore the number of auditors should be 12, the RBI said.

What are the new norms on eligibility, empanelment and selection of auditors in PSBs?

PSBs needs to allot the top 20 branches to SCAs in such a manner as to cover a minimum of 15 percent of total gross advances of the bank by SCAs. For other entities, SCAs/SAs shall visit and audit at least the top 20 branches and top 20 percent of the branches of the entities, to be selected in order of the level of outstanding advances, in such a manner as to cover a minimum of 15 percent of total gross advances of the entities, the RBI said.

What about the independence of auditors?

For commercial banks and NBFCs, the audit committee of the Board need to monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices, the RBI said. Any concerns in this regard may be flagged by the committee to the Board of Directors of the commercial bank.

What should be the tenure of auditors?

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, the RBI said. Further, commercial Banks and UCBs can remove the audit firms during the above period only with the prior approval of the concerned office of RBI, the central bank said.

Can the same audit firm be appointed again by the bank?

According to RBI rules, an audit firm would not be eligible for reappointment in the same entity for six years 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.

What is the expert take on the new RBI rules?

According to Siddharth Srivastava, Partner, Khaitan & Co, the guidelines will ensure greater transparency and independence of auditors while also improving the audit standards. "Upper limit on number of banks/NBFCs which can be audited by an audit firms has also been placed to ensure reduction of conflict of interest and monopolisation," Shrivastava said.

Makarand Joshi, founding partner, MMJC and Associates said rotation of auditors said  the issues in large NBFCs like ILFS and DHFL witnessed over the past few years has been a wake-up call for the regulator. "This is an attempt to improve transparency and reliability. The new norms would mean that management will have to invest time to make new auditors familiar with working of NBFC or financial institution more frequently," Joshi said.

Dinesh Unnikrishnan
Dinesh Unnikrishnan
first published: Apr 29, 2021 03:11 pm