The Reserve Bank of India, on Friday, said that it is putting in place a framework to take action against statutory auditors of scheduled commercial banks, should lapses be found in the audit process.
The framework comes against the backdrop of a significant divergence in the level of bad loans reported by banks and those detected by the RBI. The divergence in bad loan reporting had prompted the RBI to look into effectiveness of the bank audit process.
Statutory Auditors of banks play an important role in contributing to financial stability, said the RBI in a press statement while adding that quality bank audits are also important for the supervisory process.
In the interest of improving audit quality and with a view to instituting a transparent mechanism to examine accountability of SAs in a consistent manner, it has been decided to put in place a graded enforcement action framework to enable appropriate action by the RBI in respect of the banks’ SAs for any lapses observed in conducting a bank’s statutory audit.RBI Release
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The guidelines say that the regulator will determine the nature of the lapse and materiality of it before pronouncing punitive action. The actions could range from a cautionary notice if lapses are found to be material enough, to auditors being barred from taking on audit assignments for other banks if the violations are material.
If the central bank finds evidence of a serious lapse or violation, it will issue a show cause notice to the auditors and seek a response within 15 days. The auditors will be given a change to present their case and could also be allowed to give an oral hearing if needed.
Once it has heard the auditor's case, the RBI could pronounce a speaking order, detailing the facts of the case, the hearings and the punitive action. The banking regulator would also disclose any enforcement action or cautionary advice against an audit firm to the Institute of Chartered Accountants of India (ICAI).
In case of any other regulator ordering action against an auditor due to lapses, the RBI could also bar them. This would be subject to the the seriousness of the charges against the auditor and if larger public interest is involved, the regulator said in its statement.
The RBI will consider five types of lapses to initiate enforcement action against an audit firm:
- Lapses in carrying out audit assignments leading to misstatement of a bank's financial statements.
- Wrong certification given by auditors.
- Wrong information in long form audit report.
- Case of misconduct by auditors
- Any other violations of RBI guidelines in the matter.
The RBI's framework bank auditors come after divergences in bad loan reporting were detected during the asset quality review conducted in 2015-16. Since then other incidents have come to light. A fraud at Punjab National Bank was detected where multiple letters of undertaking were issued to ineligible borrowers. This went unnoticed by concurrent auditors and statutory auditors.
The audit community is currently self regulated by the ICAI. Explaining its jurisdiction in putting in place a new framework, the RBI said that various statutes stipulate that commercial banks shall obtain RBI approval before appointing auditors.
“In exercise of these statutory powers, in case of those auditors whose audit quality or conduct is not found satisfactory by the RBI, it decides on enforcement action against them by way of not approving their appointments for undertaking statutory audit in commercial banks for a specified period.”