BANK’S GOVERNANCE VIA AUDITORS APPOINTMENT

[Dr. Sanjiv Agarwal]

Reserve bank of India has issued new guidelines for appointment of auditors in Commercial banks and Urban Commercial Banks (UCBs) including public sector banks. This will also apply to Non-Banking Finance Companies (NBFCs) and housing finance companies but exclude Regional Rural Banks (RRBs). Non-deposit NBFC’s with asset size (total assets) below ₹ 1000 crore will have an option to adopt guidelines or continue with present procedure / guidelines.

These guidelines issued on 27.04.2021 under section 30 (1A) of the Banking Regulation Act, 1949 shall be applicable for appointment of Statutory Central Auditors (SCAs) and Statutory Auditors (SAs) from financial year 2021-22 and onwards. Such guidelines shall supersede all earlier guidelines.

The new guidelines have been made applicable from financial year 2021-22 for the first time to UCBs and NBFCs and as such, these entities shall have the flexibility to adopt the same from second half (H2) of the financial year to avoid disruption, if any.

Salient Features of Guidelines

Applicability

• Prior approval of RBI shall be required
• Commercial banks and UCBs (not RRBs) to take prior approval for appointment / re-appointment of SCAs /SAs.
• Approval on annual basis to be obtained before 31 July of concerned year.
• PSBs to apply for approval within 30 days of receipt of list of eligible auditors.
• NBFC’s are not required to take RBI nod but need to inform RBI about appointment of SCAs /SAs for each year within one month in prescribed form.

Number of Auditors

• The minimum number of auditors shall be based on asset size of previous year as follows:

Slab of asset size	No. of Auditors
Upto ₹ 15 crore	1
15 crore – upto ₹ 5 lakh crore	4
Above ₹ 5 lakh crore up to ₹ 10 lakh crore	6
Above ₹ 10 lakh crore upto ₹ 20 lakh crore	8
Above ₹ 20 lakh crore	12

The audits shall be joint audit’s with unrelated audit firms having no common partner.

• Banks shall decide the work allocation between firms in consultation with them in advance.
• Number of joint auditors shall be decided based upon Board approved policy taking into account the factors such as:

• Size and spread of assets
• Accounting and administrative units
• Complexity of transactions
• Level of computerization
• Audit inputs
• Identified risk in financial reporting etc.

• Banks shall ensure that number of auditors appointed are adequate, commensurate with asset size and extent of operations, with a view to ensure that audit is conducted in a timely and effective manner.
• Auditors shall be required to conform to the prescribed eligibility norms.
• Audit of accounts of branches of banking companies and NBFC’s shall be subject to the provisions of section 143 (8) of the Companies Act, 2013.

Auditors Independence

• It shall be mandatory for the Audit Committee of the Board (ACB) to monitor and assess  the independence of auditors and conflict of interest in terms of regulatory framework, standards and best practices. Any concerns shall be flagged to Board/RBI.
• In other cases, where ACB is not there, such responsibility shall be on the Board.
• In case of non-supply of any information or non-cooperation by the management, which may hamper the audit process, SCAs/SAs can approach the ACB / Board under  intimation to concerned RBI office.
• To be independent, concurrent auditors shall not be considered for appointment of SCAs /SAs.
• Time gap between any non-audit works, internal assignments, special assignments etc of SCAs /SAs for banks /NBFCs and any audit or non audit work for its group entities shall be atleast one year before or after the appointment.
• During the tenure as SCAs/SAs, audit firm may provide such services which may not normally result in conflict of interest and in that case, entities may take a decision in consultation with ACB /Board.

Professional Standards

• SCA’s /SAs shall have to follow professional standards to discharge their audit responsibilities with highest diligence.
• The performance of auditors shall be subject to review by ACB or board and any serious cases of negligence or lapses in discharge of audit responsibilities including conduct of SCAs /SAs shall be reported to RBI within 2 months from date of completion of audit. Such reporting shall be done with approval of ACB/Board with full details of audit firm.
• Appropriate action can be taken under the statutory /regulatory framework against the auditors if the lapses result in misstatement of financial statements and any violation in RBI direction /guidelines.

Tenure of Auditors

• To ensure independence, SCAs /SAs shall be appointed for a continuous period of three years subject to their fulfilling eligibility norms every year.
• Banks and UCBs can remove the auditors during their tenure subject to prior approval of RBI. NBFCs can remove the auditors and inform the RBI with reasons for such removal within a period of one month of taking such decision.

Rotation of Auditors

• An Audit firm will not be eligible for reappointment in same entity for six years (2 terms of 3 years each) after completion of full or part of one term of audit tenure. However, firms can continue to undertake statutory audit of other entities.
• During a particular year, one audit firm can concurrently take up statutory audit of a maximum of :

• 4 commercial banks (including one PSB or one all India financial institution – NABARD, SIDBI, NHBI, Exim Bank, or RBI
• 8 UCBs (excluding other cooperative societies)
• 8 NBFCs

Audit Fees and Expenses

• Audit fees shall be subject to relevant statutory / regulatory provisions.
• In case of PSBs, RBI guidelines will be applicable.
• ACB /Board shall make recommendations to the competent authority for fixing audit fees.
• Audit fees shall be reasonable and commensurate with 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.

Policy & Procedure for Auditors

• Each entry shall have a Board approved policy and procedure for :

• Appointment of SCAs/SAs
• Affording transparency and objectivity to key aspects of assurance purposes
• Hosting it on website /public domain

The RBI guidelines also prescribe eligibility criteria and minimum procedural requirements for appointment etc. It is expected that the new RBI guidelines on appointment of auditors of banks, banking companies, UCBs and NBFCs will bring in greater transparency, objectivity and independence in audit function and also improve quality of attestation, reduce conflict of interest and possible nexus between auditors and auditee. In a way, new guidelines will also facilitate good governance in banking entities.