Central Auditing of the Banks – Will New Rules Rein Auditors From Their Arm Twisting Methods OR It Will Help Bank Management to Further Manipulate NPAs and Other Statutory Provisions? by Rajesh Goyal
The new Financial Year has just ushered in. This is the time when the whole banking industry will be busy in closing work and the annual audit of the accounts. Among various types of the audits, one of the most dreaded annual audit is the audit by Central Auditors of the Bank.
The bankers who have handled the work of audit work at Finance Division / Balance Sheet Division at Head Office level and at Regional Offices will vouch as to how difficult it is to handle such audit parties purely due to arrogance of these auditors and the pressure of the top management to keep them in good humor so that NPAs and other provisions can be kept under check. Problems arise not on account of the work load of auditing, but on account of the attitude and demands of these auditors. Even the trainees who come alongwith such auditors behave in most arrogant manner. You can easily hundreds of stories where these auditors to squeeze bankers to yield to their demands.
The general perception about central auditors of the banks across the banking industry is poor reputation, as bankers from their experience tell that these auditors are ready to compromise on number of issues in lieu of certain pecuniary and non pecuniary benefits. A whole lot of staff works beyond working hours with all sorts of eatables, transport made available to them till the balance sheet is finalized. These auditors try to squeeze the bank staff to the maximum level.
In view of the above, I thought of educating banking officers about some of the guidelines relating to these auditors and recent changes on this subject.
In late 2014, new guidelines have been issued by GoI for appointment of the Central Auditors. Govt. of India vide their letter No. F No. 1/14/2004-BOA dated 25/11/2014 issued by Ministry of Finance, Department of Financial Services, informed that the issue of appointment of Statutory Central Auditors (SCAs) in Public Sector Banks (PSBs) has been revisited. Govt. has decided that the work of selection and appointment of SCAs will be delegated to individual PSBs for the year 2014-15 and onwards. Reserve Bank of India will provide criteria for selecting SCAs to PSBs, keeping in view the policy parameters in this regard. C & AG will provide the list of auditors available with them and PSBs can make selection out of the list with previous approval of RBI.
Thus now under the revised, banks would have to directly source the names of auditors from the panel available with the Comptroller and Auditor General (CAG) for SCAs while the names for branch auditors would have to be obtained from the Institute of Chartered Accountants of India (ICAI). [In the previous years, CAG used to empanel the SCAs and then send the list to RBI for appointment]. This move is a part of an enhanced autonomy package for PSBs, However, Finance Ministry has stipulated that the bank board’s must obtain prior approval of the central bank before making the final appointment. Moreover, RBI would continue to fix the norms and remuneration for SCA and branch auditors.
These new rules have come under lot of scrutiny as these can have a lot of impact on the status of NPA and other provisions required to be certified by central auditors. Now with the introduction of a freedom to PSB to choose their own sweet will auditors, it is likely to have lot of impact on the way the Central Auditors can be pressurized by top management to toe their line of thinking. In the long run it can even compromise and jeopardize the future of banking sector. At the same time, these auditors will have to shed some part of their ego as they have to remain in good books of the management so that they can continue to remain in the panel for the years to come. Moreover, the feedback that will be given by the respective banks to RBI and that may be shared with other banks verbally by CMDs of banks, can enhance or mar their chances of getting regular work of central auditors.
However, the new guidelines remain same for Statutory Branch Audits. It is likely that PSBs will continue to follow the existing norms and procedures wherein the Statutory branch audit of PSBs is usually carried out for all branches with advances of 20 Crore & above and 1/5th of the remaining branches covering a representative cross section of rural/semi-urban/urban and metropolitan branches, predominantly including branches which are not subjected to concurrent audit, so as to cover 90% of advances of a bank.
Conclusion :
This is a good sign that banks have been given some freedom in choosing the central auditors, but opaque procedure adopted by PS Banks in appointments will be liable to be charged with corrupt practices, and soon their may be clamor that new procedure should be scrapped as CAs will be at the mercy of management and now management will be in a better position to arm twist the CAs appointed by them as central auditors. It can lead to more hiding of NPAs and less provisions and thereby inflating the profit figures. Therefore, there is a need for more transparent rules and procedures to be adopted by each bank in selecting a new set of central auditors.
Thus, the impact of this changes will be known only after we have experienced the same in next couple of years or so.
Annexure
We are giving below the detailed guidelines and procedures for appointment of central auditors for 2014-15. This will clarify many issues for the officers who are directly dealing with these auditors, and a halo created by such auditors will vanish from the minds of many officers.
Norms on eligibility, empanelment and selection of Statutory Central Auditors in Public Sector Banks
(i) The audit firm shall have a minimum 7 full time chartered accountants, of which at least 5 should be full time partners exclusively associated with the firm. The remaining 2 could be either exclusive partners or CA employees with a continuous association with the firm for a period of one year. These partners should have minimum continuous association with the firm i.e. one each should have continuous association with the firm at least for 15 years and 10 years, two with a minimum of 5 years each and one with a minimum of one year. Four of the partners should be FCAs. Also at least two of the partners should have minimum 15 and 10 years experience in practice. (In case the paid Chartered Accountant available with the firm without any break was admitted as a partner of the said firm at a future date, his association with the firm as a partner will be counted from the date of his joining the firm as a paid Chartered Accountant.)
(ii)The number of professional staff (excluding typists, stenographers, computer operators, secretary/ies and sub-ordinate staff etc.), consisting of audit and articled clerks with the knowledge in book-keeping and accountancy and are engaged in outdoor audit should be 18.
(iii)The standing of the firm should be of at least 15 years which would be reckoned from the date of availability of one full time FCA continuously With the firm.
(iv)The firm should have minimum statutory central audit experience of 15 years of Public Sector Banks (before or after nationalisation) and/ or by way of statutory branch audit thereof or that of statutory audit experience of a private sector bank with deposits resources of not less than Rs,500 crore. (In case any of the partner of an audit firm is nominated / elected for a period of at least 3 years or more on the Board of any public sector bank then his / her such experience for a maximum period of three years will be considered as bank audit experience, provided such experience has not been earned by him/ her concurrently i.e. when his / her firm was assigned statutory audit of any P813. select all India financial Institutions or RBI.)
(v) The firm should have statutory audit experience of 5 years of the Public Sector Undertakings (either Central or State Government undertaking).
(While calculating such experience, more than one assignment given to a firm during a particular year or more than ope year’s statutory audit (audits in arrears) assigned to the firm will be reckoned, as one year experience only, for the purpose of counting such experience.)
(vi) At least two partners of the firm or its paid Chartered Accountants must possess CISA / ISA qualification.
Note- C&AG will empanel the Audit Firms based on the above parameters as on January 1 of the relevant year and send the panel to RBI.
PROCEDURE FOR APPOINTMENT OF STATUTORY AUDITORS IN PUBLIC SECTOR BANKS
Statutory Central Auditors (SCAs)
1 The number of SCAs to be appointed in PSB will be as under
i) Category “A” Banks (Large Banks viz. Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank, Central Bank-of India and Union Bank of India) shall not have more than 6 SCAs. However, in case of SBI the number of SCAs shall not be more than 14.
ii) Category “B” Banks (Medium Banks viz. Allahabad Bank, Corporation Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce. Syndicate Bank and UCO Bank) shall not have more than 5 SCAs, and;
iii) Category “C” Banks (Small Banks viz. Andhra Bank, Bank of Maharashtra, Dena Bank, Punjab & Sind Bank, United Bank of India, Vi)aya Bank, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) shall not have more than 4 SCAs.
Actual numbers of SCAs to be appointed can be decided by respective boards subject to the above limit.
2. The cooling off period after completing the term of three years as SCA will be of three years.
3. The appointment of SCAs will be made on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time to time and also subject to their suitability
4. The Government has decided that from the financial year 2014-15, selection and appointment of SCAs is delegated to individual Public Sector Banks.
5. The procedure that will be followed for selection of SCAs by the PSBs is as under
a) The eligible list of firms furnished by C&AG every year will be examined by RBI.
b) RBI will verify that the firm has minimum bank audit experience of 15 years from its records.
c) RBI will prepare separate list of rested, continuing and non continuing eligible audit firms after excluding the name of firms who have been denied audit by RBI/C&AG and the firms who have declined the offer of appointment given by Public Sector Banks. The list of non continuing eligible audit firms will be further split up into list of experienced audit firms and new audit firms. Reserve bank will be giving Public Sector Banks i) List of Continuing Firms (i.e. the list of audit Firms who have not completed three years of audit; ii) List of firms who are undergoing rest cooling; iii) List of eligible, non continuing audit firms in two parts viz. experienced audit firms and new audit firms.
d) The audit firms applying for empanelment as SCAs in PSBs will be required to give an undertaking that, in case of selection in PSBs, they would give up the existing assignment, if any, in Private Banks/Foreign Banks/RBI/Financial Institutions such as National Housing Bank, EX1M Bank etc. and they cannot refuse appointment of PSBs once selected.
e) The allotment of vacancies of SCA’s shall be in the ratio of 60:40 between ‘Experienced ‘ and New audit firms. As regards ratio of 60:40, banks will round the number to the nearest round number and choose auditors from the ‘Experienced’ and New firm list. For this purpose, an ‘Experienced’ firm is one which has a Statutory Central Audit experience of any of the Public Sector Banks and New Firm’ is one who does not have such experience.
f) While making final selection, the PSBs will take into consideration the following points:-
i) To the extent possible, at least two audit firms having their Head Office from the same place where the banks’ HO/CO is located, to be allocated
ii)Audit firms are not selected if they have retired from the same bank before going under rest
iii) The firms whose partner/s are on the Boards of PSBs are not appointed as auditors for the same PSB.
iv) In case of SBI, only experienced audit firms are considered as SCAs.
v) An audit firm is eligible to be appointed as a Central/ Branch auditor of only one PSB during a particular year.
6. Audit firm(s) selected by the PSBs after obtaining consent in writing from the audit firm will be debarred for a period of 3 years for selection if the firm refuses to accept the appointment without a reasonable ground, that is ground not to the satisfaction of RBE.
7. The above norms will be implemented during the selection process of SCAs for the year 2014-15 and onwards.
8. After selection, as per the statutory requirement, banks, in turn, are required to forward the names of the selected SCAs to RBI for its prior approval before their actual appointment.
9. A feedback on the quality of audit of SCAs may be given by PSBs to RBI after the annual audit of banks
10. Other guidelines
i) In order to protect the independence of the auditors/audit firms, banks will have to make the appointments of SCA for a continuous period of three years subject to the firms satisfying the eligibility norms each year. Banks cannot remove the audit firms during the above period without the prior approval of the Reserve Bank of India.
ii) All PSBs are required to have a Board approved policy for appointment of statutory auditors and the same may be hosted on the bank’s web-site. Banks are also required to ensure that the policy framed by the Board in the matter of selection of auditors/audit firms for appointment of auditors is strictly adhered to Further, the list of firms selected for appointment as statutory central auditors may be placed before the ACB for its concurrence before it is forwarded to RBI for final approval.
Note : A full time partner does not include a person who is:
(1) A partner in other firms.
(2) Employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice under Section 2 (2) of the Chartered Accountants Act, 1949.