Mumbai: The Reserve Bank of India, or RBI, has prohibited the statutory auditors of a bank from carrying out any consultancy work for the bank to avoid a possible conflict of interest.
A statutory auditor is an independent firm authorized by a company’s board, shareholders and regulators to check its financial health.
Clearing the air: The Reserve Bank of India’s New Delhi office. Its directive comes a week after it asked banks to state whether Price Waterhouse, Satyam’s auditor, was acting as a consultant or auditor for them. Harikrishna Katragadda / Mint
In a communication sent to chief executive officers of banks on Friday, the central bank directed them not to assign any consultancy work to their statutory auditors. “This is a pre-emptive measure to avoid any conflict of interest,” said a senior RBI official who did not want to be named as he is not the official spokesperson for the central bank. “Banks could give the auditors other deals to soften up the auditing process. We are trying to put checks and balances to avoid any wrongdoing,” the RBI official added.
He cited instances where banks in the past used their statutory auditors to validate their risk management practices. The statutory auditor of an old private sector bank also conducted due diligence on it in the past on behalf of a foreign player seeking to invest in it.
This directive comes a week after RBI asked banks to state whether Price Waterhouse, auditor for the tainted software company Satyam Computer Services Ltd, was acting as a consultant or auditor for them or any of their units in the current fiscal year.
The RBI directive, which reached banks on 16 January, says: “The issue relating to the internal assignments allotted to the audit firms at the time of their appointment as statutory auditors has been examined afresh. Audit firms should not undertake statutory audit assignment while they are associated with internal assignments in the bank during the same year. In case the firms are associated with internal assignment it should be ensured that they relinquish the internal assignment before accepting the statutory audit assignment during the year.”
RBI has put up the directive on its website too.
Bobby Parikh, managing partner, BMR and Associates, a professional services firm, said: “This directive does not prevent firms from undertaking consultancy work for other banks for whom they are not acting as statutory auditors. This practice is followed in many other geographies and should not have any major impact on the businesses of audit firms.”
A senior official handling compliance at a private sector bank said: “This was a convenient practice for banks as they already have an existing relationship with the firm. Appointing another firm for consultancy is a costly affair as such firms charge on a per-hour basis.” The official requested anonymity because of the sensitivity of the subject.
According to him, by appointing the statutory auditors as consultant, banks can also put pressure on the firm if it is “too probing” by threatening not to reappoint it as auditors.