According to RBI, the grades enforcement action framework for bank auditors is ‘with a view to instituting a transparent mechanism to examine accountability of SAs (statutory auditors) in a consistent manner’. Photo: Aniruddha Chowdhury/Mint
According to RBI, the grades enforcement action framework for bank auditors is ‘with a view to instituting a transparent mechanism to examine accountability of SAs (statutory auditors) in a consistent manner’. Photo: Aniruddha Chowdhury/Mint

RBI targets bank auditors with new oversight framework

RBI targeting bank auditors is a departure from its earlier stance where it typically held only banks responsible for bad loan divergences

Mumbai: The Reserve Bank of India (RBI) has released a framework for bank auditors that proposes enforcement action on auditors if they are found lapsing in their duties. According to RBI, the grades enforcement action framework for bank auditors is “with a view to instituting a transparent mechanism to examine accountability of SAs (statutory auditors) in a consistent manner".

RBI targeting auditors is a departure from its earlier stance where it typically held only banks responsible for asset classification and bad loan divergences observed during inspection. This means that in instances of divergences, bank auditors too would be questioned, examined and later penalised if found lapsing.

In 2017, the central bank asked three private banks—Yes Bank Ltd, Axis Bank Ltd and ICICI Bank Ltd—to disclose bad loan divergences, while the conduct of bank auditors was taken up by the Institute of Chartered Accountants in India (ICAI).

In its annual report for 2016-17, Yes Bank said its bad loan classification at the end of March 2016 varied from that of RBI’s by 4,176 crore. This was 558% more than the 748.9 crore of bad loans it had reported for that year. Similarly, Axis Bank’s bad loan divergence was 156%, or 9,478 crore, in FY16 while ICICI Bank’s was 19.5%, or 5,105 crore.

The grades enforcement action framework will allow RBI direct oversight on bank auditors.

“If the audit quality or conduct of a statutory auditor is not found satisfactory, the RBI will enforce action against them by way of not approving their appointments for undertaking statutory audit of banks for a specified period," said RBI in the circular.

Lapses that will lead to penal action include oversight in carrying out audit assignments resulting in misstatement of financial statements, giving wrong certifications and wrong information in the long form audit report, misconduct while on audit assignments and any other violations of RBI directions, said the banking regulator in the circular.

RBI will also not allow auditors to conduct bank audits if they have been debarred by other regulators, law enforcement and government agencies.

This means that the PwC group of auditors may not be able to audit banks as it is facing regulatory action from markets regulator Securities and Exchange Board of India (Sebi) for its role in Satyam scam. PwC has appealed against the Sebi order at the Securities Appellate Tribunal (SAT).

Separately, Sebi is also going to issue a discussion paper for auditors of listed companies. This will include governing principles of auditor role, responsibilities and penal action.

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