‘How bank treats NPA interest not for borrower to interpret’

NFRA said defaulters are not free of the obligation to recognise interest liability as banks are required to maintain a record of accrued interest on bad loans and do not release the borrower from the contractual liability to pay interest.

NFRA said in a disciplinary order issued against a Jharkhand-based audit firm and a chartered accountant that the contention of auditors that since no interest was being charged by the bank, there was no obligation on the audited company to recognize interest cost, was not correct.

The auditors are completely wrong in their assumption that the lending bank did not charge interest on the borrowings classified as non performing assets (NPAs), NFRA said. The banks do discontinue, in their accounts, the recognition of interest income on the assets classified as NPAs based on the prudential norms of the RBI, explained NFRA.

“However, RBI guidelines also require the banks to maintain a memorandum record of accrued interest on the NPAs, clearly reflecting the fact that the bank has not legally released the borrower from their contractual liability to pay interest...," the audit watchdog explained in its order posted on its website.

The outstanding balance of the customer will include the interest charged by the bank on such borrowings along with some penal interest as per the contract between the customer and the bank, NFRA said.

“This accounting treatment by the lending bank cannot be a premise for the borrower to stop accruing the interest liability in their books of accounts. The borrower will continue to be covered by the provisions of Indian Accounting Standard (Ind AS) 109 in relation to discharge of a liability..," the audit regulator said.

The watchdog has been trying to create awareness about auditor independence norms. NFRA wants auditors to exercise professional skepticism and do thorough due diligence of the financial statements they are certifying. NFRA has also made the point that quitting an audit assignment does not absolve the auditor of his responsibility to report any fraud that has come to her notice.

“Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity. Without a credible audit, investors, creditors and other users of financial statements would be handicapped," the regulator said.

The entire corporate governance system would fail and result in a breakdown in trust and confidence of investors and the public at large if auditors do not perform their job with professional skepticism and due diligence and adhere to the standard, NFRA said.