The Hindu Business Line : Shifts for good?

AUDIT of banks has always been an area of opportunity for the accounting fraternity in India. The lucrative central statutory audits, remunerative audits of big branches of banks and audits that ensure that the working capital of an accounting firm keeps flowing — concurrent audits — have been the core areas of competency of accountants.

The Reserve Bank of India (RBI), in consultation with the Institute of Chartered Accountants of India (ICAI) and the Comptroller and Auditor General of India (CAG), used to appoint auditors for central statutory audits and branch audits while the others were allotted by the branch round the corner.

Winds of change appearto be hitting this process, with the Finance Ministry permitting the boards of public sector banks (PSBs) to appoint auditors. The ICAI has protested against this move arguing that it would put fetters on the independence of auditors.

While this argument may not hold water, since independence is pre-assumed in auditors irrespective of the entity signing the appointment letter, a look at the changes suggest that all that the Finance Ministry has done is to complicate the process.

The argument of the ICAI is that even under the Companies Act, it is the shareholders who appoint the auditor and not the board.

The Finance Ministry has asked the boards of PSBs to take a two-pronged approach — source the database of auditors from the CAG in case of central statutory audits and from the ICAI in case of branch audits. With this database and their choice, the bank is supposed to obtain approval from the RBI before making the final appointment.

The RBI still holds the power to fix the norms for the empanelment and remuneration of both central statutory auditors.

This is in contrast to the existing system, whereby the CAG would empanel auditors and send the list to the RBI for appointment in case of central statutory auditors whereas for branch auditors the ICAI list was being used by the RBI.

All that the new system appears to have done is to shift the onus of sourcing and sending the list of auditors from the CAG/ICAI to the boards of the bank.

As an option, the Ministry states that banks that want the old system to continue can opt for it.

If all that the Ministry wanted was to shift the responsibility from one entity to the other, it could have permitted the existing system to continue.

Audit firms would be a touch happy if the same provisions are applied to the audit of Central Government companies also since there is a dire need to keep the audit fees of government companies at market rates instead of the medieval rates prevalent now.

Central statutory auditors of banks are typically large firms that have a large number of partners apart from satisfying other criteria.

Firms that match these criteria can be identified easily irrespective of who sources the database. There could be a few firms that meet the criteria annually and they could be added to the existing database.

It would be in the interests of the bank to let the RBI continue to appoint and oversee the central statutory auditors of banks since they sign the balance-sheet of the bank and would have to take some responsibility for the numbers given therein.

The fact that a few banks like the erstwhile Global Trust Bank have gone under in spite of having the best of auditors reconfirms the fact that the RBI needs to be involved in the case of central statutory audits. As far as branches are concerned, even in the present dispensation it is the head office/zonal office of the bank that allots audits to firms and not the RBI.

In effect, the new provisions do not promise much. All that the Ministry needs to do is to continue with the present system of getting the RBI involved as far as central statutory auditors are concerned with a database that can be sourced from the ICAI.

Banks can obtain the list of other auditors from the ICAI for the purpose of allotments.

The need for the CAG to give a database that is collected from the ICAI appears needless. The RBI (as the regulator), the ICAI (as the regulator of its members) and the bank (as the auditee) need to be the only three entities involved in the process

(The author is a Hyderabad-based chartered accountant.)