Shun third party route while confirming bank account balances, ICAI tells members

CA Institute has advised its membership to seek direct confirmation from banks as regards account balances of their clients during their statutory audit work. They have been told not to rely on the confirmations that come through the websites/digital channels of third party vendors appointed by some of the banks, sources close to the development said.

It is reckoned that using third party vendors digital confirmation as an audit evidence posed serious risk for auditors as such entities were not regulated and there could be risk of confidentiality of data.

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Currently, different banks are following different methods when it came to confirmation of bank account balances sought by statutory auditors. Some banks give the confirmation directly and some advise auditors to go to their third party vendors, login to their websites (third party vendors), pay the charges and download the confirmation.

Third party confirmation comes through websites of the third party vendors. These third parties are normally fintechs and many auditors have raised an issue with the Institute of Chartered Accountants of India (ICAI) as to how can they rely on fintechs for such account balance confirmation when they are not regulated.

Now, the problem for auditors is that banks are regulated, but the third party vendors are not. The CA Institute has advised its members to only go with the direct confirmation by banks as this is seen to be more reliable, sources in the CA Institute said.

“We have an auditing standard on audit evidence. This says that confirmations obtained directly (from banks) are more reliable. We are now emphasising in a way the application of that standard,” said a top ICAI official.

Third party confirmation

It is felt that there has to be a legal framework where responsibilities and liabilities of third party vendors need to be codified as regards their confirmation of balances.

Also no third party confirmation should be accepted till there is a legal framework for financial intermediaries or something of this sort in place and the third parties are counted as financial intermediaries.

External confirmations have been an important and integral part of audit procedure to obtain sufficient appropriate audit evidence in line with requirement prescribed in various Standards on Auditing (SAs). Over the years, auditors have been using external confirmations to obtain account balances confirmation from various parties (confirming parties) including banks.

Major concern

In recent years, auditors are facing various difficulties in obtaining external confirmations from banks. One of the major concerns in this regard is that some banks are using services of third-party vendors to provide confirmations on their behalf to auditors.

Use of third-party vendors leads to the risk that the information provided by them may not be authentic and complete. Further, it is not clear as to who will be responsible in case there is failure of IT controls at the end of third-party vendors which may impact the integrity of information provided.

These factors raise a question as to who will be held responsible for authenticity and completeness of information provided to auditors, the concerned bank or such third party vendors. Presently, there is no legal framework/guidelines to deal with these aspects.

Thus, auditors are exposed to serious risk, in case they use the confirmation from such third-party vendors as audit evidence, the ICAI has said.

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