Statutory auditors may have cause for cheer as a new mechanism in the form of a common balance confirmation portal is now being put in place to provide “external confirmation of balances” for aiding the audit of financial statements.
Over the years, auditors have been using “external confirmations” to obtain balance confirmations in respect of accounts receivables, accounts payables, bank balances, loans, investments or inventories held by third parties, etc. from various parties, including banks. Put simply, external confirmations means audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
The need for a mechanism has been felt because there is no standardised process or format for obtaining balance confirmation from banks. Thus, auditors are exposed to risk if they use incomplete confirmation as audit evidence. There have been scams on account of this, most notably the Satyam Computers corporate scandal in 2009, where bank balance confirmation was a significant audit failure that contributed to the overall fraud. Satyam’s founder and chairman, Ramalinga Raju, had manipulated the company’s financial statements to inflate profits and assets.
To prevent such scandals and also to streamline the process, the proposed common platform for balance confirmation will be jointly owned by the Indian Banks’ Association (IBA) and the Institute of Chartered Accountants of India (ICAI). It will initially cover only public sector banks but be later extended so as to cover private sector banks and financial institutions as well, sources said.
The task of development and maintenance of the platform has been entrusted to PSB Alliance Pvt. Ltd. (PSB Alliance), which will in turn work with the Institute for Development and Research in Banking Technology (IDRBT).
“Our Council has approved this initiative. This move to set up a common platform for balance confirmation is a very big step. It has the blessings of the Reserve Bank of India. It is another big move under Digital India”, Aniket Sunil Talati, President, ICAI, told businessline.
The PSB Alliance is a joint venture umbrella entity created and held exclusively by all 12 public sector banks. It is part of the larger public sector bank set up in India.
Audit evidence in the form of “external confirmations” received directly by the auditor from confirming parties is considered more reliable than evidence generated internally by the entity.
Benefits of common portal
The common portal will have regulatory force. Under the proposed system, there will be a regulatory set-up comprising ICAI, IBA, PSB Alliance Pvt. Ltd., and IDRBT. Banks will take responsibility for balance confirmations.
Also, no cost will be levied on auditors for obtaining balance confirmations. Other benefits to auditors would include the portal being highly efficient, having higher reliability, and resulting in appropriate authentication.
Once the portal goes live, auditors need not worry about the risks associated with external confirmations of account balances.