Bank auditor appointments. RBI’s FAQs addresses some key concerns

The Reserve Bank of India (RBI) has clarified that its “one year look back” stipulation introduced in its April 27 circular on appointment of statutory auditors in public sector banks, Urban Cooperative Banks and NBFCs will only be applicable prospectively, that is, from financial year 2022-23.

This look back stipulation was introduced to ensure that the audit firm had not provided any non-audit services to the Group entities during the 12 months period before the audit firm was appointed in the bank or NBFC concerned.

RBI clarifies

The RBI has now, in the Frequently Asked Questions (FAQ) on the April 27 circular, clarified that this look-back condition will not apply for auditor appointments for FY 2021-22.

In another significant clarification, the RBI has modified the earlier April 27 prescribed blanket kind of restriction on appointment of audit firms as auditors of banks and NBFCs in situations where the concerned audit firm had provided audit or non-audit service to any group entity of that bank or NBFC.

Cap on assignments

While earlier this norm was seen to be applicable across the Group, the RBI has now in the FAQ made it clear that this restriction does not apply to all group entities, but applies only to entities in the Group that are RBI regulated.

Also, the central bank has in the ‘Frequently Asked Questions’ issued on its April 27 circular made it clear that the cap (upper limit) on number of assignments an audit firm can undertake in a year in respect of banks, UCBs and NBFCs are applicable for audit of all RBI regulated entities, irrespective of their asset size. It maybe recalled that April 27 circular of RBI had stipulated that an audit firm cannot do audit of more than four commercial banks, eight NBFCs and eight UCBs in a year.

Experts’ speak

Jamil Khatri, Partner, BSR& Co LLP, said the concerns of the industry in the areas of the short rotation period, the requirements for joint audit and the cap on the number of audits that can be done by an audit firm, have not been addressed in the current set of clarifications.

Amarjit Chopra, former CA Institute President, said that RBI’s clarification on the one year look back norm and also on the group entity aspect is quite pragmatic and will provide flexibility in the appointment of auditors.

Ashok Haldia, former Secretary of the CA Institute, said that the FAQ has opened the door for an audit firm engaged in audit/non-audit work of group entity (not regulated by RBI) to be appointed as statutory auditor of any of the RBI regulated entity within the group. However, the board/audit committee may find it challenging to assess and take responsibility that there is no conflict of interest and independence of auditor is ensured, as required in FAQ, as in most cases it may be difficult to disentangle explicit and implicit relationship that exists between group entities. These may find it difficult to justify in case doubt arises in future, he added.

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