Opinion

Long and short of it

Mohan R Lavi | Updated on September 08, 2020

What ails the revised Long Format Audit Report

For many years now, auditors of branches of public sector banks had to fill in a Long Form Audit Report (LFAR), which served as an accompaniment to their main audit report. The LFAR contained an eclectic variety of questions that ranged from the necessary (provisions made for non-performing assets) to the unanswerable (did you observe any frauds during the year?).

This was unanswerable (the clause was modified later) because the branch audit usually takes about a week, and the auditor is expected to comment on frauds observed during the year. Keeping in view the large-scale changes in the size, complexities, business model and risks in banking operations, the RBI recently issued a new set of LFAR formats.

The LFAR acts as a check-list for the auditor. Check-lists run the risk of preventing auditors from going beyond the checklist since they spend a good deal of time answering the questions.

The last question in the revised LFAR goes, “Are there any other matters, which you, as branch auditor, would like to bring to the notice of the management or the Statutory Central Auditors?”. This is a useful question; it enables the auditor to express what he feels in areas that are not covered in the set of examination questions that make up the LFAR.

Too much to handle

The new avatar of the LFAR asks the auditor, “In respect of fraud, based on your overall observation, please provide your comments on the potential risk areas which might lead to the perpetuation of fraud”. It is clear that the RBI has a lot of wisdom on bank frauds as the LFAR goes on to identify the possible areas. Topping the list are falsification of accounts, misappropriation of funds especially through related-party/shell company transactions, forgery and fabrication of financial documents such as invoices, debtor lists, stock statements, trade credit documents, shipping bills, work orders and encumbrance certificates and avail credit, and the use of current accounts outside the consortium to divert funds.

There are more, such as the list of debtors/creditors being fabricated and receivables not being followed up/write off of debt of related parties, and fake export/shipping bill. Auditors should object to this clause; it is impossible for them to look at the diversion of funds during the limited time they spend on the audit. This question suits concurrent and internal auditors. Insertion of such paras forces auditors to give boilerplate responses “According to the management of the bank, there are no identified risk areas that might lead to the perpetration of fraud”. In most instances, by the time the fraud is reported and the head office of the bank swings into action, it is too late. The RBI should ask banks to identify high-risk branches and subject them to a mandatory investigation audit at least once in two years.

The two high-risk areas for any bank are provisions for NPAs and their treasury operations. Ind AS accounting standards mandate that provisions for NPAs should be made on the basis of expected credit losses and not lapse of time, as is the case now.

Treasury investments are reported at fair value, which is a market-based measure. The RBI has been delaying the implementation of Ind AS in banks. It should hasten on that so that financial statements accurately represent the position of banks.

The writer is a chartered accountant

 

Published on September 08, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor