True and fair?

Reading the annual report of a company can be daunting, with all the disclosures thrown in. If it is the report of a banking company, trying to understand the document can be an exercise in futility. Sample the 2014 Annual Report of Deutsche Bank; it runs to a total of 515 pages in a font that is just about readable. The Management Report takes up about 307 of these pages, out of which the Risk Report runs to around 200 pages — about 39 per cent of the annual report.

American industrialist J Paul Getty once said, “If you owe the bank 100 dollars, it’s your problem. If you owe the bank 100 million dollars, it’s the bank’s problem”. This statement aptly summarises the inherent risks in banking. Since banks deal with others’ money most of the time, almost everything can be a risk for them.

It would be impossible for the common man to comprehend all the risks that a bank goes through despite best-in-class disclosures.

Regulators in other countries seem to have found a solution — apart from an audit of financial statements, auditors are to check contents of the management report (MR) as well. The lingua franca of the audit of the MR follows the mantra of all audit reports — first disclaim, then comment.

The auditors report that they have audited the accompanying group management report — in the preparation of which the management of the bank is responsible — in compliance with the applicable requirements. They state that they have conducted the audit in accordance with generally accepted standards for the audit of the group management report promulgated.

Accordingly, they are required to perform the audit of the group MR to obtain reasonable assurance about whether the group MR is consistent with the consolidated financial statements and the audit findings, and as a whole provides a realistic view of the group’s position and suitably presents the opportunities and risks of future development. They state whether the audit of the group management report has led to any reservations or not.

They conclude that, based on the findings of our audit of the consolidated financial statements and group management report, the group management report is consistent with the consolidated financial statements, and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.

The position of banks in India has been widely commented on. Like all banks, they face the same bouquet of risks including some desi ones such as a category of borrowers christened as wilful defaulters. As per the instructions of the RBI, banks provide a good deal of data on the risks they face in their financial statements.

Auditors in India only comment on the ‘true and fair’ nature of financial statements, not on the MR, which contains a great deal of information about the activity and management of banks.

Apart from risks, the MR provides information on internal control over financial reporting, social responsibility, compensation management and corporate governance. Banks are regulated through a bevy of instructions and circulars from the RBI, all of which ultimately result in the MR. It may be a good idea for the RBI to ask auditors to comment on the contents of the MR. It may not prevent the bank from bad lending, but it may prevent the bank from bad reporting.

The writer is a chartered accountant

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