The new Financial Year has just ushered in. This is the time when the whole banking industry will be busy in closing work and the annual audit of the accounts. Among various types of the audits, one of the most dreaded annual audit is the audit by Central Auditors of the Bank.
The bankers who have handled the work of audit work at Finance Division / Balance Sheet Division at Head Office level and at Regional Offices will vouch as to how difficult it is to handle such audit parties purely due to arrogance of these auditors and the pressure of the top management to keep them in good humor so that NPAs and other provisions can be kept under check. Problems arise not on account of the work load of auditing, but on account of the attitude and demands of these auditors. Even the trainees who come alongwith such auditors behave in most arrogant manner. You can easily hundreds of stories where these auditors to squeeze bankers to yield to their demands.
The general perception about central auditors of the banks across the banking industry is poor reputation, as bankers from their experience tell that these auditors are ready to compromise on number of issues in lieu of certain pecuniary and non pecuniary benefits. A whole lot of staff works beyond working hours with all sorts of eatables, transport made available to them till the balance sheet is finalized. These auditors try to squeeze the bank staff to the maximum level.
In view of the above, I thought of educating banking officers about some of the guidelines relating to these auditors and recent changes on this subject.
In late 2014, new guidelines have been issued by GoI for appointment of the Central Auditors. Govt. of India vide their letter No. F No. 1/14/2004-BOA dated 25/11/2014 issued by Ministry of Finance, Department of Financial Services, informed that the issue of appointment of Statutory Central Auditors (SCAs) in Public Sector Banks (PSBs) has been revisited. Govt. has decided that the work of selection and appointment of SCAs will be delegated to individual PSBs for the year 2014-15 and onwards. Reserve Bank of India will provide criteria for selecting SCAs to PSBs, keeping in view the policy parameters in this regard. C & AG will provide the list of auditors available with them and PSBs can make selection out of the list with previous approval of RBI.
Thus now under the revised, banks would have to directly source the names of auditors from the panel available with the Comptroller and Auditor General (CAG) for SCAs while the names for branch auditors would have to be obtained from the Institute of Chartered Accountants of India (ICAI). [In the previous years, CAG used to empanel the SCAs and then send the list to RBI for appointment]. This move is a part of an enhanced autonomy package for PSBs, However, Finance Ministry has stipulated that the bank board’s must obtain prior approval of the central bank before making the final appointment.
Moreover, RBI would continue to fix the norms and remuneration for SCA and branch auditors.
These new rules have come under lot of scrutiny as these can have a lot of impact on the status of NPA and other provisions required to be certified by central auditors. Now with the introduction of a freedom to PSB to choose their own sweet will auditors, it is likely to have lot of impact on the way the Central Auditors can be pressurized by top management to toe their line of thinking. In the long run it can even compromise and jeopardize the future of banking sector. At the same time, these auditors will have to shed some part of their ego as they have to remain in good books of the management so that they can continue to remain in the panel for the years to come. Moreover, the feedback that will be given by the respective banks to RBI and that may be shared with other banks verbally by CMDs of banks, can enhance or mar their chances of getting regular work of central auditors.
However, the new guidelines remain same for Statutory Branch Audits. It is likely that PSBs will continue to follow the existing norms and procedures wherein the Statutory branch audit of PSBs is usually carried out for all branches with advances of 20 Crore & above and 1/5th of the remaining branches covering a representative cross section of rural/semi-urban/urban and metropolitan branches, predominantly including branches which are not subjected to concurrent audit, so as to cover 90% of advances of a bank.
Conclusion :
This is a good sign that banks have been given some freedom in choosing the central auditors, but opaque procedure adopted by PS Banks in appointments will be liable to be charged with corrupt practices, and soon their may be clamor that new procedure should be scrapped as CAs will be at the mercy of management and now management will be in a better position to arm twist the CAs appointed by them as central auditors. It can lead to more hiding of NPAs and less provisions and thereby inflating the profit figures. Therefore, there is a need for more transparent rules and procedures to be adopted by each bank in selecting a new set of central auditors.
Thus, the impact of this changes will be known only after we have experienced the same in next couple of years or so.
Annexure
We are giving below the detailed guidelines and procedures for appointment of central auditors for 2014-15. This will clarify many issues for the officers who are directly dealing with these auditors, and a halo created by such auditors will vanish from the minds of many officers.
Norms on eligibility, empanelment and selection of Statutory Central Auditors in Public Sector Banks
(i) The audit firm shall have a minimum 7 full time chartered accountants, of which at least 5 should be full time partners exclusively associated with the firm. The remaining 2 could be either exclusive partners or CA employees with a continuous association with the firm for a period of one year. These partners should have minimum continuous association with the firm i.e. one each should have continuous association with the firm at least for 15 years and 10 years, two with a minimum of 5 years each and one with a minimum of one year. Four of the partners should be FCAs. Also at least two of the partners should have minimum 15 and 10 years experience in practice. (In case the paid Chartered Accountant available with the firm without any break was admitted as a partner of the said firm at a future date, his association with the firm as a partner will be counted from the date of his joining the firm as a paid Chartered Accountant.)
(ii)The number of professional staff (excluding typists, stenographers, computer operators, secretary/ies and sub-ordinate staff etc.), consisting of audit and articled clerks with the knowledge in book-keeping and accountancy and are engaged in outdoor audit should be 18.
(iii)The standing of the firm should be of at least 15 years which would be reckoned from the date of availability of one full time FCA continuously With the firm.
(iv)The firm should have minimum statutory central audit experience of 15 years of Public Sector Banks (before or after nationalisation) and/ or by way of statutory branch audit thereof or that of statutory audit experience of a private sector bank with deposits resources of not less than Rs,500 crore. (In case any of the partner of an audit firm is nominated / elected for a period of at least 3 years or more on the Board of any public sector bank then his / her such experience for a maximum period of three years will be considered as bank audit experience, provided such experience has not been earned by him/ her concurrently i.e. when his / her firm was assigned statutory audit of any P813. select all India financial Institutions or RBI.)
(v) The firm should have statutory audit experience of 5 years of the Public Sector Undertakings (either Central or State Government undertaking).
(While calculating such experience, more than one assignment given to a firm during a particular year or more than ope year’s statutory audit (audits in arrears) assigned to the firm will be reckoned, as one year experience only, for the purpose of counting such experience.)
(vi) At least two partners of the firm or its paid Chartered Accountants must possess CISA / ISA qualification.
Note- C&AG will empanel the Audit Firms based on the above parameters as on January 1 of the relevant year and send the panel to RBI.
PROCEDURE FOR APPOINTMENT OF STATUTORY AUDITORS IN PUBLIC SECTOR BANKS
Statutory Central Auditors (SCAs)
1 The number of SCAs to be appointed in PSB will be as under
i) Category “A” Banks (Large Banks viz. Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank, Central Bank-of India and Union Bank of India) shall not have more than 6 SCAs. However, in case of SBI the number of SCAs shall not be more than 14.
ii) Category “B” Banks (Medium Banks viz. Allahabad Bank, Corporation Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce. Syndicate Bank and UCO Bank) shall not have more than 5 SCAs, and;
iii) Category “C” Banks (Small Banks viz. Andhra Bank, Bank of Maharashtra, Dena Bank, Punjab & Sind Bank, United Bank of India, Vi)aya Bank, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) shall not have more than 4 SCAs.
Actual numbers of SCAs to be appointed can be decided by respective boards subject to the above limit.
2. The cooling off period after completing the term of three years as SCA will be of three years.
3. The appointment of SCAs will be made on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time to time and also subject to their suitability
4. The Government has decided that from the financial year 2014-15, selection and appointment of SCAs is delegated to individual Public Sector Banks.
5. The procedure that will be followed for selection of SCAs by the PSBs is as under
a) The eligible list of firms furnished by C&AG every year will be examined by RBI.
b) RBI will verify that the firm has minimum bank audit experience of 15 years from its records.
c) RBI will prepare separate list of rested, continuing and non continuing eligible audit firms after excluding the name of firms who have been denied audit by RBI/C&AG and the firms who have declined the offer of appointment given by Public Sector Banks. The list of non continuing eligible audit firms will be further split up into list of experienced audit firms and new audit firms. Reserve bank will be giving Public Sector Banks i) List of Continuing Firms (i.e. the list of audit Firms who have not completed three years of audit; ii) List of firms who are undergoing rest cooling; iii) List of eligible, non continuing audit firms in two parts viz. experienced audit firms and new audit firms.
d) The audit firms applying for empanelment as SCAs in PSBs will be required to give an undertaking that, in case of selection in PSBs, they would give up the existing assignment, if any, in Private Banks/Foreign Banks/RBI/Financial Institutions such as National Housing Bank, EX1M Bank etc. and they cannot refuse appointment of PSBs once selected.
e) The allotment of vacancies of SCA’s shall be in the ratio of 60:40 between ‘Experienced ‘ and New audit firms. As regards ratio of 60:40, banks will round the number to the nearest round number and choose auditors from the ‘Experienced’ and New firm list. For this purpose, an ‘Experienced’ firm is one which has a Statutory Central Audit experience of any of the Public Sector Banks and New Firm’ is one who does not have such experience.
f) While making final selection, the PSBs will take into consideration the following points:-
i) To the extent possible, at least two audit firms having their Head Office from the same place where the banks’ HO/CO is located, to be allocated
ii)Audit firms are not selected if they have retired from the same bank before going under rest
iii) The firms whose partner/s are on the Boards of PSBs are not appointed as auditors for the same PSB.
iv) In case of SBI, only experienced audit firms are considered as SCAs.
v) An audit firm is eligible to be appointed as a Central/ Branch auditor of only one PSB during a particular year.
6. Audit firm(s) selected by the PSBs after obtaining consent in writing from the audit firm will be debarred for a period of 3 years for selection if the firm refuses to accept the appointment without a reasonable ground, that is ground not to the satisfaction of RBE.
7. The above norms will be implemented during the selection process of SCAs for the year 2014-15 and onwards.
8. After selection, as per the statutory requirement, banks, in turn, are required to forward the names of the selected SCAs to RBI for its prior approval before their actual appointment.
9. A feedback on the quality of audit of SCAs may be given by PSBs to RBI after the annual audit of banks
10. Other guidelines
i) In order to protect the independence of the auditors/audit firms, banks will have to make the appointments of SCA for a continuous period of three years subject to the firms satisfying the eligibility norms each year. Banks cannot remove the audit firms during the above period without the prior approval of the Reserve Bank of India.
ii) All PSBs are required to have a Board approved policy for appointment of statutory auditors and the same may be hosted on the bank’s web-site. Banks are also required to ensure that the policy framed by the Board in the matter of selection of auditors/audit firms for appointment of auditors is strictly adhered to Further, the list of firms selected for appointment as statutory central auditors may be placed before the ACB for its concurrence before it is forwarded to RBI for final approval.
Note : A full time partner does not include a person who is:
(1) A partner in other firms.
(2) Employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice under Section 2 (2) of the Chartered Accountants Act, 1949.
ICAI red-flags auditor selection process at PSU banks-Business Standard 06.03.2015
Has conveyed its concerns on the issue to the Finance Ministry and the Reserve Bank of India
Raising concerns, the chartered accountants’ apex body Institute of Chartered Accountants of India (ICAI) has said the current process for selecting auditors at public sector banks could compromise their “independence” in carrying out the auditing job.
ICAI has conveyed its concerns on the issue to the finance ministry and the Reserve Bank of India (RBI), among others.
Under the current process, a public sector bank’s management and audit committee are empowered to select the auditors. A panel used to appoint the auditors earlier.
Emphasising that banks should be more careful while appointing auditors, ICAI President Manoj Fadnis said the lenders need to design systems for ensuring transparency in the whole process.
“In the autonomy granted to banks for the appointment of central statutory auditors, we have a lot of concerns... The process followed by them needs a lot of refinement,” Fadnis told PTI in an interview.
The ICAI president, stressed that a greater independence of auditors is always “desirable”.
“What we believe is that the entire procedure will have to be implemented more carefully and the banks would have to design more systems for transparent method for appointment of auditors.”
Fadnis said the appointment of auditors is of great importance to ensure their independence is not compromised.
The new system is being followed pursuant to the finance ministry and RBI recently deciding to grant autonomy to public sector banks with regard to appointment of auditors. There are 27 public sector banks in the country.
In the earlier system, an auditor was selected by a committee with representations from the finance ministry, Comptroller and Auditor General and the Indian Banks’ Association.
Noting that appointment of auditors by the management is “not a desirable situation”, Fadnis said the earlier selection process through the committee was transparent and better.
“Now, suddenly this year the decision has been given to the banks. So the banks’ management and audit committees have been given the powers to appoint the auditors,” he noted.
Some appointments of auditors under the new method has already been made.
On the response from the finance ministry and RBI about concerns raised by ICAI, Fadnis said they were waiting to see the results.
"We have expressed our concerns to the Finance Ministry and RBI and we are told that this year they have carried out the methodology and are looking at the results, in the sense that how the process was carried out," Fadnis said.
My Opinion expressed in Blog three years ago are reproduced below
The Institute of Chartered Accountants of India (Icai), the apex body of accounting professionals, wants the Reserve Bank of India (RBI) to appoint statutory auditors in state-run banks. The accountants’ body has sought the government intervention on this. Till 2005, RBI was directly involved in the appointment of auditors, but now the boards of public sector banks (PSBs) appoints auditors in consultation with the central bank. Until 2005, the appointment of auditors in state-run banks was overseen by an appointments committee with representation from RBI, Icai and the Comptroller and Auditor General of India.
“If appointments are left to bank managements, there may be a tendency to take short-cuts in these regards with possible ultimate deleterious effects on the financial health of the PSBs,”
“This process compromises the independence of auditors and gives an incentive for promotion of vested interest in the appointment of auditors.”
Bankers, experts and consultants criticized Icai’s move, saying this is unlikely to make any major difference in the quality of auditing. Also, any changes in these aspects should equally apply to private and foreign banks as well, as they also deal with public money
“In many cases, auditors do not see eye-to-eye with bank managements (on issues such as) like NPA (non-performing assets) provisioning, implementation of prudential norms, etc., and this is the reason auditors are at all appointed. There must always be somebody who will not look at the business from the point of view of the management, and who will look and act at it from the point of view of good governance,”“The real issue is not independence, but the quality of auditing, which has seen deterioration in many cases in the recent past,”
I submit my views on above mentioned opinion of ICAI
I fully agree that RBI should appoint auditors for conducting statutory audit of various banks and CA should be held responsible, accountable and punishable if they fail to point out the fraudulent and illegal behavior of bank management. Auditors least bother of faults or fraud committed by banks because it is ultimately banks who will appoint them and pay them charges and extend comforts as per their desire.
Similarly in case of audit of private businessmen and service class people, auditors prepare good balance sheet ignoring all bad points so that they may be paid attractive fees. The more fees they charge, the more auditors will guide ways of tax evasion, concealment of facts related of violation of laws, avoidance of statutory provisions etc.
In brief I can say that auditors are best blackmailers and they can go to any extent against the interest of the government if they are adequately compensated for their advices. It is seen that auditors prepare balance sheet as per need of the businessmen who are inclined to avail higher amount of loans from banks. CA almost works as agent of businessmen and it is they who motivate bank officials for inflated lending in return of attractive bribe money.
As of now none is held responsible for the act of omission and commission. Banks blame auditors and auditor s blame banks for ongoing and perpetual fraudulent activities undertaken by bank management. Auditors are paid huge amount for auditing but they seldom check into records of banks and try to complete statutory audit even at big branches in a day or two even though they claim the bill for three or four days..
It is only when Branch Manager of a branch fails to give best quality of hospitability to auditors or fail to give precious gifts to some corrupt and greedy auditors that auditors try to teach lesson to bank officials and mention even non-mentionable irregularities in their audit report. Similarly at regional or zonal or corporate level various officers of the bank are entrusted the duties of entertaining, hotelling, visiting picnic spots and gifting the team of auditors to get best rating and best reports ignoring all vital information. I have seen many auditors even calling branch officials in hotel with money and gifts and signing financial reports blindly.
Unfortunately RBI officials also do not want to have headache of process of appointment and then controlling of auditors. Banks are violating important rules and laws in concurrence with RBI officials. Assets are not classified as per RBI norms of assets classification and income is booked against income recognition norms set by RBI and for this purpose auditors, bankers and regulating agencies dance as puppet of businessmen who spend money for getting illegal benefits from bank, from government and from RBI.As such even if duty of appointment of auditors is restored to RBI, corruption is not going to end. As long as actions are not taken against evil doers, there will not be any fear in the mind of neither bankers nor auditors.
Million dollar question is who will bell the cat? All are birds of the same feather. Money and only money play the role. The more the bribe is offered, the shorter becomes the eyes and ears of auditors, and also that of all regulating and investigating agencies.
Auditors do not perform auditing to safeguard rule of law and ensure following of accounting principles or for tax compliance in true spirit but play the role of mediating between borrowers and bankers, between tax officials and tax evaders and between law makers and law breakers.
It is auditors who prepares financial statement suitable for sanction of certain amount of loan and who motivates bankers for sanction of the same. It is auditors who teaches businessmen how to avoid payment of taxes and who motivate tax assessing authority to put their signature on assessment orders.
Bankers similarly do not care for safety of their bank but work for self interest. Tax officials do not work for collecting maximum revenue in line with prevalent laws but to help tax evaders so that he or she can get his share through backdoor.
It will not be an exaggeration to say that it is auditors who help in creation of black money in the country in nexus with tax officials and it is again auditors who in nexus with bankers and businessmen help in creation and accumulation of more and more bad assets in bank’s loan portfolio.
Friday, March 16, 2012
Statutory Audit of Bank may be stopped
Most of banks have adopted Core Banking solution (CBS) technology and are now using system to recognize Non Performing Assets, stressed assets, toxic assets, bad assets, and restructured assets. Now there is very little scope to hide bad assets until clever bankers in collusion with technology experts taper with the system and conceal NPA. None can however deny the foul game being played with the system by bankers to conceal bad assets from balance sheet and to present rosy picture of banks.
But the bitter truth is that Team of Chartered Accountants who have been carrying out Statutory Audit of banks as per RBI directives for decades have completely failed to perform their duty of exposing NPA for which they were appointed by RBI and public sector banks. Rather it is CA who helps bank officials in sanction of loan to unscrupulous business men by preparing rosy balance sheet as per credit policy of respective banks.
It is CA who used to treat and certify even bad assets as standard assets in collusion with bank officials. If CA are given costly gifts and treated like state guest and if CAs are served like ‘Damad – son-in-laws’ during conduct of audit they may blindly put their signature on Audit reports without looking into accounts.
It is open secret that it is CA who certified all past balance sheets of all PS banks where NPA were concealed, lesser provision was made and where profit was inflated by clever bankers to please Ministry of finance. It is worthwhile to mention here that volume of NPA of almost all banks have exhibited a big jump only after adoption of system generated mechanism to recognize NPA. And it is well known to all that NPA was not created overnight but was accumulated in last two decades of reformation era by clever bankers in nexus with team of CA only.
CA could not stop foul game of bank officials in recognition of bad assets during last four decades when everything was being done manually. One cannot therefore dream corrupt team of such CAs can stop tapering of system if at all undertaken by bank officials to hide bad assets.
Now therefore when system generated NPA is declared, there is no use of carrying out statutory audit of banks. I am of categorical view that conducting statutory audit of banks was absolutely futile and costly exercise undertaken by banks only to fulfill RBI norms. On an average bank used to spend Rs.20000 to Rs.50000 on each audit and almost similar amount in unofficial way through illegal means. A prudent banker and RBI regulator can imagine the volume of spending on useless statutory audit in about 25000 branches out of total 90000 branches of all banks. Not only this These CA use to cause loss of manpower and cause tension to bank officials during all such audits.
Hence RBI should immediately stop mandatory statutory audit of banks and this will save crores of rupees of banks which are being spent on auditors. In addition RBI should also consider stopping Revenue audit of branches being carrying out by Chartered Accountants merely to fulfill RBI mandatory requirement. Revenue Audit entrusted to CA team by banks are actually carried out by article clerk whose knowledge is negligible . Since the payment of revenue auditors is not that much as in case of statutory audit, CA do not like to even visit the branch and sign on report of article clerk blindly.In both the cases CA in most of the case simply sell their signature and blindly certify all evil works if treated like Guest and awarded with costly gifts.
Internal auditors in all banks are doing adequate exercise to stop leakage of income and hence it is they who should be provided more and more support of manpower and infrastructure to stop leakage fully and to ensure absolute recognition of Non Performing Assets and true income recognition as per RBI norms.
In case of need cross checking of banks through officers of other banks and that of RBI may be resorted to in ensuring correctness of balance sheet. Further surprise audit of banks by honest and devoted RBI officials may prove helpful in creating fear among bad bankers.
It is also true that officials of RBI or CBI or CVC are beards of same feather as CAs are. Even then it is better to come out of clutches of team of CAs who are in general (excluding some Good CAS) consistently blackmailing not only bankers but all assesses on every point for their vested interest and it is they who help in tax evasion and creation of black money . It is CAs who convert black money into white money by way of manipulation in every deal for purchase and sale of landed property.
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