The RBI will take action against, apart from erring auditors, those responsible for wrong information in a bank’s financial statements, incorrect certification given by auditors, wrong information given in the Long Form Audit Report, and any other violations of the RBI’s rules and regulations on auditing.
The Reserve Bank of India has decided to crack the whip on banks’ statutory auditors whose certification of banks’ books has later been found to have lapses.
“In the interest of improving audit quality and with a view to instituting a transparent mechanism to examine accountability of statutory auditors (SA) in a consistent manner, it has been decided to put in place a graded enforcement action framework to enable appropriate action by the RBI in respect of the banks’ SAs for any lapses observed in conducting a bank’s statutory audit,” the central bank said in a notification on its website.
Any action taken on an audit firm, including serving a caution notice, will be communicated to the Institute of Chartered Accountants of India, and such communication will be placed in the public domain by the RBI.
The central bank has found wide divergence in asset classifications in banks’ books. Besides, the role of Punjab National Bank’s SAs has also come into question in the recent Nirav Modi-Mehul Choksi scam.
Under the framework, the RBI will take action against, apart from erring auditors, those responsible for wrong information in a bank’s financial statements, incorrect certification given by auditors, wrong information given in the Long Form Audit Report, and any other violations of the RBI’s rules and regulations on auditing.
The RBI said if the quality of audit was not found satisfactory, the central bank might not approve statutory auditors’ appointments for doing statutory audit in commercial banks for a specified period.
The central bank also may not approve auditors debarred by other regulators, or government agencies.
“As regards the cases pending against auditors with the aforesaid agencies, the RBI would debar such audit firms, provided the case is of serious nature, where public interest is involved and it is established, prima facie, that the firm is culpable, either by the RBI or by the above entities and brought to the RBI’s notice.”
Violations of rules would be assessed in terms of impact on a bank’s capital to risk-weighted assets ratio, considering the amount involved in divergence-related cases, and, in the case of other lapses, the impact would be calculated in terms of the effect on the bank’s business area concerned, the RBI said.
If lapses are found, the RBI will give auditors a reasonable opportunity of being heard. The central bank would serve a notice “requiring them to show cause, in writing, as to why the action as indicated in the show-cause notice should not be taken”.
The audit firm will be given 15 days to respond.
“The RBI would provide a reasonable opportunity to the audit firm concerned for presenting its views in the matter, including through oral hearing, if it so desires or at the request of the audit firm.”