RBI Wants Auditors To Be More Responsible

RBI asks bank auditors to have a stringent monitoring process-Business StandardMumbai      

January 16, 2015

Pointing to the gaps in the auditors' work, the Reserve Bank of India (RBI) has asked banks to adopt a more stringent auditing process to ensure that review of financial results and identification of fraud is done more promptly.RBI Deputy Governor S S Mundra said there is a greater need to take a closer look into the asset quality, instances of restructuring of advances, provisioning held, etc. to ensure that there was no divergence with regard to asset classifications and provisions held.

"The point I am trying to make is that if RBI inspectors are able to identify these divergences in the limited time-frame that they are on-site, why the banks' auditors are not able to do so…Is it a question of efficiency of the auditors or is there a much deeper issue - something to do with the transparency of the process itself?," he asked while addressing members of the Audit Committee of the Boards (ACB) of ICICI Bank subsidiaries & other bank employees.

With regards to provisions, he told banks that adequate provisions should be made for post-retirement benefits like pension, gratuity and leave encashment, etc. and the auditors should ask more pertinent questions to the banks with regards to provisioning requirements

"It is important that the ACB asks the right questions to the management about various underlying assumptions that go into computation of the required provisions such as life expectancy, discount rate, expected return on investments, etc. I urge the ACBs to ask uncomfortable questions," he said in his speech.

In light of instances of know-your-customer (KYC) norms violation Mundra has urged auditors to be stricter with the process of background check. Last month, RBI had imposed penalties on ICICI Bank and Bank of Baroda for flouting KYC and anti money laundering norms.

"I believe that the absence of an appropriate punitive mechanism in the banks for lapses has also contributed to their recurrence. Therefore, our expectations from the ACBs would be to closely focus on reasons for such regulatory penalties/sanctions and seek a root-cause analysis for preventing recurrence," he added.

My Comments on auditors' role is very old and is reproduced below.

Officials of RBI and GOI normally sleep and remain dormant controller of banks and think it wise ,safe and prudent to be silent spectator of all irregularities and malfunctioning of these banks as also functioning of financial institutes in general until they are awakened by some outside forces or depositors affected by failure of corrupt bank. However to safeguard their skin, clever officials of so called regulators bodies always use to get certificate of good health of banks from panel auditors . They never bother to verify and ascertain the genuineness of these certificates .

Majority of top ranked officials are made happy by promoters and managers of these banks through costly gifts and cash bribe. Even statutory and regular Auditors appointed to check health of banks are bought by clever officials of banks after extending red carpet welcome to them and after offering attractive bribe and costly gifts for ensuring issuance of certificate of health and for final submission of these certificates to their regulating bodies including Ministry of Finance and RBI

And in this way ,cancer of corruption is allowed to perpetuate grow until it explodes and collapses to end.

Finally a committee is set up to investigate the reasons of failure or to find out the modus oparandi of loot of the bank but action is never taken against any erring officials and to stop happening of such incident in future at other banks because most of them are under patronage of powerful political leaders who were bought during good days of the bank.

This is why story of collapse of banks never ends despite the fact that Indian political leaders and Government of India use to claim every now and then that Indian financial Institutes including banks and chit funds are more safe and sound and there is no risk of failure and no need for depositors to worry.


 RBI has also been cautioning consumers against the rising case of credit card and other frauds. Mundra called upon greater sensitivity and increased focus from auditors with regards to having appropriate measures in place to prevent instances of fraud.

"In our recently concluded scrutiny into fixed deposit related frauds in some banks, it emerged that even the caution advices issued by RBI in respect of certain individuals had not percolated down to the branch officials quickly enough to enable appropriate preventive measures… I would say that ACBs should take upon themselves to monitor the trend of frauds, assimilate key learnings and ensure that mitigation measures are put in place by the management," he added.

What I Wrote three years ago is as follows

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.

 

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