Problems in Central Statutory Auditor Scrutiny of Financial Statements of Bank Branches

Over the last few decades, Indian banking industry has become large and complex. Increased complexity in banking has significantly increased RBI’s risk in supervising the functioning of banks. To deal with this risk, RBI relies heavily on bank audit reports. Over the years, its reliance on auditing and accounting profession has increased significantly. Indeed RBI, has in a sense, outsourced part of its supervisory role on banks to audit professionals by giving them tasks which are in addition to their normal audit duties.

In this column, covered the reason for the mess involving the scrutiny of banks’ branch returns by Central Statutory Auditors (CSAs).

Causes of the Rot

1. Expecting 61 CSAs to execute the additional responsibility for undertaking scrutiny of 89,157 branch returns including incorporating both audited and unaudited in a short span of 35 days to 60 days on a meagre fee of Rs 750 per branch, which includes incorporation of Branch Returns is imaginary and an illusion of the RBI.

2. RBI requests the Audit Firms in a separate engagement to assist in specific supervisory tasks, it communicates directly or through bank’s framework to be followed by external auditors. This being not done for additional responsibilities besides audit by the RBI, it failed as a supervisory authority of banks and utilized public funds for the benefit of CSAs.

Suggested Actions/Remedies

1. Need to evolve an Indian Auditing Practice Statement on the relationship between Reserve Bank of India and Bank’s External Auditors in line with IAPS 1004 – and The Relationship between Banking Supervisors and Banks’ External and IAPS 1006- Audits of the Financial Statements of Banks.

2. RBI’s request to CSAs to assist in additional specific supervisory task, especially the ‘Scrutiny of Branch Returns’ both audited and unaudited which will contribute to the performance of their supervisory role should be made in the context of a well ‘defined framework’,

3. There is a need of a strong disciplinary framework which will deter an auditor from compromising his independence and ensure due diligence in his reports on critical matters including not reporting on matters which he is professionally required to make

4. The RBI, SEBI and the ICAI in exercise of powers vested in them should call for working papers on the matter from CSAs specially on Scrutiny of Branch Returns and the process of validation followed for certifying data/information in Notes to Accounts.

5. The RBI and the ICAI need to review the suggested format of IAR to ensure the CSAs had duly performed their professional role by stating in their reports the fact that they have scrutinized the branch returns and their report and observations as a result of scrutiny undertaken.

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