In a bid to curb loan related scams in the public and private sector banks, the Reserve Bank Of India (RBI) on 29th June 2018 published a circular titled “Enforcement action framework in respect of statutory auditors (SAs) for lapses in statutory audit of commercial banks” for improving the audit quality and instituting a transparent mechanism for the same in India.
A Statutory Auditor (SA) is an external auditor whose appointment is mandated by law. Commercial banks have to obtain permission from the RBI to appoint a SA. The role of such auditors has come into question since the recent Nirav Modi scam.
“…it has been decided to put in place a graded enforcement action framework…for any lapses observed in conducting a bank’s statutory audit. The framework would cover, inter alia, instances of divergence identified in asset classification and provisioning during the RBI inspection vis-à-vis the audited financial statements of banks…” the circular read.
Misstatement of a bank’s financial statements, wrong certifications given by the auditors with respect to the certifications advised by RBI or misconduct by auditors in respect of their bank audit assignments are the lapses which are to be considered for invoking the graded enforcement framework.
The extent, frequency, persistence and impact of the lapses or violations are relevant factors based upon which enforcement action is to be taken. Lapses/violations that are determined to be not material enough would lead to the issuance of a Cautionary Advice to the audit firm. Any enforcement action, including issuance of Cautionary Advice, on an audit firm will be communicated to the Institute of Chartered Accountants of India (ICAI).
The following enforcement actions can be taken by the Reserve Bank of India:
A) not approving the appointments of statutory auditors for undertaking statutory audit in commercial banks for a specified period. RBI may also not approve auditor/s, who have been debarred by other regulators/law-enforcement agencies/government agencies.
B) The RBI could debar 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 its notice.
C) Further, the RBI would also deny audit assignments to such audit firms as are blacklisted by the above entities and brought to its notice, until the time their name is cleared by them.
Enforcement action would be taken by way of a Speaking Order served on the audit firm containing details of the lapses, written and oral submissions made by the audit firm, and findings and decision of the RBI.
Read the Official Circular here.