RBI digs in heels on auditor appointments
The Reserve Bank of India (RBI) seems to have dug in its heels on auditor appointments at banks and non-banking financial companies (NBFCS). It sees it as a ‘game-changing’ move, ensuring the independence of auditors, increasing opportunities for firms, and promising financial stability, revealed sources attuned to the RBI’S thinking.
In its April 27 norms on auditors, the RBI had said banks and NBFCS, excluding those that don’t take deposits and have a sub-~1,000-crore asset base, must immediately bring in new auditors.
The para banks, however, were allowed to do the change from the second half of the fiscal year.
Banks and NBFCS, having an asset size of ~15,000 crore or more, were asked to appoint joint auditors. Crucially, there was a retrospective applicability of the extended eligibility criteria for auditors, including those relating to the provision of audit and non-audit services.
Both NBFC lobby group Finance Industry Development Council and the Confederation of Indian Industry protested the rules.
However, the RBI argued that the guidelines are compulsorily applicable to only 300 NBFCS, of the 9,600 operational in India. The other NBFCS, with an asset size below ~1,000 crore, have the option to continue with their existing auditors.
“This will improve audit quality, avoid conflict of interest, and ensure the independence of auditors. These measures will further facilitate increasing the experienced audit pool to cater to the needs of a growing economy," said a source. Besides, the policy of joint audit is only applicable to a few, the RBI reasoned. As on March 31, 2020, other than public sector banks (PSBS), 46 NBFCS, three urban cooperative banks (UCBS), and 36 commercial banks had an asset size more than ~15,000 crore. As many as 645 audit firms meeting the eligibility criteria for appointment as statutory central auditors (SCAS) of PSBS were empanelled by the Comptroller and Auditor General office for 2020-21.
The RBI has argued that a tenure of three years is already in place for SCAS of PSBS, all-india financial institutions, and UCBS in Maharashtra, and so far, this arrangement has worked well. Private sector bank auditors had a tenure of four years, which the RBI has tried to reduce to three years in line with public sector peers.
“A regulatory authority is well within its rights to prescribe a shorter tenure for auditors of its regulated entities, as felt desirable within the broad statute requirements, so as to improve the audit outcome and in the overall interests of the system," the source said.
Besides, the six-years rotation policy is not new in case of auditors in private and foreign banks, while the same has been extended to NBFCS as well.
"This will discourage overfamiliarity between auditors and auditees and also prevent cyclical appointment of two firms as auditors of the entity," the source added.