Amarjit Chopra, Former President at the Institute of Chartered Accountants of IndiaVery recently, the Reserve Bank came out with new rules for statutory auditors of the banks to enhance audit independence and tackle concentration issues. The regulator prescribed the norms for the appointment of bank auditors, reduced the audit tenure to three years from four years for banks and five years for non-bank lenders, and capped the number of audits that a firm could undertake during the year.
In an interview with ETCFO, Amarjit Chopra, Former President at the Institute of Chartered Accountants of India, and a veteran auditor himself discussed the RBI’s new norms. Edited excerpts.
Q: How is your reading of the RBI’s new audit norms?
Amarjit Chopra: The RBI has done an appreciable job with regard to certain aspects like bringing in the concept of joint audit in respect of entities above a threshold, reducing the concentration of audit work in few hands, curtailing the scope of non-audit services being rendered by auditors or the same network firms etc.
There has been an attempt to improve the independence of auditing firms by factoring in a firm being auditor of an entity in which their audit client has significant exposure. The issue of concentration has also been addressed well with audit capping and reduced tenure, among others.
But in my opinion, the main issue of independence of auditors by ensuring their appointment by an independent authority has been left untouched. Also, there are certain other issues like cooling period, ratio of experienced and new firms etc which could have been addressed better. However, on an overall basis, the new audit rules are fine but yeh dil maange more.
In the old criteria, there was a mandatory cooling period of three years for a firm having completed a cycle of three years as SCA. So, if one completed the audit of a public sector bank for a period of three years, then one had to wait for a period of three years before one could be appointed SCA of any other bank. This criteria has been done away with. Q: How do you read the new rules related to the appointment of Statutory Central Auditors (SCA) of Public Sector Banks? How are they likely to play out?
Amarjit Chopra: Comptroller and Auditor General (C&AG) will maintain a panel of firms and based upon the minimum criteria laid down by RBI for Statutory Central Auditors of Public Sector Banks (PSBs) and will send the list of eligible firms to RBI. The RBI in turn will circulate the list to various PSBs. The auditors of PSBs shall be appointed by Banks through their Audit Committees of Board (ACB) out of a panel sent by RBI. The ACBs will consider many factors including the independence of the firm before recommending the names for appointments.
In the existing system, the RBI used to classify the firms based upon various factors including the cycles completed by firms as statutory auditors of various banks. PSBs were sent lists of experienced and new firms to ensure that vacancies were filled in the ratio of 60:40 between experienced and new firms. List of recommended firms was sent to RBI for final approval.
Now, the new guidelines seem to have relaxed this norm. There is no reference in the RBI’s circular that it will be evaluating the firms based on the experience and certain other factors.
So suppose, if there were 10 vacancies required to be filled, earlier 60 per cent of them would go to the experienced lot, and the rest 40 per cent would be occupied by the new ones. There used to be a balance between experience and youth. Now, that categorisation has been simply done away with, and banks themselves can pick up old or new firms or a mix of both.~
Also, in the old criteria, there was a mandatory cooling period of three years for a firm having completed a cycle of three years as SCA. So, if one completed the audit of a public sector bank for a period of three years, then one had to wait for a period of three years before one could be appointed SCA of any other bank. This criteria has been done away with. The only condition the new guidelines have laid down is that a firm cannot be appointed auditors for the same bank for a period of six years after having completed tenure with a particular bank. But otherwise, the firm will be eligible to be appointed auditors of other PSB.
The new rules also provide relaxation in terms of minimum number of partners and in relation to their continuity in the firm in terms of number of years. This will make a larger number of firms eligible for audit of banks.
Q: What will the implications of these new auditor appointment rules be?
Amarjit Chopra: The appointment rules will lead to greater competition. This is since the number of firms which will be eligible for the appointment as statutory auditors will go up. The cooling period of three years is no longer there in case of audit of PSBs, it will open up the space for more auditors. The firms retiring this year as statutory auditors may not be appointed in the same bank, but they will be eligible to be appointed in the other banks.
As regards private sector banks and other entities (other than PSBs) regulated by RBI, the joint audit concept will be implemented and also the restrictions being brought in with regard to non-audit services being rendered by firms under the same network a year before the appointment will impact the appointments of certain firms. Also, the non-eligibility of the firms under the same network will affect appointments of certain firms.
The new rules are applicable from the current financial year 2021-22. While the non-bank lenders can adopt the norms from the second half of the financial, the challenge could be for the banks, who have not been given such relaxation.Q: Do you see any challenges in implementing these rules?
Amarjit Chopra: There could be a few challenges that may arise. First, the audit committee, which will have a larger pool now, will have to appropriately select the auditors ensuring audit independence. To my mind, ACBs of different banks may lay down their own criteria more stringent than the norms laid down by RBI.
Another challenge could be related to the time the entities have in order to comply with the mandate of the regulator. The new rules are applicable from the current financial year 2021-22. While the non-bank lenders can adopt the norms from the second half of the financial, the challenge could be for the banks, who have not been given such relaxation.
Most of the private banks are currently audited by a single auditor, and will now have to appoint another auditor to comply with the mandatory joint audit norm. Also with the new guidelines reducing the tenure of the auditors to three years from previously four years for private banks, many entities may now be required to look out for another auditor. This all could be difficult in the current corona times. But to my mind, the regulator would realise this hardship and make it applicable for banks as well from the second half of this financial year.
Q: How is your reading of the mandatory joint audit norm?
Amarjit Chopra: I am a strong supporter of the joint audit. Two opinions are always better than one. To my mind, the joint audit norm must be extended to other public interest entities (corporates) beyond certain thresholds too.
Q: Could RBI have done anything else to improve the audit environment?
Amarjit Chopra: I feel the regulator could have done more, which is it could have also prescribed a minimum number of auditors rather than laying down only the maximum number of auditors, maybe it could have given a range.
Also as I said earlier the RBI must look at providing independence to auditors by ensuring appointments by an independent authority and it should not be left to bank/entities managements to appoint the auditors.
To my mind, various regulators need to look at this issue far more seriously and even if Indian regulators have to take the lead in this matter then let it be so.~
Also in my opinion the cooling period concept could have continued and a mix of experienced and new firms could have been mandated.
To me most importantly there could have been higher weightage to the firms with greater technology infusion. In the years to come, adoption of technology is key to the quality of audit.
Q: Last, what would be your message to the Indian audit firms?
Amarjit Chopra: I appeal to all Indian firms to consolidate, infuse technology and improve overall audit infrastructure and quality service of which we can feel proud of.
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