Keki Mistry, Vice Chairman and CEO, HDFC LtdThe Reserve Bank of India (RBI) should defer the implementation of new guidelines related to the appointment of statutory auditors of banks and non-bank lenders, said Keki Mistry, Vice Chairman and CEO at the country’s top mortgage lender HDFC Ltd, arguing that most financial entities have little time up their sleeves to comply with the mandate of the regulator.
“So obviously, the new guidelines have come in at the end of April. We have to evaluate how we can sort of look at appointing new auditors so quickly. Because the RBI guidelines say that existing auditors cannot continue (auditing) if they have done three years. I think in the case of most companies (non-bank lenders), the auditors would have already done more than three years, probably done four years… So, I hope that RBI defers this applicability by year or so because the year has already started, and a lot of them would have to start looking around for new audit firms,” Mistry told ETCFO in a phone interview.
The RBI guidelines
On April 27, the RBI released new guidelines for statutory auditors of financial entities to enhance the independence of auditors and tackle concentration issues. The guidelines require mandatory rotation of auditors after three years with a six-year cooling-off period, and appointment of joint auditors in entities having asset size of Rs 15,000 crore and above.
As of FY21 close, HDFC had total assets under management (AUM) at Rs 5.16 lakh crore. The mortgage financier is currently audited by a single auditor BSR and Co, which is an audit affiliate of accounting major KPMG and was appointed statutory auditors in July 2017 for a period of five years until FY23 as per the previous rules. The new rules would require HDFC to appoint a new auditor, and also comply with the joint auditor norm.
The RBI’s guidelines for statutory auditors are effective from the current financial year 2021-22 itself. Though the regulator has given relaxation to non-bank lenders to comply from the second half, but that time, too, is seen short by the lenders. Also, the new rules place a restriction that each auditor can audit only eight NBFCs; and further impose significant restrictions on other services (both audit and non-audit) that an auditor can provide to group entities of the audited entity.
“Many challenges here if implemented from FY22. Some bank auditors have already finished three years — they will only have weeks to make a new selection. The pool available to choose from will be limited for FY22 and many potential suitors would be conflicted under the new one-year cooling-off period having done such non-audit services in FY21,” Grant Thornton Bharat CEO Vishesh Chandiok had told ETCFO earlier this month.
Jamil Khatri, Partner, BSR and Co, was even more critical than GT’s Chandiok stating that let alone deferral, the RBI needs to review the guidelines for the rules rather than enhancing audit quality may practically have the opposite effect.
“Companies and their finance teams may need to invest significant time to manage auditor transition at short intervals. It may be advisable for the regulator to defer the timelines beyond March 31, 2022, particularly given the uncertain business environment due to Covid. In parallel, the regulator should consider setting up a committee comprising a cross-section of all impacted stakeholders (banks, various types of NBFCs, industry & professional associations, and auditors) to evaluate and solve the various practical challenges,” Khatri had written in an exclusive blog for ETCFO.
Indian regulators are trying to up the ante against the Big Four firms—PwC, Deloitte, EY, and KPMG—following a series of financial frauds including the Rs 1 lakh crore scam at construction financier IL&FS, which raised serious questions on the audit quality of global giants.