icai questions big firms
TRANSCRIPT
ICAI questions big firms' auditing practicesNEW DELHI: Trouble seems to be brewing up for the auditing operations of the Big 4 in India with the
Institute of Chartered Accountants of India (ICAI) raising questions over the manner in which their domestic affiliates source business
in the country and share infrastructure, manpower and profits.
ICAI has sent notices to a total of 12 affiliate audit firms of MNCs like PricewaterhouseCoopers, Ernst & Young, KPMG and Grant Thornton, all of whom are big players globally but operate in India through domestic firms. "It is a step against the surrogate manner these companies adopt to take up auditing work in India even as they are not allowed to do so as they are not registered with the ICAI," an official said.
The sources said local affiliates in ICAI's net include BSR & Co (affiliate of KPMG); SR Batliboi (of Ernst & Young); Walker Chandiok & Co (Grant Thornton); and Pricewaterhouse and Lovelock & Lewes (PwC).
The matter has been flagged by ICAI's high-powered committee, which is looking into the Satyam scam, and sources said the step has been backed by the ministry of corporate affairs. Under WTO norms, professional services like auditing and accounting have not yet been opened up for foreign companies. But while these companies do not take up auditing work directly, their affiliates have long been doing so, which has been objected to by the ICAI.
The ICAI committee has asked the Indian affiliate firms to submit documents detailing their agreement/contract and also the terms and conditions for usage of name of the multinational entity. Also, it has asked them to disclose the arrangement for sharing of fee/profit with the multinational entity.
A key issue on which the committee has sought details includes sharing of human resources
and infrastructure between the foreign entities and their affiliated audit firms. "In any case, even if they are sharing the network, this networking has to be registered with the ICAI," an ICAI functionary said.
The committee has also sought details of remittances made to and received from the multinational entity while also seeking disclosure on income-tax assessment orders for the last three years in respect of the CA firms registered with ICAI with identical name. It has also asked them to furnish copies of letterheads and visiting cards.
'Rotation of audit firms is a disturbing and costly exercise'
20 Jan 2009, 0442 hrs IST, Tina Edwin , ET Bureau
Mazars is an international, integrated and independent firm specialising in audit, accountancy, tax, legal and advisory services, headquartered in France.
The firm has a presence in nearly 50 countries across the world, including India. Mazars Group president Patrick de Cambourg , in New Delhi to attend the CII’s Partnership Summit among other things, spoke to ET’s Tina Edwin about the auditors’ role and auditing
practices that could improve the quality of financial statements. Excerpts:
What precautions auditors should exercise when finalising financial statements of a company?
Auditing is a duty of care like that of a medical doctor. A doctor can help cure and save lives, but can also fail. An auditor may not always succeed, he can prevent failures but not all failures. There is no such thing as full audit of a company’s financial statements. It would be like having a policeman behind every citizen. Audits operate on the basis of tests. It has to be an economical way of reducing risks and mis-statement of financial statements as well as reducing risks of fraud.
In carrying out the audit, a distinction should be made between a fraud that has significant impact on financial statements and the one that does not. Strong controls are required in businesses that relate to financial markets and trading activities, as a fraud in such instances can be dangerous. Prevention of fraud with limited impact is a function of internal control and overall checking by external auditors.
For instance, forgery by a few employees of the company involving a small amount of money may not have significant impact on the financial statements.
In the case of systematic high level corporate frauds that are obviously significant and have material impact on financial statements, audit procedures should be sound enough to detect them. Declaration of fictitious assets or over-valued assets (as in the case of subprime) on one side and on the other, understatement of liabilities or hidden liabilities have immediate consequences on financial information.
In the case of fictitious assets and hidden liabilities, audit procedure should allow auditors to spot existence of these, unless the evidence in forged (as in the instance of
Patrick de Cambourg
Parmalat). Overstatement of assets and understatement of liabilities could be judgmental error and therefore difficult to detect.
Should not verification of cash and bank balances be easy?
One basic procedure that should be followed in audit procedure is to seek confirmation from the banks that they hold the amount declared by the company in their statement. In theory, verification should be done directly by auditors and auditors should receive answers directly from the bank. But it is a complex process and therefore people take shortcuts sometimes.
Besides, the task of checking of bank accounts is typically given to the junior accountants. Advancement in technology has also made forging of documents a lot more easier.
What are the shortcomings of audit practices in India?
India is not be particularly blamed for deficiencies. There is a tendency in many jurisdictions to consider auditing as a commodity. That is not a good idea. Auditing is a serious matter that should be taken seriously by highly qualified people. Transparency on auditors’ quality, quality control, and supervision are important. Externally conducted supervision by independent bodies is very important to raise the quality of audit.
In many jurisdictions, peer review is evolving into independent supervision, and we are also moving from self regulation to regulation by government-inspired procedures.
Should then supervision be taken out of ICAI?
In many jurisdictions, the institutes are carrying on certain number of tasks such as education, training, selection, technical evolution, while an external independent body supervise evolution and structuring of the profession. I think such evolution is in the right direction because auditors have nothing to hide, especially from the business community, financial community and the society at large.
It demonstrates that you are up to speed. It is crucial also to be closely related with the international standards of auditing and accounting. Although some aspects of IFRS can be criticised, it is a quality standard and is principle-based.
Should rotation of auditors and joint audits be a norm?
Rotation of key partners is absolutely important but not of the firm. Rotation of the firms is a disturbing and costly exercise, even though it may appear protectionism in some cases. I am a strong supporter of joint auditing. It is an in-built control system even though there is an element of additional cost.
But the cost is less than that of rotation of firms or strong control systems like
Sarbanes Oxley Act, (SOX) which has not demonstrated its efficiency.
How can the independence of auditors be ensured without rotation of firms? In our initial market, which contribute about 25% of our activity, we work on the basis of joint audits. We see it as a plus. In the Mazars system, every conclusion of an audit team of a client is challenged by an independent professional from within the firm and disputes can be sent up to a technical committee for resolution.
This reduces the risk of frauds significantly. Besides, at Mazars, for significant clients we have two partners operating in tandem.
We ensure independence by protecting the firm and partners from temptation. At the firm level, we ensure that the fees clients pay is insignificant to the total turnover of the firm. As a rule, no client should be over and above 1% of the total turnover of the firm.
Partners’ independence is ensured through rotation and the criteria for determining their remuneration. For us , technical criteria are more important than the financial ones.
From Ketan Parekh to Satyam
24 Jan 2009, 0830 hrs IST, Saptarshi Ghosh,
The Satyam fraud is stunningly alarming not only because it is the biggest accounting and auditing fraud in India till date but also because it directly threatens to engulf the IT sector in India at this time of economic downturn and undermine India’s global image as one of the most promising economic stories in the new millennium.
While the Ketan Parekh fraud in the late 1990s brought about the collapse of several co-operative banks and the largest mutual fund in India (Unit Trust of India US-64),which was located right in the middle of the Indian financial system, the Satyam fraud clearly brings out the lacunae in the systems, practices and methods of auditing and accounting in India and situates itself right at the heart of India’s booming IT industry.
A chilling similarity between Satyam and Parekh lies not just in the scale of the frauds but also the incidence of criminal conduct by the top management of the various companies involved and the conflicting interests between the various groups of accountants, bankers , auditors and top management. An inescapable factor is the clearly questionable auditing standards at large and the professional ethics generally of the auditors who have supposedly audited the company’s books for at least the last four to five years.
The fundamental question that needs to be asked of the audit and accounting firm, Price Waterhouse in this case, is — why was there such a critical absence of, or failure to enforce, control systems and/or audits in accordance with the firm’s best practices for such a prolonged period of time? Clearly it is the job of the auditor not only to ensure that companies operate with prudent levels of risk, but also, that their books are subject to an effective and accurate scrutiny regime.
The fact that the Satyam fraud went on undetected and uncorrected for years and without any external audit and accounting mechanism picking it up raises serious questions as to the actual degree of implementation and enforcement of such practices as part of a credible, effective and sound auditing system.
Also, given that the audit firm in question was also involved in the affairs of Global Trust Bank and DSQ not long ago, it may be relevant to ask what corrective actions were taken by the firm to mitigate or prevent opportunities for fraud, reckless
Five facts about SatyamTop Accounting scandalsThe Great Fall of SatyamSatyam's Development Centres
mismanagement, and conflicts of interest raising the potential for such behaviour within its own organisational set-up.
Clearly, there should have been a clear objective and roadmap within the firm to achieve certain standards of ethics and benchmarking of audit practices after DSQ and Global Trust Bank. In any case, there does exist various annual reviews of frauds and serious irregularities pointed out in several audit reports after the Ketan Parekh fraud in India which should have become a basis for reviewing the basic audit and accounting systems of the many auditing firms.
The second question is whether the Indian authorities can and/or be able to hold the audit and accounting firm liable if serious auditing lapses and accounting irregularities come to view. This question is important as it will go a long way not just to ensure that acceptable, correct and effective audit mechanisms are put in place but also in terms of building the capability within the legal system that puts the burden of serious auditory lapses on the entity itself. The reasons are two-fold.
RBI collects information on banks' exposure in Satyam: Gopinath
24 Jan 2009, 2107 hrs IST, PTIMUMBAI: The Reserve Bank of India has collected data on banks' exposure in scam-
tainted IT firm Satyam Computer and an investigation in the matter is on, a top RBI official said.
"We have collected data on direct and indirect exposure of banks to Satyam. The investigation in the matter is on," RBI Deputy Governor Shyamala Gopinath told reporters here on the sidelines a conference organised by the Indira Gandhi Institute of Development Research on Money and Finance.
The Reserve Bank of India (RBI) had asked banks to furnish information to the central bank
Five facts about SatyamTop Accounting scandalsSatyam: Full Coverage
on their fund and non-fund based exposures to Satyam and associate companies.
A communique to this effect had been sent to banks recently, Gopinath said.
Replying to a question on banks not cutting their interest rates on the ground that their cost of funds are still high, Gopinath said, "It is up to (the) banks to decide how to go about it. Banks are responding by cutting PLR and deposit rates."
The Indian financial markets are facing excessive pressure due to the substitution effect, subsequent to the drying up of alternative credit avenues during the current financial turmoil.
"The slowdown in the real sector is affecting the financial sector, which, in fact, has second order impact on the real sector," Gopinath said.
During a boom time, any asset is liquid and marketable, while when the market breaks down, the asset becomes illiquid, she said.
"There is a need to have government bonds in a portfolio of liquid assets," Gopinath said.
The Indian growth process is driven by domestic factors and the country has a comfortable foreign exchange reserve, Gopinath said.
The reversal of capital flows due to the de-leveraging of global markets has put pressure on India, she said, but expressed confidence in the Indian banking sector, saying ratios of Indian banks are better than their peers.
"Indian banks' average capital adequacy ratio is 13 per cent as on March 31 as against the regulatory requirement of 9 per cent," Gopinath said adding that their foreign units have suffered some mark-to-market losses due to the widening credit spread, the Deputy Governor Gopinath said.
Commenting on over the counter derivatives (OTC), Gopinath said, "there is a need for a central counter-party for OTC derivatives when volumes are high. The gap between prudential needs and accounting standards needed to be bridged and regulations in leveraging, transparency and liquidity must be ensured."
Financial sector entities need to be seen and regulated as risk repositories in the system-any notion of their risks being dissipated into or outside the system is inherently flawed.
There is, therefore, a need for limits, prudential safeguards and adequate capital to support the risks.
ICAI blasts hasty audits of PSB books
7 May 2009, 0350 hrs IST, Souvik Sanyal & Anto Antony, ET BureauNEW DELHI: The Institute of Chartered Accountants of India (ICAI) has raised
apprehensions about the accuracy of the audited financial
statements of Allahabad Bank, Vijaya Bank and the Central Bank of India, saying the statutory auditors were under pressure from these banks to complete the audits within unreasonable deadlines.
The accounting rule-maker, which is facing flak after the financial fraud at Satyam, has told RBI that the public sector banks put pressure on the statutory auditors to complete their work within 3-4 days and that such “hurried” audits have left a question-mark on the credibility of the banks’ financial statements.
“I have advised all chartered accountancy firms (doing bank statutory audits) against completing their assignments in undue haste under pressure from banks and signing documents prepared by the branches of the banks without checking them thoroughly,” said ICAI president Uttam Prakash Agarwal. Mr Agarwal said a bank audit requires due diligence of complex transactions and needs 15-20 days to complete.
The statutory auditors of these banks admitted to ET that they were pressured to complete the audits within 3-4 working days through mails and telephone calls. Central Bank of India wanted the audit to be completed by April 8 while Vijaya Bank and Allahabad Bank set deadlines of April 9 and April 10.
There were four bank holidays in the first 10 days of April — bank closing on April 1, Ram Navami on April 3, Sunday (April 5) and Mahavir Jayanti on April 7.
Central Bank of India said in a mailed reply that most of its branches completed their internal closing on March 31 and were ready for audit from April 1.
“We are nobody to exercise any pressure on the auditors, and auditors are at their liberty to do the audit as per their system and norms, which they follow and whatever information they ask is provided to them.” E-mails and phone calls to Vijaya Bank and Allahabad Bank elicited no response.
ICAI took up the issue after complaints from the statutory auditors of the banks. “Many of the details cannot be independently verified in 2-3 days. There is a possibility that the
Five facts about SatyamThe crux of the scam in SatyamNew directors of SatyamThe Great Fall of Satyam
audited statements might not be reflecting a true and fair picture of their financial health,” an auditor, who was on assignment with one of the banks said.
ICAI may push Price Waterhouse into blacklist zone
13 Jul 2009, 0445 hrs IST, MV Ramsurya, ET BureauMUMBAI: The country’s accounting regulator is planning strict action against audit
firm Price Waterhouse after two of its partners allegedly failed to check accounting lapses and verify financial statements in the over Rs 7,000 crore Satyam fraud case.
The Institute of Chartered Accountants of India could likely consider recommending blacklisting of Price Waterhouse, which would bar the global audit firm from carrying out auditing in India. As the institute can only recommend, its decision can be challenged in court. The institute may state its decision by the month
end, say people familiar with the development.
Such a move would be similar to the temporary suspension of a Japanese audit firm affiliated with PricewaterhouseCoopers in 2006, on charges of tampering with a client’s accounts. In its independent probe into the Satyam fraud case, the ICAI, which is the nodal body for accountants and auditors in the country, has found the two auditors, Subramani Gopalakrishnan and Srinivas Talluri, were not carrying out adequate due diligence while auditing the books of the software major.
The two auditors are in jail awaiting trial for allegedly being involved with former Satyam chairman B Ramalinga Raju and his team in perpetrating the over Rs 7,000-crore fraud. In a report submitted by the institute’s committee, the accounting body is learnt to have cleared the two auditors of the other charges of misrepresentation and of taking large auditing fees.
ICAI president Uttam Prakash Agarwal, who is part of the two-member committee that probed the audit lapses, didn’t comment on the development. A spokesperson for PricewaterhouseCoopers, the parent body for audit firm Price Waterhouse said they had not received any communication from ICAI.
“We have neither received a copy of the high-powered committee report of the ICAI nor has the committee sought or received any comment or information from Price Waterhouse regarding the audit of Satyam during its inquiry.”
Interestingly, the timing of the report, which was finalised late on Friday, will coincide with the visit of an investigating team from the United States securities and exchange
Top Accounting scandals
commission team that is scheduled in India, on Monday. Satyam Computer, now called Mahindra Satyam, is an SEC-registered company.
The fraud, which encompassed many aspects including banking, debtor information and HR issues, was, at its core, related to forged bank documents. It is widely speculated that the former Satyam management kept money in a current account and showed it as fixed assets instead of bank balance by creating false receipts. This is one of the aspects being looked into by the CBI.
ICAI seeks details from all CA firms with foreign tie-ups
22 Jun 2009, 2116 hrs IST, IANSNEW DELHI: Accounting regulator ICAI today asked all chartered account firms
having foreign tie-ups to furnish information about their contracts with multinational entities and other details like income tax assessment orders for the last three years to the High Powered Committee (HPC) which was formed to probe the Satyam accounting fraud.
The Institute of Chartered Accountants of India (ICAI), which has already sent notices to 94 CA firms seeking details, today said the firms which have not received any communication so far to submit the details within 15 days.
Earlier, the Institute had asked 23 identified firms to submit details of their contract with multinational entities, remittances made to and received from the them along with partnership deeds to the HPC, chaired by President ICAI Uttam Prakash Agarwal.
The decision assumes importance in the light of the fraud in Satyam Computer, whose books of accounts were audited by Price Waterhouse, Indian arm of global auditing firm PricewaterhouseCoopers.
Following disclosure of fraud by Satyam founder B Ramalinga Raju, the institute constituted a seven-member committee headed by Agarwal to look into the role of auditors in the multi-crore scam.
'India Inc lacks fraud-detection procedures in audit plans'
25 Jun 2009, 1754 hrs IST, PTINEW DELHI: Even as India Inc talks of increasing corporate governance norms after
the Satyam scam, a study by global consultancy firm Ernst & Young has said that more than half of the companies surveyed do not take into account risk of frauds in their annual audit plans.
Though many companies have increased their internal audit budgets, the survey said that 44 per cent companies confirmed that fraud-detection procedures are not included in the work plan for most audits, while 36 per cent of them said they do not account IT risk assessments in their annual audit plans.
Though IT systems are backbone of operations in most companies, the India Internal Audit Survey 2009 showed that there is a dearth of IT auditors and a low percentage of firms perform an IT risk assessment before finalising their internal audit plans.
This means that firms need to revamp the functioning and involvement of audit committees in overseeing the audit function and see if there is proper implementation of audit recommendations, the survey said.
"Deeper involvement of audit committees is essential to improve the perception of the importance and quality of work delivered by the internal audit function," E&Y partner and national director Ram Sarvepalli said.
SEBI to bear peer review audit cost to avoid 'Satyam' repeat
14 May 2009, 2038 hrs IST, ET Bureau
KOLKATA: Securities and Exchange Board of India (SEBI) chairman C B Bhave on
Thursday said the market regulator will bear the cost of ‘peer review’ of the accounting statements of all Nifty and Sensex companies to avoid a Satyam like financial scandal.
Mr Bhave, who was in town to inaugurate SEBI’s new office premises in Kolkata on Thursday, said: "For the first exercise atleast, SEBI has decided to appoint audits as well as pay for it. We realised that there might be a slight conflict of interest in the minds of investors if companies pay the peer review fees. So we decided to pay for it. We will subsequently review how to fund this exercise."
Incidentally, the market regulator had decided to subject all Nifty and Sensex companies to a peer review of their accounting statements as part of its confidence building measure. Some listed companies outside of the Nifty and the Sensex, chosen on a random basis, would also be reviewed.
He further added, "the whole process may take a bit longer than what we had estimated simply because we had to make sure that there is no conflict of interest between the auditing firm which was supposed to do the review vis-a-vis the audit firm which had audited the accounts, as well as the companies whose accounts has been audited. It was a kind of a triangular verification and that took a bit of a time."
SEBI chairman Bhave spoke on a variety of other issues relating to corporate bond market, pledged shares, foreign currency options, interest rate derivatives, the swindle at Satyam Computer Services Ltd and the peer review process SEBI is working on.
Commenting on the SME Exchange, Mr Bhave said they would like to ensure that this attempt does not fail like few others including Over-The-Counter Exchange Of India has in the past.
On the issue of developing the bond market, Mr Bhave said the Reserve Bank of India
(RBI) will soon put in place a mechanism to facilitate settlement of trading in corporate and other bonds to infuse comfort and transparency in the bond market trading system. The new initiative will do away with bilateral settlement of trades.
"The apex bank has agreed to keep the bond market money in its system during pay in and pay out so that the market does not run a risk. Though small in number, these transactions were large in value and institutions were not confident settlement only through a couple of banks," Mr Bhave pointed out.
Since corporate bonds market is essentially an institutional market, SEBI chief feels that it needs to be tackled with different perspectives. One needs to increase the number of participants so that the market becomes a little wider and take care to introduce those institutions with different views to add greater width and variety to the market.
SEBI has already initiated a couple of measures to enhance depth in the bond market. The FIIs limit to participate in the bond market has already been increased and listing norms for those companies issuing debt instruments simplified.
Nigeria Bank Ratings Suspended at RenCap for Union, Oceanic Share | Email | Print | A A A
By Janice Kew
Aug. 18 (Bloomberg) -- Intercontinental Bank Plc, Oceanic Bank Plc and Union Bank of
Nigeria Plc had their ratings suspended at Renaissance Capital after the central bank fired their
chiefs and the bourse halted trading of their shares.
Nigeria’s central bank Governor Lamido Sanusi on Aug. 14 dismissed the chief executives of
the three banks along with those of Afribank Nigeria Plc and Finbank Plc after an audit found
the lenders were in a “grave situation” and their management had acted in a manner
“detrimental to the interests of depositors and creditors.” The stock exchange suspended
trading in the five banks’ shares yesterday.
“These banks are clearly in the process of transition and we formally reintroduce our
investment ratings and target prices when clarity returns,” Renaissance Capital, a Moscow-
based brokerage with offices in Africa, wrote in a research report dated today.
RenCap also upgraded its recommendation on Zenith Bank Ltd., Nigeria’s second-biggest
lender by market value, and reiterated its “buy” recommendations on eight other lenders
including the country’s largest, First Bank of Nigeria Plc. Those banks either passed or are
likely to survive the audit, which RenCap sees as part of a central bank plan to prepare the
banking industry for international competition, the note said.
Banks in Nigeria, Africa’s second-biggest oil producer, may have as much as $10 billion of toxic
assets, Eurasia Group, a New York-based research company, said in May. The bad debt is
partly the result of at least 1 trillion naira ($6.3 billion) of margin loans used to buy shares as
they soared 13-fold since 2000 until plunging last year, according to Bank of America Corp.
Foreign Competition
“The real match will be between Nigeria’s banks and their global retail counterparts for control
of the Sub-Sahara African banking landscape,” Lagos-based RenCap analyst Kato Mukuru
wrote in the note. “We believe the banks that have failed the audit and the ones that may fail
the audit can partner with those that have passed or seek international parents.”
Eight foreign investors are ready to take control of the five commercial banks whose chief
executive officers were fired on Aug. 14, the Lagos-based Guardian reported yesterday,
without saying where it got the information.
The four biggest banks hold 42 percent of the industry’s assets in Nigeria, compared with 84
percent held by the four largest in South Africa, Mukuru wrote.
When firing the chief executives, Sanusi also announced that 400 billion naira would be
injected into the lenders to ensure they meet minimum capital requirements. The dismals were
aimed at preventing a “freefall” in the value of their stocks, Sanusi said.
Zenith Upgrade
RenCap previously rated Intercontinental and Oceanic as “hold” and Union Bank of Nigeria as
“sell.”
The Central Bank of Nigeria may need to inject 1 trillion naira into some of the five banks
whose chief executive officers were fired last week, ThisDay newspaper said, without citing
anyone.
While Zenith is yet to pass the audit, Rencap is “confident” it will do so and raised its
recommendation on the stock to “buy” from “hold” with its price estimate increased to 20
naira from 17 naira.
Zenith, along with First Bank, Access Bank Nigeria Plc, First City Monument Bank Plc,
Guaranty Trust Bank Plc and United Bank for Africa Plc are RenCap’s top picks because they
“show up well” in terms of the central bank’s requirements of transparency and liquidity,
Mukuru wrote.
To contact the reporters on this story: Janice Kew in Johannesburg at
Last Updated: August 18, 2009 06:22 EDT
External audit quality of banks need to improve, says Basel Committee
December 2, 2008: The Basel Committee on Banking Supervision released today External audit quality and banking supervision. This paper describes the importance of audit quality in
banks, particularly due to an increased reliance on sound audits and because high-quality audits can enhance market confidence during times of severe market stress.
The paper also highlights that bank audits are highly specialised, which can be complicated by escalating complexity of banking products and the related accounting and auditing rules for those instruments. Most of the world’s banking assets are audited, and banking supervisors
are increasingly reliant on high-quality audits to complement supervisory processes.
As noted in the paper, the Basel Committee intends to build upon its ongoing efforts to address audit quality through continued support of groups with direct influence over external
audit firms and promotion of enhanced sound audit guidance, practices and standards. It also calls for enhanced transparency over the structure and financial positions of global network
audit firms.
Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that "the Basel Committee has a long track record of promoting high-quality audits in banks
and will continue to focus on this area. As bank products and the accounting for these instruments have increased in complexity, external auditors play an increasingly critical role in
supporting bank supervision, market transparency and, ultimately, market confidence."
Sylvie Mathérat, chair of the Basel Committee’s Accounting Task Force and Director (Financial Stability) at the Bank of France, remarked that “strong audit quality is an essential
prerequisite for users of financial information. For bank supervisors, this is particularly true for audits of fair value estimates, loan-loss provisions, consolidation, de-recognition and other
areas significant to banking. The Basel Committee’s ongoing efforts to promote audit quality are especially important during these times of severe market stress.”
BUSINESS LINE
‘RBI should go back to appointing auditors for banks’K.R. Srivats | 2009-02-07 13:36:17
New Delhi: Appointment of external auditors for bank audits continue to be mired in controversy.
After the auditing profession regulator, the Institute of Chartered Accountants of India (ICAI), it is now the turn of the bank employees to oppose the freedom given to public sector bank boards to choose the statutory auditor.
RBI wants productive sectors to get credit
The All-India Bank Employees Association (AIBEA) on Friday urged the Government that the earlier rule of Reserve Bank of India independently appointing auditors for the banks be restored immediately.
“We have demanded independent appointment of external auditor for bank audits. The earlier system of RBI independently appointing external auditors for audit of the banks should be brought back. Bank boards should not have the option to decide and appoint auditors,” C.H. Venkatachalam, General Secretary, AIBEA, told Business Line.
RBI to manage borrowing smoothly
Last year, the RBI had relaxed this condition and the bank boards were given the freedom to recommend the auditor of their choice for approval by the RBI.
The ICAI had recently shot off a letter to the Union Finance Ministry urging a review of the system of appointment of auditors in banks.
More India business stories
It is of the view that the bank boards, whether it be public sector or private sector banks, should not have a say in the appointment of external auditors. This involvement of bank boards’ would raise independence issues, said a former ICAI President, who did not wish to be identified.
conclusion
Before beginning, plan carefully. A wellplannedaudit will make the entire assignmentof bank branch audit totally pleasurable whilean ill planned audit will end in chaos. Spendtime and energy on drawing up a detailedaudit programme, framing checklists andquestionnaires, familiarising the team membersabout the various aspects of bank audit and you
will surely reap the benefits at the end of theassignment.
auditors’ reportto the members of ICICI BANK LIMITED1. We have audited the attached Balance Sheet of ICICI Bank Limited (the ‘Bank’) as at March 31, 2003 and also theProfit and Loss Account and Cash Flow Statement for the year ended on that date annexed thereto. These financialstatements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.2. We conducted our audit in accordance with the auditing standards generally accepted in India. Those Standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by the management, as well as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.3. In accordance with the provisions of Section 29 of the Banking Regulation Act, 1949 (‘the Banking Regulation Act’)read with the provisions of sub-sections (1), (2) and (5) of Section 211 and sub-section (5) of Section 227 of theCompanies Act, 1956 (‘the Companies Act’), the balance sheet and the profit and loss account, are not required tobe and are not drawn up in accordance with Schedule VI to the Companies Act. The balance sheet and profit andloss account are, therefore drawn up in conformity with Forms A and B (revised) of the Third Schedule to the BankingRegulation Act.4. We report that :a) We have obtained all the information and explanations, which to the best of our knowledge and belief werenecessary for the purposes of our audit and have found them to be satisfactory;b) In our opinion, the transactions of the Bank which have come to our notice have been within its powers;c) In our opinion, proper books of account as required by law have been kept by the Bank so far as appears fromour examination of those books and proper returns adequate for the purposes of our audit have been receivedfrom the branches not visited by us;d) The balance sheet and profit and loss account dealt with by this report are in agreement with the books ofaccount;
e) In our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this reportcomply with the accounting standards referred to in sub-section (3C) of Section 211 of the Companies Act,insofar as they apply to the Bank;f) On the basis of written representations received from the directors, as on March 31, 2003, and taken on recordby the Board of Directors, we report that none of the directors is disqualified from being appointed as a directorin terms of clause (g) of sub-section (1) of Section 274 of the Companies Act;g) In our opinion and to the best of our information and according to the explanations given to us, the said accountsread together with the notes thereon give the information required by the Companies Act in the manner sorequired for banking companies, and give a true and fair view in conformity with the accounting principlesgenerally accepted in India :i. in case of the balance sheet, of the state of the affairs of the Bank as at March 31, 2003;ii. in case of the profit and loss account, of the profit for the year ended on that date; andiii. in case of cash flow statement, of the cash flows for the year ended on that date.For N.M. RAIJI & CO. For S.R. BATLIBOI & CO.Chartered Accountants Chartered AccountantsJAYESH M. GANDHI per VIREN H. MEHTAPartner a PartnerMumbai: April 25, 2003
Role of External Auditor in Banking SectorThe RBI has long recognized the key role that theaccounting and auditing profession plays in assessinginternal controls. Guidance issued by the RBI and ourInstitute reflects the important role that both internaland external auditing play in enhancing internal systemsand monitoring risk. The Basel Committee hasproduced extensive guidance on the roles of both theexternal audit and internal audit and the ways these canbe factored into the supervisory process.Market discipline is becoming a key element ofsupervisory thinking, and market discipline dependson prompt, accurate financial information. Externalauditors help significantly in ensuring that financialstatements are reliable and useful to the marketplace.Periodic financial statements of banking organizations
BASEL IIare also used by RBI in its risk-focused supervisionprogrammes. These reports contribute to pre-examinationplanning, facilitate off-site monitoring programs,and ultimately help in determining the institution’sfinancial condition. A strong external audit programassists RBI in moving away from detailed, burdensomeand invasive examinations.
Supervised institutions might well decide to usethe expertise of the external auditor for more than routinefinancial reports. External auditors could alsoreview the quality of internal controls and systems andassess the internal audit function’s scope and adequacy.We are all well aware that a strong system ofinternal control is the foundation for the safe and soundoperation of the financial organization. Furthermore, afinancial institution’s board of directors is responsiblefor setting the control environment, and managementare responsible for laying down the internal controlprocess. Recognizing that responsibility, it is no surpriseif boards of directors and management are askingtheir external auditors to review the internal auditfunction and recommend improvements in light of thechanged business environment.External auditors can also help RBI by encouragingfinancial institutions to frequently reassess and refinetheir risk-management practices. A risk-managementsystem should continually monitor financial risks in achanging business climate, such as the outlook for creditrisk, market risk, liquidity risk, and operational risk..Each firm should review its own internal practicesto ensure that audits are of the best quality, consistentwith sound practices and high standards ofethics and independence. The peer-review processshould be viewed as an opportunity to improve qualityrather than a somewhat routine compliance obligationto encourage the auditing profession to police itselfand to strive continually to improve audit quality. Bydoing so we avoid suspicions regarding the competenceand judgment of independent auditors. Alsokeep foremost in mind that our ultimate client is notmanagement but the shareholder.We need not only watch for misleading financial statementsbut also for companies that apply the technical rulesunderlying accounting standards in ways that cover lossesor otherwise obscure condition and performance of aninstitution. Attention to these matters will help ensure thataudits deliver their promised benefits, that transparency isenhanced, and that market participants and supervisors arebetter able to regulate the risk-taking of financial institutionsin ways that promote financial stability.ConclusionIn the face of a rapidly evolving external environment,we see wisdom in staying the course, encouragingimproved risk-management processes and betterdisclosure. We can also observe, however, that thetime is right for banks and other financial institutions,
infrastructure providers, and utilities to work independentlyand, possibly, collaboratively, to yield atougher, more resilient financial system.
BASEL IITHE CHARTERED ACCOUNTANT 425 OCTOBER 2004
A unique feature of theIndian financial system isthe diversity of its composition.We have the dominanceof Government ownershipcoupled with significantprivate shareholdingin the public sector banks,which in turn continue tohave a dominant share inthe total banking system.There are many definitionsregarding categories ofrisk, but the bottom line is,however you define therisk factors that influenceorganisation, risk managementis corporate governanceand corporate governanceis risk management,which is what the revisedBasel II Capital Accord is allabout.
External AuditorsBy widening the range of tasks and activities the externalauditors perform, RBI may use the services ofexternal auditors as a supervisory tool and initiate dialoguewith the Institute of Chartered Accountants ofIndia as well as bank management to chalk out themethodologies and action plan. Instead of duplicatingthe efforts of external and internal auditors, the supervisoryprocess would seek to leverage the work done
by the external agencies. One of the features of theRBS is the use of specialist third parties like externalauditors as a supplement to the official oversight bysupervisors.Audit is normally a backward looking exercise asa going concern without an opinionon the future viability, whereas riskbasedsupervision is forward lookingand talks about effectiveness ofrisk management systems. Thoughthe focus of the external auditor andsupervisor may be divergent, thereconcerns compliment each other.With quality external audit in place,the supervisor can think of doingaway with detailed, often burdensomeand invasive examination ofbanks. The communication of theauditors to the management isthrough Long Form Audit Report(LFAR) commenting on mattersrelating to loan portfolio, adequacyof internal controls, etc. The formatof LFAR needs to be revised to suitrisk-focused audit.The changeover to RBS will not, obviously, be atone go, but in a gradual manner as the inadequacies inthe risk management system in the bank are removedand set right.Ideally speaking, an in-house Change ManagementTeam is to be formed and institutionalized to monitorthe progress of implementation and suggest ways andmeans to overcome the obstacles. Banks are nowrequired to give a comprehensive quarterly report toRBI detailing the status of implementation of theprocess to move towards Risk Based Supervision, inaddition to the progress on implementation of ALM &Risk Management systems in the Bank.ConclusionThe basic objectives of bank supervision process areprotection of depositors and safeguarding the integrityand soundness of the financial system. RBS hasevolved out of the on-going supervisory pursuit toaddress the issues unanswered in the traditionalmethod of supervision. Though cost of banking supervisionis rather high due to very nature of operations ofthe bank spread to the nook and corner of the country,the cost of poor supervision may prove to be higherand riskier to the whole economy. Hence, it is imperativethat Risk Based Supervision mechanism is put in
place in the banks with all the vigour. ■
THEME
To begin with, the conceptof Risk BasedInternal Audit may beintroduced on pilotbasis in selectbranches where thereis heterogeneous compositionof business.Thereafter, banks maycapture a large portionof the business of theBank through a smallnumber of branches.THE CHARTERED ACCOUNTANT 584 NOVEMBER 2004