Reserve Bank extends 'rest' period for auditors to 6 years

Central bank has extended the rest period of statutory auditors to at least 6 years

The Reserve Bank of India (RBI) on Thursday criticised private and foreign banks for appointing the same set of auditors alternatively after mandatory rest of two years, as such practice establishes a “comfortable relationship that may lead to compromise in strict adherence to audit principles.”

As per the extant rules, a statutory auditor has to be appointed for a period of four years and then there should be a rest of two years. Now the central bank extended the rest period to at least six years.

According to RBI, in some cases in private and foreign banks, the same audit firm was reappointed after a gap of two years’ rest. In a few other banks, the immediately preceding statutory auditor firm was appointed on completion of the four-year tenure of the current statutory auditor.

“The statutory central audit responsibility in such banks thus remained confined to two audit firms which were appointed on a cyclical basis,” said RBI in a notification on its website.

Criticising these banks, the central bank said the rest and rotation policy in the appointment of auditors have been mandated so that books are looked at afresh, “as a new team is likely to examine the issues in a bank from a different perspective.”

In order to make the banks follow the policy in letter and spirit, the central bank said that an auditor, after completion of its four-year tenure in a bank “will not be eligible for appointment as SCA of the same bank for a period of six years.”

The central bank’s directive assumes importance in the light of wide divergence found in the books of some private sector banks, which reported much lower NPA in their books for FY 16 than what the central bank auditors later found. If the divergence found is more than 15 per cent from RBI’s perspective, it is now mandatory than banks disclose the information in the annual report.