RBI fiat on penalties makes auditors see red; banks may have to pay more

The RBI's June 29 circular said it would take punitive action against auditors, mainly in case of divergence in provisioning norms and asset classification

The recent Reserve Bank of India (RBI) circular invoking penalties against bank auditors is likely to push up auditing cost for lenders and could also hurt banks' functioning as the audit process might seem endless.

Auditors said the proposals had not been well thought out. Audit fees have fallen 30-40 per cent in recent years. As complexities are increasing, these rules will lead to a jump in audit fees, they added.

"The fees will be very high for banks now if auditors have to assume so many responsibilities in a restrictive environment," said a senior partner at a firm.

The central bank's June 29 circular said it would take punitive action against auditors, mainly in the case of divergence in provisioning norms and asset classification. The RBI will also not allow auditors debarred by other regulators or state governments.

The ruling will hit many auditing firms, especially the Big Four (PWC, KPMG, Deloitte and EY), as these have been challenged by some regulator or government agencies.

Business Standard tried to contact them, but these firms did not want to comment on the story. However, some of the partners agreed to speak up on condition of anonymity. 

Auditors are upset about the subjectivity involved in categorising non-performing assets (NPAs).

"Bank audits have subjectivity involved, but the subjectivity has some mathematical element. For instance, an account is a NPA if it is not serviced in 90 days. Bad debts had categories of provisions - such as 10 per cent and 15 per cent - all the way to a write-off. What the RBI is doing is bringing its own subjectivity about an account and asking us to follow the same. We neither have so much information nor the mandate," said a partner at a firm. "Auditors are easy targets," the person added.

Another senior partner at an audit firm said the RBI could not take action against an auditor without coming through the Institute of Chartered Accountants of India (ICAI). 

However, in terms of regulations and guidelines on auditing a bank book, it is always the regulator's rules that prevail over the ICAI's guidelines.  However, multiple rules by different regulators make the job very difficult, he added.

“There are too many regulators. The chartered accountants institute, the RBI, Sebi, and the Irdai have separate rules for insurance company audits and now the National Financial Reporting Authority (NFRA) is being introduced,” said another partner at a firm.

The problem comes when regulators have different views on the same matter, especially when it is about investigative powers, he added.

"There should be one common approach, Currently, everyone is trying to regulate auditors differently. All audit firms should be treated in the same manner," he said.

In the US, the Public Company Accounting Oversight Board (PCAOB) is the authority over company auditors and works closely with the Securities Exchange Commission (SEC). In the UK, the Financial Reporting Council is the final authority on these matters.

"Hopefully, the NFRA will resolve this confusion. I see the NFRA as the regulator for auditors of small companies. It will set the standards," the person added.

According to the partner, in today's complex financial and economic environment, companies need auditors "who can work beyond a country's jurisdiction, understand complex subjects or different types of financial transactions that take place in terms of trade of acquisitions".

"Expertise in such areas will typically lie with larger companies as larger audit firms can attract experts. If you have a small audit firm peering through the accounts of a large entity, you are never going to get the right answers because they don't have the expertise", he added.

In recent times, many banks have been found to have bad debts. If the divergence found by the central bank audits was above 15 per cent, the lenders had to declare the whole divergence subsequently. Besides, auditors were hauled up for their lapses in catching Nirav Modi who perpetrated frauds in Punjab National Bank.