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With major frauds being reported by banks in the recent past, including the ₹13,000-crore Letter of Undertaking fraud at Punjab National Bank, the Reserve Bank of India said there is a need for improvement in the audit function and its governance.
The central bank wants the various types of audits undertaken by banks, such as statutory audit, risk-based internal audit (RBIA), concurrent audit, information systems (IS) audit and special audits to be tightened.
Concurrent audit
The RBI said concurrent audit has to be carried out on real-time or near real-time basis, and is expected to set the tone for subsequent internal audits that happen with a time lag. Exception reports, even of a routine nature, are to be seen in detail on an ongoing basis.
Audit trail should be checked for diversion of funds through round-tripping and other means. Further, the auditor needs to ensure that Foreign Exchange Management Act guidelines are complied with and Know-Your-Customer / Anti-Money Laundering directions are implemented properly.
The quality of internal audit, according to the RBI, was adversely affected due to inadequate human resources, lack of desired skill-sets (particularly for specialised branches), non-adherence to stipulated timelines for compliance with audit findings, and non-inclusion of some critical areas, indicating inadequate attention to sustainable compliance with the findings of earlier reports.
“Many instances of repetitive and similar audit findings over the years were seen. Further, internal audit could not detect many frauds, which came to light after accounts turned NPA.
“Fraud detection and reporting, as well as preventive steps, need to be more risk-focussed so as to identify red flags at an incipient stage,” said the central bank in its annual report.
Flagging non-adherence to Income Recognition and Asset Classification (IRAC) norms by banks as a major concern, the RBI said in this respect the audit function still needs to provide the desired level of assurance to all stakeholders, including the RBI.
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