The Reserve Bank of India has decided to put in place a framework to take appropriate action against banks’ Statutory Auditors (SAs) for any lapses observed in conducting the audit. The move comes in the backdrop of bad loans and frauds coming to light in the banking system in a big way in recent years.

The central bank said this is in the interest of improving audit quality and with a view to instituting a transparent mechanism to examine accountability of SAs in a consistent manner.

The framework would cover instances of divergence identified in asset classification and provisioning during the RBI inspection vis-à-vis the audited financial statements of banks. The types of lapses on the part of the SAs that would be considered for invoking the enforcement framework would cover: lapses in carrying out audit assignments resulting in misstatement of a bank’s financial statements; wrong certifications given by the auditors with respect to list of certifications as advised by the RBI to banks; wrong information given in the Long Form Audit Report; issues related to misconduct by auditors in respect of their bank audit assignments.

The determination of actionable lapses on the part of the banks’ SAs would be made on a case-specific basis, based on the two dimensions: the fact of lapse; and the materiality of the lapse.

The quantum of enforcement action will be determined based on the materiality of lapses/violations by audit firms. Lapses/violations that are determined to be not material enough would lead to the issuance of a Cautionary Advice to the audit firm. In case of a violation determined to be material, the enforcement action could be the RBI not approving the audit firm for undertaking statutory audit assignments of banks for such periods as may be decided by it.

In case of violations/lapses identified by any other regulators/ enforcement agencies/ judicial or government authorities, etc., the RBI would deny audit to such firms, provided the case is of serious nature, where public interest is involved and it is established, prima facie, that the firm is culpable, either by the RBI or by the above entities, and such violation / lapse is brought to the RBI’s notice.

Further, the RBI would also deny audit assignments to such audit firms as are blacklisted by the above entities and brought to RBI’s notice, until the time their name is cleared by them.

Any enforcement action, including issuance of Cautionary Advice, on an audit firm will be communicated to the Institute of Chartered Accountants of India (ICAI), the professional body of the audit community, as and when such action is taken. The fact of such communication to the ICAI will also be placed in the public domain by the RBI.

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