Tag: Audit

Need to improve quality, depth of audit: RBI Governor Shaktikanta Das

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Undesirable practices and structures, including incorrect assumptions in determining provisioning requirement for financial assets, diversion of funds and/or transfer of profits to connected parties, and real transactions getting camouflaged beneath various layers of IT solutions, should draw the attention of the auditors, according to Reserve Bank of India Governor Shaktikanta Das.

“One of the important roles of audit is to check the so called smart accounting practices, if any, followed by management to overstate profits or understate expenses / liabilities,” Das said in his address at the National Academy of Audit and Accounts (NAAA), Shimla.

Referring to Ind-AS (Indian Accounting Standards), which has been implemented for all listed companies (other than banks) in India, including NBFCs having net worth of more than ₹250 crore, the Governor observed that within Ind-AS, Ind-AS 109 with Expected Credit Loss (ECL) approach allows the management to exercise discretion and judgment in determining the provisioning requirement for their financial assets.

Das said: “Such flexibility and forward-looking nature of assessment, however, poses the ‘model risk’,that is, the model may rely on incorrect assumptions and may be far from representing the real-life scenarios. “This has been observed in several cases. Hence, auditors are expected to test the models used by the entities, challenge the management and validate the model outputs.”

Diversion of funds

The Governor said of late, several instances of related party transactions, without following ‘arms-length’ principle and established transfer pricing mechanism, have been observed.

“There have been instances of diversion of funds and/or transfer of profits to connected parties through various means – intra-group loans on favourable terms, over or under invoicing of transactions, asset transfers without fair valuation, etc,” he said.

Das emphasised that auditors need to identify and thoroughly scrutinise related or connected party transactions to ensure that there is no undue transfer of income or assets.

‘See-through’ IT layers

The Governor also flagged cases of manipulation and misstatement of the true nature of financial statements by employing opaque technological means (IT black boxes).

“Real transactions are camouflaged beneath various layers of IT solutions by a few entities. As such, auditors need to be technologically savvy and be able to ‘see-through’ the layers of information technology to detect the real nature of hidden transactions,” he said.

Das said since RBI, as the supervisor of the financial system, relies and leverages on the work done by auditors, the audit professionals are being sensitised through various fora to improve the quality of their reporting

He highlighted that:“We are constantly engaged with individual auditors, audit firms and the Institute of Chartered Accountants of India (ICAI) to improve the quality and depth of audit. A lot of work has been done in this area, but lot more needs to be done.”

Good governance

The Governor said the management has the responsibility for demonstrating, through its actions, the importance of ethical conduct.

While this is relevant for all businesses, it is even more important for financial institutions which hold public trust and depositors’ money in fiduciary capacity.

Das felt that financial sector entities, the audit community and the financial sector regulators and supervisors have to work together and take proactive steps to ensure good governance and ethical practices to build a strong and resilient financial sector.

Tech adoption

The Governor stressed that the auditing profession cannot afford to lag in adoption of technology. “Adopting technology tools such as computer-assisted audit tools and techniques (CAATTs) through constant upgradation and integration of new technologies will bring in a lot of efficiency in audits.

“In parallel, it has to be kept in mind that adoption of such technology tools for auditing cannot replace professional judgment,” he said.

A holistic approach is required while integrating technology tools in audit. The Governor said:“The profile of tomorrow’s auditor will be that of a critical, yet constructive challenger, with a clear focus on public interest and quality audits. There is a need to be even more professional, qualified, impartial, value-driven, ethical and display awareness and foresight.”

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RBI may not relent on ‘game-changing’ joint audit of banks, NBFCs, BFSI News, ET BFSI

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The Reserve Bank of India may not relent on its new norms that mandate joint audit of banks and NBFCs above a threshold and auditor rotation despite widespread opposition from banks, NBFCs and auditors.

The central bank sees it as a game-changing move, which will ensure the independence of auditors and increase opportunities for firms, according to a report.

According to RBI, the guidelines are compulsorily applicable to only 300 NBFCs, out of the 9,600 in India, and other NBFCs with asset size below Rs 1,000 crore can continue with the existing system.

The statutory auditors of public sector banks, financial institutions already have a tenure of three years, and RBI has reduced the tenure of private bank auditors from four years to three, according to the report.

The six-year rotation policy of auditors is in place for private and foreign banks which has been extended to NBFCs.

Audit firms at loggerheads

Top multinational auditing firms in the country are at loggerheads with their Indian peers once again, with the former lobbying to make the Reserve Bank of India reconsider its latest auditing regulations that open up new opportunities for smaller Indian firms.

The new guidelines will curtail growth opportunities for multinational firms and create substantial transitional issues, but Indian firms a chance to get more audit business from the lucrative financial sector currently dominated by the Big Four.

Multinational auditors have started reaching out to RBI, industry associations like CII and FDCI, and even larger financial companies to highlight transition problems and risks of joint audits.

Indian firms have launched a counter-offensive by supporting the central bank’s move and taking their case to the regulator and financial companies directly and through industry associations such as Assocham.

The RBI regulations

On April 27, the RBI released new guidelines for statutory auditors of financial entities to enhance the independence of auditors and tackle concentration issues. The guidelines require mandatory rotation of auditors after three years with a six-year cooling-off period, and appointment of joint auditors in entities having asset size of Rs 15,000 crore and above.

The opposition

The regulations ran into opposition from bankers and auditors who wanted it to be deferred citing less time to appoint auditors and crunch. “The new guidelines have come in at the end of April. We have to evaluate how we can sort of look at appointing new auditors so quickly.

Because the RBI guidelines say that existing auditors cannot continue (auditing) if they have done three years. I think in the case of most companies (non-bank lenders), the auditors would have already done more than three years, probably done four years… So, I hope that RBI defers this applicability by year or so because the year has already started, and a lot of them would have to start looking around for new audit firms,” Keki Mistry, MD and Vice Chairman Keki Mistry had told ETCFO.

“Many challenges here if implemented from FY22. Some bank auditors have already finished three years — they will only have weeks to make a new selection. The pool available to choose from will be limited for FY22 and many potential suitors would be conflicted under the new one-year cooling-off period having done such non-audit services in FY21,” Grant Thornton Bharat CEO Vishesh Chandiok had said.



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CII wants RBI to review circular on appointment of bank, NBFC auditors, BFSI News, ET BFSI

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Industry chamber CII has asked the Reserve Bank to review its circular on appointment of auditors for banks and NBFCs saying it was inconsistent with the provisions of the Companies Act and would create hardship for businesses in times COVID.

The Reserve Bank in its circular on April 27, 2021 imposed various restrictions on appointment of auditors by banks and NBFCs and prescribed a cooling off period for re-appointment.

Urging the RBI to review the circular, the Confederation of Indian Industry (CII) said the proposals “will cause significant hardship to the companies, its stakeholders as well as industry in general”.

The chamber said that few matters that warrant an immediate attention of the RBI include a clarification that the circular is only intended to cover banks and NBFCs and their respective audit firms.

“The RBI may not apply the same principles to the commercial banks and NBFCs, including in respect of cap on maximum number of audits, mandatory joint audits, and rotation/cool off principles. The NBFCs may continue to be governed by the Companies Act, 2013,” it said.

It also suggested to re-consider severe restrictions on capacity and eligibility requirements, limit on number of audits, maximum engagement period of 3 years and 6 years cool off period after rotation.

“The RBI may consider aligning them with the provisions in the Companies Act, 2013. The RBI may still achieve its objectives, without diluting any of the principles,” it said.

The chamber further asked for review of definition of related parties, which as per the circular include the group entities using a common brand name as this has far reaching implications and unintended consequences; and restrictions on audit/non-audit services during one year before/after the appointment as auditors of a bank/NBFC, covering the entity and its group entities.

“These provisions may create severe capacity constraints, without adding any qualitative parameters,” CII said, requesting the RBI to help in facilitating an effective implementation of regulation, without disrupting the ease of doing business.

It also said that a sudden change in major policies, without any reasonable transitional provisions, is bound to create several practical challenges in successful implementation.

“It should also be noted that appointment of auditors is a critical and important process for an organisation and merits right level of attention especially from senior management, board and audit committee, and approval from RBI,” CII said.

It added that all these amendments will create inconsistent policies without adding any qualitative parameters.

“It is all the more challenging in present times, severely impacted by COVID-19, to implement these requirements without any transitional provisions,” it said.



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Axis Bank to become co-promoter of Max Life Insurance, BFSI News, ET BFSI

Banking & Finance

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Axis Bank has become a co-promoter of Max Life Insurance after a regulatory go ahead from the Insurance Regulatory Development Authority of India (Irda).

The private sector lender will also nominate three representatives to the board of Max Life Insurance post this development. The three representative are Rajiv Anand, Rajesh Dahiya and Subrat Mohanty.

Anand heads the retail banking portfolio of Axis Bank while Dahiya heads multiple functions such as audit, human resources and compliance. Mohanty is the head of banking operations.

Further, two additional independent directors will join the board of Max Life Insurance, according to sources in the know.

“Axis Bank has been a long-term partner to Max Life and together we have contributed to deepening insurance penetration in India over the last decade,” said Amitabh Chaudhry, managing director and chief executive officer, Axis Bank.

Axis Bank had announced its intent to purchase a 30% stake in Max Life Insurance for a sum of around Rs 1,530 crore in April last year. The transaction underwent some tweaks to adhere to Reserve Bank of India and Irda recommendations.

As per the current structure, Axis Banks now owns a 13% stake in the life insurer with the option to increase its stake to 20%.

“The conclusion of this transaction will bring added strength to Max Life and help it chart a new growth trajectory by combining the forces of the third largest private bank in India and the fourth largest private life insurer in the country,” said Analjit Singh, chairman of Max Group and Max Financial Services.

Max Financial Services, a listed company, owns around 87% stake in Max Life Insurance. The remaining stake is held by Axis Bank.

Analjit Singh and his family own a 17.3% stake in Max Financial Services. Mitsui Sumitomo owns around 20% stake in Max Financial after it swapped its stake in the life insurance arm with a stake in the parent company in December.

Max Life Insurance’s growth has outpaced its private sector peers in the first nine months of 2020-21.

The company has reportedly grown its individual adjusted new sales at 14% during this period.

“Axis Bank’s role as a co-promoter de-risks the business because 60% of our sales are contributed by the bank. That is one of the major positive outcomes of this transaction,” said Prashant Tripathy, chief executive officer, Max Life Insurance.

The insurance sector has witnessed sporadic deal making in the past 12 months. IDBI Bank sold its stake in its joint venture with Belgian life insurer Ageas and Federal Bank in a recent development. Ageas acquired IDBI’s Bank’s stake to consolidate its holding. Axa has also put its stake in an insurance broking JV with Mahindra group on the block.



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RBI issues guidelines on risk-based internal audit for NBFCs, UCBs

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The Reserve Bank of India (RBI) on Tuesday issued guidelines on risk-based internal audit (RBIA) framework for Non-Banking Financial Companies (NBFCs) and Primary (Urban) Co-operative Banks (UCBs) which they need to implement by March 21, 2022.

The RBIA framework has been specifically mandated for supervised entities (SEs) — all deposit-taking NBFCs; all non-deposit taking NBFCs (including Core Investment Companies) with asset size of ₹5,000 crore and above; and all UCBs with asset size of ₹500 crore and above — to enhance the efficacy of their internal audit systems and processes.

Also read Regulating NBFCs

RBI asked the SEs to place the RBIA circular before their Board in its next meeting. The implementation of these guidelines as per timeline specified should be done under the oversight of the Board.

The central bank observed that the internal audit function should broadly assess and contribute to the overall improvement of the organization’s governance, risk management, and control processes using a systematic and disciplined approach. The function is an integral part of sound corporate governance and is considered as the third line of defence.

The supervised entities (SEs) will have to move towards a framework which will include, in addition to selective transaction testing, an evaluation of the risk management systems and control procedures in various areas of operations. This will also help in anticipating areas of potential risks and mitigating such risks.

Audit plan and review

Per the guidelines, RBIA should undertake an independent risk assessment for the purpose of formulating a risk-based audit plan which considers the inherent business risks emanating from an activity / location and the effectiveness of the control systems for monitoring such inherent risks.

The RBIA policy must be reviewed periodically. The risk assessment of business and other functions of the organization shall at the minimum be conducted on an annual basis. Every activity / location, including the risk management and compliance functions, shall be subjected to risk assessment by the RBIA, according to the guidelines.

Also read RBI’s norms will enhance stability of NBFC sector: Fitch Ratings

The SEs RBIA policy should also lay down the maximum time period beyond which even the low risk business activities / locations would not remain excluded for audit.

The Audit Committee of the Board (ACB)/ Board should formulate and maintain a quality assurance and improvement program that covers all aspects of the internal audit function.

The quality assurance program may include assessment of the internal audit function at least once in a year for adherence to the internal audit policy, objectives and expected outcomes.

RBI said a consolidated position of major risks faced by the organization needs to be presented at least annually to the ACB/Board, based on inputs from all forms of audit.

Authority and competence

The regulator wants senior management of SEs to ensure that the RBIA function is adequately staffed with skilled personnel of right aptitude and attitude who are periodically trained to update their knowledge, skill and competencies.

RBI emphasised that the internal audit function must have sufficient authority, stature, independence and resources thereby enabling internal auditors to carry out their assignments properly.

The Head of Internal Audit (HIA) shall be a senior executive with the ability to exercise independent judgment. Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the HIA shall be appointed for a reasonably long period, preferably for a minimum of three years.

RBI said requisite professional competence, knowledge and experience — including banking/financial entity’s operations, accounting, information technology, data analytics, forensic investigation, among others.– of each internal auditor is essential for the effectiveness of internal audit function. The collective skill levels should be adequate to audit all areas of the SE.

The SEs may prepare a Risk Audit Matrix based on the magnitude and frequency of risk.

RBI said the internal audit function should not be outsourced. However, where required, experts including former employees can be hired on a contractual basis subject to the ACB/Board being assured that such expertise does not exist within the audit function of the SE.

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RBI appoints external IT firm for special audit of HDFC Bank’s IT infrastructure

Banking & Finance

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The Reserve Bank of India has appointed an external IT firm for carrying out a special audit of the IT infrastructure of HDFC Bank, which has faced a number of outages in its digital banking services.

“The RBI has appointed an external professional IT firm for carrying out a special audit of the entire IT infrastructure of the bank under Section 30 (1‐B) of the Banking Regulation Act, 1949 (“the Act”), at the cost of the bank under Section 30 (1‐C) of the Act,” HDFC Bank said in a regulatory filing on Tuesday.

Also read: HDFC Bank’s internet, mobile services hit for third day in a row

The bank shall accordingly extend its cooperation to the external professional IT firm for conducting the special IT audit, it further said.

Also read: HDFC Bank’s multiple digital outages are credit negative: Moody’s

RBI had on December 2 last year directed HDFC Bank to temporarily halt sourcing of new credit card customers as well as launches of digital business generating activities planned under its proposed programme ‐Digital 2.0.

The directive had come after a sudden outage at one of HDFC Bank’s data centres impacted its digital and mobile banking and ATM and payment services on November 21, 2020 and a similar outage in December 2019.

In an analyst call after its third quarter results, HDFC Bank had said it had submitted a blueprint to the RBI on how to address these digital outages. The bank had said the action plan will take 10-12 weeks for implementation, and further timeframe will depend on the RBI’s inspection.

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RBI appoints IT firm to audit HDFC Bank’s entire IT infrastructure, BFSI News, ET BFSI

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HDFC Bank in an exchange filing has said that the regulator has appointed an external IT firm to carry out entire audit of the bank’s IT infrastructure.

Previously the bank had notified that with recent events of outages in the bank’s digital channels over the past two years in the bank’s internet banking and payment system on November 21, 2020 was due to power failure in the primary data centre.

The bank in the exchange notification said, “RBI has appointed an external professional IT firm for carrying out a special audit of the entire IT infrastructure of the Bank under Section 30 (1‐B) of the Banking Regulation Act, 1949 (“the Act”), at the cost of the Bank under Section 30 (1‐C) of the Act.”

It added, “The Bank shall accordingly extend its cooperation to the external professional IT firm so appointed by
RBI for conducting the special IT audit as above.”

The RBI had disallowed the bank to onboard new credit card customers and rolling out any new digital initiatives on the back of outages which had impacted customers and payment channels.

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