Tag: auditors

Dhanlaxmi Bank’s auditors under spotlight as shareholders reject their appointment, BFSI News, ET BFSI

Banking & Finance

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Statutory auditors of Dhanlaxmi Bank, PB Vijayaraghavan & Co, have come under the spotlight after the shareholders of the Kerala-based lender rejected their appointment at its 94th Annual General Meeting held on Wednesday (September 29), the scrutinizer report filed to the stock exchanges on Thursday showed.

Over 65 per cent of the votes were cast against the resolution to appoint PB Vijayaraghavan & Co as the bank’s statutory auditors. For an ordinary resolution to be passed, more than 50 per cent votes need to cast for the resolution.

PB Vijayaraghavan & Co were seeking reappointment for the third year (FY2021-22), and proposed to be paid a total fees of Rs 48 lakh by Dhanlaxmi bank. The Reserve Bank had already accorded approval for their appointment. The Chennai-based auditors, were the branch/ statutory central auditors of the bank during the period 2003-04 to 2008-09, FY 2019-20 and for FY 2020-21, Dhanlaxmi Bank’s annual report for 2020-21 showed.

P B Vijayaraghavan’s rejection as statutory auditors came at a time when Dhanlaxmi Bank’s financial health has been under question and the lender is also facing issues of corporate governance. The auditors, P B Vijayaraghavan, gave a clean chit to the bank in the last two years, issuing an “unqualified opinion”, the bank’s annual reports for FY20 and FY21 showed.

“It seems that the shareholders aren’t happy with the bank’s performance in the recent times and have shown their anger by rejecting the appointment of the statutory auditors,” Shriram Subramanian, MD at proxy advisory firm, InGovern told ETCFO.

Another expert echoed the same point. “It is possible that statutory auditors of the bank were not adequately questioning the management and therefore their independence was seen under doubt by the shareholders, which possibly led to their ouster,” said Mohit Saraf, founder & managing partner, Saraf & Partners.

Shares of Dhanlaxmi Bank closed 0.94 per cent higher on the BSE.



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Local audit firms see surge in NBFC clients with Sept 30 deadline for appointment of auditors

Banking & Finance

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Domestic audit firms are seeing a surge in new clients from non banking financial companies with the September 30 deadline, imposed by the Reserve Bank of India for the appointment of statutory auditors, looming ahead.

According to industry sources, almost all large non-banking financial companies (NBFCs) have appointed statutory auditors in line with the new norms.

“It is a closed chapter now. NBFCs have followed the Reserve Bank of India guidelines and most of them have appointed or are in the process of appointing auditors under the new norms,” said a person familiar with the development.

Level playing field

Domestic audit firms said the new guidelines have created a level playing field, giving them an opportunity to start audits of these firms, which were largely the domain of the Big Four audit firms in the past.

“Larger Indian audit firms are being sought after and almost all large NBFCs and banks have already appointed auditors. Those left behind are finding it difficult to get good auditors. There is a huge churn in the industry due to the new audit guidelines. Several mid-sized domestic audit firms in Mumbai have benefited from these guidelines as the value that they bring to the table is now being recognised and appreciated more by the corporate world,” said Ameet Patel, Partner, Manohar Chowdhry & Associates, and Past President of Bombay Chartered Accountants’ Society.

It is a misnomer that only the Big Four firms can deliver good quality audits and multi nationals operating or wanting to operate in India need to accept that, he added.

Also see: ICAI to cooperate with Institute of Professional Accountants of Russia for training, research

Sumit Maheshwari, Partner, Ashok Maheshwary and Associates LLP, a CA firm, agreed. “The RBI guidelines have created a level playing field for mid-sized domestic audit firms and helped us in getting to audit more NBFCs than earlier. We have already onboarded some NBFCs. A joint auditor brings a second level of check and also helps audit firms gain more experience,” he said.

Others pointed out that even the Big Four auditors have Indian teams working for them.

“These large firms also use the expertise of domestic auditors but till now, this had been the near exclusive domain of these firms because they are seen as big brand names,” said another person, who did not wish to be named.

New guidelines

In a bid to ensure independence of bank auditors, the RBI issued guidelines for the appointment of statutory central auditors or statutory auditors in April this year. Under the norms, it made joint audit mandatory for entities with asset size of ₹15,000 crore and above, capped the number of audits a firm can perform in a year at four banks, and eight NBFCs and urban cooperative banks (UCBs), and reduced the tenure of auditors.

UCBs and NBFCs were given the flexibility to adopt these guidelines from the second half of the current fiscal year.

Though the norms had led to some concern, including requests to push back the guidelines, the industry has fully adapted to it now.

Nihar N Jambusaria, President, ICAI, had in May welcomed the guidelines and said, “The new norms will bring a large number of capable audit firms into the banking and financial sector audit. There is no dearth of talent and the new RBI norms will tap into an unutilised talent pool in the fraternity.”

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Shailesh Haribhakti, BFSI News, ET BFSI

Banking & Finance

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By Shailesh Haribhakti

Due to the new circular it is most likely that many large audit firms will be ineligible for appointment as auditors of large banks & NBFCs which could potentially impact:

o Confidence of International investors – debt and equity, affecting capital flows

o Fresh international capital raising and meeting with norms for regulatory capital on an ongoing basis – potential international investors may not recognize the brand of smaller Indian audit firms and such firms may not be familiar with international regulations. The value of assurance may suffer.

o ESG Ranking/ Rating – while environment is an important driver, governance is an equally important driver in the ESG ratings / rankings of companies, and the choice of auditors could have an impact!

o Audit Quality due to inability to engage larger firms with both depth of sectoral expertise as well as greater understanding and access to international accounting norms & trends at a time when international standards (IFRS convergence) implementation involving complex and dynamic modelling for loss provisioning is still in progress for financial services entities in India.

RBI's new rules for auditors could impact audit quality: Shailesh HaribhaktiCorporate Groups and Auditors Appointment

Corporate groups having a Bank/ NBFC (including Core Investment Companies or CIC) within their fold whether as a holding company or otherwise, cannot appoint one Audit Firm or one set of firms acting as auditors’/ joint auditors for the whole group.They need to consider separate auditors/ set of auditors for the Bank, NBFC(s) and other entities of the group.This could potentially impact:

o Audit Risk & Quality – The auditor of the Holdco (being a Bank or a CIC) will be required to audit its consolidated financial statements without auditing any of the underlying entities.This is against both the international, as well as SEBI’s efforts to get holding company auditors to take responsibility for the consolidated group as a whole

o ‘Ease of doing business’ – Bank/ NBFCs in large groups will have to change auditors every 3 years, whereas the operating companies forming part of the group will have an auditor with a different tenure.

With large groups using many of the large Audit Firms (who are not their auditors) for various other services across the group, none of these Firms would be eligible to be appointed as auditors of the CIC due to the independence restrictions that apply across the group.This could lead to a significant lack of choice in appointing firms that otherwise have the capacity and capability to audit the financial statements of holding companies.Shailesh Haribhakti, veteran auditor

Auditor Rotation and Joint Audits

• Combination of auditors’ term of 3 years, cooling period of 6 years, requirement for Joint Audit & maximum limit of Banks/ NBFCs an Audit Firm can concurrently audit, could potentially impact:

o Audit Quality – auditors’ of an Entity at any point of time would have relatively low vintage, which likely impacts comprehensive understanding of nuances and complexities of issues

o ‘Ease of doing business’ objective – disruptions arising from need to appoint multiple audit firms within a group and time to be spent every 3 years by senior managements, Audit Committees and Boards on a significantly more complex auditor selection process and implementation during an aggravating pandemic time with virtually no transition time and minimal enhancement in Audit Quality etc.

o ‘Capacity’ issues – at least in the short to the medium term with a number of Audit Firms being ineligible for audit of many Banks/ NBFCs, and a requirement of joint audit in place of a single auditor for large Entities

RBI's new rules for auditors could impact audit quality: Shailesh HaribhaktiRequirement for Joint Audit could potentially impact:

o Audit Quality – due to risk of key issues ‘falling through the cracks’ arising from inappropriate division of work and responsibilities in the case of entities implementing joint audit for the first time

Sector specialization and expertise and related impact on audit quality: The financial services sector is highly regulated and very specialized, thereby requiring significant investment of time and effort in building knowledge and deep sectoral expertise and related capacity building.

o Short tenures on audits of Financial Service entities together with a cap on audits, will disincentivize firms from investing in building capabilities in this important sector

o Short tenure on the audits, also doesn’t allow auditors adequate time to fully understand the company and its business complexities, which generally takes 2-3 years

o The independence rules, essentially will make most large firms (that currently have the sectoral depth and capacity) ineligible to be auditors of large banks and NBFCs

• Overall ‘Not a progressive step’ – due to introduction of rules that are not in line with international practices, create significant hardship with no appreciable incremental benefit eg. enhanced Audit Quality

• Choice of auditors – having a cap on the number of audits also will leave new and emerging companies, including the fintech companies (many of whom have NBFC licenses) to be able to appoint a large firm as an auditor.

RBI's new rules for auditors could impact audit quality: Shailesh HaribhaktiRecommendations

• Deferral of the Circular for implementation by two years i.e. from 2023-24

• Increase maximum term of auditor to 5 years (from 3 years) and reduce cooling period to 5 years (from 6 years) which aligns with requirements under the Companies Act & guidelines of IRDA

• Coverage of only large entities eg. asset size over Rs. 15,000 Crores instead of those over Rs. 1,000 Cr.

• Alternative to 2, combine deferral as per ‘1’ above, apply only to entities with asset size > Rs. 10,000 Crores (instead of Rs. 1,000 Crores) with a phased roll out:

• I Phase: only the banks with asset size more than 15,000 crores – from 2023-24

• II Phase: Banks with asset size more than 10,000 crores – from 2024-25

• III Phase: NBFCs with asset size more than 15,000 crores. – from 2025-26

• IV Phase: NBFCs with asset size more than 15,000 crores. – from 2026-27

• At the least, consider exclusion from applicability for entities with no public funds (no borrowings from public/ banks/ FIs) including Core Investment Companies (CICs) not requiring registration with RBI

• Amend the following with regard to restriction on services to Entities & group for a period of 1 year before & after appointment as auditors:

Do away with restriction on providing non-audit services to Entity & group entities and audit services to group entities for a period of one year prior to & one year after appointment as auditors of the Entity – this is not in accordance with existing Indian or international frameworks.Shailesh Haribhakti, audit veteran.

• Align restriction on type of services to Entity & group during the term as auditors in accordance existing frameworks i.e. Companies Act & ICAI Code of Ethics

• Align definition of group entities with existing framework and exclude entities such as those which do not meet the substantive criteria of group entities such as ‘common brand name’, investment of over 20% in entities with no ability to influence etc.

• Do away with mandatory requirement for Joint Audit for entities with asset size > Rs. 15,000 Crores

• Apply restriction of maximum 8 NBFCs per Audit Firm to those with asset size > 10,000 Crores.In case Circular continues to be applicable for NBFCs with asset size > Rs. 1,000 Crores, consider increasing the limit to 12 NBFCs

• Do away with requirement to factor in ‘large exposure’ as part of auditor independence as no such considerations apply internationally and no guidance provided by RBI.

Conclusion

In sum, strengthen independence, technology usage and objectivity. Engender trust in the attest function through a rating based on inspection outcomes. This will strengthen the financial system.

ALSO READ: RBI’s new rules for auditors could pose many challenges: Vishesh Chandiok

ALSO READ: RBI’s new audit norms a shot in the arm for Indian firms

ALSO READ: Big Four’s business seen hit after RBI strengthens audit independence

ALSO READ: Why the new RBI guidelines on auditors need a review?

About the Author: Shailesh Haribhakti, an eminent chartered accountant, has considerable experience in audit, tax and consulting. He is the Chairman of New Haribhakti Business Services LLP and Mentorcap Management Pvt.Ltd.

Disclaimer: The views expressed are solely of the authors and ETCFO.com does not necessarily subscribe to it. ETCFO.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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Friction over newer compliances rising between auditors, regulators, firms, BFSI News, ET BFSI

Personal Finance

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After banks and auditors opposed the introduction of joint audit norms, it’s the turn of the Securities and Exchange Board of India‘s recent rules on due diligence by alternative investment funds that are causing consternation.

The market regulator’s recent rules require alternative investment funds to conduct in-depth due diligence of their portfolio companies. According to the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2021, which came into effect on May 5, the regulator has mandated that fund managers conduct this due diligence to make sure their house is in order.

The regulations mainly impact the private equity and venture capital funds that are registered under the Alternative Investment Funds Categories 1 & 2 and hedge funds registered under the AIF Category 3 in India.

The fund managers and trustees will have to ensure that detailed policies and procedures are in place for investments and that provisions over confidentiality, conflict of interest, Prevention of Money Laundering Act (PMLA) and addressing investor complaints are complied with.

The PPM (private placement memorandum) will be required to check on the detailed policy and procedures as well as the compliance with the code of conduct prescribed under the newly added fourth schedule. The format for reporting requirements to Sebi and trustees could also undergo a change. The new regulations would likely require funds to share the report or the procedures with the auditors.

The due diligence will have to be undertaken at the fund level as well as the investment level.

Fund managers will also have to realign investments to comply with the new regulations, as Sebi has put a threshold on the money a fund can invest in a company or another investment vehicle.

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 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.

Audit trail software

Earlier this year, the Ministry of Corporate Affairs had to defer by a year amendments to the companies accounts rules requiring firms to use accounting software that include features that can record the audit trail of each transaction.

Companies and auditors had cited little time left for the fiscal to end for them to shift to another software.

The second amendment to the Companies Accounts Rules, 2014, made the previous changes effective from April 1, 2022, according to the notification. The ministry had made the changes, to be effective from the start of the current fiscal, with the objective of curbing backdated entries by firms in the books of accounts.

“…for the financial year commencing on or after the 1st day of April 2021, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled,” the amendment made on March 25 had said.



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RBI guidelines require banks, UCBs and NBFCs to appoint auditors for 3 years

Banking & Finance

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The Reserve Bank of India (RBI) on Tuesday issued guidelines for appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) in commercial banks, urban co-operative banks and non-banking finance companies from FY22 onwards, whereby they will have to appoint SCAs/SAs for a continuous period of three years.

RBI guidelines regarding appointment of SCAs/SAs will be implemented for the first time for urban co-operative banks (UCBs) and non-banking finance companies/NBFCs (including housing finance companies) from FY 2021-22.

However, UCBs and NBFCs will have the flexibility to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption.

Auditor’s job is not to become a bloodhound, says new ICAI head

Non-deposit taking NBFCs with asset size (total assets) below ₹1,000 crore have the option to continue with their extant procedure.

Commercial banks (excluding Regional Rural Banks/RRBs) and UCBs will be required to take prior approval of RBI (Department of Supervision) for appointment/reappointment of SCAs/SAs on an annual basis.

RBI tightens internal audit framework for NBFCs, UCBs

While NBFCs do not have to take prior approval of RBI for appointment of SCAs/SAs, all NBFCs need to inform RBI about the appointment for each year.

For entities (commercial banks. UCBs, and NBFCs) with asset size of ₹15,000 crore and above as at the end of previous year, the statutory audit has to be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships/LLPs].

All other entities have to appoint a minimum of one audit firm (Partnership firm/LLPs) for conducting statutory audit.

Entities need to ensure that joint auditors do not have any common partners and they are not under the same network of audit firms.

Asset size and numbers

The RBI said the entities should decide on the number of SCAs/SAs based on a board/local management committee (LMC) approved policy by taking into account factors such as the size and spread of assets, accounting and administrative units, complexity of transactions, level of computerisation, availability of other independent audit inputs, identified risks in financial reporting, etc.

The central bank prescribed that an entity with an asset size up to of ₹5 lakh crore can have a maximum of 4 SCAs/SAs; above ₹5 lakh crore and up to ₹10 lakh crore: maximum of 6 SCAs/SAs; above ₹10 lakh crore and up to ₹20 lakh crore: 8 SCAs/SAs and above ₹20 lakh crore: 12 SCAs/SAs.

In case of any concern with the management of the entities, such as non-availability of information/non-cooperation by the management, which may hamper the audit process, the SCAs/SAs are required to approach the Board/Audit Committee of the Board/Local Management Committee of the entity, under intimation to the concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.

Concurrent auditors of the entity should not be considered for appointment as SCAs/SAs of the same entity.

The central bank emphasised that the audit of the entity and any entity with large exposure to the entity for the same reference year should also be explicitly factored in while assessing independence of the auditor.

Tenure and rotation

In order to protect the independence of the auditors/audit firms, the RBI said that entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year.

Further, commercial banks (excluding RRBs) and UCBs can remove the audit firms during the three-year period only with the prior approval of the concerned office of RBI (Department of Supervision), as applicable for prior approval for appointment.

NBFCs removing the SCAs/SAs before completion of three years’ tenure have to inform the concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken.

An audit firm would not be eligible for reappointment in the same entity for six years (two tenures) after completion of full or part of one term of the audit tenure. However, audit firms can continue to undertake statutory audit of other entities.

The RBI said one audit firm can concurrently take up statutory audit of a maximum of four commercial banks [including not more than one PSB or one All India Financial Institution (Nabard, SIDBI, NHB, Exim Bank) or RBI], eight UCBs and eight NBFCs during a particular year.

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