Regulators are taking their role on auditors’ oversight seriously and therefore auditors need to perform carefully to meet the regulators’ expectations also, said auditors.

• Mannu Arora
• ETCFO
• October 13, 2021, 09:15 IST

The RBI on Tuesday barred audit firm Haribhakti and Co from undertaking financial sector audits for a period of two years starting from the next financial year 2022-23. The regulator said the firm failed to comply with its directions with respect to statutory audit of a non-bank finance company.

While the RBI did not specifically name the NBFC, it is widely speculated that this non-bank lender is SREI Equipment Finance; Haribhakti and Co audited the accounts of SREI Equipment Finance for the year 2020-21. SREI Equipment Finance is the lending arm of the SREI Infrastructure Finance; the RBI superseded the Boards of both these companies earlier this month amid corporate governance issues. The RBI’s inspection flagged Rs 8,576-crore loans in SREI group companies as related-party loans.

Auditors reactions

Grant Thornton Bharat CEO Vishesh Chandiok feels the ban is reflective of the Indian regulators’ increased focus on monitoring and supervision, which he said, augurs well for the profession.

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He added, however, it’s important to understand that the audit firms under the radar are not necessarily lacking any processes or are involved in frauds.

The RBI’s action is not the first of a kind. Previously in June 2019, the banking regulator had barred EY’s audit affiliate, SR Batliboi and LLP, from conducting bank audits after it had found lapses in its audit assignment in one financial sector firm.

Also, other Indian regulators, including market watchdog, the Securities and Exchange Board of India (SEBI), and accounting watchdog, National Financial Authority Reporting (NFRA), too have not shied away from taking action against audit firms. In January 2018, the SEBI had banned PwC for two years in connection with its alleged accounting misdemeanour in Satyam fraud (2007), even though later in September 2019, the Securities Appellate Tribunal or SAT quashed the SEBI’s order stating it does not have powers to ban audit firm.

Another leading audit firm partner concurred. He stressed auditors need to up their game and rise to the occasion. Also, they need to price the increasing risks in the financial sector space much more appropriately, he said. “But this does not mean auditors will shy away from undertaking financial sector audits. Already, there is restriction on the number of audits that an audit firm can undertake in the financial sector space after the RBI’s new rules for bank auditors came into effect from the start of this financial year,” the partner told ETCFO requesting anonymity.

Market’s voice

Pranav Haldea, Managing Director at market research firm Prime Database, said the current incident of RBI barring Haribhakti is akin to SEBI’s ban on PwC in Satyam case four years ago (January 2018).

“Without getting into the specifics of this particular case and whether the regulatory action was called for or not, it is heartening to see some regulatory supervision and action over the audit profession. It is a healthy development for the audit markets and investors. The audit profession has gone on for far too long without adequate regulatory oversight with company’s promoters and auditors being hands in gloves with each other. Against this backdrop, actions taken by the regulators in recent times including the one now are welcome and will help in cleaning up the system,” Haldea told ETCFO.

He also said that one may see some churn in the financial sector going forward, stressing the auditors will question the management more, and won’t shy away from leaving dubious companies.

Source: https://cfo.economictimes.indiatimes.com/news/what-rbis-haribhakti-and-co-ban-means-for-auditors/86983585