Reserve Bank of India (RBI) governor Shaktikanta Das

MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das on Monday said that statutory auditors need to improve quality and depth of audit and listed a number of irregularities detected by the central bank.

“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 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,” said Das.

Delivering an in-person address at the National Academy of Audit & Accounts in Shimla, Das chose to speak on the role of audit in the modern financial system. The governor’s speech comes a few days after the central bank decided to suspend auditors of SREI for lapses in their audit.

“Without generalising, it may be said that problems usually “Without generalising, it may be said that problems usually arise when the independence of auditors itself is compromised or the auditors lack competence in performing their role,” said Das. Earlier this year, the RBI had tightened norms for statutory auditors for financial firms, requiring banks to change auditors more frequently.

Das said that with the introduction of Ind-AS for all listed companies, including non-banking financial companies (NBFCs) having net worth of Rs 250 crore, managements had got additional discretion on providing for expected credit losses.

“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 away from representing real-life scenarios. This has been observed in several cases,” said Das.

He added that auditors are expected to test the models used by the entities, challenge the management and validate the model outputs.

Explaining the RBI’s role, Das said that the statutory auditor has a duty to report directly to the supervisor (the RBI) on matters of material significance arising from the audit of banks and other regulated entities. “For these reasons, the RBI, as the supervisor of banks and NBFCs, has a keen interest in the manner with which statutory auditors perform audits in the regulated entities,” Das said.

Das called upon auditors to develop capabilities in terms of information technology as IT black boxes are often used to hide transactions. “We have also seen cases of manipulation and misstatement of true nature of financial statements by employing opaque technological means. 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.” In the case of two lenders, PMC Bank and DHFL, the management had managed to camouflage irregular loans by creating fake loan accounts in the IT system.

Source: https://timesofindia.indiatimes.com/business/india-business/fill-gaps-rbi-governor-asks-auditors/articleshow/87267055.cms