The Reserve Bank of India on Friday said it would penalise statutory auditors for any lapses in their audits of commercial banks. The central bank said it had decided to incorporate a graded enforcement action framework to deal with any lapses in auditing.
The bank’s decision follows reports of major breaches in asset classification in several leading banks.
The penalties include debarment from future audit assignments. The bank will decide the quantum of the penalty on a case-to-case basis. Depending on the gravity of the case, the bank will issue a notice to the auditing firm asking them to show cause as to why action should not be taken against them. The firm will have 15 working days to submit a reply.
The bank said the new framework will cover instances of “divergence identified in asset classification and provisioning” during its inspection of the audited financial statements submitted by banks.
“Statutory auditors of banks play an important role in contributing to financial stability when they deliver quality bank audits which foster market confidence in banks’ financial statements,” the central bank said. “Quality bank audits are also a valuable input in the supervisory process of the Reserve Bank of India for commercial banks.”
If the apex bank decides to take action against a statutory auditor, it will communicate the development to the Institute of Chartered Accountants of India and make a public mention of that communication.
In May 2017, the government passed an ordinance to empower the RBI to tackle the problem of mounting bad loans in the banking sector. The RBI then began to use the bankruptcy regulations as a way to solve the problem, as it ordered banks to refer large corporate loan defaulters for insolvency proceedings.
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