Guidelines laid down by RBI for Appointment of Statutory Auditors of Banks & NBFCs

Ashish M. Shaji

06 May, 2021

The Reserve Bank recently issued guidelines for the appointment of statutory auditors of banks and NBFCs. The guidelines for appointment of statutory central auditors/statutory auditors of commercial banks, UCBs and NBFCs (including Housing Finance Companies) would be applicable for the financial year 2021-22 and onwards.  In this article, we shall discuss the key points of the RBI notification relating to the same.

Applicability of the Guidelines

The RBI guidelines pertaining to the appointment of statutory auditors shall apply to the commercial banks (excluding RRBs), UCBs and NBFCs (including Housing Finance Companies) for financial year 2021-22 and onwards. However, non-deposit taking NBFCs with an asset size below 1000 crore rupees can continue with their extant procedure.

Prior approval of Reserve Bank

Commercial banks (excluding RRBs) and UCBs will have to take prior approval of RBI (department of supervision) for the appointment/reappointment of Statutory Central Auditors/Statutory Auditors, on an annual basis in terms of aforementioned statutory provisions. They should apply to the department of supervision, RBI, before 31^st July of the reference year, and the PSBs should approach RBI in 1 month of receipt of list of the list of eligible audit firms from RBI.

It may be noted that NBFCs don’t have to take prior approval of the RBI for appointment of Statutory Central Auditors/Statutory Auditors, but they should inform RBI about the appointment of Statutory Central Auditors/Statutory Auditors for each year through a certificate in Form A in 1 month of such appointment.

Eligibility criteria for appointment of Statutory Auditors/Statutory Central Auditors

Basic Eligibility-

Additional consideration

• The audit firm which is to be appointed as SCAs/SA for entities, it should be duly qualified for appointment as auditor of the company in terms of Section 141 of the Companies Act 2013;
• Such an audit firm should not be under debarment by any governmental agency, NFRA, ICAI RBI or other financial regulators;
• The entities should ensure that the appointment of SCAs/SAs is in line with the ICAIs code of ethics/any other standards adopted and doesn’t give rise to any conflict of interest;
• In case where any partner of CA firm is a director in any PSB, such firm will not be appointed as SCA/SA of any PSB. In case any partner of a CA firm is a director in any entity, then such firm will not be appointed as SCA/SAs of any of the group entities of that entity;
• The auditors for entities with an asset size of 1000 crore rupees should have the capability and experience in deploying Computer assisted audit tools and techniques and generalized audit software;
• For audit of UCBs, the Statutory Auditors of the firm must have a fair knowledge of the functioning of the co-operative sector and should have knowledge of the language of the state where the UCB or its branch is located.

Independence of auditors

The RBI stated that the audit committee of the board shall monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices, for commercial banks and NBFCs.

In case of any concern with the Management of the entities, like non-availability of information/non-co-operation by the management, the SCA/SA can approach the board/ACB/LMC of the entity, under intimation to SSM/RO concerned of the RBI^[1].

Procedure for appointment of Statutory Auditors/ Statutory Central Auditors

The procedure is as follows:

• The entities would shortlist at least 2 audit firms for every vacancy of SCA/SAs so that even if the firm at first preference is found ineligible/refuses appointment, the firm at second preference could be appointed, and the appointment process doesn’t get delayed. However, in case of reappointment by banks/UCBs until completion of tenure of continuous term of 3 years, there won’t be any need to shortlist and send names of multiple audit firms to RBI.
• Banking companies must continue to follow extant procedures followed by them for selecting SCA/SAs. In order of preference, they shall place the name of shortlisted audit firms before their ACB/LMC for selection as SCAs/SAs. On selection of SCA/SAs by bank in consultation with their ACB/LMC and after verifying their compliance with the eligibility requirements provided by RBI, the bank will seek prior approval of RBI for SCA/SAs appointment.
• The UCBs will place the name of the shortlisted audit firms, before their board for selection as SCA/SA. On selection of SCA/SAs by UCBs in consultation with their board and after verifying their compliance with the eligibility requirements provided by RBI, the UCBs will take the prior approval of RBI for SCA/SAs appointment.
• The entities will obtain a certificate with relevant information from the audit firm(s) that is proposed to be appointed as SCA/SAs by the entity to the effect that the audit firm complies with the eligibility norms of RBI. The certificate has to be signed by the main partner/s of the audit firm that is proposed to be appointed as SCA/SAs by the entity.
• The commercial banks (excluding the RRBs)/UCBs must verify the compliance of audit firms to the eligibility norms of the RBI and, once being content with the eligibility, recommend the names with a certificate stating that the audit firm proposed to be appointed as SCA/SA complies with all eligibility requirements.
• At the time of approaching the Reserve Bank for prior approval, commercial banks (excluding the RRBs)/UCBs should indicate their total asset size, forward a copy of board/ACB resolution recommending names of audit firms for the appointment of SCAs/SAs in the order of preference.

Conclusion

The RBI guidelines, regarding appointment of statutory auditors, has also stated that to protect the independence of the auditors/audit firms, entities should appoint SCA/SAs for continuous period of 3 years, subject to the firms fulfilling the eligibility requirements each year.

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