Reserve Bank of India (RBI) governor Shaktikanta Das has said the country needs a robust audit system for a resilient economy and for the public sector, auditing was the cornerstone of good governance.
With the increasing complexity of financial markets, the audit had become even more important, especially for a globally integrated economy, Das said on 25 October. The expertise and independence of auditors need to be leveraged for a healthy financial system, the RBI governor said at the National Academy of Audit and Accounts.
The governor’s comments are significant as recently several cases of financial sector frauds where audit reports and financial statements were manipulated have come to the fore.
Some of these cases include the PMC Bank, where the management is accused of manipulating the accounts for several years.
Economic decisions were being made based on available information and inaccurate information might lead to suboptimal decisions, Das said. If a bank sanctions a loan based on inaccurate information, it would lead to losses and make banks risk-averse.
Das said for the public sector, auditing was the cornerstone of good governance. An impartial audit instils confidence in stakeholders.
Economic stability was based on trust among stakeholders and it had become paramount to instil confidence in the system.
It was particularly relevant for the banking industry since it held public deposits. The RBI’s supervision was focusing on audit quality, assessment of asset quality and the so-called innovative accounting practices among others, Das said.
There were a large number of competent auditors in India but there were certain problem areas, Das said. Lack of competence, loss of integrity and inability to check smart accounting practices such as overstating profits and understating liabilities were among the problems identified by him.
Of late, the central bank had identified several instances of related-party transactions violating rules. Auditors need to identify such violations, the governor said.
“We have also seen cases of manipulation and misstatement of financial statements,” Das said.
For the financial sector, it was important to build a transparent and strong auditing framework along with a compliance culture, Das said. The auditing profession can’t afford to replace professional judgement with technology, he added.
The RBI had on 3 February issued a circular on risk-based internal audit (RBIA) for non-banking finance companies (NBFCs) and Urban Cooperative Banks (UCBs).
For a smooth transition from the system of internal audit to RBIA, NBFCs and UCBs will have to set up a committee of senior executives to draw up a suitable action plan, the banking regulator has said.
NBFCs with an asset size of Rs. 5,000 crore and above and all primary urban cooperative banks (UCBs) with an asset size of Rs. 500 crore and above will have to follow the new audit norms.