If RBI inspectors identify fraud in limited time,why banks' auditors not?:RBI Comments on Bank Auditors
Pointing to the
gaps in the auditors' work, the Reserve Bank of India (RBI) has asked banks to
adopt a more
stringent auditing process to ensure that review of
financial results and identification of
fraud is done more promptly.
RBI Deputy Governor
S S Mundra said there is a greater need to take a closer
look into the asset quality, instances of restructuring of advances,
provisioning held, etc. to ensure that there was no
divergence with regard to
asset classifications and provisions held.
"The point I am trying
to make is that
if RBI inspectors are able to identify these divergences in the
limited time-frame that they are on-site, why the banks' auditors are not able to do so…Is it a question of
efficiency of the auditors or is there a much deeper issue - something to do
with the transparency of the process itself?," he asked while addressing
members of the Audit Committee of the Boards (ACB) of ICICI Bank subsidiaries & other bank employees.
With regards to provisions, he told banks that adequate provisions should be
made for post-retirement benefits like pension, gratuity and leave encashment,
etc. and the auditors should ask more pertinent questions to the banks with
regards to provisioning requirements
"It is important that the ACB asks the right questions to the management
about various underlying assumptions that go into computation of the required
provisions such as life expectancy, discount rate, expected return on
investments, etc. I urge the ACBs to ask uncomfortable questions," he said
in his speech.
In light of instances of know-your-customer (KYC) norms violation Mundra has urged
auditors to be stricter with the process of background check. Last month, RBI
had imposed penalties on ICICI Bank and Bank of Baroda for flouting KYC and
anti money laundering norms.
"I believe that the absence of an appropriate punitive mechanism in the
banks for lapses has also contributed to their recurrence. Therefore, our
expectations from the ACBs would be to closely focus on reasons for such
regulatory penalties/sanctions and seek a root-cause analysis for preventing
recurrence," he added.
RBI has also been cautioning consumers against the rising case of credit card
and other frauds. Mundra called upon greater sensitivity and increased focus
from auditors with regards to having appropriate measures in place to prevent
instances of fraud.
"In our recently concluded scrutiny into fixed deposit related frauds in
some banks, it emerged that even the caution advices issued by RBI in respect
of certain individuals had not percolated down to the branch officials quickly
enough to enable appropriate preventive measures… I would say that ACBs should
take upon themselves to monitor the trend of frauds, assimilate key learnings
and ensure that mitigation measures are put in place by the management,"
he added.