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Monday, June 14, 2021

Citing disruption, NBFCs put pressure on RBI for dilution of auditor norms

The RBI circular, issued on April 27, to tighten the auditing process is facing resistance from NBFCs which had a free run till now.

Written by George Mathew
Mumbai | Updated: May 24, 2021 9:37:29 am
Industry bodies are up in arms against the RBI requirement on rotation, limiting and cooling off period for auditors of banks and NBFCs.

Pressure is mounting on the Reserve Bank of India (RBI) from banks and non-banking financial companies (NBFCs) to relax the recent tightening of the guidelines on appointment of auditors. Industry bodies are up in arms against the RBI requirement on rotation, limiting and cooling off period for auditors of banks and NBFCs.

The RBI circular, issued on April 27, to tighten the auditing process is facing resistance from NBFCs which had a free run till now. While the central bank move is aimed at preventing frauds, hidden bad loans, cosy relationships between companies and auditors and cleaning up the auditing system after the fiasco involving IL&FS, Yes Bank and DHFL, NBFCs are now lobbying through industry bodies for a roll-back. Industry body Finance Industry Development Council (FIDC) has already written to the RBI, saying that the current form of the circular requires mid-year change in auditors for FY22, which is disruptive for most of the NBFCs and will cause avoidable hardships to both NBFCs and audit firms.

The RBI has specified that an audit firm would not be eligible for reappointment in the same entity for six years (two tenures) after completion of full or part of one term of the audit tenure of three years. This means NBFCs will rotate auditors every three years. NBFCs with assets of over Rs 15,000 crore will have to go for joint audits.

Industry chamber CII suggests that the requirements related to reduction in the tenure of audit engagement, cap on number of audits and extended cooling of periods, may not specifically address any perceived concerns on audit quality. These are inconsistent with the provisions in the Companies Act, 2013, and are not comparable with international practices and regulations which are widely accepted and adopted globally. “Implementing these requirements is likely to create avoidable complications without any appreciable enhancement to audit quality and governance. Further, lack of harmony amongst various regulations on this subject is likely to add to complexity and confusion in the sector and impact ease of doing business,” it said.

According to the RBI, guidelines regarding appointment of SCAs/SAs should be implemented for the first time for urban co-operative banks and NBFCs from FY22, they should have the flexibility to adopt these guidelines from H2 (second half) of FY22 to ensure there is no disruption. “The circular has also been extended to the NBFCs for the first time, equating them with the commercial banks. It may be worth evaluating whether such restrictive norms need to be applied to the NBFCs, in addition to all the principles applicable as per the Companies Act, 2013, including rotation and cool off periods,” said CII, which has many NBFCs as members.

The reduction in the tenure of audit, cap on number of audits by an audit firm and extending the applicability of the provisions to NBFCs will make it mandatory for a large number of banks and NBFCs to immediately change their auditors, including requirements of joint audits in certain cases, based on monetary thresholds. A cool-off period of one year before appointment for the auditors’ independence is not practicable to implement. It is an established protocol to provide a transitional time to implement such provisions, NBFCs say. “Auditors could have prevented frauds in IL&FS, Yes Bank and DHFL, but they didn’t do a proper job. The RBI move is in the right spirit. It will end the cosy relationship between auditors and NBFCs and banks. The quality of auditing will improve now,” said a banking source. They also want the RBI to re-consider severe restrictions on capacity and eligibility requirements (including coverage of NBFCs, limit on number of audits, maximum engagement period of 3 years and 6 years cool off period after rotation.

The new auditors’ norms and guidelines could pose reasonable challenges for the banks. “Auditing is a process that is performed physically at banks’ premises. And during this pandemic situation, this process may be improbable,” said Jaya Vaidhyanathan, CEO, BCT Digital.

Another argument against the new norms is that the selection process of new audit firms could be time-consuming, involving tendering and auction, which may not be possible in this lockdown period.

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