Joint Audit For Private Banks

What is Audit?

It can be defined as an official inspection of an organization’s accounts, typically by an independent body and “Audits can’t be expected to detect every fraud”.

What is Joint Audit?

A joint audit is an audit on a legal entity (the auditee) by two or more auditors to produce a single audit report, thereby sharing responsibility for the audit.  A typical joint audit has audit planning performed jointly and fieldwork allocated to the auditors.

ICAI, the Institute of Chartered Accountants of India, which is the regulatory governing body of Auditors, has not proposed to the Ministry of Finance and also the RBI, that the concept of joint Audit be introduced in private sector banks, which would enhance the quality of audit.  This is mainly aimed at estimating the non-performing assets (NPAs) of some private sector banks which in turn has arisen due to the three private sector banks viz YES Bank, ICICI Bank and Axis Bank, reporting gross NPA figures in the FY 2015-16 which was inconsistent with the RBI estimates.  The main reasons quoted for such changes in the reported figures are:

• A possible divergence in the loans identified as NPA by a bank’s management and the auditors.
• Difference in interpretation of RBI circulars, relating to the details available with the RBI inspectors during their inspection and the details available with banks at the time of finalization of accounts which could be much earlier than the inspection period.
• Test check of accounts
• Insufficient information available with the Auditors especially in case of Consortium Advances.
• Also, variation information of Balance Sheet being accepted by the Auditors and that is interpreted differently by the banks.
• Variance in NPA numbers.

Interestingly,

1. The Financial Reporting Review Board (FRRB) is the body which takes care of the instances related to noncompliance in reporting area.
2. The FRRB also reviews the financial statements of some of the private sector banks which are said to be having under reported NPA figures.
3. ICAI is under pressure to verify that due compliance is made by the Auditors while arriving at the NPA figures.

By and large it is also felt that though Public Sector banks have the system of Joint Audit, nothing has proved to be effective in reducing their NPAs.