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A Hand Book On Statutory Bank Branch Audit - Rajkumar S. Adukia

SALIENT FEATURES OF JILANI, GHOSH COMMITTEES AND LFAR

 

 

JILANI COMMITTEE RECOMMENDATIONS.

 

Background

 

The Reserve Bank of India has set up a “Working group to review the internal control and inspection and audit system in banks”. The working Group which was set up in February 1995 under the chairmanship of Mr Rashid Jilani submitted its reports in July 1995. Jilani Committee recommendations are divided Into 25 points to be reported to appropriate levels. The recommendation table is divided into 6 columns as below:-

 

S.no

Recommendation No. in the WG Report

Nature of recommendation

Implementation Status at Branch

Implementation Status at RO/ZO

Implementation status at HO

 

 

Objective of Jilani Committee Recommendations:-

 

Objective of Jilani Committee is to review the efficacy and adequacy of internal control, inspection and audit system in a bank with a view to strengthening the supervisory system and reliability of data

 

There are three categories of recommendations

 

1. EDP environment in banks
2. Inspection/Internal audit in the banks
3. Miscellaneous aspect of functioning of a bank

 

Jilani committee recommendations: -

 

1. Broad guidelines to establish accountability for inspectors/auditors should be laid down
    
2. A copy of the booklet incorporating RBI circulars to be supplied to each inspecting/audit official by inspection and audit department periodically
    
3. Banks should have system for ratings of its branches on the basis of inspection reports
    
4. Major irregularities detected during concurrent audit to be immediately taken up with Head office 
    
5. Various test to be carried out to ensure that EDP applications have resulted in consistent and reliable system for inputting, processing and generation of output of data
    
6. Entire domain of EDP activities to be brought under scrutiny of inspection and audit including financial aspect
    
7. Regular checking by inspectors/auditors to verify correctness of information complied/furnished  by branches 

 

Responsibility for implementation and Auditor’s Role

 

1. Management is responsible for the implementation of Jilani committee recommendations.
    
2. The responsibly of the statutory auditor is to verify and report on the status of implementation of these recommendations and no further
    
3. The results of the verification carried out by the statutory auditor and his  comments would be given in separate  report

 

Implementation of recommendations

A format containing 25 questions is issued to indicate the answers as either “implemented” or “Not implemented”. Information received from all branches, regional offices and Zonal Offices is to be consolidated at Head office level and submission of a consolidated statement to RBI has to be done. Implementation of such recommendations has to be verified during concurrent audit/inspection and comment thereon shall be included in the respective audit reports.

 

Audit procedures
 

1. Report on implementation status of Ghosh and Jilani committee shall be forwarded to Head office
    
2. Review a copy of implementation status report so prepared and submitted
    
3. Test check to ensure that recommendations which have been said to have implemented have indeed been implemented by management
    
4. Reconsider the nature timing and extent of audit procedure for carrying out the audit and timings
    
5. Report of the statutory auditor on status of compliance

GHOSH COMMITTEE RECOMMENDATIONS

 

Back Ground

 

The Reserve Bank of India set up Ghosh Committee. It was framed as a high level Committee on fraud and malpractice in banks under the chairmanship of Shri A.Ghosh the then deputy governor. The committee was framed to enquire into various aspects of frauds and malpractices in bank and to make recommendations to reduce such incidence. The committee submitted its report in June, 1992  

 

Ghosh Committee Recommendations and classification.

 

The recommendations of Ghosh Committee are divided into Groups A,B,C,D with 2 parts each, Group C having one part. Out of 97 Recommendations 27 are required to be reported at Branch level, 43 at RO/ZO/HO level and 27 at both levels. Categorization of recommendations is as follows;

• Applicable to branches

• Applicable to controlling office like regional and zonal office

• Applicable to head office

• Applicable to treasury operations

The Ghosh Committee Recommendation Table is divided into 4 Columns as follows:-

 

Recommendation No. (Group Wise)

Nature of Recommendation

Implementation Status at Branch

Implementation Status at RO/ZO/HO

 

They are further categorized on implementation basis as follows: -
 

1. Group A -Recommendations which have to be implemented by the banks immediately
2. Group B- Recommendations requiring RBI approval
3. Group C- Recommendations requiring approval of Government of India
4. Group D- Recommendations requiring further examination in consultation with IBA

 

Main objectives of Ghosh Committee

 

1. Safety of assets
2. Compliance with laid down policies and procedures
3. Accuracy and completeness of accounting and other records
4. Proper segregation of duties and responsibilities of staff
5. Timely prevention and detection of frauds and malpractices 

 

Some of the recommendations of Ghosh committee

 

Branch Level -Group A
 

1. Joint custody and dual responsibility of cash and other valuables
2. Rotation of staff/duties
3. Designation of one of the officers as compliance officer
4. Financial and administration powers of officials to be laid down
5. Exercise of caution at the time of opening of new deposit of all types
6. Precautions against theft of cash
7. Precautions in writing of drafts/mail transfers
8. Precautions for averting frauds in letter of credits, guarantees 
9. Screening/selection of employees in EDP cell, computer area
10. Standards for fully computerized branches

 

Branch Level -Group B
 

1. Banks to introduce portfolio inspection in critical areas such as credit, investment, off balance sheet item etc
    
2. Periodical movements between bank officials and investigating officials of CBI/Police
    
3. Six months prior to retirement officials should exercise their sanctioning powers jointly with next higher authority
    
4. Paper used for cheque/drafts should such that any use of chemical for making material alterations in instrument should be visible to naked eye

 

Branch Level -Group C
 

1. Chief vigilance officer should directly refer to CVC, cases having vigilance angle involving CMD
    
2. Fraud cases up to Rs. 25000 having involvement of an insider should not be reported to police where recovery is doubtful
    
3. Introduce a return of staff members to ensure strict submission of information of assets and liabilities and proper scrutiny thereof

 

Branch Level -Group D
 

1. BR should not be outstanding for more than 7 days
2. Obtaining photograph of depositors at the time of opening of accounts

 

LONG FORM AUDIT REPORT (LFAR)

 

Back Ground

 

In the year 1985, Reserve bank of India advised the public Sector Banks to obtain long Form reports from their Auditors. This report was not substitution of the statutory report, neither a part of the said report. ICAI first issued guidelines and questionnaire to its members on the basis of earlier format of LFAR, operative up to 31-3-92. Latest circular( DBS.CO.PP.BC.11/11.01.005/2001-2002)  on LFAR was issued by RBI on 17/04/2002

 

Long  Form Audit  Report should  be addressed  by  the  branch    auditors to the Chairman of the bank  concerned with a  copy thereof    to the Central Statutory Auditors

 

LFAR is a type of management Report, where the matters required to be reported by the auditor are illustrative and not exhaustive. Where any of the comments given in LFAR is adverse, an auditor should consider whether a qualification in his main report is necessary, every adverse comment would not result in Qualification in main audit report. Auditor has to use his professional judgment having regard to the facts and circumstances of each case.

 

So LFAR should be completed before main report In LFAR an auditor has to answer a detailed questionnaire formulated by RBI.. Comments in LFAR should be specific and not vague or general. LFAR is of utmost importance for Central Statutory Auditors who place reliance on the work of Branch Auditors. It covers all the areas of the Branch Audit and is the end result of an Auditors efforts and would reflect on professional competence and therefore should not be treated as a mere questionnaire to be filed in a routine way.

 

MAJOR CLAUSES IN LFAR

1. ASSETS

1. Cash

• Branch carry cash  which vary from limit fixed by controlling authority

• Excess balance reported to controlling authority

• Adequate insurance cover of the cash on hand and cash in transit

• Cash is maintained in joint custody of the two or more officials

• Cash balance checked at proper intervals

• Special attention to currency chest operation 

2. Balance with RBI ,SBI and other banks

• Balance Confirmation certificates obtained

• Balance reconciled and differences reported

• Observations on reconciliation statement

• Cash transactions remaining un responded

• Revenue items requiring adjustments/write off

• Old outstanding balances  remaining unexplained/unadjusted

3.  Money at call and short notice

• Instructions /guidelines issued by controlling authorities of the bank complied with
   

• Un authorized deposits including in excess of authorized limit should be reported

4. Investments

•  Investments held by branches on behalf of head office available for physical verification

• Income on such investments reported to Head office

•  Matured or overdue investments should have been en cashed

• RBI guidelines regarding valuation of Investments  complied with 

5. Advances

• Examination of all large advances

Outstanding amount is in excess of 5% of the aggregate advances of the branch or Rs.2 crore which ever is less 

• Test check of other advances

                

Credit appraisal

Primary purpose of review is to ensure that 

• Assumptions on the basis of which loan was sanctioned continued to be hold good

• Loan is being used for the purpose for which it was sanctioned

• Project implemented as per approval

•  No unexplained overruns in the cost of project