CHANGES IN PROCEDURE IN THE MATTER OF APPOINTMENT OF STATUTORY AUDITORS IN PUBLIC SECTOR BANKS
A. Statutory Central Auditors (SCAs)
1) In order to provide more opportunities to eligible audit firms, the existing cycle of four years of continuous statutory central audit in PSBs with compulsory rest of two years will be reduced with prospective effect to a cycle of three years of continuous statutory central audit with compulsory rest of two years. This will be effective from 2006-07 in respect of SCAs appointed in 2006-07 and onwards. The existing continuing auditors will be allowed to complete their four years’ cycle after which they will be rested for a period of two years. The appointment of SCAs will be made on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time to time and also subject to their suitability.
2) As suggested by the GoI, the allotment of vacancies of SCAs among the “experienced” and “new” audit firms will be made in the ratio of 60:40 instead of the existing 80:20 from the financial year 2006-07 and onwards, in order to provide adequate opportunities to the “new” firms.
3) While continuing the practice of appointing one audit firm (as SCA and/or branch auditor) to one public sector bank, the banks opting for using the managerial autonomy in the appointment of auditors will clearly advise the audit firms selected for consideration of appointment that one audit firm can take up audit assignment (central and /or branch audit) in one PSB only and also should give their consent in writing for consideration of appointment in the bank concerned for the particular year and the subsequent continuing years. The consent given by an audit firm will be treated as irrevocable and request, if any, from audit firms for changing the bank, after giving its consent to the bank concerned will not be entertained.
4) In order to determine the inter-se seniority of both “experienced” and “new” audit firms for appointment as SCAs, a marking system based on various parameters such as the number of partners, period of association of partners, experience of the firms, full-time CA employees and bank audit/ PSU audit experience of the firms was followed by RBI during 2005-06. The seniority list thus prepared for the financial year 2005-06 will be treated as the base list. Further additions to the list will be made every year to include fresh additions / firms which are to be re-inducted from rest, etc. Allotment of audit will be made strictly in the order of seniority of the firms in the list in the ratio of 60:40 among the “experienced” and “new” audit firms respectively, from the financial year 2006-07 and onwards. This system of allotment of audit assignment as per the seniority will ensure equitable distribution of audit assignments among all eligible firms by way of rotation.
5) From the financial year 2006-07, the marking system to determine the inter-se seniority of audit firms will be applicable only to the “new” audit firms and the “experienced” audit firms will not be subjected to the marking system. “Experienced” firms which are to be re-inducted or appearing afresh will be placed in the seniority list as per the earliest date on which the firm was put on the list of existing auditors and in case of rested auditors the earliest date on which the firm was rested. “New” firms to be added to the SCA panel in subsequent years will be arranged strictly as per the seniority after subjecting the firms to the marking system. A firm will be subjected to marking system only at the time of its placement in the panel of SCAs.
6) It has also been decided that from the financial year 2006-07, while subjecting the “new” firms to the marking system, additional points accruing to a firm on account of merger with another firm will be given effect only after two years of the merger.
7) The procedure for selecting SCAs by banks which opt for using the autonomy has been decided as under:
(i) RBI will prepare a list of SCAs equivalent to the total number of vacancies in PSBs for a particular year strictly on the basis of seniority of each SCA in the panel of SCAs maintained by RBI on the basis of panel prepared for the year 2005-06.
(ii) The banks will select SCAs equivalent to the vacancies arising in respect of each bank from the list and obtain the consent of the audit firms in writing for consideration of appointment as SCAs in the banks concerned.
(iii) Banks will obtain the approval of respective ACB/Board of Directors in respect of the selected firms and afterwards seek the approval of RBI for the appointment.
(iv) After obtaining the RBI approval, the actual appointment of SCAs will take place.
8)In respect of banks which do not opt to use the autonomy in the matter of appointment of auditors, RBI will be arranging to obtain the approval of the appropriate authorities/Government of India for SCAs from out of the remaining names in the list given to banks, after the selection / approval of SCAs in respect of PSBs opting to use the managerial autonomy.
B. Statutory Branch Auditors
i) As per the existing practice, branch auditors appointed annually are allowed to continue for a period of five years in a bank, after which they are rotated/rested. As per the advice of Govt. of India, from the financial year 2006-07 and onwards, it has been decided that branch auditors appointed annually will be allowed to continue for a period of four years after which they will be rotated /rested. Branch auditors appointed till financial year 2005-06, however, will be allowed to complete their cycle of five years as branch auditors.
ii) While allotting branches, banks are advised to select auditors located in centres in which their offices are situated or branches located in centres which are in close proximity to their offices.
(iii) Where the number of eligible auditors / audit firms is more than the number of branches to be audited at particular centres (to be identified by RBI annually), selection of auditors / audit firms should be done, keeping in view the criterion mentioned at (ii) above. Banks are also advised to have a suitable mix of various categories of auditors / audit firms while selecting the branch auditors keeping in view the size of the branches to be audited. The same auditors / audit firms cannot audit the same bank for a continuous period exceeding four years. In such centres, where the number of eligible auditors / audit firms is more than the number of branches to be audited, the auditors / audit firms will be put to a period of compulsory rest for two years after completion of four years of continuous branch audit.
iv) Where the number of eligible auditors / audit firms is less than the number of branches to be audited at particular centres, the branches must be allotted equitably among all the auditors subject to the condition that the same auditor / audit firm cannot audit the same bank for a continuous period exceeding four years and keeping in view the criterion mentioned at (ii) above. In such centres, where the number of eligible auditors / audit firms is less than the number of branches to be audited, the branch auditors on completion of four years of continuous audit with a bank will be subjected to the principle of rotation.
(v) The concept of Part C auditors (SCAs in the list of eligible central audit firms but which could not be allotted SCA assignments) being considered for branch audit is discontinued from financial year 2006-07. Consequently, there will be no separate list of Part C branch auditors.
(vi) As regards statutory branch audit to be carried out by SCAs, banks will arrange in such a way that SCAs will be auditing the top branches (to be selected strictly in order of the level of outstanding advances as at the end of March 31 of the previous year) in such a manner as to cover a minimum of 15% of total gross advances of the bank by SCAs. SCAs will cover a minimum of 5 branches and not more than 10 branches each. Further, if the process of consolidation of branch returns is done at intermediate points i.e. Regional Office, Zonal Office, etc., SCAs must be involved in the audit of those intermediate points. If consolidation is only done at the Central/Head Office of banks, it may not be necessary for SCAs to be involved in audit of Controlling Offices. Banks may also consider entrusting statutory audit of specialised branches such as those dealing in forex, treasury, corporate loans, etc. to SCAs.
vii. As in the case of SCAs, while continuing the practice of appointing one audit firm (as branch auditor) to one public sector bank, the banks opting for using the managerial autonomy in the appointment of auditors will clearly advise the audit firms selected for consideration of appointment that one audit firm can take up audit assignment (branch audit) in one PSB only and also should give their consent in writing for consideration of appointment in the bank concerned for the particular year and the subsequent continuing years. The consent given by an audit firm will be treated as irrevocable and request, if any, from audit firms for changing the bank, after giving its consent to the bank concerned will not be entertained.
(viii) The list of eligible auditors/audit firms received from the Institute of Chartered Accountants of India (ICAI) will be subjected to scrutiny to identify/ remove audit firms against whom adverse remarks/disciplinary proceedings are pending. RBI, thereafter, will forward the full and final list of all eligible auditors/audit firms to PSBs, which have opted for using the autonomy in the appointment of auditors.
(ix) The PSBs will be required to select suitable auditors / audit firms in such a manner as to enlist the required number of branch auditors to carry out the statutory audit of branches during the year. As in the case of SCAs, in order to adhere to the concept of one PSB for one audit firm, banks will obtain written consent from the auditors/audit firms selected by them for consideration of appointment as branch auditors.
(x) The selection of branch auditors require the approval of the respective ACB/Board of Directors of the banks concerned, after which banks will have to seek the approval from RBI before their actual appointment.
(xi) RBI will be arranging for the approval of appropriate authorities / GoI of the statutory branch auditors / audit firms in respect of those banks which may not opt to use the autonomy in appointing statutory auditors, from out of the remaining names in the list of eligible auditors/audit firms mentioned at (viii) above, after the selection/ approval of branch auditors in respect of PSBs opting to use the managerial autonomy.
C. General Guidelines applicable to both SCAs and branch auditors
Government of India have suggested that in order to protect the independence of the auditors/audit firms, banks will have to make the appointments of SCA/branch auditors necessarily for a continuous period of three and four years respectively. Banks do not have any authority to remove the audit firms during the above period without prior approval of the Reserve Bank of India.