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RBI issues guidelines for Appointment of Statutory Central Auditors of Commercial Banks, UCBs and NBFCs

Gaurav Upadhyay 
on 06 May 2021

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Reserve Bank of India has come up Notification regarding Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) issued on April 27, 2021, under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs, on 27th April 2021 (“Guidelines”).

The Guidelines intend to supersede the existing circulars/notification on appointment of statutory auditors by Banks and NBFC. The Guidelines provide necessary instructions for the appointment of SCAs/SAs, the number of auditors, their eligibility criteria, tenure and rotation as well as norms for ensuring the independence of auditors.

Also, note that this Article focuses on NBFCs.

1. APPLICABILITY

  • Commercial Banks (excluding RRBs), UCBs and NBFCs including HFCs (hereinafter referred to as the Entities) for Financial Year 2021-22 and onwards in respect of appointment/reappointment of Statutory Central Auditors (“SCAs”)/Statutory Auditors (“SAs”) of the Entities.
  • However, non-deposit taking NBFCs with asset size below ₹1,000 crore have the option to continue with their extant procedure.

Note: SCAs in case of the Entities which appoint separate Statutory Branch Auditors (SBAs) and SAs in case of all other Entities.

2. THE TRANSACTIONAL PERIOD / LAST DATE TO FOLLOW THE GUIDELINES

NBFCs shall have the flexibility to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption.

RBI issues guidelines for Appointment of Statutory Central Auditors of Commercial Banks, UCBs and NBFCs

3. PRIOR APPROVAL OF RBI

  • No prior approval shall be required by NBFCs to be taken from RBI.
  • All NBFCs need to inform Regional Office of RBI (Department of Supervision) about the appointment of SCAs/SAs for each year by way of a certificate in Form A within one month of such appointment.
 

4. NUMBER OF SCAs/SAs TO BE APPOINTED

MINIMUM AUDIT FIRMS TO BE APPOINTED

Sl. No.

Asset Size of the Entity

Minimum number of SCAs/SAs

1

For Entities with asset size of INR 15,000 crore and above as at the end of previous year

Minimum Two Audit Firms (Any of the firm should not have same partner or should be not of same network)

2

For Entities with asset size of below INR 15,000 crore as at the end of previous year

Minimum One Audit Firm

 

MAXIMUM AUDIT FIRMS TO BE APPOINTED

Sl. No.

Asset Size of the Entity

Maximum number of SCAs/SAs

1.

Up to INR 5,00,000 crore

4

2.

Above INR 5,00,000 crore and Up to ₹ 10,00,000 crore

6

3.

Above INR 10,00,000 crore and Up to ₹ 20,00,000 crore

8

4.

Above INR 20,00,000 crore

12

Note: Here, audit firm shall mean Partnership firm and Limited Liability Partnership.

5. ELIGIBILITY CRITERIA OF AUDITORS

Each Entity is required to appoint audit firm(s) as its SCA(s)/SA(s) fulfilling the eligibility norms as prescribed in Annex I (enclosed).

6. INDPENDENCE OF AUDITORS

  • For NBFCs, the Audit Committee of the Board (ACB)/ LMC shall monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices.
  • Any concern in this regard may be flagged by the ACB/LMC to the Board of Directors of the NBFC and concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.
  • Concurrent auditors of the Entity should not be considered for appointment as SCAs/SAs of the same Entity.
  • The time gap between any non-audit works (services mentioned at Section 144 of Companies Act, 2013, Internal assignments, special assignments, etc.) by the SCAs/SAs for the Entities or any audit/non-audit works for its group entities should be at least one year.
  • However, during the tenure as SCA/SA, an audit firm may provide such services to the concerned Entities which may not normally result in a conflict of interest.

7. PROFESSIONAL STANDARDS OF SCAs/SAs

  • The SCAs/SAs shall be strictly guided by the relevant professional standards in discharge of their audit responsibilities with highest diligence.
  • Audit Committee of the Board (“ACB”) of Entities shall review the performance of SCAs/SAs on an annual basis.
  • Any serious lapses/negligence in audit responsibilities or conduct issues on part of the SCAs/SAs or any other matter considered as relevant shall be reported to RBI within two months from completion of the annual audit.

8. TENURE AND ROTATION

  • In order to protect the independence of the auditors/audit firms, Entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year.
  • Further, NBFCs removing the SCAs/SAs before completion of three years tenure shall inform concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken.
  • 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.
  • One audit firm can concurrently take up statutory audit of a maximum of eight NBFCs during a particular year, subject to compliance with required eligibility criteria and other conditions for each Entity. For the purpose of this circular, a group of audit firms having common partners and/or under the same network, will be considered as one entity and they will be considered for allotment of SCA/SA accordingly.

9. AUDIT FEES AND EXPENCES

  • The audit fees for SCAs/SAs of all the Entities shall be decided in terms of the relevant statutory/regulatory provisions.
  • The audit fees for SCAs/SAs of all the Entities shall be reasonable and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc.
  • Board/ACB/LMC of Entities shall make recommendation to the competent authority as per the relevant statutory/regulatory instructions for fixing audit fees of SCAs/SAs.

10. STATUTORY AUDIT POLICY AND APPOINTMENT PROCEDURE

Each Entity shall formulate a Board/LMC Approved Policy to be hosted on its official website/public domain and formulate necessary procedure thereunder to be followed for appointment of SCAs/SAs.

ANNEX II: PROCEDURE FOR APPOINTMENT OF SCAs/SAs

  • The Entities shall shortlist minimum of 2 audit firms for every vacancy of SCAs/SAs so that even if firm at first preference is found to be ineligible/refuses appointment, the firm at second preference can be appointed and the process of appointment of SCAs/SAs does not get delayed. However, in case of reappointment of SCAs/SAs by banks/UCBs till completion of tenure of continuous term of 3 years, there would not be any requirement of shortlisting and sending names of multiple audit firms to RBI while seeking approval to appointment.
  • The Entities shall obtain a certificate, along with relevant information as per Form B (as per Annexure II), from the audit firm(s) proposed to be appointed as SCAs/SAs by the Entity to the effect that the audit firm(s) complies with all the eligibility norms prescribed by RBI for the purpose. Such certificate should be signed by the main partner/s of the audit firm proposed for appointment of SCAs/SAs of the Entities, under the seal of the said audit firm.

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