Pressure is building upon the Reserve Bank of India (RBI) from the banking and financial services industry (BFSI) to defer the new auditors' guidelines for a year, which restricts the appointment of auditors for a period of three years and also allows only four banks for audit as against eight previously.
After the debacle of banks and NBFCs like Yes Bank, IL&FS, and Dewan Housing where the big four auditors were present, RBI came out with new guidelines last month. The new guidelines cover rules regarding the appointment of auditors and joint auditors, the number of auditors, eligibility criteria, tenure, and compulsory rotation period.
The new guidelines are effective from the current financial year.
The BFSI industry and the auditors are already engaging with the RBI by sending their feedback.
The BFSI industry faced with restructuring and asset quality issues is insisting that they need time as they are preoccupied with other business issues due to COVID-19 outbreak. In fact, the companies are finding it challenging to get the right pool of auditors as many big firms are out of the reckoning because of the three-year rule.
The new norms restrict the appointment of auditors only for a period of three years. There is a long six years cool-off period which means many large banks and NBFCs will be out of the ambit of big auditing firms.
The earlier pool of auditors included firms like EY, KPMG, PWC, Deloitte, BDO, and Grant Thornton. In fact, the BFSI industry engages with these players for non-audit work like consultancy, valuations, and other M&A transactions.
The RBI brought this rule from the governance perspective, which is good for the market. In fact, recent instances had threatened financial stability. Post-IL&FS, the entire NBFC industry faced asset-liability mismatches as short-term funds dried out. Similarly, the RBI and the government have to bring together half a dozen banks to save the private sector Yes Bank.
However, the auditors' community has stated that the tenure of three years as fixed by the RBI is inconsistent with the provisions of the Companies Act, 2013, under which two terms of five years each is permitted. In addition, the insurance regulator IRDAI also follows the Companies Act to fix tenure of auditors for insurance companies. "The prescribed cooling off period of six years is inconsistent with the requirement under the Companies Act, 2013, wherein five years is prescribed," say auditors.
Auditing firms, banks and NBFCs are also requesting the RBI to relax the restrictions on the number of companies an audit firm can audit. Under the new norms, only four companies are available for audit as against eight earlier which included four each for private and foreign banks. There are eight NBFCs available under the new norms whereas there was no limit earlier.
This new rule will open up the BFSI audit work for other large auditing firms, though impacting the big four auditing firms, which do both audit and non-audit work for big banks and NBFCs.
There is also now a requirement of joint audits, which, the auditors community says, will not only increase the cost but also result in differences or confusion in the auditing process.