The Reserve Bank of India's (RBI) action against Haribhakti & Company is going to be a strong deterrent for the chartered accountancy firms engaged in the auditing work of banks and financial services. Let's dive deeper into the details of the RBI's order and its implications.
Scope of RBI's action
The RBI's action against Haribhakti & Company is only against the audit assignment of entities regulated by the RBI. The auditing firm is free to do audit assignments outside the RBI's regulated space. The action was taken because of non-compliance with the RBI's regulatory directions.
Auditing work of banks & NBFCs
No, this will not impact the current audit assignments of Haribhakti & Company for 2021-22. The two-year ban starts on April 1, 2022. The firm was a big beneficiary of the RBI's new auditing rules as it bagged new assignments in the financial services space.
RBI's message to auditing community
The RB has given a clear message that it won't tolerate any laxity or non-compliance with its regulatory direction. The auditing firms have to set high standards of quality. The instances of defaults or NPA (non-performing assets) recognition is key to the soundness of any financial institution.
Past failures and lessons
The recent failure of large institutions like infra financing institution IL&FS, and new generation private bank YES Bank have shown the rotation of the auditing firm is a must. Both these large institutions had big four as their auditors. The RBI earlier found YES Bank under-reporting the NPAs in its book. Similarly, there were instances of regulatory lapses in IL&FS, especially inter-company transfers, under-reporting NPAs, etc. In fact, most NPAs were unearthed in the banking sector post the asset quality review (AQR) initiated by the RBI.
New auditing rules
The RBI has come out with new auditing rules starting with the current year. There was actually a lot of opposition in the market, but the RBI refused to budge. The new auditing rules require banks and institutions to change auditors every three years. This requirement was four years earlier and five years permitted by the Companies Act. There is also six years cooling-off period set by the RBI before the firm gets back to the same company for auditing assignment. In addition, banks and NBFCs with assets of over Rs 15,000 crore will have to go for joint audits.
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