Saturday, October 14, 2006


The Government’s decision to allow chairman of public sector banks the freedom to appoint statutory auditors without approvals from the Reserve Bank of India has led to chaos. Statutory auditors have expressed to the RBI their unwillingness to be engaged directly by the banks board and have also accordingly made a representation to the government seeking a review. The All India Chartered Accountants Society has demanded that the Government should withdraw and/or revoke its decision to permit public sector bank Board of Directors to appoint auditors. The intellectual group and leading economists are of the view that it will cause great risk to the independent functioning of public sector banks and will give leverage to the Senior Government Officials, Ministers and other Politicians to misuse public fund with the help of government nominated Board of Directors, in the absence of an independent audit. This decision of the government has the propensity to completely perish the financial sector. This decision will also promote corrupts practices in relation to appointments. The smaller firms and those who are not ‘well connected’ will loose these Audits to those who are close to the Board of Directors.

The CA profession has demanded from the Council of the Institute of Chartered Accountants of India to pass necessary resolution directing the professionals to decline acceptance of appointment as auditors, such appointments being severely marred by non-independence, in case it is made by the Board of Directors rather than by the Reserve Bank of India in consultation with CAG as per the existing practice or by any other independent authority. The auditors are supposed to critically examine the deeds and mis-deeds of the Board of Directors and top management and this most important function of the auditors will be severely impacted by the decision of the government.

Also, some public sector banks have declined to enjoy the freedom and want to continue to avail of the services of the auditors empanelled by the RBI. These banks do not wish to be questioned by public or CBI or courts in case of allegation of financial impropriety. Since this requires the RBI to continue with the practice of selecting a panel of auditors, the banking regulator has written to the finance ministry for clarification. The confusion has delayed finalization of the new panel of auditors for auditing public sector banks’ accounts in the current financial year. Some are of the view that the stalemate may result in PSBs being forced to get their financial statements for the half year ending September 30 audited by the old panel of auditors. Auditors fear doing away with the practice of RBI maintaining a panel of auditors will surely lead to a conflict of interest. They feel that audit firms might lose their freedom in recording their qualifications if they are chosen by Chairman or the Board of PSBs themselves.
Auditing financial statements of banks has become risky following failure of a number of private sector banks in last 2 years, the private sector banks being audited by the auditors appointed by the Banks’ management / owners. It may be noted that Global Trust Bank, United Western Bank and several other banks have recently been closed down / merged with public sector banks in view of their poor financial position and in the backdrop of serious allegations of improper financial reporting. The Reserve Bank of India despite its best regulatory practices, has failed to monitor the private sector banks and foreign banks, several times in past, in the absence of a detailed audit by independent auditors. On the other hand the public sector banks have shown an all round growth and recovery in their financial strength, supported by financial discipline resulted out of true and fair financial reporting by the conduct of auditors appointed independent of the Banks hitherto.


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