Memorandum for Suggesting Changes in the Process of Allotment Of Statutory Bank Branch Audits to Chartered Accountants

We are Chartered Accountants located in different parts of India. We have noted with concern the various issues that have arisen over the past few years in the matter of appointment of auditors of Bank Branches. This has not only adversely affected the NPAs of various bank branches (which in turn affects the economic health of the banking industry which forms the backbone of the Indian economy) but also resulted in several small and medium sized firms of Chartered Accountants losing an important stream of revenue. It is in this background that we humbly request you to kindly go through the below memorandum and to take appropriate action at the earliest. A few representatives of the signatories would be privileged to attend before you personally and explain the matter in detail.

Present System of Allottment of Bank Branch Audits: 

A. Every year, ICAI forwards the Bank Branch Auditors’ Panel to Reserve Bank of India (RBI). The said panel is classified into following three lists by RBI:-

i. List of auditors stationed at 33 centres where cooling period of two years is applicable after completion of their cycle of 4 years of branch statutory audit – this list is not forwarded to any bank.

ii. List of continuing auditors who have yet to complete their cycle of 4 years ofallotment of bank branch statutory audit – this list is forwarded by RBI to respective banks.

iii. List containing balance names is forwarded by RBI to all the Public Sector Banks to select their branch statutory auditors, as per their requirement.

B. Out of the 3^rd list, Banks select few CA firms as per their discretion to replace the firms which have completed their cycle of 4 years. The concerned bank then seeks the selected auditors’ confirmation either by an Email and/or phone call . On getting their confirmation, an appointment letter is issued to them.

C. Auditors in 2^nd list are sent appointment letters automatically in the normal course.

Earlier System of Allottment of Bank Branch Audit, upto2008 :

Earlier also, ICAI forwarded the Bank Branch Auditors’ Panel to RBI which classified the list in 3 parts as mentioned above with the only and major difference that the 3^rd list of new auditors was not common for all banks as is being done now. Selection of new auditors for each bank was done separately by RBI in a very transparent and undisputed manner which was never questioned by any auditor in the past 4 decades. There was no clash of same names of new audit firms in more than one bank, as is happening now. Today, because of the deficient system, some CA Firms get multiple offers for appointment from 2-3 banks. Separate list of new auditors was sent by RBI to each bank and the banks had no say in the appointment of branch auditors. As a result, independence of the auditor was well and truly safeguarded by RBI.

PROBLEMS IN THE  CURRENT  SYSTEM OF BANK  BRANCH  AUDIT ALLOTTMENT :   

1. The main problem area is the 3^rd List, whereby banks are selecting new auditors as per their own discretion because there is neither any automated software for making the selection nor is there any prescribed procedure for the same. And this is creating a very volcanic situation. As the same 3^rd list is sent to all the banks, as mentioned earlier, some CA firms get offers from 2- 3 banks whereas there are many CA firms who are not getting offer of appointment from any bank since last 5- 6 years.Also, some CA firms are getting the allotment continuously without any break even after 4 years and on the other hand, some CA firms are getting after a gap of may be 4-5 years or may be not getting even after 4-5 years.Category-IV firms are the worst hit by this new system of allotment of bank branch audits. In light of the above, it is respectfully submitted that this system is neither logical nor fair.

Ever since the process of allotment of Statutory Bank Branch Audits of Nationalised Bankswas shifted by Ministry of Finance, GOI, from RBI to respective banksin 2008vide Letter No. F.No. 1/14/2004-BOA dt. 21/11/2008, there has been widespread discontent among the Chartered Accountants regarding the methodology and fairness in allotment of branches to auditors, which has also been affecting the independence of auditors, in some way or the other.

2. As if this was not enough, in 2012,the Govt. raised the Statutory Audit cut-off limit of Rs.3 crore of advances to Rs.6 crore and further enhanced this cut-off limit to Rs.20 crores in 2013. As a result of these decisions, the number of bank branches under audit got reduced drastically in the last 3 years, giving further impetus to the – “Setting – Getting” culture in allotment of bank branch audits, which is proving damaging for the banks and Govt. of India as well. Ever since this increase in cut-off limit for audit of branches has been effected, NPA figures have gone up drastically in the last 3 years. From 2.32% in 2011 (when branches above 3 crores were audited), the NPAratio has gone upto3.84% in March, 2013 and 4.40%in 2014.And this has further increased to 4.60% in June’2014.By all standards, this is an alarming increase in NPAs. Now, if we compare this NPA ratio of last 3 years with that of 2008 to 2011 when most of the bank branches were under audit, the point that is sought to be brought out by this Memorandum becomes crystal clear. NPA was 2.33% in 2008 and 2.32% in 2011 i.e. stagnant over that period of 3 years. Comparative figures of NPAsof Public Sector Banks are given below for ready reference :-

Various frauds have also occurred in some bank branches with advances below Rs.20 crores.Looking at thisese increasing trend of NPAs, there is clearly no logic for enhancing the cut–off limit for audit of bank branches to Rs.20 crores by the Govt. 

3. In FY 2012-13, In 25 public sector banks, more than 55% branches were left unaudited due to the advances criteria with UCO Bank leading the list with 71.1% followed by Central Bank of India with 67.9%.There is a serious question on the extent to which one can rely on the financial statements of UCO Bank whose 28.9% branches only were audited during 2012-13 as against 64.1% during 2011-12 without bringing this fact into knowledge of even shareholders of bank.

4. This “Setting – Getting” culture is not in consonance with the preamble of the new Govt. which has vowed to remove corruption from every field. The recent arrest of the CMD of Syndicate Bank and cancellation of postings of CMDs of 6 Nationalised Banks are self-explanatory and indicators of the mass corruption existing in the banking sector. In such a scenario, the top management of any banks can very easily appoint branch auditors of their choice and suitability with the ulterior motive of covering up misdeeds.It may be noted here that Central Statutory auditors(CSA) do not have access to loan documents and terms and conditions of sanction which are available only at the branches. In small branches, it has been noticed during audit that date of sanction is wrongly fedand repayment schedule is not fed properly in the masterdata of the borrower at the time of conversion of the branch to CBS due to which the bank’s software is unable to recognise it as an NPA at the appropriate time. Dates can also be altered temporarily by the bank branch officials to show reduced figure of NPA. Details given in computer software are mostly incomplete/incorrect and hence mislead the auditor. Branch auditor always has an edge because he can verify the documents physically.This privilege is not available with the CSA as he is sitting at a distant place without access to physical documents & sanction letter.

5. In many cases, CA firms of North India are allotted audits of bank branches in South/West/East India and vice-versa. This entails wastage of time of auditors and also entails unnecessary travelling costsfor the banks. This is neither beneficial to the banks nor to the auditors. There is no area mapping of the location of a branch and the auditor especially in case of medium and big branches. The Setting-Getting formula is in the crux of this problem also.

6. Another important problem relating to bank audits is that auditorsdo not get sufficient time to conduct the audit in the desired manner due to undue pressure of timeline for audit set by the top management of the bank. Normally, the banks are asking their auditors to complete the audit (including the huge no. of certifications) of 2-3 branches within a week, which is proving to be a big hindrance to the conduct of a quality audit.  Surprisingly, some banks are even mentioning this time deadline in the appointment letters also. In fact, at the top level, there appears to be a race between all the public sector banks to complete their audit process fast and to become the first to publish the Balance Sheet. Their main concern seems to bean expeditious publication of their Balance Sheet and not Quality Audit.

7. On the one hand, banks are allotting upto 3 branches to every auditor and pressurizing them to complete audit of all 3 branches within a week and on the other hand, many CA firms in the 3^rd list are not allotted branch audit by any bank. This clearly indicates that the system fails to distribute work equitably and efficientlyamongst the pool of Chartered Accountants in the country

8. A large portion of funds of public welfare schemes are routed through small and rural branches which are under the sole discretion of the branch managers. Almost all such branches have been moved out of the audit purview because their advance portfolio is less than Rs.20 crores. The moot question is why is this done? Is it just to cut costs? On an average, the audit fees of a rural/small branch having advances below 10 crores will be about Rs.50,000/-. Such a small amount can be very easily saved by the bank branches by controlling various expenses through proper control & management. Banks have increased their profits in the last 4-5 years, by selling insurance and other financial products. Even rural branches are generally having profits of more than 1 crore. In such a scenario, incurring audit expenses of just aroundRs.50,000/- can hardly be considered as prudent and rational.The importance and benefits of external audit in public financial institutions far outweigh the nominal cost of the audits.   

9.   It is worth mentioning here that the system of audit which has been prevalent for over 4 decades has proved itself in all the tests of times. All the Indian banks survived comfortably even during recession when the entire banking sector of the world faced a financial crisis leading to insolvency of major banks of the World. In such circumstances, it is strange that the Government is of the view that the audits and checks require to be reduced.

10.  In all the scams that have come to light, whether it relates to stock market or public expenditure or social schemes or education etc. the channelizing is through the banks and thus this becomes one of the prime areas requiring  independent audit of transactions. It is not necessary that frauds/scams are committed in large bank branches only. The only difference is that scams in large branches get highlighted due to the quantum. Several scams are committed in rural & small branches in the disbursement of payments relating to socio-economic and public welfare schemes and in the sanctioning of loans under government sponsored schemes like KCC, PMRY, SHG, Agricultural Loans, etc.

Farmer’s loan waiver scam unearthed by CAG in its audit report talks about how the rural banks have manipulated the system. An extract from the CAG Report is reproduced below:

“The audit carried out from April 2011 to March 2012 covered 25 states involving field audit of a total 90,576 farmers' accounts in 715 branches of banks in 92 districts. 13.46 per cent accounts were those who were eligible but were disqualified by the lending institutions. Six per cent of the checked accounts were not extended their rightful benefits. 8.62 per cent were those who were not eligible but still got either complete waiver of debt relief. More than 34 percent farmers were not issued debt waiver certificates thus making them ineligible for future loans. In a large number of cases there was proof of tampering, overwriting and alteration of records. Though the scheme was meant for farmers directly, in many cases the monies were disbursed to micro finance institutions. Also, lending institutions fraudulently claimed amounts related to interest charges. Finance Ministry left it to the banks to do self-monitoring. There was no oversight by finance ministry while reimbursing claims,"

Had these branches been subjected to an external audit, the gravity of loss could have been reduced considerably.

12.   As the money lying with the banks belongs to crores and crores of depositors, it is also essential to ensure that the same is being utilized as per the directions of the regulatory authorities and now, since 70% branches have gone out of the purview of audit, potential risks have increased manifold.

13.   On one hand, Government says legislatesthat a private limited company having a share capital of even Rs. 1 lakh must undergo statutory audit even when it’s capital consists of private money onlyand on the other hand, it takes a decision that there is no need to get a bank branch audited if advances are uptoRs. 20 crores – and this is done despite the fact that huge public deposits are held by banks knowing well that these small bank branches are the custodians of public money of small depositors.

Hence, in order to get rid of the above mentioned problems, we respectfully suggest the following changes in the method of allotment of statutory bank branch audits:-

PROPOSED  SOLUTIONS :

1. We request the Govt. to look into the matter and make statutory bank branch audit compulsory for all bank branches, irrespective of the amount of advances and/or deposits of the branch. This is also a must in the era of Governance about which the Hon’ble Prime Minister- Shri NarendraModiji has committed time and again to the people of India.Hence, the policy of cut-off limit of advances of Rs.20 crores should be scrapped immediately as it is detrimental in every respect and NPAs are drastically increasing in this regime of curtailment of audits. This is a very dangerous signal for the economy.

2. And to achieve maximum governance in minimum possible time, there is one very effective tool with the government – allotment of Bank Branch Audits to CA Firms  be done by RBI and the suggestions given in this Memorandum be considered while framing the methodology of allotment.

2. DIVISION OF BRANCHES ON THE BASIS OF SIZE: All branches should be divided into category I, II, III & IV on the basis of size and overall business of the bank branch.

3.  ALLOTMENT OF AUDIT ON THE BASIS OF SIZES: Audit for Category l branch should be allotted to Category I CA firms& so on.

4.  NO COOLING PERIOD: There should not be cooling period on the basis of place, as this rule is being misused by certain unscrupulous persons.

5.  PRINCIPLE OF ALLOTMENTS: Bank Branch audit can be equally divided among all firms so that all firms get bank audits - may be on the basis of principal of “One Firm, One Bank Branch Audit on the basis of size of bank branch & CA Firm” or other similar principal.This system will have multiple benefits like equitable allotment, quality audit (as the auditor will get sufficient time to conduct audit as he has to audit only 1 branch) and lastly, completion of audit well within the timeline set by the bank.In no case should any CA Firm be allotted more than 2 branches.

6.  BANKS SHOULD BE GIVEN A SMALL LIST OF AUDIT FIRMS: Banks should be sent list of eligible audit firms on the basis of its requirements. For example, if a Bank has 100 branches which require audit - CATEGORY I BRANCH: 30, CATEGORY II BRANCH: 20, CATEGORY III BRANCH: 10, & CATEGORY IV BRANCH: 40 thensuch a bank should not be sent the entire list but only a small list - say list of 100 firms according to size of the CA firms & branch size. This will reduce the discretion of Bank to allot audits. This discretion has created many problems under the existing system which can be eliminated by implementing this suggestion.

7.  APPOINTMENTS BY TAKING “MAPPING TECHNOLOGY”:  Latest technology can be used to appoint auditors. Mapping concept can be used to save travel costs of banks and precious time of the auditors. By using mapping technology, the auditor who is located near a branch can be appointed as the branch auditor.  It is very likely that the travel costs so saved by bank branches would meet part of the audit fees.

8. Under existing system, Category IV CA Firm has very less chance of being allotted a  bank audit. The Government must take steps to reduce the gap between large firms and small and medium sized firms. It is equally important to give newly qualified CAs and relatively newer entrants to the profession an assured revenue by way of bank audit fees. This would go a long way in helping such CAs establish themselves. It is respectfully submitted that just as the Govt. gives protection and priority to SSI units, similarly it should give protection and priority to small practitioners by implementing the policy of not allotting bank branch audit to CA Firms having turnover exceeding the following specified limits, depending upon size of the city :-                                                                   

Cut-Off Limit for Bank Branch Audit

1. Metro Cities of Delhi, Mumbai, Kolkata & Chennai  -            Rs.50 Lacs

1. Tier-2 Cities – Hyderabad, Bangalore, Pune, Indore,

                          Chandigarh, Ghaziabad, Noida, Gurgaon,

Lucknow, Ahmedabad, Baroda, Jaipur,                                Rs.30 Lacs

                          Kanpur, Bhubaneshwar, Surat, Raipur,

                          Coimbatore, Ludhiana, Nagpur, Guwahati

1. All other Cities                                                                               -                      Rs.20 Lacs

And Cooling Period system should be applicable only in the 4 Metro cities.

9. Grameen Bank Audits allotted through NABARD should be reserved for Category-IV (proprietorship) and Category- III (only 2 partners) firms only. Moreover, it should be ensured that audit of Grameen Banks is allotted only to those CA firms which were not allotted statutory branch audit of banks.This will provide some relief to the small firms.

10. A Priority List of Auditors should be prepared by RBI/ICAI containing names of CA Firms who have not been allotted any Statutory Bank Branch audit in the last 2 years and the 3^rd List of new auditors to be prepared by RBI should be prepared from this priority list only. Other names should be considered only if the requirement exceeds the available nos. in the priority list. This will reduce the discontent among CA Firms who have not been allotted any bank branch audit in the last 2 to 5 years.

11. In case the Govt. decides to have a cut-off limit of advances of say Rs.3 to 5 crores, we suggest that the branches falling below this limit should be audited once in 3 years instead of the present system of 5 years, which is an extra long period and gives impetus to wrong doings at such branches.

12. The basic structure for allotment of bank branch statutory audit should be revised & should be based on the advance plus deposits exposure of branch instead of advances only. The auditors are responsible for the authenticity of deposits also. We have to audit the whole balance sheet and not merely the advances.The Balance Sheet consists of various components and one of the important items is Deposits. Without deposit mobilization, lending of the bank is not possible. We have to also check the KYC, Money Laundering, Interest Calculation and other important aspect regarding deposit also.

13. Appointment of auditors should be made in the month of February itself so that each auditor can plan his pre-audit and scrutiny in March itself and complete the audit by duly complying with all the prescribed audit procedures well within the timeline set by the bank. Presently, appointment letters are generally issued after 15^th March.

14. Central Auditor should not be allotted any branch audits. Presently, the CSA gets all the big branches of the bank. This only results in favoring the larger firms and the social parity cannot be achieved if this is allowed to continue.

In the larger interest of the thousands of small and mid sized practitioners of the country and in the interest of the banking industry which is the backbone of the Indian economy, it is our humble request to seriously consider the above suggestions and implement the same at the earliest.