In order to put an end to private and foreign banks appointing the same set of auditors alternatively after mandatory rest of 2 years, the Reserve Bank of India has extended the mandatory rest period to 6 years, it said in a notification on Thursday.

The earlier rules required an auditor to be appointed for a period of 4 years, followed by a rest period of 2 years.

The drawback of appointing the same set of auditors alternatively is that such a practice usually establishes a level of comfort between the auditor and the client, which may lead to a compromise in strict adherence of audit principles.

The RBI said that in certain cases, private and foreign banks appointed the same auditing firm immediately after a gap of 2 years. In other cases, they appointed the immediately preceding auditing firm following completion of the incumbent auditor’s 4-year tenure.

Criticizing this practice, the banking regulator said the rest period is mandated in order to ensure that the books are examined afresh, as a new team is more likely to examine issues in a bank’s books with a different perspective.

This particular RBI decision has assumed importance because in FY16, when the RBI had directed banks to clean up their books and recognise and provide for non-performing loans, some private sector banks reported significantly lower NPAs than what the central bank’s own auditors later found. #casansaar (Source - MoneyControl)

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