As more and more loan-related scams come to light in many public and private sector banks leading to a massive pile-up of bad loans, the Reserve Bank of India (RBI) on Friday decided to take auditors to task by warning them of stern punitive actions against them.

In a new circular titled 'Enforcement action framework in respect of statutory auditors (SAs) for lapses in the statutory audit of commercial banks', the RBI on Friday warned that any SA not following instructions will be met with punitive actions such as debarring them from conducting business with banks.

"To improve audit quality and bring about a transparent mechanism to examine the accountability of SAs in a consistent manner, it has been decided to put in place a graded enforcement action framework to enable appropriate action by the RBI in respect of the banks SAs for any lapses observed in conducting a statutory audit," RBI said.

The new framework will cover instances of divergence identified in asset classification and provisioning during RBI inspection vis--vis the audited financial statements of banks above the threshold specified in this circular.

Underlining the key role that SAs of banks play in contributing to financial stability when they deliver quality bank audits that foster market confidence in banks' financial statements, the circular said quality audits are also a valuable input in the supervisory process of RBI over banks.

The apex bank said its new enforcement action framework is under the various provisions of the Banking Regulation Act of 1949, the Banking Companies (Acquisition & Transfer of Undertaking) Act of 1970/1980, and the State Bank of India Act of 1955, which stipulate that banks shall obtain prior RBI approval to appoint SAs.

"If the audit quality or conduct of an SA is not found satisfactory, the RBI will enforce action against them by way of not approving their appointments for undertaking statutory audit of banks for a specified period. The RBI may also not approve auditors, who have been debarred by other regulators/law-enforcement /government agencies," it said.

Actions that will invite punitive actions include lapses in carrying out audit assignments resulting in a misstatement of financial statements, giving wrong certifications and wrong information in the long form audit report, misconduct while on audit assignments and any other violations/lapses vis--vis RBI directions about their role.

It can be noted that serving and retired CMDs/MDs/CEOs of as many as six public sector banks have been arrested by various law enforcement agencies in the recent past for unlawful/violating the board-approved lending norms.

Similarly, Chanda Kochhar, the head of the largest private sector lender ICICI Bank, was earlier this month forced to go on leave after she allegedly violated rules to lend Rs 3,250 crore to the Videocon group, which in turn helped her husband Deepak Kochhar to build a business in the renewable energy sector.

All these lending in violation of the laws have resulted in the bad loans in the banking system surging to over 11 percent of the systemic loan book. #casansaar (Source - PTI, First Post)