The Reserve Bank of India has tightened norms for appointing auditors and has capped the numbers based on the asset size of the bank with an aim to prevent wide variations in asset classification and misleading accounts statements. Banks shall take prior approval from the RBI on the appointment of auditors, but non-bank lenders can go ahead with just intimating the regulator.

As per the new norms, banks will be required to take prior approval of the RBI for appointment or reappointment of statutory auditors on an annual basis. For entities, having an asset size of more than Rs 15,000 crore, statutory audit will be conducted under joint audit of a minimum of two audit firms. All other entities should appoint a minimum of one audit firm for conducting statutory audit.

“It shall be ensured that joint auditors of the entity do not have any common partners and they are not under the same network of audit firms,” the regulator said.
The RBI has set criteria for audit firms regarding the number of audits they can take at a time, and how they should conduct it. The central bank also wants firms to have a particular size to audit banks and NBFCs.

“Given some of the recent issues at some NBFCs and Banks it seems the RBI has initiated steps to strengthen governance relating to auditors of these entities. With larger banks and NBFCs requiring joint audits as per the new guidelines, this would be an opportunity for the mid tier Indian audit firms to build their capability to service some of these Banks/ NBFCs,” said Nikhil Singhi, a partner at Singhi & Co, one of countries biggest audit firms.

The guidelines further said that in order to protect the independence of the audit firms, entities will have to appoint the auditors for a continuous period of three years.

“There are a lot of expectations from the audit firms as to how many CAs they should have, how many bank audits they can do at a time and the cooling off period of 6 years. It’s clear that RBI wants only firms with certain calibre to conduct statutory audits but the central bank is absolutely silent on the remuneration part,” said Vinayak Padwal, senior audit partner.

The RBI’s quality parameters also mean that some firms will have to invest additionally to become eligible. In the past some of the large public sector banks such as the State Bank of India, would hire hundreds of auditors across India for each of its branches. The new regulations could also mean that even public sector banks will now have to rope in statutory auditors in a particular manner.

The guidelines will be applicable to appointment of Statutory Central Auditors (SCAs) and Statutory Auditors (SAs) of Commercial Banks, urban cooperative banks and non-bank lenders. Regional rural banks and non-bank lenders. Regional rural banks have been excluded from these guidelines while non-deposit taking NBFCs with asset size below Rs 1,000 crore have the option to continue with the methods followed presently.