Related Party Agreements on the Rise, Auditors Must Be Vigilant: RBI Governor Das
RBI governor’s statement follows two-year ban on Haribhakti & Co conducting audits
Bombay, October 26
Reserve Bank of India (RBI) Governor Shaktikanta Das said on Monday that auditors should be careful of increasing accounting and innovative related party transactions and should report them promptly to the regulator.
His remarks came days after the RBI banned the audit firm Haribhakti & Co for two years from conducting audits on its regulated entities from the next fiscal year.
Without naming any company, Das said auditors in some cases failed to detect manipulation and inaccuracies in accounts, and smart accounting should be treated more strictly. It is also the auditor’s responsibility to immediately report any accounting manipulation to the regulator, but in some cases this has not been done.
The RBI banned Haribhakti & Co, auditor of SREI Infrastructure Finance, under section 45MA of the RBI Act. The article specifies that an auditor would be penalized and would have the obligation to ask if the audited company provided all the details on its deposits, assets and liabilities, income statement, etc. to the RBI who would train on the basis of disclosure-related instructions, or even a special cabinet audit.
The RBI Governor, in his address to the National Academy of Audit and Accounts, said auditors are the first line of defense against economic fraud and that a solid audit of the economy is needed.
“Economic decisions are increasingly made on the basis of available evidence and information. Inaccurate information can lead to sub-optimal decisions or an excessive allocation of resources, which would neither be in the public interest when a public authority is involved, nor in the interest of individual stakeholders, ”said the governor of the RBI.
When a bank sanctions a loan to a business based on misinformation and the business does not repay the money, it will end up affecting the safety of depositors. Banks will become risk averse from bad debts, and to recoup their losses, they will increase their interest rates. It will also hamper economic recovery and compromise the safety of depositors.
“Auditors play a critical role in maintaining market confidence in audited financial statements. In the banking sector, this public role is particularly important for financial stability, since banks hold public deposits. The quality of the audit is the key to the effectiveness of such a public role, ”said the governor of the RBI.
“An auditor has a duty to report directly to the supervisor (RBI) on matters of material importance arising from the audit of banks and other regulated entities. For these reasons, the RBI, as supervisor of banks and NBFCs, takes a keen interest in how auditors conduct audits in regulated entities, ”said Das.
“Audit failures usually occur when the independence of the auditor is compromised or the auditor lacks competence,” he said, warranting more scrutiny from auditors.
The RBI Governor said auditors should also be careful of subjectivity in IND-AS accounting. The standard is applicable to all regulated entities, except banks for now. IND-AS 109 has an expected credit loss approach, which allows management to take the path of innovative accounting, and this has been observed in several cases.
According to the Governor of the RBI, in recent times there have been several cases of transactions with related parties without respecting the arm’s length principle and the established transfer pricing mechanism.
“There have been cases of misappropriation of funds and / or transfer of profits to related parties by various means – intra-group loans on favorable terms, over-invoicing or under-invoicing of transactions, transfers of assets without fair valuation etc., “he said, adding that auditors have a responsibility to ensure that there is no undue transfer.
According to the governor of the RBI, increasingly opaque technological means, such as computer black boxes, where real transactions are camouflaged under various layers of computer solutions. Listeners must be tech-savvy to detect them. “A lot of work has been done, but there is still a lot to do,” said the RBI governor.