CII issues statement on RBI's guidelines for appointment of statutory auditors of Commercial Banks, NBFCs and UCBs

The CII, on May 23, commended RBI's intent of working towards strengthening the audit quality and governance process.

The CII said that the process was critical and fundamental to trust and credibility of the capital market. A cool off period of one year before appointment for the auditors' independence is not practicable to implement, it said.

The RBI Circular prescribed a set of selection criteria for Audit Firms based on quality parameters and independence considerations, which will further the RBI's overall objective in this area.

The CII has further evaluated various requirements contained in the circular and made the following submissions. Aspects of the Circular, which may not result in appreciable enhancement to audit quality and governance:

CII suggests that the requirements related to reduction in the tenure of audit engagement, cap on number of audits and extended cooling of periods, may not specifically address any perceived concerns on audit quality.

These are inconsistent with the provisions in the Companies Act, 2013 and are not comparable with international practices and regulations as prescribed by the IESBA, PCAOB, SEC, etc., which are widely accepted and adopted globally.

Implementing these requirements is likely to create avoidable complications without any appreciable enhancement to audit quality and governance.

Further, lack of harmony amongst various regulations on this subject is likely to add to complexity and confusion in the sector and also impact ease of doing business.

Aspects which will cause significant hardship to the companies, its stakeholders as well as industry in general:

It is a widely accepted principle that, to reduce uncertainty and implementation challenges, significant policy measures are not applied retrospectively and also allow for a reasonable transition period. This helps various stakeholders to better understand, plan for the change and ensure effective compliance.

A sudden change in major policies, without any reasonable transitional provisions, is bound to create several practical challenges in successful implementation.

It should also be noted that Appointment of Auditors is a critical and important process for an organization and merits the right level of attention especially from senior management, board and audit committee, and approval from RBI.The Circular has also been extended to the NBFCs for the first time, equating them with the commercial banks. It may be worth evaluating whether such restrictive norms need to be applied to the NBFCs, in addition to all the principles applicable as per the Companies Act, 2013, including rotation and cool off periods.

The reduction in the tenure of audit, cap on number of audits by an audit firm and extending the applicability of the provisions to NBFCs will make it mandatory for a large number of banks and NBFCs to immediately change their auditors, including requirements of joint audits in certain cases, based on monetary thresholds.

The challenge to identify an appropriate firm is further accentuated by the supply side constraints, which are likely to be caused, due to stricter eligibility criteria and independence considerations including association with groups (including those using the same brand) on providing unrestricted non-audit services, that too in the past 1 year.All these amendments will create inconsistent policies vis a vis the Companies Act, 2013, without adding any qualitative parameters.

It is all the more challenging in present times, severely impacted by COVID-19, to implement these requirements without any transitional provisions.

Few matters that warrant an immediate attention of the RBI

A clarification from the RBI that the circular is only intended to cover banks and NBFCs (to whom it is addressed) and their respective audit firms, insofar as the audit of the bank or NBFC is concerned.

Review the extended coverage to the NBFCs:

The RBI may not apply the same principles to the commercial banks and NBFCs, including in respect of cap on maximum number of audits, mandatory joint audits, and rotation/cool off principles. The NBFCs may continue to be governed by the Companies Act, 2013.

The Circular contains provisions with retrospective implications. For instance, a cool off period of one year before appointment for the auditors' independence is not practicable to implement.

It is an established protocol to provide a transitional time to implement such provisions.

Re-consider severe restrictions on capacity and eligibility requirements (including coverage of NBFCs, as mentioned above), limit on number of audits, maximum engagement period of 3 years and 6 years cool off period after rotation.

The RBI may consider aligning them with the provisions in the Companies Act, 2013. The RBI may still achieve its objectives, without diluting any of the principles.Review the applicability of joint audits, at least to the NBFCs, considering that there are enabling provisions under the Companies Act, 2013, in case the audit committee/Board of an NBFC considers it necessary.Align the restrictions on audit/non-audit services for related entities, to the established principles in the Companies Act, 2013 and the Code of Ethics of the Institute of Chartered Accountants of India. The Code of Ethics has already been mapped to the international standards (i.e., IESBA).

Review the definition of related parties, which as per the Circular include the group entities using a common brand name. This has far reaching implications and unintended consequences; and restrictions on audit/non-audit services during one year before/after the appointment as auditors of a bank/NBFC, covering the entity and its group entities. These provisions may create severe capacity constraints, without adding any qualitative parameters.

Provide adequate transitional provisions to implement. This is all the more important considering the challenges posed by COVID-19.

CII strongly supports the initiatives of the RBI to achieve the objective of strengthening governance, enhancing audit quality and auditor independence.

However, corporates have a significant role in making this a success. It is motivated by the same considerations, it is requested that the RBI helps in facilitating an effective implementation of regulation, without disrupting the Ease of Doing Business.

CII also submits that the views and suggestions in the areas of coverage of entities in the sector (in particular the NBFCs), transition time for implementation; rationalize the restrictions and eligibility criteria for auditors' appointment/rotation/cap on number of audits as per the Companies Act, 2013, may kindly be considered.