The Reserve Bank of India’s (RBI) rules changing auditors throw up “enormous operational difficulties” and are disruptive for banks and non-banks, said the Confederation of Indian Industry (CII) in a statement.
The central bank, on April 27, asked banks and non-banking financial companies (NBFC), excluding those who don’t take deposits and have below Rs 1,000-crore asset base, to immediately bring in new auditors in case the firm has completed three years of audit of a bank or NBFC. NBFCs may do the change from the second half of the year.
Banks and NBFCs having asset size of Rs 15,000 crore or more were asked to appoint joint auditors. Crucially, a retrospective applicability of the extended eligibility criteria for the auditors, including those relating to provision of audit and non-audit services.
“It is a widely accepted principle that, to reduce uncertainty and implementation challenges, such significant policy measures are not applied retrospectively and allow a reasonable transition period for a better understanding, planning and compliance,” said CII in a statement.
Identifying the right audit firm requires time and efforts, and applying the circular for 2021-22 will cause “enormous operational difficulties in implementation,” it said, adding without any transitional planning, the requirement of appointing new auditors for the year 2021- 22 would be extremely challenging and create avoidable hardships for various stakeholders.
There is “practically no time to carry out and complete this process,” for banks that will have to now appoint new auditors for the year 2021-22. The NBFCs have been allowed to complete this process in the second half of the financial year 2021-22, which also is inadequate, the statement said.
The problem is accentuated for entities that are required to select and appoint two or more audit firms to replace the existing auditors, it said. A large number of audit firms would also be ineligible under the rules because of their prior engagements with the firms.
Besides, the circular would require mid-term resignation of auditors, which would break contracts in large number of cases and create disruptions in banking and NBFC space. This would be even more difficult during the Covid period.
CII argued that the Listing Obligations and Disclosure Requirements (LODR) norms of the Securities Exchange Board of India (SEBI) requires statutory auditor of a listed company to undertake a limited review of the audit of all the companies whose accounts are to be consolidated with the listed entity as per Accounting Standard 21.
The RBI circular “will force the group to appoint different auditors within the group. Having multiple auditors in a group where Bank/ NBFCs is a parent or is an entity in the group, will pose challenges of coordination between different auditors and perform an effective review,” CII said.
The change of auditors may not also resonate with international investors, it argued.
“A period of three years is too short for a large bank/ NBFC having large number of branches across India. The complexity and span of operations makes a tenure of three years inadequate to leverage any benefit of skills and experience.
“Accordingly, there are capacity constraints as far as large firms with appropriate skills and size and, therefore, the choice is limited. Given the fragmentation, there is unarguably a need for greater number of large firms with multi-disciplinary capabilities to deal with complex audits of large banks and NBFCs,” CII said.
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