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Appointment / Re-appointment of Statutory Auditors of StCBs and CCBs

Reserve Bank of India (RBI) has issued guidelines on appointment / re-appointment of statutory auditors of State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs).

What is the basis for the guidelines?

The Banking Regulation (Amendment) Act, 2020, notified in the Gazette of India on September 29, 2020, has come into force with effect from April 01, 2021, for Rural Co-operative Banks i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs).

Accordingly, StCBs and CCBs are required to obtain prior approval of Reserve Bank of India (RBI) for appointment, re-appointment or removal of Statutory Auditor (SA) as per the provisions of Section 30(1A) of the Banking Regulation Act, 1949, with effect from April 01, 2021.

From when are the guidelines applicable?

The guidelines on appointment / re-appointment of SAs of StCBs and CCBs shall come into effect from April 01, 2024.

What is the procedure for appointment of SAs?

  • NABARD shall obtain a list of audit firms [Partnership firms / Limited Liability Partnerships (LLPs)], on an annual basis, from the Institute of Chartered Accountants of India (ICAI).
  • Thereafter, NABARD shall prepare an All-India State-wise list of eligible audit firms based on the eligibility criteria prescribed for SAs. 
  • NABARD shall then share this list with the banks for selection and appointment / re-appointment of SAs.
  • The bank shall select the audit firms from this list in accordance with the asset size of the bank as on 31st March of previous financial year. For the purpose, the asset size of the banks are categorised as – (a) Above ₹15,000 crore, (b) ₹1,000 crore to ₹15,000 crore, and (c) Up to ₹1,000 crore. 
  • In case of fresh appointment of SA, for each vacancy of SA, the bank shall shortlist minimum of 2 audit firms.
  • Thereafter, the bank shall obtain the necessary approvals from the Board of Directors (Board) / Audit Committee of the Board (ACB), and submit application for prior approval to RBI, before July 31 of the reference financial year.

When is RBI approval required?

  • The bank shall obtain prior approval of RBI before appointment, re-appointment or removal of SA.
  • The bank shall seek prior approval for re-appointment of SA annually.

How shall independence of auditors be ensured?

  • Concurrent auditors of the bank shall not be considered for appointment as SA of the same bank. There shall be a minimum gap of 1 year between completion of one assignment and commencement of the other assignment.
  • The time gap between any non-audit works undertaken by the SA for the appointing bank shall be at least 1 year, both before appointment and after completion of tenure as SA. 
  • During the tenure as SA, an audit firm may provide such services to the appointing bank which may not normally result in conflict of interest. 
  • The restrictions shall also apply to an audit firm under the same network of audit firms or any other audit firm having common partners.
  • The SA shall report concerns, if any, regarding the conduct of Management such as non-availability of information / non-cooperation by the Management (which may hamper the audit process), etc., to the Board / ACB and also to NABARD.

What shall be the tenure of SAs?

  • SAs shall be appointed at a time for 1 year only and shall be reappointed annually for the succeeding 2 years. 
  • During such period, premature removal of the SA shall require prior approval of RBI. 
  • An auditor / audit firm shall not be eligible for appointment / re-appointment in the same bank for 6 years (2 tenures) immediately after completion of a full / part tenure. However, it can continue to undertake statutory audit of other banks.
  • In case an auditor / audit firm has conducted audit of the bank for part-tenure (1 or 2 years) and then is not re-appointed for the remainder tenure, it shall not be eligible for re-appointment in the same bank for 6 years after completion of part-tenure. However, it can continue to undertake statutory audit of other banks.

How many StCBs / CCBs an audit firm can audit?

  • An audit firm can concurrently take up statutory audit of a maximum of 5 banks (including not more than one StCB) in a year. This is in addition to the limit of 20 Regulated Entities (REs), as prescribed in the ‘Guidelines for Appointment of Statutory Central Auditors (SCAs) / Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs)’ dated April 27, 2021.

Entities to be audited Maximum number of entities that can be audited by a single audit firm
Commercial Banks [including not more than one Public Sector Bank (PSB) or one All India Financial Institution (NABARD, SIDBI, NaBFID, NHB, EXIM Bank) or RBI] 4
Urban Co-operative Banks (UCBs) 8
Non-Banking Financial Companies (NBFCs) 8
StCBs / CCBs (including not more than one StCB) 5
  • In a year, an audit firm cannot simultaneously take up statutory audit of both StCB and CCBs operating in the same State.
  • A group of audit firms having common partners and / or under the same network shall be considered as one unit. The incoming audit firm shall not be eligible if such an audit firm is associated with the outgoing audit firm or is under the same network of audit firms.
  • Shared / Sub-contracted audit by any other audit firm or by an associate audit firm under the same network of audit firms, is not permitted.

What are the norms for selection of branches for audit?

  • The branches selected for audit should cover at least 70% of the total advances outstanding.
  • Top 20 branches / Top 20% of the branches of the banks (in case of banks having less than 100 branches) to be selected in order of level of outstanding advances should be compulsorily included for audit.
  • Branches where fraud, embezzlements or transactions of a suspicious nature are suspected or have taken place may be taken up for audit.
  • Branches where the loan, business growth is 50% and more over the preceding year should also be compulsorily taken for audit.
  • While deciding the branches and business coverage, the bank shall inter alia consider bank-specific characteristics such as degree of centralisation of processes, need to address fraud risk and credit risk, adverse report from internal / concurrent auditors, whistle blower complaints, and unusual patterns / activity shown by internal MIS reports.
  • The bank shall also disclose on its website / public domain the extent of branch / business coverage under Statutory Audit for the respective year and the previous year.

What are other guidelines for SAs?

  • If any partners of an audit firm is a director in any bank, the said firm shall not be appointed as SA of that particular bank.
  • The audit fees for SAs of banks shall be reasonable and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc.
  • The Board / ACB of the bank shall review the performance of SA annually. Any serious lapse / negligence in discharging audit responsibilities, conduct issues on the part of the SA, etc., shall be reported to NABARD within 2 months from the completion of the audit.


References

Reserve Bank of India. (2024, January 15). 'Guidelines on Appointment / Re-appointment of Statutory Auditors of State Co-operative Banks and Central Co-operative Banks'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12599&Mode=0


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