Reserve Bank's supervision over the branch operations was inadequate in the PNB case
Pointing out late appointment of auditors as one of the key reasons that led to the Rs 13,500 crore fraud going undetected at the Punjab National Bank (PNB) for a long time, a report by the apex body of chartered accountants body has cautioned the banks against appointing auditors towards the fag end of the financial year.
The Institute of Chartered Accountants of India (ICAI) in its report to the government has identified the loopholes in the bank systems and has suggested remedial measures to strengthen the banking system in the country.
The report, submitted to the Ministry of Corporate Affairs (MCA), focuses on how to deal with frauds and irregularities of a serious nature that have big financial implications. The ICAI, which works under the administrative control of the MCA, had constituted a high powered group in February to look into the PNB scam.
Further action on the report will be taken by the government soon. "We are studying the report and will take action wherever it is necessary," a highly placed source in the government told DNA Money.
The report calls for increasing the involvement of external auditors and giving more time for conducting statutory audits.
"Central statutory auditors should be appointed at least during the first quarter of the financial year. Their terms of engagement should be enhanced to perform a comprehensive internal control review,"the report says. "PNB auditors were appointed towards the year end. They were expected to complete the audit work and certify the branch financial reports within a short deadline,"the report said.
Flagging the issue regarding the RBI inspections, the report said that the regulator's supervision over the branch operations was inadequate in the PNB case. "The supervision function of this critical sector of the economy can't be performed effectively through off-site surveillance mechanism as is being done," said the report, cautioning it would not result in prevention and detection of major frauds of high magnitude. It suggested that RBI should seek services of external concurrent auditors with suitable skill sets.
ICAI also said it has made representation to RBI for strengthening the concurrent audit of the banking system by bringing transparency in its appointment of auditors. In the case of PNB's Brady House branch, concurrent audit was being carried out in-house by the bank employees. The concurrent audit system is an important internal control to ensure that all banking transactions are recorded in the books accurately and on timely basis, it said.
Bank branches with sensitive and complex functions such as trade finance, treasury and corporate lending should be subject to a robust system of concurrent audit by an external concurrent auditor, the report said.
It pointed out that the late appointment of central and branch statutory auditors has a severe adverse impact on audit planning, audit risk assessment and design of audit procedures towards testing of balance-sheet items rather than internal controls. "Branch auditors have very little time to design and perform appropriate audit procedures to validate the internal control system of the entity," it said.
STRICTURES ON RBI
- Reserve Bank's supervision over the branch operations was inadequate in the PNB case
- It suggested that RBI should seek services of external concurrent auditors with suitable skill sets
- Bank supervision cannot be effectively done through off-site surveillance mechanism
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 "Punjab National Bank")
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