Role, accountability and complaints of Auditor / Chartered Accountants Firms for falsification of accounts by willful defaulters of Banks

RBI Master Circular / Guidelines to Banks on willful defaulters have given Chartered accountants /auditor an active role to play in giving early warning signals through various end-use of funds certificates and at the same time it has advised banks to lodge complaint of negligent, deficient auditor.

The relevant parts of the master circular are extracted here under:

End-use of Funs certificates by Chartered Accountants

Clause 2.4

In cases of project financing, the banks / FIs seek to ensure end use of funds by,  inter alia , obtaining certification from the Chartered Accountants for the purpose. In case of short-term corporate / clean loans, such an approach ought to be supplemented by 'due diligence' on the part of lenders themselves, and to the extent possible, such loans should be limited to only those borrowers whose integrity and reliability are above board. The banks and FIs, therefore, should not depend entirely on the certificates issued by the Chartered Accountants but strengthen their internal controls and the credit risk management system to enhance the quality of their loan portfolio.

Complaint of Negligent and Deficient auditors in case of falsification of accounts

Clause 2.7

In case any falsification of accounts on the part of the borrowers is observed by the banks / FIs, and if it is observed that the auditors were negligent or deficient in conducting the audit, they should lodge a formal complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI) to enable the ICAI to examine and fix accountability of the auditors. Pending disciplinary action by ICAI, the complaints may also be forwarded to the RBI (Department of Banking Supervision, Central Office) and IBA for records. IBA would circulate the names of the CA firms against whom many complaints have been received amongst all banks who should consider this aspect before assigning any work to them. RBI would also share such information with other financial sector regulators/Ministry of Corporate Affairs (MCA) / Comptroller and Auditor General (CAG).

Certificate from auditors regarding diversion / siphoning of funds

Clause 2.7

With a view to monitoring the end-use of funds, if the lenders desire a specific certification from the borrowers’ auditors regarding diversion / siphoning of funds by the borrower, the lender should award a separate mandate to the auditors for the purpose. To facilitate such certification by the auditors the banks and FIs will also need to ensure that appropriate covenants in the loan agreements are incorporated to enable award of such a mandate by the lenders to the borrowers / auditors.

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