RBI issues FAQs on appointment Auditors of Banks, UCBs & NBFCs

Para B(vi) of Annexure
(vi) For audit of UCBs, the SA of the firm should have a fair knowledge of the functioning of the cooperative sector and shall preferably have working knowledge of the language of the state in which the UCB/branch of the UCB is located.

If any partner of a Chartered Accountant firm is a director in any Entity, the said firm shall not be appointed as SCA/SA of any of the Group Entities of that Entity. Whether this stipulation is applicable to all the Entities in the Group or the RBI Regulated Entities in the Group?

The Group Entities here refer to the RBI Regulated Entities in the Group, which fulfill the definition of Group Entity, as provided in the Circular. Therefore, if any partner of a Chartered Accountant firm is a director in an RBI Regulated Entity in the Group, the said firm shall not be appointed as SCA/SA of any of the RBI Regulated Entities in the Group. However, if an audit firm is being considered by any of the RBI Regulated Entities in the Group for appointment as SCAs/SAs, whose partner is a director in any of the Group Entities (which are not regulated by RBI), the said audit firm shall make appropriate disclosures to the ACB as well as Board /LMC

Para 6.4 : The time gap between any non-audit works (services mentioned at Section 144 of Companies Act, 2013, Internal assignments, special assignments, etc.) by the SCAs/SAs for the Entities or any audit/non-audit works for its group entities should be at least one year, before or after its appointment as SCAs/SAs. However, during the tenure as SCA/SA, an audit firm may provide such services to the concerned Entities which may not normally result in a conflict of interest⁷, and Entities may take their own decision in this regard, in consultation with the Board/ACB/LMC

Whether the Entities are required to look back for one year (regarding any non-audit works for the Entities or any audit/non-audit works for the Group Entities) before appointment of an audit firm as SCAs/SAs for FY 2021-22?

Before appointment of an audit firm as SCA/SA of the RBI Regulated Entity, there should be a time gap of minimum one year between this appointment and completion of the assignment of any non-audit works given to the same audit firm in that RBI Regulated Entity or completion of any audit/non-audit works in other RBI Regulated Entities in the Group. This stipulation shall be applicable prospectively, i.e. from FY 2022-23. Therefore, if an audit firm is involved in some non-audit work with the Entity and/or any audit/non-audit work in other RBI Regulated Entities in the Group and completes or relinquishes the said assignment prior to the date of appointment as SCA/SA of the Entity for FY 2021-22, the said audit firm would be eligible for appointment as SCA/SA of the Entity for FY 2021-22.

It is reiterated that the time gap between any non-audit works by the SCAs/SAs for the Entities or any audit/non-audit works for its Group Entities should be at least one year after completion of the audit assignment as SCA/SA

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Can the existing SCAs/SAs continue if they do not fulfill the eligibility criteria but are yet to complete their original tenure of appointment? Are the Entities required to appoint SCAs/SAs (including as Joint Auditors) immediately or they can be appointed in the ensuing Annual General Meeting (AGM)?

The existing SCAs/SAs of the Entity can continue (including as Joint Auditors) only if they fulfill the eligibility criteria and have not completed the stipulated tenure of three years as SCAs/SAs of the Entity. Till the appointment of SCAs/SAs for FY 2021-22, as per the requirements of the Circular and applicable statutory provisions, the SCAs/SAs for FY 2020-21 can continue for the Limited Review for Q1, Q2, etc.

Para 6.3 : Concurrent auditors of the Entity should not be considered for appointment as SCAs/SAs of the same Entity. The audit of the Entity and any entity with large exposure⁶ to the Entity for the same reference year should also be explicitly factored in while assessing independence of the auditor

Whether an audit firm doing audit of any Company/Entity with Large Exposure to the Entity is prohibited from being appointed as SCA/SA of the Entity?

The Circular does not prohibit an audit firm from doing audit of any Company/Entity with Large Exposure to the Entity from being appointed as SCA/SA of the Entity. It only stipulates that this aspect should also be explicitly factored while assessing independence of the auditor. In this regard, the Board/ACB/LMC shall see that there is no conflict of interest and the independence of auditors is ensured.

Para 8.3 : One audit firm can concurrently take up statutory audit of a maximum of four Commercial Banks [including not more than one PSB or one All India Financial Institution (NABARD, SIDBI, NHB, EXIM Bank) or RBI], eight UCBs and eight NBFCs during a particular year, subject to compliance with required eligibility criteria and other conditions for each Entity and within overall ceiling prescribed by any other statutes or rules. For clarity, the limits prescribed for UCBs exclude audit of other co-operative societies by the same audit firm. For the purpose of this circular, a group of audit firms having common partners and/or under the same network, will be considered as one entity and they will be considered for allotment of SCA/SA accordingly. Shared/Sub-contracted audit by any other/associate audit firm under the same network of audit firms is not permissible. The incoming audit firm shall not be eligible if such audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.

Whether the limit of audit of four commercial banks, eight UCBs and eight NBFCs for an audit firm in a year is applicable to audit of NBFCs with asset size below Rs. 1,000 crore also?

These limits are applicable in respect of audit of all RBI Regulated Entities, irrespective of the asset size.