Dear Mr Jaitley, instead of blaming the CAs just do one thing to prevent Bank Frauds

Union Finance Minister Arun Jaitley has blamed CAs and Auditors along with the Bank Management for the multi-crore PNB Fraud. Speaking for the second time within a week at the Economic Times Global Business Summit, Jaitley was harsh on auditors and bank management. He said if a fraud is taking place in multiple branches of the banking system and not a single employee raises the red flag, that is worrisome for the country as a whole. He also said that the fraud happened despite there being multiple layers of auditing in the system.

However, the Chartered Accountants fraternity does not agree with the observations made by the Finance Minister and the statement by Mr Jaitley blaming the CAs is being seen as nothing more than an exercise to protect the real culprits responsible for the fraud at the cost of the reputation and image of the CA professionals.

Let us first understand, what are the multiple layers of auditing, which Mr Jaitley is referring to repeatedly. There are three types of Audit in the Bank, which have been discussed below :

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1. Internal Audit

Internal Audit of the Bank is conducted by the full-time employees of the Bank and most of the time, the Bank Employees responsible for conducting the Internal Audit are not qualified Chartered Accountants. Even if the Internal Audit is conducted by the Chartered Accountants employed by the Bank, the big question is, how we can expect that the internal auditor who himself is an employee of the Bank, to detect and report the fraud committed by his or her colleague. When we talk about “Audit”, then it has to be an “Independent Audit”. How can we expect the Employee Auditor to report against the irregularities or fraud committed by his Senior Officers or Colleague in the Bank? 

2. Concurrent Audit

The next layer of Audit is Concurrent Audit. Concurrent Auditors, again are appointed by the Bank Management from the panel of Chartered Accountants. The only difference between the Internal Auditors and Concurrent Auditors is that while the Internal Auditors are full-time employees of the Bank, the Concurrent Auditors are the Part-Time contractual employees of the Bank. The scope and authority of the Concurrent Auditors is decided by the appointing authority. How do you expect any Concurrent Auditor to report against you if you yourself are the appointing authority?

3. Statutory Audit or External Audit

This is the last layer of Bank Audits. Every year a Panel of Independent Chartered Accountants is prepared by the RBI in consultation with the Institute of Chartered Accountants of India. Unfortunately, after the Panel is made, the same is handed over to the management of the respective Banks, who have the full discretion in the allotment of Bank Audit to any of the Chartered Accountant of their choice, subject to certain conditions. The same question of “Independence” comes here also. When the person whose affairs are to be audited, himself has the authority to appoint the auditor, how you can expect that Auditor will be able to discharge his duties independently?

It can be seen from above, that the independence of the Auditors has been completely compromised, in all the three cases. For any audit assignment, the independence of auditors is of paramount importance. The Institute of Chartered Accountants of India has dedicated a Complete Guidance Note on the Independence of Auditors. Several representations have been made by the ICAI in this regard to the various Governments in the past to streamline the system of appointment of auditors, in order to ensure the independence of the auditors, but nothing has been done so far, for the reasons best known to the Governments at that time.

 Solution :

There is a very simple solution to all these problems. Reserve Bank of India is already making the Panel of Independent Chartered Accountants every year in consultation with the ICAI. After this Panel is finalised, the same should be handed over to any Third Party (other than Bank Management). It could be either ICAI or RBI. This Third Party (and not the Bank Management) should appoint the Auditors from the Panel already finalised by the ICAI and RBI jointly.

Apart from this, the Internal Auditors and Concurrent Auditors should also be appointed from this Panel only in a similar manner. The objective of the whole exercise should be that the Bank Management itself, should not be placed in the position of Appointing Authority of the Auditors. It is also amazing as to why Banks are keeping in-house Internal Audit Departments? Banks must focus on the Banking Business, which is their core strength area and leave the Auditing to the Independent Chartered Accountants, who have the expertise in Auditing.

If our Finance Minister is inclined to carry out the aforesaid minor change to ensure the “Independence of the Auditors”, then only he can rightfully blame the Chartered Accountants or Auditors for any banking scam, fraud or any other irregularity. Unless, this is done, there is no point in blaming the auditors and the frauds, scams and financial irregularities, will continue to happen in the banking system, as these are always deliberate and are executed with the complete knowledge and connivance  of the bank managements.

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