CONCURRENT AUDIT SYSTEM OF BANKS (NORMS AND RULES): BY RUCHIR JOSHI

Deregulation and globalization of monetary administrations, along with the developing refinement of budgetary innovation are making the exercises of the bank and their risk profiles more unpredictable. Be that as it may, effectiveness of the bank relies upon how adequately it is dealing with the risks. For this, it is basic to have set up an effective internal control framework and risk management frameworks to forestall misrepresentation risk. These controls must be enhanced by a compelling Audit Function that autonomously assesses operational viability, effectiveness, and adherence to the Internal Control frameworks inside the association.

In light of the, increasing Gross Non-Performing Assets, which stood at 9.9% in September 2019[1], as per RBI report, the burden of effective functioning and growth of the banking industry is on the back of dependable financial statements which must be guaranteed by good quality audits.

What is the Concurrent Audit System?

In simple words, Concurrent Audit is a system of constant examination of financial transaction, which is held at the time of happening or parallel with the transaction. 

The Banking industry is conveying the agreement of concurrent audits since 1993, when the RBI felt its significance, and formally introduced this system vide its circular of October 1993. Thus, this one of a kind system of concurrent audit in banks was pursuant to the suggestions of the Ghosh Committee on Frauds and Malpractices in Banks.[2]

In the abovementioned circular, RBI defined concurrent audit as being “an examination which is contemporaneous with the occurrence of transactions or is carried out as near thereto as possible. It attempts to shorten the interval between a transaction and its examination by an independent person.[3]”

Purpose

The primary objective of the system is to ensure compliance with the audit systems in banks according to the rules of the RBI and significantly, to guarantee timely detection of inconsistencies and also to serve as an administrative support to branches.

As per RBI, Concurrent audit system is “regarded as part of a bank's early warning system to ensure timely detection of irregularities and lapses, which also helps in preventing fraudulent transactions at branches.[4]”

It has been seen that mostly the internal audit in banks has neglected to feature and pinpoint the presence of gross and genuine inconsistencies, for example, inappropriate credit evaluation, payment without watching the terms of authorization, inability to practice appropriate post-dispensing oversight, etc. Whereas, it is pertinent to note that concurrent auditor may not sit in judgement of the choice taken by bank or an approved authority.

Hence, the whole purpose of the concurrent audit was to forestall a malpractice before any harm is caused, by supplementing the efforts of internal audit department to fortify the internal framework of the bank.

Concurrent Audit System – Norms and Rules

RBI has previously, been recommending rules for scope, inclusion of business/branches, least things of inclusion, and so on for simultaneous evaluators of banks. Be that as it may, with the varying degrees of centralization in banks, various nature of exercises embraced by different banks, a typical program of work for simultaneous review relevant to all banks may not be attractive.[5]

Moreover, considering the rising occasions of misrepresentation identified at Indian lenders and the recommendations made by the YH Malegam Committee on the same, the RBI has issued some new guidelines as regards the Concurrent Audit system.

Scope of the Audit

As per the new guidelines, RBI has given the head of the internal audit of banks, the discretion to decide the scope of work of the editors, with approval from the Audit Committee of the Board of Directors “ACB” or the Local Management Committee for foreign banks “LMC”.

The guidelines require the banks to identify risk sensitive areas as per their business models and to include all Centralized Processing Centres under these audits.[6]

Appointment of Auditors

The choice of deciding whether the concurrent audit is to be done by bank’s own staff or external auditors, continues to be left to the discretion of individual banks.

As per the new rules, the head of internal audit in the bank should help select concurrent auditors if the audit is outsourced and should be held responsible for the quality review.

Several rules have been prescribed to ensure the transparency and enhance the efficiency of the process.

-       It is to be ensured that if any partner of a Chartered Accountant firm is a Director on the board of a bank, no partner of the same firm shall be appointed as concurrent editor in the same bank.

-       The staff engaged in concurrent audit must be independent of branch unit, where the audit is conducted.

-       The bank should frame a policy for fixing accountability in cases of serious acts of omission or commission noticed in the working of bank's own staff or retired staff, working as concurrent auditors.

-       The Banks Internal Audit Department is also required to develop a reporting system for concurrent auditors.

-       The rules also mandate conduction of a quarterly review containing important features brought out during the concurrent audits which must be placed before the ACB/LMC.

As regards the tenure, the guidelines cap the age limit of retired staff engaged as concurrent auditors at 70 years.

It has also been prescribed that ACB/LMC, have the discretion to decide the maximum tenure of external concurrent auditors. However, no concurrent auditor shall be allowed to continue with a branch/business unit for a period of more than three years.

Under the new guidelines, several powers vest with the ACB/LMC of the bank, who have the responsibility to review the effectiveness of Concurrent Audit system as well as decide the renumeration to be paid to external concurrent auditors. The detailed scope of the concurrent audit, which aims at shortening the interval between a transaction and its independent examination, may be determined, and approved by the Audit Committee of the Board of Directors (ACB)/Local Management Committee ((LMC).[7]

To ensure the effectiveness, minor irregularities pointed out by the concurrent auditors have to be rectified on spot, whereas major aberrations should be immediately brought to the notice of Controlling office of the banks. The guidelines require the Controlling office to accord high priority to the follow-up action on the concurrent audit reports.

Conclusion

In light of the recent scams such as the Nirav Modi fraud which hit the Punjab National Bank, it has been observed that concurrent audits are proved to be ineffective. Hence the current guidelines by RBI are quite comprehensive and will help to ensure effective implementation of concurrent audit system.

 

 

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[1] Public sector banks' gross NPA ratios may rise to 13.2% by Sept 2020: RBI, LIVEMINT (Dec. 27, 2019), https://www.livemint.com/industry/banking/public-sector-banks-gross-npa-ratios-may-rise-to-13-2-by-sept-2020-rbi-11577459006076.html.

[2] Master Circular – Inspection and Audit Systems in Primary(Urban) Co-operative Banks, RBI/2009-10/83, RESERVE BANK OF INDIA (Jul. 1, 2009), https://www.rbi.org.in/scripts/NotificationUser.aspx?Id =5147&Mode=0#4.

[3] Id.

[4] Concurrent Audit System, RBI/2019-20/64, RESERVE BANK OF INDIA (Sept. 18, 2019), https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT6449FC6A865BD345A2917B9386D516C3D2.PDF.

[5] Id.

[6] RBI asks banks to cover risk sensitive areas under concurrent audit, THE HINDU BUSINESS LINE (Sep. 20, 2019), https://www.thehindubusinessline.com/money-and-banking/rbi-asks-banks-to-cover-risk-sensitive-areas-under-concurrent-audit/article29467256.ece.

[7] Pallavi Nahata, RBI Revises Concurrent Audit Rules for Banks Amidst Rising Frauds, BLOOMBERG QUINT (Sep. 19, 2019), https://www.bloombergquint.com/business/rbi-revises-concurrent-audit-rules-for-banks-amidst-rising-frauds.