New Delhi, June 3, 2017

YES, Axis, ICICI recently reported NPA figures for FY16 that were in variance of RBI's estimations

The Institute of Chartered Accounts of India (ICAI), the regulatory body governing auditors, has proposed to the finance ministry and the Reserve Bank of India (RBI) the introduction of the concept of joint audit in private banks to enhance the quality of audit.

This follows questions over the role of auditors in estimation of non-performing assets (NPAs) of some private sector banks. Recently three private lenders — YES Bank, Axis Bank and ICICI Bank — had reported gross NPA figures in FY2015-16 that were in variance of the RBI’s estimations.

“As such we understand that there is no difference in the approach by ICAI members and RBI” when it comes to evaluation of NPAs, the institute said in an emailed response to Business Standard. It, however, added that there could be divergence in the loans identified as NPA by the management (of a bank), and agreed to by the auditor, as against NPAs according to RBI inspectors.

According to ICAI, these could crop up due to a variety of reasons, including difference in interpretation of some clauses of RBI circulars, availability of additional information with RBI inspectors at the time of their inspection as compared to the information available at the time of finalisation of accounts by the bank, which is much earlier to the RBI’s inspection, test check of accounts, incomplete information available to the auditor of a bank in consortium from the leader in consortium, among others. Certain events subsequent to the date of balance sheet being considered by the auditors and other acceptable reasons could cause variance in NPA numbers, the spokesperson said.

“Any divergence without adequate explanations needs to be examined,” spokesperson said. The institute’s Financial Reporting Review Board (FRRB) is the oversight body looking at instances of non-compliance in reporting requirements. The FRRB is reportedly reviewing the financial statements of some of the private sector banks that are alleged to have under-reported NPA figures.

For FY2015-16, YES Bank reported gross NPAs worth Rs 749 crore, while the RBI’s estimates pegged the figure at Rs 4,176 crore. Similarly, Axis Bank’s gross NPAs for FY16 were reported to be Rs 6,088 crore as against the RBI’s figure of Rs 15,566 crore. In case of ICICI Bank, the RBI’s estimate of gross NPAs was at Rs 31,326 crore, while the bank’s annual report pegged it at Rs 26,221 crore.

There has been pressure on ICAI to check if there had been any non-compliance on part of auditors while arriving at the NPA figures. A senior auditor noted that public sector banks already have in place a system of joint auditors. “However that has not lessened the burden of NPAs on these banks,” he said.

Joint audit:
What is the issue?
• Pressure on ICAI to check if there has been any non-compliance on part of statutory auditors  while arriving at the NPA figures of private banks
• ICAI suggests appointment of joint auditors in private banks to improve quality of audit
• Public sector banks already have multiple auditors

What ICAI is saying?

• Differences likely in interpretation of some clauses of RBI circulars
• Availability of additional information only with RBI inspectors
• Incomplete information with auditor of a bank in a consortium  
• Differences likely in loans identified as NPA by bank management and agreed to by auditor

[The Business Standard]