RBI to penalise erring bank auditors

The Reserve Bank of India (RBI) on Friday issued a circular warning auditors of punitive actions in cases of lapses by them.

This is a departure from its earlier stance where only banks were held responsible for asset classifications and divergence in bad loans found during inspections.
In the new circular, "Enforcement action framework in respect of statutory auditors for lapses in statutory audit of commercial banks", the RBI warned that statutory auditors not following procedures would be met with punitive actions such as debarring them from conducting business with banks.
"In the interest of improving audit quality and with a view to instituting a transparent mechanism to examine accountability of SAs in a consistent manner, it has been decided to put in place a graded enforcement action framework to enable appropriate action by the RBI in respect of the banks’ SAs for any lapses observed in conducting a bank’s statutory audit," RBI said. 
The new framework will cover instances of divergence identified in asset classification and provisioning during RBI inspection vis-a-vis the audited financial statements of banks above the threshold specified, RBI said.
It also said its new enforcement action framework are under the various provisions of the Banking Regulation Act of 1949, the Banking Companies (Acquisition & Transfer of Undertaking) Act of 1970/1980, and the State Bank of India Act of 1955, which stipulate that banks should obtain prior RBI approval to appoint SAs.
"If the audit quality or conduct of an SA is not found satisfactory, the RBI will enforce action against them by way of not approving their appointments for undertaking statutory audit of banks for a specified period. The RBI may also not approve auditors, who have been debarred by other regulators/law-enforcement /government agencies," it said.