Dear Professional Colleagues

You all must now be aware that the Ministry of Finance has decided to allow Board of Directors of Public Sector Banks to directly appoint their statutory central auditors and branch auditors. Under the new system, banks would directly source names of the auditors from the panel of CAG for statutory central auditors. In respect of branch auditor the names would have to be obtained from the Institute of Chartered Accountants of India.

As per the currently prevailing system a CAG Panel of Statutory Central Auditors is made available to Reserve Bank of India who decides the names of the auditors for specific banks. RBI out of a Panel specifically prepared for this purpose by the Institute of Chartered Accountants of India (ICAI) selects the branch auditors. RBI appoints specific auditors for specific bank on the basis of a transparent and highly professional system.

Under the proposed system, the banks could be free to appoint any Chartered Accountant Firm, provided it is on the Panel maintained by CAG in case of SCA and ICAI in case of branch auditors. The banks will be free to rotate the auditors, as per their choice, whims and fancies. All kinds of pulls, pushes and approaches could start operating to ensure appointment of certain specific firms of auditors, which are closer to the management. The independence of auditors, who are appointed by the Board, could be severely impacted as the appointment, re-appointment and removal of the auditors will be governed by the Directors including the whole-time directors and top management whose deeds and mis-deeds are to be reviewed and reported by the auditors.

It has been observed during last 5 years that a number of private sector banks and Urban Co-operative Bank have been subjected to serious financial scam led by management of the concerned bank. Even recently in the YES BANK IPO scam RBI has fined several private sector banks. Global Trust Bank, Lakshmi Commercial Bank etc. had to be merged with public sector banks due to poor financial state of affairs arising out of management failure and inadequate reporting by the auditors appointed by the management.

In case of Global Trust Bank (GTB) the auditors gave a true and fair view to the financial statement of March 2002 with a net worth of Rs. 400 crores, whereas the networth was actually negative as per the independent auditors appointed by Reserve Bank of India. Even again in March, 2003 the auditors appointed by the management again reflected a positive net worth whereas RBI found that the networth was not only negative but has been further eroded. RBI had already initiated action against the concerned auditors with the help of ICAI.

The appointment of auditors by the banks concerned or even by the Board of Directors, is a highly retrograde step and will severely impacts the viability and long term sustainability of the public sector banks. The new process of appointment of auditors would invite serious fraud, mis-management and open financial in-discipline in the absence of independent audit.

Liberalisation and privatisation in the financial sector must be followed by stringent financial discipline and regulation. The manner in which, as per the allegation, the GTB management and various firms or companies owned by their relatives and friends were benefited out of the way, is a clear-cut example of how serious impact, the proposed decision of the government can have on the working of the entire financial system and more specifically in the public sector banks. This new system of appointment of auditors by the bank management themselves is a direct attack on corporate governance. As the current practice of appointing a large number of firms of chartered Accountants as Branch Auditors for more than 50,000 branches not only ensure a very high quality and detailed Audit but also ensure allocation of a good quality work to smaller firms and firms in smaller town and cities. The proposed system may result in excessive concentration of Bank Audit work in few influential hands who are closer to management or decision makers. I strongly oppose this move and i think we all should come forward and raise our voice against it.

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