Hit hard by the country’s biggest bank fraud at PNB, the government is looking at tightening the norms for appointment of statutory auditors at public sector banks (PSBs) to help detect any irregularities early and take corrective actions, according to a government official. At present, PSBs appoint their own auditors and questioned have been raised in some quarters on why a USD 1.77 billion (Rs 11,400 crore) fraud could have gone undetected by the auditors of Punjab National Bank (PNB) for seven long years.
A senior government official told PTI that perhaps there is a need to bring in a membrane in banks getting to choose their own auditor and to bring in a dispassionate arm’s length decision-making in such appointments. PSBs are allowed to appoint statutory central auditors on an annual basis, subject to their fulfilling the eligibility norms prescribed by the RBI.
The Comptroller & Auditor General (CAG) annually empanels audit firms for PSBs that are scrutinised by the RBI for identifying the continuing, and non-continuing firms. The official said there is “disparity” in how auditors are appointed in central public sector enterprises (CPSEs) and PSBs.
In case of a government company, the CAG appoints the auditor for a particular financial year. The auditor in turn submits its audit report to the CAG. “Why a scam of such magnitude has not happened in a CPSE? There should be an arm’s length distance in the working of an auditor and a bank or company’s board. When the management selects the auditor, then the arm’s length distance might not be maintained,” the official said.
In what can be termed as the biggest fraud in banking sector, Punjab National Bank (PNB) last week said it has detected fraudulent transactions of more than Rs 11,300 crore in one of its branches in Mumbai. The fraud, in which diamond jewellery designer Nirav Modi allegedly acquired fraudulent letters of undertaking (LoUs) from one of its Mumbai branches for overseas credit from other Indian lenders, is being probed by CBI and Enforcement Directorate among other agencies.
The official further said that a “composite audit norm” for PSU banks could be on cards which apart from financial audit would also include information technology audit. The official further said that the norms could also mention the minimum number of auditors that the banks would be mandated to appoint based on the number of branches.
Currently, the RBI norms have classified PSU banks based on their size– Category A (large), B (medium) and C (small). While the number of statutory auditors have been capped at 6 for large banks, for medium and small size banks it is 5 and 4 respectively. “The norms do not mention the minimum number of auditors that must be appointed by banks. It should be specified since the more the number of auditors, chances of oversight gets minimised,” the official said.
Besides, the official also suggested that there should be churning every year on appointment of auditors in a PSB. “There are auditors who have been auditing the same bank every year and that is when the sense of comfort crops in while dealing with management,” he added. He said the government is committed to clean up the balance sheet of the PSU banks.
“Regulation cannot be free. It must have a price attached. If regulation and supervision are same, then where is the price attached to the RBI?,” the official noted.