FAQs: Appointment of Statutory Auditors

-Financial Services Divison (finserv@vinodkothari.com)

Last updated- June 11, 2021

The Reserve Bank of India has issued Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs, on 27th April 2021 (“Guidelines”).

The Guidelines intend to supersede the existing circulars/notification on appointment of statutory auditors by Banks and NBFC. The Guidelines provide necessary instructions for appointment of SCAs/SAs, the number of auditors, their eligibility criteria, tenure and rotation as well as norms for ensuring the independence of auditors.

We have tried to figure out the probable questions arising out of these Guidelines and respond to the same in the form of these FAQs.

  1. Who is covered under the ambit of these Guidelines?

These Guidelines are mandatorily applicable to –

  1. Commercial Banks (excluding RRBs),
  2. UCBs and
  3. NBFCs including HFCs having asset size of 1000 crores or more

(hereinafter referred to as the ‘Entities’)

Non-deposit NBFCs having asset size of less than Rs. 1000 crores shall have the option to continue with the existing procedures.

2. What is the effective date for applicability of the Guidelines?

The Guidelines are effective from the date of publication itself, that is, 27th day of April 2021.

3. What are the timelines to adopt these Guidelines?

The Guidelines regarding appointment of SCAs/SAs shall be implemented for the first time for UCBs and NBFCs for FY 2021-22. They shall have the flexibility to adopt these Guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption. However, since the auditors are appointed in the AGM itself, NBFCs and UCBs will have to ensure compliance in the ensuing AGM.

4. By when are the appointments under the Guidelines to be ensured?

Any appointment/reappointment of SCAs/SAs by the Entities for the Financial Year 2021-22 and onwards shall be in accordance with the Guidelines.

5. What would be the impact on the existing auditor’s appointment? Will existing auditors have to be replaced?

Certain points may be noted here – Firstly, the Guidelines do not have a transitional/saving clause in this regard. Second, the Guidelines prescribe certain specific ‘eligibility norms over and beyond the generic provisions of law – the present auditor(s) may or may not fulfill those norms. Thirdly, as noted elsewhere, there are overlapping provisions in these Guidelines w.r.t term of auditors vis-a-vis the Companies Act, 2013. Further, footnote 11 states as follows “.…Further, the audit firms which have already completed tenure of 1 year or 2 years with any Entity may be permitted to complete the balance tenure only, i.e. 2 years and 1 year respectively, if they fulfill the eligibility norms on an annual basis.”

Keeping in the view the above, the following view may be taken –

  1. Where the auditor does not meet eligibility –

The Auditors will have to be replaced with a new auditor, in compliance with the procedural requirements under the Companies Act, 2013. This should not be regarded as removal of the auditors since the same is due to the auditor becoming ineligible under the applicable regulations.

  1. Where the auditor otherwise meets eligibility –

From the footnote (as reproduced above) it appears that the auditor who has already served for 3 years, shall not be allowed to continue, even if he meets the eligibility norms. The Guidelines seem to be impressed by the idea of a flat 3-year term without considering the provisions of the Companies Act relating to 5 years (+ 5 years) tenure of auditors.

This is a possible conflict, which might need specific clarification from RBI. However, given the operational difficulties involved and that for NBFCs and UCBs, the transition time is till 2nd-half of 2021-22, a logical view will be to let the auditor continue at least for FY 2021-22.

5A. Do the Guidelines have a retrospective effect on existing auditors tenure?

Yes, the existing tenure of the audit firms in the Entity has to be factored to determine the continuation of such an auditor. Hence, audit firms which have already completed tenure of 1 year or 2 years with any Entity may be permitted to complete the balance tenure only, i.e., 2 years and 1 year respectively, if they fulfill the eligibility norms on an annual basis. Also, the auditors who have already completed more than 3 years would not be eligible to continue further.

5B. If the existing auditor is ineligible under the Guidelines and has to vacate such a position, will it be considered as ‘resignation’?

It is to be noted that the existing auditor has to vacate the position of the auditor due to a dis-qualification caused by a statutory regulation/guideline and the same is not a voluntary act of its own. Hence, such a vacation of the position of SA before the completion of an earlier appointed term can not be regarded as ‘resignation’.

5C. If yes, will the compliances under the SEBI circular dated October 18, 2019 regarding ‘Resignation of Statutory Auditor from listed entities and their material subsidiaries’, get attracted?

The intent of the said SEBI circular is to protect the larger interest of capital market investors and ensure smooth transition from one auditor to another.

Accordingly, if the existing auditor of the listed entity is ineligible to continue as the auditor of the entity as per the Guidelines, though the same shall not be regarded as a resignation by the auditor, such entity & the auditor should comply with the provision of the SEBI circular so as to meet the intent with which the same was brought by SEBI.

 6. Are there any exemptions provided to any specific class of Entities?

Yes, non-deposit taking NBFCs with asset size below ₹1,000 crore have the option to continue with their extant procedure. They are exempt from the provisions of the Guidelines.

7. Is prior approval required for appointment of SCAs/SAs?

Commercial Banks (excluding RRBs) and UCBs are required to take prior approval of RBI (Department of Supervision) for the appointment/reappointment of SCAs/SAs, on an annual basis. Note that, at present, section 30(1A) of the BR Act (not applicable to SBI/notified banks) anyway requires previous approval of RBI for the same.

7A. In case of Banks, what will happen if the prior approval of RBI is not received before the AGM in which appointment is proposed to be made?

The RBI has asked to submit multiple names to the RBI by July 31 and the usual timeline for an Entity to conduct the AGM is by September. Though there are minimal chances of delay in getting the approval from RBI, however, if the RBI approval is not received before the AGM proposed to be held, the Company may have an option to pass the resolution stating the names of all the proposed options subject to approval of RBI. But this might not be feasible as various information about the auditor is required to be provided. Further, such resolution would not give an option to the shareholders to disapprove any auditor out of the options given. Hence, an alternative option would be to either adjourn the AGM stating the reason that RBI approval is awaited or seek an exemption from the regulators, including MCA, SEBI and RBI.

 8. Does an NBFC require prior approval of RBI for appointment of SCAs/SAs?

No. An NBFC shall inform RBI about the appointment of SCAs/SAs for each year by way of a certificate in prescribed format (Form A) within one month of such appointment.

9. Where is the application for prior approval or intimation (in case of NBFCs) for appointment of SCAs/SAs to be submitted?

9A. What is the timeline for intimating to the RBI in form A?
As per para 3.3 of the Guidelines, an NBFC is required to inform RBI about the appointment of auditors for each year by way of a certificate in prescribed format (Form A) within one month of such appointment.
Auditors are appointed by the shareholders at the AGM of a Company as per section 139(1) of the Companies Act, 2013. Accordingly, in case of first-time appointment, the intimation has to be done within 1 month of the AGM.
For the remaining tenure, the Audit Committee or Board (in the absence of AC) shall verify the eligibility of the auditor based on the eligibility certificate received from the auditors. Accordingly, in case of ratification, the intimation shall be made within 1 month of the AC/ Board meeting where such ratification is made.

10. Is there a minimum number of auditors criteria specified under these Guidelines?

Yes. As per the Guidelines, the Entities shall appoint SCAs/SAs based on their asset size as provided in the below table;

 

Sl No. Asset size Minimum number of SCAs/SAs
1 Entities with asset size of ₹15,000 crores and above 2
2 Entities with asset size of less than ₹15,000 crores 1

 

It may be noted that prior to the issue of the Guidelines, the concept of joint auditors was limited to banks only. This seems to now be extended to NBFCs as well. In this regard, the auditors shall comply with the Standard on Auditing (SA) 299, “Responsibility of Joint Auditors” issued by the ICAI, which deals with coordination among joint auditors.

11. What factors should be considered by the entities while deciding the number of SCAs/SAs?

The Entities should decide on the number of SCAs/SAs based on a Board/Local Management Committee (LMC) Approved Policy, inter alia, taking into account the relevant factors such as:

  • size and spread of assets
  • accounting and administrative units
  • complexity of transactions
  • level of computerization
  • availability of other independent audit inputs
  • identified risks in financial reporting, etc.

12. Is there a cap on the maximum number of auditors under these Guidelines?

Yes. Considering the factors mentioned above and the requirements of the Entity, the actual number of SCAs/SAs to be appointed shall be decided by the respective Boards/LMC, subject to the following limits based on the Entity’s asset size:

 

Sl No. Asset size of the entity Maximum number of SCAs/SAs
1 Upto ₹5,00,000 crore 4
2 Above ₹ 5,00,000 crore and Upto

₹ 10,00,000 crore

6
3 Above ₹ 10,00,000 crore and Upto

₹ 20,00,000 crore

8
4 Above ₹ 20,00,000 crore 12

13. Is there any eligibility criteria for appointment of SCAs/SAs?

Yes. Every Entity shall ensure that the auditor appointed pursuant these Guidelines shall meet the eligibility criteria as provided in Annex-1 to the Guidelines.

13A. What are the eligibility criterias that the auditor has to satisfy in order to be eligible for appointment? (Guidelines, Sec. 141 & Rule 10)

In order to be eligible for the appointment, the audit firm shall satisfy a dual level of eligibility, i.e. the eligibility norms under the Guidelines and the eligibility under Section 141 of the Companies Act read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014.

13B. If the existing auditor is ineligible under the Guidelines, by when the auditor has to vacate his position? Will it be by the 2nd half of 2020-21 or after the current year?

The Guidelines are applicable from FY 2021-222 onwards. However, UCBs and NBFCs  have the flexibility to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption. In case the existing auditors (including joint auditors) have already completed their tenure or are ineligible to continue, they must vacate the office upon the determination of eligibility by the AC/Board of the Entity. Since NBFCs and UCBs have the relaxation up to second half of FY 2021-22, the determination may happen in the third quarter. In such a case, the auditors (including joint auditors) of FY 2020-21 shall have the flexibility to continue for the Limited Review for Q1, Q2, etc. This has also been clarified by the RBI vide its FAQs dated June 11, 2021.

13C. What compliances will have to be ensured under the provisions of Companies Act, 2013 where the existing auditor is vacating the position?

The following compliances shall be ensured by the entity;

  • Auditor shall send a letter to the Board citing reason as ineligibility under the RBI Guidelines
  • Board to accept the letter & initiate the process for appointing a new auditor under the Guidelines
  • File ADT-3 for the casual vacancy of the auditor
  • Audit Committee/Board to identity new auditor and check the eligibility
  • Considering it to be a case of casual vacancy not due to resignation but ineligibility due to introduction of new laws, the board is to appoint the new auditor within a period of 30 days of such vacation.
  • The said auditor should be able to hold office till the next AGM where the appointment can be regularised.
  • File ADT-1 for the appointment of the new auditor both after the board has appointed as in case of a casual vacancy and then at the time of regularisation at the AGM.

14. What is the role of the Audit Committee of the Board (ACB)/ LMCs?

The role of AC shall be as follows:

  • Monitor and assess the independence of the auditors and conflict of interest position
  • Review the performance of SCAs/SAs on an annual basis
  • Recommend to the Board/Approve the reports regarding concerns on independence of auditors, to be reported to the RBI

 15. What parameters should be considered to ensure independence of the SCA/SA?

The Guidelines provide various criteria to ensure independence of SCA/SA such as:

  • Joint auditors should not be under the same network or have same partners
  • Concurrent auditors not to be appointed as SCA/SA
  • Consideration of the fact that the bank has a common auditor as that of an entity on which it has large exposure, while making appointment of the SCA.
  • Maintaining a time gap of 1 year between non-audit services taken from the firm and its appointment as SCA/SA or firms under the same network/having same partners

16. Is there a bar on banks to appoint those auditors who are also the auditors of any entity in which the bank has a large exposure?

No. The Guidelines do not put a bar on the auditors who are also the auditors of the entity on which the bank has a large exposure. However, the Guidelines provide that this fact should be factored while assessing independence of the auditor. Thus, the onus is on the AC to ensure that the independence of the auditor does not get compromised on being appointed as the auditor of the Bank/NBFC as well as an entity in which the bank has a large exposure in the same reference year.

Further, in order to ensure independence in such cases, the following measures or the like may be employed:

  • Segregation of partners
  • Chinese wall framework within the firm
  • Segregation of audit of companies belonging to different sectors
  • Assurance from audit partner on confidentiality of information and strict policy on sharing of information within the firm

17. What steps are to be taken by the SCAs and SAs during the audit process, in case of any issues wrt the information required?

In case of any concern with the Management of the Entities such as non-availability of information/non-cooperation by the Management, which may hamper the audit process, the SCAs/SAs shall approach the Board/ACB/LMC of the Entity, under intimation to the concerned SSM/RO of RBI.

18. Can an entity appoint its concurrent auditor as the SCAs and SAs?

No. The concurrent auditors of the Entity should not be considered for appointment as SCAs/SAs of the same Entity. The audit of the Entity and any entity with large exposure to the Entity for the same reference year should also be explicitly factored in while assessing independence of the auditor.

18A. Can an Auditor who has granted concurrent audit or any non-audit services to a Bank or NBFC for the last year, be appointed as Statutory Auditor for the current year.

The language of para 6.3 suggests that persons who have been engaged as concurrent auditors cannot be considered for appointment as statutory auditor. This is in view of the intent of the Guidelines- that is to prohibit appointment of statutory auditors whose independence is likely to be affected. Further, para 6.4 prescribes a cooling period for entities performing any non-audit services including prohibited services under section 144, internal assignments, special assignments, etc. The list is an inclusive one and, in our view, will cover all services, including concurrent audit, that may affect independence of the statutory auditor.

In essence, appointing an entity that was responsible for concurrent audit in the previous year, as the statutory auditor for the current year, seems counterintuitive to the intent of independence under the Guidelines. This is because the same may result in conflict of interest considering the scope of a concurrent audit.

Hence, concurrent auditors, cannot be appointed as statutory auditors, except if the prescribed cooling period of at least one year is completed. However, the RBI has in its FAQs clarified that the requirement under para 6.4 shall be applicable prospectively- “…Therefore, if an audit firm is involved in some non-audit work with the Entity and/or any audit/non-audit work in other RBI Regulated Entities in the Group and completes or relinquishes the said assignment prior to the date of appointment as SCA/SA of the Entity for FY 2021-22, the said audit firm would be eligible for appointment as SCA/SA of the Entity for FY 2021-22.”

Accordingly, the Bank or NBFC may appoint the said concurrent auditor as its statutory auditor.

 19. What additional services can be provided by the SCA/SA?

The services wherein there is no conflict of interest, that can be provided by the SCAs/SAs are (indicative list):”

(i) Tax audit, tax representation and advice on taxation matters,

(ii) Audit of interim financial statements.

(iii) Certificates required to be issued by the statutory auditor in compliance with

statutory or regulatory requirements.

(iv) Reporting on financial information or segments thereof 8 As defined in Rule 6(3)

of the Companies (Audit & Auditors) Rules, 2014

20. Can the auditor provide non-audit services before being appointed as the SCAs/SAs?

Yes. This is subject to the condition that SCAs/SAs shall ensure that the time gap between any non-audit works i.e., services mentioned at Section 144 of Companies Act, 2013, internal assignments, special assignments, etc. by the SCAs/SAs for the Entities or any audit/non-audit works for its group entities should be at least one year, before or after its appointment as SCAs/SAs.

20A. Whether the time gap of one year between any non-audit works by the SCAs/SAs for the Entities or any audit/non-audit works for its Group Entities has to be ensured for all the Entities in the Group or the RBI Regulated Entities in the Group?

An audit firm engaged with audit/non-audit works for the Group Entities (which are not regulated by RBI) may be considered for appointment as SCAs/SAs. However, the Board/ACB/LMC of the Entity must review that there is no conflict of interest and independence of auditors is ensured, and this should be suitably recorded in the minutes of the meetings of Board/ACB/LMC.

Further, it should be noted that the audit firm whose partner is a director of an RBI regulated entity in the group shall not be eligible to be appointed as the SCAs/SAs under these Guidelines. However, if such directorship is in an entity that is not regulated by RBI, the said audit firm shall make appropriate disclosures to the ACB as well as Board /LMC while being considered for the appointment.

20B. What is the relevance of the term ‘Group Entities’ for determining the eligibility of appointment of the SCA/SA? Whether this stipulation is applicable to all the Entities in the Group or the RBI Regulated Entities in the Group

The term ‘Group Entities’ shall refer to the RBI Regulated Entities in the Group only, which fulfill the definition of Group Entity, as provided in the Guidelines.

21. The time gap of one year between provision of non-audit services and appointment as SCA/SA, shall not be applicable in which cases?

The SCA/SA is allowed to provide services that may not result in conflict of interest (refer Q19) during their tenure as SCA/SA.

There seems to be no reason to bar such services either before or after the tenure. Hence, the gap of 1 year (before or after the tenure) should not be applicable to non-conflicting non-audit services.

22. What is the tenure of appointment of SCAs/SAs?

In order to protect the independence of the auditors/audit firms, Entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year. The appointment of the SCA/SA will have to be ratified by the Board of Directors/ the ACB every year, and shall be intimated to RBI.

23. Does this mean that the eligibility of the SCAs/SAs shall be checked every year?

Yes. As per the Guidelines, the Board shall obtain eligibility certificate from the auditors in Form-A as provided in the Guidelines, on an annual basis.

The eligibility certificate shall be submitted to the RBI within one month of completion of a year.

 24. Is there a cooling off period for appointment of SCAs/SAs who have completed their term?

Yes. An audit firm would not be eligible for reappointment in the same Entity for six years (two tenures) after completion of full or part of one term of the audit tenure. However, audit firms can continue to undertake statutory audits of other Entities.

25. Is there a conflict between the Guidelines and the provision of Companies Act, 2013 with respect to the term of auditor?

The Guidelines provide that a SCA/SA shall be appointed for a continuous term of 3 years and can be re-appointed only after a cooling-off period of 6 years. However, the Section 139 of Companies Act, 2013 states that an audit firm shall be appointed for a term 5 consecutive years [sub-section (1)], but not more than 2 terms of 5 consecutive years [sub-section (2), applicable for listed and prescribed classes of companies].

Therefore, there is a possible conflict between the Guidelines and the Companies Act, 2013 in this regard and the Guidelines are stricter than the Companies Act. See Q. No. 5 above for possible implication on existing auditors.

26. Can an appointed auditor be removed before completion of 3 years?

Yes. Commercial Banks (excluding RRBs) and UCBs can remove the audit firms during the above period only with the prior approval of the concerned office of RBI (Department of Supervision), as applicable for prior approval for appointment.

27. Can an NBFC remove its auditor before completion of 3 years? Does it require prior approval of RBI?

Yes. An NBFC can remove the SCAs/SAs before completion of three years tenure without any prior approval from RBI. However, the NBFC shall inform the concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken.

28. Is there a cap on the number of entities in which a single audit firm can be appointed?

One audit firm can concurrently take up statutory audit of a maximum of four Commercial Banks [including not more than one PSB or one All India Financial Institution (NABARD, SIDBI, NHB, EXIM Bank) or RBI], eight UCBs and eight NBFCs during a particular year, subject to compliance with required eligibility criteria and other conditions for each Entity and within overall ceiling prescribed by any other statutes or rules.

For clarity, the limits prescribed for UCBs exclude audits of other co-operative societies by the same audit firm.

The intent of the limits on the number of audits is to ensure that the auditor does not burden itself with several audits which may result in compromise with the audit quality. Considering this, an auditor may undertake audits of smaller NBFCs, without considering them in computation of the aforesaid limit. Since non-deposit taking NBFCs with asset size below ₹1,000 crore are exempted from the provisions of the Guidelines, hence, in our view, the limit of 8 NBFCs should include only the NBFCs with an asset size of Rs. 1000 crores or more. However, this view is not in line with the RBI FAQs dated June 11, 2021. The RBI has clarified that the aforesaid limit on NBFCs will include all NBFC that are regulated by RBI irrespective of the asset size. This might lead to a lot of audit firms getting ineligible due to the breach of these limits.

28A. I am an auditor of 9 NBFCs whose asset size is less than 1000 crore? Have I breached the cap under the Guidelines? 

The Guidelines are mandatorily applicable only to the NBFCs whose asset size is more than 1000 crore. Hence, only in case the auditor is proposed to be appointed in an entity covered under the Guidelines (such as banks, UCB and NBFC with asset size more than Rs. 1000 crores), the provisions of these Guidelines will be applicable. In the given case, since all the entities are having an asset size of less than Rs.1000 crores, the provisions of Guidelines are not applicable and hence will not be referred to by the auditors and so, there shall be no breach.

28B. I am an auditor of 10 NBFCs, out of which 1 NBFCs has an asset size of 5000 crore and the remaining are having an asset size of less than 1000 crore. Am I in compliance with the Guidelines?

The Guidelines are mandatorily applicable to every NBFC with an asset size of 1000 crore or more. In this case, the Guidelines would be applicable to the NBFC with an asset size of 5000 crore, hence, the auditor would also be required to comply with the cap on the audit assignments. Accordingly, the auditor will be able to conduct the audit of only 8 NBFC and would become ineligible for the remaining 2. Alternatively, the auditor may resign from the particular NBFC with asset size more than Rs 1000 crores and thereafter the Guidelines would not be applicable and the auditor would be able to conduct the audit of the remaining 9 NBFCs.

28C. I am an auditor of 12 NBFCs all with an asset size of less than 1000 crore. During the next year 1 among these NBFCs, asset size of one of the NBFCcrossed the threshold of 1000 crore. What should I do?

Till the period the asset size of NBCFs are within the threshold of less than 1000 crores, the Guidelines are not applicable on such entities & the auditor. Once an NBFC crosses the threshold, the cap on the audit assignments will be applicable on the auditor and hence such auditor will have to vacate the position of auditor from the 4 NBFCs out of the total 12, to comply with the Guidelines. Alternatively, the auditor may resign from the particular NBFC with asset size more than Rs 1000 crores and thereafter the Guidelines would not be applicable and the auditor would be able to conduct the audit of the remaining 11 NBFCs.

28D. What will happen if the exiting auditor of an Entity is in breach of the cap on individual audit assignments in the first half of 2021-22?

NBFCs and UCBs have the option to comply with the Guidelines by the 2nd half of the year 2021-22. This would mean that the eligibility for the SA can be verified by the Board/ACB at its meeting in the 2nd half of the year. For the purpose of verifying the eligibility, a certificate of eligibility obtained from the SA, as per the Guidelines, shall be placed in such a meeting.
The fact that NBFCs and UCBs have the transition time till the 2nd half of FY 2021-22, allows some time to ensure that the eligibility requirements, including the upper limit on audit assignment, are met before considering the SA for appointment/verification.
Hence, in case the auditor is in breach of the maximum limit for audit assignment in the first half of the FY 2021-22, the auditor may relinquish the position of SAs in such a number of entities, so as to comply with the eligibility condition. Once complied, the SA may provide the eligibility certificate in the 2nd half of this FY and accordingly, the Board/ACB may appoint/verify the appointment of the SA.

29. Is there a criteria for determining the group of audit firms under these guidelines?

Yes. For the purpose of this Guidelines;

  • a group of audit firms having common partners and/or under the same network, will be considered as one entity and they will be considered for allotment of SCA/SA accordingly.
  • Shared/Sub-contracted audit by any other/associate audit firm under the same network of audit firms is not permissible.
  • The incoming audit firm shall not be eligible if such audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.

30. What is the provision regarding audit fees for the SCAs/SAs?

The audit fees for SCAs/SAs of all the Entities shall be decided in terms of the relevant

statutory/regulatory provisions.

Further that the audit fees shall be reasonable and and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc.

31. What would be the immediate actionables for banks/NBFCs?

The Guidelines are applicable for the audit of FY 21-22 and onwards. Further, the same may be complied with by the second half year by NBFCs and UCBs. In order to ensure compliance by the second half year, Entities shall have to take several steps immediately, such as:

  • Adoption of Statutory Audit Policy and Appointment Procedure
  • Hosting the Policy on the website/public domain
  • Verifying the compliance of auditors with the eligibility norms prescribed by RBI
  • Appointment of new auditor as per the guidelines, in case the auditor is ineligible/ the term of existing auditor has expired
  • Ratification of existing auditor, in case he is eligible and his tenure has not expired, where so permitted by the Guidelines
  • Appoint joint auditor wherever applicable
  • Take prior approval of the RBI or intimate the RBI with respect to appointment of the auditor, as the case may be

32. What should be the construct of the Statutory Audit Policy and Appointment Procedure and other compliance requirements relating to the same?

The said policy shall lay down a broad framework for appointment of an auditor and specifically deal with the following aspects:

  • Eligibility criteria to be considered for appointment of auditors
  • Criteria for ensuring independence of auditor
  • Manner and procedure of appointment
  • Manner for determination of term and audit fees

33. Whether, in terms of the Guidelines, branch audit in case of NBFCs is mandatory?

It is clear from section 143(8) of the Companies Act that in case of any company having a branch office, the accounts of such branch office shall be audited. The Guidelines, over and above, seems to stipulate a minimum branch coverage. Hence, branch audit in case of NBFCs shall be seen as a mandatory requirement, coming from section 143 itself.

34. What is the minimum branch coverage as envisaged in the Guidelines?

So, the answer will depend on the total number of branches of the Entity. Where the no. of branches is limited to 100, at least 20% of the branches shall be subjected to audit. However, where there are more than 100 branches, top 20 branches shall be subjected to audit. Note that the intent of the Guidelines is to cover a minimum of 15% of total gross advances of the Entity. Therefore, the branches are to be selected in the order of level of outstanding advances. This stipulation does not, in any manner, curtail the requirement of audit of all branches as envisaged in section 143 – this is also clear from the wordings of the Guidelines, “NBFCs shall ensure adherence to the provisions of Section 143 (8) of the Companies Act, 2013 regarding audit of accounts of all branches.”

35. Who will conduct the branch audit?

Section 143 is clear that either the central auditor or a separate branch auditor can conduct the audit. Note that, there is no stipulation as to how many branch audits (of one Entity) a single branch auditor or the central auditor can undertake.

36. What are the implications of “SCAs/SAs shall visit and audit at least the Top 20 branches/Top 20% of the branches of the Entities . . .”? Does this mean, the central auditor has to audit these top 20 branches? Also, does this mean, the central auditor/branch auditor has to visit these branches?

As stated above, the intent seems to have focused attention on top 20 branches/20% of the branches in terms of advances. The responsibility to audit the branches would lie on the branch auditor(s) (wherever appointed) and on the central auditor.

In this respect –

  • Note that section 143 provides for submission of branch audit report to the central auditor which shall be dealt with by the central auditor as he considers necessary. Further, the manner in which the branch audit report has been dealt with by the central auditor shall be stated in his own report. Also, the central auditor, in his report, shall also state whether “proper returns adequate for the purposes of his audit have been received from branches not visited by him”.
  • Also take note of standards/guidance notes issued by ICAI including Guidance Note on Audit of NBFCs and SA 600 on Using the Work of Another Auditor, etc.[1]
  • As to whether, ‘visit’ is a mandatory requirement, see below.

37. There might be cases where the branches of NBFCs are merely involved in disbursal/collection processes and are not involved in any decision-making. All books of accounts are centrally kept and managed. In that case, whether ‘visit’ is mandatory?

Section 143 mandates ‘audit’ not ‘visit’. Although it requires a statement from the auditor whether proper returns adequate for the purposes of his audit have been received from branches not visited by him.

In our view, the Guidelines shall be read constructively with section 143. As stated above, the objective of the Guidelines is to ensure minimum branch coverage in terms of advances the branch is handling. Where the branch is merely acting as an interface, and all concerned books and accounts are maintained at the central office itself, and the auditor is able to get adequate returns from such branches, a ‘physical’ visit does not seem logical. This, of course, is subject to the auditor being satisfied on efficacy of internal controls in the Entity. Hence, the auditor may have to form an opinion in this regard.

38. Whether Guidelines shall be also applicable to NBFCs in the same Group, even though assets size of the entity is less than 1000cr. if other NBFCs in the group are having assets size more than 1000cr.

The concept of ‘Multiple NBFCs’ is specifically mentioned in the NBFC Master Directions to determine the applicability of the SI and NSI regulations. These provisions shall not be referred for any other circular or notification unless specifically provided for. Accordingly, in our view the applicability of the SA Guidelines shall be determined based on the asset size of a particular entity- there is no reason to extend the applicability to other NBFCs in the group just because the other NBFCs are having asset size of more than 1000cr.

39. While computing the assets size as per the Guidelines, for NBFCs already having assets size >1000 Cr., whether assets size of other NBFCs in the same Group (NBFCs having assets size < 1000 Cr) shall also be considered or the same shall be computed on a standalone basis.

The applicability of the Guidelines (or specific applicability for appointing joint auditors) is to be determined on the basis of standalone financials. The asset size of other NBFCs in the group shall not be consolidated for this purpose.

 

[1] https://www.icai.org/post/auditing-review-and-other-standards-formerly-known-as-aas-complete-text

 

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5 replies
  1. JP
    JP says:

    Hi Sir,

    I would appreciate your brief guidance/advice on this problem:

    Person A has been appointed Statutory Auditor of ABC Pvt. Ltd. for a 5-year term, which will end in 2 years’ time.

    ABC Pvt. Ltd.’s new management wish to appoint a replacement Statutory Auditor to conduct the necessary audits. Annual filings have been overdue for 2+ years and the management wish to settle the same soonest possible (and put back the company in good standing). However, Person A is unwilling to resign and has twice objected to his removal (in Form ADT-2) on the basis that there are outstanding fees payable to him. Neither is he willing to facilitate the audit process.

    Upon investigation, there are no outstanding fees owed/payable to Person A in respect of ABC Pvt. Ltd. Person A was appointed Statutory Auditor through his associate, one Person B (i.e. former company secretary and director of ABC Pvt. Ltd.). The alleged outstanding fees (if any) are owed to Person B and concern services rendered for other unrelated Indian entities (rather than ABC Pvt. Ltd.).

    Is it against Indian laws and professional ethics/code of conduct for a Statutory Auditor (i.e. Person A) to insist that i) putting back a company in good standing, ii) his resignation and/or iii) consent to removal as Statutory Auditor be conditional upon the settlement of the fees of a third party (i.e. Person B) (where such fees are unrelated to Person A or ABC Pvt. Ltd.)?

    Thank you very much

    Reply
  2. Sona Bachani
    Sona Bachani says:

    With reference to the RBI circular dated April 27, 2021 regarding Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs). In this regard, if a Statutory Auditor has completed their 3 consecutive financial years on 31st March, 2021, therefore as per circular we need to change the Statutory Auditor at this Annual General Meeting.

    With reference to SEBI Circular dated October 18, 2019 regarding Resignation of Statutory Auditor from listed entities and their material subsidiaries, as per point no. 6 sub point (a) of the said circular where if an auditor resigns after 45 days from the end of the quarter, they have give Limited Review Report of the said quarter.

    Therefore, if the company does not want to get an audit to be done from the current auditor beside the cooling period of 2 quarters given by RBI in their circular and the company is desirous to appoint new auditor in June, 2021 so that they can do audit for the whole year (From new auditor).

    My query is:

    1. Whether the company can appoint the New auditor in June,2021 so that they can get their audit done from New auditor?
    2. Whether the company have to comply with both circulars i.e. SEBI and RBI?
    3. Whether RBI circular have an overriding effect on the other laws?
    4. If SEBI circular will be complied, then 1st Quarter limited review report to be given by existing auditor?

    Kindly guide on the same.

    Reply
    • Ajay Kumar K V
      Ajay Kumar K V says:

      1. Whether the company can appoint the New auditor in June,2021 so that they can get their audit done from New auditor?

      Reply: Yes. The company can appoint a new auditor in June 2021 who fulfills the eligibility criteria as per the RBI Guidelines.

      2. Whether the company have to comply with both circulars i.e. SEBI and RBI?

      Reply: Yes. The company shall comply with the provisions of the SEBI circular CIR/CFD/CMD1/114/2019 dated 18th October 2019 as well as the RBI Guidelines on SA appointment.

      3. Whether RBI circular have an overriding effect on the other laws?

      Reply: In our view, The RBI is the sectoral regulator for Banks & NBFCs including HFCs, and has the exclusive regulatory authority over the banking & non-banking sector, exercised through various legislations/regulations issued from time to time. Thus, the Guidelines issued by RBI, being stringent in nature, shall have an overriding effect on other laws for banking & non-banking entities.

      4. If SEBI circular will be complied, then 1st Quarter limited review report to be given by existing auditor?

      Reply: Yes. If the existing auditor of the listed entity is ineligible to continue as the auditor of the entity as per the Guidelines, though the same shall not be regarded as a resignation by the auditor, such auditor shall issue the limited review report for the 1st quarter as per the SEBI circular.

      Reply
  3. LAKHAN GUPTA
    LAKHAN GUPTA says:

    In case of listed NBFC, if the auditor is resigning due to ineligibility as per RBI guidelines, whether auditors would required to follow the SEBI Circular CIR/CFD/CMD1/114/2019 dated 18.10.2019.

    Further, if such NBFC have only 1 auditor as on date, then in ensuing AGM, the NBFC have to appoint the second auditor also for the second half of the FY 2021-22 ?

    Reply
    • Ajay Kumar K V
      Ajay Kumar K V says:

      Query 1

      In the case of a listed NBFC, if the auditor is resigning due to ineligibility as per the RBI Guidelines for appointment of Statutory Auditors (SA), such listed NBFC is required to follow the provisions of the SEBI Circular CIR/CFD/CMD1/114/2019 dated 18.10.2019.

      The listed entity shall make the necessary disclosures under the aforesaid circular and the outgoing statutory auditor shall comply with the provisions of 6A & 6B of the circular.

      Query 2

      Where an entity is required to appoint joint auditors as per the Guidelines on SA appointment, another auditor, who fulfills the eligibility criteria as laid down in the Guidelines, should be appointed at the ensuing AGM of FY 2021-22. The existing auditor should also fulfill the eligibility criteria in order to continue as one of the joint auditors of the company.

      Reply

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