New audit rules aimed at ensuring auditor independence: RBI

New rules limiting the terms and number of assignments of financial-company audits are aimed at avoiding conflicts of interest and cleaning up a system where the quantum of bad loans has risen through the years, the Reserve Bank of India (RBI) signalled Friday.

“The larger objective of these guidelines is to put in place ownership neutral regulations, ensuring independence of auditors, avoiding conflict of interest and improving the quality of audit,” said MK Jain, deputy governor, RBI. “We should also see these measures as part of RBI’s efforts to strengthen the assurance functions in the regulated entities.”

The regulator also said that the new auditing rules will help strengthen the system and bring about independence of regulated entities.

Mint Road had received multiple representations from various stakeholders and it was in the process of examining those. It also added that it could issue some clarifications.

“We have received certain representations from various stakeholders and these are being examined and we will shortly come out with those clarifications,” Jain said.

Several industry associations, including the NBFC industry grouping FIDC, have represented to the RBI to hold back implementation of the new rules in FY22. FIDC has argued that the mid-year change in auditors will cause avoidable hardships to both NBFCs and audit firms.

FIDC has also argued that non-bank lenders will face challenges in finding the eligible audit firms given restrictions around cooling period, number of audits and partner strength of audit firms.

In April, the regulator had issued new norms that tightened the appointment of auditors and capped the numbers based on the asset size of the bank with an aim to prevent wide variations in asset classification and misleading accounts statements. Banks are now required to take prior approval from the RBI on the appointment of auditors, but non-bank lenders can go ahead with just intimating the regulator.

As per the new norms, banks will be required to take prior approval of the RBI for appointment or reappointment of statutory auditors on an annual basis. For entities having an asset size of more than Rs 15,000 crore, statutory audit will be conducted under joint audit of a minimum of two audit firms. All other entities should appoint a minimum of one audit firm for conducting statutory audit.

The RBI has set criteria for audit firms regarding the number of audits they can take on at a time, and how they should conduct them. The guidelines further state that in order to protect the independence of the audit firms, entities will have to appoint the auditors for a continuous period of three years.

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