In April, a new circular came out from RBI which emphasizes the appointment of statutory auditor for commercial banks, large non-banks, housing finance companies, and large urban co-operatives. The advantages of these RBI new guidelines are to reduce cost and also to understand audit and non-audit works during auditing. The joint auditor is the position which may increase the auditing cost in the initial period, but in the long run, it promotes the competition and reduces audit fee. In the manufacturing units, the concept of division of labor reduces time and cost. In the same way, the division of work gets the job done with less time, less cost and more accuracy.
This rule will curb the waste of human resource in the auditing sector and enhance the quality of corporate governance structure. Corporate governance is part of the auditing as it ascertains the risk element when incorporating changes. Auditing is checking the accuracy and planning the process to enhance internal quality.
The new Audit rules apply to entities with a value of the asset of more than 15,000 crores. The rest of the banks with an asset value of less than 1,000 crore work can continue to operate with their existing auditor network. The new network is for high-value banks which can be a foreign bank or private bank. The norm also imposes the prevailing rule of six-year rotation for the auditors. This is to curb the familiarity and enhance quality. The global market shows that many foreign countries such as Germany, Denmark, UK, South Africa and Switzerland joint audit are in use. Let us throw light on the advantages of joint audit and the importance of corporate governance in Banks.
Advantages of joint Audit
The RBI provide guidelines about the appointment of Statutory Central Auditor, SA, their eligibility, number of auditors as per the size of the company, rotation of auditors and the tenure of their occupation. Statutory auditors are joint auditors who work for two different audit firms. The joint opinion of two audit firms is gauged as accurate by nine states around the world. Let us evaluate that how the audit firms advance the banks and financial institutions.
- The report from two audit firms analyzes the accounts with technical expertise.
- The Audit quality increases because of the competition and cooperation.
- The debate about the accuracy of audit creates a benchmark in the auditing process.
- The rotation of auditors as per the period enhances the independence and interest of the auditors.
- Change of audit firms frequently creates a problem with the knowledge of the audit team. So, appointing auditors jointly and for a predefined period enhances audit quality.
- As multinational companies and small audit firms operate in the auditing profession the new norms increase the competition.
Importance of corporate governance
Corporate governance is making the board of directors, shareholders stakeholders, and auditor responsible for their actions and decisions. The code of best practices is framed as principles and corporate governance. The external auditors promote the accountability of the business. The penalty suggested by an auditor can be a change of the position of higher authorities of the company or reduce the monetary benefit to the higher officials of the company. As the external auditor take measures for accuracy it is essential to do a proper investigation. Corporate governance shares the responsibilities and during times of financial crisis, the employees understand the action plan of the company. The auditor analyzes the risk tolerance and accordingly the company improves the system of the company.
In India, the non-banking financial companies operate with less than 1000 crore. So, they are not under pressure with these new guidelines. But, the Finance Industry development council communicated to RBI about the hardships with these guidelines. Experienced auditors and auditing from Big Four Company is a costly arrangement for non-banking financial companies. As RBI norm state about the capacity of an audit firm to handle eight NBFC and auditors work based on rotation it gives opportunity to the NBFCs for getting experienced auditors. Rotation of auditor is already in use for state government banks and public sector enterprises. The availability of auditors and the quality of auditing service has a long way to check the performance of the banking sector. RBI is under pressure to clarify to the entities about these new audit rules.