The IndusInd Bank forex derivatives portfolio crisis has put the spotlight on audit policies on regulated entities such as commercial banks, non-banking finance companies and small finance banks, experts said.
The combination of short three-year tenures, tough independence criteria, long cooling-off periods and joint audits, all of which were implemented concurrently in April 2021, has increased the operational complexity rather than improved the quality of bank and NBFC audits, they said.
“Just staying compliant takes up so much energy and time,” said the chief financial officer of an NBFC on the conditions of anonymity.
Some time back, when RBI officials sought feedback from banks and NBFCs on auditor appointment policies, the industry overwhelmingly informed the regulator of the complexity and issues.
Despite many layers of scrutiny-bank’s internal control systems, internal auditor, concurrent auditors, audit committee, statutory auditors, external consultants and RBI audits-IndusInd’s derivative accounting issue went unnoticed for 5-7 years.
“The regulations are constantly evolving, and keeping up with the dynamic environment can be a challenge for auditors,” said Paras Savla, partner, KPB & Associates.
The RBI’s regulations require an audit firm to be independent for one year before and after auditing a bank or NBFC – they cannot offer any non-audit services to the company during this period.
Then there’s a cooling-off period. Once an audit firm has completed a three-year term, it can’t be reappointed for six years. Additionally, an audit firm can audit just one RBI-regulated entity within the same group (if it has multiple RBI-regulated entities).
The joint audit regime has also brought in its own set of concerns, including distributed accountability, coordination issues, the risk of unequal effort, and difficulties in issuing a common (joint) audit opinion.
Joint audit is prescribed for banks and NBFCs where assets are more than ₹15,000 crore.
IndusInd had joint statutory auditors since 2021, including HariBhakti & Co, MP Chitale & Co, MSKA and Chokshi & Chokshi LLP.
The staggered rotation cycle usually followed, where the two audit firms don’t rotate out at the same time, has also complicated bank audits. At IndusInd, for example, MP Chitale & Co rotated out in September 2024, and Chokshi & Chokshi stepped in right in the middle of the derivatives accounting issue. The other auditor, MSKA & Associates, is scheduled to rotate out soon (June 2025 will be the last quarter review) adding another layer of disruption.
The RBI did not respond to the ET questionnaire.
