The RBI has issued guidelines for appointing and re-appointing auditors for state and central cooperative banks. These guidelines are applicable for accounting periods commencing on or after April 1, 2024.
The Banking Regulation (Amendment) Act, 2020 (No. 39 of 2020) is now in effect for rural cooperative banks, i.e., state cooperative banks (SCBs) and central cooperative banks (CCBs), from April 1, 2021. The Reserve Bank of India, using its powers under Section 30(1A) of the Banking Regulation Act, 1949, has issued guidelines outlined in the Circular’s Annex. These guidelines apply to seeking RBI approval for the appointment, re-appointment, or removal of statutory auditors and related matters for SCBs and CCBs.
Purpose
(a) SCBs and CCBs must obtain prior approval from the Reserve Bank of India (RBI) for the appointment, re-appointment, or removal of Statutory Auditors (SAs).
(b) This requirement is in accordance with Section 30(1A) of the Banking Regulation Act, 1949, effective April 1, 2021, following the Banking Regulation (Amendment) Act, 2020.
(c) The Reserve Bank of India (RBI) is issuing guidelines to SCBs and CCBs, exercising its powers under the Banking Regulation Act, on matters related to the appointment, re-appointment, or removal of Statutory Auditors (SAs) and other associated issues.
Definitions
(a) “State co-operative bank” is defined as per sub-section (u) of Section 2 of the National Bank for Agriculture and Rural Development Act, 1981.
(b) “Central co-operative bank” is defined according to sub-section (d) of Section 2 of the National Bank for Agriculture and Rural Development Act, 1981.
(c) “NABARD” refers to the “National Bank” established under Section 3 of the National Bank for Agriculture and Rural Development Act, 1981.
Applicability
(a) The guidelines outlined on the appointment, re-appointment, or removal of Statutory Auditors (SAs) are applicable to State Co-operative Banks (SCBs) and Central Co-operative Banks (CCBs).
(b) The applicability of these guidelines is effective as of April 1, 2024.
Prior RBI Approval
(a) The bank, referring to State Co-operative Banks (SCBs) and Central Co-operative Banks (CCBs), is required to obtain prior approval from RBI for the appointment, re-appointment, or removal of Statutory Auditors (SAs).
(b) Annual prior approval from RBI is mandatory for the re-appointment of statutory auditors.
Procedure
(a) NABARD is responsible for obtaining an annual list of audit firms (partnership firms or limited liability partnerships) from the Institute of Chartered Accountants of India (ICAI).
(b) NABARD applies eligibility criteria for statutory auditors (SAs) and creates an all-India state-wise list of eligible audit firms.
(c) The prepared list of eligible audit firms is shared with banks for the selection and appointment or re-appointment of SAs.
(d) Banks are required to choose the audit firm(s) from this list, secure necessary approvals from the Board of Directors (Board) and Audit Committee of the Board (ACB) and submit the application for prior approval to the Department of Supervision, RBI, before July 31 of the reference financial year.
Eligibility Criteria
(a) For the appointment of fresh statutory auditors (SAs), banks should choose audit firms from NABARD’s list.
(b) The selected audit firms must meet the eligibility criteria outlined in Appendix I.
(c) The names of the shortlisted audit firms need to be forwarded to RBI following the procedure specified in Appendix II.
Auditor’s Independence
(a) The board or ACB of the bank is responsible for monitoring and assessing the independence of auditors and addressing conflicts of interest.
(b) Concurrent auditors of the bank cannot be appointed as Statutory Auditors (SAs) for the same bank with a minimum one-year gap between assignments.
(c) There should be a one-year time gap for non-audit work undertaken by the SA for the appointing bank, both before and after their tenure, to avoid conflicts of interest.
(d) Special assignments, like tax audits and interim financial statement audits, may be allowed during the SA’s tenure based on the Board/ACB decision.
(e) Restrictions on concurrent auditors and time gaps also apply to audit firms within the same network or having common partners.
(f) SAs are required to report concerns about the management’s conduct, such as non-cooperation or unavailability of information, to the board, ACB, and NABARD.
Review of Auditor’s Performance
(a) The board, or ACB, of the bank conducts an annual review of the performance of statutory auditors (SAs).
(b) Any serious lapse, negligence, or conduct issues by the SA in discharging audit responsibilities are reported to NABARD with the approval of the Board or ACB within two months of completing the audit.
(c) Violations of statutory or regulatory norms or lapses in audit assignments, like misstatements in financial statements, are addressed appropriately under the relevant legal and supervisory framework.
Tenure and Rotation
(a) Statutory Auditors (SAs) are initially appointed for one year and can be reappointed annually for the next two years, contingent on continued eligibility.
(b) Premature removal of the SA during this period requires prior approval from RBI, and any removal request must be forwarded to RBI with the Board or ACB’s approval.
(c) An auditor or audit firm is ineligible for appointment or reappointment in the same bank for six years (two tenures) immediately after completing a full or part tenure.
(d) If an audit firm conducts a part-tenure audit and is not re-appointed for the remainder, it remains ineligible for reappointment in the same bank for six years after the part-tenure completion.
(e) Audit firms, however, can continue undertaking statutory audits for other banks.
Limit on Number of Audits
(a) An audit firm can simultaneously undertake statutory audits for a maximum of five banks in a year, including no more than one State Cooperative Bank (SCB).
(b) This limit is separate from the cap of 20 Regulated Entities (REs) outlined in the guidelines for the appointment of Statutory Central Auditors (SCAs) and Statutory Auditors (SAs) for various financial institutions.
(c) In a given year, an audit firm cannot concurrently perform statutory audits for both SCBs and Central Cooperative Banks (CCBs) operating in the same state.
(d) The overall yearly limit for an audit firm includes a maximum of four commercial banks (including not more than one public sector bank or one All India Financial Institution), eight urban cooperative banks (UCBs), eight non-banking financial companies (NBFCs), and five SCBs or CCBs (including not more than one SCB).
(e) This limit is contingent on the audit firm’s adherence to eligibility criteria, other specified conditions, and any overarching statutory or rule-based ceilings.
(f) Audit firms with a common partner(s) or under the same network are treated as a single unit for appointment purposes; incoming firms associated with outgoing firms or part of the same network are ineligible.
(g) Shared or sub-contracted audits by another firm or associate within the same network are not allowed.
Audit Fee and Expenses
(a) Audit fees for statutory auditors (SAs) across all banks will be determined in accordance with relevant statutory and regulatory provisions.
(b) The board or ACB of banks will recommend audit fees to the competent authority as per applicable statutory and regulatory instructions.
(c) Audit fees for SAs should be reasonable and proportionate to factors such as the audit scope, size and distribution of assets, accounting and administrative units, transaction complexity, level of computerization, and identified risks in financial reporting.
Auditor’s Appointment Policy
(a) Banks are required to establish a board-approved policy on the appointment of statutory auditors (SAs) and make it publicly accessible on their official website or in the public domain.
(b) The policy should cover procedures for the selection, appointment, re-appointment, and removal of SAs, ensuring transparency and objectivity.
(c) Guidelines in Appendix III of the circular should guide banks in determining branch or business coverage under the Statutory Audit.
(d) For an effective statutory audit, it’s preferable for the appointed audit firm to have proficiency in the local language of the state or Union Territory where the auditee bank is located.
(e) Banks should sensitize SAs before the audit, providing information on relevant RBI regulations, bank systems and procedures, and expectations and requirements from SAs.
RBI Circular dated 15/01/2024: Guidelines for Appointing/Re-appointing Bank Auditors (State/Central Co-operative Banks)