Background

RBI vide circular DoS. CO. ARG /SEC. 01/08.91.001/2021-22 dated April 27, 2021 modified the guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) with respect to the appointment and tenure of the statutory auditors of banks.

Further, according to the said circular, the Banks need to formulate a Board approved policy for appointment of auditors and publish the same on its official website/public domain.

Introduction

Bank’s Policy for Appointment of Statutory Auditors (SA’s) is designed to lay down guidelines on appointment of statutory auditors within the regulatory framework. In addition to conforming to all relevant statutory/regulatory requirements, the policy is designed to ensure necessary transparency and objectivity for most key aspects of this important assurance function.

Accordingly, the Bank is required to take prior approval of RBI (Department of Supervision) for appointment/reappointment of SAs, on an annual basis. For the purpose, Bank shall apply to Department of Supervision, RBI before 31st July of the reference year.

Regulatory Framework

Policy is framed with the below key regulatory frameworks:

• The Board of the Bank and the Audit Committee (ACB) will decide on the number of SAs for the Bank audit, after taking into account the relevant factors such as the 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. In case the Bank decided to appoint joint auditors, they should not have any common partners and they are not under the same network of audit firms. As per the circular, Banks with asset size of Rs. 15,000 Crores and above at the end of the previous year should have minimum of two audit firms. Currently the asset size of the Bank is below the threshold limit and hence a single audit firm will be appointed as SA.

• The Bank will appoint the SA for a continuous period of three years. Further, the Bank may remove the audit firms during the above period only with the prior approval of the ACB and the Board and concerned office of RBI (Department of Supervision), as applicable.

• Concurrent auditors of the Bank should not be considered for appointment as SCA/SA. The audit of the Bank and any entity with large exposure to the Bank for the same reference year should also be explicitly factored in while assessing independence of the auditor.

• An audit firm would not be eligible for reappointment for six years (two tenures) after completing full or part of one term of the audit tenure.

• ACB will monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices. Any concerns in this regard may be flagged by the ACB to the Board of Directors of the Bank and concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.

• In case of any concern with the Management of the Bank such as non-availability of information/noncooperation by the Management, which may hamper the audit process, the SA shall approach the Board/ACB of the Bank, under intimation to the concerned SSM/RO of RBI

• The time gap between any non-audit works (services mentioned at Section 144 of Companies Act, 2013, Internal assignments, special assignments, etc.) by the SCA/SA for the Bank or any audit/nonaudit works for Bank’s group entities should be at least one year.

• The Board/ACB of Bank will review the performance of SA on an annual basis.

• 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]

• The audit fees shall be 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. ACB will recommend the audit fees and to be approved by the Board.

Apart from the eligibility criteria as per regulatory compliance, the Bank will further evaluate the independence and other factors affecting integrity and reliability of the Firm before appointing any Statutory Auditors firm. The decision to select any statutory audit firm will be final decision of the Bank, subject to necessary approval from regulatory authorities and shareholders.

With respect to appointment, Bank shall appoint audit firm as its Statutory Auditor fulfilling the eligibility norms as given below.

Eligibility Criteria For Audit Firm

The Bank shall ensure that the audit firm confirms to details mentioned in the ANNEX I of the RBI circular DoS.CO.ARG/SEC.01/08.91.001/2021-22 dated April 27, 2021. Further, below are the key eligibility criteria for the audit firm:

1. The audit firm should not concurrently take up statutory audit of more than 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.

2. The audit firm should have at least 3 Full-Time partners (FTPs) associated with the firm for a period of at least three (3) years.

3. The audit firm should have at least 2 Fellow Chartered Accountant (FCA) Partners associated with the firm for a period of at least three (3) years.

4. The audit firm should have at least 1 Full Time Partners/ Paid CAs with CISA/ISA Qualification

5. The audit firm shall have minimum 8 years of Audit Experience.

6. The audit firm shall have at least 12 professional staff.

7. Concurrent auditors of the Bank will not be considered for appointment as Statutory Auditors.

8. Audit firm, proposed to be appointed as SAs for Bank, should be duly qualified for appointment as auditor of a company in terms of Section 141 of the Companies Act, 2013.

9. The Bank will evaluate the firms based on various other qualitative factors such as vintage of the firms, size of the firm/number of partners, Banking experience etc.

10. The audit firm should not be under debarment by any Government Agency, National Financial Reporting Authority (NFRA), the Institute of Chartered Accountants of India (ICAI) RBI or Other Financial Regulators.

11. Bank shall adhere with the ICAI’s Code of Ethics/any other such standards adopted and does not give rise to any conflict of interest.

12. In case any audit firm (after appointment) does not comply with any of the eligibility norms (on account of resignation, death etc. of any of the partners, employees, action by Government Agencies, NFRA, ICAI, RBI, other Financial Regulators, etc.), audit firm should promptly approach the Bank with full details. Further, the audit firm shall take all necessary steps to become eligible within a reasonable time and in any case, the audit firm should be complying with the above norms before commencement of Annual Statutory Audit for Financial Year ending 31st March and till the completion of annual audit.

13. The time gap between any non-audit works (services mentioned at Section 144 of Companies Act, 2013, Internal assignments, special assignments, etc.) by the Statutory Auditors or any audit/non-audit works for Bank’s group entities should not be less than one year, before or after its appointment as Statutory Auditors.

Procedure for Appointment of SA

Below are the key points for appointment of SA:

1. The Bank will shortlist minimum of 2 audit firms for every vacancy of SA so that even if firm at first preference is found to be ineligible/refuses appointment, the firm at second preference can be appointed and the process of appointment of SA does not get delayed. However, in case of reappointment of SA by the Bank till completion of tenure of continuous term of 3 years, there would not be any requirement of shortlisting and sending names of multiple audit firms to RBI while seeking approval to appointment.

2. The Bank will continue to follow the existing procedure for selection of SA. The name of shortlisted audit firms, in order of preference, will be placed before ACB for recommendation to the Board for selection as SA. Upon selection of SA by the bank in consultation with ACB and verifying their compliance with the eligibility norms prescribed by the RBI, the Bank will seek RBI’s prior approval for appointment of SA.

3. The Bank shall obtain a certificate along with relevant information as mentioned in Form B of the RBI circular DoS.CO.ARG/SEC.01/08.91.001/2021-22 dated April 27, 2021 from the audit firm(s) proposed to be appointed as SAs by the Bank to the effect that the audit firm(s) complies with all the eligibility norms prescribed by RBI for the purpose. Such certificate should be signed by the main partner/s of the audit firm under the seal of the said audit firm.

4. The Bank will verify the compliance of audit firm(s) to the eligibility norms prescribed by RBI for the purpose and after being satisfied of their eligibility, recommend the names along with a certificate, in the format as mentioned in Form C of the RBI circular DoS.CO.ARG/SEC.01/08.91.001/2021-22 dated April 27, 2021, stating that the audit firm(s) proposed to be appointed as SA by them comply with all eligibility norms prescribed by RBI for the purpose.

5. While approaching the RBI for its prior approval for appointment of SAs, the Bank will indicate its total asset size as on March 31st of the previous year (audited figures), forward a copy of Board/ACB Resolution recommending names of audit firms for appointment as SAs in the order of preference and also furnish information as per Form B and Form C as mentioned above, to facilitate expeditious approval of appointment/re-appointment of the concerned audit firm.

Review of the Policy

The Appointment of Statutory Auditors Policy shall be reviewed as and when required by the Bank, to comply with changes /modifications in regulatory guidelines. Any changes proposed in this policy shall be placed before the Audit Committee for recommendation to the Board for approval. In case there are any regulatory changes requiring modifications to the Policy, the same shall be reviewed and amended at the next possible opportunity. However, the amended regulatory requirements will supersede the Policy till the time the same is suitably amended.