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Dear Mr Jaitley, take measures to stop bank frauds instead of blaming the CAs
Union Finance Minister Arun Jaitley has blamed the CAs and auditors along with the bank's management for the multi-crore PNB fraud.
Speaking for the second time within a week at the Economic Times Global Business Summit, Jaitley was harsh on auditors and the bank's management. He said that if a fraud is taking place in multiple branches of the banking system and not a single employee raises the red flag, that is worrisome for the country as a whole.

He also said that the fraud happened despite there being multiple layers of auditing in the system. However, the chartered accountants' fraternity does not agree with the observations made by the Finance Minister. Jaitley's statement blaming the CAs is being seen as nothing more than an exercise to protect the real culprits responsible for the fraud at the cost of the reputation of CA professionals.

Let us first understand, what are these multiple layers of auditing, which Jaitley is referring to repeatedly.

There are three types of audit carried out in banks, as discussed below:

1. Internal audit

Internal audit of the bank is conducted by full time employees of the bank and in most cases, the bank's employees responsible for conducting the internal audit are not qualified chartered accountants. Even if the internal audit is conducted by the chartered accountants employed by the bank, the big question is, how we can expect that the internal auditor who himself is an employee of the bank , will detect and report the fraud committed by his or her colleagues! When we talk about “audit”, then, it has to be an “independent audit”. How we can expect the employee auditor to report against the irregularities or frauds committed by his senior officials or colleague in the bank?

2. Concurrent audit

The next layer of audit is concurrent audit. Concurrent auditors, again are appointed by the bank's management from a panel of chartered accountants. The only difference between internal auditors and concurrent auditors is that while the internal auditors are the full time employees of the bank, concurrent auditors are part time contractual employees of the bank. The scope and authority of the concurrent auditors is decided by the appointing authority. How do you expect any concurrent auditor to report against you if you yourself are the appointing authority?

3. Statutory audit or external audit

This is the last layer of audit in the banking system. Every year a panel of independent chartered accountants is appointed by the RBI in consultation with the Institute of Chartered Accountants of India. Unfortunately, after the panel is formed, the same is handed over to the management of the respective banks, who have the full discretion in the allotment of bank audits to any chartered accountant of their choice, subject to certain conditions. The same question of “independence” is raised here too. When the person whose affairs are to be audited, himself has the authority to appoint the auditor, how you can expect that the auditor will be able to discharge his duties independently?

It can be seen from the above, the independence of the auditors gets completely compromised, in all the three cases. For any audit assignment, the independence of auditors is of paramount importance. The Institute of Chartered Accountants of India has dedicated a complete guidance note on the independence of auditors. Several representations have been made by the ICAI in this regard to the various governments in the past to streamline the system of appointment of auditors, in order to ensure the independence of the auditors, but nothing has been done so far, for reasons best known to the governments of the day.

Simple solution

There is very simple solution to all these problems. Reserve Bank of India is already forming the panel of independent chartered accountants every year in consultation with the ICAI. After this panel is finalised, the same should be handed over to any third party (other than the bank's management). It could be either the ICAI or the Reserve Bank of India (RBI). This third party should appoint the auditors from the panel already finalised by the ICAI and the RBI jointly.

Apart from this, the Internal auditors and concurrent auditors should also be appointed from this panel only in the similar manner. The objective of the whole exercise should be that the bank's management itself should not be placed in the position of appointing authority of the auditors. It is also amazing as to why banks are persisting with in-house internal audit departments? Banks must focus on the banking business, which is their core strength area and leave the auditing to the independent chartered accountants, who have the expertise in auditing.

If our Finance Minister is inclined to carry out the aforesaid minor changes to ensure the “independence of the auditors”, only then he can rightfully blame the chartered accountants or auditors for any banking scam, fraud or any other irregularities. Unless, this is done, there is no point in blaming the auditors for frauds, scams and financial irregularities.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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