Non-banking financial companies (NBFCs) are worried that the Reserve Bank of India’s (RBI’s) new guidelines on hiring statutory auditors will make it difficult for them to find professionals who fit the bill, especially in the middle of the year.
While the new guidelines issued on 27 April find favour with a section of auditors, others empathize with the sentiments of NBFCs. The central bank’s move may be in the right direction to improve audit quality, but may be too stringent for many entities, they said.
According to the central bank, auditors must be rotated every three years with a cooling off period of six years before the next appointment, while joint audits by more than one auditor have been mandated for NBFCs with assets of ₹15,000 crore or more. That apart, auditors will also not be allowed to work for more than eight NBFC clients concurrently.
NBFCs can implement the new set of guidelines from the second half of this fiscal year. However, they are optional for non-deposit taking NBFCs with assets of less than ₹1,000 crore.
The Finance Industry Development Council, a body representing NBFCs, on Wednesday petitioned RBI, highlighting their hardships and urged the regulator to set up an expert panel for making the guidelines “more acceptable and less disruptive”.
While the banking regulator feels that the rotation policy will help prevent the NBFC management and statutory auditor getting into a cosy arrangement, the industry fears joint audits could lead to cost escalation and the rotation policy and other changes could make it harder to find experienced professionals.
“The current form of the circular requires mid-year change in auditors for FY22, which is disruptive for most of the NBFCs and will cause avoidable hardships to both NBFCs and audit firms…,” FIDC said in its letter. It added that a large number of audit firms may not qualify to be appointed due to the eligibility restrictions mandated by RBI. Also, if a firm can audit only eight NBFCs, it may not be easy to find an eligible audit firm, it added. Mint has seen a copy of the letter.
Jamil Khatri, partner, BSR and Co., said the new norms could increase audit costs by 10-30%. “The requirement of joint audit and changing auditors every three years would make it hard for NBFCs to find enough number of eligible auditors with the relevant experience,” said Khatri. The challenge is further compounded for large business groups, since most of the audit firms also perform non-audit work for group companies, added Khatri.
However, a section of experts said the new guidelines will go a long way in ensuring better quality audits. Ved Jain, the former president of the Institute of Chartered Accountants of India, said the RBI norms were designed to better regulate systemically important non-bank lenders.
Amarjit Chopra, former president of ICAI, said joint audits will lead to availability of more than one opinion, and rotation of the auditors is an accepted concept under the Companies Act in respect of public sector enterprises and state-owned banks.
“We must understand the value of quality audit and then relate the cost to that value. Even if joint audit means some increase in cost, that cost does not outweigh the advantages. However, for that, the mechanism of joint audit should be well planned and structured,” said Ashok Haldia, former managing director of PTC India Financial Services Ltd, a non-banking financial company.
An email sent to RBI seeking comments remained unanswered at the time of publishing.
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