First Auditor Refresh in the Indian Banking Sector: All You Need to Know

In April 2021, the Reserve Bank of India (RBI) released a notification that mandated that banks and Non Banking Financial Companies (NBFCs) must reshuffle their auditors every three years. The guidelines came after auditors were alleged to have been complacent (and in some cases, collusive) in big-ticket banking scams such as those involving IL&FS and DHCL. The idea behind the guidelines was to improve transparency and also to allow domestic firms to compete in a market that was dominated by the Big Four accountancy firms—Deloitte, PwC, EY and KPMG. 

From 1 April 2024, financial companies that appointed fresh auditors in 2021 will have to necessarily change their auditors. As we approach the deadline for the reshuffle, let’s understand the key aspects of this policy and its impact on banks, NBFCs and auditing firms.

The objective of the auditor refresh policy is to promote independence, impartiality, and integrity in the audit process. Rotating auditors every three years will eliminate potential conflicts of interest that can arise from long-standing relationships between auditors and banks. This policy ensures that auditors maintain objectivity and resist any undue influence on audit findings.

Auditor refresh goes beyond regulatory compliance; it creates a level playing field for Chartered Accountancy firms in India. This policy provides an opportunity for competent Indian firms to showcase their expertise and compete for auditing roles that were predominantly dominated by international firms, including the Big Four.

The RBI has put in place a stringent procedure for auditor appointment. Banks and NBFCs are first required to shortlist a minimum of two audit firms. They have to then place the name of the shortlisted firms, in order of preference, before the Audit Committee of their Board (ACB). After the firm has been selected by the bank in consultation with the ACB, the bank needs to obtain the prior approval of the RBI. 

There’s a fair bit of paperwork involved in this process, which includes the company having to certify that the auditors are compliant with the RBI’s eligibility norms. The banks must indicate their asset size as on 31 March the previous year, attach a copy of the Board resolution recommending the names of the firms in order of preference and also submit signed certificates from the shortlisted firms indicating they are eligible for appointment. 

The implementation of the auditor refresh policy has posed challenges for banks and auditing firms. Banks have expressed concerns about the time-consuming nature of the process. Shortlisting potential auditors, obtaining board approval, and seeking RBI approval add complexity.

Audit firms face challenges in adjusting their operations and resources to meet the demands of multiple banks undergoing simultaneous reshuffling. The rotational nature of auditors means firms will have to continuously seek new audit engagements, which could strain capacity and resources, particularly during the reshuffling process for multiple banks and NBFCs. 

The auditor refresh policy is expected to bring about significant changes. Firstly, it enhances transparency and accountability by introducing new auditors at regular intervals, preventing complacency and maintaining rigorous financial reporting standards.

Secondly, the policy promotes healthy competition by diversifying auditors and creating opportunities for Indian Chartered Accountancy firms. This helps mitigate the risks associated with relying on a few dominant firms. 

Thirdly, the policy aims to address the dominance of major auditing firms by imposing restrictions on their engagements. These limitations include servicing only four banks and eight non-banking financial companies (NBFCs) at any given time. They are also prevented from auditing multiple entities within the same corporate group.

In response to these restrictions, major auditing firms are considering more lucrative partnerships with foreign banks. This shift is anticipated to flatten the playing field, and allow local auditing firms to compete for mandates from banks and NBFCs.  There’s also a joint audit provision for entities with an asset size of ₹15,000 crore and above. The firms that are appointed for such audits cannot have a common partner or be part of the same network. This stipulation is further expected to expand the opportunity for Indian firms.   

The auditor refresh policy introduced by the RBI is a significant step in enhancing transparency and accountability in the Indian banking sector. By promoting auditor rotation, the policy ensures independence and integrity in the audit process. While the implementation of the policy poses challenges for banks and auditing firms, it also opens up opportunities for Indian Chartered Accountancy firms to become more competitive. 

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