The curious case of NPA underreporting in India: Role of auditors…

As I have argued before, the recent NPA mess is just inexplicable given wide-scale inspection powers the regulator has on banks. But there are more players in the game whose role has to be explored.

One of them is auditors whose role in reporting any such issue has been found wanting for so many years now. It is not any different this time as well.

Hemindra Hazari of Wire reports:

Recently, Axis Bank and Yes Bank jolted the Indian banking community while releasing their annual results. Both banks disclosed a staggeringly large divergence between the banks’ audited accounts and the Reserve Bank of India’s (RBI)  findings regarding bad loans on the books of these banks for the year ended March 31, 2016.

Against this background, the role of the auditor needs a closer look.

Surprisingly, in FY’2016, both Axis Bank and Yes Bank were audited by the same person, one Viren H. Mehta (membership number 048749). Mehta is a partner at Batliboi and Co., which in turn is a member firm of Ernst & Young. Some would call it strange for the same auditor to audit competing banks in the same year. What is even more unusual is that the accounts certified of both the banks by the same, individual statutory auditor have been found misleading by the statutory regulator. 

Sigh…

It is all such a complex game of multiple stakeholders:

The new private sector banks, unlike government banks, regularly seek additional  global financial capital and prefer, for international credibility, to be audited by the ‘Big Four Audit Firms’: Deloitte, Pricewaterhouse Coopers (PWC), Ernst  and Young and KPMG. However as PWC was the auditor of scam-tainted Satyam Computers and the erstwhile Global Trust Bank, the RBI had for a period of time effectively blacklisted the firm from auditing Indian banks. Therefore, only the remaining three can audit, via rotation, the new private sector banks. The preference for the remaining ‘Big Three’ is ostensibly to provide greater international credibility to the accounts of the new private sector banks.

For an Ernst and Young member auditor to simultaneously certify not one but two of such divergent banks is quite peculiar. Despite the RBI divergence being known by December 31, 2016, the Axis Bank senior management reaffirmed their faith and permitted the same auditor to continue to audit FY’2017 accounts as well.

When this writer reached out to Axis Bank with a questionnaire, the bank replied that it had made “true, fair and full provisions on said dates in accordance with the RBI guidelines in force”.

“However, the RBI being entitled to call its charges to take such further steps as may be necessary, called Indian banks to make new disclosures as per RBI circular dated 18th April, 2017. The ‘divergence’ that you aver is the outcome of RBI’s annual assessment of all banks. For a better understanding of the matter, and to draw meaningful conclusions, may we advise you to please observe similar disclosures of rest of the banking system,” Axis Bank said in a statement.

The “similar disclosures” in other banks in the private sector, so far reveals only Yes Bank has surpassed Axis Bank in the percentage divergence in NPAs and both banks have been audited by the same auditor. The regulators – RBI, Securities and Exchange Board of India, Company Law Board and the ICAI – need to evaluate the conduct and quality of the audits of Axis Bank and Yes Bank in FY2016 by Batliboi and Co. in order to restore public confidence.

Authoring an article on December 23, 2012 , Viren H. Mehta had argued for the disclosure of risk-related measures as a means to improve corporate governance in banks and as an “obligation to stakeholders.” More than four years later, a similar disclosure by the RBI on NPA divergence has cast him in the spotlight.

 

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