RBI’s New Guidelines on Appointment of Auditor – Overview, Next Steps and Frequently Asked Questions

The Reserve Bank of India has issued Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs, on 27th April 2021 (“Guidelines”).

The Guidelines intend to supersede the existing circulars/notification on appointment of statutory auditors by Banks and NBFC. The Guidelines provide necessary instructions for the appointment of SCAs/SAs, the number of auditors, their eligibility criteria, tenure and rotation as well as norms for ensuring the independence of auditors.

Vide the said guidelines, the RBI has brought into place the following broad changes as against the existing system 

• Removal of a cooling period of 3 Years except for 6 years cooling in the very Bank from which SCA is retiring. 
• UCB & NBFC also brought under the policy for the first time on the same lines of Banks.
• One Public Sector Bank  and along with 3 Private Banks And 8 NBFC/UBC can be done together by a single firm
• Concept of Joint Audit (Minimum. 2 Auditors) Introduced in All Commercial Banks, Urban Cooperative Banks, & NBFC’s with Assets size more than 15,000 Cr.
• Category A, B & C Banks bifurcation by RBI’s Old Policy done away with, Hence, Serial Number &  Grading of firms won’t be of relevance now onwards.
• All members of ACB to be Non-Executive I.e. Two ED’s generally on ACB will no longer be there giving more independence to ACB.
• No. of vacancies likely to be increased as RBI inserted paragraph on commensurate no. of auditors as per the size of bank & would have to explain if the large deviation from the generally accepted count of auditors. However, the Minimum count of SCA’s still not prescribed by RBI.
• Gap of a minimum 1 year for existing Firm already doing Non-Audit work for a bank & then further to be appointed as SCA.
• J&K Bank’s appointment of SCA to be done by CAG but with RBI Concurrence only.
• RBI Won’t send a separate list of experienced & Fresh Firms as 60:40 criteria too lifted. Rather, it will send a single list only to PSU Banks.
• Each Bank will frame its own policy on the procedure for appointment of SCA in Transparent Manner & Host on the website that policy. So, essentially, criteria by banks to include a number of Partners, Number of Staff/ DISA/CISA etc

Frequently Asked Questions on the Guidelines

Who is covered under the ambit of these Guidelines ?

These Guidelines are mandatorily applicable to:

1. 1.Commercial Banks (excluding RRBs),
2. 2.Urban Cooperative Banks (UBC) and
3. 3.Non Banking Financial Corporations (NBFC) including HFCs having asset size of 1,000 crores or more

Non-deposit NBFCs having asset size of less than Rs. 1000 crores shall have the option to continue with the existing procedures.

What is the timeline to adopt these guidelines ?

The Guidelines regarding appointment of SCAs/SAs shall be implemented for the first time for UCBs and NBFCs for FY 2021-22. They shall have the flexibility to adopt these Guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption. However, since the auditors are appointed in the AGM itself, NBFCs and UCBs will have to ensure compliance in the ensuing AGM.

What would be the immediate actionable for banks/NBFCs?

The Guidelines are applicable for the audit of FY 21-22 and onwards. Further, the same may be complied with by the second half year by NBFCs and UCBs. In order to ensure compliance by the second half year, Entities shall have to take several steps immediately, such as:

• Adoption of Statutory Audit Policy and Appointment Procedure
• Hosting the Policy on the website/public domain
• Verifying the compliance of auditors with the eligibility norms prescribed by RBI
• Appointment of new auditor as per the guidelines, in case the auditor is ineligible/ the term of existing auditor has expired
• Ratification of existing auditor, in case he is eligible and his tenure has not expired, where so permitted by the Guidelines
• Appoint joint auditor wherever applicable
• Take prior approval of the RBI or intimate the RBI with respect to appointment of the auditor, as the case may be

What would be the impact on the existing auditor’s appointment? Will existing auditors have to be replaced?

Firstly, the Guidelines do not have a transitional/saving clause in this regard. Second, the Guidelines prescribe certain specific ‘eligibility norms over and beyond the generic provisions of law – the present auditor(s) may or may not qualify those norms. Thirdly, as noted elsewhere, there are overlapping provisions in these Guidelines w.r.t term of auditors vis-a-vis the Companies Act, 2013. Further, footnote 11 states as follows “.…Further, the audit firms which have already completed tenure of 1 year or 2 years with any Entity may be permitted to complete the balance tenure only, i.e. 2 years and 1 year respectively, if they fulfill the eligibility norms on an annual basis.”

Keeping in the view the above, the following view may be taken –

a. Where the auditor does not meet the eligibility?

The Auditors will have to be replaced with a new auditor, in compliance with the procedural requirements under the Companies Act, 2013. This should not be regarded as removal of the auditors since the same is due to the auditor becoming ineligible under the applicable regulations.

b. Where the auditor meets the eligibility?

From the footnote (as reproduced above) it appears that the auditor who has already served for 3 years, shall not be allowed to continue, even if he meets the eligibility norms. The Guidelines seem to be impressed by the idea of a flat 3-year term without considering the provisions of the Companies Act relating to 5 years (+ 5 years) tenure of auditors. This is a possible conflict, which might need specific clarification from RBI. However, given the operational difficulties involved and that for NBFCs and UCBs, the transition time is till 2nd-half of 2021-22, a logical view will be to let the auditor continue at least for FY 2021-22.

Are there any exemptions provided to any specific class of Entities?

Yes, non-deposit taking NBFCs with asset size below ₹1,000 crore have the option to continue with their extant procedure. They are exempt from the provisions of the Guidelines.

Is prior approval required for appointment of SCAs/SAs?

Commercial Banks (excluding RRBs) and UCBs are required to take prior approval of RBI (Department of Supervision) for the appointment/reappointment of SCAs/SAs, on an annual basis. Note that, at present, section 30(1A) of the BR Act (not applicable to SBI/notified banks) anyway requires previous approval of RBI for the same.

Does an NBFC require prior approval of RBI for appointment of SCAs/SAs?

No. An NBFC shall inform RBI about the appointment of SCAs/SAs for each year by way of a certificate in prescribed format (Form A) within one month of such appointment.

Is there a minimum number of auditors criteria specified under these Guidelines?

Yes. As per the Guidelines, the Entities shall appoint SCAs/SAs based on their asset size as provided in the below table;

Sl No.	Asset size	Minimum number of SCAs/SAs
1	Entities with asset size of ₹15,000 crores and above	2
2	Entities with asset size of less than ₹15,000 crores	1

It may be noted that prior to the issue of the Guidelines, the concept of joint auditors was limited to banks only. This seems to now be extended to NBFCs as well. In this regard, the auditors shall comply with the Standard on Auditing (SA) 299, “Responsibility of Joint Auditors” issued by the ICAI, which deals with coordination among joint auditors.

What factors should be considered by the entities while deciding the number of SCAs/SAs?

The Entities should decide on the number of SCAs/SAs based on a Board/Local Management Committee (LMC) Approved Policy, inter alia, taking into account the relevant factors such as:

• size and spread of assets
• accounting and administrative units
• complexity of transactions
• level of computerisation
• availability of other independent audit inputs
• identified risks in financial reporting, etc.

Is there a cap on the maximum number of auditors under these Guidelines?

Yes. Considering the factors mentioned above and the requirements of the Entity, the actual number of SCAs/SAs to be appointed shall be decided by the respective Boards/LMC, subject to the following limits based on the Entity’s asset size:

Sl No.	Asset size of the entity	Maximum number of SCAs/SAs
1	Upto ₹5,00,000 crore	4
2	Above ₹ 5,00,000 crore and Upto ₹ 10,00,000 crore	6
3	Above ₹ 10,00,000 crore and Upto ₹ 20,00,000 crore	8
4	Above ₹ 20,00,000 crore	12

What is the role of the Audit Committee of the Board (ACB)/ LMCs?

The role of AC shall be as follows:

• Monitor and assess the independence of the auditors and conflict of interest position
• Review the performance of SCAs/SAs on an annual basis
• Recommend to the Board/Approve the reports regarding concerns on independence of auditors, to be reported to the RBI

 What parameters should be considered to ensure independence of the SCA/SA?

The Guidelines provide various criteria to ensure independence of SCA/SA such as:

• Joint auditors should not be under the same network or have same partners
• Concurrent auditors not to be appointed as SCA/SA
• Consideration of the fact that the bank has a common auditor as that of an entity on which it has large exposure, while making appointment of the SCA.
• Maintaining a time gap of 1 year between non-audit services taken from the firm and its appointment as SCA/SA or firms under the same network/having same partners

Is there a bar on banks to appoint those auditors who are also the auditors of any entity in which the bank has a large exposure?

No. The Guidelines do not put a bar on the auditors who are also the auditors of the entity on which the bank has a large exposure. However, the Guidelines provide that this fact should be factored while assessing independence of the auditor. Thus, the onus is on the AC to ensure that the independence of the auditor does not get compromised on being appointed as the auditor of the Bank/NBFC as well as an entity in which the bank has a large exposure in the same reference year.

Further, in order to ensure independence in such cases, the following measures or the like may be employed:

• Segregation of partners
• Chinese wall framework within the firm
• Segregation of audit of companies belonging to different sectors
• Assurance from audit partner on confidentiality of information and strict policy on sharing of information within the firm

 What additional services can be provided by the SCA/SA?

The services wherein there is no conflict of interest of interest can be provided by the SCAs/SAs (indicative list):

(i) Tax audit, tax representation and advice on taxation matters,

(ii) Audit of interim financial statements.

(iii) Certificates required to be issued by the statutory auditor in compliance with statutory or regulatory requirements.

(iv) Reporting on financial information or segments thereof 8 As defined in Rule 6(3) of the Companies (Audit & Auditors) Rules, 2014

Can the auditor provide non-audit services before being appointed as the SCAs/SAs?

Yes. This is subject to the condition that SCAs/SAs shall ensure that the time gap between any non-audit works i.e., services mentioned at Section 144 of Companies Act, 2013, internal assignments, special assignments, etc. by the SCAs/SAs for the Entities or any audit/non-audit works for its group entities should be at least one year, before or after its appointment as SCAs/SAs.

The time gap of one year between provision of non-audit services and appointment as SCA/SA, shall not be applicable in which cases?

The SCA/SA is allowed to provide services that may not result in conflict of interest (refer question above) during their tenure as SCA/SA.

There seems to be no reason to bar such services either before or after the tenure. Hence, the gap of 1 year (before or after the tenure) should not be applicable to non-conflicting non-audit services.

What is the tenure of appointment of SCAs/SAs?

In order to protect the independence of the auditors/audit firms, Entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year. The appointment of the SCA/SA will have to be ratified by the Board of Directors every year and intimated to RBI.

Does this mean that the eligibility of the SCAs/SAs shall be checked every year?

Yes. As per the Guidelines, the Board shall obtain eligibility certificate from the auditors in Form-A as provided in the Guidelines, on an annual basis. The eligibility certificate shall be submitted to the RBI within one month of completion of a year.

Is there a cooling off period for appointment of SCAs/SAs who have completed their term?

Yes. An audit firm would not be eligible for reappointment in the same Entity for six years (two tenures) after completion of full or part of one term of the audit tenure. However, audit firms can continue to undertake statutory audits of other Entities.

Is there a conflict between the Guidelines and the provision of Companies Act, 2013 with respect to the term of auditor?

The Guidelines provide that a SCA/SA shall be appointed for a continuous term of 3 years and can be re-appointed only after a cooling-off period of 6 years. However, the Section 139 of Companies Act, 2013 states that an audit firm shall be appointed for a term 5 consecutive years [sub-section (1)], but not more than 2 terms of 5 consecutive years [sub-section (2), applicable for listed and prescribed classes of companies].

Therefore, there is a possible conflict between the Guidelines and the Companies Act, 2013 in this regard and the Guidelines are stricter than the Companies Act.

Can an appointed auditor be removed before completion of 3 years?

Yes. Commercial Banks (excluding RRBs) and UCBs can remove the audit firms during the above period only with the prior approval of the concerned office of RBI (Department of Supervision), as applicable for prior approval for appointment.

Can an NBFC remove its auditor before completion of 3 years? Does it require prior approval of RBI?

Yes. An NBFC can remove the SCAs/SAs before completion of three years tenure without any prior approval from RBI. However, the NBFC shall inform the concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken.

What is the provision regarding audit fees for the SCAs/SAs?

The audit fees for SCAs/SAs of all the Entities shall be decided in terms of the relevant statutory/regulatory provisions. Further that the audit fees shall be reasonable and and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerisation, identified risks in financial reporting, etc.