Mumbai: The Governor of the Bank of India (RBI) Shaktikanta Das on Monday said that legal auditors need to improve the quality and depth of the audit and register a number of deviations detected by the central bank.
“Lately, some examples of related party transactions without following the ‘arm-long’ principle and the established transfer price mechanism has been observed.
There are examples of fund transfers and transfer profits to parties connected through various ways – intra-group loans with Profitable requirements, beating over-or less than transactions, transfer assets without fair assets, “said the watershed.
Submitting in-person addresses at the National Academy of Audit & Account at Shimla, DAS chose to talk about the audit role in the modern financial system.
The governor’s speech came a few days after the central bank decided to suspend the SREI auditor to irregularities in their audit.
“Without generalization, it can be said that the problem usually arises when the auditor’s independence itself compromised or the auditor does not have competence in their role,” said the watershed.
Earlier this year, the RBI has tightened the norms for legal auditors for financial companies, requiring banks to change auditors more often.
DAS said that with the introduction of Ind-from all registered companies, including non-banking financial companies (NBFCs) which have a net value of RS 250 Crore, management has received additional wisdom to provide expected credit losses.
“However, the flexibility and nature of the assessment that appears advanced, however, causes the ‘model risk’, that is, the model can depend on the wrong assumption and may be far from the real life scenario.
This has been observed in some cases,” said the watershed.
He added that the auditor is expected to test the model used by entities, challenging management and validating the output model.
Describing the role of the RBI, DAS said that legal auditors have the task to report directly to the supervisor (RBI) concerning matters of material significance arising from other bank audits and regulated entities.
“For these reasons, the RBI, as a supervisor of the Bank and NBFC, has a sharp interest in the way the legal auditors who conduct audits in the entities are set,” said the watershed.
Das asked the auditor to develop the ability in terms of information technology because the black box is often used to hide transactions.
“We have also seen cases of manipulation and misstatement of the true properties of financial statements using opaque technology tools.
Real transactions are disguised under various layers of IT solutions by several entities.
Thus, the auditor needs technology and is able to ‘see through the technology layer Information to detect the real nature of hidden transactions.
“In the case of two lenders, PMC Bank and DHFL, management has succeeded in disguising irregular loans by creating a fake loan account in the IT system.