Too Many Internal Accounts Could Be Doorway To Evergreening, RBI Warns CFOs
RBI found that certain internal accounts at banks were being used as conduit for fraudulent transactions and evergreening of accounts.
The Reserve Bank of India has found that certain banks have lakhs of internal accounts, and has warned chief financial officers to ensure control.
In a speech delivered on Tuesday, RBI Deputy Governor Swaminathan J told CFOs that internal accounts are high-risk in nature on account of its potential for misuse.
"We found certain banks having lakhs of such accounts, with apparently no valid reason," Swaminathan warned in his speech. "Some of these accounts were also used as a conduit for certain fraudulent transactions and evergreening of loan accounts."
Swaminathan then requested the CFOs to have these accounts rationalised completely, and that they be brought down to the essential minimum.
Internal accounts are those which belong to the respective banks. These accounts are commonly used to define suspense and write-off accounts, track paper or dummy entries.
Swaminathan also highlighted five key expectations of the regulator from auditors. These include:
Auditors must apply due rigour in their audit processes to mitigate any potential for divergence, under-provisioning, or non-compliance with statutory and regulatory requirements.
Auditors must exercise prudent judgment, prioritising substance over form. This implies that auditors must go beyond mere technical compliance.
Auditors can play a significant role in identifying and promptly reporting incipient vulnerabilities to both the bank management and the RBI.
Auditors should deploy competent staff equipped with the necessary training, skills, and experience, particularly in critical areas such as information technology and cybersecurity.
Auditors must ensure there are no conflicts of interest that could compromise the objectivity and independence of their audits.
Auditors Must Tighten Oversight
In a separate speech delivered on Tuesday, RBI Deputy Governor M. Rajeshwar Rao told banks and other financial sector auditors to move towards principle-based audits rather than rule-based ones.
In his speech, Rao highlighted certain observations the regulator had made about non-bank firms. While implementing the IndAs accounting framework at non-bank finance companies, the RBI noted certain deficiencies in the sale of assets from the amortised cost category.
The regulator also noted that NBFCs are relying on days past default as a metric to move accounts from Stage 1 to 2. The IndAS framework, however, allows for more forward-looking factors, Rao said.
"DPD, being a lagging indicator, is not always in sync with using the forward-looking approach of ECL (expected credit loss)," he added.
Even at asset reconstruction companies, the RBI noted no provision was created for management fees and expenses, which remained unrecoverable for more than 180 days.
A recent order by the National Financial Reporting Authority, in the case of an audit report of a non-banking financial company, highlighted that the auditor did not perform the audit procedures to ensure the reasonability of ECL provisions.
"We're of the view that such issues require greater levels of scepticism from the auditors," Rao said.
As independent assessors, auditors should critically evaluate and challenge management’s judgement and assumptions to ensure that they are aligned with the underlying principles of accounting standards and prudential norms, he said.
