Guidelines for Appointment of Stat Auditors in Banks

1)
In order to provide more opportunities to eligible audit firms, the
existing cycle of four years of continuous statutory central audit in
PSBs with compulsory rest of two years will be reduced with prospective effect
to a cycle of three years of continuous statutory central audit with
compulsory rest of two years. This will be effective from 2006-07 in
respect of SCAs appointed in 2006-07 and onwards. The existing
continuing auditors will be allowed to complete their four years' cycle
after which they will be rested for a period of two years. The
appointment of SCAs will be made on an annual basis, subject to their
fulfilling the eligibility norms prescribed by RBI from time to time
and also subject to their suitability.


2) As suggested by the GoI, the allotment of vacancies of SCAs
among the "experienced" and "new" audit firms will be made in the ratio
of 60:40 instead of the existing 80:20 from the financial year 2006-07
and onwards, in order to provide adequate opportunities to the "new"
firms.


3) While continuing the practice of appointing one audit firm (as
SCA and/or branch auditor) to one public sector bank, the banks opting
for using the managerial autonomy in the appointment of auditors will
clearly advise the audit firms selected for consideration of
appointment that one audit firm can take up audit assignment (central
and /or branch audit) in one PSB only and also should give their consent in writing for
consideration of appointment in the bank concerned for the particular year and the subsequent continuing years.
The consent given by an audit firm will be treated as irrevocable and
request, if any, from audit firms for changing the bank, after giving
its consent to the bank concerned will not be entertained.


4) In order to determine the inter-se seniority of both
"experienced" and "new" audit firms for appointment as SCAs, a marking
system based on various parameters such as the number of partners,
period of association of partners, experience of the firms, full-time
CA employees and bank audit/ PSU audit experience of the firms was
followed by RBI during 2005-06. The seniority list thus prepared for
the financial year 2005-06 will be treated as the base list. Further
additions to the list will be made every year to include fresh
additions / firms which are to be re-inducted from rest, etc. Allotment
of audit will be made strictly in the order of seniority of the firms
in the list in the ratio of 60:40 among the "experienced" and "new"
audit firms respectively, from the financial year 2006-07 and onwards.
This system of allotment of audit assignment as per the seniority will
ensure equitable distribution of audit assignments among all eligible
firms by way of rotation.


5) From the financial year 2006-07, the marking system to determine
the inter-se seniority of audit firms will be applicable only to the
"new" audit firms and the "experienced" audit firms will not be
subjected to the marking system. "Experienced" firms which are to be
re-inducted or appearing afresh will be placed in the seniority list as
per the earliest date on which the firm was put on the list of
existing auditors and in case of rested auditors the earliest date on
which the firm was rested. "New" firms to be added to the SCA panel in
subsequent years will be arranged strictly as per the seniority after
subjecting the firms to the marking system. A firm will be subjected to
marking system only at the time of its placement in the panel of SCAs.

6)
It has also been decided that from the financial year 2006-07, while
subjecting the "new" firms to the marking system, additional points
accruing to a firm on account of merger with another firm will be given
effect only after two years of the merger.


7) The procedure for selecting SCAs by banks which opt for using the autonomy has been decided as under:

(i)
RBI will prepare a list of SCAs equivalent to the total number of
vacancies in PSBs for a particular year strictly on the basis of
seniority of each SCA in the panel of SCAs maintained by RBI on the
basis of panel prepared for the year 2005-06.


(ii) The banks will select SCAs equivalent to the vacancies arising
in respect of each bank from the list and obtain the consent of the
audit firms in writing for consideration of appointment as SCAs in the
banks concerned.

(iii) Banks will obtain the approval of respective
ACB/Board of Directors in respect of the selected firms and afterwards
seek the approval of RBI for the appointment.

(iv) After obtaining the RBI approval, the actual appointment of SCAs will take place.


8)In respect of banks which do not opt to use the autonomy in the
matter of appointment of auditors, RBI will be arranging to obtain the
approval of the appropriate authorities/Government of India for SCAs
from out of the remaining names in the list given to banks, after the
selection / approval of SCAs in respect of PSBs opting to use the
managerial autonomy.

B. Statutory Branch Auditors

i)
As per the existing practice, branch auditors appointed annually are
allowed to continue for a period of five years in a bank, after which
they are rotated/rested. As per the advice of Govt. of India, from the
financial year 2006-07 and onwards, it has been decided that branch
auditors appointed annually will be allowed to continue for a period of
four years after which they will be rotated /rested. Branch auditors
appointed till financial year 2005-06, however, will be allowed to
complete their cycle of five years as branch auditors.


ii) While allotting branches, banks are advised to select auditors
located in centres in which their offices are situated or branches
located in centres which are in close proximity to their offices.

(iii) Where the number of eligible auditors /
audit firms is more than the number of branches to be audited at
particular centres (to be identified by RBI annually), selection of
auditors / audit firms should be done, keeping in view the criterion
mentioned at (ii) above. Banks are also advised to have a suitable mix
of various categories of auditors / audit firms while selecting the
branch auditors keeping in view the size of the branches to be
audited. The same auditors / audit firms cannot audit the same bank
for a continuous period exceeding four years. In such centres, where
the number of eligible auditors / audit firms is more than the number
of branches to be audited, the auditors / audit firms will be put to a
period of compulsory rest for two years after completion of four years
of continuous branch audit.


iv) Where the number of eligible auditors / audit firms is less
than the number of branches to be audited at particular centres, the
branches must be allotted equitably among all the auditors subject to
the condition that the same auditor / audit firm cannot audit the same
bank for a continuous period exceeding four years and keeping in view
the criterion mentioned at (ii) above. In such centres, where the
number of eligible auditors / audit firms is less than the number of
branches to be audited, the branch auditors on completion of four years
of continuous audit with a bank will be subjected to the principle of
rotation.

(v)
The concept of Part C auditors (SCAs in the list of eligible central
audit firms but which could not be allotted SCA assignments) being
considered for branch audit is discontinued from financial year
2006-07. Consequently, there will be no separate list of Part C branch
auditors.


(vi) As regards statutory branch audit to be carried out by SCAs,
banks will arrange in such a way that SCAs will be auditing the top
branches (to be selected strictly in order of the level of outstanding
advances as at the end of March 31 of the previous year) in such a
manner as to cover a minimum of 15% of total gross advances of the bank
by SCAs. SCAs will cover a minimum of 5 branches and not more than 10
branches each. Further, if the process of consolidation of branch
returns is done at intermediate points i.e. Regional Office, Zonal
Office, etc., SCAs must be involved in the audit of those intermediate
points. If consolidation is only done at the Central/Head Office of
banks, it may not be necessary for SCAs to be involved in audit of
Controlling Offices. Banks may also consider entrusting statutory audit
of specialised branches such as those dealing in forex, treasury,
corporate loans, etc. to SCAs.


vii. As in the case of SCAs, while continuing the practice of
appointing one audit firm (as branch auditor) to one public sector
bank, the banks opting for using the managerial autonomy in the
appointment of auditors will clearly advise the audit firms selected
for consideration of appointment that one audit firm can take up audit
assignment (branch audit) in one PSB only and also should give their
consent in writing for consideration of appointment in the bank
concerned for the particular year and the subsequent continuing years.
The consent given by an audit firm will be treated as irrevocable and
request, if any, from audit firms for changing the bank, after giving
its consent to the bank concerned will not be entertained.

(viii)
The list of eligible auditors/audit firms received from the Institute
of Chartered Accountants of India (ICAI) will be subjected to
scrutiny to identify/ remove audit firms against whom adverse
remarks/disciplinary proceedings are pending. RBI, thereafter, will
forward the full and final list of all eligible auditors/audit firms to
PSBs, which have opted for using the autonomy in the appointment of
auditors.


(ix) The PSBs will be required to select suitable auditors / audit
firms in such a manner as to enlist the required number of branch
auditors to carry out the statutory audit of branches during the year.
As in the case of SCAs, in order to adhere to the concept of one PSB
for one audit firm, banks will obtain written consent from the
auditors/audit firms selected by them for consideration of appointment
as branch auditors.

(x)
The selection of branch auditors require the approval of the respective
ACB/Board of Directors of the banks concerned, after which banks will
have to seek the approval from RBI before their actual appointment.


(xi) RBI will be arranging for the approval of appropriate
authorities / GoI of the statutory branch auditors / audit firms in
respect of those banks which may not opt to use the autonomy in
appointing statutory auditors, from out of the remaining names in the
list of eligible auditors/audit firms mentioned at (viii) above, after
the selection/ approval of branch auditors in respect of PSBs opting to
use the managerial autonomy.

C. General Guidelines applicable to both SCAs and branch auditors

Government
of India have suggested that in order to protect the independence of
the auditors/audit firms, banks will have to make the appointments of
SCA/branch auditors necessarily for a continuous period of three and
four years respectively. Banks do not have any authority to remove the
audit firms during the above period without prior approval of the
Reserve Bank of India.