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The statutory auditors play a significant role in maintaining stakeholder confidence in audited financial statements, which is particularly important in the banking industry where the entire edifice is built on ‘trust’, said the Deputy Governor of RBI, M Rajeshwar Rao.
While delivering the speech at a Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions (AIFIs) in Mumbai, he emphasised on the role of auditors in ensuring the health of the financial system as they assist in maintaining regulatory oversight.
The Reserve Bank has a strong interest in promoting sound and high-quality accounting and disclosure standards for the banking and financial industry, as well as in having transparent and comparable financial statements that strengthen market discipline.M Rajeshwar Rao, Deputy Governor, RBI
Collaboration with ICAI and principle based RegulationsRao mentioned that the Reserve Bank’s collaboration with the Institute of Chartered Accountants of India (ICAI) has led to the development of guidelines ensuring compliance with accounting standards and the road map for adopting Ind AS.
On the Reserve Bank’s shift towards principle-based regulations, he cited the new guidelines for the classification and valuation of investment portfolios in banks and the ongoing work on expected credit loss (ECL) based provisioning norms.
“These norms require banks to classify the investment portfolio based on intention and objective of holding the financial asset and the contractual cash flow characteristics of such assets,” he noted, adding that auditors must ensure that banks comply with both regulations and regulatory intent.
Challenges and Expectations
The Deputy Governor identified several emerging challenges for auditors, including the need to assess material risks in business operations, climate and sustainability reporting, and the impact of emerging technologies on internal controls and financial reporting.
“The role of auditor must transcend from just verifying financial statements to holistically assess material risks being posed by the business operations and business model being pursued by the entity,” he said.
He further stressed the importance of clear and comprehensive disclosures, particularly in the context of the ECL framework. He urged auditors to critically evaluate disclosure practices to ensure they meet the needs of accounting standards and end-users.
To Deeper Engagement and Collaboration
External audit is an indispensable component of a robust regulatory framework.RBI Deputy Governor Rao
He emphasised the need for ongoing discussions between supervisors and external auditors to address issues of common interest and ensure the health, stability, and integrity of the financial system.
“As banks navigate an increasingly complex emerging landscape, a harmonised approach by the regulators and auditors can remove the blind spots in risk identification and mitigation,” he stated.
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