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CFOs, auditors must follow regulations in letter and spirit says RBI

July 10, 2024

RBI emphasizes the importance of CFOs guarding against fraudulent transactions and misuse of internal accounts. Auditors advised to enhance cybersecurity measures and scrutinize business decisions. Future audit expectations include addressing climate risks and technology challenges.

Chief financial officers (CFOs) of financial institutions must guard against any misadventure or intelligent interpretation of regulations or accounting standards, deputy governor Swaminathan J said in his remarks at the conference of CFOs and statutory auditors organised by the Reserve Bank of India (RBI).

Banks must also keep the amount of internal accounts to the minimum as some of these accounts have been found to be used as a conduit for certain fraudulent transactions, Swaminathan who is in charge of financial supervision and inspection departments with the central bank among others said.

“We found certain banks having lakhs of such accounts with apparently no valid reason. Some of these accounts were also used as a conduit for certain fraudulent transactions and ever-greening of loan accounts. Internal accounts are high risk in nature on account of its potential for misuse. I therefore request the CFOs to have them rationalised completely, bring them down to the essential minimum and exercise greater control through periodical reconciliation and a proper reporting to the audit committee of the board (ACB), Swaminathan said.

He said CFOs should invest in technology and data analytics which will help them to provide more accurate and real-time financial insights. Swaminathan said auditors should deploy competent staff equipped with necessary training, skills, and experience, particularly in critical areas such as information technology (IT) and cyber security. “By ensuring audit teams are well-versed in emerging technologies and security protocols, auditors can contribute significantly to safeguarding sensitive financial data and maintaining robust cybersecurity frameworks,” he said. 

The Conference was a part of the series of supervisory engagements that the Reserve Bank has proactively been having with key stakeholders. The theme of this conference was ‘Shared Vision, Shared Responsibility: Advancing Assurance in Banking Supervision’. It was attended by 300 executives, RBI said.

In his remarks at the same conference deputy governor Rajeshwar Rao said auditors have the responsibility to carefully understand the regulations and ensure that banks comply not only with regulations but also regulatory intent. The shift by the RBI from a rule based regulation system with a principle-based regulations, gives regulated entities a degree of flexibility in their business decision making that will require an extensive use of management judgement.

“The role of the auditor must also 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,” Rao said at the same conference.

Rao said sometimes management may choose accounting estimates which may lack neutrality or freedom from bias which is where auditors have to build greater rigor and scepticism. He said that with greater flexibility in accounting and prudential norms there has to be greater responsibility in disclosures. He said the RBI is nudging regulated entities to enhance the quality of their disclosures.

Rao also listed climate and sustainability and increasing use of technology among emerging challenges and expectations from auditors in the future. “With climate risks escalating and stakeholder scrutiny intensifying, robust sustainability reporting will no longer be a nicety but will become a necessity for financial and non-financial entities….Exponential growth in usage of digital channels to avail financial services has increased regulated entities reliance on third party service providers and has exposed them to operational risks including cyber and outsourcing risks,” Rao said.

[The Economic Times]

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