“Recently, several examples of related party transactions have been observed without following the ‘arms-length’ principle and established transfer pricing mechanisms. Diversion of funds through various means – intra-group credit and benefits to related parties have been observed. There are examples of transfers, asset transfers without proper valuation, on favorable terms, more or less invoices of transactions,” Das said.
Delivering a personal speech at the National Academy of Audit and Accounts in Shimla, Das chose to speak on the role of audits in the modern financial system. The governor’s speech comes days after the central bank decided to suspend the auditors of SREI for lapses in their audits.
Das said, “Without generalizing, it can be said that problems usually arise when the independence of the auditors themselves is compromised or there is a lack of competence in the auditors to perform their roles.” Earlier this year, the RBI had tightened norms for statutory auditors for financial firms, requiring banks to change auditors more frequently.
Das said that with the introduction of Ind-AS for all listed companies, including non-banking financial companies (NBFCs) having total assets of Rs 250 crore, the management has got additional discretion on providing requisite credit losses.
“Such flexibility and the forward-looking nature of evaluation, however, creates ‘model risk’, that is, the model may rely on incorrect assumptions and may be far from representing real-life scenarios. This is in many cases It has been seen,” Das said.
He said auditors are expected to test models used by entities, challenge management and validate model outputs.
Explaining the role of RBI, Das said that it is the duty of the Statutory Auditor to report directly to the Supervisor (RBI) on matters of material importance arising out of audits of banks and other regulated entities. “For these reasons, RBI, as supervisor of banks and NBFCs, is keenly interested in the way statutory auditors conduct audits in regulated entities,” Das said.
Das called upon the auditors to develop capabilities in terms of information technology as IT black boxes are often used to hide transactions. “We have also seen cases of manipulation and misstatement of the true nature of financial statements by employing opaque technical tools. Actual transactions by some entities are hidden under various layers of IT solutions. As such, auditors are technically savvy. There needs to be and be able to see through the layers of information technology to find out the true nature of hidden transactions.” In the case of two lenders, PMC Bank And DHFLThe management managed to hide the irregular loans by creating fake loan accounts in the IT system.
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