CFOs, Auditors must ensure accuracy, integrity of bank’s financial statements and reports: RBI

New Delhi, July 9 (Mayank Nigam) Amidst a series of regulatory lapses by banks, financial institutions and NBFCs, the Reserve Bank of India on Tuesday sent a clear message to the Chief Financial Officers (CFOs) and the auditors of commercial banks saying they must ensure the accuracy, completeness, and integrity of the bank’s financial statements and reports. Addressing a conference on “Role of Statutory Auditors in Emerging Financial Landscape”, M Rajeshwar Rao, Deputy Governor, RBI, said that it is the responsibility of the auditor to obtain sufficient audit evidence to assess the appropriateness of the use of the going concern concept. In this changing environment, 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. “In the past, we have seen examples where unsustainable business model of the entity ultimately led to its downfall,” he said, adding as Statutory Auditors, this is an emerging challenge which you need to consider and find ways to assimilate in your audit process.

A second emerging challenge pertains to climate and sustainability. 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. The Reserve Bank has also issued draft regulations on disclosures in climate related risk. The complexity and diversity inherent in financial firms makes assessment of climate risk challenging and there is a vital role that the auditors can play in the process. For an audit to be effective, it should consider the needs and the expectations of users. These emerging issues highlight that the responsibilities of auditors have increased manifold and they should consider whether specialized skills are necessary to understand the design, implementation, and effectiveness of controls. Equally important is the ability and skills of the auditors to respond to these expectations so as to provide reasonable assurance and ultimately ensure a high-quality audit outcome.

He said that even 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. This would help in achieving our shared goal of financial stability as well as ensure robustness of individual institutions. Therefore, there is need for deeper engagement and collaboration between regulators and auditors, he emphasized. This has also been emphasized in the Basel Core Principles for Effective Banking Supervision on ‘Financial Reporting and External Audit’ which encourages the supervisors (regulators) to periodically meet the external auditors to discuss issues of common interest relating to bank operations. He acknowledged that external audit is an indispensable component of a robust regulatory framework and a closer collaboration is must to ensure the health, stability and integrity of the financial system. Addressing the conference, Swaminathan J, Deputy Governor, RBI said disclosures are the cornerstone of transparency. Clear disclosures bridge the gap between what management knows and what external users can infer from financial statements.

But the moot question is, how much disclosure is ‘good enough’ to ensure a clear understanding without overwhelming users with information overload. Striking a balance between comprehensive disclosure and conciseness is a tight rope walk. When disclosures are clear and comprehensive, they foster trust in the market. Financial reports of an entity offer a window into its financial performance as well as risk profile and therefore, financial reporting is often referred to as the “language” for “communication” between an entity and its external stakeholders, he said. The “communication” can be effective only if both the management and the stakeholders speak the same “language”. For this, we need a common language, in the form of a set of rules and principles, which is where the accounting standards come into play. Financial statements prepared on the basis of a set of common codified principles and standards reduce information asymmetry; enhance comparability and transparency between entities and across jurisdictions; and make the information provided through the financial reporting ecosystem relevant and reliable.