The Reserve Bank of India recently expressed concerns over certain banks having a large number of accounts that are being used for fraudulent activities and to perpetuate evergreening of loans. During discussions with chief financial officers and auditors of banks and financial institutions, RBI deputy governor Swaminathan J highlighted the need for greater control and management of internal accounts due to their potential for misuse. He urged CFOs to rationalize these accounts and minimize them to only essential ones, while also emphasizing the importance of regular reconciliation and proper reporting to the audit committee of the board.
RBI Governor Shaktikanta Das also addressed the issue of mule accounts during a separate interaction with bank chiefs, urging them to combat digital frauds. Deputy governor M Rajeshwar Rao expressed concerns about regulated entities potentially exploiting the flexibility offered in the principle-based regulation framework in a biased manner. He also emphasized the need for enhanced quality of disclosures, particularly in the context of the expected credit loss (ECL) framework.
Furthermore, Rao highlighted challenges arising from emerging technologies, which are reshaping the banking and financial sector and increasing reliance on third-party service providers. He stated that this reliance exposes regulated entities to operational risks, including cyber and outsourcing risks, and emphasized the need for auditors to evaluate management’s assessment of the impact of these technologies on internal controls and financial reporting.
In addition, both Swaminathan and Rao emphasized the importance of auditors upholding the highest standards of integrity, ensuring transparency, impartiality, and adherence to professional ethics and guidelines to maintain the credibility and integrity of audit outcomes.
Key Points from Auditors:
- Implement rigorous audit processes to prevent divergence, under-provisioning, and non-compliance.
- Conduct holistic assessments of material risks posed by businesses.
- Advocate for robust sustainability reporting from both financial and non-financial entities.
- Evaluate management’s assessment of the impact of emerging technologies on internal controls and financial reporting while investing in technology and data analytics.
