Who would audit the RBI?

 ET :KP Krishnan:June 6,2013

Two weeks ago ET reported that the Government of India had appointed two auditors for the RBI. The report also mentioned that this was done without consultations with the RBI.

 At one level this may be dismissed as trivia, of interest only to auditors and government servants. 

On deeper reflection it will be obvious that audit of regulatory agencies is more than a routine certification of balance sheets and is, in fact, an important mechanism for regulatory accountability.

The main activity of governments is to raise resources by tax and non-tax revenue measures and spend these for fulfillment of public policy objectives. 

Democracies like India have to do this within the framework of the rule of law established by the constitution. A major pillar of this framework is that ordinarily no department or agency charged with raising resources can appropriate it or a part of it for its own expenditures.

 For instance, the income-tax department cannot use the resources it raises for payment of salaries of its officers. Such expenditures have to be met out of budgetary allocations made to the department by Parliament. 

The logic is obvious. Agencies endowed by law with powers to raise resources should not have perverse incentives to mulct resources from citizens.

The Exceptions

Statutory regulatory authorities (SRAs) are an exception to this rule. SRAs like RBI are empowered by law to impose fees and to retain and use them for their expenditures.

 This exception is justified on the larger ground that the independence of SRAs is an equally important public policy goal. 

One important aspect of independence is the ability to raise resources to carry out functions conferred on the SRAs. Here is where "audit" plays a critical part.

Given the potential perverse incentives in this arrangement of an SRA raising and using resources, it is audit by a credible and empowered agency that can ensure that SRAs are acting as per rule of law. 

This means raising resources in a lawful, fair and equitable manner and spending them for the fulfilment of the objectives for which the SRA was created. Raising excessive resources and squandering them is not unknown and audit is a mechanism to check and curb this problem. In fact, an embarrassing accumulation of riches by excessive ad valorem fees on regulated entities by an Indian SRA led the board of the SRA to cut down on these fees drastically in 2008.

It is for this reason that most SRAs in India are mandated by law to be audited by the CAG. There are, however, notable exceptions and the pre-Independence SRA, RBI is one such organisation. 

The law says that ordinarily RBI will be audited by two auditors appointed by the GoI. It also says that the GoI may at any time appoint the CAG to examine the accounts of the RBI. 

However, this has never been done and the practice is chartered accountant firms audit RBI. Clearly, this is an unsatisfactory arrangement. It is unlikely that any private auditor will have the courage to point out problems, if any, in the finances and expenditures of RBI.

The Solution

It is for this reason that the Financial Sector Legislative Reforms Commission (FSLRC) has recommended in section 3.6 of its report that the financial accounts (of all financial regulators) shall be audited by CAG.

It is important to note that audit of SRAs is specialised and different from audits of government departments. Hence, teams undertaking this need to be fully equipped and trained. Otherwise we could potentially get into difficulties.

 A couple of years ago CAG insisted that SRAs cannot keep their fee incomes in separate accounts and that they should deposit these in government accounts.

Besides being regressive, this recommendation is contrary to the law. Fortunately some workable solution seems to have been found. 

But these dangers are real and persistent, so the best long-term solution will be to legislate with clarity as recommended by FSLRC.

The author is a government servant. Views are personal.

Foreign audit firms may get full practising rights

Source : FC:Falaknaaz Syed & Ritwik Mukherjee May 30 2010 , New Delhi/Kolkata

Foreign audit firms may soon get full practising rights in India. Recommendations to give them full rights and make them accountable are in the final report on the multi-crore Satyam Computers scam submitted by the Institute of Chartered Accountants of India (ICAI) to the ministry of corporate affairs.

The ministry of corporate affairs, the ministry of commerce and the Reserve Bank of India are examining the ICAI recommendations, minister of corporate affairs Salman Khurshid told Financial Chronicle in an interview.

“ICAI has given us a report on how foreign firms should be brought under the purview of ICAI. They should first be allowed to practise so that they can be made liable. So, we have to work out a system. Discussions are under way. We are talking to the commerce ministry and the RBI on the level of permission that can be given to the foreign firms,” said Khurshid.

Advocating full rights to foreign audit firms, Khurshid said, “If you have to make them liable for negligent practices, you have to first allow them to practise. You can’t have both ways where you prevent them from practising and say that you can be punished. So the whole picture has to be sorted out. We are looking at it.”

A senior ICAI member said the whole idea was to hold someone responsible and bring the right person to book in case of any wrongdoing.

“When the Satyam accounting fraud broke out, the general perception was that PricewaterhouseCoopers (PwC) India was the auditor. But on paper it was Pricewaterhouse Hyderabad or Lovelock & Lewis, which is the Indian associate of Pricewaterhouse and interestingly there was overlapping of partnership. There are individuals who are partners of both PwC India and Lovelock & Lewis. This unnecessarily creates a lot of confusion. Such complications should be done away with," the member said.

At present, foreign firms such as Deloitte, Ernst & Young, PwC, and KPMG have tie-ups with domestic accounting firms. The Indian affiliates of PricewaterhouseCoopers include Pricewaterhouse firms and Lovelock & Lewis, while Deloitte has tie-ups with C C Chokshi, A F Ferguson, Fraser & Ross and S B Billimoria. Similarly, KPMG has a tie-up with BSR, and Ernst & Young has a tie-up with S R Batliboi.

Under the existing World Trade Organisation agreement, India has no obligation to open its market to foreign audit firms. However, in the Doha Rounds, India can agree to open its market to its trade partners.

The role of global audit firms came under scrutiny when two partners of Satyam’s auditor Pricewaterhouse were arrested.

A partner and director of one of the Big Four firms told Financial Chronicle, "I have heard of such a move. In fact, this is a very progressive move. Often some negative perception is being created unnecessarily against Big Four firms. This would also create a level-playing field among audit firms. Those who cannot use the parent company's name while auditing will now be able to use that name. Having said that, I must add that there has to be a rider: partners of the parent firm or the parent firm should not be held responsible for any wrongdoings at the Indian operations’ end. The Indian outfits are accountable anyways."