AUDIT
Synopsis
- Introduction
- Section 30 of the Act
- The auditor
- Appointment
- Expenses
- Power and functions
- Audit Report
- Cases
- Conclusion
1. Introduction
Banking companies or banks form the very attic of our financial system and play a very important role in the economic development of our country. By providing for various services like granting of loans and deposit of public money that is further used to support the upcoming or growing institutions, the banks undertake a huge responsibility thereby contributing towards the economic growth.
It is necessary for a financial institution that there shall be a proper supervision mechanism so that any irregularity that may occur because of any reason shall not sustain undetected over a long period of time.
So, it is necessary that the accounts of banking companies shall be audited in a specific period of time so as to secure the money of the public and to prevent any violation of rules, laws, regulations or improper exercise of powers granted by the statutes.
The Banking Regulation Act 1949 (hereinafter the “Act”) makes provision for such audit of banking companies under S. 30.
2. Section 30 of the Act
Under S. 30 of the Act provision has been made for audit of banking companies, appointment of the auditor for this purpose, powers and functions of the auditor and the constituents of an audit report prepared by the auditor at the end of his audit.
Such constituents of S. 30 of the Act have been discussed as forth.
3. The auditor
First part of Sub section 1 of S. 30 states that any person who is duly qualified to be an auditor of the Companies under any law for time being in force shall be appointed as an auditor to check the balance sheet and profit loss account prepared by the banking companies in accordance with the provisions of S.29 of the Act.
4. Appointment
Second Part of Sub Section 1 of S. 30 provides for appointment, reappointment or removal of an auditor.
The auditor under this section shall be appointed by the banking companies in confirmation with the Reserve Bank of India.
Before appointing, reappointing or removing an auditor the banking companies are obliged to take approval from the Reserve Bank of India for any such act.
5. Special Audit
- Under sub section 1A provision has been made for a special audit to be performed under the guidance of Reserve Bank of India in case need arises.
- It states that if in the opinion of Reserve Bank of India any necessity arises in the interest of either
- Public at large; or
- The banking companies; or
- The depositors of the bank,
Then the Reserve Bank of India may direct or order for such special audit to take place.
- Such provision of the Act does not exclude the applicability of Companies Act or any other Act for the time being in force and which is applicable in similar circumstances.
- The Reserve Bank of India can therefore direct or order for the special audit of accounts of the banking company for any specific transaction or class of transactions that is considered important to be audited in the interest as above stated.
- Such special audit may also be ordered or directed to be conducted on all transactions taking place within any specified period or periods without mentioning any specific transaction.
- The Reserve Bank of India may thereby appoint a person qualified under any law in force for the time being to be auditor of companies or it may even ask or order the auditor of banking companies himself to conduct such special audit.
- Such appointment of auditor for special audit or the order for the audito of banking companies can either be included in the same order by which special audit has been directed or Reserve Bank of India can make a separate order for such appointment or direction.
- The auditor so appointed or directed by Reserve Bank of India to conduct the special audit is bound to comply by all such directions and at the conclusion of audit he shall make a report of such audit which shall be presented before the Reserve Bank of India and a copy of such audit report thereof shall be forwarded to the banking company concerned.
6. Expenses of special audit
Sub Section 1C of section 30 states that all or any expenses that have been incurred upon Reserve Bank of India during the order or in conducting such special audit along with all the expenses that are incidental to the order or direction or commission of such special audit shall be borne by the banking company concerned on whom such special audit has been ordered by the Reserve Bank of India.
7. Power and functions
- The Act itself does not make mention of elaborate powers functions and duties of the Auditor. The Sub Section 2 of Section 30 by implication makes all the powers functions and duties of auditor specified under S. 143 of Companies (Amendment) Act, 2015 applicable on the auditor appointed, reappointed as auditor for banking companies under this section.
- The said S. 143 of Companies (Amendment) Act, 2015 gives powers to the auditor of companies to access all books of accounts or any other necessary document for the purpose of such audit.
- He may make inquiries regarding any transaction he deems necessary for the purpose of such audit.
- He may require the officials of such company to produce any document before him that he may ask for the purpose of conducting such audit.
- He has the power to seek explanation from the officials for any transaction or number of transactions that he may deem necessary.
- After the completion of audit, the auditor needs to prepare an audit report in compliance of the provisions stated therein and such report shall be submitted to respective authorities after the conclusion of such audit.
- There are certain exemptions provided under the Companies (Amendment) Act, 2015 in which cases the provisions of this section would not be made applicable.
- The auditor so appointed is obliged to comply by all the audit standards as provided by the Companies (Amendment) Act, 2015 and the rules provided therein in this regard.
8. Audit Report
At the conclusion of audit the auditor concerned is required under the Act to submit an audit report. The said audit report shall in addition to all the requirements stated in Companies Act also include the following:
- Whether or not all the information and explanation that he required for the purpose of audit and that he had required the officials to produce before him have been found to be satisfactory;
- Whether or not the banking company has made all the transactions which are subject matter of the audit concerned in strict compliance of the powers give to them under the Act;
- Whether or not all the returns that have been received by the auditor sent to him from branch offices of the company concerned are found to be adequate for the purposes of his audit;
- Whether the profit and loss account produced before the auditor is correct and whether it shows a true balance of profit or loss incurred by the banking company during the concerned period which is subject matter of the audit;
- Auditor may include any other matter in his audit report that he may find necessary to be brought up in the notice of authorities concerned.
9. Cases
· Society of Auditors and Etc. Vs. Comptroller and Auditor General of India and ors.[i]
In addition to all other questions raised before the court in this case, a question was put up whether the Reserve Bank of India is under the obligation to appoint auditors for the inspection and audit of balance sheet and profit and loss accounts of the banking companies.
The court held in affirmative stating that it is the statutory duty of Reserve Bank of India to appoint an auditor in order to audit the accounts of the nationalised banks and regional rural banks imposed on it via Ss. sections 29, 30 and 31 of the Act.
Non-compliance of Reserve Bank of India of this statutory provision shall be dealt with accordingly.
· Society of Auditors Vs. Comptroller and Auditor General of India[ii]
It was held in this case that the appointment of auditor for the purpose of audit cannot be done arbitrarily and that if a person despite of being qualified under the laws in force for the time being is denied the empanelment such denial shall be done with sufficient reasoning. Otherwise it would be violative of Art. 21 of the Indian Constitution.
Moreover, in this case it was observed by the court that the auditor appointed for the purpose of conducting an audit can only ask for the documents to be produced before him that are relevant for the commission of such audit.
Therefore he cannot compel anyone to produce documents of personal nature or that nay be embarrassing for the person to produce before him. Such personal documents that may be embarrassing for the person to produce include the income tax return of that person.
Such compulsion made by the auditor to produce documents of personal nature that are not relevant for the purpose of such audit shall be violative of right to privacy guaranteed by the Indian Constitution.
· Farrukhabad GramIn Bank Vs. Assistant Commissioner of Income[iii]
It was held by the court in this case that a person may be compelled to produce all his income before him so that a segregation of sources can be made in order to find the total income and loss account of the bank.
The court held that the all the interest earned by the person in his investments with the bank would be included in his overall income and the auditor has the power under S. 30 to require him to produce such information before him.
10. Conclusion
Hence, the Reserve Bank of India or the banking companies themselves have the power under the act to appoint an auditor to check the profit and loss account and balance sheets of the concerned banking company.
The appointment, reappointment or removal of auditor by the banking company is subject to approval from the Reserve Bank of India.
The Reserve Bank of India can order for the conduction of an special audit which should be in the interest of public at large or the depositors or the banking company itself, the expenses of which shall be borne by the banking company itself.
The auditor has been given various powers has to be bound by certain duties during the audit under the act and under Companies Act 2015 which are made applicable on auditor appointed under this act as well.
After the conclusion of audit the auditor has to submit an audit report stating all the particulars as given under S. 30 of the Act and under S. 143 of Companies (Amendment) Act 2015.
[i] AIR2000Mad92
[ii] [2000]111TAXMAN516(Mad)
[iii] (2006)103ITD207Agra
