Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday cautioned auditors to be mindful of rising innovative accounting and related party transactions, asking them to bring these to the notice of the regulator.
Mr Das while delivering a lecture at the National Academy of Audit and Accounts (NAAA), said that in many cases auditors have failed to gauge manipulations in accounting practices and stressed on the need to be more alert towards this.
The central bank head noted that though it is the duty of auditors to report any kind of accounting manipulation, they don't do so in some cases.
His comments came just days after RBI had banned auditing firm Haribhakti & Company for two years from undertaking audits on its unregulated entities from 2022-23 onwards.
The RBI governor said in his speech that auditors are the first line of defence against economic fraud and a robust audit is the need of the hour for the economy.
“Economic decisions are increasingly made based on the available evidence and information. Inaccurate information may lead to suboptimal decisions or excess resource allocation, which would be neither in public interest where a public authority is involved, nor in the interest of individual stakeholders,” Mr Das said.
When a bank sanctions a loan to a company based on wrong information, and the company doesn't repay the money, it will ultimately hit the safety of depositors. Banks will turn risk averse because of bad loans, and to recover their losses will increase their interest rates, the RBI Governor noted.
“Statutory auditors play a vital role in maintaining market confidence on audited financial statements. In the banking industry, this public role is particularly relevant for financial stability, given that banks hold public deposits. Audit quality is key to the effectiveness of such a public role,” he said further.