In a bid to strengthen corporate governance in banks, the government has decided that chartered accountants who are a part of the management committee of banks will not sit on the bank’s audit committee.
The June 10 order, received mixed reactions from the CA community. While some have welcomed it, others say the move would make functioning of banks opaque.
According to the order issued by the department of financial services, “Directors appointed under Section 9(3) (g) and (h) of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970, who are on management committee/ credit approval committee, shall not be on the audit committee in any capacity.”
Under the Section, the Centre has to nominate one director who has been a CA for not less than 15 years.
Earlier, the PJ Nayak committee had said in its report that chartered accountant-directors face special conflict of interest and “only those CAs would remain available for appointments as directors who have not obtained any assignments under any bank, thus raising a very real possibility of persons with hardly any market acceptability and/or competence finding their way by default on the Boards”.
A council member of the Institute of Chartered Accountants of India (ICAI), the regulator for the profession, who requested anonymity, said the move will help in improving oversight in banks and strengthen corporate governance. “Not having the same member on both the boards will ensure independence,” he said.
The management committee/credit approval committee in banks are responsible for sanctioning of credit proposals, bringing about a compromise on the settlement of loans, taking a call on write-off proposals among others.
The audit committee is responsible for improving the financial reporting practices. It is a medium through which the Board exercises better control.
Amarjit Chopra, former chairman of the ICAI, said that not having a CA on the audit committee would defeat the very purpose of having such a committee “as it is the job of a CA to ensure compliance of the bank with the auditing standards given their expertise in the area”.
The department’s order is a departure from its 2008 position when it had reviewed rbi guidelines on composition of audit committee and had directed banks to include non-official chartered accountant-director appointed under Section 9(3)(g) in the audit committee of the board of the banks.