ICAI to review YES Bank's financial statements for FY18 and FY19

Firms say there are limits to audits identifying ever-greening of loans, or flagging suspect collateral securities.

The spotlight is back on the role of auditors in flagging the ongoing crisis at YES Bank. The accounting standard regulator, the Institute of Chartered Accountants of India (ICAI), plans to review the financial statements of YES Bank for the financial year 2017-18 (FY18) and FY19, and check whether there have been any lapses on the part of the auditors.

The audit fraternity points out that one of the key challenges in undertaking audit of banks relates to reconciling divergences between the Reserve Bank of India (RBI) and the banks when it comes to recognition of non-performing assets (NPAs).

“Over the last two-three years we have been under a lot of pressure from the RBI in matters relating to divergences. As a result, whenever in doubt we approach the RBI for guidance on suspect transactions,” said an auditor from one of the Big Four audit firms.

The auditors are also increasingly seeking information on a group’s loan exposure, than just the company they have the audit mandate for.

An RBI assessment for FY16 pegged the NPAs of YES Bank at Rs 4,925 crore as against the Rs 748 crore gross NPAs reported by the bank. The divergence ballooned to Rs 6,335 crore at the end of FY17.

To check instances of evergreening of loans, auditors said they have started keeping a tab on the money trail of loan payback. “We have started taking a close look at where the money is coming from,” said the audit head of another Big Four firm.

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However, the auditor fraternity concedes that as statutory auditors there are limits to which they could check the money trail. They also rue lack of guidance in this respect from the accounting standard regulator.

What auditors also find challenging is to ascertain intrinsic value of securities that are put forth against loans. “This is more so in an economic environment where repayment power of business is weak,” said another audit professional. Statutory auditors of YES Bank have already had a rough ride over the past few years. BSR & Co, an affiliate of KPMG India, is the current auditor of YES Bank. However, the previous auditor, SR Batliboi & Co, an EY affiliate, was hauled up by the RBI on account of lapses in statutory audit. Following this, the firm was banned for one year from carrying out statutory audit assignments of commercial banks.