Auditors need to thoroughly scrutinise related party deals: RBI Guv

25-10-2021

New Delhi, Oct 25 (UNI) Noting that several instances of related party transactions without following ‘arms-length’ principle and established transfer pricing mechanism have been observed recently, Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday said that auditors need to identify and thoroughly scrutinise the records.   

"Auditors need to identify and thoroughly scrutinise related or connected party transactions to ensure that there is no undue transfer of income or assets," said Das while addressing the probationers and other officers of the Indian Audit and Accounts Service (IAAS) in Shimla.  

He also stated that there have been cases of manipulation and misstatement of true nature of financial statements by employing opaque technological means (IT black boxes). 

"Real transactions are camouflaged beneath various layers of IT solutions by a few entities. As such, auditors need to be technologically savvy and be able to ‘see-through’ the layers of information technology to detect the real nature of hidden transactions," the RBI governor stated.  

Das said that RBI as the supervisor of the financial system relies and leverages on the work done by auditors. Further, the audit professionals are being sensitized through various fora to improve the quality of their reporting.  

"We are constantly engaged with individual auditors, audit firms and the Institute of Chartered Accountants of India (ICAI) to improve the quality and depth of audit. A lot of work has been done in this area, but lot more needs to be done," the governor said.  

Highlighting the importance of accurate reporting and information in accounting, Das said that inaccurate information may lead to sub-optimal 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. 

He cited the example of banking sector to underscore the importance of audit. He said that if a bank sanctions a loan on the basis of inaccurate and misleading financial statements and the borrower company is ultimately unable to repay, the bank loses both the principal and the interest. 

He further said that apart from the loss incurred this could make the bank risk averse and deprive other eligible companies from bank funding. 
Alternatively, the bank may try to recover this loss by charging higher interest rate to other borrowers thus resulting in sowing seeds of non-viability in such borrowers, apart from creating a situation of higher interest cost to the society, he noted. 

"Eventually at stake would be the safety of depositors’ money," the RBI governor said.