In 2015, the Reserve Bank of India (RBI) through master circular (RBI/2015-16/11) issued the non-banking financial companies (NBFC) auditors report direction 2008 which provided additional direction on matters to be reported by the auditors of NBFC. Here we will discuss the process for Auditors Appointment in NBFC.

Legal Analysis of Auditors Appointment in NBFC?

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements of the NBFC are prepared, in all material respects, in accordance with an applicable financial reporting framework. The auditor’s report indicates the financial reporting framework that has been used to prepare the NBFCs financial statements.

Understanding the entity and its environment NBFCs are required to register under the following three broad categories, viz. (i) NBFCs accepting open deposit, (ii) NBFCs not accepting/holding public deposit and (iii) Core investment companies. Details of the regulatory requirement under each category of NBFC has been dealt with by the different authors elsewhere in this journal. It is important for the auditor to understand the nature of the business environment. This would help the auditor to plan and conduct an audit in an efficient manner. Auditor uses professional judgment to determine the extent of understanding required. Audit planning is intended to meet the overall audit objective of expressing an opinion on the truth & fairness of the financial statements. In the planning stage, the auditor should gather relevant organizational information for creating his audit plan. The preliminary study would help the auditor in the following:

Understand the business issues and the associated risks.

Help in communication with the management and where required, with those charged with governance on a timely

It would help the auditor to identify the issues that may require special attention in the audit.

The auditor would be able to develop an audit scope that may add value to the entity by focusing on areas more meaningful to the management.

Credit & Legal – Loans

Many NBFCs are in the business of lending and borrowing of funds. The auditor should keep in mind various elements such as lending/disbursement, monitoring, recovery/ collection and review/renewals while verification of credit function. The auditor should consider the loan booking, approval and disbursement process, subsequent collections and collateral policy exceptions, non-compliance with internal procedures, and violations of laws and regulations

Audit areas the process of establishing the overall audit strategy assists the auditor to determine specific audit areas considering the audit risk assessment procedure. The auditor has to identify the typical items in an NBFC’s financial statements to plan substantive procedures and suggest a technique that could be used for testing. Following are the key audit areas which the audit must be aware while conducting the audit (It does not represent the exhaustive list of procedures nor do they represents the minimum procedure)

SECTION 45 I (F) of Reserve bank of India (Amendments) Act 1977 defines Non-Banking Financial Company.

A financial institution which is a company under section 45 I (A) of the Reserve bank of India (Amendment) Act 1997, no non-banking financial company is allowed to commence or carry on the business of a non-banking Financial Institution without obtaining a certificate of registration issued by the Reserve Bank of India.

A company incorporated under the Companies Act 2013, and desirous of commencing the business of non-banking financial institution as defined under section 45-I (A) of the RBI Act, 1934 can apply to reserve bank of India in arranged form along with essential documents for recordkeeping. The RBI inquiries certification of Process after satisfying itself that the condition as numbered in section 45-I (A) of the RBI Act, 1934 are satisfied.

Auditors to submit additional Report to the Board of Directors

In calculation to the Report complete by the auditor under Section 143 of the Companies Act, 2013 or section 227 of the Companies Act, 1956 (Act 1 of 1956) the books of a non-banking financial company inspected for every financial year ending on any day on or after the commencement of these Directions, the auditor shall also make a distinct explanation to the Board of Directors of the Business on the constituents specified in paragraphs 3 and 4 below.

In the case of all Non-Banking Financial Companies

Consequently, if the company is involved in the commercial of non-banking financial institution as defined in section 45-I (a) of the RBI Act and meeting the Principal Business Criteria (Monetary asset/revenue pattern) as laid down vide the Bank’s press release dated April 08, 1999, and guidelines supplied by DNBR, auditor shall examine whether the company has obtained a Certificate of Registration (CoR) from the Bank.

Whether the non-banking financial company is consultation the compulsory net owned fund condition as laid down in Master Direction – Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit-taking Company (Reserve Bank) Directions, 2016.

Note: Each non-banking financial company shall submit a Certificate from its Statutory Auditor that it is involved in the business of non-banking financial institution requiring it to hold a Certificate of Registration under Section 45-I (A) of the RBI Act and is eligible to hold it. A certificate from the Statutory Auditor in this regard with location to the location of the company as at end of the financial year ended March 31 may be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the non-banking financial company (NBFC) is registered, within one month from the date of finalization of the balance sheet and in any case not advanced than December 30th of that year. The format of Statutory Auditor’s Certificate (SAC) to be submitted by NBFCs has been issued vide DNBS. PPD.02/66.15.001/2016-17 Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016.

Auditors to submit Exception Report to the Bank

The Obligation of the auditor to submit an exception report to the Bank

where, in the case of a non-banking financial company, the statement regarding any of the items referred to in paragraph 3 above, is unfavorable or qualified, or in the estimation of the examiner the company has not complied with:

(a) The provisions of Chapter III B of RBI Act (Act 2 of 1934); or

(b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or

(c) Non-Banking Financial Company – Non-Systemically Significant Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit-taking Company (Reserve Bank) Directions, 2016.

It shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified statements and/or about the non-compliance, as the case may be, (II) The accountability of the Examiner under subparagraph (I) shall be to account only the infringements of the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such account shall not contain any statement with respect to compliance of any of those provisions.