Explained: Requirements of Banking Companies as to Accounts and Audit

Correct and accurate compilation of financial information and its disclosure, in a manner that is standardized and understood by stakeholders, is central to the credibility of the corporates including banks.

The preparation of financial information and its audit is regulated by the banking regulator in India (RBI) with stringent penalties for non-observance. Accounting Standards serve a vital function in this respect. These should be developed keeping in view international best practices and providing statutory backing. Therefore, Audits are important because they ensure that banks are following reporting standards and are being honest about their financial position.

Audit Systems in banks:

In our previous posts we talked about various types of audits conducted in banks such as (1) Statutory Audit (2) Long Form Audit Report 3) What is a forensic audit?  (4) What is a Legal Audit? (5) Concurrent Audit System in bank. (6) Emergence of Risk-Based Internal Audits in Banks (7) Tax audit,  and (8) What is the stock audit? For details, you may read those articles.

The Bank Company Act of 1991 requires auditors to report on whether adequate provision has been made for bad and doubtful loans and assets. The purpose of this is to provide a true and fair view of the bank’s financial position. Banks must identify, measure, and monitor risks that could impact their goals and objectives. They must also have controls in place to manage these risks.

Accounting system

A bank’s accounting system uses a slip system of posting and sectional balancing. Individual balances from the subsidiary ledger are compared with the total control accounts in the general ledger to check accuracy.

Indian Accounting Standards (Ind AS) is defined as a set of rules that govern how Indian companies record, present, and report their financial statements. The standards are issued by the Institute of Chartered Accountants of India (ICAI) and are based on the International Financial Reporting Standards (IFRS).  The standard has been formulated keeping the Indian economic & legal environment in view and to converge with IFRS Standards, as issued by and copyright of which is held by the IFRS Foundation. Applicability of IND AS is mandatory for all Banks, NBFCs, and Insurance companies from 1st April 2018,

Preservation of records:

 At present, Section 209 (4A) of the Companies Act requires companies to preserve the books of accounts, together with the vouchers relevant to any entry in such books of account, together with vouchers to any entry in such book of account in good order, relating to a period of not less than 8 years immediately preceding the current year.

Cash Flow Statement:

Worldwide, the importance of Cash Flow Statements is being specifically recognized. At present, the listed companies are mandated to include a Cash Flow Statement in the Annual Report and the Standards of Accounting prescribed by ICAI also require in specified cases a Cash Flow Statement to be submitted along with the Balance Sheet and Profit & Loss Account to make Cash Flow Statement mandatory. The Companies Act of 2013 requires most companies to prepare cash flow statements, including banks, financial institutions, and enterprises that carry on insurance business.

The Committee felt that there was a need to include the definition of the term Financial Statement in the Act, to include Profit & Loss Account, Balance Sheet, Cash Flow Statement, and Notes on Accounts.