Auditors’ pleasure! Regulatory common platform to be set up for balance confirmation

Far away in memory, statutory auditors have been using “external confirmations” to obtain balance confirmations in respect of accounts receivables, accounts payables, bank balances, loans, investments, or inventories held by third parties, etc. from various parties, including banks. In other words, external confirmations mean audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other media.

In the present system, auditors are exposed to risk if they use incomplete confirmation as audit evidence. There have been scams on account of this, most notably the Satyam Computers corporate scandal in 2009, where bank balance confirmation was a significant audit failure that contributed to the overall fraud. The company had manipulated its financial statements to inflate profits and assets. In view of risks associated with incomplete confirmation as audit evidence, the need for a mechanism has been felt because there is no standardised process or format for obtaining balance confirmation from banks. 

The proposed new mechanism in the form of a common balance confirmation of balances is expected to thwart such scandals and also streamline the process.  Under the proposed system, there will be a regulatory set-up comprising ICAI, IBA, PSB Alliance Pvt. Ltd. The PSB alliance is a joint venture umbrella entity created and held exclusively by 12 Public Sector Banks.  The platform will be jointly owned by the Indian Banks’ Association (IBA) and the Institute of Chartered Accountants of India (ICAI).  Banks will take responsibility for balance confirmations and no cost will be levied on auditors for obtaining balance confirmation.  It will initially cover only public sector banks but be later extended so as to cover private sector banks and financial institutions as well, sources said.

It is understood that the move to set up a common platform has the sanctifications of the Reserve Bank of India.