Asks auditors to verify associated celebration transactions: RBI Governor flags ‘camouflaged’ transactions, fund diversions

With a number of cases of fund diversion and switch of income to “connected parties” surfacing, Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday requested auditors to determine and totally scrutinise associated or linked celebration transactions to make sure that there isn’t a undue switch of revenue or belongings.
“Of late, several instances of related party transactions without following ‘arms-length’ principle and established transfer pricing mechanism have been observed,” he stated.
“There have been instances of diversion of funds and/or transfer of profits to connected parties through various means – intra-group loans on favourable terms, over or under invoicing of transactions, asset transfers without fair valuation, etc,” Das stated whereas addressing the National Academy of Audit and Accounts, Shimla.

“Auditors need to identify and thoroughly scrutinise related or connected party transactions to ensure that there is no undue transfer of income or assets,” he stated. Three main monetary entities – IL&FS, DHFL and Srei corporations – had come beneath supervisory motion within the final three years as a result of fund diversion and mismanagement.
“We have also seen cases of manipulation and misstatement of true nature of financial statements by employing opaque technological means (IT black boxes),” Das stated. Real transactions are camouflaged beneath numerous layers of IT options by a couple of entities. As such, auditors must be technologically savvy and be capable of ‘see-through’ the layers of knowledge know-how to detect the actual nature of hidden transactions, the Governor stated.
“Such undesirable practices and structures should draw the attention of the auditors. Since RBI, as the supervisor of the financial system, relies and leverages on the work done by auditors, the audit professionals are being sensitised through various fora to improve the quality of their reporting,”
Das stated. “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,” he stated.

He stated inaccurate info could result in sub-optimal selections or extra useful resource allocation, which might be neither in public curiosity the place a public authority is concerned nor within the curiosity of particular person stakeholders.
He stated statutory auditors play a significant position in sustaining market confidence on audited monetary statements. “In banking industry, this public role is particularly relevant for financial stability, given that banks hold public deposits.”