LFAR and Ghosh and Jilani committee - PuneICAIpuneicai.org/wp-content/uploads/2015/05/CA_Prashant...LFAR and Ghosh and Jilani committee CA. Prashant Tidke SEMINAR ON BANK BRANCH AUDIT

LFAR and Ghosh and Jilani committee

CA. Prashant Tidke

SEMINAR ON BANK BRANCH AUDIT

15th March 2015 PUNE BRANCH OF WIRC 1


Agenda

1. LFAR

2. Ghosh committee

3. Jilani committee


Long Form Audit Report (LFAR)


LFAR purpose

LFAR is designed to focus on systemic issues in banks It also acts as an early whistle blower for

the irregularities persisting in the branch/bank Matters required to be

reported by the auditor in LFAR are illustrative not exhaustive


Background As part of Statutory Audit of Bank Branches, an

Auditor is required to answer a detailed questionnaire prepared by RBI. This report is known as “Long Form Audit Report (LFAR)”.

LFAR has been in use since 1992-93. current format notified vide circular no.

DBS.CO.PP.BC. 11/11.01.005/2001-2002 dated 17.4.2002 .It is applicable from the year ending 31.3.2003.

Required to be submitted by the Auditors of Public sector banks, Private sector banks and foreign banks (including their branches).


LFAR LFAR is of two types

LFAR in respect of a bank branch LFAR by Central Statutory auditors of bank

1.DBOD No FOL.BC.97/C 729-85 dt 18/08/1985 2. DOS No B.C. 1/16.10.001/93-94/dt 19/01/94 3. Reserve bank of India (RBI) advised the current

format of LFAR (LFAR) for the banks from their auditors vide circular number DBS.CO.PP.BC.11/11.01.005/2001-2002 dated April 17, 2002.


BACKGROUND

Changes in the regulatory /supervisory framework ofbank along with widening role of Statutory BranchAuditors in certifications and validations necessitated arevision in LFAR (Para 1 of the circular dated 17-04-2002)

The circular dated 17-04-2002 addresses All scheduled commercial banks (except RRBs).

Auditors of foreign branches of Indian bank should also furnish LFAR.(Para 2 of the LFAR Questionnaire)

Auditors have to answer a detailed questionnaire formulated by RBI


LFAR in case of Bank branches

The Statutory Branch Auditors should address LFAR to Chairman and managing director of Bank, Copy to Central Statutory Auditors (Para 1 of LFAR Questionnaire)

Comments in LFAR should be specific and not vague or general

Where any of the comments given in LFAR is adverse, the auditorshould consider whether a qualification in his main report isnecessary. LFAR should be completed before mainreport. (Para 3 of LFAR Questionnaire)

At times though audit qualifications are included in the LFAR,they are not highlighted in the main Audit Report Every adversecomment would not result in Qualification in main audit report.Auditor has to use his professional judgment having regard to thefacts and circumstances of each case. (Para 3 of LFARQuestionnaire)


Consider The LFAR Questionnaire can be used as an Audit

Planning Tool, to decide the areas to be covered The work on LFAR should be started along with

statutory audit right from day one in order to avoid duplication of work and enable timely completion

The responses to questionnaire should be categorical, specific and to the point. Vague/general comments should be avoided

Give instances of shortcomings/weaknesses in the LFAR, wherever possible


Remember!!

Audit Report and LFAR are separate and distinct reports- LFAR is not a substitution of the statutory report, neither a part of the said report.

LFAR is actually a management Report. LFAR should be completed before main report.

So that in case of adverse comment, the auditor can consider whether a qualification in main report is necessary.

Every adverse comment would not result in qualification in main audit report


Also remember ..

Auditor has to use his professional judgment having regard to the facts and circumstances of each case

Any comments of qualificatory nature should not be included in LFAR. They should be included in the Audit Report and not in LFAR.


Major categories in LFAR

LiabilitiesLiabilities

AssetsAssets

General General

Profit And Loss Account

Profit And Loss Account


Assets

» Cash » Balance with RBI ,SBI and other banks» Money at call and short notice» Investments» Advances» Other Assets


Liabilities

» Deposits» Other Liabilities » Contingent liabilities


Profit and Loss account

» Discrepancies in interest/ discount» Income recognition norms» System of estimating and providing

interest accrued on overdue/matured term deposit

» Divergent trends in major item of income and expenditure


General

» Books and records » Reconciliation of Control and subsidiary

records» Inter branch accounts» Audits/ Inspections» Frauds » Miscellaneous


Other Contents of LFARQuestionnaires Applicable to Specialized Branches1. For Branches dealing in Foreign Exchange Transactions

2.For Branches dealing in very large advances in excess of Rs. 100 crores

3.For Branches dealing in Non Performing Assets such as Asset Recovery Management Branches.

4.For Branches dealing in Clearing House Operations, normally referred to as Service Branches

ANNEXURE to the Long Form Audit Report (FOR LARGE/IRREGULAR/CRITICAL ADVANCE ACCOUNTS) 25 requirements of reporting


I.1 Cash(a) Branches carry cash depending upon the limit fixed

by controlling authority

(a) Excess balance reported to controlling authority

(b) Adequate insurance cover of the cash in hand andcash in transit

(c) Cash is maintained in joint custody of the two ormore officials

(d) Cash balance checked at proper intervals


Cash

Does the branch generally carry cash balances ,which vary significantly from the limits fixed by the controlling authorities of the bank?. Whether excess balances have been reported to the controlling authorities of the bank?


Sample response

As mentioned in management letter dated 5th April 2008 Head office /regional office vide letter dated 23rd march 2001 has fixed cash retention limit of Rs. 10 lakhs . Xerox of letter is not produced to us. On 105 occasions carrying cash is more than retention limit. On 54 occasions it has exceeded 40lakhs.excess carrying cash is not reported to controlling authorities.


Balance with RBI ,SBI and other banks

(a) Balance Confirmation certificates obtained

(a) Balance reconciled and differences reported

(b) Observations on reconciliation statement Cash transactions remaining unresponded Revenue items requiring adjustments/write off Old outstanding balances remaining

unexplained/unadjusted


I.3.Money at call and short notice

Instructions /guidelines issued by controlling authorities of the bank complied with

Unauthorized deposits including in excess of authorized limit should be reported


I.4.Investments(a) Investments held by branches on behalf of head office

available for physical verification

(b) and (c) Income on such investments reported to Head office

(d) Matured or overdue investments should have been encashed

(e) and (f)RBI guidelines regarding valuation of Investments complied with


I.5.(e)Advances-Guarantees and Letter of Credit

(i) Details of outstanding amounts of guarantees involved andfunded by the branch at the end of year

(ii) Details of outstanding amounts of Letter of credit and co-acceptance funded by the branch at the end of year


I.6.Other assets-I.6(a)Stationery & stamps(i) Internal control over issue and custody of stationery

comprising security items (Term deposit receipts,Drafts, Payorders ,cheque books, Traveler's cheques, Gifts Cheque etc

(ii) Cases of missing/lost item of stationery

I.6(b)Suspense accounts/Sundry Assets(i) Expeditious clearances of items debited to suspense

accounts, Reasons for delay in adjusting the entries, Scrutiny of balance which are not recoverable and require a provision/write off

(ii) Any unusual items in the account


II.1.Liabilities – Deposits

(i) Conduct and operation of inoperative accounts

(ii) Unusual large movements in the aggregate deposits held at the year end after the balance sheet date and till the date of audit

Overdue/matured term deposits at the year end


LiabilitiesII(2)Bill payable ,sundry deposits etc (i) The number and aggregate amount of old outstanding items

pending for 3 years or more (ii) Any unusual items or material withdrawals or debits

II(3)Contingent LiabilitiesMajor items of contingent liabilities not acknowledgement by the

branch. Internal controls to ensure that transactions giving rise to contingent liability are executed by the persons authorized to do so and in accordance with the laid down procedure. Representation from management that all contingent liabilities have been disclosed


III.Profit and Loss a/c (1) Branch has a system to compute discrepancies in

interest/discount and timely adjustment thereof

(2) Scrutinize the revenue audit report /income and expenditure audit report

(3) Branch complied with Income recognition norms prescribed by RBI

(4)System of estimating and providing interest accrued on overdue/matured term deposit

(5)Divergent trends in major item of income and expenditure


IV.1.General - Books and records (a) In case maintained manually whether they have been properly

maintained ,with balances duly inked and authenticated by authorized signatories

(b) In case of computerized branches

Whether hard copies are printed regularly Extent of computerization and areas of operation covered Access and data security measures Contingency and disaster recovery plans are in place for

loss/encryption of data Suggestions for improvement in the computerized system


IV.3.General Inter-branch accounts

(i) Branch forward on a daily basis to a designated cell / Head office,a statement of debit/credit transactions in relation to otherbranches

(ii) Outstanding debts in the head office account in respect of inter-branch transactions

(iii) Branch expeditiously comply with/respond to communicationfrom the designated cell/ Head office as regards unmatchedtransactions

(iv )Old/large outstanding transaction/entries as at the year endwhich remained unexplained


GeneralIV(4) Audits / Inspections (i) Is branch covered by the concurrent audit report or any other audit

inspection during the year(ii) (ii) Major adverse comments rising out of the latest reports of the

previous auditors ,concurrent auditors ,stock auditors or internal auditors or RBI inspectors.

IV(5) Frauds discovered if any and suggestions to minimize the possibilities of their occurrence.

IV(6)Miscellaneous (i) Examination of accounts indicate window dressing

(ii) Branches maintained records of all fixed assets acquired and held by it

(iii) Any other matter which as a branch auditor would like to bring to the notice of management and central Statutory Auditors


(A)For branches dealing in foreign exchange transaction

1 Are there any adverse features in the report of other auditors relating to RE/NRNR/FCNR/EEFC /RFC and other similar deposits accounts

Obtain a list of all Nostro Accounts

Does the branch follow the prescribed procedures in relation to maintenance of Vostro Accounts.


Questionnaire for Branches Dealing in Foreign Exchange Transactions contd…..

2 Whether Branches have followed Instructions in respect of foreign exchange specially deposits, advances, export bills , bills for collection, dealing room operations Any other area


For braches dealing in very large advances

Examples include corporate banking branches, Industrial finance branches or branches with advances in excess of 100 crores

Information in the prescribed format for borrower with outstanding of Rs 2crores and above

Major shortcoming in credit appraisal ,monitoring

List the accounts (outstanding in excess of 1 crore) which have either downgraded or upgraded with regard to their classification as NPA or standard asset and reason thereof


For branches dealing in recovery of NPA

1. Information in the prescribed format for borrower with outstanding of Rs 2 crores and above

2. List the accounts (outstanding in excess of 2 crore) which have upgraded from NPA to standard asset and reason thereof

3. Information relating to valuation of security charged

4. Age wise analysis of the recovery.suit filed and pending cases

5. Branch promptness in execution of decrees for recovering from defaulting borrower

6. Recoveries & appropriation of interest and principal in respect of accounts settled/written off/closed

7. New borrower accounts transferred to the branch


For branches dealing in clearing house

operations(Normally called service branch)

1. System of periodic review of outstanding entries in clearing adjustments accounts

2. Year wise breakup of outstanding in number and value 3. Branch followed guidelines of the controlling authorities with

respect to operations relating to clearing transactions


Special aspects

Ghosh Jilani Committee requirements


Ghosh Committee High level Committee on fraud and

malpractice in banks under chairmanship of Shri A. Ghosh ex deputy governor

Enquire into various aspects of frauds and malpractices in bank


Report make recommendations to reduce such

incidence. Committee submitted report in June,1992 The report is divided into Groups A,B,C,D with

A, B and D having 2 parts each, Group C having one part.

Out of 97 Recommendations 27 required to be reported exclusively at Branch level, 43 exclusively at RO/ZO/HO level and 27 at both levels


Categorization of recommendations

Applicable to head office

Applicable to controlling office like

regional and zonal office

Applicable to treasury operations

Applicable to branches

Ghosh

Committee


Categorization on Implementation basis

Recommendation

Group AGroup

CGroup B

Group D

requiring further

examination in

consultation with IBA

requiring RBI

approval

requiring approval of

Government of India

to be implemented immediately


Objectives of Ghosh Committee recommendations

Proper system exists to ensure:

Safety of assetsCompliance with laid down policies andproceduresAccuracy and completeness of accounting andother recordsProper segregation of duties andresponsibilities of staffTimely prevention and detection of frauds andmalpractices



Branch Level -Group A• Joint custody and dual responsibility of cash

and other valuables• Rotation of staff/duties• Designation of one of

the officers as compliance officer • Financial and administration powers of officials

to be laid down• Exercise of caution at the time of opening of

new deposit of all types


Group A (contd.)

• Precautions against theft of cash• Precautions in writing of drafts/mail

transfers• Precautions for averting frauds in letter of

credits, guarantees• Screening/selection of employees in

EDP cell, computer area• Standards for fully computerized

branches


Branch Level -Group B• Banks to introduce portfolio inspection in critical

areas such as credit, investment, off balancesheet item etc

• Periodical movements between bank officialsand investigating officials of CBI/Police

• Six months prior to retirement officials shouldexercise their sanctioning powers jointly withnext higher authority

• Paper used for cheque/drafts should be suchthat any use of chemical for making materialalterations in instrument should be visible tonaked eye


Branch Level -Group C

• Chief vigilance officer should directly refer toCVC, cases having vigilance angle involvingCMD

• Fraud cases up to Rs. 25,000 havinginvolvement of an insider should not be reportedto police where recovery is not doubtful

• Introduce a return of staff members to ensurestrict submission of information of assets andliabilities and proper scrutiny thereof


Branch Level -Group D

1.BRs should not be outstanding for morethan 7 days

2.Obtain photographs of depositors at thetime of opening of accounts


Jilani Committee “Working group to review the internal control and

inspection and audit system in banks” under thechairmanship of Mr. Rashid Jilani. The committeesubmitted its report in July 1995

Objective was to review the efficacy and adequacy ofinternal control and inspection and audit system in abank with a view to strengthening the supervisorysystem and reliability of data

The Implementation form is divided into 25 points,10 ofthem are applicable on a Bank branch.


Management is responsible for the implementation of Jilani committee recommendations, the statutory auditor is responsible to verify and report on the status of implementation of these recommendations. The results of the verification carried out by the statutory auditor and his comments would be given in separate report


Recommendations - Jilanicommittee

3 categories of recommendations EDP environment in banks Inspection/Internal audit in the banks Miscellaneous aspect of functioning of a bank


Recommendations

Co-ordination between Inspection and operationalwings to be ensured

Profiles of bank branches in thrust areas such asaudit ratings, assets quality, level of NPAs, revenueleakages etc to be maintained on computer

Broad guidelines to establish accountability forinspectors/auditors to be laid down

database on training inventory of each inspector/auditor to be developed

A copy of the booklet incorporating RBI circulars tobe supplied to each inspecting/audit official byinspection and audit department periodically


Recommendations

Revenue / Income audit to be conducted at selectbranches where leakages are noticed and there is noconcurrent audit

A manual of Instructions for inspectors/ auditors to bemaintained

Inspection/ audit to be completed within 2 months andfor very large branches within 3 months

All poorly rated branches to be inspected within 12months an others between 12 to 18 months of previousinspection

Inspection audit report to be updated/ revisedperiodically. An executive summary to be prepared afterevery inspection to be submitted to the higher authorities


Recommendations

Banks should have system for ratings of its branches onthe basis of inspection reports

A computerized track record of efficiency ratings over theprevious 4- 5 inspections to be maintained in theInspectorate with periodic updating and summaries

Major irregularities detected during concurrent audit tobe immediately taken up with Head office

Irregularities pointed out in case of smaller/ mediumbranches to be rectified within 4 months

Majority of Irregularities to be got rectified during thecourse of audit itself


Recommendations

Immediate action to be taken to plug gaps in seriousirregularities/ revenue leakages

Items for discussion at the audit committee meetings andperiodicity of the meetings to be decided upon

A separate report to be submitted on inspection findingsrelated to frauds involving malafide corrupt practices

Appropriate control measures to be devised anddocumented to prevent the computer system fromattacks of unscrupulous events

Various test to be carried out to ensure that EDPapplications have resulted in consistent and reliablesystem for inputting, processing and generation of outputof data


Recommendations

If outside computer agencies are engaged , banksshould ensure that they have the right to inspect theprocess of application and ensure the security off data /inputs given to those agencies

Entire domain of EDP activities to be brought underscrutiny of inspection and audit including financial aspect

Changes to standard software to be approved, inspectedand monitored by senior management

Internal vigilance machinery to be strengthened and itsworking to be reviewed by the Board every six months.

Regular checking by inspectors/auditors to verifycorrectness of information complied/furnished bybranches


QUESTONS AND ANSWERS SESSION


THANK YOUTHANK YOU

Documents

LFAR and Ghosh and Jilani committee - PuneICAIpuneicai.org/wp-content/uploads/2015/05/CA_Prashant...LFAR and Ghosh and Jilani committee CA. Prashant Tidke SEMINAR ON BANK BRANCH AUDIT