Banking Laws (Amendment) Bill 2024: Auditors see higher remuneration but flag independence, quality risks
The Banking Laws (Amendment) Bill 2024, passed in the Lok Sabha, grants banks control over auditor remuneration, with experts predicting greater flexibility and higher remuneration to auditors, but raising concerns about audit quality, independence, and potential conflicts of interest.
Allowing banks to set their own auditor remuneration introduces flexibility, which could lead to more competitive compensation and attract higher-quality auditors. This would enable audits to be tailored to the specific complexities of each bank’s operations, potentially enhancing the quality of audits, opined top India Inc auditors.
However, auditors raised concerns about the impact on auditor independence. When banks control audit fees, there is a risk that they may exert undue influence on the audit process, particularly in larger institutions with significant financial power. If banks prioritise cost-cutting measures, it could compromise the depth and thoroughness of audits.
Additionally, smaller audit firms may struggle to handle complex audits effectively, potentially lowering audit quality. While the shift to a market-driven approach could improve competitiveness and customization, it also introduces risks related to conflicts of interest. Therefore, strong oversight mechanisms are essential to safeguard the integrity and independence of audits, ensuring high-quality financial reporting, auditors said.
Recently, the Banking Laws (Amendment) Bill 2024 was passed in the Lok Sabha earlier this month. Along with several changes to the banking sector, it introduced one key change regarding auditors and bank audits. The Bill now empowers banks to decide the remuneration of their auditors, replacing the previous system where the Reserve Bank of India (RBI), in consultation with the central government, fixed these fees.
Jaspreet Singh, Partner at Nangia & Co LLP, remarked, “This reform signals a shift toward market-driven dynamics, empowering banks to engage auditors competitively and prioritize high-quality audits tailored to their needs. Looking ahead, with banks in control, auditor remuneration could increasingly be influenced by market dynamics, leading to variability in fees based on the perceived value.”
Publication – The Economic Times
By Jaspreet Bedi
