Public sector banks pay much higher audit fees than private banks

Audit fees public sector banks (PSBs) have paid are much higher than those shelled out by their private sector peers.

State Bank of India (SBI) and Bank of India paid over Rs 2.16 billion and Rs 896 million in 2016-17, while HDFC Bank and ICICI Bank forked out Rs 25.8 million and Rs 78.3 million, respectively.

Private banks have a single auditor while PSBs have multiple auditors.

Amit Tandon, founder and managing director of ·Institutional Investor Advisory Services (IiAS), a proxy advisory firm, said: “Higher fees paid by PSBs can be because of more branches, multiple auditors they appoint, fees prescribed by the Reserve Bank of India (RBI), and large numbers of physical audit of branches.”

However, he added there was a disconnect between audit fees and the strength of audit controls. “The amount and the average fraud size are significantly larger in public sector banks,” he added.

The RBI has categorised PSBs into three groups for appointing statutory central auditors (SCAs) with small lenders requiring four SCAs and big lenders six.

The largest — SBI — can engage as many as 14 SCAs.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP, said: “In regard to the audit process applicable to PSBs when compared to private banks, due to structural issues it may be perhaps true that with the involvement of far too many people and non-uniformity of quality, the overall audit process, though extensive and expensive, may not have the same outcome in terms of quality.”

Public sector banks audit more than 30 per cent of branches, and also appoint auditors from non-metros, while private sector banks audit less than 5 per cent of branches due to centralised banking systems.

An auditor aware of how bank audits are done said: “Multiple auditors handling different regions or different aspects reduces control and coordination. There is also a strong lobby of auditors, which is why the work of audit remains in a few hands. If one sees the names of auditors PSBs appoint, there are only a few top firms.”

Many smaller audit firms also simultaneously ask their clients to obtain finance from banks, which can be a conflict of interest, he said.

All banks now have core banking software and visiting branches is not of much use unless there are some doubts or issues.

Private banks’ auditors, therefore, focus on centralised data while PSBs prefer physical audits. Tandon suggested “one auditor for each bank, small or big, PSB or private”.

Auditors of PSBs, however, said the RBI and Institute of Chartered Accountants of India (ICAI) decided the number of auditors and their fees. According to them, there are issues of internal governance in banks, internal systems, processes, controls, and management, some of which may pass the auditor’s radar altogether.

Shailesh Haribhakti, managing partner, Haribhakti & Company LLP, said: “Auditors are responsible for what is mandated to them but the decision on fees etc is a regulatory issue. We do raise flaws in banks systems with banks wherever we come across.”

A senior public sector banker said concurrent audit at branches was a detailed process, for which banks had the discretion to engage external auditors, which pushes up the auditors’ fees.