Comptroller and Auditor General of India Shashi Kant Sharma said there is a need to consider whether financial regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) need to be audited.
“In the light of the growing incidence of financial frauds, it is a thought for consideration as to whether, in future, our audit should look into the risks and vulnerabilities facing our financial sector as well as the ability and effectiveness of regulators to mitigate such risks,” Mr. Sharma said while speaking at an Assocham conference on corporate and financial frauds.
“In India, CAG does not audit the RBI, whose auditors are appointed by Central Government under the provisions of the RBI Act. CAG conducts audit of other financial sector regulators like SEBI, IRDA and PFRDA but does not conduct performance audits,” Mr. Sharma added.
Robust mechanism A former RBI official said the central bank has a robust and comprehensive audit mechanism.
“The RBI has an extremely professional audit system,” Usha Thorat, former Deputy Governor of the RBI, said. “It has an independent professional external auditor appointed by the government and a system of rotation every three years. In addition there is internal audit and inspection.
“The Audit Committee of the Board headed by an independent director meets at least once in every quarter to consider the reports of the various audits and also initiate any measures for enhancing the audit function,” Ms. Thorat added. “The system is rigorous and comprehensive.”
Federal Reserve The CAG mentioned how the Federal Reserve in the U.S. and the Bank of England in the U.K. had both come under greater scrutiny over the last few years.
Observing that there were two main types of frauds — those committed against a large number of people, and those committed by individuals against a corporation — Mr. Sharma said that one common area where frauds occur are collective investment schemes (CIS).
“In practice, a large number of schemes are designed with a view to escape the legal definition of CIS and the applicability of CIS regulations by SEBI,” Mr. Sharma said.
“In numerous cases, substantial funds have been raised from public without obtaining authorisation from SEBI. Recent examples include the Saradha and Rose Valley groups of West Bengal, Sahara and PACL.”
Chit funds The CAG also highlighted chit funds and multi-level marketing schemes as sources of frauds.
Financial frauds thrive in poorly regulated environments and where there is poor financial literacy, Mr. Sharma said.
A widely held view was that a significant proportion of bank NPAs were due to advances involving fraud, he added.
“There is a belief that a significant part of NPAs could be amounts fraudulently obtained as advances from the banking system,” he said. “There is also a belief that a large part of these amounts may have been transferred abroad and may never get recovered.”
This article has been corrected for a factual error.
