The Financial Reporting Review Board (FRRB) of the Institute of Chartered Accountants of India (ICAI) may look into the ongoing controversy surrounding derivative accounting discrepancies at private sector lender IndusInd Bank, ICAI President Charanjot Singh Nanda has indicated.
However, he clarified that while the issue may be taken up for discussion at FRRB level, no decision has yet been made on whether a formal probe should be ordered.
“We have our FRRB which may look into it. It’s too premature to talk about what course of action FRRB may finally take. They have to meet and discuss before anything is decided”, Nanda told businessline when asked if ICAI is doing anything about it.
Interestingly, National Financial Reporting Authority (NFRA) is yet to take a call on whether it wants to look into the role of statutory auditors in this matter.
The role of auditors in the fiasco may be significant and required to be studied with the bank having five different auditors during the seven year period for which the discrepancies have come to light, said finance industry observers.
Nature of the alleged irregularities
IndusInd Bank recently disclosed accounting discrepancies related to derivative transactions, raising concerns about potential misreporting or non-compliance with prescribed accounting standards.
The bank’s management had on Monday acknowledged the discrepancies in a filing with stock exchanges and revealed estimated ₹ 1,500 crore hit to its balance sheet.
The promoters of the bank swung into action on the same day to assuage investor concerns and urged them not to panic about the situation, noting that impact of ₹ 1,530 crore is not much.
The problem lay in the bank using its internal trading desk to hedge foreign currency risk in the balance sheet. The Reserve Bank of India (RB) had in September 2023 asked all banks to discontinue internal trading of derivatives from April 1,2024.
The bank’s internal review found discrepancies in accounting for the derivative transactions with the treasury and trading desk using different valuation methods for the derivative contracts. The accumulated losses have reportedly gone unnoticed for five to seven years.
Corporate governance experts said this may be a good case to evaluate the role of the board in this fiasco. Some even suggested that regulators must appoint an external agency to see how this discrepancies missed the attention of board level committees and the auditors.
FRRB’s role
The FRRB is responsible for reviewing financial statements of enterprises to ensure compliance with accounting and auditing standards. If significant departures from prescribed norms are found, the board can recommend further investigations, disciplinary action, or regulatory intervention.
Given the gravity of the concerns raised, the FRRB is expected to assess whether the bank’s financial reporting practices adhered to Ind AS, RBI guidelines, and ICAI’s ethical standards. The board may also evaluate whether any material misstatements were overlooked by the bank’s statutory auditors, Nanda added.
Accountability of management and auditors
The primary responsibility for accurate financial reporting rests with the bank’s management, which must ensure transparency and compliance with applicable standards. If discrepancies in derivative accounting were knowingly or negligently allowed, it could raise questions about governance lapses.
Additionally, statutory auditors play a crucial role in safeguarding financial integrity. Their duty includes verifying whether the bank’s financial statements provide a true and fair view of its financial health. If the auditors failed to detect or report accounting irregularities, it could call into question their diligence and professional skepticism.
What happens next?
While the FRRB’s initial discussion will focus on understanding the issue, no formal investigation has been initiated yet. If the board finds merit in the concerns, it may recommend a detailed probe, which could involve scrutiny of financial statements, auditor reports, and correspondence between the bank and regulators.
If a probe is ordered and lapses are confirmed, the consequences could be significant. Regulatory penalties, restatement of financials, and reputational damage could follow. Moreover, if professional misconduct is found on the part of auditors, ICAI could take disciplinary action.
For now, all eyes are on the FRRB’s next move as the banking sector watches closely. The case underscores the critical role of robust financial reporting in maintaining investor confidence and regulatory trust,
