Accounting professionals and auditors of banks have to gear up to cope with newer risks and shocks in the banking and financial institutions segment, said K C Chakrabarty, deputy governor, Reserve Bank of India (RBI).
In a keynote address, to a two-day international conference on the accountancy profession, he said they and auditors should work with the regulator to bring resilience to risk and shock in the banking sector.
The bank management and auditors have to ask pointed and relevant questions on the adequacy of capital and advances to make banks pro-actively block risks and shocks.
"The recent global financial crisis underscored the fact that risks and shocks are unavoidable. Taking risk is an inevitable part of the business of banks," he said.
"If we have to improve the role of auditing profession in managing the resilience to risk and shocks, our entire audit system has to undergo change," he added.
Accountants need to come out from the narrow consideration of accounting standards and come at specific answers. Similarly, auditors need a system-wise understanding of markets, products and their connectedness, especially in times of stress. Auditors have to move beyond narrow transaction audits and considered to look at the larger picture.
The diversification of activities of banks from the traditional function of lending and borrowing to various other activities, including corporate advisory consulting and the technology-driven nature of the sector in modern times has changed the risk and shock profile of banks.
It is also critical that periodical stress-test results are incorporated in the business and capital assessment and planning exercise of banks.
The overall acceptable levels of expected (risk) and unexpected (shock) loss willing to be incurred by banks should be a management decision, based on rigorous and analytical assessment of available information, he said.
