LFAR, Reports on Forms on Implementation of JILANI

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LFAR, Reports on Forms on Implementation of
JILANI GHOSH Committee Recommendations

CA .Rajkumar S. Adukia radukia_at_vsnl.com
rajkumarfca_at_gmail.com http//www.carajkumarradukia
.com 093230 61049/098200 61049
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AGENDA

• Various Reports/Certificates
• LFAR
• 3. Report on Forms on implementation of
  recommendations of Ghosh Committee
• 4. Report on Forms on implementation of
  recommendations of Jilani Committee

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Various Reports/Certificates

• Tax Audit Report
• Position of Advances above certain amount
• PMRY Audit Certificate
• DICGC Certificate
• Verification on Friday Statements
  Certificate(Form X sec 27)
• Service Tax Certificate
• Income on Insurance Business
• Frauds

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Various Reports/Certificates(Contd.)

• Ghosh Committee Recommendations
• Jilani Committee Recommendations
• LFAR
• MOC-Classification
• MOC-Income Recognition
• Other reports
• AUDIT REPORT- U/S 30 OF The Banking Regulation
  Act,1949 r.w.s.228(3) of the Companies Act,1956

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Audit Processes in a Audit Cycle for a Bank
Branch Audit

• Pre-commencement Activities
• Understanding the business of bank branch
• Effective audit planning
• Audit Procedures
• Audit Reporting

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BACKGROUND

• LFAR is of two types
• LFAR in respect of a branch
• LFAR by Central Statutory auditors of bank
• 1.DBOD No FOL.BC.97/C 729-85 dt 18/08/1985
• 2. DOS No B.C. 1/16.10.001/93-94/dt 19/01/94
• 3. Reserve bank of India (RBI) advised the
  current format of LFAR (LFAR) for the banks from
  their auditors vide circular number
  DBS.CO.PP.BC.11/11.01.005/2001-2002 dated April
  17, 2002.
• Changes in the regulatory /supervisory framework
  of bank along with widening role of Statutory
  Branch Auditors in certifications and validations
  necessitated a revision in LFAR (Para 1 of the
  circular dated 17-04-2002)
• This report is not substitution of the statutory
  report, neither a part of the said report. LFAR
  is actually a management Report.
• Matters required to be reported by the auditor in
  LFAR are illustrative not exhaustive
• The circular dated 17-04-2002 addresses All
  scheduled commercial banks (except RRBs).
• Auditors of foreign branches of Indian bank
  should also furnish LFAR.(Para 2 of the LFAR
  Questionnaire)
• Auditors have to answer a detailed questionnaire
  formulated by RBI

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Long Form Audit Report in case of Bank branches

• The Statutory Branch Auditors should address LFAR
  to Chairman of Bank, Copy to Central Statutory
  Auditors (Para 1 of LFAR Questionnaire)
• Comments in LFAR should be specific and not vague
  or general
• Where any of the comments given in LFAR is
  adverse, the auditor should consider whether a
  qualification in his main report is necessary. So
  LFAR should be completed before main report.
  (Para 3 of LFAR Questionnaire)
• At times though audit qualifications are included
  in the LFAR, they are not highlighted in the main
  Audit Report Every adverse comment would not
  result in Qualification in main audit report.
  Auditor has to use his professional judgment
  having regard to the facts and circumstances of
  each case. (Para 3 of LFAR Questionnaire)

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Major Clauses in LFAR

• I Assets
• 1. Cash
• 2. Balance with RBI ,SBI and other banks
• 3. Money at call and short notice
• 4. Investments
• 5. Advances
• 6. Other Assets
• II Liabilities
• 1. Deposits
• 2. Other Liabilities
• 3. Contingent liabilities
• III Profit and Loss account

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Major Clauses in LFAR

• IV General
• 1. Books and records
• 2. Reconciliation of Control and subsidiary
  records
• 3. Inter branch accounts
• 4. Audits/ Inspections
• 5. Frauds
• 6. Miscellaneous
• Questionnaires Applicable to Specialized Branches
• For Branches dealing in Foreign Exchange
  Transactions
• For Branches dealing in very large advances in
  excess of Rs. 100 crores
• For Branches dealing in Non Performing Assets
  such as Asset Recovery Management Branches.
• For Branches dealing in Clearing House
  Operations, normally referred to as Service
  Branches
• ANNEXURE to the Long Form Audit Report (FOR
  LARGE/IRREGULAR/CRITICAL ADVANCE ACCOUNTS)

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I.1 Cash

• (a) Branches carry cash depending upon the limit
  fixed by controlling authority
• (a) Excess balance reported to controlling
  authority
• (b) Adequate insurance cover of the cash in hand
  and cash in transit
• (c) Cash is maintained in joint custody of the
  two or more officials
• (d) Cash balance checked at proper intervals

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I.2.Balance with RBI ,SBI and other banks

• (a) Balance Confirmation certificates obtained
• (a) Balance reconciled and differences reported
• (b) Observations on reconciliation statement
• Cash transactions remaining unresponded
• Revenue items requiring adjustments/write off
• Old outstanding balances remaining
  unexplained/unadjusted

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I.3.Money at call and short notice

• Instructions /guidelines issued by controlling
  authorities of the bank complied with
• Unauthorized deposits including in excess of
  authorized limit should be reported

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I.4.Investments

• (a) Investments held by branches on behalf of
  head office available for physical verification
• (b) and (c) Income on such investments reported
  to Head office
• (d) Matured or overdue investments should have
  been encashed
• (e) and (f)RBI guidelines regarding valuation of
  Investments complied with

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I.5.Advances

• The replies are required to be given on the basis
  of full verification of large advances and
  remaining on test check basis. Examination of all
  large advances
• Outstanding amount is in excess of 5 of the
  aggregate advances of the branch or Rs.2 crore
  whichever is less are LARGE ADVANCES
• Example In a branch with advances of 50
  crores, all advances which have outstandings on
  31st March 2006, greater than 2 crores will have
  to be verified by the Auditor.
• Advances means all advances, Standard as well as
  NPA.

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I.5.(a)ADVANCES Credit appraisal

• Primary purpose of review is to ensure that the
  branch generally  complied  with  the
  procedures/instructions  of  the controlling
  authorities  of  the bank  regarding loan
  applications, preparation of  proposals  for
  grant/renewal of advances, enhancement of limits,
  etc., including adequate appraisal documentation
  in respect thereof.
• Assumptions on the basis of which loan was
  sanctioned continue to stand good
• Loan is being used for the purpose for which it
  was sanctioned
• Project implemented as per approval
• No unexplained overruns in the cost of project

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I.5.(a)ADVANCES- Credit appraisal(Contd.)

• Stipulated installments/interests are being paid
  regularly
• Terms and conditions of the loan complied with
• Required margins are maintained in the accounts
  at all times
• Property mortgage/hypothecated/Pledged are
  maintained in good order by the borrower
• Proposals are recommended after due consideration
  of all relevant factors like latest financial
  statement, past dealings, repayment capacity etc
  of parties
• Banks complied with instructions regarding
• Loan application,
• Preparation of proposal for grant/renewal of
  advances,
• Enhancement of limit

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I.5.(b)Advances- Sanctioning /disbursement

• (i) Instances of credit facilities having been
  sanctioned beyond delegated authority or limit
  fixed by branch
• (ii) Advances disbursed without complying the
  terms and conditions of the sanction

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I.5(c)Advances -Documentation

• (a) Instances of credit facilities without
  execution of all necessary documents
• (b) Instances of deficiency in documentation,non-r
  egistration of charges , non-obtaining of
  guarantees etc.
• (c) Instances of Advances against lien of
  deposits have been granted by without marking a
  lien on deposits

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I.5.(d)Advances- Review/monitoring/supervision

• (i) Assess procedures for Periodic balance
  confirmation/ acknowledgement of debts. Analysis
  of accounts overdue for review/renewal between 6
  months 1 year and over 1 year (A list can be
  taken from the Branch Manager of Accounts not
  renewed yet and due for renewal from-
• Before 31st March 2005
• 01st April 2005 to 31st September 2005)
• (ii) and (iii) Stock/debts statements and other
  periodic operational data and financial
  statements etc received regularly from borrowers
  and duly scrutinized
• (iv) For Advances to non-corporate borrowers
  above the reasonable limits fixed by the board of
  directors branch has to obtain Audit report from
  the borrower. (Circular no. DBOD.No.BP.BC. 33
  /21.04.018/2002-03). See cases where branch has
  not obtained such audited accounts of borrower.
• (v) Physical verification of securities charged
  to banks

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I.5.(d)Advances- Review/monitoring/supervision(Con
td.)

• (vi) Deficiency in value of security, Frequent/
  unauthorized overdrawing beyond limits
• (vii) Guidelines of security creation,asset
  inspection, insurance etc in case of leasing
  finance activities
• (viii) Credit card dues recovered promptly
• (ix) Branch identified and classified advances
  into standard/sub-standard/doubtful assets as per
  RBI

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I.5.(d)Advances- Review/monitoring/supervision(Con
td.)

• (x) All NPA promptly reported to controlling
  authority of the bank
• (xii) Status of rehabilitation programme of NPA
• (xiii) Claims of DICGC and Export Credit
  Guarantee/Insurance and subsidy duly lodged and
  settled. Status of Pending claims giving year
  wise break-up of number and amounts involved
• (xiv) Valuation reports obtained from approved
  valuers for the fixed asset charged to the bank
  once in three years. (The day the auditor
  receives appointment letter he should request for
  the following Statement)
• (xv) Recovery policy of the bank with respect to
  compromise/settlement and write off cases
• (xvi) Major deficiencies in credit review,
  monitoring and review

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I.5.(e)Advances- Guarantees and Letter of Credit

• Details of outstanding amounts of guarantees
  involved and funded by the branch at the end of
  year
• Details of outstanding amounts of Letter of
  credit and co-acceptance funded by the branch at
  the end of year

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I.6.Other assets-

• I.6(a)Stationery stamps
• (i) Internal control over issue and custody of
  stationery comprising security items (Term
  deposit receipts,Drafts, Pay orders ,cheque
  books, Traveler's cheques, Gifts Cheque etc
• (ii) Cases of missing/lost item of stationery
• I.6(b)Suspense accounts/Sundry Assets
• (i) Expeditious clearances of items debited to
  suspense accounts, Reasons for delay in adjusting
  the entries, Scrutiny of balance which are not
  recoverable and require a provision/write off
• (ii) Any unusual items in the account

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II.1.Liabilities Deposits

• (i) Conduct and operation of inoperative accounts
• (ii) Unusual large movements in the aggregate
  deposits held at the year end after the balance
  sheet date and till the date of audit
• Overdue/matured term deposits at the year end

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Liabilities

• II(2)Bill payable ,sundry deposits etc
• (i) The number and aggregate amount of old
  outstanding items pending for 3 years or more
• (ii) Any unusual items or material withdrawals or
  debits
• II(3)Contingent Liabilities
• Major items of contingent liabilities not
  acknowledgement by the branch. Internal controls
  to ensure that transactions giving rise to
  contingent liability are executed by the persons
  authorized to do so and in accordance with the
  laid down procedure. Representation from
  management that all contingent liabilities have
  been disclosed

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III.Profit and Loss a/c

• (1) Branch has a system to compute discrepancies
  in interest/discount and timely adjustment
  thereof
• (2) Scrutinize the revenue audit report /income
  and expenditure audit report
• (3) Branch complied with Income recognition norms
  prescribed by RBI
• (4)System of estimating and providing interest
  accrued on overdue/matured term deposit
• (5)Divergent trends in major item of income and
  expenditure

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IV.1.General - Books and records

• (a) In case maintained manually whether they have
  been properly maintained ,with balances duly
  inked and authenticated by authorized signatories
• (b) In case of computerized branches
• Whether hard copies are printed regularly
• Extent of computerization and areas of operation
  covered
• Access and data security measures
• Contingency and disaster recovery plans are in
  place for loss/encryption of data
• Suggestions for improvement in the computerized
  system

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IV.3.General Inter-branch accounts

• (i) Branch forward on a daily basis to a
  designated cell / Head office, a statement of
  debit/credit transactions in relation to other
  branches
• (ii) Outstanding debts in the head office account
  in respect of inter-branch transactions
• (iii) Branch expeditiously comply with/respond to
  communication from the designated cell/ Head
  office as regards unmatched transactions
• (iv )Old/large outstanding transaction/entries as
  at the year end which remained unexplained

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General

• IV(4) Audits / Inspections
• Is branch covered by the concurrent audit report
  or any other audit inspection during the year
• (ii) Major adverse comments rising out of the
  latest reports of the previous auditors
  ,concurrent auditors ,stock auditors or internal
  auditors or RBI inspectors.
• IV(5) Frauds discovered if any and suggestions to
  minimize the possibilities of their occurrence.
• IV(6)Miscellaneous
• (i) Examination of accounts indicate window
  dressing
• (ii) Branches maintained records of all fixed
  assets acquired and held by it
• (iii) Any other matter which as a branch auditor
  would like to bring to the notice of management
  and central Statutory Auditors

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(A)For branches dealing in foreign exchange
transaction

• 1 Are there any adverse features in the report of
  other auditors relating to RE/NRNR/FCNR/EEFC /RFC
  and other similar deposits accounts
• Obtain a list of all Nostro Accounts
• Does the branch follow the prescribed procedures
  in relation to maintenance of Vostro Accounts.

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Questionnaire for Branches Dealing in Foreign
Exchange Transactions contd..

• 2 Whether Branches have followed Instructions in
  respect of foreign exchange specially
• deposits,
• advances,
• export bills ,
• bills for collection,
• dealing room operations
• Any other area

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For braches dealing in very large advances

• Examples include corporate banking branches,
  Industrial finance branches or branches with
  advances in excess of 100 crores
• Information in the prescribed format for borrower
  with outstanding of Rs 2crores and above
• Major shortcoming in credit appraisal ,monitoring
• List the accounts (outstanding in excess of 1
  crore) which have either downgraded or upgraded
  with regard to their classification as NPA or
  standard asset and reason thereof

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For branches dealing in recovery of NPA

• Information in the prescribed format for borrower
  with outstanding of Rs 2 crores and above
• List the accounts (outstanding in excess of 2
  crore) which have upgraded from NPA to standard
  asset and reason thereof
• Information relating to valuation of security
  charged
• Age wise analysis of the recovery.suit filed and
  pending cases
• Branch promptness in execution of decrees for
  recovering from defaulting borrower
• Recoveries appropriation of interest and
  principal in respect of accounts settled/written
  off/closed
• New borrower accounts transferred to the branch

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For branches dealing in clearing house
operations(Normally called service branch)

• System of periodic review of outstanding entries
  in clearing adjustments accounts
• Year wise breakup of outstanding in number and
  value
• Branch followed guidelines of the controlling
  authorities with respect to operations relating
  to clearing transactions

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Jilani Committee

• Working group to review the internal control and
  inspection and audit system in banks under the
  chairmanship of Mr. Rashid Jilani. The committee
  submitted its report in July 1995
• Objective was to review the efficacy and
  adequacy of internal control and inspection and
  audit system in a bank with a view to
  strengthening the supervisory system and
  reliability of data
• The Implementation form is divided into 25
  points,10 of them are applicable on a Bank
  branch.

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Responsibility for implementation

• Management is responsible for the implementation
  of Ghosh and Jilani committees
• The responsibly of the statutory auditor is to
  verify and report on the status of implementation
  of these recommendations and no further
• The results of the verification carried out by
  the Statutory Branch Auditors and his comments
  would be given in separate report

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Implementation of recommendations

• A format containing 25 questions was issued to
  indicate the answer as either implemented or
  Not implemented
• Information received from all branches and ROs/
  ZOs to be consolidated at Head office level and
  submission of consolidated statement to RBI
• Implementation of recommendations to be verified
  during concurrent audit/inspection and comment to
  be included in their report

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Ghosh Committee Recommendations-Summary
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Audit procedures

• Report on implementation status of Ghosh and
  Jilani committee forwarded to Head office
• Review a copy of implementation status report so
  prepared and submitted
• Test check to ensure that recommendations which
  have been said to have implemented have indeed
  been implemented by management
• Reconsider the nature timing and extent of audit
  procedure for carrying out the audit and timings

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Report of the statutory auditor on status of
compliance

• Report should contain following points
• Responsibility for implementation of the
  recommendations of the Ghosh and Jilani committee
  is solely that of the management of the bank
• Auditors has also considered the reports of
  Inspection teams other auditors (Concurrent,
  Internal)
• Verification was limited primarily to enquiries
  and obtaining confirmation from management
• Auditors has carried out the test checks to
  assess the status of implementation

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Ghosh Committee

• High level Committee on fraud and malpractice in
  banks under chairmanship of Shri A. Ghosh ex
  deputy governor
• To enquire into various aspects of frauds and
  malpractices in bank
• To make recommendations to reduce such incidence.
  
• Committee submitted report in June,1992
• The report is divided into Groups A,B,C,D with A,
  B and D having 2 parts each, Group C having one
  part.
• Out of 97 Recommendations 27 required to be
  reported exclusively at Branch level, 43
  exclusively at RO/ZO/HO level and 27 at both
  levels

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Four groups under Ghosh Committee

• Group A -Recommendations which have to be
  implemented by the banks immediately
• Group B- Recommendations requiring RBI approval
• Group C- Recommendations requiring approval of
  Government of India
• Group D Recommendations requiring further
  examination in consultation with IBA

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Categorization of recommendations

• Applicable to branches
• Applicable to controlling office like regional
  and zonal office
• Applicable to head office
• Applicable to treasury operations

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Main objectives of Ghosh Committee

• Safety of assets
• Compliance with laid down policies and procedures
• Accuracy and completeness of accounting and other
  records
• Proper segregation of duties and responsibilities
  of staff
• Timely prevention and detection of frauds and
  malpractices

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Some of the recommendations of Ghosh committee

• Branch Level -Group A
• Joint custody and dual responsibility of cash and
  other valuables
• Rotation of staff/duties
• Designate one of the officer as compliance
  officer
• Financial and administration powers of officials
  to be laid down
• Exercise of caution at the time of opening of new
  deposit of all types

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Some of the recommendations of Ghosh committee

• Branch Level -Group A
• Precautions against theft of cash
• Precautions in writing of drafts/mail transfers
• Precautions for averting frauds in letter of
  credits ,guarantees
• Screening/selection of employees in EDP
  cell,computer area
• Standards for fully computerized branches

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Some of the recommendations of Ghosh committee

• Group B
• Banks to introduce portfolio inspection in
  critical areas such as credit,investment,off
  balance sheet item etc
• Periodical movements between bank officials and
  investigating officials of CBI/Police
• Six months prior to retirement officials should
  exercise their sanctioning powers jointly with
  next higher authority
• Paper used for cheques/drafts should such that
  any use of chemical for making material
  alterations in instrument should be visible to
  naked eye

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Some of the recommendations of Ghosh committee

• Group C
• Chief vigilance officer should directly refer to
  CVC,cases having vigilance angle involving CMD
• Fraud cases upto Rs. 25000 having involvement of
  an insider should not be reported to police where
  recovery is doubtful
• Introduce a return of staff members to ensure
  strict submission of information of assets and
  liabilities and proper scrutiny thereof

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Some of the recommendations of Ghosh committee

• Group D
• BR should not be outstanding for more than 7 days
  
• Obtaining photograph of depositors at the time of
  opening of accounts

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