1.15     Query

Audit of banks.

1.The auditor of a bank is required to report, among other things, on the following

“Whether or not the transactions of the bank which came to his notice have been within the powers of that bank”.

2.  The querists raised the following issues regarding the above requirement for opinion of the Expert Advisory Committee:

(i) Whether the requirement relates only to the verification of transactions with reference to the Memorandum and Articles of Association, the Companies Act, 1956, the Banking Regulation Act 1949, the Reserve Bank of India Act 1934, the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, etc; or it also relates to the verification of transactions with reference to the discretionary powers delegated by the board of directors to the branch managers and other officers of the bank.

(ii) Where the branch managers and other officers of a bank have sanctioned loans and advances or have incurred expenditure much in excess of their discretionary powers and they have not been ratified by the competent authority on the date of audit, whether the auditors can state in their report that the transactions were not within the powers of that bank if the amount involved is material.

(iii)If the answer to (ii) above is in the negative, can it be said that the directors have, by signing the annual accounts, impliedly ratified the unauthorised actions of the branch managers and other officers as the relevant amounts have been incorporated in the accounts; and

(iv) If the answer to the (iii) above is also in the negative, what would be the effective status of such unauthorised acts vis-a-vis the directors and the auditors.

Opinion                                                                                                                      August 13, 1982

            The point-wise-opinion of the Expert Advisory Committee is given below:

(i) In the opinion of the Committee, the expression “powers of that bank” in the above quoted requirement relates only to the verification of transactions with reference to the Memorandum and Articles of Association, the Companies Act 1956, the Banking regulation Act 1949, the Reserve Bank of India Act 1934, the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, etc. the discretionary powers are granted to the branch managers and other officers only to facilitate internal management of the bank. The board of directors is expected to delegate authority keeping in view the overall powers of the bank, and if this has been done, the fact that  some officers have exceeded their discretionary powers does not mean that the bank was also not empowered.

(ii) In view of the above, the auditors may not state in their report that loans and advances sanctioned by the branch managers in excess of their discretionary powers were not within the powers of the bank even if the amount involved is material and such acts were not ratified on the date of audit.

(iii) Confirmation or ratification of the unauthorised acts viz., granting of loans in excess of the discretionary powers of subordinate officers by the competent authority, is done on the merits of each individuals case. Thus, in the opinion of the Committee, the fact that the directors have signed the annual accounts does not amount to ratification of such aberrations.

(iv) The Committee refrains from expressing an opinion on this issue because it involves legal implications.

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