IndusInd Auditors Quiet on Derivative Valuation Concerns

Quick Summary

• IndusInd Bank’s auditors removed ‘derivative valuation’ from their Key Audit Matters (KAM) in the 2023-24 financial year,despite its meaning in the previous audit report.
• The shift comes amidst regulatory changes; RBI directives in September 2023 required banks to adhere to ICAI guidance on foreign currency derivatives accounting.
• Prior auditor reports highlighted risks associated with derivative valuation models due to significant management judgment and uncertainty in fair value determination.
• The changes coincide with IndusInd Bank’s declaration of ₹1,500 crore derivative losses by March 2025, attributed partially to divergent accounting methods-accrual for internal transactions and mark-to-market for external ones.
• Regulatory compliance issues surfaced as these practices allowed deferred losses and upfront gains. Loss figures may be revised further following special and forensic audits currently underway.

Indian Opinion Analysis

The removal of ‘derivative valuation’ as a key audit matter raises questions about auditor assessments given prior concerns over complex accounting techniques noted explicitly in the 2022-23 report. While one plausible explanation is that auditors were satisfied with improved bank procedures, it contrasts starkly with RBI’s subsequent intervention prompting a ₹1,500 crore loss disclosure.

This situation highlights critical vulnerabilities within India’s banking sector regarding derivative accounting standards. transparency regarding risk factors remains vital as complex valuations can obscure liabilities until mandated corrections amplify their impact-a lesson for regulators, auditors, and institutions alike. Ensuring consistency between auditing judgments over time may warrant scrutiny under ICAI guidelines moving forward.

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