Banking · Fraud Reporting and Off-Balance Sheet Liabilities
A major branch of a Public Sector Bank is undergoing a Statutory Audit. The auditor finds that several 'Bank Guarantees' (BGs) have been issued by the branch without entering them into the Core Banking Solution (CBS). These BGs were issued manually and the commission was also collected in cash and not credited to the bank's income account. The total value of such 'off-balance-sheet' BGs is estimated to be 200 Crore INR. One of these BGs has recently been invoked by a beneficiary, but since the BG is not in the system, the branch has no record of it. The branch manager claims these were 'emergency issuances' to help a long-standing client and the entries were 'pending for a quiet time'. Analyze the severity of this finding and the auditor's next legal steps.
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1This is a minor 'Procedural Irregularity' and should be noted in the branch's internal diary for correction.
- 2This is a 'Major Fraud' involving the suppression of liabilities and income; the auditor must immediately report this to the Bank's Head Office and the RBI.✓
- 3The auditor should wait for the branch to enter the data in CBS and then treat it as a 'Standard Disclosure' in the next year's audit.
- 4Since the BGs were issued manually, they are not legally binding on the bank, so the auditor should ignore them.
Correct answer
This is a 'Major Fraud' involving the suppression of liabilities and income; the auditor must immediately report this to the Bank's Head Office and the RBI.
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