The extra freedom given to the 26 public sector banks from this year to choose their statutory auditors has auditing companies both those chosen and those left out restive.

The have approached the Union finance ministry and the Prime Ministers Office to say that the decision will affect the quality of audits. The Institute of Chartered Accountants of India (ICAI), which has been representing against this shift in policy for quite a while, has done likewise.

The banks, however, reject this criticism and say the new system is a welcome shift.

Until three years ago, the Reserve Bank of India (RBI), the banking regulator, used to assign auditing companies to PSU banks from a list given to it by the Comptroller and Auditor General (CAG). Following a plan notified by the finance ministry in 2005, RBI has been progressively handing over this responsibility to these banks.

Last year, RBI issued a list of auditors that had the same number of companies as the vacancies that needed to be filled. This year, RBI gave a bigger list that had double the number of auditors than the vacancies. The process has been concluded for this year. From next year, RBI is expected to allow these banks to choose from the entire list of CAG-approved companies.

The banks welcome the widened choice. This (the new system) gives us a wider choice to appoint auditors who can add value to the balance sheet. Auditors with good credibility stand a better chance, said DL Rawal, the chairman and managing director of Dena Bank.

But chartered accountants (CAs) disagree. This can lead to disasters as auditors appointed on references by banks themselves cannot act independently. Their reports will be biased, said Ramesh Kapoor, a New Delhi-based CA.

According to sources, some banks which were not keen to use the autonomy option (they were given the freedom to opt for an RBI-appointed auditor) shifted to the new system after some issues emerged between their managements and auditors. While bankers complain that auditors appointed by RBI are dictating their terms, auditors feel they have the right to question.

Under the earlier system, we were able to point out inadequacies, mistakes and discrepancies in accounts without fear. Now, banks can choose not to give us a second term if we are empanelled again. Similarly, more companies chasing fewer vacancies makes us vulnerable before bank managements, said a Mumbai-based CA who did not wish to be identified.

CM Khurana, general manager, Oriental Bank, counters: This has brought transparency, as in the earlier system no one knew which bank was audited by whom.

But, say CAs, PSUs other than banks are not allowed to choose their auditors. It is the CAG that does the job of selecting auditors for other PSUs. Why should it be left to banks, when the public stake in all nationalised banks by way of deposits and capital is more than Rs 28,000,000 crore? an aggrieved CA asked.