Banks under companies act, Auditing

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Banks under Companies Act

Banks are incorporated under the Companies Act like any other business but are granted special privileges under the same Companies Act and subjected to very strict controls by the Central Bank of Kenya. Apart from frequent visits from the Central Bank and regular reports to the Central Bank on liquidity levels the auditor is also required to submit a copy of his audit report to the Central Bank. The auditor should review the reports submitted to the Central Bank and the reports submitted to the bank by the Central Bank as a result of the visits. The auditor is also concerned with enquiring into compliance with the Banking Act. In theory, banks are allowed to set up secret reserves by writing down assets or creating excessive provisions without disclosing that they have done so. The effect of this is:

  • The real position may be better than that disclosed but never worse.
  • In good years, secret reserves are created and in bad years they are run down. The effect of this is to even out the profits and the customers are not then tempted to withdraw their deposits if the bank has a bad year.

 

If the bank was to take advantage of these provisions then it would not be possible for the auditor to give a true and fair view report on the accounts. In practice banks in Kenya do not take advantage of the provisions and therefore the auditor carries out a normal audit and gives a report in true and fair terms.


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