Bank audits not up to scratch, finds FRC

by Richard Crump

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28 May 2014

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THE BIG FOUR accountancy firms that vet the books of Britain's banks and building societies have been criticised by the profession's regulator for continued failings in the quality and rigour of their work.

In its annual review of audit quality published today, the FRC warned banks could be exposing themselves to bad debts because auditors have failed to challenge them on the amount of money they put aside to cover loan losses.

The quality of bank and building society "continues to fall below average", in particular because of insufficient testing and challenge of the provision banks have been making against possible losses on their loans, the FRC said.

Of the ten bank and building society audits inspected by the FRC in 2013/14 not one could be classified as good, while half required some improvement and one was found to be in need of significant improvement.

The findings show that auditors continued to produce sub-standard bank audits despite receiving severe criticism for failing to spot the build-up of bad debts that helped contribute to the onset of the financial crisis.

"We have not seen enough progress in the quality of bank and building society audits which continues to be generally below that of other types of entities," said Paul George, the FRC's executive director for conduct.

Last year, the FRC said it plans to conduct a formal review of bank audits in the second quarter of 2014 to find out why progress in improving their quality has been so slow. The review will focus on the testing of loan loss provisions and general IT controls and look at issues including the specific actions being taken the major firms.

"The review will aim to assess the extent to which the firms' actions to address the FRC's concerns are having an impact and if not, identifying what further action is required," Baroness Hogg, the then chairman of the FRC said at the time.

Deficiencies were also identified in the testing of IT controls on a number of bank audits, while the reports also highlighted inadequacies in the audits of letter box companies - groups that have little more than a registered office or correspondence address in their country of registration. However, the audit watchdog noted that "firms have made changes to their methodologies and guidance" as a result of its concern.

Aside from the audits of banks, the quality of auditing in the UK was found to be generally good, with 60% of audits conducted to a good standard or requiring only limited improvements. The proportion of audits with the highest grade in the FRC's inspection continued to increase, while 86% of the audits inspected in the FTSE 100 were good or required only limited improvements.

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