PracticeAuditFRC reveals plans to turn up heat on auditors

FRC reveals plans to turn up heat on auditors

Auditors need to be aware that the FRC will be watching even in these tough economic times

frc

Auditors working in sectors badly damaged by the economic crisis be warned ­
the Financial Reporting Council will be watching closely to ensure your work
continues to stand up to scrutiny.

And that, among other sectors, could mean the auditors of banks.

Just before Christmas the FRC revealed its draft plan for its Audit
Inspection Unit, one of the City’s top regulators, in 2009 and 2010. Among the
big issues it plans to examine is whether auditors can maintain the quality of
their work in a transformed economic environment.

Its inspection work is expected to mirror that of the Financial Reporting
Review Panel, which has already revealed it will look at banking. The FRC’s
audit inspection unit is likely to take the lead and examine bank auditing.

The FRC draft schedule comes amid growing regulatory scrutiny of the audit
industry.

Already the Treasury select committee has said it will look at the role of
auditors as part of its ongoing probe into the banking crisis. The committee
will be keen to find areas for reform. In earlier enquiries it became especially
concerned by ‘comfort letters’ written by PwC for Northern Rock in relation to
securitisation deals.

The FRC worries that auditors may struggle to properly assess risks faced by
clients as the economy worsens. ‘The complexity and volume of risks arising from
the tougher economic conditions may be challenging for auditors to adequately
address,’ it said.

Andrew Jones, director of the Audit Inspection Unit, added: ‘With the credit
crunch and then the financial crisis, there must be more risk to audit in terms
of going concern, valuations of financial instruments and impairment issues
around goodwill balances. The auditors have to rise to the challenge.’

Should the AIU come up with major criticism of banking audit there is likely
to be some anxiety on the part of auditors (though published reports will not
give away client identities).

Already there has been criticism from commentators, but as yet no evidence
has been presented. Indeed, FRC chief executive Paul Boyle has indicated in
speeches that he believes auditors have, so far, had a good crisis.

Auditors believe that the FRC needs to place more focus on directors and
their financial reporting.

Phil Crooks, head of assurance at Grant Thornton, says: ‘The focus on audit
and the pressure on auditors is fair but there needs to be a lot more focus on
companies’ understanding of disclosures.’

In Banking: a regulatory accounting and auditing guide ­ a 2001 tome
co-authored by John Hitchins, a PwC partner who appeared before the Treasury
committee on the Rock audit ­ the writers say bank regulators ‘need sensitive
antennae, a healthy scepticism and a measure of cynicism. They need to be
suspicious of motives and alert to evasion, but above all they need courage.’

Some already believe that the regulators of audit should adopt the same
mindset.

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