Peter Williams – Bank support: please confirm

Coming to a high street bank near you soon is a new style of bank confirmation letter.

Gathering reliable third party evidence has always been an important part of the audit process on the way to forming an audit opinion. And nothing could be more pukka than the bank confirming the balances – and other related matters such as guarantees – once a year for a small fee.

Unfortunately, over the last few years, bank confirmations have become an increasingly frustrating and wasteful experience for auditors.

Stories abound of banks failing to supply anything like audit evidence that would pass muster in a Joint Monitoring Unit inspection: balances given for dates not requested, answers to requests scribbled in an unidentified hand, and some information just plain wrong.

In a bid to rectify the banks’ increasingly shoddy work, the Auditing Practices Board has spent the last year or so quietly bashing up the banks’ representative body, the British Bankers Association, to ensure its members understand the importance and the mechanics of bank confirmation letters.

The problem stems from the fact that the banks can see no benefit in carefully and correctly answering bank confirmation letters. Hence the office junior is let loose – often to no useful purpose. But banks should care about them.

For a start, they charge the client for the privilege of supplying the information. Secondly, and more importantly, the bank confirmation process is a small but important part of the audit assurance process which is integral to the running of the market economy. After all, which sector places most reliance on audited accounts? Step forward the banking industry.

If for no other reason than enlightened self-interest, the banks should work to ensure their confirmation letters work.

Under the new guidance, the quality of information should increase dramatically – mainly because the new process, which comes into force on 1 December, makes life simpler for the banks and creates more work for the auditor.

Auditors will have to assess what they expect from each letter and ensure so-called ‘additional information’ is requested, particularly as that includes ‘any other contingent liabilities not already detailed’.

If they get that wrong, the standard information will not give the same level of assurance as a correctly filled-in old-style letter. Auditors are also going to have be more organised as the request has to go out two weeks earlier than before.

Having said all that, if the new system works, it should be a better deal for auditors, banks and clients. But for the first few months of the new method, auditors should keep a watchful eye on the banks to make sure they stick to their side of the bargain.

Peter Williams is a freelance writer and a chartered accountant.

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