And still the aftermath of the financial crisis continues. In June the
Financial Services Authority (FSA) and the Financial Reporting Council (FRC),
published a discussion paper looking into the role of financial services
auditors in the financial downturn. In their assessment they found inadequecies.
The rationale behind the paper “Enhancing the auditor’s contribution to
prudential regulation”, is that, in spite of being given a clean audit opinion,
the FSA believes that auditors did not show sufficient professional scepticism,
particularly regarding management’s judgement over the valuation of investments.
The paper places a question mark over the role auditors play in reporting risks
and irregularities to regulators and investors.
The paper aims to encourage more dialogue and a stronger relationship between
auditors and the FSA, which is no bad thing. However, the nature of the dialogue
must be clearly thought through and carried out in order for it to reap the
benefits for all involved. There needs to be transparency and clarity, but there
is no requirement for the FSA to become experts in audit or, as is put forward
in the paper, to become the regulator of auditors – it is simply not a valuable
use of their time, particularly as there are already expert regulatory bodies
who oversee the industry to a high standard. Mutually enlightening discussions
between the FSA, ICAEW, FRC and auditors about each other’s roles and how best
they can complement one another is needed, not a complete overhaul of the
The most positive outcome of the paper is the proposed increased use of the
Section 166 skilled person reports. These reports are efficient because they are
only carried out where the FSA perceives a need, rather than the alternative of
the FSA requiring more audited information from all financial services firms.
Use of the s166 reports also supports the FSA’s desired risk-based policy.
Having recognised this positive, the paper unfortunately only discusses audit
assistance in terms of banking and insurance, and does not attempt to
distinguish assistance for other financial services firms. One size does not fit
all. The implementation costs of new regulation suitable to a global listed bank
represent a massive burden on a small private equity house and, in some
instances, could produce irrelevant data which may inturn hide key information.
Although it would require considerably more focussed effort, if the FSA really
want to better utilise the skills and experience of auditors, they need to
create a sliding-scale of reporting depending on the size, work and risk of the
financial services firm. The auditor needs to be looking for the right
information, not all of it.
This discussion paper is just one point in a long and interesting debate on
the interaction between accounting and regulation. However, claims that it
heralds a shake-up of the auditing profession greater than the introduction of
Sarbanes Oxley are, to say the least, far-fetched.
Michelle Carroll is a member at
Partners financial services consultancy. She is also a member of
the ICAEW working party and of the ICAEW investment management committee.
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