In July, Singapore’s Accounting and Corporate Regulatory Authority (ACRA) held its fifth annual public accountants conference. A central theme at the conference was audit quality and the value of audit. These are topics attracting attention across the world at the moment as a fall-out from the global financial crisis. And bank auditors are the focal point of much of this attention.
Several consultations are currently underway in leading financial markets across the world, looking at the role and value of audit. In the US, the Lehman court case resulted in questions being asked about the value of audit – not just in the US but across the world. In the European Union, the Commissioner for the internal market, Michel Barnier, has already published a Green Paper on corporate governance in financial institutions and has another one up his sleeve on all aspects of audit , expected to be published shortly. In the UK, the Financial Services Authority – the market regulator – and the Financial Reporting Council are consulting on the auditors’ role and the contribution they could make to prudential regulation.
Any crisis brings change. The important thing now is to make sure we learn all the lessons we can from the global financial crisis. That goes for all market participants, the accounting and auditing profession included.
There is no doubt that auditors play an important role in financial markets, promoting confidence in financial information provided by banks and other financial institutions and acting as a discipline for directors and management.
An auditor goes into a company with the purpose of providing greater confidence in the financial statements prepared by a company’s management and directors in accordance with the appropriate financial reporting standards. They do this by giving an independent opinion on its truth and fairness – an opinion that is reached by gathering evidence to support the financial statements, usually on a sample basis, by examining risk management processes, governance, systems and internal controls and by challenging management on the assumptions and decisions they have made.
Auditors use their professional judgement to reach conclusions and recommendations which are then reported back to audit committees and senior management. Where there are issues which they believe the users of annual reports need to be made aware of, they will include a statement to this effect.
Independent auditors are not there to assume management roles or compensate for inadequate in-house finance teams. Ultimately it is the company directors who are responsible for the success or failure of the entities they lead and run. The role of the auditor has primarily been to ensure that shareholders are provided with information which enables them to hold the directors of the companies they own to account.
As a result of the crisis, we have had to think about how the audit model needs to evolve to meet the needs of regulators, investors, management and society as a whole. Over the past 18 months ICAEW has also been examining how the current audit model needs to evolve. On the back of stakeholder research we have published a report entitled Audit of Banks – Lessons from the Crisis which recommends a number of practical steps which could be taken to help meet changing stakeholder expectations.
On bank reporting we think risk information is often presented in a piecemeal manner in bank annual reports, spread between the audited financial statements and the unaudited front sections of these reports. Banks need to focus on clearer presentation which allows users to understand the big picture - often obscured by the volume of detailed information. Summary risk statements are a potential way of meeting this objective particularly if auditors are able to provide assurance on these statements.
We also think insufficient information is provided under the current framework about the work that underpins an audit. This makes it difficult for investors to assess the performance of bank auditors or to understand the key areas of challenge. To address this gap, banks themselves can help, for example by confirming that they have discussed with their auditors the critical accounting estimates and judgements disclosed in the financial statements as well the information disclosed in the front end of their reports.
More regular exchange of information between auditors and the bank supervisor will enable both to perform their duties more efficiently and effectively. Finally, we also think auditors and other external experts have particular skills that could be used to support banking supervisors in performing their functions more effectively.
However, if there is one big lesson from the crisis for auditors, it may be that more needs to be done to explain the value of audits to those outside the audit process. Making more information available about discussions between auditors and banks could increase the value placed on audit and thereby increase market confidence.
The Audit of Banks – Lessons from the Crisis report can be downloaded from www.icaew.com/fsf.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Mark Billington is Regional Director at ICAEW South East Asia. He is a UK qualified Chartered Accountant with 15 years experience in various business units.