Study supports audit and supervision links

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By Michael McGlinchey, Head of Editorial

30 June 2015

Research commissioned by ICAS supports re-establishing the links between supervisors of financial services firms and their auditors. 

New ICAS research supports the strengthening of the relationship between auditors and supervisors of financial services firms.

The financial crisis brought to the fore public and governmental concerns over the audit, regulation and supervision of financial services. One of the major initiatives undertaken in the UK following the crisis was the re-establishment of the links between supervisors of financial services firms and their auditors. 

This study, published by ICAS and undertaken by Professor Ian Dewing and Peter Russell from the Norwich Business School, University of East Anglia, investigates the changes to the relationship between auditors and supervisors since the financial crisis, the impact of the crisis on risk governance and the key accounting and auditing judgements of financial services firms.

The findings from the research are linked to current developments and proposals for change, both within the sector and more broadly within assurance.

This new independent report is particularly timely as it provides evidence for the Prudential Regulation Authority's (PRA's) consultation paper on the engagement between external auditors and supervisors

Key findings

The study, Audit, supervision and risk in financial services finds that:

  • There is widespread support for the reinvigoration of the relationship between auditors and supervisors, but there is recognition that this is an evolving process. Initiatives to enhance this dialogue would be welcomed.
  • Concerns were expressed about supervisors trying to impose their views on accounting and auditing judgements, this was seen as the responsibility of the firm and their auditors.
  • There has been a rapid growth in risk management in financial services firms, including the creation of risk committees and the changing nature of internal audit. 
  • The demarcation of issues between the risk and audit committees was sometimes an issue for firms, but this was resolved by overlapping membership.
  • Whilst auditors have been criticised publicly for a lack of scepticism, this was not borne out by interviewees from either the audit or financial services firms.  There was recognition, however, that there was more need to document challenge.

Recommendations

The researchers make a number of recommendations, including:

  • Strengthening the quality of the auditor-supervisor dialogue. The PRA's proposal to require auditors of the largest banks and building societies to produce written reports to the PRA should be adopted.
  • Providing information to stakeholders about the auditor-supervisor dialogue. Auditors of financial services firms should include discussion of the dialogue in the new extended auditor's report.
  • Informing financial services firms, investors and wider stakeholder groups. A summary of the key topics discussed at high-level meetings between the PRA and audit firms should be published.
  • Enhancing the effectiveness of the internal auditor-supervisor dialogue. The Chartered Institute of Internal Auditors (CIIA), in conjunction with regulators, should establish a process for the independent monitoring of compliance with the CIIA's Code on internal audit in financial services.

Peter Russell said: "Prior to the financial crisis contact between auditors and supervisors had largely disappeared. We found that following the financial crisis the auditor-supervisor dialogue has been reinvigorated and transformed to the mutual benefit of auditors, supervisors and financial services firms."  

Prof Dewing said: "In addition to improved external auditor-supervisor dialogue, we also found that growth of risk management and internal audit functions and separately established risk committees are making important contributions to strengthening the corporate governance of UK financial services firms."

Michelle Crickett, Director of Research at ICAS, said, "We are very pleased to publish this research focusing on audit, risk and supervision in the financial services sector.  The research covers a period of significant regulatory change in the sector and highlights the importance of a close auditor-supervisor relationship.

"ICAS welcomes the reinvigoration of this relationship and hopes that the research will be useful to the PRA in its deliberations on how to continue to enhance this vital contact."

Notes:

For more information contact: ICAS Head of Editorial Michael McGlinchey (+44 (0) 7799 583 409/ +44 (0) 131 347 0126.

About the research:

The research is based on a review of regulatory and other documentation and a series of interviews with audit partners and representatives of financial services firms.

About the authors:  Ian Dewing is a Professor and Peter Russell is a Senior Lecturer in accounting at Norwich Business School, University of East Anglia.

Topics

  • Research
  • Audit and Assurance

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