Auditors must learn to articulate their value
If there is to be a positive legacy of the financial crisis, it must be in the lessons that market participants have learned from extremely challenging times. Bank auditors have been no exception.
The Financial Services Authority (FSA) and Financial Reporting Council have set out their thoughts on the auditors’ role and the contribution they could make to prudential regulation in a consultation paper published yesterday. The document highlights a number of challenges for the auditing profession. It also sets out how auditors can play a stronger role in the regulatory oversight of banks within the framework that is being developed in this post-banking crisis world.
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.
Auditing and the regulatory framework that supports auditing have generally held up well in the crisis. However, questions have been asked including by the House of Commons Treasury Select Committee about the value of bank audits against an expectation that auditing should have provided some forewarning of the banking crisis.
EVOLVING THE AUDIT MODEL
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.
For example, regular exchange of information between auditors and the bank supervisor enables both to perform their duties more efficiently and effectively. We have already seen improvements in both the frequency and quality of such dialogue but I’m sure it can be improved further. As the FSA has also identified, there is scope for making greater use of external experts on a thematic basis, as part of the overall monitoring regime.
Auditors can help give greater confidence in bank reporting. They could provide assurance on summary risk reports which will enable investors to better understand key risk information. They should also have more involvement in reporting on the front sections of annual reports.
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.
With any crisis comes change. Over the coming months, there will be much discussion about these and the other proposals set out by the FSA. I have no doubt that these will play a significant role in shaping the future of audit and ensuring the expertise and professional judgement of the auditor continues to be valued.
Michael Izza is chief executive of the Institute of Chartered Accountants in England and Wales.