21 June 2013

FEE comments on external audits of banks

FEE notes indeed that many of the principles outlined in the Basel Committee public consultation that pertain to auditors’ behaviour are already dealt with in the principles-based pronouncements of independent IFAC Boards (IESBA Code of Ethics, ISAs and ISQC1) and, therefore, need not be repeated without appropriate acknowledgement of this fact. Otherwise this could draw an artificial distinction between bank auditors and any other auditors.

Furthermore, the detailed suggestions made to the IAASB underlying the 16 principles are generally rules-based, prescribing what the Basel Committee believes to be needed for adherence to the bank audit principles that FEE in substance supports. This means that whereas the ISAs are principles-based, many of the Basel Committee’s proposals, if followed, would result in detailed rules-based requirements applicable for the audits of all banks, which might not take into consideration the specifics of individual audited credit institutions. To tackle this issue, a thorough analysis of the recommendations pertaining to auditor behaviour comparing each of them directly to the relevant existing requirement of the applicable standards etc. would be extremely useful in order to differentiate:

a. The areas in which the Basel Committee is merely reaffirming the necessity for existing requirements; and

b. Those areas where the Committee is either calling for strengthening (revising) existing requirements or for additional guidance as to their application.

While FEE notes that some references to ISAs and other standards have been included, such referencing has not been undertaken consistently.

Finally, suggestions that relate to matters beyond auditor behaviour would need consideration by parties other than auditing standard setters. In other words, FEE would suggest the Basel Committee differentiates between what is already required, what is seen as firming up on existing requirements and what is really a new idea.

Support to enhanced supervisor – auditor dialogue

FEE is supportive of the main principles enshrined in the Document. FEE particularly values the intention to foster more efficient dialogue between the supervisor, auditor and other relevant stakeholders. This dialogue is considered particularly important in order to assist the supervisor in maintaining the stability of individual banks and the banking system as a whole.

FEE agrees that the supervisor can benefit from the results of the external auditor’s work because, in many respects, the two parties have complementary objectives, although their focus is different. Similarly, the external auditor may benefit from insights that the supervisor can communicate to him based on an overview of the entire industry sector. The document sets out significant expectations about communications from the external auditor to the supervisor but provides minimal guidance on communications from the supervisor to the external auditor. Reciprocal communications from the supervisor to external auditors have an important role to play in supporting improved audit quality. It should be noted that in many EU Member States there is room for improvement in this communication, whereas FEE sees good practices in others.

Scope

With regard to the scope of the proposals in the Document, many banks and, in some jurisdictions all of them, are defined by the competent legislator (the European Union and EU Member States) as public interest entities (“PIEs”). Once this is the case, the audit, quality control and ethical rules for PIE audits apply and should apply to them. However, where the competent legislator decides that certain banks are not PIEs, the need to apply all principles of PIE audits to such banks should be seriously considered.

Indeed, the Document proposes the same level and type of requirements for the external auditor regardless of the relevant characteristics of the audited bank. FEE proposes the Document highlights that the supervisor’s expectations on external auditors should differ based on the risk, the complexity, the size and the type of the audited bank. Having regard to the scale of the differences in the current global banking industry, the “one size fits all” approach is clearly disproportionate and ineffective.

The Document makes several references to additional work that the auditor performs for the supervisor, either as part of the statutory audit or as a separately defined specific engagement. FEE understands that, since ISAs are not industry-specific, the supervisors expect external auditors to tailor their audit work in response to specific risks associated with the banking business. FEE wishes to stress that the role of the auditor in discharging his audit duties, as opposed to providing other professional services based on separate regulatory requests, needs to be clearly distinguished. Care must be taken to avoid creation of any existing or perceived conflicts between these roles.

FEE therefore strongly recommends that the Basel Committee further clarifies the scope of the work and the audit procedures that are expected from the auditor for prudential regulatory purposes. This is particularly important, since none of the paragraphs defining supervisor’s expectations of the auditor starts with the standard wording “during the course of the audit ...”, which is the usual expression that highlights a procedure anticipated as part of the standard audit work.

In this context, from FEE's point of view, the title of the guidance ‘External audits of banks’ might be misleading. The principles set out in the guidance refer not only to the external auditor, but also to audit committees, supervisors etc. Accordingly, FEE suggests a title that would imply a broader perspective of the subject matter such as ‘The basic principles for the external audits of banks’.

Press release

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