12 July 2013

FCA publishes Code of Practice for the relationship between the external auditor and the supervisor

The aim and focus of the FCA's Code is to enhance the regulatory process and contribute to high-quality external auditing by promoting an effective relationship between the auditor and supervisor in the context of particular regulated firms.

The FCA made the following announcement regarding plans for annual bilateral meetings between supervisors and external auditors of high impact firms:

"As a result of the financial crisis, we recognised the need to engage more effectively with auditors. So the Financial Services Authority's (FSA) Supervisory Enhancement Programme put annual bilateral meetings in place between supervisors and external auditors of high impact firms. The FSA then published DP10/3 - 'Enhancing the Auditor's Contribution to Prudential Regulation' (published jointly with the FRC) - which stated an objective to improve the quality and frequency of this engagement.

The external auditor has an important role to play in the regulatory framework, which requires confidence in audited financial information to ensure that supervisory efforts and policies are effective, appropriate and based on accurate data. This requires an open, cooperative and constructive relationship between the supervisor, discharging the responsibilities of the FCA, and the auditor, so they can both provide effective input to the regulatory process. It is important, therefore, that the terms and scope of this relationship are clearly defined and understood by both the supervisor and auditor, as well as regulated firms.

This Code sets out principles that establish, in the context of a particular regulated firm:

• the nature of the relationship between the supervisor and auditor;
• the form and frequency that communication between the two parties should take; and
• the responsibilities and scope for sharing information between the two parties.

Other wider relationships also exist between the regulator and audit firms (both individually and collectively) through which inputs to the regulatory process take place. These wider relationships are not addressed in the Code. However, the subject matter and concerns that are envisaged in the Code to be raised between supervisors and auditors about particular regulated firms will inform and guide discussions at all levels of dialogue between the regulator and audit firms.

The nature of the relationship and information-sharing between the regulator and audit firms should be considered in the context of the respective roles and responsibilities of auditors, a regulated firm’s management and those charged with the governance of a regulated firm:

• A regulated firm’s management is responsible for maintaining an effective system of internal control for producing financial statements, applying accounting policies, forming judgements and developing appropriate assumptions in doing so.
• Auditors are responsible for gathering sufficient and appropriate evidence to form an independent opinion about the regulated firm’s assertions on those financial statements, taken as a whole within the context of a true and fair audit opinion.
• As part of its governance structure, a regulated firm’s audit committee is charged with holding the management of the regulated firm to account for internal control and financial reporting, overseeing the external audit process and appointing external auditors.

While the relationship with the regulator as guided by the Code is designed to enhance the effectiveness of both the audit and the supervisory process, it does not detract from the independent role the auditor plays in forming judgements and opinions on a regulated firm’s financial statements for the benefit of investors and other stakeholders.

Press release

FCA's Code of Practice

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