In its draft Plan & Budget for 2014/15 published today
, the Financial Reporting Council (FRC) announces a series of key projects including a specific review of the quality of auditing of banks. This thematic review will focus on aspects of how bank and building society audits are conducted to identify why progress in improving their quality has been slow and what needs to be done to achieve necessary improvements. The FRC’s review will begin in the 2nd quarter of 2014 as soon as this year’s audits have been completed, with a formal report expected to be published by the end of the year.
The FRC is concerned that the pace of improvements in the quality of auditing of banks and building societies has not been sufficient. Over the last five years, the FRC has increased its monitoring of bank and building society audits in its annual programme of audit quality inspections, but the findings have shown they are below the average of all audits inspected. The 2013 Audit Quality Inspection report identified the need for improvements in the quality of auditing of financial institutions as a key concern. Specific issues highlighted were the adequacy of the testing of loan loss provisions and general IT controls. Early indications from the latest cycle of audit inspections suggest that it is unlikely that the FRC will be able to report that significant progress has been achieved.
Baroness Hogg, Chairman of the Financial Reporting Council, said,
“Concerns about the quality of auditing of banks and building societies persist, not least from our own inspections of audits and despite enhanced corporate governance requirements. We are clear that there is scope for improvement and we hope to see a genuine step change in the quality of bank and building society auditing in the UK. The issues and concerns that have been raised mean that a specific review of audit in this sector is warranted. The review will aim to assess the extent to which the firms’ actions to address the FRC’s concerns are having an impact and if not, identifying what further action is required.”
The FRC’s review will focus on the testing of loan loss provisions and general IT controls and look carefully at issues including;
What specific actions have been taken by the major firms to address issues identified in the FRC’s audit inspections of banks and building societies
How the major firms have assessed the effectiveness of actions they have taken
The FRC’s assessment of the effectiveness of the actions taken
Focussing on issues where recommendations have been made to specific audit firms to ensure they have been properly addressed
The FRC will continue to perform a number of routine inspections of banks and building societies and will take account of any audit issues arising from those inspections.
The FRC is announcing this review now so that firms and companies are well aware of its expectations in advance of the 2014 audit season. The FRC also plans to discuss with the chairs of audit committees of banks and building societies how they too can reinforce the quality of corporate reporting and audit in this sector.
Notes to editors:
The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
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