Today’s report by the Financial Services Authority and Financial Reporting Council on Enhancing the auditor’s contribution to prudential regulation highlights a number of real challenges for the audit profession.
As the Treasury Select Committee pointed out last year, there is little evidence to suggest that the auditors have failed in their duties. Today’s report, whilst making a number of claims about the role and judgement of auditors in the run-up to the banking crisis, fails to provide any further evidence to support them.
Of course, that doesn’t answer the basic challenge from the Committee; If the current audit model failed to highlight developing problems in the banking sector, what is the usefulness of the audit process?
In setting out how auditors can play a stronger role in the regulatory oversight of banks, the FSA report makes the point that auditors are an integral component of corporate governance structures.
Nonetheless, together with all market participants we have had to reflect on the lessons we can learn from 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 in this post-banking crisis world.
This is a process that we started in January last year with our evidence to the Treasury Select Committee and which our Financial Services Faculty has taken forward through its Future of Bank Audits project, publishing our recommendations earlier this month. The FSA document has picked up on many of these in today’s report.
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. We will be responding in detail to the report in due course and are keen to hear your thoughts.