As the 2011 year-end bank reporting season starts, financial institutions, their auditors and financial report users must be particularly alert.
Tough economic times always mean additional challenges for auditors. In a period of serious economic volatility, they need to make sure that the financial position of banks is properly explained and understood.
I’d like to share ten actions Banks could take to improve business and investor confidence in their financial reports, which came out of a recent debate organised by ICAEW.
The debate was by ICAEW’s Financial Services Faculty’s Auditor-Investor Forum, which brings together investors, auditors and preparers of financial reports.
- Preparing for further potential economic shocks from the Eurozone, which may happen shortly after bank results are announced
- Ensuring banks’ financial statements provide the full story of the business, its key drivers and results
- Further improving risk disclosures, particularly around trading activity
- Providing more information about the approach taken to liquidity management, including how different classes of assets are funded
- Offering clarity over exposure to Eurozone countries’ debt and provisioning against it
- Delivering clear explanations of fair value measurement judgements
- Highlighting impact of the bank’s own credit risk on its net worth and profitability
- Providing critical assessments of a bank’s goodwill on the balance sheet, as some of this is arguably impaired
- Being aware of differences between IFRS and US GAAP requirement, especially relating to the netting of financial instruments
- Improving transparency around banks’ capital ratios
It is impossible to predict the nature, timing or impact of future economic shocks, and it is not the job of accounting to do so.
However, clear explanations will mean fewer nasty surprises for readers of financial reports, which is why it is so important that reports are properly written and carefully scrutinised.