The Bank of England is consulting on plans to require the external auditors of the largest UK banks to provide written reports to the Prudential Regulation Authority (PRA) as part of the statutory audit cycle, as well as tightening up disciplinary procedures.
Under the proposals, external auditors of the largest UK headquartered deposit takers would be required to provide written reports to the PRA on an annual basis on firms’ financial reporting and the accompanying audit.
The PRA says these reports will help it to gain a better understanding of the risks in banks’ financial reporting and help supervisors to focus on the key areas of risk. The reporting process will also give auditors an early indication of the PRA’s concerns in any particular year before the main audit starts.
The regulator says that although engagement between external auditors and the PRA has improved in recent years, the PRA’s monitoring of the quality of auditor-supervisor dialogue has shown that there is more that can be done.
It says the absence of an effective relationship between auditors and supervisors in the pre-crisis period has been identified as a weakness by both the Treasury Select Committee and the Parliamentary Commission on Banking Standards.
The consultation proposes that, initially, only the largest UK headquartered deposit takers will be in scope, as they pose most risk to financial stability, and that it will be introduced, in full, in relation to the audits of financial reporting periods ending on or after 1 November 2016.
The Financial Services and Markets Act (FSMA) gives the PRA the power to discipline external auditors and actuaries of PRA-authorised firms if they fail to comply with reporting requirements under FSMA or duties imposed by PRA rules. The range of disciplinary powers that the PRA can use includes fines, public censures or disqualification from working in financial services.
The PRA is also consulting on how it will use those powers and how it will co-operate with other regulators when it is using the powers.
The PRA says disciplinary action could be taken against the ‘person’ who is formally appointed to undertake the audit or actuarial work. This may be an individual or a firm, depending on the terms of appointment.
Andrew Bailey, deputy governor, prudential regulation, Bank of England and CEO of the PRA said: ‘We need the relationship between external auditors and supervisors to work effectively. This needs to be supported by high quality, thorough audits which can help mitigate emerging issues and risks that can threaten both the safety and soundness of individual firms and financial stability more broadly.
‘Where auditors and actuaries fail to provide us with the information that we need to supervise firms effectively, we now have disciplinary powers which allow us to take action to rectify this.’
The consultation closes on 27 May and full details are available here
