The Financial Reporting Council (FRC) is to review the quality of auditing of banks following a number of high profile bank failures over the last five years, as part of measures to improve the quality of audit by identifying the key areas where improvements can be made quickly.
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 they remain below the average of all audits inspected. It says early indications from the latest cycle of inspections suggest that little has changed.
Baroness Hogg, FRC chairman, said: '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 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 says the review will begin in the second 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.
It will focus on the testing of loan loss provisions and general IT controls which were highlighted as problematic issues in its 2013 Audit Quality Inspection report. The regulator will look at what specific actions the major firms have taken to address issues identified in the FRC's audit inspections; how they have assessed the effectiveness of those actions; and the FRC's assessment of the effectiveness of the actions taken.
Where recommendations have been made to specific audit firms, the FRC will be checking to ensure they have been properly addressed. The regulator 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 as part of this review.
The FRC said it is giving notice of the planned review now so that firms and companies are well aware of its expectations in advance of the 2014 audit season. It also plans to discuss with the chairs of audit committees of banks and building societies how they can reinforce the quality of corporate reporting and audit in this sector.
Iain Coke, head of ICAEW's financial services faculty, said: 'We expect that bank audit committees and auditors will want to explain in the 2013 annual reports how they have addressed the concerns raised by the FRC about audit quality, and why investors should have confidence in the published financial statements.
'We will see disclosures for the first time early next year about how the audit process has addressed key risks. These new disclosures provide a real opportunity to better inform the public about this.'
A number of the Big Four welcomed the announcement.
In a statement, KPMG said: 'Economic volatility and dynamic business models continue to change the nature and extent of risks in the financial sector. Audits have responded to these changes in the years since the financial crisis, but this evolution needs to continue.'
PwC said it remained 'committed to continuing to achieve the highest levels of quality and continue to support measures that seek to improve audit quality and build confidence in the profession and market'.
