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June 28, 2010

Auditors criticised for lack of scepticism

Auditors have been criticised for falling short of expectations for professional scepticism in a consultation by the UK Financial Services Authority (FSA) and the Financial Reporting Council (FRC).

The regulators are considering ways to enhance auditors’ contribution to prudential regulation.

The discussion paper, Enhancing the auditor’s contribution to prudential regulation, questions whether auditors have been sufficiently sceptical and have paid enough attention to indicators of management bias when examining financial accounting and disclosures that depend on management judgement.

FSA director of prudential policy Paul Sharma said at times auditors have focused too much on gathering and accepting evidence to support firms’ assertions rather than exercising sufficient professional scepticism.

“This falls far short of what the FSA, and society at large, expects from auditors,” Sharma said.

“We have learnt the lessons of the financial crisis and continue to enhance all aspects of our approach to prudential regulation of firms. It is time for the auditing profession to demonstrate that they have also learnt from the crisis.”

More scrutiny required

FRC chief executive Stephen Haddrill said investors have a right to expect a more robust approach from auditors in challenging management’s judgements and related disclosures.

“We see significant improvements in disclosures about credit exposures, risks and uncertainties provided by banks in their most recent financial statements,” Haddrill said.

Institute of Chartered Accountants in England and Wales chief executive Michael Izza said the report poses some tough questions for the audit profession.

He noted that the UK Treasury Select Committee concluded last year that there was little evidence to suggest that auditors failed in their duties in the run up to the financial crisis.

Izza also pointed out that while the FSA/FRC report makes a number of claims about the role and judgement of auditors in the run-up to the banking crisis, it fails to provide any further evidence to support them.

“Nonetheless, as a profession we are learning the lessons from the crisis and asking ourselves how does the current audit model need to evolve to meet changing market needs?” Izza said. “Any response to this question must be evidence based.”

The deadline for comments on the discussion paper is 29 September.


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