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.”

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By GlobalData

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.