The UK Financial Services Authority (FSA) has issued a draft code of practice to enhance the dialogue between auditors and supervisors.
The FSA, who worked jointly with the Bank of England (BoE), said the aim of the code is to improve audit effectiveness and ensure supervisors are better informed about, and able to challenge, the firms they regulate.
The code of practice proposes a framework for auditors and supervisors to work together in an open and collaborative way to enhance the ability of the FSA to scrutinise specific accounting practices and related judgements to understand their implications fully and highlight emerging problems
Auditors are also expected to gain valuable insight from dialogue with the FSA when gathering evidence to support their audit opinions.
Principles in the code of practice cover:
- the nature of the relationship between the supervisor of a regulated firm and the firm’s external auditor,
- how often and in what form they should be communicating with each other; and
- the way that information should be shared between them.
For certain firms, the code specifies a minimum level of formal meetings between the supervisor, the external auditor and the firm.
It also encourages informal discussions to help both supervisors and auditors fulfil their responsibilities towards regulated firms and enhance the effectiveness of the supervisory and audit process.
“Auditors have an important role to play in the supervisory process as the annual financial statements that they audit form the basis of the prudential information that the FSA uses when supervising firms,” the FSA said.
PwC chairman and senior partner Ian Powell said the firm welcomes the proposals as it would help both auditors and regulators benefit from each other’s knowledge and help to reduce systemic risk in capital markets.
ICAEW chief executive Michael Izza also supports the draft saying the communication has to be two-way with supervisors able to access the insights of auditors into the banks they’re regulating and auditors should be aware of any concerns or issues regulators have, which may have a bearing on audit opinions.
“This code of practice starts to redefine the relationship between auditors and supervisors for the better. In setting out a clear framework for this two-way dialogue, both formal and informal, the BoE and FSA have demonstrated how important it is that all those who play a part in the oversight of banks and their activities should work more closely together.”
Deadline to comment on the draft is 25 March.