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Auditors Asked to Do More for Financial Stability

March 20, 2012

External audits could play a larger role in providing information to the regulators and supervisors of financial institutions, and the effectiveness of the regulation of external audits—particularly of financial institutions—could be enhanced, according to an international regulatory body.

The Financial Stability Board, a group established to coordinate internationally the work of national financial authorities and international standard-setting bodies in promoting financial stability, underscored those needs at a plenary meeting in January, the FSB announced last Thursday.

The FSB noted that the recent global financial crisis has demonstrated the importance of addressing these issues. It acknowledged that work to improve audit practices and standards is ongoing, with some regulators and auditing standard setters having issued finalized guidance on certain audit issues, while proposals in some other jurisdictions are subject to public consultation.

“In view of the global nature of markets, financial institutions and audit firms, greater international consistency in external audit practices and requirements will be important while continuing to promote their high quality,” said the FSB.

In particular, the FSB is encouraging further work in the following areas:

1. Improving the information that external audits provide to prudential supervisors and regulators of financial institutions, including systemically important financial institutions. As part of this effort, the FSB will provide input to the Basel Committee’s ongoing revision of its external audit policy papers and as it develops new robust external audit guidance, to be proposed by end-2012, and to the International Association of Insurance Supervisors as it updates and enhances its policies with respect to external audits of insurance companies.

2. Reinforcing the effectiveness of audit regulation, particularly for external audits of financial institutions, to improve audit quality. The FSB is requesting the International Forum of Independent Audit Regulators to report on (i) challenges and problems that its members have identified in their inspection programs relating to external audits of financial institutions, including audits of SIFIs; (ii) responses by IFIAR members to those issues, including follow-up with external audit firms; and (iii) member recommendations concerning steps that could be taken by audit regulators and auditors to further strengthen external audits of financial institutions.

The FSB also said it recognizes the importance of other work underway to improve audit practices and standards and encourages the continued efforts of the International Audit and Assurance Standards

Board, internationally, and other audit standard setters in their national contexts to improve the standards on information that external audits provide to investors and other financial report users. The approaches in the various consultative documents differ across jurisdictions, and it will be important to seek high-quality standards that enhance audit practices, and to the extent possible, improved international consistency, the FSB noted.

At least one Big Four firm has weighed in on the proposals. In response to the Financial Stability Board’s comments, Deloitte said last Friday it welcomes the FSB’s call to improve the dialogue between external auditors and prudential supervisors and regulators of financial institutions in the wake of the recent global financial crisis.

“We also applaud the collaborative and global approach to addressing lessons learned from the financial crisis through the leadership of the FSB and engagement of International Audit and Assurance Standards Board and International Forum of Independent Audit Regulators,” said the firm. “These challenges clearly require global and consistent solutions. As we have stated in the past, Deloitte is firmly committed to supporting measures that would sustain and enhance audit quality and build confidence among investors and other stakeholders, and ultimately help prevent a future financial crisis. We look forward to collaborating with the FSB and other parties in working to enhance financial stability in today's increasingly complex business environment.”

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