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Bank of England auditor reporting changes looming

The Bank of England has requested that auditors of Britain's largest banks present it with written reports, while also assuming the power to issue fines and bans against auditors in its continuing review of banking standards in the UK.

In a consultation paper published at the end of February, the Bank of England's Prudential Regulation Authority (PRA) proposed that external auditors to the UK's largest lenders be required to provide written reports directly to the PRA as part of the audit cycle of their clients.

According to the regulator, the reports will enable to better understand the risks in banks' financial reporting, as well as allowing supervisors to focus on key areas.

The consultation paper also seeks to outline how the PRA is to use those disciplinary powers it already holds over banks' auditors, introduced by the Treasury under the 2000 Financial Services and Markets Act.

Despite what the PRA described as "improvements" over the past few years in its relationship with external auditors, the regulator said constant monitoring of the quality of auditor-supervisor dialogue has shown "there is more that can be done."

Indeed, the move is the latest in an ongoing trend of government scrutiny of banking standards in the wake of the financial crisis.
"The absence of an effective auditor-supervisor relationship in the pre-crisis period was identified as a weakness in the Financial
Services Authority's supervisory approach by both the Treasury Select Committee and the Parliamentary Commission on Banking Standards," the PRA explained in the consultation paper.

PRA chief executive officer and Bank of England prudential regulation deputy governor Andrew Bailey said the relationship between external auditors and supervisors such as the PRA needs to work effectively.

He added: "This needs to be supported by high quality, thorough audits which can help mitigate emerging issues and risks that can threaten both the safety and soundness of individual firms and financial stability more broadly."

Bailey said the proposed changes to the relationship would also serve to strengthen enforcement.
"Where auditors and actuaries fail to provide us with the information that we need to supervise firms effectively, we now have disciplinary powers which allow us to take action to rectify this," he explained.

Commenting on the PRA's proposal, EY UK and Ireland managing partner for assurance Hywel Ball described the addition of disciplinary powers as "part of a wider trend on increased accountability being introduced across all senior roles relating to financial services," as well as a "recognition of the importance of the role the auditor plays in building confidence and transparency."

He added: "Part of an audit's role is to promote wider confidence in the industry and the capital markets more widely.
"The increased two way dialogue that is being developed between the regulator and the audit profession is going to be key to achieving that."

Commenting on the publication of the consultation paper, the Institute of Chartered Accountants of England and Wales (ICAEW) head of financial services faculty Iain Coke said: "ICAEW has long called for more frequent meetings, and this is a healthy step but the quality of discussions is even more important.

"We need to monitor this as part of auditors' and supervisors' commitment for continuous improvement," he explained, "The PRA report on this does just that."

However, Coke also warned against potential overlap between the disciplinary powers of the PRA and existing audit regulators such as the FRC and the Recognised Supervisory Bodies, including the ICAEW itself.

"These bodies must coordinate any disciplinary action to ensure auditors do not face double or triple jeopardy as a result," he cautioned, "That would only further muddy waters we are all trying to clear."

The consultation closes on 27 May 2015 and any changes will apply to the audits of financial reporting periods ending from 1 November 2016.

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