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Review Questions Audit Report Value

Global Glimpses | June 15, 2010

Bank shareholders value the external audit process but feel the audit firm’s end report is just a bland compliance statement that carries no useful information, according to a review by the Institute of Chartered Accountants in England and Wales (ICAEW).

The review said investors felt the audit process was “essential in imposing discipline upon directors’ presentation of financial information.” But the published end product—the formal audit report—doesn’t reflect that.

“If there is one big lesson from the crisis for auditors, it may be that more needs to be done to explain the value of audits to those outside the audit process,” said Iain Coke, head of the ICAEW’s Financial Services Faculty.

The report, “Audit of banks: lessons from the crisis,” calls on banks to improve the way they present risk information and for better interaction between auditors and bank supervisors.

One of its ideas is to set up an investor-auditor forum to highlight themes that bank-sector auditors will pay particular attention to in a reporting season. “Making more information available about discussions between auditors and banks could increase the value placed on audit and thereby increase market confidence,” said Coke.

The ICAEW says the auditing and the regulatory framework that supports auditing has “generally held up well in the crisis,” but its report accepts that politicians and regulators have questioned the value of bank audits, since auditing did not provide forewarning of the banking crisis.

In April, the U.K. Financial Reporting Council, which regulates corporate governance, said it wanted a debate about the value of external audit—in banks and more widely. The European Commission kick started its own review of the issue last week.