Prudential supervisors and external auditors. Marc Pickeur, CBFA Brussels, 27 October

Transcription

1 Prudential supervisors and external auditors Marc Pickeur, CBFA Brussels, 27 October

2 Disclaimer The views expressed by the speaker are entirely his own, and are not to be taken to represent those of the BCBS or the CBFA 2

3 Overview The Basel Committee on Banking Supervision Why are banking supervisors interested in accounting developments? Why are banking supervisors interested in auditing developments? Key areas of interest to banking supervisors Potential areas where auditors can contribute to prudential supervision 3

4 Basel Committee on Banking Supervision Chair: Nout Wellink, President of the Netherlands Bank Members: head of supervision of Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States Location: Basel (Switzerland) 4

5 Basel Committee on Banking Supervision a forum for regular cooperation on banking supervisory matters. its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. developed guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision. Accounting and auditing via Core Principles. 5

6 Basel Committee on Banking Supervision Accounting Task Force is one of the BCBS main groups ATF has three subgroups Conceptual Framework Issues Subgroup Financial Instruments Practices Subgroup Audit Subgroup ATF has three ad hoc working streams - specific issues The Financial Statement Presentation work streams The Insurance issues in Banking work streams The Transparency working group Secretariat 6

7 Why are banking supervisors interested in accounting? Financial information: investors, supervisors Reporting - exchange of information about banking risks Disclosures (accounting and Pillar III) Impairment Accounting for financial instruments Link with regulatory capital requirements Accounting standards could be at odds with the objective of financial stability 7

8 Why are banking supervisors interested in auditing? Banks financial statements are subject to audit by external auditors. The auditor s opinion lends credibility to the financial statements and promotes confidence in the banking system. The need for bank supervisors to be confident of audit quality has been reinforced by a variety of factors and events: increased reliance on external auditors' expertise and judgements high-quality audits enhance market confidence supervisors are increasingly reliant on high-quality audits to complement supervisory processes major external audit firms have globalised and, as a result, their structures are complex and governance within the firms lacks transparancy 8

9 Key areas of interest to banking supervisors Bankers' and supervisors' reliance on external auditor's expertise and judgement has increased: implementation of principles-based accounting standards and increased complexity of rules-based accounting standards have amplified reliance on auditor expertise and judgements and intensified auditor evaluation of management judgements; financial instruments and banking transactions are becoming increasingly complex, which poses challenges to auditors; audit quality specific to bank accounting is influenced by the quality and complexity of accounting standards; auditing and ethics standards are written for a broad range of audited companies and do not always include requirements that are specific to banking. This increases reliance on auditors' specialised expertise and emphasises the importance of the Committee's input into the audit standard setting process. 9

10 Key areas of interest to banking supervisors High-quality audits enhance market confidence, particularly in times of severe market stress: the market turmoil revealed valuation challenges in the audit of illiquid and/or complex financial instruments; a perceived lack of transparant financial information from banks and across the financial system as a whole was a major factor of the current market crisis. It also has the potential to widen the expectations gap for audits; Banks actions regarding off-balance sheet vehicles raised questions about existing guidance related to consolidation accounting. In addition, banks' treatment of such changes to the balance sheet may diminish market confidence in the audit process with regard to consolidation. 10

11 Key areas of interest to banking supervisors Most of the world's assets banking assets are audited, and supervisors are increasingly reliant on high-quality audits to complement supervisory processes: As most of the world's banking assets are audited, high-quality audits contribute to a sound banking system and financial stability; auditors can provide an early warning on issues of supervisory concern; audited financial information is among the sources of information used in the riskfocused supervision process, which contributes to increased efficiency in banking supervision. 11

12 Key areas of interest to banking supervisors Major external audit firms have globalised and, as a result, their structures are complex and governance within the firms lacks transparancy: transparancy is lacking about global network firm corporate governance and their world-wide positions; consistent interpretation of accounting, auditing and ethics standards within a global firm poses challenges. 12

13 Auditing BCBS documents about auditing: External audit quality and banking supervision, December 2008 Internal audit in banks and the supervisor's relationship with auditors, August 2001 The relationship between banking supervisors and banks' external auditors (also knowns as IAPS 1004), January 2002 Audit of the financial statements of banks (also known as IAPS 1006), October

14 Auditing IAASB documents of interest to supervisors: ISA External Confirmations ISA Auditing Accounting Estimates, Including Fair value Accounting Estimates, and Related Disclosures Revision of IAPS 1012: Auditing Financial Instruments Measured at Fair Value (work in progress) 14

15 Some potential areas where auditors can contribute to prudential supervision information sharing between auditors and supervisors trilateral meetings auditor, audit committee and the supervisor duty/right to report meetings with auditors the quality of regular returns adequacy of internal controls pillar III and prudential information in the annual report enhancing auditors' reporting on client assets * * * enforcement powers co-operation should not blur the responsabilities of auditors and supervisors 15