The FSA is consulting on ways to enhance the effectiveness of auditors after saying their work often "falls far short" of what it expects.
In a discussion paper published today, the FSA and Financial Reporting Council (FRC) say auditors focus too much on gathering and accepting evidence "rather than exercising sufficient professional scepticism in their approach".
The FSA says it wants to stimulate debate on the role of auditors in a bid to enhance their contribution to prudential regulation.
- Questions aspects of the quality of audit work relevant to prudential regulation - in particular, whether the auditor has always been sufficiently sceptical and has paid sufficient attention to indicators of management bias when examining key areas of financial accounting and disclosure which depend critically on management judgement;
- Outlines the FSA's concerns about auditors' work on client assets and how auditors fulfil their legal obligation to report to the FSA;
- Explores a variety of ways in which changes are being made and further changes could be made by the FSA, the FRC and auditors to increase the effectiveness with which auditors undertake their work; and
- Examines the regulatory environment in which auditors operate more widely and suggests measures to enhance how auditors contribute to prudential supervision.
Paul Sharma, FSA director of prudential policy, says: "Our experience has indicated that, at times, auditors have focused too much on gathering and accepting evidence to support firms' assertions rather than exercising sufficient professional scepticism in their approach.
"This falls far short of what the FSA - and society at large - expects from auditors.
"We have learnt the lessons of the financial crisis and continue to enhance all aspects of our approach to prudential regulation of firms. It is time for the auditing profession to demonstrate that they have also learnt from the crisis. This paper is an important step in the debate that needs to be had around the role of auditors."
Stephen Haddrill, chief executive of the FRC, adds: "Investors have a right to expect a more robust approach from auditors in challenging management's judgements and related disclosures.
"The auditor's ability to carry through their challenge is also important and proposals in this paper for improved engagement and information sharing between auditors and the FSA will facilitate appropriate improvements."
The deadline for responses to the discussion paper is 29 September 2010.
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