UK: the auditor's contribution to prudential regulation - feedback on FSA discussion paper

The Financial Services Authority has today published a feedback statement - see here (pdf) - in response to its discussion paper Enhancing the auditor's contribution to prudential regulation (here, pdf). This covers some of the same ground as the FRC in its paper below with regard to auditor scepticism and, in this regard, the FSA notes that a difference of views remains between it and auditors on whether auditors have been sufficiently sceptical. More specifically, the FSA states (paras 1.8 and 2.7):

While recognising that this may be exacerbated by the fact that it is often difficult to identify in retrospect whether auditors have been sufficiently sceptical, we have each held or will hold separate meetings with individual audit firms to explain the specific matters that led to our conclusions. Our concerns include whether there was sufficient challenge in relation to particular judgements and whether scepticism is adequately embedded in the audit firms’ processes and training ... We recognise that accounting estimates are the responsibility of management, not auditors. Our concern is about circumstances where auditors do not sufficiently consider whether there are alternatives not considered by management and therefore do not challenge whether management are making the most appropriate judgements ... We acknowledge that professional scepticism is a particular mindset and therefore that direct evidence of its exercise, or otherwise, may be hard to observe after the event and is often circumstantial. Going forward, we believe it is important that our focus is on improving confidence that an appropriate degree of scepticism will be applied consistently by auditors".

Elsewhere the FSA states its belief that it can enhance the effectiveness of audit committees through engaging with them on accounting and financial reporting issues to a greater extent. The FSA also states that it will soon publish a policy statement setting out proposals for final rules the objective of which is to improve the quality and consistency of auditors’ client asset reports.