External bank auditors have new guidance from the Basel Committee on Banking Supervision as of March 31, 2014, and banks should understand the updated guidelines before their next audit.
The new guidelines, 46 pages in all, replace The Relationship Between Banking Supervisors and Banks' External Auditors, published in 2002, and External Audit Quality and Banking Supervision, from 2008.
The main reason for the updates
The international consortium of central banks believe the 2008 financial crisis showed weaknesses in banks' risk management. A key tool to strengthen risk management is an external audit conducted by third party auditors who work for the bank, not for the regulators.
The goal is for banks and their external auditors to identify risk management issues and strengthen their risk management process before an audit.
The guidelines contain two major differences from earlier recommendations:
- Regular communications among audit committees, external auditors, and banking regulators on risks, systemic issues, accounting techniques, and auditing issues
- Auditors that understand the banking industry, are independent third parties, and have clear policies that bar conflicts of interest
Role of the audit committee
The committee also outlined nine principles that spell out the role of the audit committee and the relationship between banking supervisors and auditors. Those principles are:
- The audit committee should have a robust process for approving, or recommending for approval, the appointment, reappointment, removal, and remuneration of the external auditor.
- The audit committee should monitor and assess the independence of the external auditor.
- The audit committee should monitor and assess the effectiveness of the external audit.
- The audit committee should have effective communication with the external auditor to enable the audit committee to carry out its oversight responsibilities and to enhance the quality of the audit.
- The audit committee should require the external auditor to report to it on all relevant matters to enable the audit committee to carry out its oversight responsibilities.
- The supervisor and the external auditor should have an effective relationship that includes appropriate communication channels for the exchange of information relevant to carrying out their respective statutory responsibilities.
- The supervisor should require the external auditor to report to it directly on matters arising from the audit that are likely to be of material significance to the functions of the supervisor.
- There should be open, timely, and regular communication between the banking supervisory authority, audit firms, and the accounting profession as a whole on key risks and systemic issues, as well as a regular exchange of views on appropriate accounting techniques and auditing issues.
- There should be regular and effective dialogue between the banking supervisory authority and the relevant audit oversight body.
Although the Basel Committee has no authority to set standards for auditors, the committee has asked that the International Auditing and Assurance Standards Board (IAASB) use its recommendations to impose new regulations on banks.
The US members of the Basel Committee include the Federal Reserve Board, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp.
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