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FRC review finds bank audits in need of ‘significant improvements’

THE AUDITS of two banks and building societies required “significant improvements”, the FRC said on Tuesday as it published the findings of a thematic review of audits in the sector following its criticism of their quality and rigidity.

Last year, the FRC launched a formal review of bank audits to find out why progress in improving their quality has been so slow. In particular, the review focused on the testing of loan loss provisions and general IT controls.

The accountancy watchodg reviewed 13 audits of banks and building societies, for financial years ending between July 2013 and December 2013. The organisations – including six UK listed banks, three building societies and four subsidiaries of internatioanl banks – were audited by seven of the UK’s biggest audit firms: the Big Four, BDO, Grant Thornton and Mazars.

However, the FRC did not publicly name the audits in need of vast improvement.

It found that ten audits were deemed as either good or requiring limited improvements, while one needed improvement and two required significant improvements.

The two requiring the biggest improvements were audits of UK subsidiaries of foreign banks. The FRC said that in both these cases it had “identified issues with both the quality of the audit work performed and evidence provided through reporting by other group auditors”.

Other areas for continued concern include the “consistency of audit quality”. It found that “auditors are not applying a sufficient degree of challenge and/or scepticism at all times and that this is not being identified by internal quality control reviews.”

Even on audits where it found examples of “thorough, probing audit work with evidence of challenge and review” those same audits demonstrated examples of “inadequate follow-up of issues raised by audit team”.

Loan loss provisioning was flagged as a “significant risk in all audits”. There were also anxieties raised over the reliance on the work of others, especially on UK subsidiaries of overseas banking groups.

In five of the audits “IT control deficiencies identified by the IT specialists were not sufficiently or appropriately followed up”, nor were raised issues or scope limitations.

The FRC findings revealed that in the majority of reviewed audits, issues about consistency in the quality of audit testing, encompassing controls, substantive and IT testing showed that “auditors are not consistently applying a sufficient degree of challenge, and that such improvements are not being identified by internal quality control procedures”.

FRC executive director, Paul George, was broadly welcoming of the efforts made by industry, saying: “I am pleased to note the improvements achieved by many audit teams. This reflects investment in sector specific procedures and focus by the firms in addressing concerns previously highlighted by the FRC. There is no room for complacency and we expect all audit firms to achieve consistently high quality.”

“The report highlights that firms have in the main demonstrated that, with appropriate focus and resources, good quality audits can be achieved. It is clear that firms with sufficient banking sector experience and access to up-to-date specialist knowledge in IT and other relevant areas, such as real estate valuation, are able to audit loan loss provisions to a good standard.”

The FRC vowed to keep a close eye on the banking sector and undertake follow-up work on audits where significant improvements are required as part of next year’s inspection cycle.

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