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The Financial Services Authority (FSA) and Financial Reporting Council (FRC) have today published a feedback statement summarising the responses to the joint discussion paper on enhancing the auditor’s contribution to prudential regulation.

The FSA and the FRC received a wide range of constructive responses from accountancy firms, accountancy bodies, financial institutions and other stakeholders.

The discussion paper was intended to stimulate debate on the contribution that auditors make to prudential regulation. It examined several key areas:

• promoting dialogue and information sharing between auditors and supervisors;
• the application of professional scepticism by auditors;
• the nature and extent of disclosures about management’s key judgements;
• FSA and FRC powers; and
• the scope of auditor reporting

The feedback statement addresses each of these in light of the comments received and sets out the FSA’s and FRC’s responses, including the actions that have been taken, the further steps that will be taken and the matters that will be explored further.

Following the discussion paper and wider work in this area, a number of actions have already been taken to enhance the role of auditors including:

• development of a draft code of practice by the FSA, alongside the Bank of England, designed to enhance the dialogue between auditors and supervisors;
• increased dialogue between the FSA and auditors, individually and collectively, to discuss key financial reporting issues;
• increased and more effective use by the FSA of section 166 skilled person reporting; and
• formalisation of cooperative arrangements between the FSA and the FRC’s Audit Inspection Unit, in a memorandum of understanding;

In addition, the FRC has today published the feedback to its discussion paper: Auditor Scepticism: Raising the Bar. The FRC confirms in this paper that it will continue to monitor the extent to which professional scepticism is being applied by auditors. The FRC has also announced a number of measures designed to ensure a consistent understanding of the nature and role of auditor scepticism and appropriate support for, and transparency of, its application.

Both the FSA and the FRC expect these measures to contribute to effective auditing and higher quality disclosures in firms’ annual reports and are encouraging auditors to share any observations or concerns about the adequacy of firms’ disclosures with the FSA.

Following the current financial reporting season, the FSA and the FRC will evaluate the effectiveness of increased engagement with auditors, the quality of disclosure in annual reports and application of professional scepticism by auditors and will provide further feedback to auditors and firms.

Richard Thorpe, FSA auditing and accounting sector leader, said:

''This paper sets out what we and the FRC expect from auditors. We will continue to encourage regular open dialogue between auditors and supervisors to increase the effectiveness with which auditors undertake their work, and the effectiveness of our supervision. We are pleased that the FRC is taking actions to address auditor scepticism and look forward to supporting its efforts as we continue to evaluate the extent of auditors’ contribution to prudential regulation.''

Richard Fleck, a Director of the FRC and Chairman of the Auditing Practices Board, said:

''We support the renewed emphasis on closer engagement between supervisors and auditors and will encourage such continued engagement in the future. Auditor scepticism is fundamental to ensuring high quality audits. The challenge now is to build on auditors’ recognition of its importance.

We will promote further debate within the profession, and with others, to ensure there is a consistent understanding of what it means in practice and secure full support for, and transparency of, its application in the future. We also believe that the quality of the financial statements of a company is enhanced by appropriate disclosures about those matters the auditor has challenged.''

Notes to editors.

1. FS11/1: Enhancing the auditor's contribution to prudential regulation: Feedback on DP10/3 is now available on this website.
2. DP 10/3: Enhancing the auditor's contribution to prudential regulation was published in June 2010.
3. The FRC’s feedback to its discussion paper Auditor Scepticism: Raising the Bar is available on the FRC website.
   
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.