Britain’s financial and corporate governance regulators have told external audit firms to be more skeptical, claiming they let down investors, regulators, and “society at large” by failing to challenge management in the run-up to the financial crisis.
A joint paper from the Financial Services Authority and the Financial Reporting Council also called on audit firms to do more to help regulators. Among a series of ideas, it suggests that firms should blow the whistle to regulators if they find internal control weaknesses, for example.
“At times, auditors have focused too much on gathering and accepting evidence to support firms' assertions rather than exercising sufficient professional skepticism in their approach,” said Paul Sharma, FSA director of prudential policy. “This falls far short of what the FSA—and society at large—expects from auditors.”
Sharma added that it was time for the auditing profession to show that it has learned lessons from the crisis.
“Raising the bar for auditors on the application of professional skepticism has been high on our agenda for some time,” said FRC Chief Executive Stephen Haddrill. “Investors have a right to expect a more robust approach from auditors in challenging management’s judgments and related disclosures.”
Haddrill said he wanted to see “significant improvements” in disclosures about credit exposures, risks, and uncertainties provided by banks. Guidance from various regulators now required this, said Haddrill, but he added, “These improvements should have been achieved earlier and with less intervention.”
The deadline for responses to the discussion paper is Sept. 29, 2010.
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