ICAEW: Banks Should Reveal Auditor Disagreements

BANKS SHOULD disclose key accounting disagreements with auditors in their annual reports, the Institute of Chartered Accountants in England and Wales (ICAEW) has said.

Details of key "accounting judgments" that have been challenged by the audit committee should be revealed as part of an effort to shed more light on the relationship between company audit committees and their auditors, the ICAEW said in a report published on Tuesday.

Much of the bank audit process takes place behind closed doors, which has led to "questions being asked about the extent of professional scepticism being applied", the ICAEW said.

Iain Coke, head of the ICAEW's financial services faculty, said: "The effectiveness of the audit process depends on the relationships between the auditor, audit committee and executive management. For rigorous challenge to take place in an open way, the relationships must balance cooperation and challenge, be based upon trust while underpinned by professional scepticism."

Auditors must tell a "full, clear story" of the audit to audit committees, while audit committees, must "tell their own story to the public" to provide confidence in the governance process, Coke added.

The Big Four audit firms have faced fierce criticism for failing to ring alarm bells over the banks before the financial crisis. In 2010 Lord Lawson accused bank auditors of being the "dogs that didn't bark", during a House of Lords inquiry into auditors.

Recommendations in the ICAEW report include:

• Make the challenge and debate that has taken place as transparent as possible, for example, include details in the annual report on key accounting judgments challenged by the audit committee and of debates between the auditor and audit committee as well as auditor and executive management

• Consider key accounting judgements in light of risk. For example, the audit committee might debate whether it is appropriate to accept both an aggressive risk strategy and a valuation at the aggressive end of the acceptable range
• Plan ahead for an efficient year-end process; timetable pressures should not prohibit challenge and debate.