ICAEW Call for better Bank Risk Reporting

ICAEW has published a report warning that banks need to consider carefully how they communicate issues such as their exposure to sovereign debts and the way they manage risks and liquidities in their 2011 year-end reporting.

The report summarises a discussion at ICAEW’s auditor investor forum, which brings together investors, auditors and financial statement preparers to debate current areas of concern. It was set up following the publication of the faculty’s report Audit of Banks: Lessons from the Crisis in June 2010.

ICAEW says the findings indicate there is scope in many banks’ accounts to improve the communication of information on risk generally, and liquidity in particular. It said there is a case for the banking industry developing an agreed approach to producing a statement on risk, which would bring greater transparency and focus to the key question of what risks are being taken in order to earn returns.

Trading was seen as a particularly opaque area, with little transparency around the nature and degree of risk represented by sometimes very large balance sheet values for trading assets and liabilities (including derivatives).

The report also says it is currently very difficult to discern from published accounts the approach taken by banks to liquidity management, and that there needs to be more information about how different classes of asset are funded.

In addition, much more information could be provided on the extent to which assets are encumbered (for example, through sale and repurchase agreements or covered bond programmes), and also the level of assets which remain available for use as collateral.

There was agreement that the standard cash flow statement does not contain useful information for banks and that it would be better replaced by something along the lines of a statement on the sources and application of funds.

Iain Coke, head of ICAEW’s financial services faculty, said: ’This year will be particularly difficult. It is impossible to predict the nature, timing or impact of future economic shocks, and it is not the job of accounting to do so. However, clear explanations will mean less nasty surprises for readers of financial reports, which is why it is so important it is done properly and scrutinised carefully.’