The FSA continues to be concerned by the number of firms that are failing to comply with ‘CASS’ – its complex rulebook on client assets (including client money), which is designed to protect assets belonging to clients and being held by the firm from the firm’s insolvency (and its creditors). The FSA is, to some extent, dependent on firms’ auditors, through their compulsory annual report on a firm’s client assets systems and compliance, to bring firm-specific breaches and weaknesses to its attention. The FSA has expressed very serious concerns about the scrutiny applied by auditors during their annual reviews, and the quality of the reports that are being produced. In some cases the FSA has referred auditors to disciplinary boards.
In June 2011 new rules for auditor client asset reporting will take effect. The main objective is to improve the FSA’s oversight of firms’ client asset systems and compliance through better quality, more transparent and consistent auditor client asset reports. Auditors will also be keen to repair their reputation by showing the FSA they are up to the task, and firms can expect auditors to be more probing, thorough and challenging in their annual reviews.
The main resulting risk to firms is that breaches that were previously undetected (or perhaps just undisclosed) are now more likely to be identified, examined and reported to the FSA, and therefore the chances of the auditor client asset report resulting in a formal FSA investigation (and enforcement action) are greater. To reduce the risk of such a regulatory crisis, firms should confirm their understanding of precisely how CASS applies to them and the extent to which they are CASS-compliant, ideally resolving any issues before their auditor commences its annual review. They should also be prepared to address any further breaches identified by the auditor with appropriate remedial action and, in some cases, they may need to challenge auditors where they believe they are wrong. The governing body of the firm will be formally required to read the auditor’s client assets report, and they and senior management are advised to take an auditor’s ‘adverse opinion’ very seriously.
Click here to read our full analysis, which expands on the new rules, discusses the FSA's concerns in more detail and explains how firms should manage the resulting risks during the various stages of their annual client assets audit.