On March 10, the UK Financial Services Authority (FSA) and the Financial Reporting Council (FRC) published a joint feedback statement, Enhancing the auditor's contribution to prudential regulation FS11/1, summarizing the responses to their June 2010 joint discussion paper, DP10/3, similarly titled.
DP10/3 was intended to stimulate debate on the contribution that auditors make to prudential regulation. It examined several key areas: (a) promoting dialogue and information-sharing between auditors and supervisors; (b) the application of professional scepticism by auditors; (c) the nature and extent of disclosures about management's key judgements; (d) FSA and FRC powers; and (e) the scope of auditors' reporting.
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: (a) development of a draft code of practice by the FSA, alongside the Bank of England, designed to enhance the dialogue between auditors and supervisors (see the February 11 edition of Corporate and Financial Weekly Digest); (b) increased dialogue between the FSA and auditors, individually and collectively, to discuss key financial reporting issues; (c) increased and more effective use by the FSA of Section 166 skilled person reporting; and (d) formalization of cooperative arrangements between the FSA and the FRC's Audit Inspection Unit, in a memorandum of understanding.
In addition, on March 10 the FRC also published feedback on its parallel 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. It also announced measures designed to ensure a consistent understanding of the nature and role of auditor scepticism and appropriate support for, and transparency of, its application.