The Basel Committee on Banking Supervision (the “Basel Committee”) of the Bank for International Settlements issued a revised set of guidelines (the “Guidelines”) concerning the external audits of banks. The Basel Committee said that the recent global financial crisis highlighted the need to improve the quality of banks’ external audits. The Basel Committee further stated in the Guidelines that external auditors of banks can contribute to financial stability “when they deliver quality bank audits which foster market confidence in banks’ financial statements.” A sound bank audit, continued the Basel Committee, provides valuable input to a bank’s regulatory supervisors. The Guidelines replace two earlier sets of guidelines on these issues released by the Basel Committee in 2002 and in 2008, respectively.
The Guidelines are divided into two parts. In Part 1, the Guidelines discuss the role and responsibilities of bank audit committees in the context of external audits and the interaction of bank supervisors with auditors and audit oversight authorities. Part 1 of the Guidelines also provides a framework that supervisors can use to assess the effectiveness of an audit committee in overseeing a bank’s external audit. Part I of the Guidelines sets forth nine key principles concerning the audit committee and bank supervisors’ roles and interactions related to banks’ external audits.” The nine principles articulated by the Basel Committee are:
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Principle 1
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The audit committee should have a robust process for approving, or recommending for approval, the appointment, reappointment, removal and remuneration of the external auditor.
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Principle 2
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The audit committee should monitor and assess the independence of the external auditor.
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Principle 3
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The audit committee should monitor and assess the effectiveness of the external audit.
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Principle 4
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The audit committee should have effective communication with the external auditor to enable the audit committee to carry out its oversight responsibilities and to enhance the quality of the audit.
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Principle 5
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The audit committee should require the external auditor to report to it on all relevant matters to enable the audit committee to carry out its oversight responsibilities.
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Principle 6
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The supervisor and the external auditor should have an effective relationship that includes appropriate communication channels for the exchange of information relevant to carrying out their respective statutory responsibilities.
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Principle 7
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The supervisor should require the external auditor to report to it directly on matters arising from the audit that are likely to be of material significance to the functions of the supervisor.
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Principle 8
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There should be open, timely and regular communication between the banking supervisory authority, audit firms and the accounting profession as a whole on key risks and systemic issues as well as a regular exchange of views on appropriate accounting techniques and auditing issues.
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Principle 9
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There should be regular and effective dialogue between the banking supervisory authority and the relevant audit oversight body.
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The Basel Committee noted that differences in national laws may impact the implementation of these Principles.
Part 2 of the Guidelines discusses the Basel Committee’s expectations and suggestions regarding improving the quality of banks’ external audits. The suggestions cover key areas where the Basel Committee believes there is a relatively high risk of material misstatements in a bank’s financial statements. The six expectations articulated by the Basel Committee are:
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Expectation 1
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The external auditor of a bank should have banking industry knowledge and competence sufficient to respond appropriately to the risks of material misstatement in the bank’s financial statements and to properly meet any additional regulatory requirements that may be part of the statutory audit.
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Expectation 2
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The external auditor of a bank should be objective and independent in both fact and appearance with respect to the bank.
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Expectation 3
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The external auditor should exercise professional skepticism when planning and performing the audit of a bank, having due regard to the specific challenges in auditing a bank.
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Expectation 4
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Audit firms undertaking bank audits should comply with the applicable standards on quality control.
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Expectation 5
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The external auditor of a bank should identify and assess the risks of a material misstatement in the bank’s financial statements, taking into consideration the complexities of the bank’s activities and the effectiveness of its internal control environment.
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Expectation 6
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The external auditor of a bank should respond appropriately to the significant risks of a material misstatement in the bank’s financial statements.
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Last, the Guidelines provide an annex providing examples of an external auditor’s report to bank supervisors and guidelines on the timing and context of meetings between bank supervisors and external auditors.
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