02 December 2008

BIS paper on external audit quality and banking supervision

The paper describes the importance of audit quality in banks, particularly due to an increased reliance on sound audits and because high-quality audits can enhance market confidence during times of severe market stress.

The paper describes the importance of audit quality in banks, particularly due to an increased reliance on sound audits and because high-quality audits can enhance market confidence during times of severe market stress. It also highlights that bank audits are highly specialised, which can be complicated by escalating complexity of banking products and the related accounting and auditing rules for those instruments.

 

The paper summarises four key areas of the Committee’s focus, including:

Ø       Bankers’ and supervisors’ reliance on external auditors’ expertise and judgments has increased

Ø       High-quality audits, which enhance market confidence, particularly in times of severe market stress

Ø       An increasing reliance on high-quality bank audits to complement supervisory processes

Ø       The globalisation of major external audit firms has contributed to the complexity of their structures and a lack of transparency regarding their governance

 

In recent years, there has been a change in banking supervisors’ reliance on audited information and in the nature of the major external audit firms. The need for bank supervisors to be confident of audit quality has been reinforced by a variety of factors and events. These include concerns about the risk of audit failures, the global expansion of the major audit firms, and increased complexity of both accounting standards and financial instruments. In addition, the challenges associated with fair value estimation processes, which have been amplified by the current market crisis, have similarly underscored the importance of high quality audits. This paper describes the Basel Committee on Banking Supervision’s understanding of these circumstances and steps it intends to take regarding key findings.

 

Press release

External audit quality and banking supervision

 

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