FSA Condemns Audit Practices

by Robin Pilgrim, LawAndTax-News.com, London

30 September 2010

The UK Financial Services Authority (FSA) has published the findings of a review aimed at improving the quality and consistency of auditors’ reports on clients' assets.

The FSA said that, as part of its more intensive approach to supervision and a more enhanced focus on client assets, the comprehensive review identified a number of serious failings – across the profession – showing a general deficiency by auditors in their application of FSA requirements when reporting on clients' assets.

The review identified the following material failings and weaknesses in a number of reports:

• Auditors providing ‘clean’ reports, despite the firm having committed significant breaches of the client asset rules;
• Auditors’ reports covering the wrong chapters of the Client Assets Sourcebook (CASS);
• Failure to provide the report on client assets because the auditor was not aware of, or did not understand, the reporting requirements;
• Auditors failing to provide adequate detail on the issues and exceptions identified in their report;
• Auditors submitting their reports several months late (in some instances, they were submitted years after the period they relate to); and
• Some auditors’ reports had ‘simple errors’, such as the auditor not signing or dating the report, quoting the wrong FSA firm reference number, or referring to another firm within the body of the report.

The FSA has decided to publish a consultation paper to address these deficiencies, setting out ten proposals aimed to drive improvements in the quality and consistency of auditors’ reports on client assets. The proposals will be applicable to firms and their external auditors. In summary, these proposals aim to:

• Confirm and clarify the standards required for the auditors’ reports on client assets in order to provide clear focus of accountability;
• Make consistent and increase the information provided in the report so that the FSA can better utilize it to undertake both firm and thematic reviews; and
• Improve firms’ governance oversight of both their auditors and their compliance with the client assets rules.

Richard Sutcliffe, FSA’s Client Assets Sector Leader, said:

"We have repeatedly emphasized the importance of firms segregating client money and assets effectively. We have also made clear our disappointment in the quality of auditors’ reports that we have reviewed. It is ultimately a firm’s responsibility to ensure that they have adequate systems in place, but they, as we, rely on their auditors to provide the necessary assurance in this regard. Auditors charge a fee for this professional service – it is important that we and firms can rely on the reports they are signing off.”

"The actions we have taken recently, along with the changes we are consulting on, will significantly strengthen the requirements in this regard and also mean that should we fail to see improvements we will be able to take action more easily."

The consultation is to conclude on December 31, 2010. The FSA intends to publish a policy statement during the first quarter of 2011.

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