Basel Committee issues guidance on the external audit of banks

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02 Apr, 2014

The Basel Committee on Banking Supervision ("the Committee") has published supervisory guidance on the external audit of banks which aims to “improve external audit quality of banks and enhance the effectiveness of prudential supervision”. The guidance replaces existing guidance contained within ‘The relationship between banking supervisors and banks’ external auditors’ (January 2002) and ‘External audit quality and banking supervision’ (December 2008).

The guidance has been published in response to the recent financial crisis which highlighted the need to improve the quality of external audits of banks.  The Committee highlight that auditors have a key role in contributing to financial stability by delivering “quality bank audits which foster market confidence in banks’ financial statements.  The Committee comment:

This document aims to enhance the quality of external audits of banks and the effectiveness of prudential supervision, which contribute to financial stability.

The guidelines cover:

  • The audit committee’s responsibilities in overseeing the external audit function.  The Committee highlight that “a bank’s audit committee has a key role in fostering a quality bank audit through the effective exercise of its responsibilities with respect to the external auditor and the statutory audit”.  The guidelines “promote an effective two-way communication between the audit committee and the external auditor to enable the audit committee to carry out its oversight responsibilities and to contribute to the effectiveness of the audit process”.  This also provides a framework for the supervisor to assess the effectiveness of the audit committee’s oversight of the bank’s external audit.
  • The prudential supervisor’s relationships with external auditors of banks and the audit oversight body.  Guidance is included with respect to the relationship between prudential supervisors and the external auditor and between prudential supervisors and audit oversight bodies in order to emphasise the need for effective relationships that can contribute to enhanced banking supervision.

The guidance also includes “supervisory expectations and recommendations relevant to external audits of banks that the Committee believes will enhance the quality of these audits”.  These expectations include the Committee’s expectations with respect to the external auditor’s knowledge and competence, objectivity and independence, professional scepticism and quality control over the bank’s audit. 

The guidelines apply to all banks that are subject to a statutory audit (including those within a banking group) and holding companies whose subsidiaries are predominantly banks.  The Committee highlights that supervisors should seek to “fully implement” the guidelines but should consider implementation on a proportionate basis taking into account the “size, complexity, structure, economic significance, risk profile and other facts and circumstances of the bank and the group (if any) to which it belongs”.  The Committee also recognises that the guidelines and, expectations and recommendations “should be applied in accordance with national legislation and corporate governance structures applicable in each country”.

The press release and the guidance can be obtained from the Bank for International Settlements website.

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