By Max Clarke
The Financial Services Authority (FSA) and the Financial Reporting Council (FRC) have today agreed a new memorandum of understanding (MOU) to enable a greater degree of co-operation and information exchange between the two regulators.
The FRC is concerned with corporate governance and reporting while the FSA is largely responsible for regulating financial services firms within the United Kingdom.
The memorandum underpins the increased dialogue between the FSA and FRC on accounting and disclosure issues that has been in place since 2005 and follows the publication of a joint discussion paper on the audit of financial institutions published in June 2010.
The new agreement will deliver a closer working relationship between the FSA and the FRC’s Audit Inspection Unit (AIU) and will enable both organisations to improve their oversight of the audits of authorised firms. The AIU operates a risk-based system of audit inspections and its scope has been extended recently to include all banks incorporated in the UK to better support markets and the prudential regulator.
The FSA and FRC will assist each other in the performance of their respective functions by providing timely information, subject to any legal constraints. Where information shared is subject to confidentiality undertakings both regulators will handle the information in accordance with those requirements.
Richard Thorpe, FSA’s accounting and auditing sector leader and Paul George, Director of Auditing at the FRC, have commented on the agreement.
Richard Thorpe said:
"Our recent discussion paper highlighted our concerns that some auditors may not be exercising sufficient professional scepticism in their approach to the audit of key areas of management judgement.
“The FSA relies on audited financial information to meet its regulatory objectives and it is imperative that we have confidence in the information provided to us — this memorandum is a public statement of the way we will share information with the Audit Inspection Unit at the FRC. Sharing information with the FRC will go some way to mitigating our concerns."
Paul George said:
"It is vital that audit serves the interests of the UK’s capital market by providing relevant and high quality information to prudential regulators as well as the market. This agreement ensures that the dialogue established during the financial crisis is both durable and meaningful.
“By working more closely with the prudential regulator we will enhance our collective ability to identify and correct weaknesses in the quality of audited information being provided to regulators and the market."