PRA statement on the evaluation of the Written Auditor reporting policy

In view of the recent presentation of the feedback from institutions‘ auditors as to the status quo on the implementation of IFRS 9 on expected credit loss (ECL) accounting and accounting for climate-related financial risks during the past financial reporting period (EventID 23264), the Prudential Regulation Authority (PRA) has reevaluated its policy as regards auditor reporting and published a corresponding statement. The policy as described in supervisory statement SS1/16 requires auditors of large institutions (UK banks and building societies) to respond to a number of questions posed by the PRA following the conclusion of the regular audit. This „private“ auditor report – so to speak – aims to identify ongoing issues among supervised financial institutions, help the regulator to more effectively monitor such institutions, and improve communication between audit firms and the PRA.
In its statement now, the PRA is reflecting on how well these goals have been achieved and its way forward in this context. As far as the achievement of objectives is concerned, the PRA notes the following:
– The policy is successfully meeting its goal of enhancing the „quality, focus, and discipline“ of interactions between auditors and supervisors. There have been no detected issues necessitating modifications to the existing policy.
– The policy costs have remained in line with or even under the PRA’s expectations. Furthermore, the policy provides sufficient flexibility to adjust the driving cost factors on a firm-by-firm basis to ensure a proportional approach towards institutions.
– The PRA will continue to improve the policy in view of proportionality and costs incurred by firms.
##### The key goals for the future are the following:
(1) Reducing the number of questions: The PRA aims to continue asking a low number of questions in the future. It has already gradually reduced the number of questions asked to auditors, focusing on those that are most valuable in understanding the quality and consistency of banks‘ and building societies‘ processes.
(2) Focus on accounting standards: The PRA seeks to concentrate its questions on areas where the effective application of accounting standards is crucial for ensuring the safety and soundness of PRA-authorized firms.
(3) Fewer questions for smaller and less complex firms: The PRA intends to ask fewer questions for smaller and less complex firms to manage costs and reduce the burden on these entities.
(4) Clarifying guidance to auditors: The PRA aims to provide clearer guidance to auditors on what is expected in their responses, encouraging shorter, more focused answers and avoiding unnecessary text and time.
(5) Setting clear goals for repeated questions: The PRA plans to set clear goals for repeated questions to limit duplication in responses and help auditors understand the PRA’s focus. These goals will guide the analysis and feedback process.
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To conclude, the PRA notes that now and in the future it aims to strike a balance between gathering essential information, minimizing the burden on auditors, and improving the efficiency and effectiveness of the entire audit process. For the upcoming financial reporting year, it expects to take above noted issues into account when designing the relevant questions.