Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued an advisory to indicate their support for the principles and expectations set forth in Parts 1 and 2, respectively, of the Basel Committee on Banking Supervision’s March 2014 guidance on “External audits of banks” referred to as the BCBS external audit guidance.

The advisory notes bank examiners should evaluate any actions taken by institutions within the scope of the advisory and their audit committees to ensure such actions are consistent with the objectives of the advisory and the BCBS external audit guidance. Where there are differences between the BCBS external audit guidance and U.S. standards, examiners should encourage institutions’ audit committees to follow the practices identified in the advisory.

Matt Kelly contemplates the reasons why the regulators issued the advisory here, and outlines some of the looming practical aspects here, which he refers to as a “winter of turmoil.” According to Matt, “The immediate question for external auditors, internal auditors, and audit committees is whether the external auditor will adjust its definition of what’s material to the audit, given all the turmoil in financial markets. I hear anecdotal evidence that this is happening, although I don’t know to what extent. But remember that audit firms are under pressure from the Public Company Accounting Oversight Board to do better at assessing risk, and the PCAOB has already addressed this point.”

Matt also notes “Last week’s guidance from the banking regulators specifically mentions regulatory capital ratios as important to a successful external audit of a large bank. The Fed, FDIC, and OCC have no authority to compel audit firms to consider capital reserves and other liquidity ratios—but they do have the power to make audit committees uncomfortable until the committees do that dirty work for them. Their guidance even says: “The agencies expect audit committees will ensure that their external auditors consider regulatory capital ratios in planning and performing the audit.” That does not sound like a whimsical and benign request to me.”


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