External audit quality and banking supervision: new Basel Committee paper

The Basel Committee on Banking Supervision released today External audit quality and banking supervision. This paper describes the importance of audit quality in banks, particularly due to an increased reliance on sound audits and because high-quality audits can enhance market confidence during times of severe market stress.

The paper also highlights that bank audits are highly specialised, which can be complicated by escalating complexity of banking products and the related accounting and auditing rules for those instruments. Most of the world's banking assets are audited, and banking supervisors are increasingly reliant on high-quality audits to complement supervisory processes.

As noted in the paper, the Basel Committee intends to build upon its ongoing efforts to address audit quality through continued support of groups with direct influence over external audit firms and promotion of enhanced sound audit guidance, practices and standards. It also calls for enhanced transparency over the structure and financial positions of global network audit firms.

Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that "the Basel Committee has a long track record of promoting high-quality audits in banks and will continue to focus on this area. As bank products and the accounting for these instruments have increased in complexity, external auditors play an increasingly critical role in supporting bank supervision, market transparency and, ultimately, market confidence."

Sylvie Mathérat, chair of the Basel Committee's Accounting Task Force and Director (Financial Stability) at the Bank of France, remarked that "strong audit quality is an essential prerequisite for users of financial information. For bank supervisors, this is particularly true for audits of fair value estimates, loan-loss provisions, consolidation, de-recognition and other areas significant to banking. The Basel Committee's ongoing efforts to promote audit quality are especially important during these times of severe market stress."