Research Paper:

Independent Audit Assurance on Banks’ Capital Information

In this research note, we examine the role of independent assurance in post-crisis initiatives aimed at achieving financial stability and how this relates to current and proposed regulatory mandates. We draw comparisons with these regulatory developments and the US's Sarbanes Oxley (SOX) legislation, and similar legislation in other jurisdictions that were enacted with the aim of reducing the risk of material misstatements in financial reporting. We consider whether the role and responsibilities of auditors framed in SOX legislation should be extended more broadly to risk reporting.

In principle, we support an expanding role for accountants and auditors to adapt financial metrics and reporting to achieve more comprehensive and precise disclosure of accepted risks in audited financial statements. This represents both a risk quantification and an accounting challenge as regulators seek to more fully engage accountants and auditors in achieving greater financial stability while risk-adjusting the financial system.

Number of pages = 12

Number of Figures = none

"The most useful focus of assurance initiatives would be on Risk Weighted Assets (RWAs) as it would of necessity require assurance providers to penetrate into the deep recesses of the assumptions and mathematics that underpin capital ratios and other capital related regulatory measures. Such independent assurance reports have the potential to moderate, or even displace the voluminous narrative disclosures included in annual reports on the status of firms’ risk management that do not always provide banks’ stakeholders with the assurances they require on capital adequacy."

Table of contents::
The Scope of Independent Assurance
The Users of Assurance Reports and the Form of Reporting
The Focus of Assurance Reports
The Frequency of Assurance Reporting
Model Design, Capital Rules and Regulatory Approvals
End-to-End vs. Specific Aspects of Underlying Systems
The Type of Assurance Provided
Comparability of Information
The Determination of Materiality
Regular vs. Ad Hoc Reporting
Factors Affecting the Costs and Benefits of Assurance Reporting
Assurance on Capital Information as a Permitted Non-Audit Service
Transitional Arrangements
Financial InterGroup Principals
- Allan D. Grody
- Peter J. Hughes
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