External audit quality and banking supervision

In recent years, there has been a change in banking supervisors' reliance on audited information and in the nature of the major external audit firms. The need for bank supervisors to be confident of audit quality has been reinforced by a variety of factors and events. These include concerns about the risk of audit failures, the global expansion of the major audit firms, and increased complexity of both accounting standards and financial instruments. In addition, the challenges associated with fair value estimation processes, which have been amplified by the current market crisis, have similarly underscored the importance of high quality audits. This paper describes the Basel Committee on Banking Supervision's understanding of these circumstances and steps it intends to take regarding key findings.

The current market turmoil and demand for increased transparency suggests that reliable, clear financial information supported by quality audits are key elements in enhancing market confidence. Thus, continued involvement by the Committee to promote audit quality is warranted.

This paper summarises four key areas of the Committee's focus, including:

• Bankers' and supervisors' reliance on external auditors' expertise and judgments has increased
• High-quality audits, which enhance market confidence, particularly in times of severe market stress
• An increasing reliance on high-quality bank audits to complement supervisory processes
• The globalisation of major external audit firms has contributed to the complexity of their structures and a lack of transparency regarding their governance

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.