Audited accounts for the regulator. As a complement to the audit of financial accounts
While these days the issue that UK Parliament’s attention is focused on the Brexit, the proposal made in the parliamentary commission on banking standards to require a separate set of audited accounts for the regulator based on the regulatory, and not the accounting, framework remains on its agenda.
The proposal is registered in The Routledge Companion to Fair Value in Accounting (by Gilad Livne, Garen Markarian) a book, among other things very interesting, that shows the different facets for and against fair value.
Livne and Markarian summarize it:
“The UK Parliamentary Commission on Banking Standards suggested that banks should prepare a separate set of audited accounts for the regulator based on the regulatory, and not the accounting, framework. Although enhanced disclosures arising from the revised Basel Pillar 3 framework may have diminished the need for such accounts, an audited set of such accounts might provide some additional sunshine on the risks that banks run, which would be useful to investors”. [Pg. 13]
The backdrop is how bank accounting should be and, more specifically, that of financial instruments.
Historically, fair value measurements have been considered both response and blame in the face of different financial crises.
Currently, the crossroads of international standards is being clarified by IFRS 9 Financial Instruments and its key dimensions of valuation and provisioning.
The valuation dimension is a combination of amortized cost and fair value.
Waiting for the IVSC to open a more secure path in relation to valuations of financial instruments? It seems so, because the revised conceptual framework of the IAASB does not mention fair value as a measurement basis. However, it is supported by many other IFRS standards and has one especially dedicated to how to measure it (IFRS 13). In another post I referred to this.
The provisioning dimension includes the methodology of expected credit losses.
(1) The appropriate measurement of individual financial assets / liabilities and their portfolios; and
(2) Both the relationship and the differentiation with prudential measures.
That is why the proposal in the UK Parliament can be an effective solution, not necessarily free of costs, to help resolve this crossroads.
It will be necessary to differentiate between regulatory accounts and prudential accounts.
Because in relation to regulatory accounts, and its auditing, there are important advances, so the IASB still does not have a satisfactory answer: IFRS 14 – Regulatory Deferral Accounts is a interim standard.
There are interesting examples of audited regulatory accounts reports:
- Northern Ireland Electricity Networks Limited (2018)
- Arquiva Group Limited (2016)
- Northern Gas Networks Limited (2016)
- NATS (En Route) plc (2015)
- SP Transmission Limited (2012)
Although these examples refer to utilities, with regulated tariffs, they make it clear that there is an international practice of presenting regulatory accounts not prepared according to the financial accounting structure (IFRS or US GAAP), subject to independent audit.
It should be borne in mind that, although there are many differences with the ‘prudential accounts,’ it is not far from the audit of accounts for the regulator based on the regulatory, and not the accounting, framework..
These days the orientation of the US-PCAOB guidance on critical audit matter requeriments and the latest proposals for audit reform in the European Union (which include a mightier audit regulator) and what impact they will have on the profession stand out internationally.
In Colombia, the CTCP is conducting a survey on the application of ISA 701. Hopefully, the error is not made, as the Superintendencia Financiera de Colombia (SFC) privileges its prudential standards on the IFRS standards, concluding that the revisoría fiscal already incorporates the audited accounts for the regulator referred to herein.