Side corridor of lounge and a peek view of the docks.

FSA lays down law for CASS audits

25 March 2011

The FSA has turned its concerns about auditors' client assets reports into action with new rules and a clear policy statement.  Client assets will remain a regulatory priority.

The FSA is continuing to take action against investment firms and now, where auditors' reports are defective, the FSA will refer the relevant auditor to its supervisory body and the AADB.  The AADB has already announced investigations into the auditors of Lehmans and JP Morgan Securities.

To date, the FSA's CASS activity has largely involved investment firms. The FSA now plans policy work to focus on a review of CASS 5 - insurance mediation. Insurance brokers beware!

The FSA acknowledges that it had partly relied on external independent assurance to gain comfort that regulated firms had systems adequate to enable them to comply with the client assets regime. Following a review of auditors' client assets reports, the FSA identified material failings and weaknesses that are "not localised to one or a limited number of auditors, but rather indicate a general failure by auditors to apply our requirements relating to client assets effectively, and a need to take steps to improve the quality of auditor’s client assets reports".

New CASS rules will be introduced on 1 June including new guidance under CASS 3 that the FSA "expects an auditor to have regard, where relevant, to material published by the Auditing Practices Board that deals specifically with the client assets report which the auditor is required to submit to the FSA".

The also FSA plans to set out explicitly its requirements for a reasonable assurance report, to stipulate a template to be used for the auditor’s report and to require the auditor’s report to be signed by the individual responsible for the audit (in their own name). The FSA's focus on senior managers' responsibility will henceforth apply also to the CASS auditors.

Jonathan Davies wrote in November about the threat posed by the FSA to auditors and actuaries.  In the FSA's press release today, Richard Sutcliffe, the leader of the FSA’s Client Assets Unit, said: “We have seen serious failings in relation to auditors’ client assets reports.  As a result we have referred a number of auditors to their relevant auditing bodies over the past year and are currently considering referring several other cases."

The new guidance will also suggest that a firm must "keep under review the adequacy of the skill, resources and experience of its auditor and should critically assess the content of the client assets report as part of that ongoing review." So in addition to firms' RDR professionalism requirements to monitor their own staff, they must now continually assess their CASS auditors.

The FSA's regulatory reach stretches yet further.