For the first time in its history, the FCA has publicly censured an auditor for failings in the client assets reports it has produced. The reports the auditor produced failed to detail breaches, even though in some cases, breaches had actually been identified by the auditor. The final notice suggests that the auditor didn’t fully understand the expectations on auditors and wasn’t familiar with the FRC Standards for audit firms on Providing Assurance on Client Assets to the Financial Conduct Authority.
The FCA relies on audit reports to give it an insight into whether firms are complying with the CASS rules and how well the firm is remediating identified issues. For this reason, it’s essential for audit reports to give an accurate representation of a firm’s CASS compliance arrangements.
Whilst the fine is noteworthy in the context of the expectations on audit firms, it is just as interesting for CASS firms when considering the expectations on them when appointing a CASS auditor. The FCA’s Supervision sourcebook places an obligation on firms to ensure that its auditor has the skills, resources and experience to do the job, a requirement which is reiterated within the Client Assets Sourcebook. Some firms are of the view that by verifying that the auditor is qualified and eligible for appointment under the Companies Act, they meet this requirement. However, more is expected, particularly in the context of appointing a CASS auditor. When selecting a new CASS auditor, it’s always worth asking questions such as:
- Have you carried out CASS audits for firms of our size before?
- Have you carried out CASS audits for firms with a similar business model to ours before?
- If not, how will you ensure you have the skills and experience within your business to audit the firm?
- How many clean audit opinions have you issued in the last year?
- How many times have you had to report to the FCA that you will be late delivering and audit report in the last 12 – 24 months and what were the reasons for the delay?
Any experienced CASS auditor will be prepared to answer questions like this. But it’s worth noting that the answers to the questions won’t give you a hard and fast ‘yes’ or ‘no’ decision on whether to appoint an auditor. For example, just because an auditor hasn’t audited a firm with your business model before, doesn’t mean they won’t be able to adapt their skills and experience to your model. However, it’ll give a useful insight into how big a gap there is to bridge. For example, if the auditor has only audited debt management firms before and your firm is a derivatives trader, you might have more questions to ask on how they’re ready to scrutinise things like your internal client money reconciliations.
It’s also worth keeping a record of the appointment process, so that you can show the FCA that you gave proper consideration to the skills and experience of the auditor. The FCA regularly follows up on audit reports it receives, and not just the adverse or qualified ones. We’ve seen the FCA ask questions of CASS firms that have received clean audit reports, to understand how the firm selected the auditor.
Something else to bear in mind is that it can be beneficial to change auditors periodically. We wouldn’t expect this to happen every year, or even every few years, but it can be good practice to get a different viewpoint every so often. Whilst the auditor is ultimately serving a purpose to meet an FCA requirement, it is also doing a job for you and it’s important to make sure that you get the right value from the not insignificant cost associated with a CASS audit.
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If you need help selecting a CASS auditor, supporting your firm throughout the audit process or remediating breaches identified by the auditor, please reach out to ngreen@square4.com. We have a team with deep CASS knowledge and expertise ready to help.
