Heidi
Kia ora and welcome to 5 minutes with the FMA, a podcast by New Zealand's Financial Markets Authority. Today I'm joined by the FMA's head of Audit, Financial reporting and Climate Related Disclosures, Jacco Moison, welcome Jacco.
Jacco
Thanks. Nice to be here, Heidi.
Heidi
So you're here to talk about the FMA’s latest Audit Quality Monitoring Report. For those who might not be familiar, why do we publish this report?
Jacco
It is actually a mandatory requirement in the Auditor Regulation Act to publish a report on our monitoring activities during the year. So we basically look at the quality control systems at an audit firm. But we also look at a sample of their audits. If they comply with the auditing standards. It is quite important because OK financial markets rely upon reliable financial information and order to provide insights or give some comfort about the robustness of the financial statements.
Heidi
So it's not just about compliance, it's about building confidence in the market.
Jacco
Yes, because people naturally rely that an auditor does their job. So it's our job to make sure that they actually have the evidence to support their opinions.
Heidi
So let's talk about this latest report. What stood out for you?
Jacco
We did something different than last year. We focused this on bank orders, so that was quite a different story. So that that that's an important pillar. Also there was an introduction of a new requirement for audit firms to. Build up their quality control system so that it was quite new. So, we looked at that in in some more detail and that gave us some good insights on how the audit firms themselves operate and how they check their quality of their work.
Heidi
So you mentioned that this year you looked into bank audits. What did you find there?
Jacco
We actually found that the quality of those orders were particularly good. So all those orders were either good or had limited improvements. However, there were some things that could have done have been done better by audit firms. The main thing we found is that if you look at the remuneration structure of some of the key management at the bank, it's very much focused on variable remuneration. They are remunerated based upon certain key indicators. One of them is a financial targets, if they make that. What we saw with the audit firms was that there was not a good understanding on how that remuneration was built up and how that could lead, for example to fraud or management override to hit some of those key financial sagas. So making sure that they actually hit their bonus targets. So that's an area where some improvement is needed. And another area where we saw some improvements is that banks very much rely upon manual systems when they're looking at their provisioning of their loans. Although audit firms have…did do the right work, they should probably push a bit more to management to have those systems a bit more automated, so it makes it easier to audit.
Heidi
So what would you say are the key takeaways for auditors and directors from this report?
Jacco
For auditors, it's mainly focusing on when they get data from either the entity or from a third party provider that they check that data pretty good, so they do some testing and find the evidence. For directors is making sure that management shares all the information with the auditor and that's particularly relevant when looking at the related party transactions because they very much rely upon on directors providing that information. And also, yeah, when we're talking about those key incentives for banks that they really explain how that works and they are comfortable that the fraud risk is eliminated or what controls they build into making sure ok that those incentives are not misused basically to get a big bonus.
Heidi
That's a lot to take in. If you had to sum it all up in one message.
Jacco
Yeah, audit quality is not only the responsibility for auditors, but directors can play a big role as well. So yeah, auditors should be really looking critically at the audit evidence and directors can support in that. So that's the key message I want to give.
Heidi
Fantastic. Well, thank you so much for your time today, Jacco. That was a really fantastic overview. If you'd like to find out more or read the latest audit quality monitoring report, head on over to our website at www.fma.govt.nz. See you next time.
