Reliability prudential reporting

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Prosper Carpenter
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1 Reliability prudential reporting Perspectives from an external auditor DNB Seminar, 12 December 2012 Dick Korf Background Recently highlighted by DNB following a cross sector investigation in 2012 the quality of prudential reporting and related financial reporting controls need sector wide improvement, especially also in light of upcoming CRD IV requirements 1 1

investigation in 2012 the quality of prudential reporting and related financial reporting

2 Agenda Three areas Preparation The bank as preparer DNB The supervisor as user and regulator External audit The auditor as assurance provider 2 Preparation the bank as preparer Requirements are demanding, changing and ever increasing Much attention and time spent to maintain sound B2 reporting and make improvements where needed Substantial overhauls and investments are made in preparing for B3 Against the background of tightening capital and liquidity requirements 3 2

increasing Much attention and time spent to maintain sound B2 reporting and make improvements where needed

3 Preparation the bank as preparer Requirements are demanding, changing and ever increasing Much attention and time spent to maintain sound B2 reporting and make improvements where needed Substantial overhauls and investments are made in preparing for B3 Against the background of tightening capital and liquidity requirements Best practice Prudential reporting forms an integral part of the management cycle and related financial reporting processes subject to the same governance and financial reporting controls with similar engagement and ownership of senior management and the business. 4 The profile of prudential reporting within banks It is time to lift the profile of prudential reporting in banks Best practice Prudential reporting forms an integral part of the management cycle and financial reporting processes and is subject to the same governance and financial reporting controls with similar engagement and ownership of senior management and the business. 5 3

management cycle and related financial reporting processes subject to the same governance and financial reporting controls with similar engagement and ownership of senior management and the business.

4 Lifting the profile of regulatory reporting beyond the finance department Please ask yourself does your bank or client Adopt such an integrated approach? Are the prudential returns given similar attention as management reporting and financial reporting? And subject to similar closing and sign off procedures? Are the returns tabled for board meetings? Does key management understand what the reported numbers represent other than the ratio s? Or are the ratio s discussed and reported only? Why is this relevant? 6 A first step: more meaningful internal reporting The returns are not self explanatory nor easy to digest and understand other than by the finance specialists themselves Returns are technical by nature and designed for DNB needs only. The use of IRB/ AIRB modelling makes the returns less transparent with interdependencies between finance and risk The returns do not form a complete set of financial information Basis of preparation is missing There are no notes, no comparatives etc There is no requirement to highlight interpretations or choices made by the institutions Changes of accounting policies or interpretation are not disclosed 7 4

Does key management understand what the reported numbers represent other than the ratio s? Or are the ratio s discussed and reported only? Why is this relevant?

5 DNB and prudential reporting Requirements are demanding, changing and ever increasing DNB is getting increasingly critical on the quality of reporting As indeed DNB found discrepancies and mistakes so have a right to speak Recommendations There are limits to what a bank can absorb as additional reporting requirements within a certain timeframe be realistic, set priorities The rules are complex make them better accessible Provide feedback on prudential reporting findings to the external auditor 8 Recommendations to DNB Limitation to what a bank can absorb within a certain timeframe Be vigilant and responsive to practical dilemma s with realistic priority setting: relevance versus cost, timeliness and reliability Rules are already complex provide better access Simplify Open Boek Toezicht: make it more user friendly plus further clarification to legal language Provide direct access to a complete set of reporting requirements for each prudential return we miss the Handboek Wtk Feedback to the external auditor Dialogue and information sharing is beneficial to all parties involved 9 5

make them better accessible Provide feedback on prudential reporting findings to the external auditor 8 Recommendations to DNB Limitation to what a bank can absorb within a certain timeframe Be

6 The external auditor Scope of the audit is fragmented: parts are audited, parts are not Approach to model based reporting is contra intuitive: only partially in scope No specific assurance on quality of processes: only certification of some of the returns 10 Recommendations to the external auditor Recommendations Be relevant against the current and upcoming demands Stay tuned with the increasingly technical requirements use of experts and mandatory Basel III training Address the audit of AIRB model based reporting Auditing around the models is not appropriate when significant to RWA s IFRS 9 (financial instruments) is about to arrive Mandatory long form reporting instead of opinion only Provide assurance on processes and controls in addition to auditing the returns 11 6

the increasingly technical requirements use of experts and mandatory Basel III training Address the audit of AIRB model based reporting Auditing around the models is not appropriate when

7 Thank you Dick Korf 2012 KPMG Accountants N.V., registered with the trade register in the Netherlands under number , is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are 7

KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with

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