Media Release Relationship Between Banks, their External Auditors and the Reserve Bank

Since 1986 the Reserve Bank has obtained from each bank's external auditor an annual assurance that information supplied by the bank to the Reserve Bank has been reliable, that key risk management systems in the bank are adequate, and that the various prudential requirements are being observed. After ten years in operation, these arrangements have been subject to a thorough review, involving substantial consultation with banks and their external auditors. This review has led to a major reform of the arrangements and a revised Prudential Statement released today spells out the new procedures.

The responsibility for providing the Reserve Bank with an assurance about the efficacy of risk management systems will shift from the external auditor to the Chief Executive and board of each bank. This assurance will be provided by way of an annual attestation to the Reserve Bank from the Chief Executive, endorsed by the board (or relevant senior officer outside Australia in the case of foreign bank branches). In brief, chief executives and boards will attest that risks have been identified, systems have been designed to manage those risks, and that those systems are working effectively.

The external auditors will retain their responsibility to provide the Reserve Bank with assurances about each bank's observance of prudential requirements and the reliability of the information provided by the bank to the Reserve Bank. In addition, each year external auditors will review a particular area of the bank's operations. They will provide the Reserve Bank with an analysis of the strengths and weaknesses of the risk management systems employed by the bank in the selected area. The targeted area in a particular year will often be the same for all banks to facilitate peer group analysis. However, should circumstances warrant, the Reserve Bank may select an area for an individual bank which is different to the general subject for that year.

As in the past, these arrangements are not meant to interfere with relationships between banks and their external auditors. Banks will instruct external auditors to provide the required reports after consultation with the Reserve Bank. Any of the three parties may initiate discussions among them at any time.