Insight

In October 2011, the Auditing Practices Board (“the APB”) issued Bulletin 2011/2 “Providing Assurance on Client Assets to the Financial Services Authority” (“the Bulletin”), which is the APB’s extant guidance relating to the provision of assurance to the FSA on client assets.

Background

As part of the Policy Statement 11/05 (“PS 11/05”), the FSA:

• clarified expectations by setting out requirements for a reasonable assurance report;
• stipulated a reporting template; and
• required a separate template schedule of breaches.

The Bulletin provides guidance on these matters to persons who are preparing and submitting the Client Assets report (“the CASS auditors”).

Reasonable Assurance Report

The FSA has stated the Client Assets report is a reasonable assurance report stating whether the Firm has complied with the FSA’s Client Money and
Custody rules throughout the year, and at the period-end date.  In order to give “reasonable assurance” the APB guidance states that the CASS auditor will test transactions, controls and reconciliations at various points in time throughout the period, rather than continuously.

The Bulletin emphasises the following two requirements:

• the need for the CASS auditor (and indeed Firm) to adopt an insolvency mind-set and to evaluate a firm’s procedures against a presumption that the Firm may become insolvent.  The effective segregation of clients’ assets (eg appropriate segregation, accurate record keeping and correct trust status) only comes into effect upon insolvency of the Firm.  Ineffective segregation could result in client assets becoming divided among all the creditors in an insolvency; and
• as the CASS rules are complex, the CASS auditor should have a thorough knowledge of all the relevant FSA rules.

As a consequence of the above requirements, the audit of client assets is considered a specialism and requires appropriate training and experience - the CASS audit is not an “add-on” to the statutory audit and requires a specialist CASS audit engagement team.  This specialist CASS audit team can be a different firm to the statutory audit firm.

Reporting template

To improve the consistency of reporting, the FSA has provided templates which mandate the content and wording of the Client Assets report, (including the Breaches schedule) - deviations from these templates is not allowed.

In PS 11/05 the FSA stressed that they were seeing clean/un-modified audit reports when CASS rule breaches had been reported separately by firms themselves.  The Bulletin states that the reporting of any breach will be inconsistent with an unmodified audit opinion.  However, if breaches that have occurred have been rectified by the period end, a clean opinion can be issued with respect to compliance as at the period end date.

Further, the Firm is required to ensure that its governing body is provided with the Client Asset report so that it is aware of any deficiencies in the Firm’s systems.

Breaches schedule

Accompanying the Client Assets report will be a separate breaches schedule, which identifies every breach that the CASS auditor is aware of, whether identified through its own work or disclosed to it by the Firm or a third party.  Materiality is not relevant when determination of a CASS rule breach is made - error of segregation of £5 is no different from an error of £5m, both are a breach in the rules - and the FSA wishes to have all breaches reported to it.

The breaches schedule does give the opportunity for firms to demonstrate to the FSA its pro-activeness in addressing and implementing any remedial action in relation to identified CASS rule breaches.

Additional Guidance

The Bulletin also gives some guidance to the CASS auditor of factors to consider - and hence areas that firms should be aware of will attract a great deal of scrutiny - when they are testing for compliance with the CASS rules:

• have Client Money bank accounts been properly set up with regard to their trust status? Has the correct notification of trust status been sent and received within the prescribed period?;
• have Client Asset reconciliations been prepared on an accurate and timely basis? Are reconciling items genuine timing differences or do they indicate a breach of the rules?;
• are Client Money “buffers” incorrectly incorporated into the reconciliations?; and
• is the alternative approach being adopted without the pre-approval and sign-off by the CASS auditors?

Firms need to understand the requirements of this Bulletin, so that they can challenge their CASS auditor, determine that the CASS auditor has the specialist knowledge to fulfil the reporting requirement and ensure that the CASS audit is sufficiently scoped and detailed to identify the CASS risks.

For further information please contact David King.