By Samantha Washington, Business Presenter
A City watchdog has criticised the financial reporting of three banks but refused to name them.
Two banks' audits were deemed to require significant improvements by the Financial Reporting Council (FPC) which said auditors needed to work harder to challenge a bank management team's accounts rather than corroborating them.
The accountancy watchdog reviewed the audits of 13 banks and building societies after concerns were raised, particularly in the reporting of provisions on loan losses.
While ten of these audits were deemed either good or requiring limited improvements, one required improvements and two needed to make significant improvements.
The FRC said it could not reveal the names of the banks whose audits fell significantly short of expectations, admitting only it concerned the UK subsidiaries of international banks.
The body's chief executive, Stephen Haddrill, told Sky News he was prevented by law from naming the firms but said the appropriate regulatory bodies were made aware.
He said: "Financial reports are fundamental to shareholders taking decisions to the broader public deciding which bank they want to put their money in and indeed they are fundamental to the work of the financial services regulators.
"They can't divulge things any more than we can but they can act on it in relation to the quality of the work being done at the banks."
The firms involved in the audits of these banks were asked to carry out remediation work but declared that this revision did not result in the adjustment of financial statements.
So why does this all matter?
Loan provisioning is a measure reported in financial statements of how a bank predicts losses.
Getting it right ensures that banks are adequately capitalised in the event that loans it has granted do not get repaid.
As a potential or existing bond investor or shareholder, it's key to understanding a bank's balance sheet and what is driving profits and what may impact them in the future.
The reason it can be wrong is that it is essentially a prediction, which relies on a lot of judgement rather than pure empirical analysis.
The importance of ensuring the financial statements are accurate and robust was highlighted by the Co-op Bank, which revealed in April 2013 that it had found a £1.5bn hole in its books.
Its year-end accounts to December 2012, which did not make any mention of this capitalisation gap, had been signed off by KPMG.
The FRC is conducting a separate probe into these accounts and KPMG's audit.
The FRC said that banks' reporting has improved overall but the sector remains a priority area and follow-up work will be done with respect to the two banks requiring significant improvement.
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