AUDITORS have welcomed moves by Banking Commissioner David Carse to clamp down on the use of inner reserves by local banks, saying tighter supervision will make them more comfortable in expressing their views on banks' financial statements. A new policy issued at the launch of the results reporting season would also help bring Hongkong's regulatory framework more closely into line with international standards which discourage inner reserves, according to Mr Raymond Yung, an audit and business advisory partner with accounting firm Arthur Andersen. The tighter regulatory approach, which Mr Carse told banks might eventually lead to the formulation of a comprehensive guideline on reserves composition and transfers, suggests that individual banks submit a clearly defined written policy on inner reserves for approval by his office. It further places the onus on bank managements to justify to regulators why, when and how any transfers to or from inner reserves should be made. Mr Carse circulated a letter to the heads of the territory's locally incorporated licensed banks setting out basic principles which should govern transfers to or from inner reserves. ''It is the view of my office that transfers from inner reserves should be rare and exceptional,'' the letter read. ''Generally we believe that they should only be made when there is good reason to believe that the publication of a loss or a sharp fall in profits would severely damage confidence in the institution concerned. ''It follows therefore that any planned transfer from inner reserves would call for special explanation by the bank.'' Speaking yesterday at a luncheon held by the Chartered Institute of Bankers, Mr Yung said that under the new approach, the users of banks' published financial reports - depositors, investors and other banks - would get a better understanding of the trendin profits. ''This is a very substantial step towards encouraging consistency of published financial data and I am very pleased that the banking community has accepted the Banking Commissioner's supervisory approach,'' he said. ''Under this type of supervisory arrangement, auditors should feel more comfortable in expressing their opinion on banks' financial statements even with the existence of inner reserves.'' In the letter, the commissioner requested that banks notify his office before making any transfer either to or from inner reserves so that a meeting between the regulatory body, the bank and the bank's appointed auditor could discuss the proposed transfer. The bank would then need to show that the transfer conformed to its own policy on the reserves. It would also be asked to comment on the size of the proposed transfer and how it compared with such transfers in previous years. The bank would be asked to comment on any ''material divergences'' between the trend in actual profits and published profits - for example, in the event that published results showed an increase in year-end profits, but actual profits were lower. Inner reserves should not be used as a substitute for general provisions, neither should a portion of inner reserves be ''earmarked'' in the place of taking a specific provision. Shareholders could also stand to profit as the regulator would also wish to discuss dividend policy, as the amount available to be transferred to inner reserves depended on the size of the dividend payout. Examination of the composition of inner reserves was also on the commissioner's agenda as he suggested that a distinction be made between ''revenue'' - essentially liquid - reserves and ''capital'' reserves, comprising unrealised gains such as those arising from property revaluations. Noting a general lack of support among local banks for an alteration in policy, the letter stated that the commissioner had no intention to force banks to disclose their inner reserves, which they were permitted to maintain under the Companies Ordinance. ''While I respect the view of the banks that we should move cautiously in this area, it is also the case that inner reserves run counter to the general trend, both locally and internationally, towards greater transparency and accountability,'' he wrote. While the new policy approach was not to be construed as a ''guideline'', it might in time lead to the formulation of a general guideline on the subject, the letter read.