Auditors not to blame for banking crisis, academic tells MPs

Expectations on auditors are too high and the profession should not be expected to avert management failure or challenge flawed business models, a leading academic has told MPs.

Appearing before the Treasury Select Committee investigation into the banking crisis Professor Michael Power of the London School of Economics yesterday defended the performance of the audit industry.

He added: 'Auditors are not there to challenge business models with finance directors. That is not their job. For that to happen, things would have to change substantially.'

Responding to MPs who demanded to know why, given the vast fees audit firms received from the banks, auditors failed to act or advise regulators of the looming crisis, Power said: 'Auditors ultimately rely on a variety of external sources including market prices and management.'

Paul Boyle of the Financial Reporting Council, along with Robert Hodgkinson, executive director, technical of the ICAEW institute, and Helen Brand, of the ACCA institute, made a robust of the limits of auditors’ power and responsibility.

But Prem Sikka, professor of accounting at Essex University – who is a vocal critic of audit firms -- declared that 'financial audits are out on a limb.”

MPs also raised concerns over auditors’ independence, citing examples of firms offering non-audit work to audit clients.

However, Power declared the issue a red herring. 'The real issue in this debate is operational,' he told the committee. 'The question is: what do auditors actually do, who does it and who do they rely on?'

Sikka, however, launched a withering attack on the audit industry, particularly the Big Four firms.

'Auditors are too close to the companies and they can’t bite the hand that feeds them,' he said. 'How can one bunch of commercial entrepreneurs audit another bunch of commercial entrepreneurs? That kind of model is broken and cannot work.'

In lively exchanges, Treasury committee chairman, John McFall, asked whether auditors had a duty of care to the wider public and whether there had been a fundamental failure of the system that allowed the near collapse of banks despite the attentions of the UK audit firms.

Paul Boyle, made a spirited defence of audit in the UK, although both the ICAEW and the ACCA representatives accepted that there was ‘room for improvement’.