Treasury report questions value of bank audits

Bankers have had the hair-dryer treatment, private equity bosses have been vilified and regulators have been accused off being asleep at the wheel. All have been blamed for the banking crisis and the wider financial turmoil.

But the final part of the Treasury Committee report into the banking crisis, which examined the role of auditors and was published last week, was not as critical of the profession as some had feared. In fact, it may see auditors’ influence enhanced.

MPs concluded that auditors were not to blame for the banking crisis, but claimed that they suffer from ‘tunnel vision’ when signing off accounts, and questioned the usefulness of the financial audit.

The committee rejected suggestions that auditors should provide a more extensive assessment of risks facing banks, however.

‘Our report does not conclude that auditors failed in their duties,’ said committee chairman John McFall.

‘However, the banking crisis has raised some serious questions about the usefulness of financial audit, and we have put forward suggestions for change.’

MPs also raised concerns about auditors selling non-audit services to clients ­ a sensitive subject for accountants who claimed to have sorted out after the Enron scandal.

‘We strongly believe that investor confidence, and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the Financial Reporting Council consult on this proposal at the earliest opportunity.’

John Flaherty, UK and Ireland assurance leader at Ernst & Young, said the report was ‘positive and supportive’ of the profession.

He said there was a ‘lack of clarity’ about what constitutes non-audit services and where it is appropriate to offer these to clients. ‘There are certain non-audit services that are entirely appropriate for the auditor to conduct on behalf of a client that do not compromise our independence,’ Flaherty added.

MPs backed suggestions by the ICAEW to strengthen the role of bank auditors, including more frequent meeting between auditors and the Financial Services Authority.

The FSA’s ‘piecemeal approach’ to using auditor knowledge about individual banks was a ‘wasted opportunity’ to improve the effectiveness of bank supervision, the committee said, and urged the FSA to respond to the ICAEW proposals.

Michael Izza, chief executive of the ICAEW, called for clarification on whether tax would be defined as a ‘non-audit’ service which auditors could not provide to an audit client.

Meanwhile, the committee backed ‘fair value’ accounting, which critics have blamed for exacerbating the multi-billion losses in the banking industry by requiring assets to be valued at current market rate.

MPs said: ‘The uncomfortable truth for banks is that market participants had over-inflated asset prices which have subsequently corrected dramatically. Fair value has actually exposed this correction, and done so more quickly than an alternative method would have done.’