AUDITORS "MISLED" investors in the lead up to the crisis by supplying UK banks with a clean bill of health after being told taxpayers' money would be used to bail them out, a House of Lords Committee has heard.
The Lords' Economic Affairs Committee criticised auditors for signing off on banks' accounts on the basis the UK Government would prop up the banks.
"Your duty is to report to investors the true state of the company. You were giving a statement that was deliberately timed to mislead the company and mislead markets and investors about the true state of those banks and that seems to be a very strange thing for an auditor to do," said Lord Lipsey.
Debate focused on the use of "going concern" guidance, issued by auditors if they believe a company will survive the next year. Auditors said they did not change their going concern guidance because they were told the government would bail out the banks.
"Going concern [means] that a business can pay its debts as they fall due. You meant something thing quite different, you meant that the government would dip into its pockets and give the company money and then it can pay it debts and you gave an unqualified report on that basis," Lipsey said.
Lord Lawson said there was a "threat to solvency" for UK banks which was not reflected in the auditors' reports.
"I find that absolutely astonishing, absolutely astonishing. It seems to me that you are saying that you noticed they were on very thin ice but you were completely relaxed about it because you knew there would be support, in other words, the taxpayer would support them," he said.
Ian Powell, chairman of PwC UK, which audited Northern Rock, said auditors made the best judgments with the information available to them.
He said in 2007 no-one predicted the scale of the banking collapse and later, in 2008, auditors were able to sign off on company accounts because they knew the government would provide support.
"We made the realistic and educated assumption about where the market was likely to go... The view that we formed was that there would be adequate liquidity to sign off on the financial institutions," he said.
John Connolly, senior partner at Deloitte, which audited Royal Bank of Scotland, recounted discussions between auditors and government officials in the months after Lehman Brothers' collapse.
"We had conversations that sought to understand the likelihood of support being forthcoming," he said.
He said auditors failed to see the possibility of global banking collapse in the years leading up to the crisis.
"We were completely aware of what was going on in the world but, like most other people, we didn't appreciate what was going to happen, especially to Lehman Brothers in 2008," he said.
Lord Lawson criticised Connolly for claiming "auditors performed well" in the crisis.
"That seems to me to be extraordinarily self-satisfying in the light of what we now know to be the case," he said.
"You were the auditor of the Royal Bank of Scotland which went belly up within a few months of a clean report."
(Picture shows (from left to right,) Scott Halliday, Ernst & Young; Ian Powell, PriceWaterhouse Coopers; John Griffith-Jones, KPMG; and John Connolly, Deloitte. Parliamentary copyright © 2010-2011)
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