THE “COMPLACENCY” of bank auditors was a “significant contributory factor” in the banking crisis, a Lords committee has concluded.
In a highly critical report, the House of Lords’ committee on economic affairs has found after its eight month inquiry that a lack of dialogue between bank auditors and regulators contributed towards the need for government bailouts for banks.
“We regard the recent paucity of meetings between bank auditors and regulators, particularly in a period of looming financial crisis as a dereliction of duty by both auditors and regulators,” stated the report.
Claims by the Big Four that the auditors had carried out their duties properly during the crisis were dismissed by the committee.
“We do not accept the defence that bank auditors did all that was required of them.
“In light of what we now know, that defence appears disconcertingly complacent. It may be that the Big Four carried out their duties properly in the strictly legal sense, but we have to conclude that, in the wider sense, they did not so.”
Although auditors and bank regulators have initiated plans to begin closer dialogue, the committee wants to go a step further and introduce a statutory obligation for regular meetings.
The Lords also concluded that auditors cannot take for granted that banks in difficulties will be bailed out by the government and taxpayers. The committee refused to accept that a bailout should be a decisive consideration in making a “going concern” judgment.
The committee was unimpressed with PwC’s audit conclusion in January 2007 that gave Northern Rock a clean bill of health for its 2006 accounts. The committee cited FSA research that at the time pointed to the bank’s business model as more risky than its peers.
“We find this complacency disturbing,” said the committee.
The committee also criticised the auditors for providing clean bills of health prior to the banking collapses.
PwC’s concerns with Northern Rock were flagged up to the FSA in September 2007, shortly before the bank called for emergency funding. But PwC’s decision to sign off its 2007 accounts without a going concern due to the availability of funding in the wholesale markets was not accepted by the committee.
“A going concern qualification was clearly warranted in several cases, even if the auditor may understandably have been reluctant to make it for the reason referred to…”
(Picture shows members of the Lords economic affairs committee delivering the report earlier today ©Iain Winfield/Incisicve Media)
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