RESPONSIBILITY for auditing the accounts of the UK's biggest banks should not be in the hands of accountancy firms, a parliamentary committee was told yesterday.
Accountancy experts told a sub-committee of the Commission on Banking Standards, chaired by Lord Lawson, that the concept of true and fair view had become a box-ticking exercise and that auditors were the ‘weak link' in the financial crisis.
Prem Sikka, a professor of accounting at the University of Essex, called for a state body to audit the accounts of all "financial enterprises".
"Auditors should have been telling us there are financial difficulties [at the banks]," Sikka said. "They should have been aware that Bear Stearns had a leverage of 33 to 1. Sooner or later, the financial horses weren't going to come home."
Accounting standards also came in for stinging criticism from the panel of experts. Stella Fearnley, professor of accounting at Bournemouth University, expressed horror at the "deathly silence from the accounting establishment about some of the dysfunctional outcomes" from IFRS.
Fearnley called on regulators to to make it more difficult for the banks to under-provide for their loans and make profits out of financial instruments that are not marketed to deep and liquid markets.
"When you get surpluses on these financial instruments, they shouldn't be able to use them either for any form of distribution or bonus payment of to ramp up their solvency," she said, adding that the UK "should use an override" on IFRS for banks "and say rats to the IASB".
"I'd like to see the unrealised profits clearly disclosed and ring-fenced in the accounts. At the moment it's not clear what's realised and what's unrealised," Fearnley added.
Hans Hoogervorst, chairman of the IASB, defended the standards' role in the financial crisis when he later addressed the committee.
"The financial statements produced under IFRS showed very clearly in the period leading up to the crisis that banks were excessively leveraged. Our numbers clearly showed that there was excessive leverage in the system and that the banking system was in a perilous state," Hoogervorst said.
However, Hoogervorst accepted there were weaknesses to the incurred loss model used to account for loan losses and stressed the IASB was "busy finalising the expected loss model".
"The way [the loss model] was phrased gave too much leeway for banks to procrastinate recognising losses and face reality and led to some degree of front loading of profit," he said, but did not allow that an expected-loss model could have prevented the crisis.
"It could never have given enough safeguards for the huge unexpected loss that occurred," he said.
Wasn't IAS 39 effective in 2005? So, is Chairman Hoogervorst apologizing for requiring the procrastination of losses only 7 years ago?
Posted by: Anonymous, 17 Jan 2013 | 18:46
Complete and utter waste of resources. Banks' auditors should do their job properly in the first place. They should check all the banks' transactions looking for why, what for and how much is being paid. They will then hopefully not miss substantial value transactions relating to bogus mortgage bundles that the banks were selling to each other, paying themselves massive bonuses and paying high fees to auditors keeping them sweet who were then issuing wafle-filled completely useless audit reports. Joe public has to foot the bill for such criminally negligent behavior when the banks naturally go bust.
Posted by: A JAY, 18 Jan 2013 | 11:54
Responsibility for the quality of checks and balances on finance seems to have moved to the European Union nowadays.
The Whitehouse is even encouraging a coherent Europe on many important matters.
Hopefully the past disasters in global finance will lead to more support for the independence of audit from national government.
Posted by: slightly optimistic, 18 Jan 2013 | 13:05
Assuming Hoogervorst is correct that the balance sheets revealed the severity of the over-leveraging, instead of blaming auditors and standards, regulators and investors should also be asking themselves and each other "Why didn't we ask more questions?" The answer seems clear - investors were raking in profits, and regulators (governments) were enjoying the popularity associated with healthy (so it seemed) economies. So whatever deficiencies there may have been in the standards was only magnified by the blindness of those who used the financial statements. Not saying there's no room for improvement in audits and standards, just that all should remember that when you point a finger, there are three fingers pointing back at you. For the cause of this crisis, there is enough guilt for all to share.
Posted by: Dave W, 15 Feb 2013 | 16:12
You may also like
If budgeting is to have any value at all, it needs a radical overhaul. In today's dynamic marketplace, budgeting can no longer serve as a company's only management system; it must integrate with and support dedicated strategy management systems, process improvement systems, and the like. In this paper, Professor Peter Horvath and Dr Ralf Sauter present what's wrong with the current approach to budgeting and how to fix it.
In this white paper CCH provide checklists to help accountants and finance professionals both in practice and in business examine these issues and make plans. Also includes a case study of a large commercial organisation working through the first year of mandatory iXBRL filing.