Bank of England should audit banks, says Prof

The audit of banks should be taken over by the Bank of England, the Financial Services authority or another state regulator, according to an academic appearing before an influential House of Commons committee today (Wednesday, 28 Jan).

The committee will also hear that auditors need to be continuously present in banks because to monitor significant transactions and that the ‘conventional audit model is broken and cannot be repaired.’

The views come from Professor Prem Sikka, of Essex University, ahead of the Treasury committee’s review of banks and auditing in the financial crisis.

Sikka was due to appear before the committee in Westminster yesterday along with representatives from PricewaterhouseCoopers, the auditors of Northern Rock and Lloyds Banking Group, and KPMG who were auditors of HBOS.

In written submissions to the committee Sikka wrote: ‘The issuing of audit reports is subject to organizational and regulatory politics. Auditors may be reluctant to qualify bank accounts for fear of losing substantial clients, creating panic or jeopardising their liability position.’

However, the MPs on the committee are also likely to hear a defence of auditing in the banking crisis. The ICAEW in written submissions says the speed with which asset values were eroded ‘is not something that could have been predicted by their auditors.’

However, ahead of the hearing PwC dismissed Prof Sikka’s suggestion. ‘Bank audits have been performed soundly and to high standards in the crisis, as evidenced by the lack of any restatements. The regulator's role is fundamentally different from the auditor's role and any change might cause a confusion and a weakening of both,’ said John Hitchins, UK banking leader, PricewaterhouseCoopers.

However, the ICAEW proposes that some changes be considered or at least reviewed.

The institute suggests it might be considered whether auditors should review the regulatory returns made by banks to the FSA, which may uncover breaches of regulation. It also raises whether the FSA should return to an old regime of having auditors report regularly to the watchdog on issues such as internal controls and risk management. Under the current system the FSA commissions such reports only on an ad hoc basis.

Lastly, the institute suggest that if a bank does receive a ‘modified audit opinion’ then ‘investors and other businesses respond in a measured and considered manner’ and that the media be encouraged to avoid reporting statements on going concern issues as if they were ‘a qualified audit opinion’.

Jonathan Hayward, a consultant with Independent Audit and another expert before the committee, he cautioned against blaming auditors for the crisis.

‘The most important thing is that the temptation to take a swipe at auditors should be resisted. It would be unfair and unwise to do that. There’s no indication at all that bank audits have been badly done.’

He added that one question to consider would be the role of the auditor and extending from ‘commenting on the accountability statements’ to comment on the risk position of banks, something they are not currently required to do under terms of the audit.

Hayward also raised a further tricky issue for banks. Because the system relies upon confidence in the markets, he suggested one consideration would be whether auditors should be more involved in discussing their findings with regulators behind the scenes.

He said proposing that the central bank or FSA audit banks was to ‘confuse audit with regulation.’

Appearing before the committee are

First session

Robert Hodgkinson, Institute of Chartered Accountants in England & Wales; Helen Brand, Association of Chartered Certified Accountants; Paul Boyle, Financial Reporting Council; Prof Prem Sikka, University of Essex; Prof Michael Power, London School of Economics

Second session

John Hitchins, PwC; Brendan Nelson, KPMG; Jonathan Hayward, Independent Audit

To read all written submissions click here