Breaking News: FSA accuse auditors of failing to question management bias

Auditors have become yes-men who don’t adequately question management bias
according to concerns raised by the UK’s chief financial regulators.

The Financial Services Authority (FSA) and the Financial Reporting Council
today released a scathing discussion paper into the profession following
concerns raised in the wake of the financial crisis.

Among its concerns is that auditors “portray a worrying lack of scepticism”
when scrutinising potential management bias.

“In some cases that the FSA has seen, the auditor’s approach seems to focus
too much on gathering and accepting evidence to support management’s
assertions,” he said.

The FSA said while there had been significant improvements in the quality of
disclosures in bank statements, it believes “these improvements should have been
achieved earlier, with less need for intervention”.

“We also believe this shortcoming may partly reflect a lack of effective
challenge by auditors and the effectiveness with which auditors use available
levers to influence management, such as reporting their concerns to the FSA.”

Auditors have been eagerly anticipating the report which will add scrutiny to
the role they played during the banking crisis. Auditors escaped blame in the
immediate aftermath of the crisis, but found themselves in the spotlight after
the release of a report into collapsed bank Lehman Brothers in March.

The report, by US court appointed examiner Anton Valukas alleged that Lehmans
manipulated their balance sheet position during sensitive reporting periods via
the use of repurchase agreements, known within the bank as Repo 105
transactions.

It found Big Four accounting firm Ernst & Young may have shown
professional neigligence in their audit of Lehmans and prompted a number of
official investigations, most recently from the Financial Reporting Council’s
Accountancy and Actuarial Discipline Board.

E&Y has consistently defended its role in the audit and said it will
co-operate with any regulatory investigation.

The accusations accelerated deep soul searching from within the profession
about the value of audit, which failed to highlight the issues in large
institiutions which contributed to the crisis. Senior figures have acknowledged
the need for change, most recently John Griffiths Jones, senior partner at KPMG,
in a speech at the ICAEW earlier this month.

“What is the point…of doing extensive and increasingly elaborate audits of
the financial accounts of our banks, when audits failed to identify the huge and
systemic risks which led to the near collapse of the global banking system in
the Autumn of 2008,” he said at the time.

The report also follows the publication of an EU green paper on corporate
governance in financial institutions which also suggests audit be reformed.