Auditors to tell Treasury MPs they can’t predict the future

Auditors are doing a good job, shouldn’t be expected to predict risks faced
by a business and were not to blame for the collapse of banks audited by the Big
Four.

That’s what senior figures from the profession are likely to say when grilled
by MPs on the commons Treasury committee about their role in the banking crisis
and whether a review of the audit sector is needed.

‘The auditor’s role is not to predict the future but to ensure that
companies’ accounts give a true and fair view of the previous 12 months,’ says
Richard Sexton, UK head of assurance at PricewaterhouseCoopers. ‘We are
absolutely not asked to give an observation on future financial health of a
company.’

The committee will quiz auditors by January 6 as part of its inquiry.

MPs have already sought and been sent evidence on the role of accounting
standards as part of an investigation into how to secure financial stability to
protect the taxpayer, customers and shareholders.

The collapse and nationalisation of banks ranging from Lehman Brothers to
Northern Rock has prompted calls for financial reporting rules to be overhauled.

One suggestion is to require companies to disclose more fully risks to their
business – whether economic, regulatory, or geo-political – as well as their
future prospects.

There is some support for reforms along these lines among the profession’s
big hitters, although auditors stress that they are not responsible for ‘forward
looking’ statements in accounts and any changes in this area.

Others have implied that the audit industry may have some lessons to learn
from the banking crisis, however.

Chris Dickson, executive counsel of accounting regulator Joint Disciplinary
Scheme, has called for a review into whether auditors can rely on debt ratings
given by credit rating agencies such as Fitch, Moody’s and S&P, when valuing
company assets and signing off accounts.

Investment bankers have been accused of taking reckless gambles to hit
targets for bonuses and banks have been vilified for withdrawing lending to
small businesses.

The reputation of the accountancy profession has emerged relatively unscathed
– but litigation experts have warned firms could be sued over their role in the
packaging up of US sub-prime mortgage assets.

Senior accountants are thought to have suggested that the committee should
question the profession about the banking crisis and a possible review of the
audit industry.

This is not unusual. The accountancy profession regularly lobbies MPs and
suggests business issues for discussion and possible reform. But the approach to
MPs does signal that accountants want to get their defence in first.