Are the labyrinthine structures of high street banks, and their exotic
financial instruments, becoming too complicated for even the auditors to
This was one of the questions posed by the influential Commons Treasury
select committee which met last month.
The committee met to rake over the ashes of the banking crises – who is too
blame and what lessons can be learnt? It questioned representatives from
ACCA and the
ICAEW, two eminent
professors, as well as City regulator the
Financial Services Authority and auditors.
One MP, Jim Cousins, questioned whether auditors could be expected to keep
pace with the complexities of banking practices when so much lies off balance
sheet and offshore.
Other MPs highlighted a perceived breakdown in the relationship between
regulators, auditors and clients. Had that breakdown, one asked, led to a point
where unsustainable risks were taken unchecked by banks?
Deloitte had racked up some £31m in audit fees from its work on RBS, but
failed to either spot or flag up some of the more risky balance sheet items,
another MP said.
The inferences were clear: either the system is broken, the auditors were
incompetent, or, more worryingly, that one of the Big Four, with all the
resources at its disposal, was incapable of accurately auditing a major UK bank.
Answers were not forthcoming as the institutes and well-briefed Big Four
representatives stressed the limits of auditors’ responsibilities.
But Professor Michael Power of the LSE wondered whether the crisis was the
opportunity to fundamentally rethink audit’s role in the financial system, and
perhaps even ‘start again’.
Both the ICAEW and ACCA defended the profession from accusations of inaction,
but the committee continued to question whether auditors should have taken
action to work with regulators to improve banks’ risk management.
Power was more sympathetic towards the role of auditors, arguing that they
should not be expected to avert management disasters and question dubious
‘Auditors are not there to challenge business models with finance directors,’
he said. ‘For that to happen, things would have to change substantially.’
Mitigating circumstances aside, auditors can expect to face more tough
questioning and regulatory scrutiny over the next year as the fall out from the
banking crisis continues.
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