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
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.
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,
However, the ICAEW proposes that some changes be considered or at least
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
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
John Hitchins, PwC; Brendan Nelson, KPMG; Jonathan Hayward, Independent Audit
To read all written submissions click
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