Bank regulators should be talking to auditors, say Lords

The FSA has been urged to resume regular meetings with bank auditors to keep
themselves better informed about the state of the banking system by a Lords
committee probing the causes of the credit crunch crisis.

Peers on the House of Lords Economic Affairs committee said in a report that
it was ‘regrettable’ that supervisors ceased meeting with auditors, who told the
Committee that information sharing had become less effective when the FSA
assumed responsibility for supervising the banking system.

The report, on the causes of the banking crisis, said there was ‘no evidence
that bank auditors failed in their statutory duty to make a going-concern
judgment on their clients’ and made it clear they ‘should not be required to
make a more general judgment on the quality of their client’s’ strategies.’

It added: ‘In any event, it is unlikely that auditors would be more able than
financial supervisors to identify structural problems in the financial sector.’

The report also defended ‘mark-to-market’ accounting, insisting it ‘generates
verifiable information about banks’ and that without it investors would be less
well-informed and confidence would suffer in downturns.

But it urged supervisors to ‘identify ways to ensure that it does not amplify
the economic cycle.’

The report’s key finding is that failure of regulation and supervision by the
tripartite regime of the FSA, Treasury and Bank of England ‘contributed to the
financial crisis in the UK’ and urged the government to ‘return responsibility
for macro-prudential supervision from the FSA to the Bank’.

It said the FSA had focused on its consumer protection role and failed to
take steps to alleviate risks to the system caused by excessive debt and the
banks’ ventures into complex and opaque financial instruments.