Banking reform report: “fundamental questions” about purpose of audit

There needs to be “fundamental questions” about the purpose of audit
following the financial crisis, called the UK commission into the future of

The Future of
Banking Commission
wants auditors to take a more critical eye over
the way banks account for assets and liabilities, looking beyond whether they
have stuck with the appropriate accounting rules, to gauge the underlying risk.

“The commission is concerned that auditors failed to report on the higher
levels of risk and leverage being run by the major banks,” stated the report.

It also called on a “robust classification criterion” for assets and
liabilities to ensure the numbers reported are meaningful and relevant.

“Regardless of the measurement basis, there is no substitute for the
professional judgment of the auditor,” it added.

The Financial Services Authority should also encourage more dialogue with
auditors, in order to flag up concerns about their clients and deal with any
risks before they grow out of control.

“It is important that early work is done to nip things in the bud, and
auditors are well placed to help in this activity.”

Tory MP David Davis, chair of the commission, said that “opaque accounting
practices” were, in part to blame for the crisis.

“The formalisation of international accounting rules had the perverse and
unintended effect of reducing the requirement on accountants to exercise
judgment in signing off balance sheets,” stated Davis in the report’s foreword.
“As a result, one of the historic checks on asset value was undermined.”

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