THE HOUSE OF LORDS Economic Affairs Committee wants to reinstate the once cosy relationship between auditors and bank regulators which existed 20 years ago, in a move which is likely to become a key recommendation of its wide-ranging inquiry into the audit industry.
The committee heard there was a breakdown in communication between the Financial Services Authority and auditors in the lead up to the crisis.
The Lords said they want to see auditors re-establish their close relationship with regulators which existed after the creation of the 1987 Banking Act – a plan which would “certainly be one of the proposals we put forward” following the inquiry.
Bank of England representatives, who appeared before the committee yesterday, said they would repair the relationship when they inherit financial supervision responsibilities from the Financial Services Authority.
“It is a question of recovering some of the things that were introduced in the late 1980s…there certainly was a dialogue between auditors and bank supervisors and that is something we are very keen to ensure happens,” Paul Tucker, deputy governor at the Bank of England.
Committee chair, Lord MacGregor, said he was likely to recommend a better communication between auditors and regulators.
“That is an issue which has come up in our discussion of auditors I expect it will certainly be one of the proposals we put forward,” he said.
Auditors and bank supervisors were required to meet routinely under the 1987 Banking Act under Chancellor Nigel Lawson. Lawson, now a Lord, sits on the Economic Affairs Committee and has roundly criticised regulators for taking their “eye off the ball”.
During the late 1980s the Bank of England could force auditors to complete work on their behalf, known as Section 39s. It would also hold regular, private, one-on-one meetings with auditors.
The dialogue broke after 1997, following the creation of the FSA. Today, there are “relatively few” pieces of information passed from auditors to the regulators, according to testimony from the FSA.
“There is a requirement both under our legislation and under European directives for auditors to inform us of anything they find, in the course of their audit, which is of material significance to us as a regulator – we get relatively few of those notifications,” Richard Thorpe, accounting and auditing leader at the FSA, told the inquiry last week.
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