RESPONSIBILITY for auditing the accounts of the UK’s biggest banks should not be in the hands of accountancy firms, a parliamentary committee was told yesterday.
Accountancy experts told a sub-committee of the Commission on Banking Standards, chaired by Lord Lawson, that the concept of true and fair view had become a box-ticking exercise and that auditors were the ‘weak link’ in the financial crisis.
Prem Sikka, a professor of accounting at the University of Essex, called for a state body to audit the accounts of all “financial enterprises”.
“Auditors should have been telling us there are financial difficulties [at the banks],” Sikka said. “They should have been aware that Bear Stearns had a leverage of 33 to 1. Sooner or later, the financial horses weren’t going to come home.”
Accounting standards also came in for stinging criticism from the panel of experts. Stella Fearnley, professor of accounting at Bournemouth University, expressed horror at the “deathly silence from the accounting establishment about some of the dysfunctional outcomes” from IFRS.
Fearnley called on regulators to to make it more difficult for the banks to under-provide for their loans and make profits out of financial instruments that are not marketed to deep and liquid markets.
“When you get surpluses on these financial instruments, they shouldn’t be able to use them either for any form of distribution or bonus payment of to ramp up their solvency,” she said, adding that the UK “should use an override” on IFRS for banks “and say rats to the IASB”.
“I’d like to see the unrealised profits clearly disclosed and ring-fenced in the accounts. At the moment it’s not clear what’s realised and what’s unrealised,” Fearnley added.
Hans Hoogervorst, chairman of the IASB, defended the standards’ role in the financial crisis when he later addressed the committee.
“The financial statements produced under IFRS showed very clearly in the period leading up to the crisis that banks were excessively leveraged. Our numbers clearly showed that there was excessive leverage in the system and that the banking system was in a perilous state,” Hoogervorst said.
However, Hoogervorst accepted there were weaknesses to the incurred loss model used to account for loan losses and stressed the IASB was “busy finalising the expected loss model”.
“The way [the loss model] was phrased gave too much leeway for banks to procrastinate recognising losses and face reality and led to some degree of front loading of profit,” he said, but did not allow that an expected-loss model could have prevented the crisis.
“It could never have given enough safeguards for the huge unexpected loss that occurred,” he said.
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While everyone values audit quality highly we must be be careful that we don’t let it deter talent. We need to guard against its commoditisation and the threat to a unitary profession
Commissioning and preparing an asset valuation for financial reporting should involve a three way dialogue between the client, valuer & auditor