Has the value of audit to investors improved post-HBOS?

IS there anything left to be said about the collapse of HBOS, and the role audit played in the lender’s demise, seven years on from the bank’s failure?

In a word, yes. The Bank of England’s long-awaited report into the failings, which led to the bank’s collapse, runs to 500 pages. The report has been criticised for failing to shed any new light on why and how the bank failed – many of its findings have long been aired – but it nevertheless poses some important points about the value of audit.

The report revealed that KPMG, the bank’s auditors, had raised several warnings about the overly upbeat and optimistic view management took over the funds it had set aside to cover possible bad loans. Yet despite sounding the klaxon, much of KPMG’s previous warnings were unheeded by HBOS management.

That was back in 2007 and 2008. Since HBOS fell, the profession has embarked on a number of changes to how auditors voice concerns raised with management. New long-form auditor reports have been introduced into annual reports which require greater information around how management assumptions have been challenged, plus more detailed descriptions of how risks of material misstatement are assessed, materiality and the scope of the audit.

Indeed, this is beginning to shed more light and transparency on a process that had previously been described as a “black box” by investors. The profession’s watchdog hopes this trend will be converted into “improved justifiable confidence” in audit.

Accounting standards too have been updated – chiefly the much-maligned incurred-loss model used by banks under IFRS, which has been labelled as a chief culprit for the onset of the financial crisis – has been updated to a forward looking approach.

Nevertheless, in the years since HBOS, auditors continue to face scrutiny over failings to uncover capital shortfalls and successfully challenge management on overly-optimistic accounting assumptions – such as in the case of the Co-op Bank and Tesco. At the same time, the new expected-loss model developed by the IASB has failed to satisfy some of the sterner critics of IFRS.

While firms and their partners haven’t been found guilty of misconduct around the two most recent examples of corporate woe, they have faced many questions about how they challenged management’s assumptions.

The ultimate arbiter of value around audit will be on how these challenges are artiuclated to the investment community. As is so often the case – concerns get rasied about management assumptions but they never found their way through to the investment community – until a long way down the line.

Improvements have been made to how audit is undertaken, so will the enchanced auditor reports complete the task? There is still some way to go for audit to deliver real value to investors.

Richard Crump is the deputy editor of Accountancy Age 

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