In its final report released today, the Parliamentary commission on banking standards criticises the ‘complacency’ of bank auditors who it says ‘fell down in their duty’ to provide accurate information about companies’ financial positions say Harris & Co accountants Northampton.
The report describes this as a ‘significant contributory factor’ in the financial crisis, and says auditors failed to act decisively and fully to expose risks being added to balance sheets throughout the period of highly leveraged banking expansion.
The committee says competing commercial interests meant ‘at best, auditors did not act as the last line of defence against banks’ questionable reporting on their own businesses and, at worst, they were cheerleaders for it’.
It said that auditors might have been reluctant to qualify a bank’s accounts for fear of causing a run on the bank, while conflicts of interest created by the cross-selling of consultancy services by auditing firms further reduced incentives to expose poor practice.
In its evidence, the Financial Services Authority (FSA) said auditors tended to adopt a ‘narrow, box-ticking approach’, assessing whether transactions are ‘clearly inconsistent with accounting standards’ rather than applying professional scepticism.
Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), told the commission that auditors tended to rely on regulators to identify problems, saying: ‘I think that the auditors were relying on the regulators to take care of going concern, to tell you the truth. That’s a reason why they were not so very critical. I think they need to be more critical’.
The committee also looked at whether the adoption of International Financial Reporting Standards (IFRS) had resulted in auditors taking an overly simplistic and rigid approach at the expense of professional judgement, saying more work was needed on the rules governing how banks set aside money to cover bad loans.
The report is critical of what it describes as a bias in the tax system which incentivises companies to favour debt over equity, saying that this encouraged banks to take on more risk.
Overall, the committee says that ‘deep lapses’ in standards have been commonplace. Its report, Changing banking for good includes a package of recommendations covering several areas including: making senior bankers personally responsible, reforming bank governance, creating better functioning and more diverse markets, reinforcing the powers of regulators and making sure they take action.
The report is available from www.parliament.uk.