The FT has a report this morning that begins:
The regulatory body that oversees the auditing profession has criticised the industry's “below average” quality and slow pace of reform in bank audit work.
In particular, the Financial Reporting Council questioned the adequacy of testing of banks' loan loss provisions and general IT controls.
It's hard to work out who got the report more wrong; the FT or the FRC.
First. there are only four auditors of banks of any size in the UK: KPMG, PWC, EY and Deloitte. They have all been proved to be consistently bad. That means that bank auditing is not below average. It is universally bad.
Second, the failure to provide bad debt was because the International Financial Reporting Standard reporting regime does not work on an anticipated loss model; it works on a realised loss model. That meant that losses could not be booked until they went wrong; the ability to predict some would go wrong was no longer enough. So the question is not whether the auditing was bad, but should be about firstly why this model was adopted and second what the role of the Big 4 firs was in its adoption. That is where the corruption at the heart of accounting and auditing lies.
Third, the question should then be asked as to why the supposed 'true and fair' over-ride did not apply and the auditors did not insist on the banks provisioning despite the accounting framework in which they were reporting not requiring them to do so. For this the villain in the piece is the Institute of Chartered Accountants in England and Wales whose guidance on this issue is discussed by Tim Bush here in evidence given to the House of Lords. Without having any legal right to do so the ICAEW basically exonerated this approach, but also fundamentally failed to recognise the duty in law that a company has a primary duty to ensure its own solvency when doing so. Clearly that duty was not fulfilled by the banks and their auditors failed to raise issue with them despite that fact.
In that case then the question of audit quality is important but far from being the most important issue. That most important issue is the systemic failing of bak auditing and why the undue influence of the Big 4 on the International Accounting Standards Board and so International Financial Reporting Standard and in turn on the Institute of Chartered Accountants in England and Wales allowed this to happen.
But I have a strong suspicion those questions will not be asked.
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I dare somebody at ICAEW to reply with “you might think but I couldn’t possibly comment”!
You might wish that but I couldn’t possibly comment
Would not disagree with the above, but you don’t mention the (Labour) Government giving the Green Light to the Big 4 Auditors not to Qualify the banks’ Accounts
as they promised a back stop Guarantee.
I agree
I have never exonerated Labour on this and won’t
But, presumably, please correct me if I’m wrong, it isn’t only the banks. Although they were, unsurprisingly, the biggest culprits.
What you, Richard, seem to be saying is that there was a massive systemic failure in 2 parts;
firstly, the IFRS disastrously overtook the old “concept of prudence” & allowed ALL big corporations to produce blatantly false A/Cs that recognised profits without recognising massive, consequential, potential liabilities &
secondly, being aware of this, the auditors could have insisted that those liabilities were recognised, nonetheless (because to do so would be the only way to produce true, fair A/Cs), which would have cost Boards of Directors their bonuses & pension pay-outs & reduced the share price they relied on for their share options, but, instead, they chose to keep quiet.
Have I misunderstood the point, is it more complex ?
“I’m worried about the direct debits to my A/C for identity fraud insurance. I never asked for identity fraud insurance.”
This horrifies me. There used to be a time when you’d deal with a Company & if it was audited, not by a big 4 firm but by, say, Salmon & Herring & Co, FCA of Grimsby, you’d know you could rely on those financial statements.
That sort of certainty seems to be slipping away.
Cicero made his name as a lawyer by asking ‘Cui bono?’ Who benefits? then it all becomes obvious. IASB wants to run the world’s accounting and get paid well for doing it. B4 made loadsamoney from IFRS complexity and create barriers to entry globally because smaller firms don’t have the infrastructure to handle such a behemoth. Banks can be as imprudent as they like. Regulators have been spineless and stupid and fallen for the global standards myth which will never happen. US would never give up control of its standards, nor should it. ICAEW and FRC have both contributed to the silence about IFRS’s role in the crisis. Public interest – forget it. Whose pockets are they in?