The Financial Reporting Council has decided that KPMG have no case to answer with regard to the quality of their audit of HBOS signed off immediately prior to the collapse of the bank in 2008. According to the Guardian report:
The FRC concluded “there was not a realistic prospect that a tribunal would make an adverse finding against KPMG in respect of the matters within the scope of the investigation”. KMPG said it was pleased with the findings.
"The firm's work did not fall significantly short of the standards reasonably to be expected of the audit, the test that a tribunal would apply,” the FRC said.
The implication is obvious: Tim Bush, head of governance and financial analysis at Pensions & Investment Research Consultants (who I advise) made the appropriate connection talking to The Telegraph
"Clearly there needs to be a full explanation as to why the FRC hasn't proceeded," he said. "The big question is whether the FRC's own standards were a contributing factor."
It is known, after all, that this issue was discussed by the auditors of all banks in 2008. This was revealed in parliamentary interrogation of them some years ago when it was also hinted that assurances on bail outs were, in effect given, and were relied upon. But that was not enough in the case of HBOS and it was not referred to in the accounts.
In that case questions as to whether there was an unspecified standard in play here, or whether the standards were simply inadequate, or whether the FRC feels it can simply ignore obvious attention to an obvious failure referred to it by a parliamentary committee are all in play because what is beyond any reasonable doubt is that there was an audit failure.
In that case I sincerely hope that this issue returns to parliament. Auditing deserves to be in crisis over this issue. The Treasury Committee needs to bring that crisis specifically into the open, and add the role of the supine FRC into its remit. Then this failure may be subject to appropriate review. Right now it is not.
In the meantime I recommendAtul Shah's book on the whole issue.
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“The FRC concluded “there was not a realistic prospect that a tribunal would make an adverse finding against KPMG in respect of the matters within the scope of the investigation”. KMPG said it was pleased with the findings.”
The key phrase is “within the scope of the investigation” I think.
If the investigation parameters are drawn in such a way that prohibit apportionment of culpability then the outcome is a foregone conclusion.
This seems to be standard practice in the establishment in the various forms of public enquiry. I don’t think this is me being cynical I think this is governments using their power cynically.
KNPG said it was pleased with the findings? I bet they were.
When you look at the terms of engagement of an auditor you realise that the audit isn’t really worth the paper it is written on.
The audit is basically a box ticking exercise so that the company can show that they have done something they are legally required to do and where applicable enable regulatory bodies to tick a box to say one of their requirements has been met too.
The entity being audited is the customer and if they don’t get the result they want they are free to go elsewhere.
For well run organisations an audit is a costly nuisance and unnecessary but mandated expense.
For poorly run organisations an audit is the cost related to appearing to be just fine.
Auditors rarely have a full understanding of complex businesses that they are auditing and all they are likely to find is a broken formula in a spreadsheet.
I have said it before and I will say it again, if you want to see real audits of companies of national importance then the audit work needs to be passed to a well funded organisation that isn’t selected or paid by the company being audited. Maybe the work could be handed over to the aptly named “National Audit Office” …
I have long agreed with that
I say it as someone who saw audit from the inside
My auditing experience was in the 1960s, so it’s long past its sell-by date in terms of methodologies. However the principles remain the same and I have never understood how any of the big banks got clean dockets from their auditors. After all the banks clearly didn’t understand the real nature of many of the sub-prime derivatives they were holding as assets, so how could the auditors be expected to understand them if their clients couldn’t give a clear understanding of how the derivatives were created, how they functioned as investment vehicles and what their attendant risks were? My old-school 1960s training was that if you couldn’t form an opinion, you had to qualify, but that clearly wasn’t applied to the banking and finance industry’s accounts leading up to the 2007-8 crash.
In the 1960s I was on the audit of Glasgow Corporation’s Loans Department which required not a”true and fair view” docket, but a “correct” one. This meant vouching every single transaction relating to loans to and from the city and ensuring that interest had been correctly calculated in all cases and that all payments and receipts were correct in countless ledgers going back decades. The audit took forever twice a year and was regarded as the office’s “Salt Mines”, so I’d obviously been a very naughty boy at some point.
Fast forward to the 2008 crash and the banks’ audit dockets might as well have stated the accounts “were OK as far as we know!”
“The entity being audited is the customer and if they don’t get the result they want they are free to go elsewhere.”
Yep, spot on.
Its the same issue that came up with the ratings agencies giving “AAA” ratings to ridiculous CDO’s etc. pre-2008. Conflict of interest and auditors pretending to be “independent”.
The auditors will never be independent unless the regulators give them a big reason to fear being exposed when they fail. Without that fear we have a very big case of moral hazard.
[…] development in the fiasco of the Financial Reporitng Council clearing KPMG of any audit failure in giving a clean report on HBOS’s 2007 accounts months before that bank collapsed. As they report (behind a paywall, […]