{"id":32952,"date":"2016-03-30T15:15:34","date_gmt":"2016-03-30T14:15:34","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=32952"},"modified":"2016-03-30T15:15:34","modified_gmt":"2016-03-30T14:15:34","slug":"the-financial-reporting-councils-evasiveness-tells-us-its-unfit-for-purpose","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2016\/03\/30\/the-financial-reporting-councils-evasiveness-tells-us-its-unfit-for-purpose\/","title":{"rendered":"The Financial Reporting Council\u00e2\u20ac\u2122s evasiveness tells us it\u00e2\u20ac\u2122s unfit for purpose"},"content":{"rendered":"

Guest post by Atul K. Shah<\/a><\/em><\/p>\n

\"_86769638_ufrpuzl2\"The failure of the UK\u2019s fifth largest bank, HBOS, led to over \u00a352\u00a0billion of losses, and had a significant impact on jobs, pensions and savings for thousands of people. In spite of a large number of enquiries and reports, no-one has gone to prison, nor has there so far been any extensive investigation<\/a>\u00a0of the role of the \u2018Big Four\u2019\u00a0audit firm KPMG, which was HBOS\u2019s external auditor throughout the bank\u2019s short life.<\/p>\n

In a country which boasts a healthy democracy and the rule of law, this is a disaster. It shows how flawed and unfair the system is. It also raises serious questions about the ethics and integrity of the ICAEW, one of the oldest professional bodies of accountants in the world. More fundamentally, our research<\/a> reveals that a much deeper and wider game of \u201cregulatory arbitrage\u201d was being conducted by financial institutions, audit firms and regulators, which is seriously undermining the effectiveness of financial regulation.<\/p>\n

Auditors are, by law, meant to ensure that financial statements give a \u201ctrue and fair view\u201d of their clients\u2019 financial position, and our research shows\u00a0that\u00a0KPMG fell far short of this<\/a>, especially in the case of HBOS\u2019s accounts for 2007 and 2008. When auditors fail, they are supposed to be investigated by the Financial Reporting Council. This was strongly resisted for several years, partly because the\u00a0regulator preferred to\u00a0await a report by the Bank of England\u2019s Prudential Regulation Authority and the Financial Conduct Authority, a report which conveniently took years to complete<\/a>. It\u00a0finally finally came out<\/a> in 2015.<\/p>\n

Based on this, a very limited investigation was announced, but this was also to be conducted in a preliminary way by internal staff members of the FRC.<\/p>\n

The Treasury Select Committee did not like the sound of this, and suggested that a more robust investigation be undertaken, including the engagement\u00a0of outside independent experts. The detailed correspondence in 2016 between Treasury Select Committee chairman Andrew Tyrie MP and the FRC\u2019s chief executive Stephen Haddrill has just been released<\/a>\u00a0by the committee, and it makes for shocking reading.<\/p>\n

Haddrill\u2019s answers to Tyrie\u2019s detailed questions are limiting, vague, feeble and weasly, in spite of the urgency of the matter, and fail to make clear how much evidence will be released to the public.<\/p>\n

One regulatory strategy in the event of massive corporate failure is to \u201ckick it into the long grass\u201d. That\u2019s what\u2019s happening here, and to KPMG\u2019s benefit, in this instance, and it seems the FRC is continuing to kick. In the latest response from the FRC, independent outside experts are being avoided, and there is even a denial of the FRC\u2019s regulatory and enforcement powers in material areas. All this shows that, as a regulatory body, the Financial Reporting Council is wholly unfit for purpose, and remains as captured as ever by the audit firms it is supposed to regulate.<\/p>\n

HBOS whistle-blower Paul Moore<\/a>, himself a former KPMG partner\u00a0and author of Crash Bank Wallop<\/a>, suggests one key factor is\u00a0the:<\/p>\n

\u201cmysterious fact that the Financial Reporting Council changed the threshold for investigations in 2013 from \u201cconduct which falls below the standards\u2026\u201d to \u201cconduct which falls significantly below\u201d.<\/p><\/blockquote>\n

And Tim Bush, head of governance and financial analysis at PIRC, argues that:<\/p>\n

\u201cgiven the over-riding requirement for auditors to ensure that accounts give a \u2018true and fair\u2019 view, the auditors and the FRC must not simply look at specific accounting standards but the overall picture of financial performance presented in the annual report, which was hugely misleading.\u201d<\/p><\/blockquote>\n

Prem Sikka, professor of accounting at the University of Essex says:<\/p>\n

\u201cThe correspondence shows shocking \u00a0inertia by FRC. The very fact that the \u00a0FRC needs to be pushed is an indictment of its failures. The FRC refers to a number of cases that it has examined, but make no reference to what it has ignored or neglected. It makes no mention of the time taken to report on the cases either. The FRC is unfit to be a regulator.\u201d<\/p><\/blockquote>\n

It is time the public, parliament and media rise to challenge the Financial Reporting Council\u00a0and KPMG over its audits of HBOS and ensure they key people involved are investigated and punished. Nothing less will do.<\/p>\n

Dr Atul Shah<\/a> is senior lecturer at Suffolk Business School. His research is focused on the areas of business ethics, governance, and financial regulation.\u00a0<\/em><\/p>\n

Note: on its website <\/a>the FRC says:<\/p>\n

The Financial Reporting Council is the UK\u2019s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. We promote high standards of corporate governance through the UK Corporate Governance Code. We set standards for corporate reporting, audit\u00a0and actuarial practice and monitor and enforce accounting and auditing standards. We also oversee the regulatory activities of the actuarial profession and the professional accountancy bodies and operate independent disciplinary arrangements for public interest cases involving accountants and actuaries.<\/p><\/blockquote>\n

It is also worth remembering that KPMG also audited numerous other failed banks around the world including Bradford & Bingley and Co-operative Bank in the UK. The FRC has supposedly been investigating its audits of the latter since January 2014<\/a>. In some countries including the US, Italy, Bulgaria and Nigeria, KPMG has already been penalised for flawed auditing of banks, either by regulators or through the courts.<\/p>\n