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Auditors slammed by PCBS

02/07/13

The Parliamentary Commission on Banking Standards (PCBS) has suggested that auditors failed in their duty to expose the risks on banks' balance sheets and implied that the overly close relationships between the two organisations could be partly to blame.

According to evidence collected by the PCBS, auditors did not carry out their role as the last line of defence against banking problems and at worst acted as "cheerleaders" for the questionable reporting being generated by the sector.

The PCBS was set up in the wake of a string of scandals that affected the industry, and now hopes to ensure these issues do not arise again by keeping track of the relationships between regulators, investors, auditors and banks.

Furthermore, the report declared that the accounting rules themselves are flawed and have exacerbated the crisis in banks, suggesting that further changes to the regulatory environment could be afoot over the coming years.

"Auditors failed to act decisively and fully to expose risks being added to balance sheets throughout the period of highly leveraged banking expansion," the study said.

However, the organisation also highlighted some positive audit changes that have occurred since the crisis, including the expected-loss model. 

The PCBS recommended that banks be made to create a separate set of accounts for regulators that can be checked often, ensuring that the closeness between the two groups does not effect the quality of their surveys.

"We would expect that for the dialogue to be effective, both the PRA and the FCA would need to meet a bank's external auditor regularly, and more than the minimum of once a year which is specified by the Code of Practice governing the relationship between the external auditor and the supervisor," the report claimed.

Plans to reduce the market share of the big four audit firms and improve competition in the sector could also be used to try and disrupt the cosy relationship between banks and auditors.

http://www.financialdirector.co.uk/aa/news/2275987/auditors-acted-as-cheerleaders-for-questionable-bank-reporting

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10127894/Banking-Commission-Auditors-are-cheerleaders-of-poor-bank-accounts.html

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