Lawmakers attack auditors over bank statements

LONDON Tue Nov 23, 2010 7:24pm GMT

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LONDON (Reuters) - Lawmakers accused top auditors on Tuesday of misleading investors by giving banks a clean bill of health even though some eventually needed taxpayer bailouts to survive.

The economic affairs committee in the upper house questioned how the world's "Big Four" auditors -- Ernst & Young, Deloitte, PwC and KPMG -- could endorse annual reports of banks as a going concern as the financial crisis began unfolding from mid-2007.

John Connolly, UK chief executive of Deloitte, which audited RBS (RBS.L), a bank Britain had to part-nationalise, angered some committee members by saying there had been no failure of audit in the crisis.

"That seems to me to be extraordinarily self-satisfied in light of what we know to be the case," Nigel Lawson, a former chancellor, said.

"You were the auditor of RBS, which went belly up within a few months of giving it a clean bill of health," Lawson added.

Auditors appeared to be signing off on bank statements because they knew the lenders would be supported by the taxpayer and therefore still meet the going concern rule, Lawson said.

Auditors are required to state whether a company has the resources to last another year, and the sector is now facing some fallout from the crisis.

Ernst & Young is being probed by the Financial Reporting Council for its role in auditing Lehman Brothers, the U.S. bank that collapsed in September 2008, helping bring the world's financial system to its knees.

THIN ICE

Connolly said independent inspectors generally found that bank audits were of a high quality and in no case has there been a requirement to restate the accounts.

The Big Four met with the Bank of England in late 2008 and early 2009 as the crisis deepened in order to understand the likelihood of government support for banks, the auditors told the committee.

"Had we concluded there was not going to be support, then there would have been a different audit," Connolly said.

Lawson found this to be "absolutely astonishing."

"You noticed they were on very thin ice but you were completely relaxed as you knew they would be supported by the taxpayer," Lawson said.

David Lipsey, another committee member, said the duty of auditors was to report the true state of a bank and not to "mislead markets and investors."

"There is an increasing Alice in Wonderland feel to this discussion," Lipsey said.

The auditors rejected Lipsey's view.

"I disagree with that statement. At the end of 2006 nobody could see the crisis coming," said Ian Powell, chairman of PwC in the UK which audited Northern Rock, a bank that had to be nationalised.

Powell said that after the financial crisis began, auditors assessed if there was going to be enough liquidity to keep a bank going "wherever that liquidity comes from."

John Griffith-Jones, chairman of KPMG in Europe, said the banking industry is built on confidence and that full disclosure is absolutely fine in a stable environment.

"Come a crisis, the government of the day and Bank of England of the day may prefer the public not to know... to control events in those circumstances," Griffith-Jones said.

The House of Lords committee was taking evidence on concentration in the auditing market and the role of auditors.

Nearly all the world's blue chip companies are audited by the Big Four, creating concerns among policymakers of growing systemic risks, particularly if one of them fails.

"I don't see that is on the horizon at all," Connolly said.

The European Union's executive European Commission has also opened a public consultation into ways to boost competition in the sector, such as by having smaller firms working jointly with one of the Big Four so there is a "substitute on the bench."

"Having a single auditor results in the best communication with the board and with management and results in the highest quality audit," said Scott Halliday, an E&Y managing partner.

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