Regulator probes Deloitte auditing of RBS

LONDON Mon Dec 12, 2011 6:36pm GMT

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LONDON (Reuters) - A regulator has opened a probe into Deloitte's auditing of Royal Bank of Scotland, the British lender that taxpayers spent 45 billion pounds rescuing in 2008.

Financial Services Authority chairman Adair Turner said on Monday a copy of its report on the near collapse of RBS and other material had been passed to the Accountancy and Actuarial Discipline Board.

"The AADB will consider what, if any, action it is appropriate to take in relation to the conduct of any accountancy firm or individual accountant," said a spokesman for

the Financial Reporting Council, of which the AADB is part.

Deloitte said it was normal procedure for the FSA to pass on its findings to the AADB and was "not an indication there was a complaint or a problem identified," or that the AADB plans to conduct an investigation.

"We are confident that we properly fulfilled our responsibilities as auditor, and are satisfied that our work was thorough and carried out in compliance with auditing standards and appropriate regulatory requirements," a Deloitte spokesman said.

The FRC is already probing how Ernst & Young -- another of the so-called "Big Four" auditors -- checked the books of Lehman Brothers before the U.S. investment bank collapsed in September 2008, bringing the world's financial system to its knees.

Policymakers believe auditors were not tough enough in challenging assumptions made by banks in their accounts.

The European Union has unveiled a sweeping draft law to try to remedy faults it believes were highlighted by the financial crisis.

The FSA looked at how RBS, its audit committee and Deloitte valued some of the bank's assets, including collateralised debt obligations, which turned sour in 2007 as the financial crisis unfolded.

No adjustment was made to the value of RBS's super senior CDO exposure at the end of 2007, while those of ABN AMRO, the Dutch bank it was taking over that year, were written down by 188 million pounds.

Other lender in Europe and the United States had also "significantly reduced" the valuation of their super senior CDO exposures in 2007, the FSA report said.

"The phrase we ended up with is that we believe there was a bias to optimism in the valuations," Turner told a news conference.

Although the valuation of super senior CDOs were not "outside the bounds of reasonableness" at that time, with hindsight the acceptance of that optimism by Deloitte was "difficult to justify," Turner said.

While Deloitte did identify 200 million pounds of further adjustment to CDO valuations, an adjustment was not made as the auditor agreed with RBS it would be immaterial compared with the bank's 2007 after-tax profit of 7.7 billion pounds.

RBS went on to make significant writedowns weeks later in March and April 2008.

(Reporting by Huw Jones; Editing by Dan Lalor)

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