LONDON (Reuters) - Banks may need their own accounting rules and governance codes to restore investor trust in the sector, Britain's audit policeman said on Monday.
Accounting firms are on the back foot after they gave banks a clean bill of health just weeks before many had to be rescued by taxpayers in the 2007-09 financial crisis.
Banks were audited using rules applied to all sectors and Financial Reporting Council (FRC) chief executive Stephen Haddrill said this may have to change given what happened.
"To what extent, for the purposes of our work, should banks be regarded differently?" Haddrill told a conference organised by accounting firm Ernst & Young (E&Y).
"Should they have a separate code and their own accounting standards?" Haddrill said, adding the need was not "evident" for now but the FRC has set up a working group to study this.
There was a "real challenge to investibility" in banks and lenders should make greater use of disclosures in financial reports to win back market trust, Haddrill said.
In June Andrew Haldane, director of financial stability at the Bank of England, which will regulate lenders from next April, said the UK needs separate accounting rules for banks for investors to properly evaluate risks.
Haddrill said he was nervous about introducing more rules which could be manipulated or foster the herd mentality seen in the run up to the crisis.
For now the FRC will put more pressure on boards to ensure reports are fair, balanced and understandable.
"We want to bring an end to any part of the report being used to puff up the company without due regard to the quality of information," Haddrill said.
The FRC won't "spoon feed" companies with detailed guidance on what is fair, balanced and understandable. "The more guidance we provide, the more we emasculate banks and others involved in governance," Haddrill said.
Hywel Ball, a partner at E&Y, said the audit sector, dominated by the "Big Four" - E&Y, KPMG, PwC and Deloitte - faces several regulatory powder kegs set to blow the sector apart.
The FRC has just introduced a rule requiring UK companies to consider retendering their book-checking work at least every 10 years to end what critics say are cosy relationships between auditors and their customers spanning decades.
The European Union is approving a law forcing companies to switch accountant every six years, with the FRC's U.S. counterpart, the PCAOB, looking at similar moves.
Britain's Competition Commission will also say in early 2013 whether the audit sector needs "remedies" to boost competition.
Ball said these changes could spark a price war to win business with audit quality suffering, but Haddrill said the FRC would monitor the impact of retendering on quality.
The "shareholder spring" of the past year, when investors at banks and other firms publicly challenged generous pay packets of top officials, should move on to behind-the-scenes lobbying by investors rather than rows in public, Haddrill said.
"We are not going to get involved in setting people's pay," he said.
Editing by Mark Potter