July 25, 2011 / 11:10 PM / 9 years ago

Company auditors told to stand up to banks

LONDON (Reuters) - Company auditors should question management more closely about how their revenue forecasts stand up against a backdrop of poor economic conditions and weak markets, the industry’s watchdog said on Tuesday.

Lawmakers and financial regulators are piling pressure on auditors to be more assertive with banks in particular after many gave lenders a clean bill of health in the run up to the financial crisis — just months before some of them had to be rescued by taxpayers.

“We find too many audits that require significant improvement. Scepticism is a key factor in those audits that do need an improvement,” said Paul George, director of auditing at the Professional Oversight Board (POB).

The POB’s annual survey of audits found that the operations of the “Big Four” — KPMG, PwC, Deloitte and Ernst & Young — along with two smaller firms Grant Thornton and BDO, all failed to be sceptical enough.

PwC was told to pay more attention to how impairment of goodwill is calculated, while Ernst & Young should make sure there is enough evidence to back growth rates.

Grant Thornton, KPMG, BDO and Deloitte were told to apply appropriate challenges to company bosses.

Companies have gone through a period of weak growth and this means that future projections need to be scaled back in line with current performance, said George.

“Our message to firms is that we believe their audit teams need to be more challenging in reviewing the assumptions that managements put together to support various values in financial statements,” he told Reuters.

“Management are often too slow to recognise the long-term implications of current trading conditions,” he added.

The findings will fuel efforts by the European Union’s financial services chief Michel Barnier to finalise an EU draft law for the autumn.

It will likely require auditors to tell regulators about any concerns they have such as whether a business model is too risky or is based on overly optimistic assumptions.

A report from Britain’s upper House of Lords chamber has called for auditors to be more forthcoming in challenging banks over their accounts.

The Financial Reporting Council, of which the POB is an element, has been pushing auditors over the past 18 months to beef up challenges to management and George said these actions should start feeding through into next year’s survey.

Ernst & Young said it was taking the necessary actions.

Reporting by Huw Jones; editing by Sophie Walker

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