House of Lords attacks Big Four

2012-03-15 Author: BCAA


         The auditing profession – and in particular the role of the Big Four – came in for another bashing in the House of Lords yesterday during the debate on the Economic Affairs Committee’s report about the audit market

Former Treasury select committee chair Lord McFall said that he couldn’t understand what the point of auditors was if they weren’t able to flag the imminent collapse of a bank, while Lord Lawson asked what KPMG was doing when the bad decisions – highlighted in the Financial Services Authority’s report on the Bank of Scotland earlier this week – were being taken at its audit client. “To all intents and purposes, they were doing nothing,” he said.

Former Treasury minister Lord Stewartby accused the auditors of suspending their critical faculties when they audited banks.

Several lords expressed surprise that nobody, including the auditors, had taken responsibility for the banks’ collapses. Lord Lawson pointed to the demise of Johnson Matthey Bank (JMB) in 1984, which led to the first rescue of a private bank by the Bank of England.

As Chancellor, Lord Lawson had authorised the Bank to sue JMB’s auditors, Arthur Young (now Ernst & Young), and had obtained a sizeable sum in an out-of-court settlement. “This time not a single firm has been sued. I find it baffling.”

The Lords also maintained that as a result of IFRS, the audit had turned into a box-ticking exercise and demanded to know what steps the Government was taking to put prudence and judgment back into the audit process.

The debate was not all one-sided, however. Baroness Hogg, who is chair of the Financial Reporting Council, told the Lords that British auditors were among the strongest in Europe, if not world leaders.

Lord Northbrook, founder of Mars Asset Management, told the committee that they had been unfair to accuse the auditors of dereliction of duty. “It’s not the job of the auditors to forecast profits or look at the business model. It’s the regulators who should monitor the banks, not the auditors.

“Auditors only look at one point in the year, not all the year round. So how could the auditors have stop ill-advised pre-crisis takeovers like RBS and Amro?

“If the regulators didn’t foresee the problems, how could the auditors have?”

Auditors could not have prevented the financial crisis on their own, Government minister Baroness Wilcox added. “Auditors never had a financial stability role. They are only one part of the financial regulatory framework.”