Hound of the bank villains: the Treasury Select Committee on audit industry's trail

Entrenched and trenchant positions, major disagreements, little fresh thinking and meagre insights on the way forward ­ and that was just the accountancy profession. MPs seemed bemused and angered by some of the responses of the profession’s representatives called as witnesses in the ongoing parliamentary enquiry into the banking crisis by the Treasury Select Committee.

However, it is possible that radical proposals, which would impact the relationship between the finance director and auditor in the financial services industry, may emerge from the investigation. Labour MP for Leeds East, George Mudie, called for banks to be subject to a “deeper audit” to examine systemic risk, and for auditors ­ with the knowledge of the bank ­ to report areas that are not working to the regulator.

Promising direction
Paul Boyle, outgoing chief executive of the Financial Reporting Council, called the idea “a promising line for further study” but added a note of caution, saying, “It needs to start with what communications are currently taking place ­ and remember auditors are not currently responsible for changing the behaviour of the banks.”

Committee chairman John McFall wondered whether auditors had asked the right questions of bank FDs over the past few years. Michael Power, professor of accounting at the London School of Economics, re-iterated the purpose of an audit. “It may not be reasonable to expect that auditors would be challenging business models and raising strategic issues. That is not their job and if we want to make it their job, then things would have to change substantially,” he said.

Both the ICAEW and the FRC claimed that, following the Enron scandal seven years ago, there had been a significant refocusing on audit quality. “In part, that has come from the existence of an independent regulatory agency, the FRC, which is focusing on the auditors’ attentions to audit quality,” he said.

However, he added, “That does not deal with the fundamental questions about whether the audit is focused on the right things. Auditors are currently focused on what parliament has asked them to focus on. It is possible to change that role.”

ACCA’s managing director, Helen Brand, said the external audit would only have a limited impact in this kind of crisis, but suggested there is room for improvement in the audit function “which auditors are now starting to address”. She added, “There is an ‘expectations gap’ about what auditors can provide. There is room for improvement within the audit and risk management functions and this involves all stakeholders in the process.”

Auditor value
Boyle described the audit as “a hugely valuable activity that would really be missed if it were not there. The value of an audit is not in the beauty and the elegance of the financial statements you see, it is the difference between those financial statements and what would be produced if management were not subject to independent review, either from over-optimism or simple error.”

Putting audit in a wider context, Power said auditing is one part of a wide and complex network of institutions which provide trust and stability in an economic system. “I do not think we understand well the inter-connectivity that supports this system of trust and assurance.”