Auditors 'failed to raise alarm' over credit crisis
The UK's Big Four accountancy firms have been accused of fuelling the financial crisis through complacency and dereliction of duty.
Amber light: PwC was singled out over its audit of Northern Rock
A House of Lords Committee found that Pricewaterhouse-Coopers, Deloitte, KPMG and Ernst & Young are operating an oligopoly over FTSE 100 companies and called for a competition probe into their stranglehold on the market.
After a detailed eight-month examination, the peers castigated audit firms for failing to ring alarm bells over the banks.
'Either they were culpably unaware of the mounting dangers or, if they were aware of them, they equally culpably failed to alert the supervisory authority of their concerns,' the economic affairs committee said in its damning conclusions.
PwC was singled out for criticism over its audit of Northern Rock. 'We are astonished that PwC appeared not to recognise an amber light that flashed so brightly.'
The committee wants the Big Four to draw up 'living wills' to minimise disruption if one of them collapses as a result of an audit failure.
It claimed standards are slipping due to new international accounting rules known as IFRS. These encouraged a 'box-ticking approach' that did not necessarily reflect the true financial situation.
IFRS standards are particularly defective in the case of banks because they are not forced to provide for all expected losses, meaning their profits may be overstated and they might pay out too much in dividends and bonuses.
Their Lordships said accountants were understandably reluctant to qualify the accounts of a bank for fear of provoking a run. But it found auditors and regulators had neglected to hold confidential talks where risks might have been addressed.
This 'regrettable backsliding' was a dereliction of duty on both sides, the committee said.
Lord Lawson, former Chancellor, introduced regular meetings between bank auditors and the Bank of England in 1987 after the collapse of Johnson Matthey bank.
He described their discontinuance as a 'glaring failure' and blamed it on Gordon Brown's move in 1997 to wrest bank supervisory powers from the Bank of England and hand them to the Financial Services Authority.
'The system was dysfunctional and the FSA did not do their job,' he said.
The committee is calling for new legislation for high level meetings at least once a quarter. Claims by top beancounters they had carried out their duties were scathingly dismissed as 'disconcertingly complacent'.
Chairman Lord MacGregor described their appearance in front of the committee in November as 'not their finest hour'.
FTSE 100 firms audited 99
Years with same auditor 48
Offices in tax havens 81
Warnings on credit crisis 0
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