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Lords enquiry points finger at regulators

Lord Lawson accused city regulators and the audit community of being “asleep on the job” prior to the financial crisis, a House of Lords enquiry heard yesterday.

The Financial Reporting Council (FRC), Office of Fair Treading (OFT) and Financial Services Authority (FSA) were all accused of failing to effectively communicate with auditors, stakeholders and regulators before the crisis.

"You were asleep on the job, and to the extent you were half-awake, your eyes were not on the ball," said Lord Lawson.

The Committee tried to establish whether the regulators are doing enough and if steps have been taken to prevent a similar collapse in the future. The FRC said it thought more could be done, suggesting additional registration of auditors by the FRC to be implemented.

Currently the Institute of Chartered Accountants for England and Wales conducts the registration. “If we had registration in our hands we would be able to influence its systems and remove questionable partners from public audits. At the moment it is really difficult for us to review mistakes and we want our powers to be strengthened,” FRC chairman Baroness Hogg said.

All the witnesses strongly opposed large audit networks offering non-audit services to audit clients and said the UK has to work with the wider European and international community when making changes in the audit sector.

The FSA managing director of risk Sally Dewar said communication between the regulator and the auditors could be improved. “At the moment auditors have to inform us of issues found in audits, however auditors are passing on the responsibility to clients and saying they should inform us,” Dewar said.

There were many questions asked by the Lords but regulators were unable to answer all the questions and admit partial responsibility, encouraging the Committee to suggest changes to the audit market. The enquiry also said there was a risk of greater systemic failure if one of the Big Four were to collapse, but concluded that further research was necessary.

The committee is to hear from the Big Four in the next couple of weeks.

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