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March 30, 2016

Accounting experts: FRC’s reply to Treasury Committee on KPMG’s HBOS audit enquiries shows “shocking inertia”

The FRC’s responses have been criticised by Dr Atul Shah, who suggested the regulator doesn’t seem to be tough enough with Big Four firms. And professor Prem Sikka said the correspondence "shows shocking inertia by the FRC" describing the regulator as unfit for purpose and in need to be replaced.


The House of Commons’ Treasury Committee has published the latest letter sent by Stephen Haddrill, CEO of the UK Financial Reporting Council (FRC), to the committee chairman Andrew Tyrie MP’s questions on the accounting regulator’s oversight of KPMG audit work of HBOS.

On 3 February Tyrie had written a letter to Haddrill expressing that the then-announced FRC’s preliminary enquiries of KPMG were "long overdue". Such delayed investigation "raised a number of concerns", thus Tyrie asked Haddrill several questions chiefly on what the regulator planned to do next.

Haddrill’s reply published yesterday is dated 10 February, day on which the FRC held its open priorities meeting. During the course of that meeting he was asked about the HBOS/KPMG issue.

At the meeting, Haddrill said: "I think Andrew Tyrie is asking legitimate questions. The Treasury Committee itself has the privilege of publishing responses to its inquiries. I don’t have that privilege. So we have to wait for the Committee to publish it."

Besides publishing Haddrill’s letter announcing a full report with "our conclusions in the spring", the Treasury also published an accompanying statement by Tyrie.

Tyrie reiterated that the FRC’s decision to publish a report is "overdue, but welcome".

He added: "The HBOS report exposed the staggeringly poor quality of HBOS’ loan book. The role of the auditors – for years left unexamined – will now be subject to a measure of public scrutiny. And not before time.

"The Committee will persist with its effort to secure a thorough examination of the role of the auditors."

Haddrill started his letter by explaining what the FRC’s powers to investigate are, namely the Accountancy Scheme.

"[Its] provisions […] have until recently had to be agreed with the professional bodies. There are no statutory provisions. The Scheme requires individuals and firms who are members of the body to provide us with the information we seek. We have no power to require others to cooperate."

However, Haddrill noted that from June 2016 the new EU audit rules will give the FRC greater powers and statutory backing when it comes to investigations and enforcement.

In 2013 the FRC looked at KPMG audit work of HBOS and reached the conclusion that were no grounds to conduct an investigation.

But the publication on 19 November 2015 of the report "The failure of HBOS plc" by the Financial Conduct Authority and the Prudential Regulation Authority, as well as the scrutinising work of the Treasury Committee, have given momentum to reassess the role of the failed bank’s external auditor.

As a result the FRC announced on 21 January 2016 that it had decided to undertake "preliminary enquiries of KPMG under the Accountancy Scheme".

Tyrie’s had asked Haddrill whether the FRC reached "this preliminary stage" when it first look at the case in 2013. Haddrill answered that back then the regulator conducted "a supervisory inquiry" which focused on loan loss provisions.

"At that time the Scheme did not allow the FRC to use a preliminary enquiry as an initial investigative tool but it has subsequently been amended to do so. A supervisory inquiry is conducted with rigour but is not a process with formal information seeking powers.

"That said, KPMG voluntarily provided us access to the audit files we considered appropriate to our understanding of their work on loan loss provisions," Haddrill wrote.

The rest of the questions and answers can be found on the Treasury Committee’s website.

FRC’s shocking inertiaThe FRC’s responses have been criticised by Dr Atul Shah, senior lecturer at Suffolk Business School, who suggested the regulator doesn’t seem to be tough enough with Big Four firms.

Atul Shah is a member of the group of experts advocating for an independent investigation of KPMG’s audit work.

Shah told The Accountant that the general public assumes that an audit is reliable and independent, and that regulators focus on ensuring good regulation.

"We have conducted detailed research on the audit failure at HBOS. This correspondence from the FRC shows that it is far from the truth – regulators of auditors, in the event of audit failure, do their utmost to ensure they minimise harm to the auditors."

He continued: "Billions have been lost by HBOS, and shareholders, employees, pension funds and lenders have also incurred huge losses, but no-one has been punished so far, and there is huge public anger.

"Far from challenging auditors, the FRC want to protect them as much as possible, and minimise the scope of investigations and any potential damage this could do to a Big Four audit firm."

Prem Sikka, professor of accounting at the University of Essex, told The Accountant that the correspondence published yesterday "shows shocking inertia by the FRC" describing the regulator as unfit for purpose and in need to be replaced.

"The very fact that the FRC needs to be pushed is an indictment of its failures. The FRC refers to a number of cases that it has examined, but makes no reference to what it has ignored or neglected. It makes no mention of the time taken to report on the cases either. As usual it is being very economical with information."

Sikka recalled a number of examples illustrating how "the regulatory wheels turn slowly at the FRC".

Among the cases cited by Sikka is the investigation of audit failures at Presbyterian Mutual Society during 2000 to 2008, which commenced in August 2009 and concluded in February 2016.

He also mentioned iSoft’s investigation launched in October 2006 to look into corporate governance and accounting matters related to 2003-2005, with the final report published in 2015.

"And who can forget the investigation of audit failures at MG Rover, which was announced in August 2005 but finalised in April 2015," Sikka added.

Related articles

Comment: The Financial Reporting Council has failed and needs to be replaced

FRC preliminary inquiries of KPMG’s audit of HBOS – Timeline

Probe into KPMG’s audit of failed bank HBOS intensifies

Haddrill: the cost of regulation should be borne by accounting firms

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