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January 29, 2013

Banking crisis

Within the profession there is so much going on in terms of audit and accounting issues and developments. Yet there are times when it all seems rather small beer. Such a time is when eleven top accountants and tax advisers are in front of a hostile panel of politicians in the UK’s parliament.

January 23 saw the UK Parliamentary Commission on Banking Standards bring in the accountants to explain their role in the 2008 banking crisis and since. If this seems familiar ground, that is because it is. This observer remembers being in the same room in the Palace of Westminster, listening to many of the same politicians asking very similar questions at the 2009 Treasury Select Committee and the 2010 House of Lords audit inquiry.

At the start, even the politicians (led by Lord Lawson, a former UK Chancellor, and Lord McFall, who had respectively headed those previous inquiries) seemed a little subdued by the sense of deja-vu. But they soon warmed to their task.

Lawson, a long-time critic of the profession, has a particular grudge with IFRS and has great sympathy with a growing lobby group of campaigners who are adamant that the fair value accounting regime worsened the banking crisis. The fact that the concept of prudence was taken out of the International Accounting Standards Board’s (IASB) conceptual framework is evidence to him of where the profession has gone wrong. The explanation, given by Association of Chartered Certified Accountant’s (ACCA) Chas Roy-Chowdhury, among others, at the session, that the standards themselves are still full of prudence, was not accepted. ‘I find that difficult to believe’ insisted Lawson. ACCA begs to differ – we believe the IASB is moving its standards in the right direction, and it is standards not frameworks, which are actually applied in practice.

We believe the adoption of IFRS has improved and promoted transparency in financial reporting and not diminished it. And contrary to the assertions of the critics, some of whom had spoken at an earlier session of this panel, IFRS contain requirements that direct preparers to step back and take an overall view of whether the accounts present fairly the performance, position and cash-flows of the entity. Furthermore if the goal of fair presentation requires further disclosures than actually specified by IFRS, then these must be provided, and if compliance with IFRS would prevent a fair presentation then those other requirements must be overridden.

Lawson was also unimpressed by the length of time it was taking to address issues like provisioning. The explanation from many of the accountants that the IASB was given a firm steer by the 2009 G20 summit to concentrate on forging a set of global standards – with the inevitable need for a long convergence process with the US – again fell on deaf ears. And while everyone agrees that the unique circumstances of the global financial crisis put great strain on the fair value system, the argument that the alternative system of historic cost would have been less transparent also failed to assuage Lawson. ‘Well if the alternative isn’t good enough, its up to you to find a better solution’. That in itself is a fair point – but we would argue the IASB is doing just that.

McFall was more interested in taking on the auditors, who he claimed ‘had not got any credibility’. He demanded to know why early warning systems were not given to a wider group of stakeholders if auditors can see problems looming. A quiet word with the audit committee was not enough – ‘it stays with the board’. He wanted the profession to engage with its stakeholders – including politicians – much more and ‘bring us real-time information, not after the event’. He wanted to know why the profession, as he saw it, is always on the back foot and ‘never come to us with solutions’.

An explanation of the major changes being proposed by the International Auditing and Assurance Standards Board to auditor reporting and commentary (not to mention the European Commission’s (EC) forthcoming proposals) seemed not to impress. Neither did the difficulties inherent in auditors raising red flags when the result could be to destabilise the company.

The inevitable old question of whether audit and consultancy sat well together came out. That one at least can be left to the EC’s proposals which seem set to crack down on the list of services auditors can offer to their audit clients.

Two more interesting and recent issues came up at the end – tax advisers from the Big Four firms all insisted that banks were addressing tax planning differently now, given the huge public debate on tax avoidance both in the UK and elsewhere. The firms too were very aware of reputational issues when giving advice to clients. That at least is a new topic from the previous inquiries, and perhaps surprisingly was not pursued by the two Lords here in terms of more specifics.

Also noteworthy was the call from the firms to be part of the new global macro-regulatory structure, which has the Financial Stability Board at its heart. Macro-auditing to match macro financial regulation? Yes, we should be hard-wired into that system said one. Whether the authorities believe the audit profession’s performance in the crisis justifies such an extension of their remit will be interesting to see. Again that issue was not queried at this session by politicians seemingly keener to get back to familiar ground.

New developments such as these might get us away from fairly sterile questions about accounting standards and bank auditing. For on this evidence, the ‘expectations gap’ between what an important political constituency believe the auditing profession should be doing and what the profession offers remains worryingly wide. We do need to find ways of engaging more positively with, and explaining more fully to, non-accounting stakeholders just what is going on in terms of post-crisis progress within the profession.

Some of their demands, as illustrated here, are unrealistic and woolly. But until the profession gets more onto the front foot, some of us might find ourselves back in committee room 5, Palace of Westminster, in another two or three years.

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