Regulator raps Big Four over bank audits

The Financial Reporting Council (FRC) has criticised the Big Four accounting firms for continued failings in their audit work of banks and building societies.

Audit quality continues to fall below average because of insufficient testing and challenges, the annual review said. The FRC warned that banks could be exposing themselves to bad debts because auditors have failed to challenge them on the amount of money they put aside to cover loan losses.

The watchdog inspected 10 bank and building society audits from 2013-14, but not one could be classified as ‘good'; half required some improvement and one was found to be in need of 'significant improvement'.

Paul George, FRC executive director for conduct, said...

Continued...

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mr. mischief's picture

ICAEW Disciplinary    5 thanks

mr. mischief | | Permalink

The shoddy work in this area during the period from 2005 to 2009 is what the ICAEW Displinary people should be concerning themselves with as the number 1 priority.

Not whether some hapless sole trader signed a form for a client instead of  putting "pp" on it.  In the second case the consequences were at worst bad for one client and potentially their lenders.

In the case of the cosy relationships between the fat cat big 4 guys and Fred Goodwin and his ilk, millions of people - conceivably billions - have been affected by their shoddy work.

ShirleyM's picture

Yes, the bank bailouts still rankles with me    4 thanks

ShirleyM | | Permalink

They brought the country to it's knees, but the people responsible haven't been held to account, and probably still get their fat cat salaries and bonuses while the majority of less well off citizens pay the price of their cockups.

There is absolutely no incentive for bankers to be honest and ethical, because on the odd occasion where penalties are applied it is the end customer who pays ... the penalties don't come out of the bankers salaries and bonuses. The incentive of avoiding prison may have had better results.

Withdraw Thier Audit Certification    3 thanks

Trethi Teg | | Permalink

The Big 4 have quite clearly brought the profession into disrepute by continually signing off clean audit reports on businesses which nearly brought the world's economy to a standstill.

The audit partners have therefore become very rich from their negligence.

The solution is easy. Simply take their audit registrations away.

This will leave the next tier of auditors to pick up the work. They cant possibly do any worse and it  will demonstrate that the services offered by the Big 4 are overrated and over priced.

Sadly I suspect this will not happen.

 

 

Problem is...........    1 thanks

Michael C Feltham | | Permalink

The core problem is, the big guys drive and dominate CCAB and the FRC(And therefore, ASB and APB)!

 

 

 

Audit failure    1 thanks

Shay Daly | | Permalink

The main issue is that if one of the Big 4 is replaced as auditor for a bank,the replacement will be a different member of the Big 4."Moving deckchairs" but no difference.
It will remain thus until the mantra of "you don't get sacked if you choose a top brand" regardless of it's performance.

Worth perhaps remembering.....

Michael C Feltham | | Permalink

How the top ten accountancy and Audit teams were:

Compelled to divest their incestuous captive consulting arms on clear confliction of interest basis: and immediately proceeded to add consulting services back again:

Swopping instruction on Audit with Insolvency, between them. When their audit side screwed up big time another top ten firm undertook the IP function and no hue and cry about the appalling "fair and true" nature of the audit:

Example? Olympia and York: wound up and in admin by one firm and then the devious Reichman Bros simply bought their assets back for 20% of the loss and carried on much as before:

The cause of a massive hike in PI rates: and how the top ten boys were allowed by ICAEW and the CCAB to incorporate to avoid personal bankruptcy of their partners. One example simply demands further investigation. The alarm company a plc sold to a US outfit who sued the auditors and ALL the partners were personally bankrupt as the PI was nowhere near the £500 million quantum including interest:

How top ten boys set up (with a nod and a wink from the "regulators") a captive offshore mutual insurance company since no one else would indemnify them for audit work!

How could it be and why should it be that RBS received clean audits each and every year before imploding? How could no prosecutions under the Companies Act NOT follow? The wording and potential liabilities are pretty damned glaringly plain.......yet miss a Co's House accounts filing deadline by just one day and they are all over you like a rash!

How could the likes of BCCI, Polly Peck, Equitable Life, Northern Rock, Barlow Clowse, Maxwell Communications Corp,occur? 

Add your own names. Hundreds to chose from!

 

Audit of Banks

N.Krishnaswamy | | Permalink

The best solution is to appoint joint auditors of four five middle tier firms to do the audits and different audit firms to audit the branches. In the case of big banks, rotate the auditors under the supervision of BOE, every three or five years.

This system goes smoothly in India. The big 4 does not agree for joint audits and so they are on the black list for audit of banks in India and  because they bungled the audits of two private banks, which declared almost bankruptcy  about more than five years ago..

The audit of the  State bank of India, which is one of biggest global banks is audited jointly by middle tier firms and also other public banks are also audited by the auditors empanelled by the Reserve Bank of India and graded according to the number of fellow partners and the number of years of experience and the banks choose from the list  three to five central statutory auditors and the local lesser graded auditors  to audit the local branches of these various banks,thus saving on travelling expenses and also getting the audited accounts approved by the Board  of the respective banks by May end of each year(Financial year closes uniformly on 31st march,). the fees are fixed for each branches according to the level of the advances of each branch as notified by the Reserve Bank of India and also for the central level auditors.The branch auditors complete the audit by 10th of April and the statements are sent to the Regional/central offices and the consolidation and over all audit of the bank after considering the branch returns by the central auditors,the audited accounts are ready by  second week of May and the audit is completed.

The State Bank of India has developed its software to classify the bad loans on the basis of the Information sent by each branch and the branch auditor has to report if any item has been omitted to be taken up by the software.due to any reason and report the same. So the auditor cannot omit any bad loans and the provisions to be made for the same. Already criteria have been established by the Reserve Bank of India for classification of bad loans for all the banks and accordingly they have to make LOSS provision.

Why the banks in England have not developed the software to detect the bad loans and report them every month?. If the auditors do not follow the bad loans list and verify the same and make the right provision,they could be easily caught up.

THE LESSON IS THAT BIG BANKS(THAT CANNOT FAIL) SHOULD HAVE JOINT AUDITORS  AND DIFFUSED AUDITORS FOR VARIOUS BRANCHES. THEN THIS MALAISE COULD BE CONTROLLED AND COMPETITION WILL PUT OUT MORE EFFICIENT AUDITORS WITHOUT COMPLACENCY.

Nice Idea, But......

Michael C Feltham | | Permalink

N.Krishnaswamy wrote:

The State Bank of India has developed its software to classify the bad loans on the basis of the Information sent by each branch and the branch auditor has to report if any item has been omitted to be taken up by the software.due to any reason and report the same. So the auditor cannot omit any bad loans and the provisions to be made for the same. Already criteria have been established by the Reserve Bank of India for classification of bad loans for all the banks and accordingly they have to make LOSS provision.

Why the banks in England have not developed the software to detect the bad loans and report them every month?. If the auditors do not follow the bad loans list and verify the same and make the right provision,they could be easily caught up.

THE LESSON IS THAT BIG BANKS(THAT CANNOT FAIL) SHOULD HAVE JOINT AUDITORS  AND DIFFUSED AUDITORS FOR VARIOUS BRANCHES. THEN THIS MALAISE COULD BE CONTROLLED AND COMPETITION WILL PUT OUT MORE EFFICIENT AUDITORS WITHOUT COMPLACENCY.

The core reality is rather simple.

Despite "Mark To Market", large banks in - mainly - the UK and USA, carry large quantities of non-performing (i.e. delinquent) loans on their books and even loans which they have absolutely no chance of ever collecting.

For example, the debacle over syndicated high-risk Eurodollar loans in the late 1970s> ought to have sounded a clarion call to regulators, globally.

http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CD...

If the continually carried forward value on the balance sheets were to be stripped out, then most major Western banks suffer huge ill-liquidity.

Their loans books are further manipulated thanks to credit money creation and, worst of all Fractional Reserve Lending, where the true core assets (reserves, deep reserves, capital and actual clean money deposits) have become only a fraction of liabilities, since they all resort to instant money access via the global interbank market (a majority of it breaking the golden rule of safe and prudent banking: since it is Borrowed Short and Lent Long) rather than traditional depositors.

Derivative Products, Securitization and a range of "off balance sheet" debt further cloud true reality.

The bottom line is rather simple: true (reserve) assets are now only a tiny fraction of obligations; and if reality were revealed then ALL these major banks would be insolvent. Neither government nor the so-called regulators will move, since the resultant effect would be to destroy most Western socio-economies, overnight!

This is the utter shambolic mess created.

Quote:
...........software to classify the bad loans........

Well such software (Risk Management Software) has been around for years: using the latest algorithm-based analysis products, risk really ought to be a thing of the past: indeed,  as with Compliance, Risk Management has been the star department of banks for some time. That worked well, then!

The long feared Ultimate Domino Effect is only just around the corner..........

 

Not Fit for Purpose?

redboam | | Permalink

What remains so astonishing is that bank balance sheets that were so divorced from reality could nevertheless have been signed off year after year as being "true and fair." In addition compliance or lack of it was never once raised as being an issue despite the fact that as we now know, Libor was deliberately fiddled in the wake of the wheels falling off in late 2007. No-one appears to have been effectively challenged over these failings on the part of the banks' auditors. If they were to be so we might at least get important answers as to how fit for purpose they actually are. It may of course be the case that their defence would be that they had been deliberately misled but either way, prosecutions of the responsible individuals would not only be in the public interest but that of the accounting profession (especially at the highest level) too.

RBS

AndrewV12 | | Permalink

Hi Michael

You have stolen my thunder, I was going to mention RBS, I would love to know which of the big 4 Accountancy firms signed off that Audit prior to the crash, RBS losses to date post crash 46 billion, 46 billion pounds from a Scottish based company, that would wipe out Mr Salmond's proposed 50 billion tax oil windfall reserve.

 

I once  heard on a radio show a employee of one the big accountancy firms advised we only Audit historic data, which gives no clues of future performance, what a lovely get out clause, some say cop out, as Accountants lets all remember this one, whats good for the big 4 is good enough for us, we can also do away with quite a few SSAP's and FRS's.

 

  

Bank Audits

AndrewV12 | | Permalink

Bank Audits are worthless its just a process they have to go through, why do I think they are worthless:

 

Banks transactions are very complicated ( I would be interested to know who actually understands them, former Chairmen of Banks admitted post crash on reflection they did not)

 

Banks are Global- who can gauge the world wide risk 

 

A rouge trader can easily run up loads of Losses, greed, risk and reward (bonuses) are still the driving force behind many top banks.

 

Banks are to big to Audit.

 

Bank pay is high at the top end, and a lot of bankers think they are a lot smarter than they think they are,   

Fred Goodwin

AndrewV12 | | Permalink

Sorry to lower the tone and your post, In Viz a letter was published on the back of fred loosing his knighthood, the letter advised fred should have his name taken away as well so he is know officially as a nobody. 

Financial Analysts and investors

AndrewV12 | | Permalink

I have read in the Investors chronicle that Financial analysts and investors give the Audit qualification  a big fat zero, and do not rate it at all. 

Banks at risk

AndrewV12 | | Permalink

I once saw on channel 4 news a Banking expert advised, gauging by the bonuses Banks pay, the next Banking crises is around 10 - 15 years away.  No one seems to understand risk and reward are entwined.  

TBTF

AndrewV12 | | Permalink

I think the Banks and Auditors see the Large banks as to big to fail, they know the government will always provide a safety net, they just have to ride it out, and audit other lagre Banks in the meantime. 

No one wants to rock the boat

AndrewV12 | | Permalink

I do agree, it appears the politicians and regulators looked at would happen if they did not step in (stare into the abyss) and were happy to brush it all under the carpet and move the problem on the national debt. It may not have looked good on the politicians to have a in depth name and shame enquiry.

More on RBS:

Michael C Feltham | | Permalink

AndrewV12 wrote:

Hi Michael

You have stolen my thunder, I was going to mention RBS, I would love to know which of the big 4 Accountancy firms signed off that Audit prior to the crash, RBS losses to date post crash 46 billion, 46 billion pounds from a Scottish based company, that would wipe out Mr Salmond's proposed 50 billion tax oil windfall reserve.

 

I once  heard on a radio show a employee of one the big accountancy firms advised we only Audit historic data, which gives no clues of future performance, what a lovely get out clause, some say cop out, as Accountants lets all remember this one, whats good for the big 4 is good enough for us, we can also do away with quite a few SSAP's and FRS's.

 

RBS's auditors. PwC (fired by Goodwin) and then Deloittes:

http://www.ianfraser.org/deloitte-and-the-demise-of-rbs/

Interesting reading here:

http://www.qfinance.com/blogs/ian-fraser/2010/12/06/if-the-fsa-wanted-a-...

http://www.ianfraser.org/financial-regulation-with-griffith-jones-appoin...

http://www.ianfraser.org/paul-moore-why-john-griffith-jones-must-go/

Which rather supports my earlier point vis a vis FRC and CCAB etc.

It is pretty clear despite later -rapid! - amendments by FRC and thus ASB on reporting on analysed risk, the Companies Act, prior to the 2006 amendments, demanded auditors to deliver a "Qualified" report if their view of going concern and risk was jaundiced.

Interesting reading here: http://www.theguardian.com/business/2011/dec/12/rbs-collapse-timeline

 

 

 

 

Adding it all up

AndrewV12 | | Permalink

When you read the articles above in one go it makes un-believable reading, I note how cunningly timed and slow the information is released, waiting ages for the story to drop of the radar, then leak out a little more information and then a little more.

 

Full credit for those people who write and publish such articles, it must be very scary to write such articles, with the possibility of court cases and financial losses, ironically such people could be sued from Accountants   who were hopeless at best.

 

The good news is, if all other Accountants are ever accused of poor performance, lacking knowledge, or lacking experience they can say well compared to the big 4 mistakes our mistakes are a drop in the ocean.  The big four carried on regardless and so will we.   

Ausit by Big4s

N.Krishnaswamy | | Permalink

Why no punishment for the indulgent, callous audit firms? The partners in the firm in charge of audit misconducted should be suspended from 1 year  to 5 years from membership of the professional body and audit certificate depending on the degree of misconduct and a fine imposed on the basis of the audit fees received.
PCAOB punished PWC group companies  of India  $1,500,000 for shoddy audit of Satyam Software  and absence of proper quality control in force and suspended the partners for six months from certifying any accounts under USGAAP for listed companies in USA, in 2010. 

This means that the regulatory authorities in the other countries do not have enough teeth to grind against big4s.

Not Forgetting ..........

redboam | | Permalink

FIFA - whose financial statements are audited by KPMG. Does anyone know if they have ever qualified them?