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PwC and E&Y probed on bank asset audits

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4th Oct 2010
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Two of the UK’s biggest accounting firms are being investigated by the Accountancy and Actuarial Discipline Board (AADB) for possible compliance breaches under the FSA’s client asset rules (CASS).

In the case of PricewaterhouseCoopers (PwC), the AADB investigation centres on its role as auditor of JP Morgan Securities for the 2001-08 financial years.

Ernst & Young will be under the AADB microscope for its preparation of a report to the FSA on Lehman Brothers International (Europe)’s compliance with CASS for the year ended 30 November 2007.

While E&Y’s investigation only covers one year, the firm has already encountered regulatory fallout from its role as Lehman auditor, most notably when a US court examiner identified “actionable balance sheet manipulation” and “accounting gimmicks” such as the Repo transactions that were used to move securities off the balance sheet at towards the end of the 2007 financial year.

Following the US report, the AADB announced that it would investigate Ernst & Young’s treatment of the 2007 Repo transactions and the preparation and audits of Lehman’s financial statements for 2007.

Since then, the US Securities and Exchange Commission has taken an increasingly active interest in the auditor’s role in the Lehman collapse; the Wall Street Journal reported in September that the regulator was close to issuing civil proceedings against those involved in the off-balance sheet dodges.

But the latest AADB investigations indicate that regulators are opening a new front on the audit profession related to the broader question of how carefully they report on bank assets under the FSA’s CASS rules.

In January the FSA conducted a review that identified a number of “serious failings” across the board, including:

  • auditors providing clean reports where banks had committed significant breaches of the client asset rules
  • failure to understand the reporting requirements;
  • lack of adequate detail on the issues and exceptions identified in their reports
  • CASS reports submitted several months (and even years) late
  • reports covering the wrong chapters of the Client Assets Sourcebook (CASS) and other mistakes such as quoting the wrong FSA firm reference number or referring to another firm within the body of the report.

Some of the shortcomings are laughable, but in the context of the global financial crisis an inability to comply with the CASS rules is an ugly blot on the profession’s reputation.

Last month the FSA put out a consultation paper setting out a series of proposals to improve the quality and consistency of auditors’ reports on client assets. The proposals include clarification of the standards required for auditors’ reports on client assets and stronger governance proposals to improve firms’ oversight of auditors and their compliance with the client assets rules.

“We have also made clear our disappointment in the quality of auditors’ reports that we have reviewed,” said FSA client assets sector leader Richard Sutcliffe. “It is ultimately a firm’s responsibility to ensure that they have adequate systems in place, but they, as we, rely on their auditors to provide the necessary assurance in this regard. Auditors charge a fee for this professional service – it is important that we and firms can rely on the reports they are signing off.”

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By Jaquin
06th Oct 2010 02:50

Why Does Investigation Starts after Collapse?

I have always had this question in mind. From WorldCom, Enron etc.

How come professionals arent aware of the early signs?

What is wrong with this industries of Auditors? Is it money blinds? or Commitment to clients and not clients customers?

Now that many people have lost monies, Who is then accountable?

 

 

 

 

 

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By Wiganer Elaine
06th Oct 2010 15:22

Responsibility?

 Unfortunately," he who pays the piper calls the tune".

So long as the auditor is appointed, and paid, by the board of directors, the auditors will ultimately do what the board wants rather than lose a major client and the accompanying huge fee.

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By Jaquin
07th Oct 2010 04:04

Whistle Blowers

Where do whistle blowers go to after exposing coverups that deceive the nations of middle class investors?

 

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