UK watchdog says accountants must quiz banks more

LONDON Wed May 29, 2013 6:46am EDT

LONDON (Reuters) - Accountants still fail to question banks properly over how they make provisions for poorly performing loans on their books, Britain's auditing policeman said on Wednesday.

The criticism goes to the heart of regulatory efforts since the 2007-09 financial crisis to restore investor confidence in the figures lenders publish about their health.

The Financial Reporting Council (FRC) said in its annual report it was concerned and disappointed there had been no significant improvement in auditing loan-loss provisions at banks and building societies in Britain.

There was "insufficient challenge" to the key assumptions used to determine provisions, inadequate corroboration of management's explanations, and insufficient verification of supporting calculations, the watchdog added.

Accounting firms were accused of being too cosy with their banking clients and giving them a clean bill of health just before many had to be shored up by taxpayers in the crisis.

This prompted world leaders to call for reforms to make banks book provisions much earlier.

"Insufficient evidence demonstrating the completeness of information in respect of forbearance arrangements and the implications for both provisioning and disclosures was also of concern in a number of audits," the FRC said.

The watchdog has passed on its findings to the Bank of England's prudential regulation authority, as it normally does.

Four accounting firms dominate auditing in the UK: PwC, KPMG, Ernst & Young, and Deloitte.

KPMG said it worked and invested continuously to improve the quality of its audits and the FRC's report and specific observations were an important part of that process. E&Y declined to comment. PwC and Deloitte had no immediate comment.

"NOT SUFFICIENTLY ENGAGED"

The Bank of England has said expected losses on bank loans were in some cases greater than current provisions and worried that delays in recognizing losses and making provisions lead to a wrong impression of asset values at banks.

Accounting rules are being changed to make banks recognize losses sooner from around 2016 and for now the FRC is trying to tighten how the current rule is applied.

It said UK auditors must also take a stronger lead in checking mining and other companies whose registered "letterbox" in Britain but nearly all of the activity is abroad.

More audits were given the poorest rating in the past year partly because of issues relating to "letterbox" company audits relying heavily on sign offs from accountants outside Britain.

"We don't believe that in all cases the UK group auditor is sufficiently engaged in the work of the group's main components," FRC executive director Paul George told Reuters.

The FRC is also looking at how some audit partners have sought bonuses or promotion for winning advisory work from the company whose books they are checking.

"Audit partners and staff cannot be incentivized to sell non-audit services to clients," George said.

The FRC report saw an overall improvement in audit work, especially at the top 350 listed companies, though accountants still needed to question what clients were telling them. The report is based on a review of 85 sample companies, of which 33 were from the top listings.

(Editing by Mark Potter)