UK accounting watchdog to review bookkeeping at banks

Thu Dec 12, 2013 7:37am EST

* Watchdog review to focus on loan losses, IT controls

* Report to be published end of 2014

By Huw Jones

LONDON, Dec 12 (Reuters) - Britain's accounting watchdog will begin reviewing bookkeeping at banks in the second quarter of 2014 to find out why the lessons of the financial crisis are being applied so slowly.

Several banks in Britain had to be shored up by taxpayers during the 2007-09 crisis, prompting policymakers to ask why auditors gave the lenders a clean bill of health beforehand.

The Financial Reporting Council said its review will start in the second quarter of next year, as soon as this year's annual reports have been completed.

It will look at what action top accounting firms took to address specific issues the watchdog already raised with individual accounting firms earlier this year regarding bank audits.

A key issue is checking how banks set aside enough capital to cover souring loans after the crisis revealed some lenders were woefully undercapitalised when losses mounted.

The FRC will publish its report by the end of 2014.

"The FRC is concerned that the pace of improvements in the quality of auditing of banks and building societies has not been sufficient," the watchdog said in a statement on Thursday.

Britain's biggest banks, such as HSBC, RBS, Lloyds and Barclays are all audited by the so-called Big Four accounting firms: KPMG, Deloitte, EY and PwC.

The FRC said it has increased its monitoring of bank and building society audits, but the findings have shown they are below the average of all audits inspected.

The latest monitoring showed problems with the adequacy of testing loan loss provisions and general IT controls.

"Early indications from the latest cycle of audit inspections suggest that it is unlikely that the FRC will be able to report that significant progress has been achieved," the watchdog added.

FRC Chairman Baroness Hogg said the watchdog wants to see a "genuine step change" in the quality of bank and building society auditing.

The FRC said it will inspect banks and building societies and was announcing the review now so that auditors are aware of its expectations in advance of the 2014 audit season.

The watchdog will meet chairs of audit committees at banks and building societies to discuss how they can reinforce the quality of financial reporting.

The FRC is separately scrutinising financial reports from Co-operative Bank, including disclosures on loan impairments.

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