* FRC says auditors don't question banks enough
* FRC to get bigger stick to spur better audits
* Fear that falling fees may hit audit quality
By Huw Jones
LONDON, June 13 Audits of British banks have
improved but accountants must challenge more of what their
clients tell them about bad loans on their books, the accounting
industry watchdog said on Wednesday.
Many policymakers blame insufficient auditor scepticism for
clean bills of health given to banks just before they had to be
rescued by taxpayers in the 2007-09 financial crisis.
It triggered political scrutiny of the sector, leading to a
draft European Union law that proposes mandatory "rotation" or
changing auditors every certain number of years, a step the
United States is also considering.
But the UK's Financial Reporting Council (FRC) said in its
annual report on Wednesday that reforms have yet to bear fruit
in making auditors more sceptical about what they are told.
Across all industry sectors auditors are not questioning
enough if the value or "goodwill" of acquisitions made in the
good times are being written down to reflect a weaker market.
And some audit teams did not always fully understand the
accounting and reporting requirements in this area.
"We do think more action is required," the FRC's director of
auditing, Paul George told Reuters.
The regulator is due to get more powers to fine and
otherwise sanction auditors and the accounting profession
bodies, a move George said will provide additional stimulus to
get faster improvements in audit quality.
"I see these additional powers very much as being a
backstop. I believe the actions firms are taking should further
accelerate improvements in performance," George said.
The FRC is already working closely with the Financial
Services Authority on the information banks give on provisioning
for possible defaults on mortgages and the extent of their
"We believe there is more to be done," George said.
The FRC's annual report on audit quality looked at more than
80 audits, including all banks and building societies as well as
firms from other sectors. They were mostly conducted by the "Big
Four": KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young.
Only one audit of a financial firm needed significant
But the push to improve audit quality further could be
hampered by a big drop in audit fees as businesses are tendering
their audits far more frequently than in the past in a bid to
The watchdog is worried lower fees will lead to fewer hours
spent on checking books as auditor margins come under strain.
"We are seeing some signs that our concerns are happening
and we are encouraging the firms to put in some better
safeguards centrally, and that audit committees should also be
alert to this," George said.
FRC findings that audit tendering has increased
significantly and fees falling could help the Big Four show
Britain's Competition Commission that the audit market is
The Commission is probing and sector and due to say by
November whether there should be "remedies" in a market where
the Big Four check the books of the vast majority of large
The FRC said that of 84 audits across all industries looked
at in 2011/12, 39 were good with only few tweaks needed, down 1
There was a jump in the number of audits that were
acceptable with improvements required, to 37 from 30. Eight
audits needed significant improvements, down from 11.