News Column

Bank auditors overlooking risky loans, regulator says

May 28, 2014

Sean Farrell

Bad debts could be putting banks and building societies at greater risk than thought - and leading them to overstate profits - because their auditors are failing to do a thorough job, according to the accounting standards regulator.

In its annual report on audit standards, the Financial Reporting Council (FRC) said that years on from the financial crisis the auditing of banks and building societies was below the general standard for the UK, even though banks were riskier than other companies.

The FRC inspected the audits of five banks and building societies for the year ended December 2013, including large financial institutions. None of the audits was judged to be good and one required major improvements. More than half - 56% - needed some improvements.

The watchdog found that auditors did not question lenders' management teams closely enough about bad debt provisions and did not demand more evidence to support the company's claims. Monitoring of loans subject to "forbearance" - letting borrowers delay payments to avoid defaulting - was a worry.

The findings show auditors are still failing to check banks' books properly despite the big accountancy firms having come under fire after the crisis for having signed off lenders' books for years as risk built up in the financial system.

The watchdog warned in December that it would investigate lenders' audits, and will report on its investigation in November.

Paul George, the FRC's director of conduct, said: "We have not seen enough progress in the quality of bank and building society audits. We are particularly concerned about the lack of sufficient challenge when testing key assumptions underpinning loan loss provisions."

The FRC is not responsible for assessing banks' capital positions but other regulators have said they are worried that letting struggling customers defer loan payments is storing up trouble.

George said: "The risk is that the loan loss provisions is understated and profits are overstated. We are not saying that is the outcome. We are saying that to be satisfied that is not the outcome the auditor needs to do more work."

An audit is an independent assessment of a company's financial position so that shareholders can make a clear judgment on management. The big audit firms - Deloitte, PricewaterhouseCoopers, KPMG and EY - have been accused of conflicts of interest for serving the interests of banks' management instead of those of the shareholders. Their fees for consultancy services often outstrips the money the banks pay for audits.

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Source: Guardian (UK)

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