Auditors are told to get tough with banks on loss provisions

Marion Dakers
AUDITORS for British banks and building societies are not scrutinising the firms’ books closely enough, despite repeated warnings that auditors should have caught some of the warning signs ahead of the 2008 financial crisis, a watchdog said yesterday.

The Financial Reporting Council flagged up poor testing of loan impairment models and a widespread reluctance among auditors to challenge management on their provisions. Shoddy oversight of IT systems at the banks was also highlighted by the FRC in its quarterly report yesterday.

The stubbornness of some of these problems, with no sign of change despite years of warnings, has prompted the FRC to start an industry-wide inspection of bank and building society audits to be published in the autumn.

“[W]e have not seen enough progress in the quality of bank and building society audits, which continues to be generally below that of other types of entities. We are particularly concerned about the lack of sufficient challenge when testing key assumptions underpinning loan loss provision,” said Paul George, executive director of conduct.

Across British companies, the number of audits deemed to be “good” has risen – yet one in six of the books checked were in need of significant improvements.

The watchdog also said it was worried about the number of failing audits signed off for so-called letterbox companies, or firms that base themselves in a country with only a mailing address.

The biggest four auditors – Deloitte, KPMG, EY and PwC – are braced for a European rule change that will require listed firms to tender their audit contract once a decade.