Don’t blame the auditors for doing what they’re told to

Elizabeth Fournier

THE CITY’s beancounters have been having a tough time in recent days, and none more so than big four stalwart KPMG.

Following the release last week of a parliamentary report into HBOS, the defunct bank’s auditors KPMG – and specifically former chairman John Griffith-Jones – have been flung into the spotlight, lumped alongside board members Sir James Crosby, Andy Hornby and Lord Stevenson as the target of political ire over the lender’s failing.

Griffith-Jones’ appointment as chair of new City regulator the Financial Conduct Authority is only making the scrutiny more intense. But just how much responsibility does an auditor have in these situations?

Griffith-Jones didn’t lead the bank (like Hornby and Crosby) or chair its board (like Stevenson). His firm was simply hired by them to scrutinise its accounts for mistakes or misstatements. As chairman, it’s unlikely Griffith-Jones himself ever sat down and poured over the numbers, but even that would not make him a worthy target.

And anyway, an FSA report into HBOS last year – after which former head of lending Peter Cummings was fined £500,000 – has already all but exonerated the accountant, saying KPMG had consistently suggested HBOS take a more prudent approach to provisioning for possible losses.

The fact that HBOS “consistently chose to provision at what KPMG identified as being the optimistic end of the acceptable range” isn’t the auditors fault – particularly when the only figures that the numbercrunchers had to work with were provided by the bank’s management themselves.

Regulatory body the FRC – which yesterday said it was considering an investigation into KPMG’s audit – produces reams of guidance on exactly what an auditor should and shouldn’t do, and content requirements are also set out in the Companies Act 2006.

Independence is a given, as should be integrity and confidentiality. But the auditor’s main role is to ensure the annual accounts give a true and fair view. Not to advise the company on risks looming on the horizon, or model worst-case scenarios into every last paragraph.

Short of qualifying HBOS’ accounts – if the information provided is incomplete or did not meet international standards – there’s little an auditor can do to raise alarms about a firm’s performance.

Emphasis of matter statements, which highlight uncertainty about a firm’s prospects as a going concern have become increasingly popular in recent years, but accountants are still somewhat reluctant to fire the starting gun on an otherwise avoidable collapse.

That’s not a failure of auditors – it’s a lack of confidence in a regulatory system ill-equipped to deal with systemic breakdowns and scrabbling to stay ahead of the curve.

It’s also worth remember the ISA (international standards of accounting) were overhauled at the end of 2010 – long after HBOS had to be rescued by Lloyds.

There are a lot of people who can be blamed for the collapse of HBOS. Unless KPMG didn’t do its mandated job, John Griffith-Jones shouldn’t be one of them.