UK accounting watchdog warns over bank audits

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BIG FOUR accountants who check the books of Britain’s banks must sharpen their act or could be ordered to take corrective measures, the sector’s watchdog said in a report showing how a core lesson from the financial crisis has yet to be applied.

The Financial Reporting Council (FRC) said in its annual audit quality inspections report that there was a significant improvement in audits of listed companies in general, but the banking sector continued to lag.

“The overall grading of bank and building society audits is, and continues to be, generally below those of other types of entity,” the FRC said.

The inspections during 2013 and 2014 covered audits for the year that ended December 2012. They included the books of five banks and five building societies, all unnamed and none were “good” - the top grading - while 56 per cent needed improvements.

In particular there was no significant improvement in how accountants check the way banks set aside capital to cover souring loans, known as loan-loss provisioning.

Too low levels of capital forced taxpayers to shore up lenders during the 2007-09 financial crisis. It also prompted policymakers to ask auditors why they gave banks a clean bill of health just months before they had to be rescued.

“Weaknesses in the testing of loan impairment models and related assumptions were key issues,” the FRC said in the report.

“Insufficient challenge of management or the failure to obtain further evidence to support provisioning judgements were common themes in the issues identified.”

The big banks are all audited by one of the Big Four accounting firms - KPMG, Deloitte, PwC and Ernst & Young, all significant employers in Yorkshire.

Regulators are forcing companies to change accountants more frequently to avoid cozy relationships.