Blackfriar: Will new watchdog be a toothless tiger or lion with teeth?

Earlier this week, KPMG issued a statement stating that it stood by the quality of its audit work at HBOS.

This was the bank which was the subject of a £20.5bn taxpayer bailout caused by, in the words of the Parliamentary Commission on Banking Standards, the “toxic” misjudgments of its top brass.

KPMG’s role as auditor has come under scrutiny. because the accountancy firm’s former chairman, John Griffith-Jones, has become the chairman of the new Financial Conduct Authority (FCA), which has the job of protecting consumers from financial services firms that behave badly.

John Mann, the Bassetlaw MP, who is a member of the Treasury Select Committee, has called on Eton-educated Mr Griffith-Jones to quit, because he failed to flag up the large losses at HBOS during his time at KPMG.

When Blackfriar spoke to Mr Mann, he expressed concerns about the “cosiness of the relationship” between the banks and the regulators, which was a key part of the wider problems facing the financial services sector. As Mr Mann observed: “How come they (HBOS) got a clean bill of health?”

In response, The FCA said that Mr Griffith-Jones had been the subject of a “rigorous appointment process” and didn’t sit on the sub-committee which had the job of looking at its report into HBOS.

Last year, the now defunct Financial Services Authority – which had been set up to protect us from catastrophes like the collapse of major banks – delivered a report on Bank of Scotland, part of the vast HBOS empire, which stated that KPMG’s overall level of the firm’s provisioning was “acceptable”.

However, tucked away on page 32 of this ‘Final Notice’ is a line which states “the slow migration to high risk meant that the full extent of stress in the corporate portfolio was not visible to KPMG”. It was this type of high risk activity, of course, which forced the taxpayer to bail out HBOS, and led to the losses of thousands of jobs.

It’s unclear whether this will be the end of the saga.

When Blackfriar contacted the Financial Reporting Council – the UK’s audit regulator – he was told “in relation to the HBOS and KPMG audit story” that the FRC will consider the report from the Parliamentary Commission and the forthcoming reports from the FCA “to identify whether there is a case for an investigation under our powers”.

So KPMG still defends the quality of its work with HBOS. Blackfriar is no accountant. But he is left scratching his head, and wondering if he inhabits a strange, parallel universe.

Controversies surrounding auditors are, of course, not restricted to the UK. Earlier this week, KPMG resigned as the auditor of US company Herbalife after one of its senior partners engaged in insider trading in Herbalife stock

Herbalife said that KPMG’s resignation had nothing to do with its accounting practices or the integrity of its management. KPMG said it had resigned as the outside auditor of two of its clients because of the actions of a senior partner, who was in charge of the audit practice in its Los Angeles business unit.

It said the unidentified partner provided inside information about its clients to someone who had used that information in stock trading.

The other company has not been identified. It’s hard to imagine that the reputation of financial services, and the regulators who were supposed to protect us, could sink much lower.

Former HBOS chief executive Sir James Crosby’s decision to hand back his knighthood has been widely praised, but he is hardly facing penury. He’s still left with a £406,000 a year annual pension linked to his time at HBOS.

Most of the bank workers who lost their jobs due to his mistakes can only dream of having a pension of one tenth that size.

That’s why the new regulator must show real independence, and be able to wield the cudgel on behalf of consumers.

Blackfriar shares Mr Mann’s concern that the FCA could become just another “toothless tiger”, or an enforcer that only acts long after the economy has been wrecked, and the horse has bolted.

n April, as TS Eliot observed, is the cruellest month.

For us it’s a confusing month, as a slew of contradictory economic data leaves us on a knife edge as we wait to hear if the UK has sunk into a triple dip recession.

Britain’s entrepreneurs are keeping their collective noses to the grindstone and hoping for better times.

The big date looming is April 25 – when we’ll receive the first official estimate of whether Britain’s economy shrank in the first quarter.

A survey of purchasing managers showed a contraction in manufacturing activity last month, which suggests the economy faces a long, slow climb away from recession.