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Financial Institutions: Auditors

Volume 712: debated on Tuesday 7 July 2009


Asked By

To ask Her Majesty’s Government what action they are taking to prohibit interlocking directorships between auditing companies and banks and other financial institutions.

My Lords, Part 42 of the Companies Act 2006 prohibits the appointment of an audit firm where a partner in that firm is also a director or employee of the audit client, its parent or a subsidiary.

My Lords, I thank my noble friend for that reply, but a recent article in the Sunday Times states:

“As Goodwin went on to build RBS through an acquisition spree, he kept turning back to Deloitte”,

his former employer,

“for advice”.

The firm’s fees rose from £4 million in 2000 to £32 million in 2007. How come all the accounts of the major banks were signed off as presenting no problem just one year ago? When will the necessary measures follow from the current spate of reviews so that, whatever vested interests stand in the way, the public can be assured that there can be no repeat of the tragedy that the banks and their auditors have caused for many millions of workers and their families?

My Lords, I thank my noble friend for his Question, which covers a number of important issues. The independence of auditors has been the subject of increased regulation over the past 20 years. Indeed, the Treasury Select Committee recently recommended a consultation on the issue of auditors earning fees from non-audit work and the Financial Reporting Council is planning to consult later in the year. On the general point of where the auditors were during the financial crisis, there are lessons to be learnt for the accounting profession, just as there are for many different aspects of the financial services industry. As someone who worked in the industry, I know that auditors were involved in the risk governance and control side. We are not aware, however, of any evidence of an audit failure in one of the banks where the Government have had to intervene. Furthermore, the Audit Inspection Unit of the Financial Reporting Council, which reviews the audits of large firms, has concluded that audits are fundamentally sound.

My Lords, is it not the case that, despite the Companies Act 2006 and the provision that the Minister has quoted, too often there is an altogether too cosy relationship between the audit company and the bank or financial institution—or, for that matter, large company generally? Does this not arise because there are too few auditors who are thought to be capable of doing the job of a major company or bank? Does my noble friend have any suggestions as to how to deal with that?

My Lords, after Enron, considerable consideration was given to an outright ban on audit firms doing non-audit work. The conclusion was that that was not necessary and that the ethical standards board of the financial reporting system would ensure that the audit firms were independent. The FSA is also there to ensure that the audit firms are operating independently. Personally, I think that we could do with a few more audit firms. The industry is looking at that. It is important that we do not have just four firms, albeit that they are London-based and doing a great job.

My Lords, I am most grateful. Will the Minister, who has a background that we all respect, look at this again? This is a question not, in my judgment, of the major auditing firms being corrupt but rather of a degree of complacency and incompetence. Is the noble Lord aware that, when Johnson Matthey Bankers went bust on my watch, I authorised the Bank of England to sue the auditors—Arthur Young, a very respectable firm—for incompetence, in effect? The Bank of England won and the auditors lost. Is it not surprising that nothing of the sort has happened in the present, much worse, crisis?

My Lords, first, we should stress that the choice of auditors is a matter for the board and shareholders. Secondly, we should remember that they have to seek re-election every year. That is the role of the board and the shareholders. We should also remember that the FRC is conducting a review of the combined code and that the Walker review is reviewing the governance of the industry. Putting all that together, I think that we are doing enough to review the lessons learnt. I also believe that it is incorrect to say that all banks have a cosy relationship with their auditors. That is not my personal experience.

My Lords, clearly there is overwhelming support in your Lordships’ House for the point made by the noble Lord, Lord Lea of Crondall. Without wishing to give a heart attack to the noble Lords, Lord Stoddart and Lord Pearson of Rannoch, who I see is not in his place, does the Minister accept that a major driver for reforms in this area has come from the European Commission? Is he aware of any action that the European Commission now proposes to take in this area?

My Lords, it is important to highlight the fact that Europe is looking at the future of the accounting profession and that issues are coming out of the Sarbanes-Oxley legislation on the limited liability of auditors. The profession will have to learn lessons from the crisis. Europe is looking at it and we in the UK are looking at it. It is important to wait for the FRC, Walker and other reviews and then put those all together and assess the implications.

My Lords, following the question from the noble Lord, Lord Lawson, does not my noble friend find it surprising that the major audit firms of the major banks were giving clean, unqualified certificates and yet a week or two later billions of pounds were being written off the balance sheets for which the auditors had given a clean certificate? Therefore, is it not surprising that some auditors have not been sued?

My Lords, it is important that we are clear on the purpose of an audit, which is to examine the accounts prepared by the directors of a company and to state whether they have been properly prepared and give a true and fair view of the results. That is exactly what the industry believes that it did. The banks are comfortable. It is their duty under the Companies Act to make sure that that happens.

My Lords, from across the House may I support the noble Lords, Lord Borrie and Lord Barnett, and hope that the Government will take sensible account of what they have said?

My Lords, it is important to say that there are lessons to be learnt. We will take noble Lords’ comments on board, but to blame the accounting profession for the problems of the industry would be a huge mistake.

My Lords, is my noble friend aware that he has put his finger on precisely the people who are at fault here—the accounting profession? Many of us have asked questions about this several times, but at no point has the accounting profession—namely, its professional bodies—got involved. Separate from whether we are ready for prosecution, we are simply ready to see whether professionally these firms have behaved properly. All the indications are that the incentives that confront them are to behave improperly, because if you query the accounts you lose the business.

My Lords, let me be clear: there are lessons to be learnt. The causes of the problems were greed, mismanagement and mispricing of risk. A whole series of issues caused the crisis. I do not disagree that it is critical that the accounting profession learns lessons from the crisis. It cannot walk away and say, “We weren’t involved in it”. I agree with the comments that have been made. The profession is a very important part of the industry and it is important that it learns lessons.