19th May 2009:

Last week’s report from the UK Treasury Select Committee of the House of Commons

Last week's report from the UK Treasury Select Committee of the House of Commons commented on both the role of auditors and of fair value accounting in the banking crisis.

Commenting in its summary on the role of auditors in the banking crisis the report states:

"We note that the audit process failed to highlight developing problems in the banking sector, leading us to question how useful audit currently is. ..... We recommend that the FSA consult on ways in which financial reporting can be improved to provide information on bank activities in a more accessible way."

Whilst the report recognises that there was no audit failure I think they are right with regard to the audit process not highlighting the "developing problems" although we don't know to what extent audit firms commented on these issues to boards and audit committees. In my view much of this is due to the regulatory and litigation environment in which we operate making it difficult for auditors to offer advice and comment outside that which they are required to do so. The answer is thus not more regulation but perhaps a look at how to help the auditor feel comfortable about going "beyond his/her brief" - and removing the fear of litigation if we do so. As the detailed report states:

"We are perturbed that the process results in 'tunnel vision', where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures."

As far as fair value accounting is concerned the report states:

"We regret the power of the European Commission to pick and choose which international accounting standards should be implemented in the EU and call on the Treasury to consider the impact of the Commission's powers on the objective of establishing a single global set of accounting standards."

Indeed! The issue of course goes well beyond the EU if we are to establish a single set of high quality global accounting standards.

 Mark to Market  Standards & Regulators  5 Comments May 19th, 2009