The world’s largest accounting firms were yesterday cleared of blame for their audits of banks here as the country hurtled toward financial disaster in 2008.
A major review of the accountants’ actions, which cost €1.33m and took five years, yesterday said an accounting standard applied by external auditors was “found wanting”, but that the external audits themselves were generally of a high standard.
The Chartered Accountants Regulatory Board (CARB) said it had asked the tough questions and, for the first time, examined the audits its members had carried out on Irish banks, which had to be rescued at huge expense to taxpayers.
Critics have long raised questions about the breakdown of a web of controls over Irish banks and why external auditors were not able to identify mounting losses on the banks’ loan books as the property market started to slide in 2008.
Taxpayers ended up paying €64bn to keep the banks from collapse.
The audits of the banks by the so-called ‘Big 4’ accounting firms had not previously been put under detailed scrutiny in the three official reports carried out since the crash. The firms received millions of euro in fees for their audits of Irish banks.
The CARB review looked at the standards of the audits in 2008 and 2009 by KPMG of Allied Irish Banks, EY’s audit of Anglo Irish, and PwC’s audit of Bank of Ireland. It also involved scrutinising EY’s audit of the EBS Building Society, KPMG’s audit of Irish Life & Permanent and the audit of Irish Nationwide, also by KPMG.
The review was led by CARB chairman and former senior civil servant Don Thornhill and David Spence, an international expert. Their 80-page report does not name individual banks or auditors, but details minor weaknesses in audit processes in some banks at the time. CARB said its review examined whether external auditors followed the “legal, regulatory, and professional standards” in their audits in assessing the value of loans on the books of the banks.
Its main finding is that the so-called IAS 39 standard, an international accounting rule used by auditing firms, was to blame. The rule only allowed loan loss provisions to be booked in the financial year that they occurred.
“It was found not to be satisfactory,” Mr Spence said.
He said CARB was satisfied that the review was “tough” on the auditors, and, apart from a few areas, external auditors applied the standards of the day in full.
Over five years, CARB obtained all the paper and electronic audit files. It said it thoroughly challenged the judgments of the auditors made at the time. It said it was prohibited by law from identifying individual banks, and from conducting “over-arching” investigations.
Last night, however, Eugene McErlean, a leading expert and commentator on banks and corporate governance, told the Irish Examiner questions still remain about the failure of internal and external controls that led to the banking collapse.
“Are accounting processes so far removed from reality that they miss something that should be staring them in the face?” he asked.
Mr Thornhill said CARB was confident its review was a fair and independent one.
It focused on the level of impairments for loan losses set aside by the banks as the country’s property markets started to collapse. It said implementation of a new accounting standard “is on the horizon”, to include providing for estimates of future loan losses, but that more work may need to be done.
CARB recommends regularly reviewing an existing protocol between auditors and the financial regulator.
Mr Thornhill said: “The banking institutions covered by the government guarantee were at the centre of the crisis which hit Irish society and the economy from 2007/2008. The board considered that it would be remiss if, in the public interest, we did not conduct a thorough review of the role of the auditors of the relevant banks during the critical period.”
Mr Spence said the conclusion of the report was that “the auditors were able to demonstrate that they had generally applied appropriate procedures and complied with relevant standards” in relation to the audits of the directors’ valuation of loans and provisions for impairment of these loans but that “a number of improvements were needed to clearly demonstrate the challenges and scepticism applied in reaching their conclusions”.
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