Auditors could have changed outcome of crisis

THE auditors charged with examining the books of the banks could have altered the overall outcome of the economic collapse if they had challenged lending practices during the property boom.

Yesterday’s report by former IMF economist Peter Nyberg said his Commission of Investigation “would have expected a bank auditor, exercising necessary professional scepticism, to have concerns where there were growing property and funding exposures, combined with material governance failings.

“This combination of factors should have raised questions for the auditor about the sustainability of a bank’s business.”

The report basically labelled the banking meltdown as a domestic issue, pinning the blame on the Government, the regulators and banks for not halting a reckless funding reliance on the property sector.

But Mr Nyberg added that the Irish banks’ external auditors — including Ernst & Young, KPMG and PricewaterhouseCoopers — failed to sufficiently challenge banks’ management over their practices, and if they had, it could have altered the overall outcome.

While the auditors did communicate various issues in their annual reviews to the bank boards on changing business models, they failed to comment on their possible implications, it said. The changing lending practices at Anglo Irish Bank and Irish Nationwide were identified by the auditors, but merely communicated rather than challenged.

“In the absence of an express requirement for the auditors to do so, there appears to have been no challenging dialogue with the covered banks on their business models and their growing property and funding exposures. Such dialogue could have highlighted the business model risks and might have influenced the banks in relation to their growing vulnerabilities.”

It added: “The commission finds it unfortunate that sufficient, timely and challenging auditor dialogue was not used to influence the banks’ business models and lending practices. This type of professional scepticism could have been a considerable value-added contribution by the auditors.”

The report noted client confidentiality has been cited by auditors as a limitation to their ability to report matters to the Financial Regulator. “However, no such limitations would arise in respect of reports to the audit client,” it added.