Auditors under fire over role in bank crisis

Peers call for competition inquiry into 'oligopoly' of Big Four firms
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The Independent Online

The House of Lords yesterday accused the "Big Four" accountants of complacency in their auditing of banks and called for a competition investigation into their dominance of the market.

The Lords' economic affairs committee also attacked the accountants and the Financial Services Authority (FSA) for "a dereliction of duty"in not discussing mounting risks at the banks in the run up to the financial crisis.

"Either [the accountants] were culpably unaware of the mounting dangers, or... they equally culpably failed to alert the supervisory authority of their concerns," the report said.

The committee called for legislation to make meetings between regulators and auditors compulsory. It said that would overcome auditors' wariness about adding warnings to a bank's accounts that could spark a run.

The Big Four – Deloitte, PwC, KPMG and Ernst & Young – audited all but one of Britain's top 100 companies last year and those companies change auditor on average every 48 years, the report said. The peers said the Office of Fair Trading should investigate the audit market with a view to referring the Big Four to the Competition Commission.

"It is clearly an oligopoly with all the attendant concerns about competition, choice, quality and conflict of interest. It gave no warning of the banking crisis," the report said.

The committee called for Britain's top 350 companies to put their audits out to tender every five years to give second-tier firms such as BDO and Grant Thornton a shot at the business.

The need for more competition is more urgent because the Big Four's dominance is so great that the market might not be able to cope if one of them failed, the report warned. Arthur Andersen imploded in 2002 after its reputation was shattered by its US arm's auditing of Enron.

Auditors have mainly escaped severe criticism for the way they approved banks' accounts. In the US, an investigation into Lehman Brothers' collapse accused Ernst & Young of "professional malpractice".

The peers' attack was aimed mainly at Deloitte, PwC and KPMG because Ernst & Young is not active in UK bank auditing. The committee criticised PwC in particular for its checking of Northern Rock's books.

Ian Powell, the chairman of PwC UK, said: "I am surprised by the committee's claim that there was a 'dereliction of duty', given their stated view that auditors fulfilled their legal duties." The ICAEW, one of the accountants' many industry bodies, said auditors did the job they were expected to do.

But the peers said: "We do not accept the defence that bank auditors did all that was required of them. In the light of what we now know, that defence appears disconcertingly complacent." Alan MacDougall, the managing director of the shareholder group Pirc, said: "There seems to have been a mutuality of convenience on the one hand for the auditors and unreal profits on the other for the banks they audited."

The Bank of England and the FSA have proposed a code of practice to revive regular meetings with auditors but the report said this did not go far enough after meetings "fell into desuetude" after the FSA took over bank regulation from the Bank in 1997.