The Financial Reporting Council (FRC) has admitted that it should have been quicker to launch a probe into audit giant KPMG’s sign-off of the accounts for failed bank Halifax Bank of Scotland (HBOS) during the financial crisis.
In a report into collapse of HBOS , the FRC conceded that not only had it placed too much reliance on the UK’s former regulator, the Financial Services Authority (FSA), as lead regulator in the area, but that its actions lacked transparency.
The report conceded: “While much work was undertaken in the period between 2009 and 2013, we were not sufficiently proactive in making enquiries in relation to the HBOS audit and relied too heavily on the work of the FSA and the [current regulators] and on the information provided by them.”
It continued: “Public interest in and criticism of the outcome of our enquiries and investigation has highlighted that we could better explain the reasons for our decisions to close cases.”
Tim Bush, head of governance and financial analysis at Pensions & Investment Research Consultants (PIRC), told IPE: “The low bar for audit quality this outcome shows follows years of investment by the accounting profession in lobbying. It is analogous to a prison where the inmates have chosen the guards and designed the fences. The outcome is entirely predictable.”
He added that there remained “legacy issues” left over from the 2008 financial crisis that had yet to be addressed.
The FRC report also revealed that “certain factors identified in the audit work… were reasonably treated as mitigating the overall level of risk”.
These factors included strong deposit inflows during the fourth quarter of 2007, the fact that HBOS was “in touch daily” with the FSA, and that the majority of analysts had a ‘hold’ or ‘buy’ recommendation on HBOS’ stock through to January 2008.
Earlier this year, IPE obtained confidential minutes of a meeting attended by investors and representatives of the so-called ‘big four’ audit firms in the run up to the financial crisis in 2007.
The minutes recorded discussions among investors and auditors hosted at the London office of Schroders, the listed asset manager, in the run up to the crash.
They revealed that the FRC was “fully aware that there may be going concern problems in relation to the forthcoming financial year end”.
Furthermore, the minutes flagged up “sectors such as banking, homebuilders and commercial property” as being of particular concern.
The FSA, according to the minutes, was allegedly “concerned to learn of the more aggressive judgements” but “would not approach auditors”.
PIRC’s Bush said it was “common knowledge the numbers were wrong in 2007 and earlier”, adding that the Institute of Chartered Accountants in England and Wales’ audit quality forum had also discussed the issue.
Communicating other comprehensive income
The International Accounting Standards Board (IASB) has reached a number of tentative decisions during discussions on its Primary Financial Statements project that could affect the future layout of the “other comprehensive income” (OCI) section of the income statement. This section includes gains and losses related to pension funds.
The IASB has decided to rename the two current OCI categories as ‘remeasurements reported outside profit or loss’, and ‘income and expenses to be included in profit or loss in the future’.
Defined benefit (DB) pension remeasurements are not recycled through profit or loss and fall into the first category, in contrast to cash-flow hedges or changes in the fair value of available-for-sale securities.
The board rejected, however, a proposal to separate the two categories with a new sub-total.
Board members also tasked staff with exploring whether there was any demand to remove the presentational options for OCI in International Accounting Standard 1.
It emerged during the board’s earlier discussions that the presentation of associates and joint ventures could prove to be a controversial topic among constituents.
IAS 19’s impact on German asset allocation
The 2011 revisions to IAS 19 – the standard outlining the reporting of employee benefits, including pensions – had a marked impact on asset allocation decisions made by German DB scheme sponsors, new academic research released at a recent IASB research forum meeting has found.
Researchers found that the adoption of the accounting rules by firms using international financial reporting standards caused schemes to “significantly shift their pension assets from equities into bonds, relative to control firms”.
The study also found that the effect was less marked among DB sponsors with better funded plans.
The researchers put the shift in pension investment down to the fact that IAS 19 put actuarial gains and losses through OCI.