Accountancy’s watchdog has admitted that it should have taken a more “proactive approach” in delving into KPMG’s work as auditor of failed bank HBOS.
A Financial Reporting Council (FRC) report into its own processes and lessons learned following HBOS’s collapse and sale to Lloyds, requested by the Treasury Select Committee, states that it should have begun its investigation far sooner, rather than wait for other financial regulators to complete their work.
It is also updating its governance and broadening its mix of skills and experience on its board committees as part of the learning process.
A reliance on the evidence collated by other regulators, along with that work being delayed, led to a big gap in the FRC beginning its own inquiry.
“…We relied too heavily on the work of the [Financial Services Authority] and on the information the FSA provided to the FRC,” states the report.
An accompanying letter by Financial Reporting Council CEO Stephen Haddrill (pictured) to Nicky Morgan MP said the FRC’s investigations should be run in parallel with others to avoid delays, which in turn will aid other regulatory parties.
He also flagged concerns about the limits of the FRC’s powers in accessing information, in comparison with other financial regulators, as a reason for the watchdog to initially take a back seat.
“We were concerned that the limitations in our powers to secure information from companies meant it was sensible to await the conclusions of the financial services regulators which had full access to information and whose conclusions would enable us to focus our own work better,” wrote Haddrill.
The FRC’s governance structure, plus board and committee composition, is still being reviewed. However, it has rebuffed concerns that its people are conflicted due to their past roles in the profession, outlining its rule that no auditor or accountant can join the FRC within three years of them practising at an audit firm or as an office holder in an audit body.
The FRC has also put in place a lower barrier to setting out a case, having found that there was no realistic prospect of an independent tribunal making a finding of misconduct against KPMG for its audit work for HBOS in 2007 and 2008. Audit cases can now be brought against firms in relation to “breaches of a relevant requirement”. The old test remains in place for individual accountants, but the FRC is talking to accountancy bodies about extending this lower barrier.