Watchdog’s fangs aren’t up to the job

THEY are the beancounters, the control- checkers, the spreadsheet creators: The armies of accountants who operate in the backrooms of the business world.

Auditors don’t set the world on fire and they don’t necessarily make for scintillating dinner party guests, but their work is essential.

Reliable company accounts are a fundamental pillar of the whole system: If they cannot be trusted, the whole edifice is under threat.

That is why accountancy regulator the Financial Reporting Council (FRC) should not be allowed to sweep questions over Big Four firm KPMG’s audit of HBOS under the carpet.

It has been a week where the financial world has been fixated on the Federal Reserve putting up interest rates for the first time in a decade.

Understandably, the Treasury Select Committee’s questions over the auditing at HBOS – and why the accountancy watchdog has taken no action – have been shunted to the sidelines.

But this is not a peripheral issue: It really matters to the millions of small investors and to all of us as taxpayers.

A quick recap. The FRC was invited by the Bank of England to have a look at KPMG’s work in 2007 and 2008 as HBOS lurched towards disaster. It did so, but decided the criteria for an investigation were not met.

That is pretty astounding given the lender’s near-collapse would lead most sane observers to think an inquiry into the auditing was automatically a good idea.

Andrew Tyrie, chairman of the Treasury Select Committee, has this week written to FRC chief executive Stephen Haddrill and urged him to reconsider.

It has replied in limp fashion and is reviewing last month’s regulatory report into the downfall of HBOS to see if there is new evidence that warrants a probe. If it decides there isn’t, the council will explain its reasons.

How pathetic. Even a cursory reading of the report into the failure of the bank by City regulators that was published last month indicates KPMG has serious questions to answer. So why doesn’t the FRC get on with it, instead of yet another review?

And it hardly helps restore public trust that the review in question is being carried out by the FRC’s conduct committee, whose 14- strong membership includes three ex-KPMG folk.

One is excusing herself to avoid a conflict of interest. Another is Paul George, the executive director of conduct, who has years of past service with the firm. That should come as no surprise since John Griffith- Jones, who chairs the FCA, one of the City regulators that compiled the report into HBOS, is also a former chairman of KPMG in Britain.

Given the darkening environment in the run-up to the crisis, senior figures at the auditor must have realised the gravity of their undertaking when they carried out checks in relation to the £4bn rights issue in April 2008, where investors were asked to stump up more cash to prop up the bank.

Equally, the third- quarter figures for that year, also scrutinised by the auditors, were crucial in the takeover of HBOS by Lloyds.

As the auditors, they were responsible to shareholders in HBOS, who paid its large fees, and indirectly to Lloyds investors who were supporting the rescue.

It is not true, as is sometimes claimed, that KPMG sounded no alarms. The question, given that the disaster unfolded regardless, is whether they were followed through with sufficient vigour.

In 2008, the firm made it quite explicit that the bad debt figures proposed by HBOS management were not acceptable, and insisted on a further £1.9bn being added. It also found 85 weaknesses in the lenders’ controls, some serious.

HOWEVER, by November 2008, the situation was so dire the auditors realised the processes for assessing bad debts ‘ could no longer be relied on’ – another way of saying the accounts were possibly not worth the paper they were printed on. Surely that should have been shouted from the rooftops?

Under its new boss Simon Collins, who has been one of the profession’s leaders in trying to make audits better, KPMG wants to move on. While the HBOS issue dangles over its head, it cannot.

So even the audit firm has been ill- served by the failure of the watchdog to grasp the nettle.

As for the FRC, even if it does order a probe now, it will be too little, too late.

The so- called watchdog has haemorrhaged credibility and should be disbanded. Shareholders, taxpayers and decent members of the audit profession deserve a far better regulator.