A new report has been published by the Financial Reporting Council (FRC) – the UK’s independent regulator with responsibility for promoting confidence in corporate reporting and governance. 3 international banks are accused in the report of failing to meet the accounting standards that are expected of them. This is largely due to auditors not being sufficiently rigorous in their approach, according to the report.

Audit firms are supposed to be inherently sceptical towards their clients’ valuations of assets and other elements of their finances, but this scepticism has been lacking in their approach, according to the FRC’s Audit Inspection Unit. The report evaluates the accounting practices of 10 banks and buildings societies, and is especially critical of 3 UK subsidiaries of international banks.

Although the report declines to name the banks in question, which span the retail and investment sectors, they are graded in the “lowest possible category”. The FRC has warned that deficiencies in the auditing practises at these institutions create unacceptable levels of risk, with the failure of auditors to properly challenge the assumptions built into the banks’ accounts being cited as a major problem.

Previous FRC reports haven’t placed so much emphasis on the auditing of banks, but, following the recent financial crisis, the watchdog felt it was necessary to examine this area in greater depth. The Audit Inspection Unit indicated that the 2012 report would extend this focus, with UK building societies set to be looked at more closely.

95% of FTSE 350 companies are currently audited by the firms known as the ‘Big Four’ – Ernst & Young, PriceWaterhouseCoopers, Delloite and KPMG. The way audit firms have handled the possible conflicts of interest that arise as a result of the consulting work they undertake alongside their statutory account-checking duties was also criticised by the FRC report. The European Commission is currently looking into the possibility of strengthening the rules on what consulting services auditors are allowed to provide, whilst the FRC is pushing for a general review of its structure and function, which it hopes will result in it being given the power to sanction auditors.

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