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The UK accounting watchdog has for the first time admitted it was too slow to investigate KPMG’s audit of HBOS, the failed British lender. The Financial Reporting Council blamed the inaction on its lack of regulatory powers in the aftermath of the financial crisis.
The FRC on Thursday released a 65-page document setting out why it felt justified in clearing the big four accountancy of misconduct in its audit of HBOS before the collapse in 2008.
The report marks the first time the FRC has issued a detailed explanation of its reasons for dropping an investigation. The unprecedented move comes after the watchdog was criticised by politicians in September for clearing KPMG in the matter.
Stephen Haddrill, the FRC’s chief executive, said in a letter, also released on Thursday, to Nicky Morgan, the Conservative MP who chairs the Treasury select committee, that it “should have adopted a more proactive approach” when assessing the HBOS audit.
Mr Haddrill said the watchdog previously had limited powers to obtain information from companies, which meant it had a “heavy reliance on other regulators”. The watchdog’s powers had since been strengthened and the FRC was now taking a more dynamic approach to investigations.
Ms Morgan, who called on the FRC to issue a detailed explanation of its decision to clear KPMG, said her committee will summon the watchdog to give further evidence on whether its conclusions “go far enough” in 2018.
“This long-awaited report rightly acknowledges that the FRC should have been more proactive in investigating KPMG’s audit of HBOS,” she said. “It was only through pressure from the Treasury committee that the FRC decided to act.”
The regulator cleared KPMG of any wrongdoing after deciding the audit of HBOS’s 2007 results “did not fall significantly short of the standards reasonably to be expected”. It said the assessment of the bank’s health in 2008 “was not unreasonable at the time”.
The report published on Thursday also showed the regulator found KPMG’s work on the HBOS audit was not “above criticism” and “raised questions about the adequacy of the nature and extent of some of the audit procedures”.
However the FRC reiterated its finding that KPMG had not committed misconduct when it declared the bank was likely to remain a “going concern” — or stay afloat — in the 12 months after March 2008. HBOS and other UK banks were bailed out by the government in October 2008.
Karthik Ramanna, a professor of business at the University of Oxford’s Blavatnik School of Government, said the FRC should be given “credit for their candour”.
He added: “They have been willing to admit that they were slow to respond and that they haven’t done a great job in building public trust in their decision making. But the real issue is that they are dwarfed by the power of the big four audit firms.”
The FRC also asked the government to support its efforts to gain greater powers in pursuing in-house company accountants over potential wrongdoing.
Legislation last year allowed the FRC to act against auditors found to have “breached requirements” and those found to have committed misconduct. The watchdog is in talks with professional bodies for the accounting industry over similar rules for accountants.
The FRC has requested that the government legislate to give the watchdog similar powers over accountants if talks with the professional bodies break down.