The Audit of HBOS

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

One of the mysteries not adequately researched in the recently report into the demise of HBOS was the failure to examine the audits of the company that took place. The Financial Reporting Council (FRC) decided two years ago not to look into the audits of the bank by KPMG prior to its collapse and acquisition by Lloyds in 2008. But the Parliamentary Treasury Select Committee has now been looking into this further.

Andrew Tyrie, the Committee Chairman, has already suggested the FRC should reconsider its decision and called it a “serious mistake”.

This is what Tim Bush of PIRC has said on this matter: “In evidence to the Treasury Select Committee (‘TSC’) in December 2015, Andrew Bailey, Chief Executive of the Prudential Regulatory authority, revealed that the taking out of expected losses from accounting standards [IFRS in 2003] caused the assumptions unpinning the Basle I capital adequacy regime to fail.  

The manifestation of this in the specific case of HBOS is still under investigation by the TSC. The TSC has extracted that KPMG, HBOS auditors, was debating IFRS provisions of the order of £1-1.5bn, when the outcome was actually £53bn. Andrew Bailey confirmed that the true losses were in excess of shareholder funds and ‘bail-in capital’ (i.e. subordinated debt), in other words HBOS was bust before being taken over by Lloyds and bailed out by the UK taxpayer.”

In other words the defective accounting standard did not provide a “true and fair view” of the financial position of the company as required by law (see the last ShareSoc Newsletter for more background on this). The use of IFRS caused KPMG to grossly underestimate the impairments that HBOS would suffer and this contributed to the collapse.

Roger Lawson

  1. The duties of auditors are not properly policed by the mechanism of civil litigation. It is now the accepted law that the auditors owe no duty of care to investors, but only to the company that appoints them. The company will not sue, because it has suffered no loss. So the auditors only have an incentive to please the directors who appoint them, with little fear of the consequences.

    I recall Equitable Life’s pursuit of Ernst and Young. Equitable failed because its directors gave evidence that even if E&Y had correctly performed their duties, Equitable would still have conducted itself imprudently.

    This needs to be addressed by legislation.

    Robert Morfee

  2. sharesoc says:

    Could not agree with you more Robert. The Caparo judgement was a real stinker which needs to be rectified by legislation. Roger Lawson,

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