Now Mr. Murphy is complaining that auditors obey the law

The Bank of England issued a statement yesterday saying that the UK’s major banks and building societies are currently underestimating their losses by £50 billion.

I think that’s true.

But why didn’t they say as a result that the accounts of the banks in question are not true and fair?

Or that they cannot have been properly audited as a result?

And that this crisis is in no small part the fault of the Big 4 auditors who signed those accounts off and who in very large part helped set the rules under which those accounts were prepared that were written by the International Accounting Standards Board, of which they are major funders?

Why is it that when auditors have so very obviously failed completely and utterly in their duty we just turn a blind eye?

Because the law says that auditors should audit banks in this manner. It\’s what the law actually says they must do.

But accounts were and should be prepared on an anticipated loss basis as happened to 2005

Yes, the law was changed in 2005.

16 thoughts on “Now Mr. Murphy is complaining that auditors obey the law”

  1. I don’t understand his point.

    IFRS says you provide for losses on one basis; the Bank of England is saying that if you were to provide on a more prudent basis the loss provisions may be higher and has quantified the possible extent of that increase at £50bn.

    So the range of exposure is up to £50bn more than is used in the accounts, but this is not news. If a bank were to provide at the top of the range, then:

    a) it would be quite rightly challenged for not following GAAP, and
    b) it would be paying much less tax (about £12bn at current rates) if the losses were anticipated.

    I’m not au fait with the details of banking regulation, but to me it simply seems that the Bank is saying that when calculating a risk cushion you should take into account more losses than when you’re assessing profitability. That seems eminently sensible.

    I also think that having the banks pay tax on the £50bn, which is what IFRS is doing, seems eminently sensible too.

    Unless Murphy is really suggesting that banks should be allowed an extra tax deduction to save them £12bn?

  2. Oh dear. He’s getting basic tax compliance utterly wrong, and deleted my corrections because they’re “misleading”.

    If he ever does any tax compliance work he’s just asking for a PI claim. That would be terrible 🙂

    I wonder if I can get the ICAEW to do a peer review of his tax clients…

  3. He really doesn’t like the Big 4, does he.

    Makes sense, I guess. There really is an awful lot of influence concentrated in four organisations with no great democratic accountability… and that’s three organisations with no great democratic accountability too many for Dear Murphy.

  4. but ask yourself how auditors should respond if complying with the law and showing a true and fair view are mutually exclusive. Look at the audit report. complying with the law, or complying with accounting standards might result in accounts which don’t show a true andfair view. It might be a brave stance to take if you are a professional auditor! But there is an element of truth in the Murph’s stance.

  5. Firstly Murphy is lying again (one is tempted to say “as usual” but that would going to far). The BoE statement says “expected losses which *might arise* … *could* exceed existing provisions by around

  6. mutter, mutter
    could exceed existing provisions by around £30 billion
    Please note the £30 billion; also the use of the subjunctives to describe a worst case scenario instead of the “best estimate”
    The £50bn comprises that £30bn plus £10bn for future fines for unspecified misdemeanours or just to fill the pockets of the regulators pluis £12bn extra capital required if they took a more prudent view on risk-weighting of assets.

  7. @ alastair harris

    Audit opinions explicity state that the accounts show a true and fair view in accordance with the prevailing accounting rules.

    The UK used to be a lot less prescriptive about what could be done in a set of accounts.. thus giving much more scope for auditors to go back to fundamental principles and excercise the sort of judgement that Murphy seems to want here. The trouble is, that his usual approach to things is to demand more rules and regulation, not less, and I don’t think anyone seriously thinks that he wants company directors and their auditors (big 4 or not) to be given far more scope to ‘interpret’ the numbers as they choose.

    Which is why his argument is so inconherent. He’s criticising the auditors for not beahving in a way that he doesn’t *really* think that they should be allowed to behave. His problem is with whoever made the rules.. but he’s got a problem with the big 4, so he’s lashing out at them.

  8. Murphy is getting a lot of attention and is certainly helping to set the “mood music”. To that extent he is a very dangerous individual.

    Unfortunately for him, he is also a Greek tragedy in waiting. He will never be allowed into the positions of power that he is expecting because the moment he got into the Treasury all his imbecility would be pointed out to him by people who actually know what they are talking about.

    I think the Labour lot will keep stringing him along until the election, because he’s a non-aligned and highly vocal anti-Tory agitator who gets a lot of BBC play.

    But when they have won it they will drop him, at which point there will be passable impersonations of Rumpelstiltskin being done in a boring-looking little house in Norfolk.

    I hope his missus is ok writing scripts for antidepressants.

  9. I disagree – he might not make it as a Labour parliamentarian because he ticks so many of the wrong boxes (middle aged white male) and also that Observer piece that the lying toerag now claims was some sort of bizarre indirect tip-off to the taxman will continue to come back and haunt him, but unless someone gets on the Beeb to shred him (rather like Pellinor has done on his site – amazing that so many of his comments have made it), he may well remain influential because his irrational arguments still have an emotive appeal to the “base”.

    He needs to be publicly humiliated for his idiocy

  10. @ the thought gang. An audit opinion is not something many understand. You could say the same about accounting standards and financial reporting. But whilst the rule book has got bigger , and whilst the requirement to comply with accounting standards is explicit in the Companies Act, we still have a principles based approach to financial reporting. And of course it is possible that in complying with a specific part of a specific finanancial reporting standard that the financial statements might not show a true and fair view – that is a matter of two sets of judgements – the preparers and the auditors. Personally I am not convinced by the Murphy argument, and I would agree completely that he has a bee in his bonnet about the big 4 as they are now – but don’t let that get in the way of a reasonable argument!

  11. I’m almost with Ritchie on this one, for two reasons:

    As far as I know, prudence has never been shown the door and if you want to produce a prudent set of accounts you provide for a loss as soon as you become aware of it. I’m sure Brown stuck his oar in here and massaged away any fears, in much the same way he brokered the Lloyds deal which cost me rather a lot of money.

    But the second point is that the provisions for mis-selling PPI are way over the top.

    So, either they should have provided for the losses in 2007 onwards or they should scale down the PPI provisions. which may or may not be connected with the sudden desire of the BoE to increase the banks capital.

  12. until companies moved onto the new accounting standards – all major companies not just banks – of course people used to provide for expected losses. However, that process was abused, especially during takeovers, when huge provisions for future losses would get booked to enable higher profits later = noh, the losses are not so bad aftyer all, so let’s release a provision.

    To prevent such distortions, auditors were told to clamp down on loss provisions.

    You get what you ask for….

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