Role of auditors under review

The Government is expected to move quickly to establish a group to review the role of auditors to the financial institutions, one of the recommendations of the DIRT Inquiry report. The review will have significant implications for the Republic's major auditing firms.

The inquiry report recommends that a review be established by the Department of Enterprise, Trade and Employment to examine the auditing issues raised in the report. Separately, the Institute of Chartered Accountants in Ireland is examining the findings of the report as it relates to its members.

The report is critical of the role of banking auditors, particularly of Ernst & Young in connection with ACCBank, PricewaterhouseCoopers in its work with AIB and KPMG with National Irish Bank.

Accountancy bodies - and sources in the industry - have generally welcomed the idea of the review group. However, several recommendations of the committee on reforms are likely to be controversial. PricewaterhouseCoopers is the biggest auditor to the financial institutions, holding the audits of the two main groups, AIB and Bank of Ireland, but all the bigger firms conduct audit work, either for domestic banks or for the Irish subsidiaries of foreign banking groups.

Industry sources are critical of the sub-committee's view that there should be a maximum term of five years for any auditor to a financial institution.

They say it takes time for an auditor to get to know the business and that, typically, more problems occur in the early years of an audit.

They also say such a move might inconvenience international groups which tend to want to use the same accountancy group in Ireland as is used by their international parent.

Central to the interests of the review group will be the provision by accountancy firms of other services to companies and whether this compromises their auditing function. Accountancy firms at present appear to operate different policies in this area.

The other central issue will be how the audit is conducted, the relationship with bank management and the role of auditors in ensuring compliance with legislation such as DIRT laws.

The final crucial area for the review group will be the relationship of the auditor with the financial regulator. The committee recommends that the Central Bank should play a role in regulating and monitoring the management letters issued by auditors to the financial institutions and that it might even consider appointing a joint auditor.

In the UK, the Bank of England plays a significant role in monitoring the role of auditors and this practice may now develop in Ireland, with the Central Bank taking a more active role, providing it remains the main prudential regulator under whatever restructuring of financial regulation is agreed by the Government.