Banking Inquiry: Deloitte audits employed ‘due care and diligence’

Deloitte Ireland carried out audits of Ulster Bank with "due care and diligence", but responsibility for maintaining the stability of the banking sector lay with the financial regulator, the banking inquiry has heard.

Deloitte Ireland managing partner Pat Cullen and head of audit Gerry Fitzpatrick have been giving evidence on Wednesday afternoon in what marks the beginning of the inquiry's hearings on the role of external auditors to the banks.

Mr Cullen said reviews of the firm’s audit process are carried out annually and are subject to external review.

“Our role is fundamentally different to that of the financial regulator, who is primarily concerned with maintaining the stability of the banking system, and while audited financial statements contribute to the regulatory process, the determination of capital, the undertaking of tests for future stress, and the setting of regulatory buffers, are functions undertaken by the regulator,” said Mr Cullen.

“That process is not, under statute, part of the scope of the external audit.”

He said that in providing opinions on the financial statements of banks, the firm “discharged our responsibility professionally and with due care and diligence”.

“The financial crisis has had an enormous impact on a wide range of stakeholders, and our profession has reflected on the need to learn from the crisis and is reflecting on how financial reporting and auditing could be enhanced,” he said.

Fianna Fáil finance spokesman Michael McGrath asked whether, in hindsight, the men believed reports relating to Ulster Bank in 2007 and 2008 gave a true and fair view at that time.

"I'm satisfied that opinion was appropriately given," said Mr Fitzpatrick, and explained that the audit involved "looking at a point in time" as well as "at the available data".

Mr Fitzpatrick told the inquiry Deloitte has been auditing Ulster Bank since 2000, and Mr McGrath asked whether it was “healthy” for the relationship to have lasted 15 years.

“There has been quite a lot of debate in relation to the benefits of audit rotation,” said Mr Fitzpatrick. “I think there is a lot of learned experience in terms of understanding an organisation.

"I think we as a firm and our profession have mitigated that with rotation of audit partners, so in terms of the risk you might think may exist in terms of bias and too close a relationship in terms of the judgments made, the rotation of audit partners both right around the Royal Bank of Scotland, the Ulster Bank Group, caused to my mind that to be mitigated."

He added that he had “no issue” with the longevity of relationships “as long as the right safeguards are in place”.

Asked whether the “huge income streams” that auditors benefit from might lead to a “don’t rock the boat” attitude from them, Mr Fitzpatrick said there was “nothing in the ethic of our firm or my personal ethic that would cause me to produce a report I didn’t agree with”.

“I have an ethical responsibility and a professional responsibility to be clear in my audits,” he said.

Asked whether he was satisfied Deloitte had done a good job as auditor to Ulster Bank, Mr Fitzpatrick said “absolutely”.

“I had a duty of care of a professional standard,” he said. “I believe it was a difficult environment to work in because judgments were quite difficult.

“I can see that in hindsight the shortcomings in historical measurement of financial information can be misinterpreted, but in no way did I feel I was unable to give a report.

“I looked for the appropriate data at the time...and that included trying to understand what the state of impairment was in their loan book and having reasonable processes, not always perfect processes, to do that.

“Then having identified those cases that are impaired, the question was what collateral value would you recover, and that was a challenge.

“But seeking out information from a bottom up, looking at individual cases, and then from a top down at a portfolio level, saying ‘what is the level of risk’ - they ensure that in accordance with the appropriate standard.

“It didn’t ultimately transpire to be that way because the assumptions proved to be flawed, because ultimately the market and future events caused collateral values to fall further and further and further. But ultimately it’s not a future loss model.”

Asked whether he believed Ulster Bank had been dishonest with Deloitte in terms of the situation, Mr Fitzpatrick said: “Do I believe I was misled? I don’t. I’ve no cause to believe that.”

Socialist Party TD Joe Higgins asked whether the auditing profession “takes any responsibility for the boom and the bust” situation that led to the crisis.

“The accounts are prepared by the directors and our role is to report on those accounts in accordance with the auditing and accounting framework that is there,” said Mr Cullen.

“Even [Finnish finance expert, Peter] Nyberg said in his report that we carried out our function quite professionally and well.

“But the question it did raise is whether the scope of what the auditor does is adequate, and the auditing profession certainly has been looking at that question very closely since that time.

“There are quite a lot of changes that have already come in or changes that are in progress. The hope and expectation would be that those will certainly mitigate the risk of a similar situation arising again.”