Auditors’ failings in the crunch prompts regulatory scrutiny

The role of auditors is to be scrutinised following criticism that they were not sceptical enough of companies during the financial crisis.

The collapse of several major financial companies led to questions about the role auditors had played. In particular, auditors Ernst & Young came under fire after Lehman Brothers’ use of off balance sheet techniques to present a misleading picture of its finances.

Earlier this year MPs on the influential Treasury Select Committee criticised auditors for their ‘tunnel vision’ and failing to deliver relevant information to shareholders

The Financial Services Authority (FSA) and the Financial Reporting Council (FRC) are now asking for input to a paper intended to stimulate debate on the role of auditors following the financial crisis.

It questions whether auditors have always been sufficiently sceptical and paid sufficient attention to signs of management bias when examining key areas of financial accounting.

It also raises concerns that auditors fulfil their legal obligation to report to the FSA when necessary.

Paul Sharma, FSA director of prudential policy, said: ‘Our experience has indicated that, at times, auditors have focused too much on gathering and accepting evidence to support firms' assertions rather than exercising sufficient professional scepticism in their approach - this falls far short of what the FSA - and society at large - expects from auditors.'

Stephen Haddrill, chief executive of the FRC, added: ‘Investors have a right to expect a more robust approach from auditors in challenging management’s judgements and related disclosures.’