HBOS review offers the chance to expose the flaws in our accounting system

Sir, The recent report by the Financial Conduct Authority and the Prudential Regulation Authority into the failure of HBOS — one of the largest in the history of UK banking — must be a trigger to at last correct major shortcomings in our financial reporting and auditing system.

The report leads us to question whether HBOS’s auditor, KPMG, failed the most basic purpose of auditing (warning shareholders of impending insolvency), or the IFRS accounting standards against which the directors and the auditors are judged, are defective — or both.

While the former would clearly be a serious matter given the scale of the bailout by Lloyds and the UK taxpayer, we have long argued that the flaws with IFRS result in systemic risk to investors and — in the case of banks — the public. These flaws persist today.

The report’s description of HBOS management’s “all-or-nothing” risk culture is a stark reminder of the dangerous behaviour enabled by IFRS. If the HBOS Board had required prudent (not overstated) accounts from management, arguably the executives would simply not have been able to take the risks they did (nor been incentivised to do so). Both reported profits and capital would have been lower than the IFRS numbers, reflecting the risks embedded in the loan book as well as the uncertain nature of “profits” flowing from mark-to-market (or even mark-to-model) gains in the trading book.

The Treasury select committee’s effort to clarify what went wrong with KPMG’s audit of HBOS, and why the FRC decided not to investigate, is welcome. This review offers an opportunity to expose the deeper systemic problems embedded within our accounting system. In the end it is vital that our accounting standards protect the public interest by encouraging long-term stewardship.

Natasha Landell-Mills

Sarasin & Partners

Eric Tracey

GO Investment Partners

Cllr Kieran Quinn

Local Authority Pension Fund Forum

Elizabeth Fernando

USS Investment Management

Roger Collinge

UK Shareholders Association

Robert Talbut

Independent director