Commercial property and buy to let loans caused the first ever overall loss at EBS
Commercial property and buy to let loans caused the first ever overall loss at EBS and the need for a €1bn bailout, the Banking Inquiry has been told.
Dargan Fitzgerald, Audit Compliance Principal with Ernst and Young which audited the accounts of the building society, said the turning point for the EBS was a 2005 decision to follow its competition into development and property lending which was a mistake.
Mr Fitzgerald, responding to questions from Deputy Michael McGrath, said they were not consulted on this decision and had no role.
Auditors had no function in making judgements on any bank loans, a former lead Auditor of Bank of Ireland, John McDonnell told the committee.
Questioned by Deputy Joe Higgins, Mr McDonnell of PriceWaterhouseCooper. said “we have no role in advising management on the wisdom of their business model or their lending strategies”.
Asked by Deputy Kieran O’Donnell why there was no criticism by the auditors of Bank of Ireland’s accounts for 2007 and 2008, Mr McDonnell responded that financial statements were about giving a representation of past transactions and events and PwC had done that fairly.
Deputy John Paul Phelan further asked how PwC reconciled signing off on accounts for 2007 and gave the bank a clean bill of health as a going concern when eight months later the taxpayer had to pay €3.5bn to rescue the bank.
Mr McDonnell repeated that financial statements were about past transactions and a “going concern” was a concept where a bank was not in liquidation or anticipated to go into liquidation.
The auditor confirmed that rules in place during the economic crisis had since been found wanting and changes had now been made.
There was a better chance now that financial statements could alert to future problems and would recognise loss quicker than in the past.
PwC has been the sole auditor to Bank of Ireland since 1990, a position it will continue to hold up to 2020 when the bank will be required to rotate its auditor.
The Inquiry heard how the company earned €9m from Bank of Ireland in 2008 and that was less than 3pc for the firm’s total revenue of €231m that year and well within the professional threshold of 10pc for any one client.
They had been paid €66m for their work with the Bank which was among their top three clients and their largest financial services client.
Ronan Murphy, Senior Partner at PwC said his company was the statutory auditor of Bank of Ireland from 2001 to 2010, Bank of Scotland (Ireland) for 2009 and AIB for 2001.
He said bank auditors now needed to find a way to “give much more insight” about what comes out of an audit.
If investors wanted to know where critical judgements were made “we have to consider how to respond”.
He defended auditors against public comments that they were not sceptical enough saying “our reporting in public is limited by statute to our audit report”.
There was no capacity for the auditor to make comment on the quality of the judgement within the financial statements.
Audits from the start of the financial crisis, he said, “were clearly challenging due to the inherent uncertainty facing the Irish and global economies and the particular issued face by Irish Banks”.
His company stood over the quality of the audits and financial statements for their clients.
Mr Fitzgerald stressed that the need for regular discussions between the Financial Regulator and bank auditors was a “clear lesson” from the economic crisis
Two way dialogue between these parties was an “important consideration” Progress had been made on this point and “consideration should be given to putting this on a formal basis”.
Accounting standard changes said Mr Fitzgerald, had also been made since the crisis to allow financial institutions to report expected losses and he welcomed this change.
Paul Smith former managing partner of Ernst and Young (Ireland) said the crisis had been triggered by international factors “rather than by any failure of the Irish banks to comply with accounting standards” he added.
He agreed that the exposure of the Irish banks might well have been increased by their lending strategies and practices but these were commercial issues and the responsibility of the individual banks, their directors and their managements, the Financial Regulator and the Central Bank.
Ernst & Young also audited Anglo Irish Bank but this is not being examined by the committee at this stage because of ongoing criminal proceedings.