He said these could form a system of grading for the accounts of banks similar to the ratings that credit rating agencies award countries’ debt.
Speaking yesterday evening in the House of Lords’ debate on the Economic Affairs Committee report on the audit market, Lawson said that the move to IFRS meant that instead of exercising judgment and prudence, auditors had concentrated on box-ticking.
Lord Lawson also condemned the move from UK GAAP to IFRS as “disastrous.”
“A move away from prudence in accounting is far more serious in banks than in other areas of business,” he said. “At the heart of all, there is a cultural problem and a moral decline and these are both things that are very hard to address by legislation.”
Lord Lawson made seven proposals overall:
- Recreate the board of banking supervision that was introduced in the 1987 Banking Act and swept away by Gordon Brown who replaced it with the Financial Services Authority. The system that the government is currently recreating is better, he said, but not as effective as it could be.
- Make it possible for dialogue between the auditors and the supervisors. “If auditors find anything amiss, they can tip off the supervisory authority which is now the Bank of England. The Bank of England could also ask the auditors to look at particular banks to find out what they are doing. Dialogue is essential.”
- Introduce rating for banking accounts. In practice, it is almost impossible for auditors to qualify a bank’s accounts. Instead, they should grade the accounts. “Possibly auditors would be less corrupt and more reliable than credit rating agencies are.”
- There should be complete separation between retail and investment banking. The government has only gone half way in ring-fencing the businesses. “Bankers are clever and will find a way around.”
- Sort out the problems with marking to market and the valuation of assets. Sometimes there is no market for assets so marking to market leads to completely fictitious profits. It is illegal to pay dividends out of these paper profits but okay to pay bonuses.
- Put the prudence back into banking and bring back the power for banks to make general provisions that was prohibited by IFRS.
- Change the tax treatment of loan and equity capital so that interest on both is tax deductible.
Wrapping up the debate, government business minister Baroness Wilcox said that she come back to Lord Lawson once she had had time to consider his proposals.
The Committee’s report released in March year, Auditors: Market Concentration and their Role, found that auditors’ “complacency” and “dereliction of duty” contributed to the financial crisis and that the Big Four’s domination of the large company audit market limits competition and choice.
As a direct result of one of its recommendations, the Competition Commission is currently investigating the audit market.