Bank of England turns up the heat on accounting firms

By Huw Jones LONDON (Reuters) - The Bank of England would have the power to fine or ban accounting firms from working in financial services under proposals setting out how the UK central bank's regulation arm will monitor the accounting industry. The proposals from the Prudential Regulation Authority (PRA), which supervises Britain's banks, were published on Friday and show how the watchdog plans to oversee the accountants and actuaries hired by banks and use new powers to sanction them. The accuracy of external audits has come under scrutiny by regulators and governments after banks had to be rescued by taxpayers in the 2007-09 financial crisis just months after accounting firms gave them a clean bill of health. The plans echo measures being taken inside banks to make individuals more directly accountable for their actions, making it easier to punish rule breaches. Britain's big banks, such as HSBC , Barclays , Lloyds and RBS , all use one of the "Big Four" accounting firms, PwC [PWC.UL], Deloitte [DLTE.UL], EY [ERNY.UL] and KPMG [KPMG.UL]. "Although engagement between external auditors and the PRA has improved in recent years, the PRA's monitoring of the quality of auditor-supervisor dialogue has shown that there is more that can be done," the PRA said in a statement. The watchdog is proposing that accountants for the biggest UK headquartered deposit-taking banks provide written reports to the supervisor annually on financial reporting and the accompanying audit. "These written reports will enable the PRA to gain a better understanding of the risks in banks' financial reporting and help supervisors to focus on the key areas of risk," the PRA said. The aim is to spot problems early before they get out of hand and so action can be taken in a timely way. The new requirement will be introduced in full in relation to audits ending on or after Nov. 1, 2016. "Where auditors and actuaries fail to provide us with the information that we need to supervise firms effectively, we now have disciplinary powers which allow us to take action to rectify this," PRA Chief Executive and Bank of England Deputy Governor Andrew Bailey said. Iain Coke, head of financial services at the ICAEW accounting industry body, said a written report would in practice mean auditors doing extra homework at times to provide good answers to questions from supervisors. "This is about making sure auditors are more relevant, and that is absolutely integral to rebuilding trust in banking," Coke said. (Editing by David Clarke and Jane Merriman)