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Europe’s 128 largest banks will be required to undergo extra audits before the ECB starts regulating the sector at the end of the year. Known as the asset quality review (AQR), the lenders will soon have their balance sheets pored over by a fresh pair of eyes to check for any gaping holes in capital requirements or any murky accounting blips.
The ECB has made clear that none of the banks will be allowed to use the same accounting firm for the AQR that it uses the for normal audits, to ensure a level of detachment. That stipulation has created a scramble across Europe for the lucrative contracts as the Big Four bid for the extra AQR work. National regulators expected to decide who gets what slice of the audit pie by the end of February. The auditing process is likely to take months.
Accountancy firms are keen to participate, with some creating special AQR "task forces" for the roles. "This is an exceptionally important moment in putting Europe on the path to recovery and in terms of restoring confidence to the banking sector we would therefore like to play a role", says Stephen Smith, who is leading KPMG’s AQR team.
The prospect of fresh auditors has raised alarm in some quarters. Some bankers are concerned that some of their more creative accounting techniques – such as in the area of bad shipping loans – could fail to pass muster under a fresh pair of eyes. Others have raised questions over the idea that auditors will in effect now be checking each other’s homework and some have questioned whether their new auditors will have the linguistic skills to understand all the risk-related documents of, say, a German bank.
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