The managing partner of PricewaterhouseCoopers (PwC) has told the Oireachtas Banking Inquiry that the firm stands over its audits of Bank of Ireland, AIB and Bank of Scotland (Ireland) before and after the financial crash in 2008.

“We stand over the quality of the audits of the financial statements of Bank of Ireland, AIB and Bank of Scotland Ireland and the robustness of the audit opinions issued on their respective reporting dates,” PwC senior partner Ronan Murphy told the committee.

“Audits in the period from the start of the financial crisis were clearly challenging due to the inherent uncertainty facing the Irish and global economies and the particular issues faced by Irish Banks,” he said.

“The loan loss provisions were clearly a material estimate in the overall set of financial statements on which we expressed an audit opinion.”

He said management at the banks are responsible for setting the loan loss provisions while the firm is responsible for auditing management’s provisions. “We are not responsible for setting such provisions, nor are we responsible for choosing the regulations and how they should be applied,” he said.

John McDonnell, the lead audit partner at PwC on Bank of Ireland between 2010 and 2014, said audit rules were found wanting when applied to the financial statements of Irish banks during the financial crisis.

“IFRS (international financial reporting standards) set the rules which had to be applied in the financial statements of Irish banks during the financial crisis,” he said. “The financial crisis tested some of these rules and found them wanting. Changes have now been made.

“But, nonetheless, they were the prevailing rules and notwithstanding one’s view of their fitness for purpose, they were required to be applied. The accounting rules of the time did not allow the recognition of future events or risks.”

‘Economic decisions’

Mr McDonnell said financial statements portray the effects of past transactions or events and are not intended to provide all the information that users may need to make “economic decisions”.

“Matters such as stability and capital adequacy are outside the remit of accounting standards,” he said.

Mr McDonnell said the primary purpose of an audit was to provide “independent assurance” to shareholders that the directors have prepared the financial statements properly in accordance with IFRS rules.

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“An audit does not exist to provide general comment or opinion on a company’s business model,” he said.

Mr McDonnell said there was a “clear delineation” of responsibilities between board and management as “preparers and approvers” of financial statements and the statutory auditor in their capacity as auditor of the statements.

“In this regard, it is the responsibility of the board and management to set banks risk appetite, risk management framework, internal control, and risk and other reporting framework (both internal and external),” he said.

Committee chairman Ciaran Lynch asked Mr McDonnell if PwC’s staff were sufficiently expert in property transactions to perform their audit function at Bank of Ireland.

“We had the appropriate experience in property to conduct our audit and to determine the appropriateness of the bank’s impairment charge,” he said.

When asked by Senator Sean Barrett if he was surprised by the 43 per cent discount applied by Nama to the face value of property loans that it acquired from Bank of Ireland after the agency was set up in 2009, Mr McDonnell said he wasn’t.

The haircut applied to the nominal value of the loans, which were issued before 2008, and not the “carrying value” of the loans on the books of the bank at the time of the transfer to Nama, by which stage Bank of Ireland would have applied impairment provisions, he said.

Mr McDonnell said the transfer of the loans was at the bottom end of the cycle and represented fair value at the time.

Accounting rules prevented the bank from writing down the value of the loans to fair value and it could only book the additional loss when the loans transferred to Nama, he added.

‘Impairment of independence’

Mr Murphy said it would be “wrong to say there was any potential impairment of independence” by the level of fees earned by PwC each year from Bank of Ireland, particularly non-audit fees.

He said in the year to the end of March 2008, PwC was paid €9 million by Bank of Ireland. Of this, €8.1 million was for audit work and €900,000 for non-audit services.

Mr Murphy said this represented less than 3 per cent of the firm’s total income that year of €231 million and was “well short” of the 10 per cent threshold for any one client that is applied under professional rules.

Mr McDonnell was asked by deputy John Paul Phelan how PwC could now reconcile signing off Bank of Ireland’s statutory accounts in May 2008 with a clean bill of health when eight months later it required a €3.5 billion bailout from the State.

Mr McDonnell said that under accounting standards, the ‘going concern’

concept must be applied unless a company was in liquidation or was expected to be placed into liquidation. He added that “no-one had expected” the collapse of Lehman Brothers in the UK in September 2008 or anticipated the impact it would have on global financial markets.

PwC has been sole auditor to Bank of Ireland since 1990 and will remain in position until 2020 when the bank will be required to rotate its auditor.

Mr Murphy said Bank of Ireland was one of its three biggest clients and its largest financial services one. The firm earned fees of €66 million - from audit work and other services - from the bank in the key years leading up to and after the crash.

It was also the statutory auditor for Bank of Scotland (Ireland) for the year ended December 2009 and for AIB for the year ended December 2001.

Mr McDonnell told the committee that PwC is the only auditor in Ireland with a dedicated banking practice as opposed to a broader financial services one. He said about 200 PwC staff would work on the Bank of Ireland audit each year, of which 25 per cent would be “senior management”.

PwC provided the committee with more than 5,300 pages in advance of its appearance today.