Thank you very much. Good afternoon. My name is Paul Smith. I joined Ernst and Young in 1973, specialising in tax, and became a partner in 1982. I was based in the firm's Irish tax desk in New York between 1994 and 1996, before returning to Ireland. I was managing partner from 2000 until 2009, when I retired from the firm.
I hope my remarks today can assist the committee with its inquiry. I will briefly outline my role and responsibilities as managing partner before and during the banking crisis. I will explain how we undertook our audits of EBS, the role auditors played generally, and my reflections on lessons learned from the banking crisis.
As I outline in my written evidence, I was responsible for the strategy, management and leadership of the firm, working with my colleagues in the firm's management committee. I was also responsible for dealing with specific issues referred to me as managing partner, from time to time. An important part of my role was to represent the partnership externally, and within the EY network internationally.
EY Ireland has several divisions and practice areas, covering various professional disciplines and sectors. One of these is our financial services group, and the partners in this group carried out the audits of banks and other financial institutions. The partners and staff of this group were specialists, highly experienced and conferred regularly. They had available to them the depth of resources and expertise, both in Ireland and internationally, that were required to operate to the highest professional standards when providing services to large and complex financial institutions. The partner in charge of the financial services group kept me and my colleagues in the management committee up to date on significant developments in the sector and on matters relating to individual clients, where necessary.
While I was not involved in the planning and execution of individual audits, I understood the fundamental principles underpinning the firm's approach. Significant issues would be referred to me if they required my attention. The management committee and I engaged particularly closely with the financial services group as the banking crisis unfolded. We knew that our colleagues were responding to the challenging environment, increasing the extent of their audit work, and that significant additional resources were allocated.
While I was aware of the increasing challenges facing Irish banks, no issues were referred to me as managing partner at any time with respect to our audit of EBS. Nor, as far as I am aware, did we ever receive any complaint from EBS. I appreciate that the committee may have questions about our audit. As I am not an auditor, and as no issues were referred to me with respect to the audits, I have proposed that my colleague, Dargan Fitzgerald, should appear alongside me, and the committee has invited him to do so. He was the audit partner of EBS for 2007 and 2008. Dargan is EY's audit compliance principal, and an audit partner specialising in the audit of financial institutions, and is better placed to answer detailed questions on the EBS audits, and on audit procedure generally, than I am. I have read the evidence Dargan has supplied to the committee, and I agree with it to the extent of my own expertise.
I have also discussed this opening statement with Dargan and my former colleagues in EY Ireland.
While I don't claim to be an auditing expert or to have reviewed the EBS audit files, I am confident that the EY audit team properly performed its responsibilities as statutory auditors of the financial statements of EBS. I believe that EY undertook its duties as statutory auditor professionally and diligently, in accordance with international auditing standards. The audit opinion on the EBS financial statements reflected the applicable statutory requirements. In accordance with normal practice, the audit team also reported in greater detail to the audit committee and to the board of EBS, drawing their attention to any management and control issues identified during the course of the audit. Finally, the audit team also communicated with the Financial Regulator as required.
Our audit reports offered all stakeholders reasonable assurance about the state of EBS at a particular point in time. In particular, the financial statements presented by the directors were true and fair. The presentation complied with accounting standards. It is worth noting that our audit opinions have not been subsequently challenged. EBS has not restated its accounts for 2007 or 2008. Statutory audits are not designed to provide advice on future business models, or commercial decision making. Neither is it the auditor's role to advise on risks to the business, particularly business risks, which are market wide and not confined to a single entity or job review. During ... dealing with these risks, it is the responsibility of the management, their advisers and regulators. It is inappropriate for auditors to advise on these questions. To do so would compromise their independence. It is fundamental that auditors do not audit their own advice.
But I do understand why people ask why auditors didn't warn the banks of the risks of their decisions. The first thing to say is that it is now clear that the combined risks were underestimated by all stakeholders at the crucial time, that is, the period leading up to the peak of the boom. Second, it is important to view this question in the light of the statutory role of an auditor and the parameters and limitations of that role. The focus of auditors was on the risk that previous years' financial statements had been materially misstated. Therefore, at the start of an audit, we're looking back at the decisions that have already been made and the income and expenditure of the company of the year that has passed. Third, it was the responsibility of each bank's board, under the supervision of the prudential regulator, to run its business and to determine its commercial strategy and its appetite for risk. If we had issues about a particular commercial strategy, then our role would be to ensure that those charged with the governance of the client were aware of those issues and that the impact of the financial statements at the year end was correctly reflected.
In terms of our role at the time, however, the auditor's primary function was to carry out a statutory audit of the company's financial statements and to express an independent opinion on them. I believe that the statutory audit does play an important role. It provides an independent, professional opinion, based on an audit conducted in accordance with international auditing standards. It records the auditor's opinion as to whether the financial statements conform to international accounting standards and whether they provide a true and fair view of the company's position and results over a particular period. Financial statements are inherently historic, reflecting the position up to the previous year end. Of necessity, decisions by a company and the regulator are based on more current, but non-audited information, such as the company's own management information, the books and records which the company is legally required to keep and the detailed returns supplied by the company to the Financial Regulator.
It is important for me to acknowledge that the banking crisis has had devastating consequences for individuals and families all over Ireland. The effects have been humbling for anyone involved in financial services and I understand the loss and the anger of people who have suffered. Everyone connected to the financial services industry at the time has reflected on their own role in the crisis and how the regulatory environment can be improved. It is important that this reflection happens and EY and the audit firms generally are no exception to that. As I have explained, auditors perform the role required of them but that is no cause for complacency. We believe that many users of financial statements generally understood the purpose and limitations of an audit but we accept that many observers expected more from the audit process than a statutory audit was actually designed to deliver.
Since the crisis, EY Ireland, our international colleagues and various authorities have considered how audit can be made more useful. Changes have been made in several areas and Dargan will refer to these in his opening statement. But more can be done. I'd like to use my remaining few minutes to suggest areas where some changes could be made in the future to improve the usefulness of audit. I understand that auditors are now better able to communicate to the regulator. This communication with the regulator, in my opinion, should be in both directions. Specifically, the regulator should be permitted and encouraged to exchange information with auditors. That is my first recommendation.
I am sure my colleagues will continue to support strengthening the role of audit committees and internal audit functions within companies. I understand that progress has been made on this point, but that it's a continual process, and Dargan can answer questions on that subject. And that is my second recommendation. My third and final recommendation is based on discussions I have had with former colleagues since being invited to appear before this committee. Insurance companies are required to provide detailed information to regulators in their regulatory returns and to ask an external auditor to provide an opinion on those returns. It seems logical to me that banks and other financial institutions could be subject to the same requirements. Their returns could be independently audited as well. That would improve the transparency of the system and increase regulators' confidence in the information that financial institutions provide. It would also ensure ... it would also serve to ensure that auditors were aware of current trends in the Financial Regulator. That is my third recommendation.
So, to sum up, I believe that EY performed its statutory duties, in accordance with auditing standards, and carried out high quality audits on the EBS financial statements and that those financial statements provided transparency and reasonable assurance to investors, regulators and policy makers in respect of the company's financial performance during the period covered by the financial statements. I understand the distress and anger of people who have suffered as a result of the banking crisis and I've reflected on the causes of the crisis. And I've also commented on improvements since the crisis and suggested some further possible improvements. I welcome the opportunity to speak to the committee and I look forward to your questions.
