Major changes are coming to Israel's auditing system for the banks, following an IMF critique, due in its final report next month. The report says that there is almost a monopoly in bank auditors and a lack of an alternative pair of eyes.
The draft report on Israel's financial system, signed in November 2011, was sent to the system's three regulators: Supervisor of Banks David Zaken, Israel Securities Authority chairman Shmuel Hauser, and Supervisor of Capital Markets, Insurance and Savings Prof. Oded Sarig. "Globes" obtained a copy of the draft report.
The report devotes a chapter to the accounting firms that audit the banks. In it, the IMF slams the sector, saying that there is a near monopoly by a single firm. The IMF does not name the firm, but it is KPMG Israel Somekh Chaikin, headed by Gad Somekh. The firm audits four of Israel's big five banks. Mizrahi Tefahot Bank (TASE:MZTF) of the big five banks and Bank of Jerusalem (TASE: JBNK) of the other major banks are the only banks it does not audit.
The IMF report is a hot potato for Zaken and Hauser. Israel's banks are public companies traded on the Tel Aviv Stock Exchange (TASE), and Gad Somekh has very close ties with business leaders and personal relations with many of them. Incoming Bank Leumi (TASE: LUMI) CEO Rakefet Russak-Aminoach once worked for years at Somekh Chaikin, rising to CEO before moving to the bank.
The IMF rejects the claims by the accounting firms and the Banking Supervision Department that the firm's internal turnover means that, every few years, different accountants handle a particular bank's reports. The IMF also criticizes what it calls the prevailing self-regulation on the banks' books and the lack of proper public oversight.
The IMF does not consider the Bank of Israel's Proper Banking Procedure 302, the guidelines for auditors, as an adequate response to the current situation, which has lasted for many years. The guidelines state that an accounting firm's partners should be rotated every five years, and that a bank's board of directors should discuss, at least once every three years, or at the end of the term of the auditor, whichever comes later, whether the auditor should be rotated.
The Banking Supervision Department is discussing the IMF's recommendations. So far as is known, some Bank of Israel officials assert that it is impossible to order a mandatory rotation of auditors, and that no regulator in the EU or US requires the rotation of firms in law or regulations.
The Banking Supervision Department and the Securities Authority have not yet responded to the report.
Published by Globes [online], Israel business news - www.globes-online.com - on February 27, 2012
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