Mr. Terence O'Rourke:

Thank you, Chairman, and good afternoon, members of the joint committee. As managing partner of KPMG from 2006 to 2013, I welcome this opportunity of discussing with you the role of KMPG as auditors in the period you're looking at. I have provided a written ... a detailed written witness statement in response to the themes identified by the committee. These themes include the integrity of financial reporting and the impact of prevailing standards in recognising risks. In this brief opening oral statement I will deal with a number of matters in that witness statement, specifically the role of an audit, the purpose of financial reporting and the basis of the accounting standards used in financial reporting, the going concern issue when preparing accounts, and, finally, I'll speak briefly about changes in these areas since 2008, which might have contributed to the avoidance of the crisis like the one we've gone through.

Personally, I've spent all my professional life in KPMG since joining in 1975. I was a partner from May 1988 to April 2013. I was head of audit from May 2004 to December 2006, which also involved participation in a number of financial institution audits, including a role on the AIB audit. I held the position of managing partner from December 2006 to April 2013. I've not held an active role within KPMG since retiring as managing partner in April 2013 but the firm has provided support and assistance to me in preparing for today, and I confirm that, in particular, I have consulted with, and received input from, Mr. Paul Dobey, who's also here today, and who was the lead partner on the AIB audit.

I'd, firstly, like to discuss the purpose of financial statements and the role of the external auditor, as there can be misunderstandings in relation to what an audit actually is and what certain commentators think or would like it to be, particularly in relation to the strategy and risk appetite of an entity. The management of an entity is responsible for the preparation of its financial statements. The overall responsibility for financial statements rests with the board. The role of the audit is to provide a report to shareholders on those financial statements. In reporting on whether the accounts present a true and fair view, auditors do an extensive amount of work in checking and verifying the systems producing the accounts as well as the financial information that is presented. Those who prepare the accounts and the auditors who audit the statements must comply with an extensive framework of technical rules known as financial reporting standards and auditing standards. These standards are set by independent international bodies, apply currently in some 280 jurisdictions, and are underpinned by national and by EU regulation. The objective of having clearly defined financial reporting and auditing frameworks, standards and rules is to provide uniformity, consistency and transparency to the users of financial statements. Without such rules, it would be very difficult to ensure the level playing field ... to ensure a level playing field in comparing the results and financial positions of companies across the world and the quality of audit reports on the accounts of those companies. As far as KPMG is concerned, our work was carried out in accordance with our quality control framework for performing high quality audits and we believe that the accounts of the financial institutions we audited were prepared in compliance with the relevant international standards and that KPMG audited those accounts in accordance with their statutory duty and the auditing rules.

In addition, I'd make the following two points. Financial statements are a point-in-time record of financial information of an entity, including its results. By definition, financial statements are a record of past financial performance and do not seek to forecast or predict future performance. An audit opinion, which deals with whether accounts give a true and fair view in accordance with IFRS, does not assure, for example, the long-term success or sustainability of the business model of an entity nor the effectiveness with which management has conducted its affairs.

This responsibility rests with the management and boards of the entity.

I would like briefly to discuss the accounting rules which make up the financial reporting framework. From 2005 onwards, the rules that applied to Irish financial institutions was the set of international financial reporting standards known by the acronym IFRS. The IFRS was developed by the International Accounting Standards Board, IASB, through a formal system of due process and broad international consultation involving the accounting profession, investors, governments, regulators and other interested parties. IFRS seeks to ensure that financial statements provide consistent information about the financial position, past performance and cash flows of an entity that is useful to those making economic decisions. The adoption of IFRS in 2002 across the EU was endorsed with an overwhelming majority vote in the European Parliament and IFRS has force of law in Ireland by way of statutory instrument.

The auditing framework applicable to the audits of the financial statements of Irish institutions was the auditing and assurance pronouncement issued by the UK's Financial Reporting Council, a body independent of the auditing profession. The use of this framework is part of the statutory licensing regime for auditors in Ireland. The directors of our financial institutions which audit clients thus had responsibility for the preparation of financial statements in accordance with IFRS from 2005 onwards. It was, and remains, KPMG’s view that the financial reporting of the relevant institutions was conducted in accordance with the requirements of IFRS.

The KPMG teams performing bank audits during the relevant period were experienced in the application of auditing standards in IFRS and had an in-depth understanding of the banking sector. These teams monitored emerging best practice through their connection with fellow KPMG firms in Europe and the US. These audit teams had particularly close ties with our UK firm and were, therefore, familiar with best practice in the UK market and how the accounting and auditing standards were being applied there.

One of the most significant accounting standards impacting the Irish institutions was IAS 39, and its requirements regarding the recognition of provisions for loan losses. My colleague, Paul Dobey, will deal with the issues arising from the fact that IAS 39 is based on an incurred rather than an expected loss model.

I said earlier that accounts were a point in time, and that the numbers that auditors reported on were historic and thus backward looking. There is one matter however that falls to be considered in preparing a set of accounts that is forward looking, and that is the going concern basis of preparation. This means that every year, when preparing the annual accounts, the directors of the company or a bank are required to consider whether they believe the entity will be in operational existence for at least one further year. Typically directors make that assessment based on forecasts, budgets and an evaluation of the risks that the business faces. Auditors are then required to assess whether directors' judgments and conclusions are reasonable and whether it is appropriate for the accounts to be prepared on the going concern basis.

Up to and including 2006 year end, the assessment of our audit teams, based on the economic assessments and forecasts of respected bodies, was that the going concern basis of preparation of the banks’ financial statements was appropriate. The additional steps taken by our audit teams in respect of the subsequent years, in light of the unprecedented economic conditions, will be dealt with by Mr. Dobey.

KPMG is very conscious of and acknowledges the significant adverse impact which the banking crisis has had on our society, our people and our clients. We recognise the important work of the joint committee in looking at the systemic issues involved in the crisis and more important, in identifying steps that might be taken to avoid a repeat. KPMG is committed to and is assisting in this process, in particular in relation to further developing audit and corporate and financial reporting standards to reflect the lessons learned from the crisis.

And so the final issue I want to address are the changes in financial and reporting standards since 2008. In light of the global financial crisis the International Accounting Standards Board, the IASB, completed a review of what changes might need to be made to accounting standards. This review considered the lessons learned across more than 100 jurisdictions in which the IFRS had applied by 2008. The IASB's post-crisis review confirmed the important role of financial reporting in providing unbiased, transparent and relevant information. However, it also recognised that only so much can be expected of accounting. The IASB noted, and I cite the IASB chairman who said, that accounting standards could contribute to financial stability, but they should not be expected to provide a veneer of stability by ignoring volatility when it is really there.

The most important conclusion of the review, however, was probably that there should be a more forward looking impairment model for loan loss provisions. It is only recently, after much debate and lots of transatlantic dialogue, that the IASB has agreed a new revised loan loss provisioning model that specified an expected rather than incurred loss model for loan loss provisioning. This standard should permit the earlier recognition of loan losses. As a result, it will be possible to recognise expected losses in the downturn when there is evidence of expected impairment.

Apart from the issue of how losses are recognised, a more wide ranging debate is also under way globally regarding how corporate reporting can be improved. One body, the International Integrated Reporting Counsel, a global coalition of regulators, investors, companies, standards setters and the accounting profession, is examining ways in which to better set out in an integrated report what is happening in a business in more than just financial terms. Such an integrated report would be a concise communication about how an organisational strategy, governance, performance and prospects in the context of an external environment, is intended to lead to the creation of value in the short, medium and long term.

To conclude, I have sought to give the committee an overview of the context of which financial statements are prepared and audited, the legal framework within which that work is done and some developments in standards since the crisis. Mr. Dobey will address now, in more detail, how these principles and standards were applied now in the case of AIB. Thank you.