Mr. Paul Dobey:

Thank you, Chairman. And thank you for the opportunity to give evidence to assist the committee in its very important work. I am here specifically in view of my role as lead partner on the AIB audit from 2005 to 2008. I'll make some high level comments on the lines of inquiry dealt with in detail in my witness statement. Specifically, I will explain why it is KPMG's view that the AIB financial statements were prepared in accordance with IFRS and Irish law.

KPMG audited AIB in accordance with our statutory duty and the auditing rules. The AIB accounts gave a true and fair view and the accounting rules and related laws were not a contributing factors to the banking crisis in Ireland. Notwithstanding this, there are important lessons to be learned for the accounting profession from the crisis.

AIB was a large and complex organisation with over 25,000 employees in 2008 operating in Ireland, the UK, Poland and the US. AIB had a very experienced board of directors, and an audit committee drawn from a wide range of disciplines. The board oversaw the implementation of the strategy. The audit committee oversaw the internal control and financial reporting of the bank. The AIB accounts are very complex and expertise was required to make sure the transactions, balances and disclosures in these accounts were complete and the accounting was in accordance with IFRS.

The KPMG audit team, which comprised approximately 20 partners and over 200 managers and staff, had the expertise to deal with these matters. The team applied the best practice auditing and accounting standards to the bank's published accounts. A quality review partner for KPMG UK and an SEC reviewing partner from our US firm was also involved in the AIB audit, bringing a further international perspective.

As Mr. O' Rourke has outlined, AIB was required by EU and Irish law to comply with the IFRS accounting rules. Similarly, KPMG was required to carry out its statutory duties as auditors in accordance with Irish law and the relevant auditing rules which were international standards on auditing. The AIB team took all the necessary steps to form an opinion that the AIB accounts gave a true and fair view.

The financial statements set out AIB's exposure to each sector, including the property and construction lending. KPMG is satisfied that the financial statements appropriately disclosed the banks property related lending exposures. AIB was aware of the risks arising from these business strategies, but like other financial institutions, did not anticipate the scale of the adverse circumstances which would give rise to unprecedented loses.

AIB had an extensive risk infrastructure and semi-annual risk reports were presented to the AIB board by the chief risk officer. These reports dealt with the top ten risks facing AIB, including credit risk, operational risk, market risk and liquidity risk. The risk relating to credit and liquidity featured with increasing prominence in these reports in the period from 2005 to 2008. As Mr. O'Rourke has mentioned, there is a common misunderstanding in relation to the role that an auditor plays regarding the strategy and risk appetite. For KPMG to have sought to determine AIB's business strategies would have been beyond our role and expertise as auditors, and would undermine our ability to give an independent auditor's report on the financial statements of our audit clients.

What KPMG did do, was to identify and report the risks to the AIB audit committee in the context of our audit work in order to ensure that the financial reporting implications were properly reflected in the financial statements. Our consideration of these risks, and the audit findings on other communications with the AIB audit committee, were circulated to the Financial Regulator at the end of each audit.

Turning, if I may, to the integrity of financial reporting. The most relevant standard for loan loss provisioning was IAS 39 which required the use of an incurred loss model. This model has been criticised because, in order to avoid smoothing of profits which was and is considered undesirable, it did not allow banks to create or hold general provisions in the good years to offset problems in the bad years. It is the view of KPMG that the operation of IAS 39 was not a contributing factor to the issues which AIB faced in 2008. I am not saying that IAS 39 was perfect, we have learned from the crisis that it needs to be changed and Mr. O'Rourke has outlined some of the steps being taken in this regard. The major shortcoming of IAS 39 was that it delayed the recognition of the loan loss provisions when the downturn came in 2008.

It was always acknowledged that IAS 39 was pro-cyclical and would give rise to significant additional provisions in a downturn. The scale of these additional provisions would reflect the scale of the downturn as it occurred. When the downturn came in 2008, AIB was not permitted by IAS 39 to make impairment provisions for all of the losses it was forecasting for subsequent years. It was for this reason that AIB disclosed to the market in its investor presentation in February 2009 that it expected to book further losses of between €4.6 billion, base case, and €6.7 billion, stress case, in 2009 and 2010 as the Irish economy further contracted and property prices further declined. These estimates were based on models and assumed a contraction of the economy in 2009 of between 5.5% and 7% and a peak-to-trough decline in property values of between 20% to 50%, excluding land, and 30% to 80% for land. It is now known that the economy contracted by over 10% in 2009 and certain categories of property such as land became almost worthless. As a result, the actual losses recorded by AIB in 2009 and 2010 were much greater than the forecasts. Finally on this issue, I would add that financial regulators can require banks to hold additional capital to absorb losses that could arise in a downturn. This was done in some jurisdictions such as Spain and Canada. Regulators may also do this in the downturn to reinforce confidence, and that was done in Ireland in 2011.

Chairman, I'd just like to make a few comments on the liquidity and solvency of AIB in 2007 and 2008. At each year end, our audit team was required to consider whether the going concern basis of AIB's financial statements was appropriate. In performing the 2007 year-end audit in early 2008, we were concerned about the effect of worsening financial markets on the liquidity and funding position of the bank. AIB prepared a detailed going concern paper in early 2008, and based on this and AIB's liquidity plans, KPMG was satisfied with the going concern basis. One year later, when it came to our 2008 year-end audit, our audit team had very significant concerns in relation to both liquidity and solvency of the bank. These concerns arose for a number of, from a number of factors. There was great uncertainty in Ireland and the economy was contracting rapidly, AIB was forecasting losses of up to €8.5 billion between 2008 and 2010. It had agreed to take €3.5 billion from the Government in preference shares. The position in relation to the availability of emergency liquidity access from the Central Bank and the euro system was not at all clear. In early 2009, we informed AIB that we needed to take additional steps on the going concern issue and engage with the regulator, the Central Bank and the Government as part of our 2008 year-end audit completion process. Confirmation and clarification was sought of our understanding of the public statements made by the Minister for Finance in relation to the Government's support for AIB. This was provided to the AIB audit team at meetings held in February 2009 with the head of banking supervision of the Financial Regulator, with the deputy governor of the Central Bank of Ireland and the assistant secretary general of the Department of Finance.

The onset of the global financial crisis was a shock to all of us. The worldwide financial system broke down and regulators and Governments were forced to take unprecedented steps in response. In my role as lead audit partner in AIB, I experienced some of these challenges first hand. From mid-2008, the KPMG team knew that the 2008 audit of AIB was going to be the most difficult we had ever done. Based on the Irish and international environment at the time, there were factors at play on this audit that were without precedent. In the face of these challenging circumstances, our audit team and AIB, in late 2008 and early 2009, worked tirelessly to deal with those issues. We brought all of the global expertise and local expertise of KPMG to bring to bear, and all of our personal energies to bear, in completing and ensuring that the audit was in compliance with the required standards, both for the bank and for us.

Chairman, to conclude my opening statements I would reiterate that the AIB financial statements in each of the years, relevant years, was prepared in accordance with IFRS and Irish law. KPMG audited AIB in accordance with our statutory duty and auditing rules. The directors of AIB had a legal obligation to prepare accounts that gave a true and fair view and fulfilled this obligation. We formed an audit opinion that AIB's accounts gave a true and fair view. The accounting rules and the related laws did not, in our view, contribute to the banking crisis in Ireland. However, as I said at the outset, there are important lessons to be learned by the accounting profession from the crisis and I would be happy to give my views on some of these to the committee if it considers it helpful in its questioning. Thank you.