Mr. John McDonnell:

Thank you Chairman, thank you Ronan. Good morning Chairman and members of the committee of inquiry. Like Ronan, I welcome the opportunity on behalf of PwC to meet with the committee this morning and to assist you in your work. I am here today in my capacity as lead audit partner on Bank of Ireland from 2010 to date. Whilst not directly involved in the Bank of Ireland audits from 2001 to 2009, I am familiar with the audit procedures adopted by PwC in the audits of banks in the period in question and like Ronan, I will do my best to answer the committee's questions.

Chairman, I submitted my written statement on 6 May 2015. I'm happy to take the statement as read but I would like to make a few introductory remarks on two aspects: (a) the role of audit, what it is and what it is not, and (b), the impact of prevailing accounting standards in recognising risks. So moving to the role of the audit, there is and has been a lot of discussion about the role of an audit, including what it is, what people think it is and what they might like it to be. So I think it's important at the outset to set out what the role of an audit is, where it begins and ends, and what it is not. In doing this I'm drawing from the requirements of company law in Ireland and auditing standards. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework, that's IFRS in the case of Irish banks for 2005. Although an auditor's opinion enhances the credibility of financial statements, the user cannot assume that the audit opinion is an assurance as to the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity.

In other words, the primary purpose of an audit is to provide independent assurance to the shareholders that the directors have prepared the financial statements properly in accordance with the rules of IFRS. An audit does not exist to provide comment or opinion on a company's business model. That is not the purpose of an audit, nor is there any means for an auditor to express such views in the audit opinion. The prescribed format and somewhat binary nature of an audit opinion does not allow for commentary on an entity's business model. In fact, the content and set of financial ... the content of a set of financial statements is prescribed by the accounting and regulatory framework. There is nothing in this framework which allows an auditor an avenue to express a view in the financial statements on a company's business model. In the context of regulatory returns, there is no requirement for auditors to audit or review, and nor did we audit or review, any regulatory turn of the bank, be it solvency, liquidity or otherwise.

I move on to the second item - impact of prevailing accounting standards and recognising risks. The objective of financial statements is to provide information about the financial position, the performance and changes in financial position of an entity. Accounting standards set the rules for the preparation of financial statements and, as I said, IFRS are the accounting standards that applied to listed entities in Ireland, including the banks, from 2005 or March 2006 in the context of Bank of Ireland.

Financial statements portray the effects of past transactions or events. They're not intended to provide all the information that users need to make economic decisions. The aim of accounting standards is to faithfully represent past transactions or events in financial statements. Matters such as stability, capital adequacy and future prospects are outside the remit of accounting standards. The requirement to focus on past transactions and events means that IFRS prohibits the recognition of future events. By way of example:

1) There is a general rule in IAS 39, which deals with accounting for financial instruments and impairment, that losses expected as a result of future events, no matter how likely, are not recognised as impairment on loans and receivables - this is called the incurred loss approach.

By way of example, the date a borrower became unemployed would be an impairment trigger in many retail books. What I mean by an impairment trigger is the first point at which impairment is allowed to be recognised. But banks cannot take into account an ... expected increase in unemployment in the following year, say 2016, in their year-end, say 2015, assessment of impairment, no matter how likely, because this unemployment has not yet happened. There is a second example. There's a general rule in IAS 37 and that deals with provisions contingent liabilities and contingent assets, that provisions cannot be recognised for future operating losses. And my third example deals with events after the balance sheet period, IAS 10, and this standard does not allow an entity to recognise the financial impact of events that arise after the balance sheet date concerning conditions which did not exist at the balance sheet date.

IFRS set the rules which had to be applied in financial statements of Irish banks during the financial crisis. The financial crisis tested some of these rules and found some of them wanting. Changes have now been made but, nonetheless, they were the prevailing rules. Therefore, they were required to be applied. The accounting rules of the time did not allow for the recognition of future events or risks. There have been changes since the crisis to accounting auditing and corporate governance standards. We've engaged heavily in the process and welcome the opportunity to engage further with the various stakeholders in the overall debate on improving financial reporting. Thank you, Chairman.