Accountants draft standards to audit Libor submissions

Tue Sep 4, 2012 11:07am EDT
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By Huw Jones

LONDON (Reuters) - An international accounting body is drawing up guidelines on conducting external audits of banks' interest rate estimates, to restore confidence in the Libor benchmark after the revelation that bankers rigged figures.

Such audits were proposed four years ago by the United States and could become a requirement under regulations being considered in Britain after a scandal over the manipulation of the London Interbank Offered Rate caused havoc this year.

British bank Barclays (BARC.L: Quote) was fined a record $450 million after it admitted manipulating its submissions used to calculate Libor, the basis for contracts worth hundreds of trillions of dollars across the global financial system.

Regulators believe the rate rigging went far beyond Barclays and are investigating most of the world's largest banks. Banks could also face huge potential litigation risks from parties that were hurt by illegal rate rigging.

Libor is calculated from banks' own estimates of their borrowing costs, without outside verification. Finding a way to reassure markets in future that the rates are sound is seen as a vital step in cleaning up the mess.

Under its settlement with regulators, Barclays will be required to hire auditors to verify its Libor submissions for four years, beginning in June 2013. The Royal Bank of Scotland, (RBS.L: Quote), is also widely believed to be close to a settlement, probably also requiring it accept audits.

The ICAEW, a global accounting body based in London, has started work on international guidance for such audits, which it hopes to have in place in time for the first Barclays audit next year, ICAEW head of financial services Iain Coke said.

Coke said he believes other banks will probably either face a requirement in the future to have an external audit, or will introduce audits voluntarily to reassure markets and supervisors.   Continued...