BUSINESS BRIEFING:EARLIER THIS month the Financial Reporting Council, which sets the accounting rules for Ireland and Britain, published something called International Standard on Auditing (UK and Ireland) 700 (revised October 2012).

It is never going to be a bestseller but it may turn out to be quite controversial as it is being interpreted in some quarters as an attempt to close off the main flaw in the argument for why Irish auditors cannot be held responsible – in the legal sense, anyway – for the debacle at the Irish banks.

It addresses the thorny subject of whether Irish company law trumps international accounting rules. On this seemingly arcane point hinges the issue of whether the auditors of the Irish banks dropped the ball in 2007 and 2008 by not flagging the massive holes appearing in the banks’ balance sheets.

The main plank of the audit firms’ defence in this regard has been “we were only obeying orders”, the orders on this occasion being the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board. (The Financial Reporting Council decides how these international rules apply in Ireland and Britain.)

Under the international accounting rules in force in 2007 and 2008, banks could only reflect a problem loan in their published financial statement if the loan was not performing. It did not matter what else they knew about the borrower or the wider economy. With hindsight this was a pretty stupid rule and explains why the Irish banks were given relatively clean bills of health right up to their collapse. It also explains – in part – why the government made the fatal misstep of guaranteeing the banking system in its entirety.

There are of course other factors, but the legal obligation to adhere to IFRS is at the heart of the profession’s explanation for why they got it so wrong. But, as has been written about extensively in this paper by Cormac Butler and others, there is a conflict between the international standards and basic Irish company law, which undermines the argument and potentially leaves auditors exposed.

As Butler has pointed out, company law requires auditors to certify that accounts give a “true and fair” view of the company’s position, including its expected losses. The implication is that, notwithstanding the international standards, the Irish banks’ auditors should have alerted shareholders – and everyone else – to the fact that the bad-debt position was potentially far worse.

The document published by the Financial Reporting Council purports to put the issue to bed and builds on a discussion paper released earlier this year. It appears to confirm that the obligation to give a true and fair view does trump the international standards under British law, but is rather ambiguous when it comes to Ireland, pointing out that “UK and Irish law differ but follow similar principles”.

To understand what this might mean you have to look at the original February discussion document, which said that under Irish company law giving a true and fair view and complying with IFRS are one and the same thing. The key reference in the February document is the following: “In the Republic of Ireland . . . section 193(4C) of the Irish Companies Act 1990 requires the auditor to express an opinion as to whether the financial statements ‘give a true and fair view in accordance with the applicable financial reporting framework’.” (My italics.)

This is seen as giving the Irish bank auditors an out for having signed off on financial statements that were so misleading. It is something of a fig leaf, but failing a legal challenge to clarify the matter it is sufficient to allow everyone to carry on as before.

It is complicated stuff and may all sound a bit like arguments over how many angels can dance on the head of a pin, but there are important questions raised by all of this.

The first is whether the accountancy establishment here and in the UK is – for want of a better word – deliberately drawing a veil over a massive screw-up by the big Irish audit practices, all of whom are member firms of the “big four” that dominate the profession globally: PricewaterhouseCoopers; KPMG; Deloitte; and Ernst & Young.

You also have to wonder if they are anxious to avoid any further scrutiny of the way the international standards that the Irish auditors implemented so blindly were drawn up in the first place. They are without a doubt very bank friendly, and encouraged the sort of risky lending that generated huge payouts for bankers but ultimately led to catastrophe.

That in turn speaks to the notion of a profession that lost its way and, rather than provide a check on rule-bending in financial services, became a willing and well-paid accomplice.