Barclays and PwC poised to part

BARCLAYS Bank is on the brink of parting company with its auditor PricewaterhouseCoopers after a relationship lasting about 100 years. The expected separation follows an acrimonious dispute that involves the Accounting Standards Board, leading British banks and top accountancy firms.

The ASB stands accused of eccentricity at best and maladministration at worst by such names as Deloitte & Touche, Ernst & Young, Lloyds TSB and Royal Bank of Scotland.

At the centre of the row is an obscure type of security known as reserve capital instruments (RCIs). British banks have raised £4 billion using these, which have been classified as virtual shares in their accounts. They have not had any impact on annual profits and have enjoyed the top tier one capital status.

The ASB has just decided to reclassify RCIs as liabilities, which means they will count against profits.

The change will probably have the greatest impact on Barclays, led by chief executive Matthew Barrett, where it would slice about £150 million from the bottom line. A host of other large banks will be affected.

The ASB's decision follows a meeting of its subsidiary the Urgent Issues Task Force which voted by a narrow margin to alter the status of RCIs.

PwC's senior accounting technical partner, Peter Holgate, sits on the UITF.

PwC signed off Barclays' accounts last year in which RCIs were classified as quasiequity. The firm then fully accepted this classification. Ernst & Young has also accepted it, as have KPMG and Deloitte & Touche. Banks that have issued RCIs include Lloyds, Bank of Scotland (now part of HBOS), Abbey National and Northern Rock.

Neither the issuing banks nor the major auditors understand why the ASB has acted in this way. The Urgent Issues Task Force is supposed to interpret accounting policy, yet in this case appears to have directed it.

'We feel uncomfortable with what the ASB and the UITF have done,' said one accountancy firm. 'The ASB has changed regulation through the back door,' said another.

PwC would make no comment about its role in the reclassification of RCIs. However, sources within Barclays are known to be furious about the way they perceive the accountancy firm has behaved.

In 2000, PwC received £4.6 million in auditing fees and £16.5 million for other accounting and regulatory work. It also audits Lloyds TSB's accounts.