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* Watchdog review to focus on loan losses, IT controls
* Report to be published end of 2014
By Huw Jones
LONDON, Dec 12 (Reuters) - Britain's accounting watchdogwill begin reviewing bookkeeping at banks in the second quarterof 2014 to find out why the lessons of the financial crisis arebeing applied so slowly.
Several banks in Britain had to be shored up by taxpayersduring the 2007-09 crisis, prompting policymakers to ask whyauditors gave the lenders a clean bill of health beforehand.
The Financial Reporting Council said its review will startin the second quarter of next year, as soon as this year'sannual reports have been completed.
It will look at what action top accounting firms took toaddress specific issues the watchdog already raised withindividual accounting firms earlier this year regarding bankaudits.
A key issue is checking how banks set aside enough capitalto cover souring loans after the crisis revealed some lenderswere woefully undercapitalised when losses mounted.
The FRC will publish its report by the end of 2014.
"The FRC is concerned that the pace of improvements in thequality of auditing of banks and building societies has not beensufficient," the watchdog said in a statement on Thursday.
Britain's biggest banks, such as HSBC, RBS,Lloyds and Barclays are all audited by theso-called Big Four accounting firms: KPMG, Deloitte, EY and PwC.
The FRC said it has increased its monitoring of bank andbuilding society audits, but the findings have shown they arebelow the average of all audits inspected.
The latest monitoring showed problems with the adequacy oftesting loan loss provisions and general IT controls.
"Early indications from the latest cycle of auditinspections suggest that it is unlikely that the FRC will beable to report that significant progress has been achieved," thewatchdog added.
FRC Chairman Baroness Hogg said the watchdog wants to see a"genuine step change" in the quality of bank and buildingsociety auditing.
The FRC said it will inspect banks and building societiesand was announcing the review now so that auditors are aware ofits expectations in advance of the 2014 audit season.
The watchdog will meet chairs of audit committees at banksand building societies to discuss how they can reinforce thequality of financial reporting.
The FRC is separately scrutinising financial reports fromCo-operative Bank, including disclosures on loanimpairments.
