In reading Richard Murphy’s discussion about PWC’s conflicted position at Northern Rock, I could not help but think that this would not be allowed under SEC rules. US regulators have become so paranoid about conflicts that a situation where the incumbent audit firm is also advising on a core part of the business strategy would not be tolerated.
It’s also likely that non-executive director Rosemary Radcliffe would have to stand down. She was former chief economist with PWC. A similar situation recently arose at H&R Block which led to KPMG losing the audit tenure:
H&R Block decided to replace KPMG because two people recently named to H&R Block’s board of directors serve to monitor KPMG under its deferred prosecution agreement with the Department of Justice.
We may sometimes look over the Atlantic to the US and thank them for their rigor in applying rules designed to ensure a clear separation of duties and the imposition of enforced independence. After all, it is the UK’s relatively lax attitude in these matters that encourages non-UK companies to set up business in Britain. But as this case proves, there will always be situations where conflicts carry significant consequences.
No-one is suggesting that Northern rock’s strategy would have changed had PWC not advised on securitisation transactions and the raising of wholesale funding. Given the level of fees: £0.7 million (depending on the deals, that would equate to £70-100 million in deal flow), PWC was deeply involved in a core part of strategy execution while holding the audit appointment. That cannot be right.
What amazes me is that institutional investors did not pick any of this up. But then who reads accounts these days? Who among the investment advisory community bothered to pick through the accounts? More to the point, why must these things be left to investigative reporters and bloggers?
