It is rare for me to write on audit issues these days. They are far better parsed by Francine McKenna. This one cannot pass. As many in the profession get ready to shut down for the holiday season, a piece in the FT about the immediate post Lehman situation on bank audits caught my eye, courtesy of a Tweet from Francine McKenna.
[blackbirdpie url="http://twitter.com/#!/retheauditors/status/17021196755271681"]
The article says (paywall in operation):
Fresh details have emerged of secret talks between bank auditors and the government during the financial crisis, as regulators prepare changes to the auditor’s role to lessen the risk of similar chaos.
Note the word secret. So what was so secret that ‘we’ were not supposed to know:
They show how the Big Four audit firms – Deloitte, Ernst & Young, KPMG and PwC – wrote to Alistair Darling, then chancellor, in November 2008 for advice as to whether they could describe UK banks as going concerns. Their letter was written two months after the collapse of Lehman Brothers and tried to gauge the extent to which the government would continue to prop up financial institutions…
…some committee members had been shocked by the implication that banks had been treated as going concerns not on their own merits but because of an informal nod that bail-out funds would be available.
[my emphasis added.]
It’s a very long time since I undertook audit work in any depth but unless things have changed there’s a few things going on here that require explanation.
- Have the Big Four attempted to abdicate their responsibilities to the shareholders of the banks by seeking to obtain an understanding of likely government action? The answer appears to be a qualified yes. In my day it was standard practice to take up third party confirmation where it appeared that third party support was needed in order to keep a business afloat. The qualification went something like: ‘On the basis of our examination of the assets and liabilities, XYZ may not be a going concern. We have received assurances from [named third parties] who have provided financial undertakings to maintain the capital base of XYZ.’ There are plenty of variations on this broad theme but that’s the essence. We would have been be remiss in our responsibilities to clients if we had NOT sought assurance and crafted some sort of similar wording. In my day, banks and other third parties (like large suppliers) relied on the audit report in order to understand how companies might stay afloat. I’m sure the irony of this situation is not lost on those auditors in similar situations today.
- The FT describes the exchanges between the Big 4 as ‘secret talks.’ Why? The Big 4 are said to have been afraid that qualification might lead to collapse. If that’s true then surely they already knew or had grave concerns about their ability to sign off a clean report and the viability of the banks they were auditing. It doesn’t matter which way you slice and dice this argument you come up with the same answer: ass covering.
- Did the Big 4 discuss the issue in terms of a veiled threat? In other words did they turn to government and say something like: ‘We think the banks are in trouble to the extent we need assurance from YOU that government will bail them out. If not then [name your bank here] could go out of business.’ That’s not stated though commenters seem appalled that the Big 4 might operate this way. As they should. But then given the UK government’s proclivity for spending tax payers money to shore up pretty much any bank, it doesn’t take a genius to work out what government’s response was likely to be.
Francine, myself and others have for years been saying that audit is broken. As I said above, Francine has been doing a tremendous job exposing the issues, far better than I. But this is one thing that any self respecting professional must look at and wonder. What the hell is going on with our profession? How many more desperate measures will we see the Big 4 take before either litigation or firm government action is taken to sort out what is rapidly becoming an anachronism that feather beds a few to the detriment of the many.
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