An accountant has responded to my blog entitled 'Come on', in which I challenged the idea that accountants have a good credit crisis.
He said, initially quoting me,:
"RBS failed, Lloyds TSB failed. HBOS failed. Bradford & Bingley failed. Alliance & Leicester darned nearly failed. Not a single hint, not one, anywhere in their audit reports that these companies were not going concerns, that they did not have the necessary liquidity to survive."
Perhaps you might like to provide your evidence for this nonsense? You are entitled to your opinions, and I would fight for your right to express them, but I assume you have the intellect to understand that opinion is not the same as fact, and that your definition of failure in this case is unreasonable.
I am left scratching my head about how to respond to this absurd comment. HBOS was heading for bankruptcy when forced into a merger. Bradford and Bingley quite clearly failed due to a lack of liquidity. Alliance & Leicester only avoided failure for the same reason by accepting a takeover at a substantial discount. RBS and Lloyds TSB were both forced to accept government funds, in the first case accounting to more than 60% of their equity, to make good the holes in their balance sheet.
In every case there was a lack of liquidity: precisely the allegation I levied.
In no case did the auditors to draw attention to this.
I held an UK audit license for more than 15 years. In every audit that I signed off I required clear and unambiguous evidence that the company on whose accounts I was offering opinion was capable, with reasonable probability, of surviving the coming year as a going concern.
It is apparent that none of these banks had that capacity.
Prima facie that is an absolute failure of the audit function and of the audit firms that accepted the responsibility to report on these accounts.
This accountant denies that fact, saying my opinion is nonsense. I reiterate: I stated facts. I did not express an opinion. My definition of failure in this case is objective: the companies in question were not going concerns and the auditors therefore formed incorrect opinion upon their accounts. As a matter of fact the audit opinions were, therefore, wrong.
I state, this is not opinion, this is objectively correct. I accept, it is objectively correct after-the-fact, but when it is apparent that there was a systemic fault in the system then the limited number of auditors who were responsible for reporting on all the banks in question should have between them identified that systemic risk. That was part of their duty. Their failure to do so only compounds their negligence.
Any accountant who denies this shows either their lack of understanding of risk, or audits or systems or a wilful ability to deny the truth. I presume my commentator is honest. In that case let us assume that he, like most accountants, suffers from a lack of understanding of the real world of economics, finance and risk. We are left with little other choice.
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I might be mis-quoting here, but many years ago it was allowable to accept a margine of error of about 20% on the profit and loss account provided the money due was, or seemed to be, in excess of liabilities.
But I do agree that today, information in respect of viability is or seems to be not available at time of Audit. This is easily arranged.
There is a mobile ‘phone company with some £2 or £3 or even £4 Billion, of borrowing that is due for re-payment by the years 2010 and 2012. Because of the “Crunch” this has had to be postponed. Liquidity is a problem.
Then again, look at Enron.
Regards, ATFlynn, “Norfolk’s Mutineer”
gosh – I feel well honoured 😉 BTW I am an economist as well.
but your main thesis is still wrong. There certainly has been and continues to be a liquidity problem – but this does not support your failure thesis. If you are really suggesting that Lloyds TSB plc is not a going concern then you need your head examining.
Alastair
I have to differ. Aren’t you aware that it is a lack of liquidity that results in a company ceasing to be a going concern?
If Lloyds TSB did not enjoy that liquidity – and on this we appear to agree – and had no alternative way of accessing it – on which it appears the markets agree – then everything else you say is wrong.
At which point I think I have made my point and I suggest you stop digging an even bigger hole for yourself.
Richard
so are you suggesting that Lloyds TSB is about to fail? As you probably know well, the banks are facing liquidity problem resulting from the problems in the interbank market, and the pressure on regulatory ratios as a result of mark to market accounting and abnormal provisioning. However in spite of these extraordinary problems the banking sector seems to be surviving. Your case seems to be that most of the UK banks are not going concerns, and that their auditors failed to spot this. But if that is the case where are the failed banks? The only failure of note is Lehmans, despite the best efforts of doommongers like yourself. Instead of arguing with me perhaps you might like to apologise to the banks and their auditors.
Alastair
I come to the conclusion that you post your comments to waste my time because I cannot believe that you are as ill informed as they suggest.
of course I am not suggesting that Lloyds TSB is about to fail. It has as a matter of fact already failed. The only reason why it is able to continue to trade it is because of the support supplied to it both in the form of capital and by the provision of credit facilities to it by the government. perhaps you have not noticed these?
The auditors did not notice the fundamental flaw in the balance sheet of Lloyds TSB that would require the injection of this additional capital to provide it with the ability to trade. As such their audit report was negligently wrong. I stand by my case. there is absolutely no logic to yours and because I do believe that you are time wasting I’ve will be blocking your comments on this site for some time to come. I’m not wasting my time dealing with issues that you raise, and I do not think that you add value to the readers of this site.
Richard
Dear Richard,
I have had some of the same apologists for the Big 4 comment on my similar posts. But I agree with you wholeheartedly with regard to the “going concern” opinion. In fact, on of the commenters acknowledged that auditors rarely give these opinions any more since they know it is a death sentence and the end of their fees, since it usually triggers non-compliance with debt covenants and therefore makes bad liquidity issues acute. So I think the auditors are complicit in propping up these firms for their own self interest. There are legal theories of claim against them under these circumstances. I am exploring them in a future post. 😈
As far as other failures, on a global basis there are many. But let me remind your commenters of just three I have written much about, Fannie Mae, Freddie Mac, and AIG. That should get their lips flapping. For more examples, just look at those graded REED in this post.
http://www.retheauditors.com/2008/09/my-clients-are-failing-my-clients-are.html
Francine
Thanks
And for all those with doubts, I suggest you read Francine’s blog, day in, day out
Richard
[…] a bad candidate, I say this may possibly mean, they are better than their competition. I made a comment on Richard Murphy’s blog yesterday to respond to someone there that was flapping his lips, similarly apologizing for the Big 4’s […]
“I reiterate: I stated facts. I did not express an opinion. My definition of failure in this case is objective: the companies in question were not going concerns and the auditors therefore formed incorrect opinion upon their accounts. As a matter of fact the audit opinions were, therefore, wrong.”
This is factually inaccurate, and I’m afraid that it demonstrates your own lack of understanding. The failure of an entity within 12 months of issuance of financial statements that do not contain a going concern opinion is not evidence that the audit opinion was incorrect. You have failed to distinguish between information available at the time of the issuance of the financial statements and subsequent information. I will not argue the specifics of the cases you mention, because I am not familiar with them.
However, consider this set of circumstances. A widget-manufacturing company is wildly successful, profitable, etc. They get a clean audit opinion as of 12/31/07. In May 2008, a hurricane hits their plant, wipes out all operations, and a competitor snatches up all their business (customers couldn’t wait 6 months for our company to re-build it’s plant). Extending your logic, this company should have had a going concern opinion in their FS. Their inability to survive for a year proves that the 12/31/07 audit opinion was flawed.
Surely you would agree that claiming a error in the 12/31/07 opinion is ludicrous in this situation. As such, your position that “actual results prove the validity of the previous audit opinion” is flawed. Perhaps in your cases, there was an audit failure. If so, it is not for the reasons you state. You can only consider what the company and the auditors should reasonably have known at the time of the opinion, you can not expect them to know what will happen subsequent to that date.
Also, to censor comments that you disagree with is childish.
[…] quite a debate going on regarding concerns Francine McKenna and I have raised regarding the problems of banks failing after Big 4 auditors issued unqualified audit […]
[…] quite a debate going on regarding concerns Francine McKenna and I have raised regarding the problems of banks failing after Big 4 auditors issued unqualified audit […]