The auditors were wrong: worse they were negligently wrong

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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.