It's depressing to note the ongoing incompetence of my own profession. As the Guardian reports:
Auditor PricewaterhouseCoopers admitted to years of mistakes relating to the failure of investment bank JP Morgan to ensure that billions of pounds of its clients' assets had been properly ring-fenced.
PwC is now expected to face a heavy fine over its role in the client asset scandal which could have wrought unnecessary mayhem had the bank collapsed at the height of the financial crisis in October 2008. At that point, JP Morgan's futures and options desk held $23bn (£14bn) of client money, largely belonging to hedge funds, which was not segregated from the bank's own funds.
This is basic stuff. It's not, as PWC implies, a small slip. It's an absolutely fundamental failure to audit. It's incompetence on a gross scale. And incredibly easy to spot.
But PWC did not do it.
So threee questions:
1) Why not?
2) Why are they allowed to continue in operation in that cae?
3) When will auditing be totally reformed?
The answer is, in all cases 'conflicts of interest' do in differing ways explain a) why it happened b) why it will continue to happen c) why reform is blocked.
And if ministers won't tackle this then you can be sure they won't tackle other deep problems in society either.
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Spot on Richard. I think ‘conflict of interest’ neatly connects all the big crises in this case: A ‘conflict of interest’ of the media being too close to the police and to government, a conflict of interest of auditors being too close to clients and the government, a conflict of interest of banks and finance being too close to government. In fact, let’s summarise these as the conflict of interest of big business being too close to government full stop – of money corrupting democracy.
As Cameron’s speech yesterday proved however, this government consistently falls at the first hurdle in ‘fixing’ any of the major issues (assuming they’re genuinely trying to in the first place, which may not be the case), through complete failure to correctly identify the cause(s).
Richard, I am pleased to see that you have drawn attention to this. I worked on the team investigating the Goldman Sachs/AIG issue and a sinilar scenario exists with JPM. There appears to be collusion between these companies, the regulators and the auditors – either that or they are totally negligent.
These companies and the Inter-Alpha banks – all under the same senior shareholding, are protected by a barrier which is difficult to penetrate, although efforts are being made to charge the head of one bank with fraud.
I am sure you wil also remember the role of E&Y in the Equitable Life debacle.
This is so naive – why are they allowed to continue in operation? Even an A level student will answer that for you.
Because we do not want a big 3, this will merely exacerbate the problem where companies have a choice of 4 global firms. The lessons of Andersen haven’t been learnt.
You close down a firm and, voila, the partners merely merge with another big firm and take there clients along.
You also need to wake up to the reality that there cannot be audit reform unless (a) the big firms agree to it and (b) the reform is on a global scale.
The first step is too seek the breakup of the Big 4 into a Big 8 (just like in the early 80s) and at the same time hammering firms who make these cock ups in the partners pockets.
So you agree with me then
Not naive at all, after all
But let’s stop the nonsens about consent
We can have a state audit commission – and should given that the market has failed
[…] I was quoted generously based on Stan’s extensive interview with me. I was also pelased sto hear so many other distinguished commenters including several university professors, John Carney from CNBC, and Richard Murphy in the UK. […]
has the market failed? i must confess to being puzzled to some of the comments of the report that was issued – they clearly have no idea how cut throat the audit market is. the firms are all undercutting each other on price which leads to lower quality audits. i assume you must have experienced this when you were at kpmg richard?
Well I was at kpmg a long time ago, much more recently in my own firm.
Oligopolists can compete and still represent market failure
And audit is only one dimension on which they compete