The best comment I have seen on the Financial Reporting Council's whitewash of KPMG's failure to spot that HBOS was bust in 2008 when Northern Rock had already gone under is in the FT, where it is noted that:
The[se firms of accountants]are so much bigger than the pack that no amount of merging would create a fifth international firm to match them. They are so far ahead of the competition that big companies hardly dare risk appointing an auditor outside the “Fab Four”.
Except that this week has exposed that KPMG is not fab at all. It gave HBOS a clean bill of health months before the bank had to be rescued and had to suffer an investigation by the Financial Reporting Council. Fortunately, this industry watchdog concluded that the firm's 2008 audit was just fine. Unfortunately, this conclusion was so far removed from common sense as to make the FRC the laughing stock of the City. As for PwC's audit of the collapsing Royal Bank of Scotland, the FRC didn't even feel it needed any special look.
Let's be blunt about this: the world has noticed the obvious lack of rigour at the FRC when it comes to the Big Four. And as The Times noted yesterday, the obvious question to ask is whether the fact that forty or more people with close links to these firms serve in some way or other at the FRC might have anything to do with this.
Impossible you might say. Objectivity cannot be bought, surely? Look at KPMG South Africa and the evidence is that, unfortunately, it can be. I am not saying that is happening here. I am saying an audit mentality requires openness to risk.
There is a need for action on these firms and, perhaps more importantly, their regulation. The time to do that is now, before the next crisis starts.
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Presumably the sort of ‘investment’ strategies that the failed banks were operating had actually been dreamed-up in the first place by the wizards from the very same Big Four?
I am reassured to hear you imply that the next crisis hasn’t started yet.
It could very well be too late. The next crisis may well already have a head of steam.
The problem we have here is that the only people able to do the job of regulating the poachers are by definition poachers themselves. Finance is a closed shop in that regard. Where would you suggest we find regulators if not from the ranks of those already engaged in poaching?
With the greatest of respect, I hear this argument AGAINST anything other than self-regulation everywhere and it’s just plain wrong. And uncreative to boot.
You may need a nuanced appreciation of detailed technical issues in order to tease-out the important facts on any one particular detail of a case or study but you do not need that sort of insight to lay-out the broader direction and requirements of ethical actions for the sector as a whole; that’s not only easily done but I’d argue is required to be done solely by responsible and honest people outside the sector from the society in which the industry operates and on whose behalf the oversight and regulation should be performed.
Self-regulation always fails to support and reflect the social interest over the venal. Always.
You can find enough poachers-turned-gamekeeper to determine the technical facts (surprisingly there ARE more than enough honest doctors, solicitors, accountants, energy providers, local government operatives, social care experts etc to provide this technical input provided we protect them from sectoral repurcussions) but we must perform that activity within an oversight framework which allows the selfish interests of corporate, profession and individual friendship interests to be effectivly neutralised. If we don’t we end up with the decisions this post refers to and many, many more besides.
I think it would have been quite reasonable to expect that following the Financial Crash, this catastrophic event may have raised and answered a simple, but I acknowledge perhaps a difficult technical propoposition; if an audit may (well) reveal absolutely nothing critical (to the shareholders) in such catastrophic circumstances as 2007/8; what on earth is the point of doing it?
They argue it works behind the scenes
I am not convinced
Perhaps I am simply being obtuse, but while I can understand many spheres of interest, including depositors, who may be satisfied by the proposition “it works behind the scenes”, and not least in massaging the sense of importance it gives to those who are ‘behind the scenes’; I am less clear that this works for the shareholders who are paying for it.
Now I can see that it may be that we all have to bend to the ‘greater interest’ in the stability of the system, or whatsoever higher value we are being asked to serve here: but if that is the test (and I am not averse), then it does seem to me that the profession should simply move into the public sector and simply become what inf fact ‘behind the scenes’ at least seems to imply to me: the executive arm of regulation. They would then be paid out of the public purse. Maybe that would work!
John S Warren;
“… the profession should simply move into the public sector and simply become what inf fact ‘behind the scenes’ at least seems to imply to me: the executive arm of regulation.”
This is an interesting point and mirrors the one made in banking about the essential difference between high street and investment banking. I think the arguments for making standard external company audit and reporting activities a state-delivered or monitored operation are just as sound as those for saying that standard retail banking services should be as well.
At the very least this would alert the whole of society to the essential difference between those socially-necessary and convenient activities and the risky ones of investment banking and business consultancy which banking and accountancy professionals offer. I don’t want a ‘chinese wall’ between them within corporate bodies in those sectors, I want a moat, drawbridge, portcullis and guards with big pikes between them, preferably with huge state powers to back that all up.
Then we might have found a way to separate those who want to treat banking and accountancy as a normal, natural, safe and unproblematic small part of their lives from those who wish to treat them as the Wild West.
Money should be nationalised in the same sense as many now clamour for the other utilities to be. I’m aware one could argue that it’s nationalised now, as in theory we own the BofE and private bank monies are created under license from our (hopefully) elected government, but in practice we’re reliant upon gougers for our supply just as we are water, internet access, train travel, electricity etc., a situation which needs to change.
So it need not be nationalised
It need sot be properly regulated
Let’s not pretend we can do without banks
Then we need the option of community banks, run as a community service, not in the usual parasitic fashion.
I accept that
This FRC decision beggars belief.
Now that the FRC has been “nationalized” perhaps it might be subject to more public scrutiny?
I doubt it
The political will is not present