The Big 4 are giving evidence to the House of Lords right now on auditing.
I missed the start but the admissions are amazing.
First Deloitte at least signed off bank audit reports saying they were going concerns in 2008 because they assumed the government would bail the banks out. They didn’t say so. But that was the reason for their unqualified opinions. I think their Lordships were surprised.
Second, PWC said Northern Rock had a clever business model everyone knew about.
Third, they have confirmed that IFRS did not allow a loss to be recognised as a provision — only when it had occurred. So as Tim Bush has said time and again — IFRS allowed profits to be recognised when not realised but did not allow losses to be recognised until realised — so building in massive overstatement of profits — and they all signed off on this basis.
Oh, and KPMG have said that they might have assumed a bail out because the government wanted them to do so and not mention it.
The arrogance, lack of flair, incompetence and sheer smugness is staggering.
If you wanted to know why the system is broken watch these four make fools of themselves.
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Auditors these days are not thanked, respected or retained by their clients for their ability to exercise prudent, sceptical, professional judgement and to report their consequent findings honestly, or promoted and remunerated by their firms accordingly as they used to be (more often) in the past.
Instead they are appointed, remunerated and promoted for their ability to demonstrate they can avoid risk (eg of being sued, or losing a client, of generating adverse media comment). That means a slavish tick the box and compliance with accounting standards mentality, no exercise of professional judgement, and no controversy. A good suit and haircut helps too.
The much-respected true and fair view approach of the past and the auditors competent and willing to express it are defunct. The profession is staffed by clones wearing profit-share blinkers and none of them is able or willing to rock the boat, even when it’s holed below the water line or to depart from the pre-prepared marketing spiel they have committed to memory.
Depressing.
At about 1hr 29mins and 23secs , John Connolly states:
On Deloitte’s website, his resume says:
Well, if RBS are happy to pay for advice from someone who knows nothing about banks, then no wonder they got into such a mess!
The four of them should be ashamed of their performance today, the performance of their firms and the quality of the work they do. However they won’t be because they are all making too much profit to care and profit is their only motivator.
Hmmm … Deloitte. Now there’s a thing.
Any truth in the rumour that auditors (and others) promptly “go native” once they disembark in the permissive environs of offshore secrecy jurisdictions – a.k.a. the Crown Dependencies?
@Deeply Depressed
well spotted….
@ Deeply Depressed
The RBS is Deloitte’s biggest international client.
Further comment would necessitate repetitive use of the words, “mess”, “ashamed”, “indifferent”, “profit motivated financial trapeze artists”.
Generally shows auditors are idiots. You’d think after Enron, Worldcom etc the financial world would learn…… 🙄
You can’t blame the accounting standards for the failure of auditors (even if they are a pile of crap).
You can’t blame the auditing rules for the failure of auditors – as an auditor I think they are actually very robust (when they are followed).
If you want a target – its self regulation. The number of times the QAD/JMU/AIU whatever else lets auditors of the hook for collusion with clients, failure to follow the standards, negligence and out and out fraud is amazing. I have seen my employers – a mid size firm, get away with it time and time again.
The fastest way to fix audit is to place audit inspection with the government. And to take away audit registrations for those who won’t follow the rules.
I am ashamed of the lack of integrity of my profession. I hope others are.
@Alex S
I remember writing saying that in Accountancy Age in maybe 1990
But we can blame IFRS and auditing rules too – after all, they are self regulation too
These are industry et standards
And hey’re fundamentally flawed
There appears to be a fundamental issue with some of the analyis above – the general gist is that the big 4 collude with their clients – they don’t.
Their clients are the shareholders of the companies they audit, as a group! The are certainly not colluding with them.
They are colluding with the management team – this is a far far far worse crime.
For instance – Deloitte signing off the audit report as a going concern as they assumed the government would bail the bank out – whose benefit is it to bail them out? Certainly not the shareholders – the shareholders had a right to know that they were likely to have their shareholdings significantly diluted.
In whose interest were they acting? Not, ire repeat NOT the shareholders, and therefore not their clients.
There was, it would appear to me to be every possibility of a conspiracy to defraud (in my personal opinion) their clients, in favour of pleasing the management team
Having worked with and for The Big 4/6/8 and several mid tier firms for many years (not as an accountant)I can remember in my early days one of the old school audit partners, for whom I had enormous respect, telling me he always applied the “smell test” while the box tickers were doing their jobs – “if something smells fishy,it usually is”.
Having dealt with reputational issues going back to Maxwell and beyond, I have always had sympathy for the auditor but can’t help wondering where the partners are with the skill and more importantly the experience to apply today’s “smell test”.If you have grown up, qualified and become an audit partner under the current regime can you really gain the experience that the old principles approach fostered? And can you be criticised for not having that sense of smell when the regulatory regime does not encourage you to develop one?
Times change and the modern auditor has to live and work with a regulatory, compliance and, unfortunately, litigation climate that makes risk the focus of attention but does so in a way that is not risk as we once knew it.I know all the arguments for how we have ended up where we are but a lot of people share responsibility for getting us to this position,not just the auditors.
As to John Connolly being an “expert” I recall a senior management consultant once telling me – “do it once you are experienced, do it twice and you are an expert, do it more than that and you are an industry guru!” As Connolly only has one bank on his cv perhaps he is not an expert, just experienced!
The age old problem is one of Independence – if you are busy making money from other services you are not going to be independent Audit minded. Regulation is very tight – but for the smallest Audit firms because they are the ones that can be bullied, the big 4 seem to be above regulation.Audit rotation is needed as well. But Government auditing is worse because you only exchange oligopoly for monopoly.
@Roger White
So right
But the whole approach now is to remove that “sixth sense” in all professions
Judgement is essential – but the drive to standards in assessment removes it
And that is a significant loss
And for those who say I am a statist (and they’re wrong) this is an area where government embracing of the 1990s ethos of standards that swept the private sector first (remember) has been seriously detrimental
But the legacy of that standards approach remains in the accounting profession – to ist detriment
@Brass Tacks
I’d love to agree with you
But the client is management, not shareholders
And since Caparro there is little duty to shareholders
It needs to be reinstated
@Richard Murphy
Surely it is shareholder’s capital that ensures their ownership of a public limited company. The directors or “management” may not even be shareholders.
Ultimately the shareholders have the means of dismissing the directors (and management) through mechanisms inherent in the company’s AGM.
The shareholder’s capital pays for the company’s audit and they have a right to receive disclosure of any circumstances or information known to the auditors which may effect the future welfare and security of the company. Failure may well be viewed as a conspiracy to defraud the shareholders — irrespective of who is considered to be the “client”.
Similarly with lawyers: If directors use company money to employ the company’s legal advisors in any other capacity other than acting in the company’s best interest then this may be viewed as fraudulent use of company resources.
Just been reading some of the media and online coverage of the debate – it seems Lords Lipsey and Lawson were making a valiant affort to prick Big 4 consciences but the overall tone is one of the collusion between Government and auditors to keep the true state of affairs below the shareholders and public radar – one commentator observed that the big 4 senior partners escpaed with mild bruising, which is surely the whole point – a golden opportunity for some serious questionning and robust discussion was ducked by most of the Committee.
@Richard Murphy
Suppose the auditors discover some “unsavory matter” during an audit of a plc and then later publish a report to the shareholders that contradicts the existence of this “unpleasantness” … are the auditors still protected by Caparro?
Richard,
Taken from the ICAEW audit report, but could be any audit report:
This report is made solely to ICAEW’s members, as a body. Our audit work has been undertaken so that we might state to ICAEW’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than ICAEW and ICAEW’s members as a body, for our audit work, for this report, or for the opinions we have formed.
I’ve always presumed that members meant shareholders – surely this paragraph puts them on the hook.
Also agree with Premier Shareholder Group – If directors use company money to employ the company’s legal advisors in any other capacity other than acting in the company’s best interest then this may be viewed as fraudulent use of company resources.
Finally – I used to be an auditor – I’ve never heard of Caparro – are you saying that someone has won a case that means that an audit has no (or limited) duty of care to shareholders – who exactly are the auditors beholden to? At what point does it matter (to the auditors) if the auditors give the wrong opinion?
This is getting ridiculous!
There were at least a couple of points that stood out for me in the evidence given to the HoL committee.
None of the four senior partners knew which firm had audited the Bank Of Ireland or the Allied Irish Bank, despite these two companies being in the news as recently as this week for creating the banking crisis in Ireland.
If I remember correctly, PwC disclosed that they have apparently invested $400m (of which £40m was in the UK) on new audit procedures. What was wrong with the old ones that such an investment was required, and when do the new ones come into play?
John Connolly stated that the firms have unlimited liability, but is this correct? I thought they were all LLPs.
I was surprised that Lord Lawson didn’t realise the nature of the firms as partnerships, so that the Irish firm of PwC could not be wholly owned by the UK firm. Other than that, Lawson was the best interrogator, though I was also impressed by Michael Forsyth (surprisingly).
The firms are due to send written notes to expand on some of the answers. It will be interesting to see what these say.
@Brass Tacks
That’s the game
the reality is the members can only sue when an entity has gone bust
So the relationship is tenuous at best
And non-existent in the US where Delaware law breaks it
It’s all part of the fiction of capitalism – most of which was spun by the fairy who lives at the bottom of my garden!
Re Caparo: http://en.wikipedia.org/wiki/Caparo_Industries_plc_v_Dickman
Lord Bridge of Harwich who delivered the leading judgment restated the so called “Caparo test” which Bingham LJ had formulated below. His decision was, following O’Connor LJ’s dissent in the Court of Appeal, that no duty was owed at all, either to existing shareholders or to future investors by a negligent auditor. The purpose of the statutory requirement for an audit of public companies under the Companies Act 1985 was the making of a report to enable shareholders to exercise their class rights in general meeting. It did not extend to the provision of information to assist shareholders in the making of decisions as to future investment in the company.
He said that the principles have developed since Anns v Merton London Borough Council[2]. Indeed, even Lord Wilberforce had subsequently recognised that foreseeability alone was not a sufficient test of proximity. It is necessary to consider the particular circumstances and relationships which exist.
Lord Bridge then proceeded to analyse the particular facts of the case based upon principles of proximity and relationship. He referred approvingly to the dissenting judgment of Lord Justice Denning (as he then was) in Candler v Crane, Christmas & Co [1951] 2 KB 164 where Denning LJ held that the relationship must be one where the accountant or auditor preparing the accounts was aware of the particular person and purpose for which the accounts being prepared would be used.
There could not be a duty owed in respect of “liability in an indeterminate amount for an indeterminate time to an indeterminate class” (Ultramares Corp v Touche[3], per Cardozo C.J New York Court of Appeals). Applying those principles, the defendants owed no duty of care to potential investors in the company who might acquire shares in the company on the basis of the audited accounts.
Although it was not necessary to decide the matter, it would seem unlikely that shareholders independently would have any right of action against the auditors for negligently prepared accounts even if they chose to dispose of their shares on the basis of those accounts. The company itself would have a right of action for any loss it suffered as a result of those accounts being negligently prepared.
Lord Oliver and Lord Jauncey, Lord Roskill and Lord Ackner agreed.