The HSBC issue is not likely to go away for a day or two.
Let me ask a question then that needs to be asked. Where were the auditors? It is true that auditors are not meant to detect and prevent all fraud. They are meant to identify material risk to the business. A potentially fraudulent business model, which is the nub of the HSBC accusations, is however well within the range of risks that I think any auditor should have identified.
KPMG were HSBC auditors from 1991 to 2013.
I have no idea whether or not KPMG did a good or bad job at HSBC. They did not qualify the accounts.
What I do know is that during that same period KPMG were fined for partaking in criminal tax activity in the USA.
And that a former KPMG senior partner became chair of HMRC.
Whilst another became chair of the Financial Conduct Authority that regulates banks.
Whilst moving in the opposite direction, the former head of the anti-avoidance group at HMRC is now a KPMG director.
None were, I suspect, involved in HSBC. KPMG is a big organisation. But it would be a better organisation if it just did its job properly and if it did not wish to spend rather too much time spreading its tentacles into places where its influence might lead to doubt as to the objectivity of our regulatory authorities when looking at its activities.
KPMG's audits may have been fine.
HMRC's actions might have been fine.
But because of the links and KPMG's own past I do not think current structures are capable of objectively forming that conclusion.
And that worries me.
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They even have a former employee running Tax Research UK as I understand it! 🙂
From 32 years ago
I think I have been sanitised
I was also never a partner
I was told I could be – it was enough to make me leave
Why do auditors seem to make such a poor job of spotting fraud? One factor, says Richard Murphy, a partner at accountant Murphy Deeks Nolan, is a massive expectation gap about what auditing can and can’t do. Despite unshakeable general assumptions to the contrary, he says, auditing (like accounting in general) is a subjective, not objective, discipline representing an opinion, not a certainty.
‘Put five accountants in a room with the raw figures,’ says Murphy, ‘and they’ll come up with five different profit figures, all legitimate. Accountants and companies understand that, but regulators, users of accounts and governments want it to be black and white.’
The basic function of an audit as currently practised is to confirm that reported transactions actually took place, not to root out dishonesty. Current thinking in corporate governance puts increasing responsibility for the latter on a company’s directors.
‘Deep down, every auditor knows he is on a hiding to nothing,’ says Murphy. ‘Every time he signs off a “true and fair view”, he knows that another view could be perfectly possible.’
Indeed
I was saying then what I am saying now – that they have to strive to get it right
And some did not
In the above quote from you, you basically say that is not the auditor’s job to root out dishonesty – it’s up to the company directors.
In the article above, you claim the opposite.
This is complete nonsense, and a wholly false interpretation of a limited amount of commentary to a person who was using it to discuss careers in a newspaper.
I was when I made the comment still a registered auditor, and was entirely happy with the soundness of my commentary. I am well aware, and always have been, that auditors cannot identify all fraud, and nor are they require to. But they are required to identify material risk that might lead to a misstatement of the accounts that would have impact upon a third-party user of them, including shareholders. It is very obvious that the information now revealed would have had that impact on the users of the accounts of HSBC at the time that the alleged frauds took place. Therefore, there was an obligation on the auditor to identify whether compliance with the relevant legal requirements had taken place, and whether (and irrespective of whether compliance had occurred, or not) there was a chance that liability or consequence might arise for the company that could be material to the understanding of the user of the accounts. It is my opinion that such failure occurred, and therefore in this case I would suggest there was a misstatement. It is not the identification or otherwise of fraud that gives rise to an error on the auditor’s part, it is the failure to disclose the fraud if it is material to the understanding of the accounts of the reporting entity, and that is what I’m suggesting might have happened.
Maybe those arguments are a little too sophisticated for you.
Clearly “Tyler” is taking a very close interest in you, Richard. Pity they forgot to include the source of the quoted material. And I’d be interested to know who “Tyler” is, of course.
But anyway, concentrating on this comment from you: ‘Current thinking in corporate governance puts increasing responsibility for the latter on a company’s directors.’ I note from various quotations from Stephen Green’s writing, cited in The Guardian today, that he takes (or took) the same view. Unfortunately, in his case it doesn’t appear to have followed through into practice. I wonder if this could be because corporate governance is also ‘…a subjective, not objective, discipline representing an opinion, not a certainty.’ as you note accounting is?
Ivan
From here http://www.theguardian.com/money/2000/jan/16/workandcareers.madeleinebunting1
I am not sure what distinction he is trying to draw
If he is trying to say I changed my position he’s wrong. I was saying auditors have to exercise sound judgement in the face of conflicting evidence
I would suggest some did not do so
I’m sure they are trying to suggest you’ve changed you view, Richard. But given the date of article, they’d also appear to be sending you a message: you are being shadowed.
Ivan
That’s been the case for a long time
And I really don’t mind
It’s a sign they’re rattled
Richard
Ed note: comment deleted for boring repetition
Be a man. Answer the question.
Are you accounts correct or not?
Of course they are
You just can’t read them properly
So when you say turnover was 72k, but net income was at least 92k?
Income in advance rose by £22,450 in the year
That is explained in the notes
Grants and other payments made but not earned are income in advance
In the area where I work payment in advance is commonplace
I understand payment in advance is commonplace.
Only problem is, that in your “notes” you say that 18k of the Joffe income was treated as in advance. But you don’t mention at all that the total for income in advance was 22,450. Also, it is usual to spread that income in advance over the period the work is undertaken – so some of that money should be realised in your 2014 accounts.
So are your accounts clear? Can we all be certain that there is nothing funny going on at all?
We can’t. Not that I can prove from your accounts that you are doing something dodgy either. And that’s really my point.
You just look at company accounts and accuse them of tax avoidance and evasion. You have no hard evidence to prove that there is any wrongdoing.
There is an explicit note on income in advance in creditors
I am sorry, but you arenjust showing you can’t read accounts
The figures are quite clear with considerable detail published not required by law – including everything you have referred to
The accounts I have of yours, downloaded from companies house, do not show you treating 22,450 of income as deferred. It has 18k of income as such.
Still, you miss the point. Reading your accounts, it is perfectly possible to allege that you are avoiding tax by shifting profits into different years via income in advance, or simply not declaring all your income through the accounts.
I have no hard evidence of this, of course, but I do have suspicions. You are saying that your accounts are completely accurate and no tax has been evaded or avoided.
Now take the other side. You have looked at the acocunts of Starbucks, Barclays and Vodafone to name but a few. You have nothing more than I did when looking at your accounts, but are happy to accuse them of tax avoidance on a grand scale.
You simply don’t have enough information either way to prove it, but are more than happy to smear them in public for tax avoidance.
You have to either accept that your accounts also allow for a degree of suspicion, or that you shouldn’t attack these various companies, as you simply don’t have the information necessary to do so.
Respectfully I pointed you where to look and you clearly did not
I expect a degree of intelligence to be applied to the questions raised and you are not offering that
The £22k is the difference in income in advance between years
I publish full accounts as I have nothing to hide
Now, with respect, and because your comments clearly how you do not know what you are talking about, this debate is closed
“there was an obligation on the auditor to identify whether compliance with the relevant legal requirements had taken place”
That’s the problem though. HSBC Switzerland was complying with the relevant legal requirements in Switzerland, and its parent company in the UK was complying with the relevant legal requirements in the UK. There’s no law that says UK-headquartered banks must inform HMRC about account-holders in overseas subsidiaries. (If there was, you can be quite sure that any tax-dodgers would use one of the many other Swiss banks available, not HSBC.)
There might well be a moral imperative on HSBC, particularly for former chairman Lord Green who is an ordained CofE priest. But that doesn’t make it a legal requirement.
But the audit report was on the UK parent so that was the criteria for assessment, i would argue
I’m very sorry to see this thoughtful and informative blog descending into personal abuse.
(I exclude Michael’s comment from this as it was just so obviously a witty aside).
Let’s stick to the issues.
If you disagree with Richard’s comments, make your argument dispassionately.
Don’t be personal- no-one wants to read such slurs.
It is a standard policy of those without an argument
I will be deleting again – for which no doubt I will be accused of censoring
“Be a man” is hardly the sort of persuasive argument I come here for.
Please try and moderate your language and address the issues.
Passion is fine, if directed at the matter in hand.
And of course Douglas Flint went from KPMG’s Banking group (I think the audit partner for HSBC) to become CFO at HSBC and then group chairman…