The Times has reported a major development in the fiasco of the Financial Reporitng Council clearing KPMG of any audit failure in giving a clean report on HBOS's 2007 accounts months before that bank collapsed. As they report (behind a paywall, but I share some if it because of the public importance of the issue):
The Financial Reporting Council ruled that KPMG was reasonable in vouching for the health of HBOS, but “was aware” in 2007 of going concern problems at UK banks.
Confidential minutes from a high-level City meeting in 2007 raise questions about the ruling this week by the Financial Reporting Council that KPMG was “reasonable” in vouching for the health of the soon-to-fail bank HBOS.
With the credit crunch in full swing, a meeting of investment chiefs and senior accounting professionals at the offices of Schroders two weeks before Christmas 2007 heard how the FRC was “fully aware that there might be ‘going concern' problems” at UK banks.
Yet the FRC, the main regulator for UK accountancy firms, this week cleared KPMG of any failings when in February 2008 the accountants judged HBOS to have made £5.5 billion of profits and to be a going concern. The FRC ruled that market conditions at the time did not show KPMG's judgment to be unreasonable.
As they add:
Minutes of the Company Reporting and Auditing Group, seen by The Times, show that the attending accountants, who included Neil Sherlock, KPMG's public and regulatory affairs partner at the time, were well aware of serious question marks being raised about the quality of bank assets.
They discussed how banks made differing judgments about the quality of assets, which ranged from prudent to aggressive, and that the Financial Services Authority was “concerned” about the more aggressive judgments.
I share the view of Stella Fearnley, noted as follows:
Stella Fearnley, professor of accounting at Bournemouth University and a former member of the FRC audit inspection board, said the group's minutes were “very significant”. She said the FRC decision this week was “complete tripe,” adding, “I don't believe they [KPMG] could not have known there was something wrong. Companies do not go bust overnight.”
I should add The Times note;
An FRC spokesman said: “We undertook a thorough investigation which included the opinions of external experts. Our conclusion is that the test for misconduct was not met.”
Then the test was wrong is the only conclusion I can reach.
This one will not be going away.
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Is that the same Neil Sherlock who beat Boris Johnson to the presidency of the Oxford Union, was later a special adviser to Nick Clegg, and is now a partner at PwC?
In order to comply with ISA 570, the auditors would have to be happy not only that the bank was a going concern, but also that there was adequate disclosure in the accounts of any material uncertainties in relation to going concern.
Since (I assume) there was no disclosure of any such uncertainties, the auditors must have considered that there weren’t any. Which doesn’t seem at all reasonable to me.
I don’t know about KPMG, but PWC testified before the Select Committee that they only signed some of their audit reports on the understanding that the government would bail out any banks that got into trouble. However, even that fairly fundamental assumption wasn’t deemed worthy of a mention in the accounts.
I’m not normally a fan of conspiracy theories, but if the government had put pressure on the Big 4 to sign off on the bank audits (presumably to avoid a panic), in return for guaranteeing no come-backs if the banks did fail, then we’d have ended up with a situation that looks remarkably similar to the one we have now.
I suspect all auditors had that assurance
The failure to disclose it was key
I think that was an audit failure admitted a long time ago
I like to thing of these major financial organisations as akin to the monastic orders of the Middle Ages. KPMG could be the modern equivalent of the Cistercians. The orders gained so much wealth and power and abused them so much that they had to be dissolved, as they were under King Henry VIII. Where is Thomas Cromwell when you need him?
Prem Sikka would do
Prem Sikka? I’ll have to go to my Funk and Wagnell again.
Now you have lost me….
Reference from ancient US TV comedy series, “Rowan and Martin’s Laugh-in” built largely around repeated catchphrases. ‘Look THAT up in your Funk and Wagnall’ being one of them. F&W published reference books – possibly still do.
Translates as: I have to look him up on Google, because I don’t know about him.
A ha
Or something like that
Congratulations are due as I am sure Uber’ s ban must be at least in part thanks to your uncovering of their VAT avoiding tactics. Now Londoners will be paying VAT on fares as they should which will help the economy tremendously.
And a victory too for the unions who campaigned to end Uber’ s so-called arrangements with drivers who will now have to get proper ‘black cab’ licences.
Win-Win for the left and surely the pattern for the future if the left can organise and take control!
I am aware of your cynicism
But a level playing field in tax is essential
As is security in employment
What is sad is that you want an economy based on artificial competition and exploitation.
Well said Richard. The 40K Uber drivers will appreciate their employment becoming more secure in the long term. Short term they may suffer some pain but they will recover.
If there is demand for 40,000 drivers it will find a new and better outlet very soon
My feeling is that ‘Paul Pott’ should go back to counting his skull piles.
Uber seems to be a great idea, but it needs to be good for all participants.
Black cabs are being hit by a technology disruptor. ‘The Knowledge’ no longer has the value it once had because we have satellite navigation. (Note that I’m not saying the sat nav is as good as a cabbie, but it’ll do for most purposes)
A city centre Diesel ban would be even more disruptive.
Driverless vehicles are almost certainly going to completely change the way we travel so this is a temporary skirmish A rearguard action in a war that will be lost. Painful, messy and pointless.
As ever it’s the ‘poor bloody infantry’ who carry the can with their lives or their livelihoods.
An interesting perspective on accounting practices presented here by Colin McKay “[A]ccounting today no longer refers to any objective reality but instead circulates in a “hyperreality” of self-referential models. The accounting sign now precedes (and even creates through its ‘‘sign value’’) the referent that it once purported to represent. It is no longer an abstraction or an appearance of any ‘‘real’’ thing. It is its own pure simulation, making circular references to other models which themselves make circular references to accounting signs.” which all sounds a bit space cadet but actually may explain much. https://psalmistice.com/2016/05/09/dishonourable-debt/
It is true
Bill, this report highlights well the fact that debt and accounting are just creations of the mind and some would draw a parallel with religion.
Note another problem looming on the horizon which will require some creative thinking to explain it and deal with it:
http://www.cecaust.com.au/aas/vol19no38/20170922_AASVol19No38_Economics.pdf
And Babylon makes its presence increasingly felt. My friend Deborah, Bankster Slayer by profession, recently declard, exasperated, !I wish more people would realise the dollar is religious instrument, not a financial one”. By chance, I have words to hand from Michael Hudson on the subject, loosely; ““If you look at the Liberty Bell, it is inscribed with a quotation from Leviticus 25: “Proclaim liberty throughout all the land.” Well now we have translation problems again. The word doesn’t mean liberty, the word really means Clean Slate. It means freeing society from debt, letting everybody have their own basic housing and means of self-support. And by striking coincidence, what does the Statue of Liberty do? She’s holding aloft a flame. And in the Babylonian historical records, when Hammurabi would cancel the debts they would say: “The ruler raised the sacred torch.” So here you have a wonderful parallelism. 

It’s been written out of history today, It’s not what you’re taught in Bible school, or in ancient studies, or in economic history.”” Indeed. Why not, one wonders, if not to keep us captive though ignorance?
It was an accounting firm that gave the corrupt government of Greece a clean bill of health allowing it to join the Euro and causing untold misery to the people.
What we need is not only the name of the company of auditors but the names of those who make the decisions.
As in Brexit: every Minister, Civil Servant, journalist (TV and newspapers) who touted it should be named.
Too much secrecy allowed.
To be fair there was some turning of blind eyes towards the Greek application to join the Euro. It wasn’t, I think only the Greeks who wanted to be in there there were political; imperatives in making the club membership as large as possible irrespective of good financial sense.
Tony Blair would have had the UK in the Euro and I suspect that we would have been hammered in the wake of 2008 without a floating currency. I’m not a big fan of Gordon Brown, but at least I give him credit for keeping Sterling.
One wonders if Arthur Andersen would have gotten a free pass from this FRC. Time and place notwithstanding.
Arthur Andersen and Enron were a rather different case I think, because they were pioneering a new territory of deceit. Enron created deep embarrassment amongst (important) people with skin and reputation in the game and they were culled. Convictions were a necessary revenge of the establishment. Al Capone used baseball bats.
The current situation I believe to be different because ‘everybody’ is in on the act. Prohibition is over and the establishment is now controlling the alcohol trade.
Enron’s dodgy practices are now mainstream. (I think.)
That should read ‘gulled’ not culled. Freudian slip perhaps!