How have they managed to dodge the spotlight for so long? The auditors of the major banks, KPMG, PwC and Deloittes have successfully managed to avoid any of the blame for the banking crisis. Should they carry any of the blame? You bet they should.
Auditors are charged to provide a “fair and true” view of the financial position and performance of a company. Yes it’s about facts and figures, but auditors are also required to use their professional judgement and flag up any concerns they have about any aspect of the company to the directors.
In the case of Northern Rock, PwC failed to voice any concern that the Northern Rock business model was extremely risky. This was not difficult to spot and impossible to conceal.
At the time of the pre Northern Rock crash audit, there were grounds for questioning whether the business was a ‘going concern’. Nothing was said and the accounts were not qualified in any way. This, in the words of the House of Lords Inquiry into the banking crisis, was a ‘dereliction of duty’. In their view, PwC was ‘disconcertingly complacent’ – an understatement if ever there was one.
So, what about the pre-banking crisis audited accounts of Bank of Scotland, Lloyds, Barclays, HSBC and RBS? Was there any concern raised by the auditors about the value of the billions of pounds of Collateralized Debt Obligations (CDOs) they had squirreled away? Not a dickey bird, nothing, everything in the garden was just fine. So, in the light of what happened, were the audits a “fair and true” view? Absolutely not!
So what does this tell us? Were the auditors just incompetent or complacent or were there other forces at work? Well, there might have been. Just imagine the dilemma of PwC, Deloittes, KPMG or Ernst & Young if they had the account of one of the big banks – worth millions. Would they jeopardise all that money and kudos by threatening to qualify the accounts if they had doubts about the value of CDOs – or would they accept the bank’s assurances that they were as safe as houses? History tells us that they would chose the latter, and that’s exactly what happened – despite the fact that at the time of the pre-crisis audit there were serious concerns about CDOs.
The question is, did the banks and the auditors conspire to conceal the toxic nature of CDOs? There is every likelihood that they did, but we will never know. What to do? It is vital that the ‘cosy’ relationship between banksters and their auditors is brought to an end. The best way of doing this is for the FSA to rotate auditors. Perhaps this is something the Independent Commission on Banking will recommend. I hope so.