Scrutiny of audit firms over crisis is critical

Wed, May 30, 2012, 01:00

BLOXHAM, THE country’s oldest stockbroking firm, closed on Monday after it was found it had been lying about its profitability over a period of three years from 2007 to 2009.

There is a procedure in our laws to protect the public against such falsehood: the requirement for companies to employ independent auditors to give an annual true and accountable picture of a company’s affairs. In this instance, the auditing firm was one of the largest and most prestigious in the country, Deloitte.

I contacted Deloitte yesterday morning to ask about this. I was referred to their public relations company, which stated Deloitte wasn’t making any comment on this at present. I inquired why, and there was a suggestion of a Central Bank inquiry under way which they did not want to cut across. I asked simply how did Deloitte not realise there was a problem here, given its duty, as auditors, to form a “true and fair” view of the financial state of the company. There was no answer.

I inquired whether Deloitte acted as accountants/auditors to any government agency and was informed they were now auditors to Irish Bank Resolution Corporation (IBRC), the present incarnation of Anglo Irish Bank and Irish Nationwide Building Society. Minister for Finance Michael Noonan revealed last week the National Asset Management Agency (Nama) paid Deloitte €4.8 million in fees.

Ernst & Young acted as auditors to Anglo Irish Bank. The firm’s website has a classy three-part moving screen presentation, one of which reads: “Growing Beyond: A Place of Integrity” which has to do with its global fraud survey; another advertises its Entrepreneur of the Year competition; and the third has to do with its sixth Global Capital Confidence Barometer.

The Ernst & Young audit report of Anglo Irish Bank for 2007 (the year before we found out the bank was bust) stated: “In our opinion, the Group financial statements give a true and fair view, in accordance with the IFRSs (International Financial Reporting Standards), as adopted by the European Union, of the state of affairs of the Group as of 30 September 2007 and of its profit for the year then ended.”

The statements referred to reported Anglo had made a profit for the financial year of €1.243 billion, there had been customer deposit growth of €16.7 billion, high quality growth in customer lending of €18 billion, up 37 per cent on the previous year, and 30 per cent return on equity.

Ernst &Young told Anglo shareholders as of November 2th, 2007, that the bank was booming. It got €1.1 million for this opinion. The bank was heading for the rocks as Ernst Young wrote its testimony, and collected its fees.

I contacted Ernst &Young yesterday morning to ask about this, and await a response.

KPMG were auditors to AIB in 2009. On February 27th of that year they stated of the bank’s financial statements for 2008: “In our opinion the Group financial statements gave a true and fair view in accordance with IFRSs, as adopted by the EU, of the State of the Group’s affairs as of 31 December 2008 and of its profits for the year then ended.”

The statements showed the bank made an operating profit of €862 million. KPMG gave no warning that the bank was on the verge of insolvency. Within a year we discovered the bank was bust. Last week, Noonan revealed KPMG was engaged by Nama as “audit-coordinator” and was paid €18 million in fees from its inception to January 31st last.

I inquired yesterday morning of the Institute of Chartered Accountants of the inquiries instituted by it into the role of auditing firms in relation to their banking clients in the period immediately before the financial bust-up. I was told they would revert to me with information on that within a few hours. I am awaiting their response.

How is it that auditing firms failed in their primary duty as auditors of Anglo Irish Bank, Irish Nationwide and AIB to alert shareholders and prospective shareholders and the country at large about the crisis that was emerging in these institutions?

How is it they have not been brought to account, given the huge losses for shareholders and massive debts being inflicted on this society? How is it that they are still operating as though their reputations remain untarnished?

How is it that State agencies, notably Nama, have engaged these firms that were found to have been so negligent in their role as auditors to the banks?

John McGuinness was confident a few weeks ago that the Public Accounts Committee, of which he is chairman, would be able to institute a thorough inquiry into the banking crisis, although it would be precluded from reaching any conclusion that was critical of anybody!

He needed the consent of the Government to start such an inquiry. The arrangement whereby Oireachtas inquiries, whose functions are primarily to hold governments to account, must seek the permission of the Government to start an inquiry underlines the fatuousness of such “accountability”.

That now, four years into this crisis, there is still no proper, fully resourced inquiry into what has happened and what is happening is just pathetic.

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