Do question marks hang over the heads of auditors?

 

ANALYSIS: The forthcoming Quinn hearing is an example of the increasing attention being given to the role of external auditors

THE ROLE of external auditors has arisen in relation to the crisis affecting the banking sector and the Seán Quinn group in recent times.

The issue arose most recently on Tuesday when a spokesman for the Quinn Group said solvency returns given to the Financial Regulator by Quinn Insurance over recent years did not have to disclose the existence of bank and bond guarantees on subsidiary assets, and that the company’s auditors were of this view.

The regulator is understood to be of the opinion that the existence of the guarantees, which have been instrumental in the appointment of provisional administrators to Quinn Insurance, should have been disclosed.

Also the group’s spokesman has indicated that the fact that the Quinn Insurance auditors, PricewaterhouseCoopers, signed off on the company’s annual consolidated accounts will be put forward as an argument in next Monday’s expected High Court hearing, where the regulator will seek confirmation of the administrators’ appointment. The Quinn side will, it appears, argue that its auditor’s approval of the Quinn Insurance accounts is a material fact in relation to the regulator’s views on the effect of the guarantees on the insolvency issue.

Likewise, the role of the auditors in relation to a number of financial institutions has arisen recently, because of the marked write-down in the value of property loans. How could the auditors have agreed on the value of assets such a short time ago, which have now dropped in value by 40 per cent and more?

Also, how could auditors have signed off on the accounts of banks where the security on some huge loans has been found to be so inadequate that the National Asset Management Agency (Nama) wants to ascribe a value of zero to them?

Already the Chartered Accountants Regulatory Board, which regulates members of the Institute of Chartered Accountants in Ireland, has asked the former comptroller and auditor general, John Purcell, to inquire into the actions of members Seán FitzPatrick, David Drumm and Willie McAteer, all formerly of the now nationalised Anglo Irish Bank, in relation to a number of matters at the bank.

The same inquiry is also looking at the role of Anglo’s auditors, Ernst Young, in relation to these matters. Mr Purcell may report to a committee of the board in about three months time. If he decides there is a prima facie case to be answered, then a full-scale inquiry, in public, will occur. In relation to the audit firm, the greatest penalty that can be applied is the removal of its audit licence.

In the Dáil recently, Sinn Féin TD Caoimhghin Ó Caolain raised the roles of Ernst Young and KPMG – which audited Irish Nationwide’s accounts. In response, Minister for Finance Brian Lenihan said the role of the firms would be looked at as part of the overall banking inquiry, given the “dramatic character of the change that took place” after Anglo was nationalised.

Mr O’Caolain said KPMG had audited Nationwide’s 2008 results which showed a pretax profit of €300 million after having made provision for bad debts of €500 million. Yet 11 months later, it was disclosed that the institution would need €2.6 billion in funds from the exchequer. Mr Lenihan said he would bring this to the attention of Nama and Ó Caolain’s expressed concern that these same two firms could be conducting work for the State agency. Both firms work for Nama.

KPMG is also auditor to AIB. In the High Court recently, Mr Justice Peter Kelly expressed astonishment that more than €500 million in loans to Liam Carroll’s Zoe group had security which the judge considered inadequate. These loans are understood to be part of the €1 billion in developers’ loans on banks’ books to which Nama was recently inclined to ascribe a value of zero.

Asked to comment on these matters, a senior partner in one of Dublin’s top accountancy firms, speaking off the record, said it was important to recognise that auditors sign off on historical accounts, and give an opinion on whether the accounts presented to them are fair and accurate.

Companies have line managers, control functions and internal auditors who report directly to the board. These structures are designed to ensure that excessive risks and inaccuracies are spotted and addressed.

He said there was no doubt that, in a rising market, financial firms tend to lighten up on security and address themselves more to winning business. However, it had to be borne in mind that businesses continually use assumptions and can hardly be blamed when the market turns so violently against assumptions that were generally held, as has been the case in the Irish property market.

There is a huge difference between generally held assumptions being subjected to a violent shock and the deliberate misrepresentation of accounts, he said.

“Fraud by its nature is covert and very difficult to find.

“If auditors have failed to discharge their professional responsibilities, they should be held to account. There can be an understandable temptation to find someone to point the finger at. But if people are to raise questions about external auditors, they have to also raise questions about senior management, internal audit and company directors. You have to be fair.”