Have the well-paid watchdogs been asleep or are they simply afraid of asking hard questions for fear of losing the account? Siobhán Creaton wonders if auditors are too busy preserving their relationships with firms to detect fraud

Shareholders of large public companies must be asking themselves what the world's leading auditing firms do for the huge fees they are paid. We now know that they certainly haven't detected massive fraud across corporate America or in the Republic. So have the well-paid watchdogs been asleep or have they developed such a rapport with their clients that they rarely ask hard questions for fear of losing the account?

It would appear that most auditors can go through their entire career without ever stumbling upon fraud. It took gutsy employees at Enron and WorldCom to blow the whistle on robbery and deception on a scale that was almost unimaginable. Yet it is hard to believe that they were the only people who suspected things were not as they seemed.

At WorldCom, a lawsuit based on interviews with 100 of its employees had been lodged a year earlier in a Mississippi court. It detailed many of the claims now facing the former telecommunications giant in relation to hidden expenses worth $2.8 billion (€2.82 billion). The judge simply refused to believe that a fraud of this magnitude could be possible and the case was thrown out of court.

Mr Melvyn Dick, a partner at the firm's auditors, Arthur Andersen, said he was aware of the contents of the 113-page lawsuit yet claimed to have been surprised by WorldCom's admission that it broke accountancy rules.

Four months before the scandal was exposed in June, the firm told WorldCom's audit committee - a sub-committee of the board of directors - that the company had strict procedures in place to prevent false statements in financial filings, including in areas that proved to be central to the company's book-keeping scandal.

The report to the audit committee also assured the directors that there had been no significant changes in the accounting policies during 2001, the year when new procedures for handling expenses were adopted.

At Enron, a report from the US Senate last week states that directors knew of and were complicit in the company's dubious accounting practices.

It also reveals that Mr David Duncan, the Andersen partner handling the Texas oil giant's audit, had warned the directors on the audit committee that the company engaged in high-risk accounting practices, warning that they were "pushing the limits" and were "at the edge" of acceptable practice.

Andersen has been destroyed by this and far worse offences - the main one being the shredding of evidence surrounding the web of deceit at Enron. All of its clients have now come under suspicion internationally because independent auditors' reports compiled by the firm are viewed as being barely worth the paper they are written on.

Its reputation has been destroyed to such a degree that AIB shareholders have questioned the awarding of the bank's €1.8 million audit to KPMG, which has merged with Andersen in the Republic.

Mr Terence O'Rourke, senior partner at KPMG, says none of the individuals at Andersen's practice in the Republic had been associated with any wrongdoing but accepts that the poor perception of the firm internationally is something that will linger.

KPMG is not immune from suspicion and criticism, both internationally and in the Republic. It had a long and close relationship with Elan, the pharmaceutical company crippled by questions that have arisen about its accountancy practices. Elan's two most senior executives who stepped down this week - former chairman and chief executive Mr Donal Geaney and finance director Mr Tom Lynch - had both come to the company from the bosom of KPMG.

The firm's role as auditors to the defunct Northern Ireland-based engineering group Powerscreen is being investigated by the Institute of Chartered Accountants of Ireland. Three Powerscreen directors are facing charges brought by Britain's Serious Fraud Office in relation to accounting irregularities at its Gloucestershire subsidiary Matbro.

Mr O'Rourke fully accepts that auditors have much work to do to reassure shareholders and the public in general. "It is up to all of us to get our act together."

He likens recent shortcomings by auditors as being akin to being a referee who is crucified for one bad call having made right decisions for 99 per cent of the game. "The auditor's report is based on the making of reasonable assumptions. We can't make assumptions based on 100 per cent knowledge. Judgments are based on how much work you have to do and the complexity of that work. You get some judgments wrong. It has now been shown that things have been slipping through the cracks. So you have to go back and look at the audit methodology," he says.

AIB shareholders found to their cost that hundreds of millions of dollars slipped through the cracks at its US subsidiary Allfirst without its long-standing external auditors, PricewaterhouseCoopers (PwC), noticing. The firm's relationship of almost 20 years with AIB ended in April in the wake of the discovery of a €691 million fraud that had been perpetrated by a lone foreign exchange trader at Allfirst.

Initially, it was thought that his reckless gambling with the bank's own money had notched up these colossal losses over one year. Within weeks, however, it emerged that the trader, Mr John Rusnak, had been concealing mounting losses since 1997.

AIB chairman Mr Lochlann Quinn, a former auditing partner at Arthur Andersen, appeared initially to absolve the firm from any tardiness, laying the blame for the disaster with Allfirst's treasurer, Mr David Cronin, and five other executives who worked in this division.

Many observers expressed great surprise that the bank was not considering taking a lawsuit against PwC as a means to recover some of its losses. A number of class actions have been filed against the bank in the US by investors seeking to recoup monies from the bank to compensate for the fraud.

These investors would have expected AIB to pursue all avenues to recoup any funds possible and would have questioned why it appeared to rule out taking a legal action against PwC.

The bank had successfully sued the auditing firm Ernst & Whinney, now part of Ernst & Young, for its advice on the valuation of the Insurance Corporation of Ireland (ICI), which it purchased in the 1980s. Within a couple of years, ICI became insolvent and, but for the intervention of the State, could have bankrupt AIB.

Last month, AIB deputy chairman Mr John McGuckian seemed to indicate that it may still pursue its former auditors in the courts. Addressing shareholders at a re-convened annual general meeting to approve the appointment of KPMG as its auditors, Mr McGuckian said the directors had "made no decision on PwC".

The firm's senior partner, Mr Donal O'Connor, refused to discuss its relationship with AIB, stressing that the public should have full confidence in its auditing skills. "Auditors have a vested interest in making sure that company accounts are in order. Your reputation is damaged if anything is wrong and we can be sued if we make a mistake." He points out that accountancy firms have unlimited liability and would have to shoulder the entire cost of any court rulings against them.

Auditing has become the poor relation in terms of the money-spinning services offered by accountancy firms. Ms Ann Fitzgerald, secretary general of the Irish Association of Investment Managers, has always questioned accountancy being referred to as a "profession". She believes it is better described as a business. It would appear that the recent litany of bad calls by auditors may well have been down to their preserving business relationships to the cost of investors.