After hearing the evidence given to the DIRT inquiry, shareholders could be forgiven for wondering whether the relationship between auditors and their clients could be too close for comfort. The Institute of Chartered Accountants in Ireland (ICAI) insists it is too soon to make such a judgment, but the evidence given by some of the State's biggest accountancy firms to the inquiry is hardly reassuring.
The inquiry has lifted the veil of secrecy that has traditionally shrouded the day-to-day interaction between the banks and the individuals who act as their watchdogs, the internal and external auditors.
Both sets of auditors are charged with fulfilling difficult roles and must ensure the banks' accounts provide an accurate reflection for shareholders of their overall financial positions. There are accountancy guidelines which determine how auditors reach their conclusions. In his evidence, AIB's former head of internal audit, Mr Tony Spollen, highlighted the degree of sensitivity that was attached to information gathered by internal auditors. In 1991, he estimated AIB could have a potential DIRT liability of £100 million (€127 million), but his figures were dismissed out of hand by the bank's executives. At the inquiry, AIB's former group chief executive, Mr Gerry Scanlan, described Mr Spollen's calculation as "infantile" and "very childish". However, Mr Jim Culliton, the bank's former chairman, subsequently agreed with the committee that the figures were not entirely unrealistic.
Mr Spollen's £100 million figure would hardly have been music to the ears of anyone in AIB at that time, as such a liability would have almost entirely wiped out the bank's total profits for that year. Its audit committee, which was chaired by Mr Culliton, did nonetheless investigate his claims and decided the £100 million liability estimate was not an accurate reflection of its exposure to unpaid DIRT. And so nothing was done about it.
AIB still strongly disputes the £100 million figure, insisting that any potential DIRT liability at that time would not have been greater than £35 million. But it remains emphatic that it does not have any outstanding DIRT liabilities because it had a deal with the Revenue in 1991 to write off any back tax.
The bank's problem now is that it never got anything in writing from the Revenue which can confirm the existence of such an arrangement. The chairman of the Revenue Commissioners, Mr Dermot Quigley, has strongly rejected the bank's claims to the committee. The Revenue is now examining accounts held at the bank to determine just how much money it owes.
Shareholders must also have been perplexed by some of the evidence given to the inquiry by AIB's external auditors, PricewaterhouseCoopers. One of the firm's partners, Ms Mary Walsh, created considerable confusion in explaining the contents of a note of a meeting she held with AIB's head of taxation, Mr Philip Brennan, last year following the "leaking" of Mr Spollen's DIRT estimates to the Sunday Independent.
Ms Walsh contradicted her own minutes of that meeting, in which she had made clear the direct involvement of two chairmen of the Revenue Commissioners in agreeing the bank's liability for DIRT. She explained that a number of "inaccuracies" which were contained in her note had been pointed out to her by Mr Brennan in the days before her appearance before the inquiry and that she was happy to accept this view. "I unreservedly accept the position that the bank has represented. The note is incorrect," she told the inquiry.
In this situation, Ms Walsh found herself in a difficult position. Indeed, committee chairman Mr Jim Mitchell questioned how appropriate it was for Mr Brennan to have made such a representation to her.
In further evidence PwC admitted that in 1991 it readily accepted the bank's assurances of a deal with the Revenue and, on that basis, never recommended that a provision be made in the accounts for the year to cover any outstanding tax liabilities.
AIB's tax officials who were involved in the discussions with the Revenue on its DIRT liabilities in April 1991 have told the inquiry that the agreement or amnesty was only concluded sometime between September and December of that year. Yet PwC signed off AIB's annual results in May 1991.
And in previous weeks, another of the State's big accountancy firms, Ernst & Young, admitted it knew in 1992 that ACC Bank could have a potential DIRT tax liability of £17.5 million yet no provision was made in the accounts. The committee members who questioned the firm's representatives, which included its managing partner, Mr John Hogan, pointed out that the bank itself was worth just £20 million at the time.
The £17.5 million figure was contained in a long form report which Ernst & Young was preparing for potential bidders if the bank was partly privatised. At the inquiry, Mr Hogan stated the £17.5 million liability was arrived at following an "absolutely prudent view of the situation". Under the letter of the law, he admitted, ACC had a potential DIRT liability of £17.5 million but Ernst & Young never brought it to the attention of the bank's board of directors or its main shareholder, the Minister for Finance, even though such a tax demand would have jeopardised the bank's solvency.
The firm took the view that the Revenue would never go after DIRT arrears, he explained. And as the privatisation plans for ACC were not progressed, a final version of the long form report wasn't completed and the £17.5 million liability was forgotten about.
ICAI chief executive Mr Brian Walsh refused to comment on the evidence from the various firms to the inquiry ahead of its report. He stressed that shareholders should have confidence in auditors until such time as it were proven to have been misplaced.
The basis on which auditors make judgments on clients' accounts is rarely black and white. A firm has to make judgment calls based on its knowledge, he stated. "These judgment calls are based on evidence in the company's books and records; from oral evidence from its directors; and from third-party evidence, such as documentation from the Revenue Commissioners. The firms before the inquiry have defended their actions. I won't jump to any conclusions at this stage."
It should be noted that the banks provide very rich pickings for the big accountancy firms and the loss of one of these accounts would be a huge setback. Last year, PwC was paid £1.6 million for its audit work at AIB and a further £400,000 for other services. The same firm was paid £1.1 million in 1998 by Bank of Ireland for its audit work and an additional £3.4 million for other work. And Ernst & Young was paid £76,000 by ACC for its total services to the bank last year. These accounts are put out for tender at regular intervals and all of the firms know that a good working relationship with their client is essential if the business is to be retained.
The Dail sub-committee conducting the inquiry is now drawing its conclusions based on seven weeks of evidence and expects to issue its report before Christmas. It remains to be seen what recommendations it may make about the relationship between auditors and their clients and whether this relationship is too close for its liking.
