OPINION:How did the banks get a clean audit report one year and collapse under huge losses the next? asks JOHN McMANUS
IF YOU raise the issue of the dominance of the “big four” accountancy firms – or indeed the “big five” Dublin law firms – with businesspeople it will be greeted with a knowing look, a shrug of the shoulders, eye-rolling or a combination of all three. This is often followed by a reference to Chinese walls, implying that the person you are talking to thinks their existence is slightly less probable than that of the tooth fairy.
But still these firms get the lion’s share of the high-value corporate work going in Ireland and are – it must be said – the firms of choice of the vast majority of decision-makers.
The situation would appear to be that most businesspeople do not consider themselves to be so naive as to think these firms don’t have a serious issue with conflicts of interest, but on balance they believe they have the best people working for them. The firms themselves would no doubt add that they expend a great deal of effort in trying to manage conflicts.
This was certainly the situation that pertained before the current crisis and it looks like the one that continues to exist based on the way that the big legal and accountancy firms are feeding off the National Asset Management Agency (Nama) despite being advisers to the banks and property developers who are primarily responsible for the €50 billion catastrophe that Nama is meant to try to resolve.
According to the Auditor Comptroller General, PricewaterhouseCoopers – the auditor of Bank of Ireland and Quinn Insurance – has received €5.5 million in fees for services rendered to the Government as it grappled with the banking crisis. This, no doubt, includes the 2008 PwC report saying the banks were all adequately capitalised. KPMG (auditor to AIB and Irish Nationwide) got €2 million while Ernst and Young (the former Anglo Irish Bank auditor) got €240,000. Deloitte, the last of the big four and current Anglo Irish auditor got €420,000.
It would appear that the big professional firms have managed to weather the crisis without any external – or, it would seem, internal – questioning as to whether the way they go about business means they must shoulder some responsibility for what happened. It’s a can of worms that nobody wants to open. Nobody, apart from the European Commission, which once again looks like forcing us to face up to things we would rather brush under the carpet.
Last week, the internal markets commissioner Michel Barnier published a Green Paper called Audit Policy: Lessons from the Crisis. It is based on the premise that there is probably something wrong with a system in which banks across Europe got clean audit reports one year, only to collapse under massive unseen losses the next.
It’s a simple premise, but not one that very many seem keen to accept in this corner of Europe.
Pretty much everything is up for review in the Green Paper, right down to the question of whether audit firms truly understand their social mandate. There must be some good reason why the State has passed a law that guarantees them work – the requirement for limited liability companies to make audited accounts publicly available. But when you look at the current state of the Irish banks which were subject to years and years of highly lucrative statutory audits, you would be hard-pressed to see what the taxpayer got out of it.
But even if this sort of Euro-socialism is not to your taste, there are plenty of other issues raised in the Green Paper which Irish people might like to hear the big four firms respond to. The commission wants to know whether it might not make sense for a third party to decide who audits a bank and how much they should be paid to do it rather than leave it to the bank itself.
It also suggests the mandatory rotation of audit firms, “with a view to instilling and maintaining objectivity and dynamism in the audit market”.
Another issue is the provision of non-audit services by auditors to clients they audit. The logic is blisteringly simple: how can you give an independent opinion on the financial health of a company you have a business interest in.
They also want joint audits of large companies as a way of upskilling second-tier audit firms and breaking the loop by which only four firms get big company audits because only four firms have the ability to audit them.
This has become such a problem, the commission argues, that should one of them collapse it could seriously disrupt the flow of information to shareholders and investors about a large number of companies. The big four firms may themselves be “too big to fail”.
It’s impossible to argue in the wake of the biggest financial crisis in history that these are not important issues. It’s even harder to argue that, in the country that has experienced the most ruinous banking collapse, they are not doubly important. But plenty are still willing to try.
