Banking inquiry: ‘Big four’ discussed concerns with regulator

The “big four” audit firms all attended a meeting with the financial regulator to discuss concerns in relation to the liquidity of the banks, eight months prior to the bank guarantee.

KPMG partner Paul Dobey and former KPMG managing partner Terence O'Rourke – who is also a non-executive director of The Irish Times Ltd – gave evidence as the inquiry's hearings on the role of banks' external auditors continues.

Mr Dobey told the inquiry that all four of the main audit firms – Deloitte, PricewaterhouseCoopers, KPMG, and Ernst and Young – attended a meeting with the regulator in January 2008 to discuss the banks.

“We were concerned generally as a firm in relation to the financial stability matters in 2007,” he said.

“On January 10th, 2008, we met with the financial regulator. That meeting was initiated by me through the institute.”

He said the purpose of the meeting was to “have a discussion about the issues that were arising in the environment at the time”.

“We wanted to have a general discussion, and actually all the four firms went in and talked to the regulator.

“We talked about opinions, growing concern around valuation issues, we talked about hard to value securities, we talked about risk management . . . we talked about what was going on in relation to liquidity in the system generally.”

Asked whether collectively the firms had concerns around the audit of banks, and more particularly around liquidity at that time in respect of the banks, Mr Dobey said: “Yes, the regulator had concerns. We had concerns. It was a very uncertain time.”

AIB audit

KPMG were auditors of AIB, which received a total State bailout of €21 billion following the financial crash.

Mr Dobey, who was lead partner for KPMG on the bank’s audit from 2005 to 2008, said they had “significant concerns” in relation to both the liquidity and the solvency of the bank in its 2008 audit.

“In 2007, there were issues in relation to the liquidity position of the bank,” he said.

“We asked AIB to prepare a detailed paper setting out what liquidity it had available to it. The conclusion from that paper was that AIB had some €30 billion of liquidity available to it. Therefore, we were satisfied that we didn’t need to go any further, and we didn’t.”

Mr Dobey also said KPMG discussed the liquidity of AIB with the Central Bank and the government in 2009.

“We were concerned in 2009 about liquidity and we spoke to the deputy governor of the Central Bank around the availability of ELA [emergency liquidity assistance] and we got assurances in relation to that matter,” he said.

“We were also concerned about the capital of the bank and solvency, if I can put it that way. The government had agreed to put capital into the bank of €3.5 billion. That came in in Q2 [second quarter]. We weren’t sure if that was enough.

“We spoke to the assistant secretary general of the department of finance in February 2009 to get assurances that if more capital was required it would be made available.”

‘True and fair view’

Mr Dobey said audits provided by KPMG related to “the true and fair view” given by AIB’s financial statements and did not address the effectiveness with which management or the board of AIB conducted its affairs, or the appropriateness of its risk appetite.

“That responsibility rested with the management and boards of AIB,” he said.

Mr O’Rourke said: “We were not inept. We did a very high quality audit of AIB, I can assure you of that.”

Sinn Féin finance spokesman Pearse Doherty asked whether the firm wished to "apologise to the Irish people".

“Of course it was regrettable the crash occurred,” Mr Dobey said.

“Of course it is terrible for the Irish people what they were facing into. But I don’t believe it was a result of our audits or the financial statements that the crash occurred.

“If you’re apologising, you’re apologising for making a mistake. We don’t believe we made a mistake.”

Mr Dobey said there was “a very open dialogue” between KPMG and AIB at all times. “They were very open in terms of providing us with information.”

“What I can say is that when the crisis hit AIB in 2008, the 2008 audit was the most difficult we had done to that time,” he said.

“There were difficult audits subsequently also.

“There was great difficulty in gathering the information needed to assess the loan loss provisions, and we allocated huge amounts of man hours to that. AIB allocated huge amounts of man hours to it.

“We got to the right answer in February, but it was very, very difficult and very expensive and costly.”