Banking crisis: Don’t blame the auditors

Repeating that Audit in the UK has ""no systematic weaknesses"" depicts a very narrow view of system as does the "recklessly driven car" metaphor. But neither is as damning as clinging to the "duties as currently stipulated" excuse.

Our current ill fortunes, whether Banking Crisis or a shamed Parliament, are the result of attitudes and, because people are the damaging part of the system, it is no longer OK to hide behind prevailing codes and standards that are based on nothing more than data collection.

It might not be appropriate for an Auditor to advise on a "Banks business strategies and practices" but it ought to be a matter of principle that an Auditor reports the financial implications.

Until such time as culture, attitude and behaviour have no impact whatsoever on financial performance it should be the moral duty of an Auditor to observe, measure and pass comment on them.

I am not a financial auditor, and not in the accountancy profession, so hopefully have a view that is not biased, except from the perspective of being affected by the whole crisis. I am however very active in looking at other auditing practices, particularly management systems and business sustainability, so can give another perspective.

Like most of the respondents, I am appalled at the apologies being made to justify why Auditing is not to blame, or at least partially responsible for the problem. The issue is that audits need to give confidence (or otherwise) that an organisation is a safe place to work/invest/save/whatever. To hide behind such things as auditing rules is just missing the point - if the rules stop this happening then the rules need to change - and quickly.

The problem seems to be that the profession doesn't not want the rules to change, as it is far too comfortable (and financially lucrative and risk managed) to keep it like it is. In management system auditing the value of the audits is being severely challenged, and the same is true of financial auditing - if it cannot deliver the value needed, then it will be replaced with something that can. It is not there for the comfort of the auditors.

I am appalled by the comment around "A recklessly driven car is still more likely to crash whether it has been recently serviced or not." What a load or rot to suggest that this should not be part of the risk profile that needs to be understood. The problem is that auditing is currently measuring the wrong thing. It is looking at things that can be easily measured to indicate compliance, even if this is not what in reality drives outcomes. Yes, it is partially contributory, but other things are far more so. For example, the car crash could easily be predicted if you asked passengers in the car, other drivers on the road or the people the driver spoke to in the pub about the behaviours being displayed. The same is true within any business and much more easily gathered.

Auditing needs to focus by looking for lead indicators of risk, such as behaviours, if they are to provide a realistic level of value to their readers. Yes, compliance is important, but is just an early step on the pathway to business maturity, especially in this era of delivering an appropriate mix of economic, social and environmental outcomes. At the moment audits seem to be there primarily to keep the company operating, not to provide risk information to those outside it. The profession has forgotten what their outcome should be - what they are trying to achieve - they are acting just like looking at the maintenance record of a car. Is this what they get exorbitant fees for?

Tools to help consistently understand and analyse behaviour are available - so why oh why doesn't the profession start to use them? If I get a reply to this question, it will be interesting ..... If I don't , that will be equally indicative .....

This article is a shocking apology for a profession that has run out of control. You only need to see the docket of lawsuits to understand that or to recall the fraud cases for which partners at the Big 4 have been found culpable.

I'm sure the Big 4 will be mightily relieved as will ICAEW but quite frankly this is a great exposition of the ignorance the Treasury has about audit. Does Mr Churchill honestly think that is going to stop the welter of lawsuits the auditors are going to be faced with?

"It must be remembered that an auditor’s responsibility is to report on the truth and fairness of the bank’s financial status, not to challenge the bank’s business strategies and practices. That is a job for the regulator, the Financial Services Authority (FSA)." - absolutely true but that also includes assessing risks which include those that fall under IR39.

You cannot convince me that auditors did not know the problems. From almost the get go it was clear that on any objective assessment, it is almost impossible to determine a value for a derivative. It's a casino chip. This was something I warned about in 2001-2. I am not a bank audit specialist (though I have done forensic work on bank fraud). I'm someone who made ONE phone call to discover the nature of derivatives at that time. It was glaringly obvious to anyone who bothered to think about the issues that there were genuine problems. It has nothing to do with Mr Harris's assertion about crystal ball gazing.

What must also be obvious is that attempting to pit a newly minted graduate against the PhD rocket scientists dreaming up these instruments was a no contest yet STILL partners turned a blind eye.

In discussing 'reciprocal arrangements' I get the feeling the writer is condoning what amounts to a cozy nod and wink club. That above everything HAS to be ended.

The Big 4 may not be to blame but they assuredly played their part. No amount of Treasury Committee reporting can avoid that unsavory truth. Neither will it prevent the lawsuits.

We are living in a new era. It is NOT business as usual. Any pretence to the contrary does a serious disservice to the profession.

If you think any of this is pure ranting, ask Jeremy Newman, CEO at BDO what he thinks. I have. Globally they're on the hook for $521 million. Ask Grant Thornton what they think. Goodness knows what their total exposure is. And then ask the Big 4 what they think about Madoff.

I have posted an extensive commentary on the absurd arguments in this article athttp://www.taxresearch.org.uk/Blog/2009/06/04/auditors-have-a-massive-responsibility-for-the-financial-crisis/

I suggest its author reads that piece and then think again.

Richard Murphy

The previous comment suggested that auditors should have known that packaged mortgage instruments containing "trailer trash" were over-valued. This completely misses the point about auditing in a market economy. While there was an active market for these securities how would an auditor justify insisting on departing from market value? The fact that the market miss-priced assets (with the benefit of hindsight) may be a failure of the market but is not a failure of auditing. If such comments are taken to the extreme, most assets should be written down much further (e.g. investments) because most of them are miss-priced at some time. If that were not the case then we would be accepting a perfect market hypothesis which clearly does not really exist. Until (if ever) there is a better way to transact the best (albeit imperfect) measure of value is that given by the market. If you want to know where the market is going in the future, ask a clairvoyant, but don't blame the auditor for not foreseeing the future when noone else did! Or do you want utterly subjective values on which the auditors would be unable to report anyway?

In my opinion the standard of auditing while improved in recent years is still weak in a number of areas. This stems from a number of factors including a) over-complex accounting standards leading to focus on compliance and disclosure, not true and fair b) legal system and corporate governance regimes causing auditors to be too close to directors - why not only ever allow auditors to be appointed by shareholders in general meeting c) confusion as to who auditors' clients really are i.e. the members, not the directors d) lack of willingness to challenge directors e) users misunderstanding as to the nature and objective of an audit - not aided by confusion in law and auditing standards between assisting the stewardship function and providing information to potential investors. However, none of these criticisms means that the auditors should be expected to see into the future!

At some point in time in the USA what appears to have happened is that somebody got it into their head to shuffle the pack of residential mortgages and mix the High Quality with the Trailer Trash or sub prime. He then passed that off as top quality. He found that by doing that he could pass off all the trash as quality.

This was closely followed by others doing the same thing.

So those who bought did so thinking that they were buying quality and no doubt it must has been valued as such.

So who failed to audit this shuffling about and why did it go by unexpained?

Is everyone totall blind when allocating responsibility Its No Not Me! I suppose none of the auditors had ever seen adverts which suggested - Self Certified Loans - no problem or Loans up to 100%.. Did all the auditors live on a separate planet?

Who might possibly have thought that with interest swinging up to 7 or 8% pa any of this made any sesnse whatsoever.

Yes sack all the Boards of Directors and Senior buyers of the trash, sack the auditors and get rid of all the IFA staff who were looking in the wrong direction too!

and I am a liberal minded person!

Call the auditors to account

Julian Hamilton