Minister Noonan abnegates responsibility for pursuing auditors who signed off accounts based on imperfect loan documentation

“our own [NAMA’s] detailed due diligence on a loan by loan examination has revealed a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans – all born of a mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending” NAMA CEO Brendan McDonagh speaking to an Oireachtas committee in April 2010

Many people in this State which has been bankrupted by banks, are still seething at firms of auditors which signed off on the financial statements of banks during the boom, financial statements that included loan valuations that have since turned out to be fantasy. The capital bases of most domestic banks were wiped out and the State has so far injected €62.8bn of cash and promissory notes into six financial institutions – AIB, Anglo, Bank of Ireland, EBS, INBS and Irish Life. In addition NAMA is judged to have paid nearly €5bn in state-aid to the banks when it acquired the €74bn of loans, now managed by the Agency. Yet the audit firms have never been held to account, and indeed are prospering during the Depression much as they did during the boom. Why is that?

What many people don’t realise is that it is not the job of an auditor to place a value on a loan in a bank. The bank does that. What the auditor does is check the calculations and underlying paperwork. They don’t do this for every individual loan but they should take a representative sample. If the bank assumes that the borrower will continue repayments or that the underlying property securing the loan will generate enough to cover the loan, then the auditor checks the calculations but it is not the auditors job to get out a crystal ball and foretell property values into the future. And as we know back in 2007/8 there was what is often referred to as a “benign” view of the future of the economy, or as it came to be known, there was a “soft landing” in prospect. Since 2007, the economy contracted by more than 10% in GDP terms and worse in GNP terms, unemployment spiralled to the current record of 14.8%, residential property is down 50% from peak, commercial property is down 65%. Sadly we can’t blame auditors for the awful subsequent collapse.

But we should be able to blame auditors for inadequate or shoddy loan documentation. After all, their jobs should have included sampling the loan documentation to ensure it supported the values being placed on loans by the banks. And we have known for some time that NAMA encountered appalling standards at banks whose loans were being transferred to the Agency. In April 2010 – more than two years ago – NAMA CEO Brendan McDonagh told an Oireachtas committee “our own [NAMA’s] detailed due diligence on a loan by loan examination has revealed a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans – all born of a mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending”. In fact some documentation was so bad that NAMA either paid nothing for the associated loans or refused to acquire the loans altogether. It is not precisely clear what over-statement of loans attributable to poor documentation and other practices that should have been uncovered in audits, has cost this State, but it would seem to be at least €477m (see below) excluding loans which NAMA simply rejected.

So where are the consequences? Where is the hunger to pursue audit firms? Where is the public discourse on professional indemnity insurance?

On Tuesday in the Dail, the Sinn Fein finance spokesperson Pearse Doherty had the following exchange with the Minister for Finance, Michael Noonan

“Deputy Pearse Doherty:  further to the recent publication of a special report by the Comptroller and Auditor General, if he has sought a report from the National Assets Management Agency on the standard of loan documentation available at the participating institutions and the degree by which the poor standard of documentation diminished the value of acquired loans, with a view to examining if it is appropriate to take action against auditors of those Institutions.  [27953/12]

Minister for Finance, Michael Noonan: I am advised by NAMA that the valuation of loans acquired from Participating Institutions was based on an extensive due diligence process carried out by NAMA on the security held for the loans and the assets securing them. Legal due diligence reports submitted by the participating institutions were reviewed by NAMA’s external legal panel with a view to highlighting any issues which would give rise to legal difficulties for NAMA in managing the loans or in engaging in enforcement actions in respect of them. Arising from these reviews, questions were raised about the enforceability of security in certain cases and as a result, it was necessary to impose appropriate legal discounts. To account for these and to account also for financial obligations identified during the course of legal review, downward adjustments aggregating to €477m were made to the acquisition value paid by NAMA on these loans. As a direct consequence, the consideration paid to the participating institutions was duly discounted to take account of poor documentation.

The question of taking action against auditors of institutions for the poor standard of documentation at those institutions is a matter for the institutions themselves.”

So that you get this straight – the Irish state owns 100% of Anglo and INBS and practically, Irish Life, 99% of AIB and EBS and 15% of Bank of Ireland – though in Bank of Ireland’s case, we were in practical control of that bank until private investors were found last summer. The Minister for Finance is nominally the minister who manages these interests in government on our behalf. And that Minister is accepting there was poor loan documentation, that it had significant financial consequences which are borne by the State but at least two years after NAMA brought this to the government’s attention, the Minister abnegates responsibility.

You can tell we are at the start of a five year term of office – such responses produced in an election year would torpedo a government’s prospects for re-election.

The following is a table of auditors at the six covered banks during the boom.

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