For those of you who feel that auditors have questions to answer for the colossal cost of the collapse of the Irish banking system, you’re not alone. Whilst auditors cannot be blamed for failing to identify a credit/property bubble or for not being able to forecast loan losses, they can be blamed for failing to uncover sloppy loan documentation which subsequently rendered loans valueless, and the carouselling of deposits at year end in order to enhance the appearance of financial accounts. In the US, the global accounting and audit firm Arthur Andersen met its end – as it was then embodied, there is still an Arthur Andersen brand name – in the wake of the Enron scandal. Yet in Ireland, not a single auditor has been called to account in the collapse of the banking system as we approach the fourth anniversary of the bank guarantee in September 2008.
It seems that Minister for Finance Michael Noonan has no real interest in pursuing auditors, if only to establish if there is culpability which might give rise to a claim for compensation. Yesterday in the Dail the Sinn Fein finance spokesperson Pearse Doherty asked Minister Noonan to identify those responsible for the audits in Anglo and Irish Life and Permanent – remember these were the two banks where €7.4bn of deposits were transferred at year end so as to enhance the apparent financial strength of Anglo. It was KPMG which audited Irish Life in 2008 and the Minister identified the partner responsible for the audit as Alan Boyne. However in the case of Ernst and Young which audited Anglo, the response was that Anglo was “not in a position to positively identify all the principal persons at that company who were responsible for the conduct of the audit” !
Of course the identity of those responsible for the audits is secondary to the issues that many believe the audits should have uncovered. And when asked what steps had been taken by Minister Noonan to seek redress for apparent failings in the audits, the Minister’s response does not fill you with confidence that there is any serious will, either on the part of the Minister who is the sole shareholder in Anglo (now renamed IBRC after the merger with INBS) and who controls over 99% of Permanent TSB, or on the part of the Department of Finance which supports the Minister. The matter is pawned off on the Chartered Accountants Regulatory Body which is akin to, say, the Irish Farmers Association investigating allegations of milk price-fixing by farmers. It is the State that owns these banks, it is the State that has potentially suffered financial loss and yet it is a trade body (or professional body) which is looked to, to deliver justice to the State. The prosecution of three former Anglo staff is also cited as an excuse for the delay, frankly the opposite could be the case – the prosecution of Messrs Fitzpatrick, McAteer and Whelan could prejudice a financial claim on the auditors.
The full text of the questions is shown here. There is a previous blogpost which details the auditors in Irish banks during the boom and crash here, together with a flavour of Minister Noonan’s position.
Deputy Pearse Doherty: To ask the Minister for Finance the principal person or persons at an audit firm (details supplied) who was or were responsible for the audit of the financial statements for the year ended 30 September 2008, of the bank formerly known as Anglo Irish Bank which is now 100% owned by the State.
Deputy Pearse Doherty: To ask the Minister for Finance the steps taken by the bank formerly known as Anglo Irish Bank to seek redress from an audit firm (details supplied) in respect of any failure to identify irregularities in the financial statements for the year ended 30 September, 2008..
Deputy Pearse Doherty: To ask the Minister for Finance the steps taken by him or agencies acting under his aegis to seek redress from auditors (details supplied) in respect of any failure to identify irregularities in the financial statements for Anglo Irish Bank..
Minister for Finance, Michael Noonan: I propose to take questions 268, 270 and 271 together .
As the Deputy is aware the company referred to in the question, chartered accountants and registered auditors, conducted the audits of the relevant financial statements of Anglo Irish Bank Corporation for the year ended 30 September 2008. I have been informed that the bank is not in a position to positively identify all the principal persons at that company who were responsible for the conduct of the audit.
The Deputy will be aware that the Chartered Accountants Regulatory Board (CARB) appointed Mr John Purcell to conduct an independent enquiry into certain matters relating to their conduct as auditors of Anglo. The Statement issued by CARB following his investigation is attached.
Mr Purcell also carried out an investigation into the conduct of Mr Sean Fitzpatrick, Mr William McAteer and Mr David Drumm, all officers of Anglo and members of CAI. The Statement issued following the investigation is attached
In all cases Mr Purcell concluded there was a prima facie case. The next step in the process is for CARB to hold public Disciplinary Tribunals. However, these have been stayed following a request from the DPP who was concerned that the CARB prosecution of any of these cases could prejudice the criminal enquiry against the individuals or the firm named above arising from the various investigations carried out by the Garda and Regulatory Authorities.
The bank has also advised me that it is actively investigating all legacy issues with a view to taking appropriate action to resolve such issues. Due to the sensitive nature of those issues, it would be inappropriate for the bank to comment further on the subject matter of the question at this time.
NAMA Wine Lake 
Bad enough that these auditors will not be brought to book but the government continues to get very expensive advise from these clowns.
Anyone that could not spot that Anglo was a basket case should not be asked for advise on anything to do finance.
This government and the lackeys in finance have no interest in taking on these vested interests.
Could be awkward in clubhouse….
Ernst and Young went to the High Court in April 2011 to try to halt the CARB investigation into its role as Anglo auditor. Case got thrown out, though.
http://www.irishtimes.com/newspaper/breaking/2011/0513/breaking40.html
You’d wonder do they really not know, or is it a case that they don’t want to be seen to in any way prejudice the cases of the Anglo 3 ….. or would the real answer be more embarrassing in that the people who actually carried out the audits may have moved on to somewhere like NAMA!
[…] Gael now protecting Anglo Auditors Anglo This is the most bizarre excuse I have ever heard. Anglo are unable to identify who actually […]
I think the government is afarid to take a case against Ernest & Young as they know the damages would be so colossal they would bankrupt the firm and cause chaos in the financial community who bankroll Fine Gael.
It is hardly surprising….When all you have to work for you is that spineless.Noonan, He does what he is told by his masters and stands in the Dail and tells us how hard it is to identify those responsible for the fraudulent activities in anglo.He is a waste of space.
I can’t see why the government and it’s agencies cannot demand to obtain the identity of the people who carried out the audit? The working papers from an audit would quickly identify the auditors who went in to carry out the audit.
The name of the individual auditor, the audit manager and the managing partners name would be easily identifiable.
The firm carrying out the audit are required to retain audit papers for audits that it to carry out. Why can’t these audit papers be accessed for example?
[…] Anglo “Unable To Identify” Persons Responsible For Audit Of Its Accounts In 2008 (NamaWineLake) […]
What auditors and chartered accountants have been involved in serious scandal recently?
Of course, there’s always the possibility that the accounts weren’t audited at all.
Maybe the signature used to sign off on the audit was encrypted?
An ancillary issue : why is it that only Pearse Doherty TD appears to be asking the relevant questions about the Quinn case, Anglo Promissory notes, bank recapitalisations and sovereign debt in the Dail?
Are there no other opposition Finance spokesmen TD’s willing or able to ask the relevant questions of Noonan & Co? Why isn’t Michael McGrath questioning Noonan about these issues?
Much more than an ancillary issue Mr. D, its a highly important question. I too would like to know the answer.
Serious misunderstanding of the role of an auditor. Auditors are not responsible for uncovering dodgy loan documentation. Nor are they or shoudl they have a role in judging the commercial decessions of a bank. A clean audit really does not tell you much
In hindsight you’re correct. We should have ignored the audited financial statements showing Anglo Irish Bank pretax profits €1.2 billion for 2007 and profits €784 million for 2008 respectively.
@DCB, will take issue with part of what you say there. Auditors are supposed to validate the financial accounts presented to them by management. In the case of a bank, the bank will show its loans as assets in its balance sheet. You would expect auditors to check the system used to arrive at the total figure for loans, and you would generally expect auditors to sample-check some loans, and I would expect that to the extent the value of a loan is dependent on a signed loan agreement and assignment of assets, for a sample to be checked.
@nwl
The implication of your position is that you believe not only that the auditors did not
“check the system used to arrive at the total figure for loans”, and
and did not
“sample-check some loans”
and did not
check a sample of
“signed loan agreement and assignment of assets”
but also that the Minister has established that to be the truth of the matter, and has shamefully decided to do nothing about it.
Can you justify your position ? Please refer to the DPP’s stance in your answer.
@Fergus, we don’t precisely know what the auditors did or didn’t do, but we do know that NAMA acquired €455m of loans for nil consideration because of inadequate documentation, and I think it fair to assume that the banks are also nursing loans of questionable value again because of poor documentation. I also can’t see qualifications to the accounts. A possibility therefore is that the auditors did not check systems and documentation, but that is one of many possibilities. It’s worthy of investigation though, and that is the point.
The remainder of your comment is accordingly nugatory.
@ nwl
‘And when asked what steps had been taken by Minister Noonan to seek redress for apparent failings in the audits, the Minister’s response does not fill you with confidence that there is any serious will, either on the part of the Minister who is the sole shareholder in Anglo (now renamed IBRC after the merger with INBS) and who controls over 99% of Permanent TSB, or on the part of the Department of Finance which supports the Minister. ‘
That’s the formal, constitutional reality, but the operational reality is very different. It is not in the personal or corporate interests of the Minister or his fellow party leaders to fall out with those who dominate the world of auditing and finance. Financial contributions, directorships, opportunities for friends and family members would dry up. It’s not conceivable.
What went on in our financial sector was murder pure and simple. Like Chernobyl, the strategy is to pour as much concrete as possible over the smoking ruins, and move on. This approach protects all of the insiders, and the existing system more generally. As each year goes by, the responsibloe individuals and bodies feel that bit ‘safer’. After a decade or so , it will all be history. Or so they think.
Long term unemployment and emigration cannot but erode public confidence in our traditonal institutions, including the professions. The helplessness of the administration will become more and more apparent, as the can gets steadily harder to kick. Sinn Fein, as a largely northern party, has least to lose, and most to gain, from the inevitable shakeup in Dublin, and the longer it is postponed, the more fundamental it will be, IMHO.
@Fergus O’Rourke : the audit working papers for Anglo Irish Banks should be retained by the auditing firm. A review of those audit papers would quickly show what figures throughout the banks subledgers were tested for (as applicable) accuracy, materiality and supporting documentation during the annual audit.
It is reasonable to assume that in the audit of a bank’s financial statements that an audit firm would interrogate a large sample of customer loans to validate the accuracy of the value ascribed by management to those “assets”?
Another issue would concern system audits. As well as undergoing annual financial/management accounting audits, many firms undergo system audits. This is where a company system of procedures is tested to ensure that processes and procedures are engineered to protect the viability of a business and to ensure the protection of the assets of that business. Usually a businesses external auditors conduct system audits. Where E&Y commissioned to undertake such system audits at Anglo?
I have no issue with what you say. Nor do I have any information of the sort you seek.
@Nwl
Of course, auditor negligence is a possibility. There is an infinity of possibilities. But your implication is that because there have been no prosecutions or other litigation, it is because the minister is not interested. You also imply that the minister is using the DPP as “an excuse”, and that the DPP does not know what she is doing – I refer to this passage:
“The prosecution of three former Anglo staff is also cited as an excuse for the delay, frankly the opposite could be the case – the prosecution of Messrs Fitzpatrick, McAteer and Whelan could prejudice a financial claim on the auditors.”
I would point out that the charges faced by the three men mentioned have nothing to do with the matters mentioned by you in connection with possible auditor liability.
@nwl
I almost forgot: Because I like you (a little, and not in *that* way), I will overlook your lèse majesté in using the word “nugatory”. Only I get to use words like that around here :-)
Part of any investigation in to the role of Ernst & Young’s validation of Anglo’s financial statements should incorporate a review of the audit papers of other auditors at Anglo Irish Bank.
In 2008 Anglo Irish Bank annual report, Ernst & Young validated the financial statements which stated that the bank earned €784 million profit.
In 2009 Anglo Irish Bank annual report, Deloitte & Touche validated the financial statements which stated that the bank lost €12.1 billion.
A comparison of the audit papers from both firms might shed some light upon the level of accuracy, materiality and source documentation validated.
Surely the State can apply to a court to obtain an order of discovery in order to obtain the audit working papers and to establish who in E&Y conducted the audit?
(that’s assuming this government are interested in ascertaining the facts)
@Fegus O’Rourke
The tone of your comments suggests your in some way protecting the work undertaken by E&Y with regards to their audit of Anglo. Events in the meantime suggests that such as stance is rather pointless. This is not a case of hindsight being 20 20 vision. It must be remembered that in 2007 all Irish banks saw their share prices collapse whilst at the same time most international stock markets reached new highs in Oct 2007 – Anglos share price had been in sharp decline since 1st June 2007 – c30% falls from the highs until the end of Nov 2007 and by c40% until the end of the 2007 calender year. As far as I can recollect the 2007 annual report wasn’t actually produced until some time in Nov 2007 meaning the 2007 audit was signed off sometime during Nov 2007 when stock markets were in retreat at a serious lick.
In addition as far as I can recollect the original 2008 Audit report issued in Dec 2008 was withdrawn and reissued in Feb 2009 which suggest E&Y had made a balls of the 2008 job in suggesting all was dandy.
The basic point I making is that the market participants knew something was up in the summer of 2007 – not 2008. It seems unbelievable that those closest to the numbers prior to the 2007 sign off were blissfully unaware as to what was going on – Auditors have an obligation right up to sign off date which is never the year end date to question the truth and fairness of the results presented to them. On both measures by Nov 2007 prior to sign off they ought to have known something was seriously amiss so trying to defend their stance given what was going on suggests you’re perhaps compromised in some fashion.