Deloitte and the demise of RBS

In Article Library by Ian Fraser1 Comment

By Ian Fraser

Published: Sunday Herald

Date: 18 December 2011

John Connolly, former global chairman of Deloitte. Photo: The Sunday Times

One of Fred Goodwin’s first acts on being appointed chief executive of the Royal Bank of Scotland on March 6, 2000 was to sack PWC as auditors and to wheel in his ‘alma mater’, Deloitte & Touche. Ex-insiders suggest this was because Goodwin believed that Deloitte – where he cut his teeth in the early 1980s and was a partner from 1988 to 1995 – would be more “biddable” than PWC. “Goodwin was very close to John Connolly. It seemed somewhat incestuous”, said one ex-RBS senior executive.

Connolly, who was then Deloitte’s UK managing partner and went on to become the firm’s senior partner, had been Goodwin’s boss at Touche Ross and is widely considered to have been Goodwin’s “mentor”.

Connolly was censured by the Joint Disciplinary Scheme over his role in the 1988 Barlow Clowes fraud, which cost the government £150m in compensation to thousands of mainly elderly savers. Instead of drumming Connolly out following this misdemeanor, Touche Ross partners rewarded Connolly by voting him in as their UK managing partner.

In 2007, when RBS made a string of reckless “gambles” that caused its near-demise, including the ABN Amro acquisition and failing to hedge the super-senior tranches of toxic CDOs, Deloitte received £17m in audit fees and £14.2m in non-audit fees from the bank – a total of £31.2m. The recent FSA report does not record whether Deloitte, which failed to qualify the 2007 RBS accounts, ever warned that the Edinburgh-based bank’s recklessness and wafer-thin capital ratios might endanger its future.

In both 2005 and 2003 Deloitte received more in non-audit fees than audit fees from RBS which ought to have raised alarm bells among investors, since such a balance can jeopardize the independence of the audit.

In November 2010, ex-chancellor Lord Lawson accused Connolly of being “extraordinarily self-satisfied,” after the accountant claimed Deloitte had audited RBS well during a hearing of the House of Lords economic affairs committee. “You were the auditor of RBS, which went belly up within a few months of giving it a clean bill of health,” said Lawson.

This year Deloitte appointed Steve Almond as Connolly’s successor as the firm’s global chairman, even though Almond led the RBS audit between 2005 and 2009. Alan MacDougall, head of Pensions & Investment Research Consultants (Pirc), described the appointment as “disappointing”. He added: “Given the centrality of the audit to protecting the interests of shareholders, and given the amount of shareholder funds lost in the case of RBS including the rights issue in early 2008, this appointment requires some explaining to shareholders.”

One investor told The Telegraph: “The audit firms and the standards they operate are dominated by a tight group that has no interest in shining a light into the industry. The appointment of Mr Almond absolutely epitomises this.”

Three years on from its client’s near demise Deloitte, which continued to audit RBS’s books even after the bank was rescued by the taxpayer at a minimum cost of £45.5bn, is being investigated by the Accountancy and Actuarial Discipline Board, part of the Financial Reporting Council, over its RBS audits.

Note: an edited version of this article accompanied a wider piece on plans from EU commissioner Michel Barnier to reform the audit sector. It was published alongside a similar piece on KPMG’s inadequate audits of HBOS. Photo: courtesy of The Sunday Times. (minor edits March 31st, 2013)

9 March 2017: Further research of the Royal Bank of Scotland annual reports from 2000-15 shows that during that 15-year period, RBS paid Deloitte a total of £484.7m in fees. Of this, audit fees represented £351.7m (72%), while non-audit fees represented £133m (28%). In the eight years Fred Goodwin was RBS CEO (2000-08), the bank paid Deloitte £201.4m, of which £116.7m (57.9%) was audit fees and £84.7m (42.1%) was non-audit fees. 2001, 2002 and 2003 were the years when non-audit fees exceeded the audit fees, though it was once again a close-run thing in 2006. RBS paid Deloitte £283.3m in fees in the seven years the accountancy firm continued to handle the RBS account after the bailout (2009-15). Of this, audit fees represented £235.1m (83%) and non-audit fees represented  £48.3m (17%). The audit fees soared from £4.9m in 2000 to £44.6m in 2009 before falling back to £28.1m in 2015. Deloitte was replaced by Ernst & Young from 1 January 2016. 

 

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