Financial regulation: With Griffith-Jones’ appointment, Britain keeps it in the family
By Ian Fraser
Date: June 18th, 2012
I was surprised and exasperated to learn last week that chancellor George Osborne has rubber-stamped the appointment of John Griffith-Jones, the senior partner of KPMG, as chairman-designate of the Financial Conduct Authority, one of the two financial regulators that will take over from the soon-to-be-disbanded FSA. As the news of this “revolving door”, “poacher-turned-gamekeeper” appointment sank in, my disappointment bordered on outrage.
Old Etonian Griffith-Jones is part of the self-serving “wagon-circling” culture of cover-up and denial that, sickeningly, still permeates the City of London despite the financial crisis of October 2008. Under his stewardship, KPMG was of course perfectly happy to sign off what appear to have been fraudulent accounts in order to give bankrupt or near bankrupt banks including Bradford & Bingley and HBOS the veneer of solvency in early 2008, a few months before they collapsed, at tremendous cost to their investors. The latter institution, now part of Lloyds Banking Group, was censured for “serious misconduct” by the FSA on March 9. As David Pitt-Watson, chair of Hermes Focus Asset Management told a House of Lords committee in January 2011:
“If we had had more conservative accounting, then the profits and the equity of the banks would have been lower; the bonuses wouldn’t have been so big; they wouldn’t have loaned out so much more money. I am intrigued that when HBOS was taken over by Lloyds, of their £432bn loan book, Lloyds said £186bn was not business that they would’ve wished to do. It would have been helpful … if [KPMG] had said, ‘Your loan book seems to us to be rather different from the loan books that we’re finding in other banks’.”
KPMG may yet face an FRC investigation into its HBOS audits. The firm also endangered its position by accepting £1.2m from HBOS in exchange for writing a wholly partisan 2005 report into the sacking of HBOS’s former group head of regulatory risk Paul Moore. Moore was personally fired by HBOS’s ex chief executive Sir James Crosby in November 2004 after he sought to alert the Edinburgh-based bank’s board to the fact it had embarked on a suicidal course. There is no doubt that KPMG was wrong to accept this assignment; as the bank’s external auditor, it was hopelessly conflicted, and had a clear vested interest in producing a hatchet job on Moore, which was what it produced. To have cleared him would have undermined the veracity of years of audits.
Given such egregious failures, it is perhaps unsurprising that KPMG is neither trusted nor well-liked by investors.
Nor is is it surprising that leading corporate governance watchdog Pensions Investment Research Consultants is seeking to get KPMG ousted as auditors of Standard Chartered. Pirc claims the firm used IFRS to flatter the Asia-focused bank’s financial position by $3.6bn (£2.2bn), or 8.9% of net asset value.
In the US, KPMG has been accused by the bankruptcy trustees of initiating accounting fraud at California-based New Century Financial, or else standing idly by as the failed subprime mortgage lender committed fraud, in 2005 and 2006. Bloomberg reported:-
Negligent audits and reviews by KPMG LLP, the US member firm of KPMG International, led to New Century’s collapse, according to lawsuits filed yesterday in state court in Los Angeles and federal court in New York. The suits, filed against both KPMG International and KPMG LLP, seek at least $1 billion in damages … “Once an auditing firm lacks independence, then their audits aren’t worth the paper they’re written on,” Steven Thomas, an attorney for New Century Trustee Alan M. Jacobs, said. “KPMG had a duty directly to New Century and a duty directly to the public. It was acting as a gatekeeper for a company that was at the center of the housing boom.”
Following the publication of a report requested by the US Department of Justice, DoJ appointed examiner Michael Missal told Reuters:
“In the post-Enron era, one of the lessons should have been that accountants need to be skeptical, strong, and independent. You didn’t have any of those attributes here.”
Missal said New Century lacked internal controls that might have prevented some seven “wide-ranging, improper accounting practices”, few of which were in accordance with US GAAP. These resulted in the subprime lender reporting a profit of $63.5m in the third quarter of 2006 when it should have reported a loss. Missal wrote:
“KPMG contributed to these failings in critical ways. The KPMG engagement team acquiesced in New Century’s departures from prescribed accounting methodologies and often resisted or ignored valid recommendations from specialists.”
According to the Dept of Justice’s Missal, KPMG’s most egregious error was that it suggested another method for calculating New Century reserves needed to cover potential defaulting loans (for more on failed audits by KPMG read “Time to audit the auditors“)
Griffith-Jones was also one the group of four ‘Big Four’ chiefs (a.k.a. “The Platitudinous Bullshitters”) who were hauled before the House of Lords economic affairs committee to explain the multiple failures of their firms in November 2010. He and his counterparts from Deloitte, Ernst & Young and PWC suggested it was perfectly acceptable to misrepresent banking clients’ solvency, as long as the government had made a vague commitment to bailing out bankrupt banks in the event of total meltdown. The House of Lords economic affairs committee later accused KPMG and and other ‘Big Four’ firms of ”dereliction of duty” and “complacency“, which it said had helped fuel the banking crisis.
At an event organized by KPMG held in the Waldorf Astoria on October 2, 2008, Griffith-Jones seemed wholly uncontrite. Without a shred of shame he informed clients, company directors and City types that accountants would never challenge client managements outside the specific remit of the audit, for example on matters such as risk parameters or business models, as to so so would be ‘commercial suicide’ (i.e. they might lose business as a result)!!
There are further things that concern me about Griffith-Jones. Back in September 2007, a few weeks after the collapse of Northern Rock, he seemed perfectly comfortable with the UK’s ‘light touch, limited touch’ regulatory regime. In an interview with the Independent on Sunday, the Old Etonian said the FSA “ha[s] probably got it about right – they’ve played a subtle game”. He was not enthusiastic about any additional rule-making or regulatory creep:
“There always seems to be the temptation to write another rule – certainly some regulation is rather too prescriptive.”
So a man embedded in a corrupt financial system, who earned millions while his firm turned a blind eye to egregious and deceptive practices at criminal or quasi-criminal organisations including HBOS and Bradford & Bingley, who described the UK’s financial regulatory regime as “about right” after Northern Rock’s collapse, and who won’t criticise corporate management for fear it might cost him business and reduce his earning power, is considered a fit and proper person to serve as chairman of the new FCA?
To me this whole thing stinks to high heaven. The proposed appointment of Griffith-Jones, which may yet be blocked via a judicial review, confirms my worst fears about the UK’s coalition government — it has learnt nothing from the crisis. Rather than properly investigating the causes of the banking and financial crisis, dealing with the culprits, and instituting fundamental reforms, the Griffith-Jones appointment suggests its preference is to bury the truth and just paper over the cracks in the hope of a recovery.
Further reading on auditing, financial regulation and the widespread disinclination to tackle financial crime:-
- Ten things you should know about Big Four audit firms by Francine McKenna
- FSA’s failure to tackle white collar crime endangers the City of London by Ian Fraser
- FSA’s Hector Sants passes the buck for financial crisis by Ian Fraser
- ‘Big Four’ auditors on back foot after UK parliamentary report exposes failures by Ian Fraser
- Accountants who don’t want to be ‘conservative’ or ‘prudent’ are serving capital markets ill by Ian Fraser
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