The horse has bolted, but at least the Lords have started to clean out accountancy’s Augean stables

March 30th, 2011

Here is Lord MacGregor, a former Conservative chief secretary of the Treasury, unveiling the hard-hitting and long-awaited conclusions of the House of Lords Economic Affairs Committee’s report into audit profession.

This is an inquiry I’ve been following with great interest and which I’ve written on Qfinance (Scrap mark-to-market accounting or face further crisis, warn investors), on this blog (‘Big Four’ auditors admit they lied about bank solvency pre-crisis) and on Naked Capitalism (Is the House of Lords inquiry putting the FCIC to shame?).

The report calls for a competition probe into the ‘Big Four’ auditors’ oligopoly. It also found that the ‘complacency’ and ‘dereliction of duty’ of Deloitte, Ernst & Young, KPMG and PWC was a major contributor to financial crisis.

The report follows an eight-month investigation by the economic affairs committee into the audit market. As Lord MacGregor says in the above clip, there are three main areas of findings.

(1) The Big Four auditors’ domination of the large firm audit market limits competition and choice.
(2) The breakdown of dialogue between bank auditors and regulators, together with inadequate auditing, made the financial crisis worse.
(3) Audit and accounting standards are slipping, with far too much box-ticking and not enough prudence.

On the last of these points, IFRS accounting standards as applied in the UK have been a disaster. They meant the banks were able to produce “phantom” profits. Adam Applegarth, ex-chief executive of Northern Rock, told the Daily Telegraph in 2005 that  “IFRS had introduced more volatility and led to ‘fairly insane’ profits growth”.

Along with surreal profit reports, as Yves Smith has pointed out, IFRS also gave rise to looting (making it possible for “remuneration committees” to pay put salaries and bonuses to executives to a degree that endangered the firms themselves).

I suspect that the committee’s report, coupled with pressure from the European commissioner for the internal market Michel Barnier, represents a turning point. It might even represent the start of the long-overdue clearing out of the Augean stables of a profession that has, sadly, become so corrupted it has become a danger to capitalism itself.

MacGregor said:

‘Our inquiry has revealed widespread concerns about the Big Four’s dominance and the risk that they could become the Big Three. Our report makes several recommendations to reduce this dominance but we feel that this market concentration is of such significance that a thorough review of the issues by the Office of Fair Trading and possibly the Competition Commission is now overdue. Equally important is our support for regular meetings between auditors of financial institutions and regulators to avoid the serious failures of communications between the two which were so starkly revealed by the evidence to us and which contributed to the financial crisis.’

Sadly, however, as Alistair Osborne points out in this Telegraph piece, the horse bolted long ago and all we’ve been left with is a heap of sh*t!

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Posted by Ian Fraser on Mar 30 2011. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry