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The FSA wanted someone to whitewash RBS and, sure enough, PWC obliged

December 2nd, 2010

The Financial Services Authority this morning declared that, after a 17-month “investigation”, it has concluded that none of the RBS directors who led the bank to the biggest banking failure in history, costing the British taxpayer a total of £1.3 trillion to bail out, did anything wrong.

In an article called The FSA/PwC ‘investigation’ into RBS’s ‘bad decisions’ is a joke, right? I have sought to explain why I believe this is a cover-up which both the FSA and PwC will come to regret.

In this follow-up post, I just wanted to provide a few pointers as to why I believe the FSA’s 2009 decision to outsource this inquiry to PricewaterhouseCoopers was flawed — and was probably specifically designed to ensure the conclusions would be favourable to the FSA (i.e. a whitewash/cover-up).

By the way, I am far from being the only person who thinks this. Pretty much everyone I’ve spoken today, including Stewart Hamilton Professor Emeritus in accounting and finance at IMD in Lausanne, agrees.

The point is that PWC is not the most reliable of investigators for this type of exercise. It is fatally compromised by its own past wrongdoing — as well as being conflicted. The accountancy firm connived with the management of other banking clients to misrepresent their financial strength pre-crisis through deceitful accounting, the abuse of off-balance-sheet vehicles, the burial of risk and, it has been alleged, conspiracy to defraud.

The ‘Big 4′ accountancy firm — which was paid £7.7 million for producing the FSA’s RBS report — is currently being investigated by various regulatory bodies for the flawed auditing of financial institutions around the world in addition to being sued for millions by investors in several of these.

Let’s say the reason for RBS’s failure was that the bank’s auditors, Deloitte, had been using “creative” accounting or even “cooking the books” for years (which I don’t believe to have been the case). But, just for the sake of argument, let’s imagine it had. Would PWC really have wanted to spill the beans?

Let’s imagine that the reasons for RBS’s collapse included that

  • the FSA allowed RBS to operate with wafer-thin capital ratios for years
  • the FSA failed to notice wholly inadequate corporate goverance at the bank
  • the FSA turned a blind eye to the fact RBS had become massively over-leveraged
  • the FSA turned a blind eye to the fact RBS was ballooning its balance sheet with high-yielding but very high risk subprime related instruments
  • the FSA allowed RBS to massively overpay for largely  worthless parts of Dutch bank ABN Amro

… in such a scenario would PWC have pointed the finger at the FSA, which is paying RBS £7.7m for its “report” and to which PWC is one of the largest providers of consultancy services? I somewhat doubt it.

Here’s a summary of the other things that PWC got up to before, during and after the crash.

In September 2008, PWC was asked by the Irish government to investigate the loan book of Anglo Irish Bank. However the report was a flimsy affair which turned a blind eye to significant tranches of the bank’s toxic loan book and ignored other aspects of Anglo Irish operations. It also appears to have taken at face value the valuations ascribed by the bank’s management team to property assets in Ireland.

PwC didn’t even bother to examine any loans of less than €330m and focused on only “62 large cases”. The firm didn’t discuss the bank’s profit and loss account with management nor did it examine the movement of funds on that account. As the Irish Independent has pointed out:

What does all that mean? Essentially it means that PWC was forced into taking the word of Anglo management as the truth and, because of time constraints, could not validate the statements.

This hardly represented good value for money for the Irish government. As with the accountancy firm’s “inquiry” into RBS, one wonders if the ‘big four’ accountancy firm was being a tad gullible and whether it was perhaps a little inclined to take whatever a company’s directors told it at face value (a common failing for all members of the “Big 4″ which are so driven by the sales ethic they rarely stand up to their clients any more).

The PwC non-report report into Anglo Irish has been extremely costly for the Irish people. It played a key part in influencing Dublin’s decision to re-capitalise and nationalise the disastrous institution in early 2009. Combined with other wrong moves by the Irish government, including its catastrophic decision to offer a blanket guarantee to depositors in Irish banks in 2008, this helped drive Ireland to the brink of national bankruptcy and necessitated the crippling €85 billion EU/IMF bailout in November.

PWC is also defending charges that it facilitated an alleged fraud that enabled retail ‘tycoon’ Jon Asgeir Johannesson to siphon $2bn (£1.4bn) out of collapsed Icelandic bank Glitnir. Here’s The Guardian’s report on that:-

In its capacity as auditor of Glitnir, PwC was named as a defendant in a legal claim brought by US bond investors in New York in May … of PwC’s role at Glitnir, the claim alleges “defendants could not have succeeded in their conspiracy without the complicity of PwC. PwC … knew what Glitnir’s true related party exposure was, reviewed and signed off on financial statements which grossly misrepresented Glitnir’s related party exposure.”

PWC was also responsible for auditing Landsbanki, another Icelandic bank that failed with catastrophic consequences for Iceland; and for savers in the bank’s UK arm Icesave. Not only did PwC audit the bank’s 2007 financial statements, it endorsed its results for the first half of 2008.

Landsbanki’s administrators Deloitte have accused PWC of negligence over the audit, and are considering pursuing damages on behalf of creditors.

(Incidentally, the Landsbanki/Icesave fiasco has also led to an expensive and damaging diplomatic dispute between Iceland and the UK over who should guarantee these deposits — which the Icelandic bank would have been unable to attract if people had been made more aware of the stresses within its balance sheet).

PwC also failed to spot the fact that another of its audit clients, US investment bank JP Morgan, was mixing up £16 billion of clients’ money with its own funds — an activity for which JP Morgan has already been fined £33.3m by the FSA. All PwC faces is the not particularly terrifying prospect of being investigated by the supposedly “independent”, but actually toothless, regulatory organisation the Financial Reporting Council. According to The Times:-

In addition to serving as principal auditor, PWC was retained by JP Morgan to produce an annual client asset returns report — a yearly certification to prove that customers’ funds were being effectively ring-fenced and therefore protected in the event of the bank’s collapse. But PWC signed off the client report even though JP Morgan was in breach of the rules.

On a smaller scale PWC was also responsible for the September 2007 administrative receivership of Corporate Jet Services and the August 2010 pre-packaged administration of interdealer broker Mint Partners (acquired by New York-based BGC Partners). Both were handled by PWC’s “Mr Prepack” David Chubb. Both were highly questionable deals which may have involved collusion.

Before, during and after these prepacks, a 53-year-old former NatWest banker, David Mills, and some of his business partners, were seemingly given free rein to prosper at the expense of creditors and legitimate owner/managers. In October 2010, Mills was arrested at Luton Airport and bailed as part of the Serious Organised Crime Agency and Thames Valley Police investigation into the alleged £1bn Bank of Scotland Reading fraud (an investigation, dubbed ‘Operation Hornet’, that is also probing alleged money-laundering, corruption and large-scale fraud).

The latest stage in the litany of highly questionable behaviour from PWC came earlier this week, when the Accountancy & Actuarial Discipline Board, part of the FRC, said it was launching an inquiry into PWC’s audit of the collapsed social housing provider Connaught. As the Guardian said:

The AADB, which can deliver unlimited fines, said it would look at the conduct of auditors PWC and of other qualified accountants in relation to Connaught’s 2009 accounts and interim figures from earlier this year. The firm went into administration in September with the loss of more than 1,000 jobs.

The probe is likely to look closely at the issue of “mobilisation costs”, incurred at the start of a contract. Connaught was reckoned to have a more aggressive accounting method for dealing with the costs. Some companies recognise the upfront costs immediately in their profit and loss accounts, while others spread them out over the lifetime of the contract.

I suspect that, as with KPMG supposedly “independent” investigation into the dismissal of HBOS whistleblower Paul Moore, and PWC’s “forensic” investigation into  accounting practices at Magellan Aerospace, the PwC report into RBS was a charade.

That’s why we should demand that the FSA chief executive Hector Sants makes it public and makes it public now. If he refuses, we should resort to using Freedom of Information legislation (following a revision to the deeply flawed Financial Services & Markets Act 2000) to find out what is actually in PWC’s supposed “report” into the RBS collapse.

Nils Pratley, writing in the Guardian said:-

If the FSMA is the problem, it’s time to change the law. Parliament should request that the RBS report be published as fully as possible. It is reasonable to keep commercially sensitive information under wraps. But taxpayers, having coughed up £45bn to keep RBS alive, are owed a fuller explanation of why their cash was needed.

Short URL: http://www.ianfraser.org/?p=2631

Posted by on Dec 2 2010. 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

6 Comments for “The FSA wanted someone to whitewash RBS and, sure enough, PWC obliged”

  1. Great stuff Ian!

    Loving the new blog.

  2. can this article be passed to someone useful?
    Like Vince cable on the Govt side and to Ed Milliband for the opposition?

  3. Yep…. It’s a whitewash. You know that and I know that. RBS was and still is a bank that likes to say “bugger off” especially if you’re an SME.

  4. [...] other corporate governance and risk management structures, auditors (especially Deloitte, KPMG and PWC), the FSA, the Bank of England, H.M. Treasury (which is was also largely “captured” by [...]

  5. […] It was also found, this time by journalist Ian Fraser, that after an ‘independent’ review by PwC, the FSA decided to close its investigation of the Royal Bank of Scotland and exonerate the entire board. Fraser went on to call this a ‘cover up‘. […]

  6. […] It was also found, this time by journalist Ian Fraser, that after an ‘independent’ review by PwC, the FSA decided to close its investigation of the Royal Bank of Scotland and exonerate the entire board. Fraser went on to call this a ‘cover up‘. […]

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