Assigning blame for the financial crisis: Auditors on the defensive

December 16, 2008 in Accounting, Banking, Economics | Tags: Accountancy, Auditors, Blame, Economy, Financial meltdown,
ICAEW, Regulation, Responsibility

Much has been said over the past few months about the responsibility of regulators in the current global financial crisis. I’ve
written about it myself back in September suggesting that they are yet to acknowledge their role and their own failings.

Three months on, it still seems that the regulators are either in denial, or suffering from a debilitating shock of their own past
incompetence, as we are still not seeing much positive change from them. Even with the current obvious trend for greater regulation
promoted on the government level, there is no clear evidence of regulators stepping up their game.

What do I mean by that, I hear you say? Well, there are two aspects to this. The first one is about acknowledging regulators’ failure to
prevent the financial crisis – and in this, I am going to specifically focus on auditors in this post. The second aspect is about regulators
changing their attitudes immediately, not at some point in the future. That would be the subject of another post.

Role of auditors: I was deeply disappointed to see an article in the November Accountancy magazine called “the Blame Game”
arguing that auditors are not really responsible for the meltdown of the financial system.

This magazine is the official publication of ICAEW, the Institute of Chartered Accountants of England and Wales, and its opinions
carry some weight in the British accountants’ profession. The article goes on to admit that there has been some criticism of ”dodgy
auditing” and a general failure to accept responsibility – quoting Emile Woolf, Accountancy’s columnist, which was also quoted in the
article:

Auditors have contributed to the crisis by accepting directors’ “mark-to-market” valuation of trading assets, when some basic
questions would have shown them that those directors (i) hadn’t the remotest clue what was in the mortgage / loan packages they had
acquired; (ii) were utterly bemused by the nature of the complex derivatives on which their asset valuation rested; and (iii) knew that
there was no market to “mark” to.

Auditors and their outstanding job? So far, so good, sounds very fair. However. It then goes on to quote various parters of big audit
firms that “the suggestion that auditors are to blame for failing to prevent market meltdown has been branded a “cheap shot” by the
profession” and that auditors have done an “outstanding job”. Apparently auditors simply give a view on “whether the numbers are
right and should not comment on the risks of a particular business model”.

It is the last bit that incensed me. Now, I worked as an external auditor in my past life. And at least yearly, we did control and risk
assessments on the companies we audited in my days – not that long ago, only just over 10 years back. Our objective was to make sure
we understood the business processes in advance of the big year end audit, documented all internal controls, and tested and checked
compliance.

For instance, auditing a mortgage company, we would review its portfolio of products, understand its client base, review how risk
premiums were calculated and applied, speak to mortgage underwriters and look at their paperwork in detail. We look at their rates
charged and compared them to competitors’. Our audit seniors would then write up a document about business processes – it all tied
into assessing whether the business is a going concern and how well it operated internally.

If this is not commenting on risks of a business model, what is? Has this been scrapped all of a sudden in the heady days of the last
economic upturn? I find this hard to believe. More likely, it is a symptom of senior people doing a little play on words and trying to
“redefine the definition” of auditors’ remit in order to wriggle out of admitting responsibility when it suits them.

Warning signs: OK, I am not really suggesting auditors themselves caused the financial meltdown – and I don’t think anyone is
either. But they failed to spot the warning signs, and failed to report these on time. Just like those directors, they were “utterly
bemused” by the complexities of the financial structures, and chose to stay so. In this, they were surely in breach of their responsibility
to the shareholders to get to the bottom of things and report on risks they found. So I personally cannot support the view of
“outstanding job” having been done, but what do I know!!!

Legal cases: The article concludes with looking at the possibility of auditors being sued for negligence, reminds readers that the
primary responsibility lies with banks’ directors; that other regulators were also responsible; and that there are many complex legal
questions to overcome before auditors can be really held liable, none of which has apparently really been tested in court.
And the conclusion? You’ll like this. “In the absence of any major lawsuits .. for the moment at least, auditors are not really being
blamed”. So, rest assured, Mr and Mrs Accountant Auditor, the magazine has given you a stamp of reassurance to calm your worries.

A profession full of contradictions: Honestly, it’s just not really good enough. Talking about skirting round the issue and covering up
the real questions with appropriaty comforting quotes from senior audit partners noted down on a good day. If the question whether
and to whom an auditor owes a duty of care is still a grey area, why do we bother with audits in the first place? And if some claim that
auditors should not comment on risks of business models, why is it that many accountancy practices are currently choosing to rebrand
their audit branches as “business assurance”? None of this stacks up. It sounds like people are desperately trying to defend the
indefensible.

Surely now it’s time to grow up and be honest about the real issues before it’s too late!

A Critical Review of Distress Syndrome in Nigerian Banks with a View to Preventing Recurrence

Emeka Offor
affiliation not provided to SSRN

November 18, 2009

Abstract:
The problem of distress or outright bank failure has always featured in the Nigerian banking industry. However, never in
history has the degree and scope of the distress been as high as witnessed in the mid 90’s.The present global financial
crisis seems to be an off-shoot of what happened in the 90's. In fact, during this period, the number of distressed banks
and severity of the problem increased rapidly. The reason for this upward trend is not far fetched. Whereas the distress
problem assumed epidemic proportions, its treatment has been rather piecemeal and ad hoc in nature. The confidence
reposed on the regulatory agencies by the banking public is now very shaky. Some are beginning to wonder if the
regulators should not be regulated. Some others are doubting the effectiveness of the CAMEL rating system and a lot
more.

It is observed that adequate efforts have not been made to conduct empirical test of the factors responsible for the
distress rather, various factors are always blamed without subjecting them to any empirical verification.

The urge to remedy the limitations posed by such subjective conclusions inspired this study. The study inter alia, identified
some major causes of the current distress in Nigerian banks; appraised the extent of the bank distress in our economy;
reviewed previous resolution strategies to determine why they failed to achieve the desired objectives.

Following from the above, the study offered various strategies to arrest the situation and avoid future occurrence.

Finally, the study recommended immediate adoption of the newly proposed CAMEL rating system by members that
participated in the CBN/NDIC collaborative study. Also favoured by the study is the adoption of long-term distress
resolution strategies as against the present ad hoc measures.These measures should entrench risk management and
corporate governance.

Keywords: distress, banks, Nigeria, CAMEL, risk management, corporate governance

Working Paper Series

 Date posted: November 21, 2009 ; Last revised: November 21, 2009

Suggested Citation
Offor, Emeka, A Critical Review of Distress Syndrome in Nigerian Banks with a View to Preventing
Recurrence (November 18, 2009). Available at SSRN: http://ssrn.com/abstract=1508335

A Critical Evaluation of the Role of the Central Bank of Nigeria in Ensuring Corporate Governance in
Nigerian Banks Post Consolidation

Emeka Offor
affiliation not provided to SSRN

August 21, 2009

Abstract:
Corporate governance describes the expectations of stakeholders on how corporations are governed. These expectations
or perceptions keep changing; and because they keep changing, the managers of corporations and indeed all
stakeholders need to keep pace with these expectations.

In this paper, the researcher reviewed the various attempts made by Central Bank of Nigeria (CBN) at entrenching
corporate governance in Nigerian banks with a special focus on whether banks in Nigeria are complying with the code of
corporate governance post consolidation (2005-2009).

The study employed an interpretivist methodology and collected data through observation, document analysis and a
review of the CBN case.

The case x-rayed the regulator-induced banking consolidation reforms and the compliance with the mandatory code of
corporate governance for banks in Nigeria post consolidation as well as issues bordering on supervisory framework,
architecture and risk management.

The research revealed that banks in Nigeria are committed to conforming to the dictates of the code of corporate
governance. The study further revealed that these banks are struggling to achieve a balance between performance and
conformance, thereby calling for a rethink on the relationship between corporate governance and risk management.

The research made far reaching recommendations on how CBN and also the banks can keep pace with the ever
changing dictates of corporate governance in Nigeria.

Keywords: Corporate Governance, Consolidation, Risk Management, stakeholders, supervision, regulation, Central Bank
of Nigeria, post consolidation, Nigerian Banks

Working Paper Series

Date posted: November 21, 2009 ; Last revised: February 08, 2010

Suggested Citation
Offor, Emeka, A Critical Evaluation of the Role of the Central Bank of Nigeria in Ensuring Corporate
Governance in Nigerian Banks Post Consolidation (August 21, 2009). Available at SSRN:
http://ssrn.com/abstract=1509454

Export to: Export Citation What's this?

Contact Information

Emeka Offor (Contact Author)

affiliation not provided to SSRN ( email )

Alpha females seem closer to the alpha male than to the ordinary woman in gender

From The Sunday Times

January 25, 2009

Government probes role of bank auditors

Iain Dey

Recommend? (1)

THE government was under pressure last night to investigate the role of auditors in the collapse of British banks, after a Sunday Times
investigation into fees paid to the “big four” accountancy firms.

The four banks that are expected to sign up to the government’s controversial toxic-asset-protection scheme have paid almost £650m
in fees to their auditors since 2000.

Royal Bank of Scotland, HBOS, Lloyds TSB and Barclays have paid their auditors almost as much for “other services” as they have
for their official role in checking the books.

The findings resurrected cross-party calls for a probe into the relationships between auditors and their clients.

Related Links

• KPMG offers staff unpaid leave or four-day weeks

• Business Letters: Auditors could have curbed the excesses

Questions are due to be tabled on the issue this week in both houses of parliament.

Representatives of the leading audit firms – Deloitte, Ernst & Young, KPMG and Price Waterhouse Coopers – are due to appear
before the Treasury committee this week to answer questions on the crisis engulfing the banks.

John McFall, the Labour chairman of the committee, said: “What is the role of auditors? Is it to examine the books and provide a
company’s board, and the public, an accurate view of the health of that company? Or is it to provide other services that are more
profitable than the auditing undertaken for that company?”
Conservative Michael Fallon, deputy chairman of the committee, said: “We need to examine who was supervising what, and the role
of audit is clearly a part of that.” In the palm of the banks?

British Politics’s Blog

The ravings of an individual, UK voter frustrated with our politicians

Bank auditors should also be held responsible

with 8 comments

I find it difficult to disagree with anything stated in this article from Power to the People, which I have reproduced in case anyone has
missed it. The reality is, auditors do have a major responsibility to shareholder’s, who rely on their reports being objective and
searching, surely the auditors can’t claim that they cannot he held liable for the fact that they have missed completely or failed to
understand the risks involved with the strategy employed by some banking and financial institutions. I feel sure some ‘auditor’ will
come in at some stage, in defence of his profession and I look forward to the response, assuming he or she is not too busy dealing with
company administrations and liquidations!

At the moment one day pretty much blends into another, but on one of the evening news programmes this week, another fat cat, fee-
earner had the temerity to say, when questioned, that auditors had played no part in the financial mire that is the bane of every UK
taxpayer. I have to admit, that I wanted to throw something at him, because I have been arguing for weeks that the auditors have
failed in their duty to the shareholders and worst still, shall be one of the few ’industries’ that will make money out of this
fiasco, through company administrations, receivership’s, consultancy fees and so on.

Lets look at the generally accepted definition of a Finance Audit:

The process of verifying a company’s financial information. Auditors are certified public accountants who are independent of the
corporation. An auditor examines a company’s accounting books and records in order to determine whether the company is following
appropriate account procedures. An auditor issues an opinion in a report that says whether the financial statements present fairly the
company’s financial position and its operational results in accordance with Generally Accepted Accounting Principles (GAAP).

And here is a common definition of an Auditor

Auditor is the person appointed to conduct an examination of the records, to form an opinion about the authenticity and correctness
of such records, by verifying the correctness and reliability of the recorded transactions from the evidences available, opinion and
inference reachable based on his expertise.

Most, if not all, stock market listed companies in this country and, for that matter, around the world, use the services of one of the so
called ‘Big Four’ accountancy firms. These big firms charge huge sums for their audits, often running into £millions, and the audit
teams are lead by high ranking ‘fee earners’. In other words, as the businesses, banks and financial institutions they audited expanded,
so have the fees earned by the auditors and yet, not one audit firm appears to have asked any questions about what is now being
described as “questionable accounting” practices within the financial services and banking sectors.

For example, do we know of any audit firm that qualified a set of accounts within the banking sector because of the heavy reliance on
a particular financial model, such as in the case of Northern Rock? Has an audit firm raised any prior concern over the way that
‘bundled’ mortgage debt was traded, sold and then re-sold, with each party taking a profit or commission, without really knowing the
risks or true value of the asset.

You would think that after Enron and Worldcom, auditors would be even more cautious, especially given investors and business
people alike, will have increasingly come to rely on the expertise and the independence of the auditors before they make financial
investment decisions related to the company being audited. It is absolutely essential that the audits of company’s that rely on
external investors for funding are wide-ranging, thorough and probing, a failure to do this and ask questions, is, in my
impinion a dereliction of the auditors responsibility to the shareholders. If an audit is not indepependent, or in-depth, why on
earth do so many companies pay so much money out every year for their audits?

I personally believe that, when the investigation begins, as it surely will, the part played by company auditors also needs
investigating. Given they will be the only party to have profited in the ‘boom’ as well as profited out of the ‘bust’, yet they were also
the only party, other that the regulatory authorities, that had a duty to ensure that they reported the facts, discovered questionable
practices and reported their findings in an open, direct and a frank manner. I do not say that any of these accountancy firms are
culpable, because I would have nothing to back this up with (other than logic of course), but I can say that, I believe they have failed,
for the most part, in their duty to appropriately and competently assess the risks associated with some of the more questionable
practices adopted by the banking and financial industries.

I also believe that shareholders that have lost money should consider individual or class actions against any audit firms that
are left wanting in this current mess. For them to be preening themselves in front of the cameras, whilst rubbing their hands with
glee, behind the scenes, is stomach churning. If there job was not to highlight risks, operating and reporting practices, asset values and
profit claims, what on earth were they charging such massive audit fees for? The Audit Firms must not be allowed to extract
themselves from any form of responsibility whilst the rest of us are left to pick up the tab and the pieces of what is left.

Article Source: Power to the People

Written by British Politics

8 October, 2008 at 4:03 pm

Monday 15 March 2010

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Auditors not to blame for banking crisis, academic

tells MPs
Auditor role does not involve challenging boardroom strategy,
Professor tells Commons Treasury Select Committee

Written by Christain Doherty

Accountancy Age, 29 Jan 2009

Expectations on auditors are too high and the profession should not be expected to avert management failure or
challenge flawed business models, a leading academic has told MPs.

Appearing before the Treasury Select Committee investigation into the banking crisis Professor Michael Power
of the London School of Economics yesterday defended the performance of the audit industry.

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He added: 'Auditors are not there to challenge business models with finance directors. That is not their job. For
that to happen, things would have to change substantially.'

Responding to MPs who demanded to know why, given the vast fees audit firms received from the banks,
auditors failed to act or advise regulators of the looming crisis, Power said: 'Auditors ultimately rely on a
variety of external sources including market prices and management.'

Paul Boyle of the Financial Reporting Council, along with Robert Hodgkinson, executive director, technical of
the ICAEW institute, and Helen Brand, of the ACCA institute, made a robust of the limits of auditors’ power
and responsibility.

But Prem Sikka, professor of accounting at Essex University – who is a vocal critic of audit firms -- declared
that 'financial audits are out on a limb.”

MPs also raised concerns over auditors’ independence, citing examples of firms offering non-audit work to
audit clients.

However, Power declared the issue a red herring. 'The real issue in this debate is operational,' he told the
committee. 'The question is: what do auditors actually do, who does it and who do they rely on?'

Sikka, however, launched a withering attack on the audit industry, particularly the Big Four firms.
'Auditors are too close to the companies and they can’t bite the hand that feeds them,' he said. 'How can one
bunch of commercial entrepreneurs audit another bunch of commercial entrepreneurs? That kind of model is
broken and cannot work.'

In lively exchanges, Treasury committee chairman, John McFall, asked whether auditors had a duty of care to
the wider public and whether there had been a fundamental failure of the system that allowed the near collapse
of banks despite the attentions of the UK audit firms.

Paul Boyle, made a spirited defence of audit in the UK, although both the ICAEW and the ACCA
representatives accepted that there was ‘room for improvement’.

Tags:

• Banking-crisis
• Treasury-select-committee
• Banking-crisis

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Comments

Adam Smith's visible hand ...

Now that there is no invisible hand to temper

unrestricted capitalism, where is Adam Smith's

'visible hand'?

The only people I know who conduct Quality Audits

are Quality Auditors. Accountants only audit
performance - not Quality & Reliability.

My suggestion would be to implement ISO9000 in

the financial industry as soon as possible.

Posted by: Andy U, 31 Jan 2009

True & Fair View...

The arguments put forward by Prem Sikka are

absolutely sound. An audit firm
should provide an independent
review of the financial statements and
hold a thorough and complete
understanding of all assets and liabilities
- accounting 101 - SSAP 1 - financial statements
presented must present a "true and fair view" -
when assessing the sub-prime
derivatives it is clear that the audit
firms in question failed to assess the true
risks in question. I realise that we have been
living in a decade of full of marketing spin, but
until we get back to the fundamentals of honest
and transparent reporting with full accountabilitiy
held into question then this crisis will only worsen.

Posted by: Jeremy Ash ACMA, 30 Jan 2009

Banks again...

This is a blog post I had read just an hour before the

Accountancy Age alert -
it's as if the piece is responding
...http://westburyblog.com/2009/01/27/banks-again-number-2461/#comment-23

Posted by: Michelle Carvill, 30 Jan 2009

Auditors should be blamed

The auditor's responsibility is to

give opinion on impairment of assets.
Didn't they test all those toxic assets
or maybe they were not able to check their valuation?
This way or another -
if the auditor is not able to provide
enough comfort for the shareholder, he is useless.

Posted by: Tomek, 29 Jan 2009

Banking Crisis and the responsibility of the auditors

Posted on 08 October 2008 by Frustrated Voter

At the moment one day pretty much blends into another, but on one of the evening news programmes this week,
another fat cat, fee-earner had the temerity to say, when questioned, that auditors had played no part in the
financial mire that is the bane of every UK taxpayer. I have to admit, that I wanted to throw something at him,
because I have been arguing for weeks that the auditors have failed in their duty to the shareholders and
worst still, shall be one of the few ’industries’ that will make money out of this fiasco, through company
administrations, receivership’s, consultancy fees and so on.

Lets look at the generally accepted definition of a Finance Audit:

The process of verifying a company’s financial information. Auditors are certified public accountants who are
independent of the corporation. An auditor examines a company’s accounting books and records in order to
determine whether the company is following appropriate account procedures. An auditor issues an opinion in a
report that says whether the financial statements present fairly the company’s financial position and its
operational results in accordance with Generally Accepted Accounting Principles (GAAP).
And here is a common definition of an Auditor
Auditor is the person appointed to conduct an examination of the records, to form an opinion about the
authenticity and correctness of such records, by verifying the correctness and reliability of the recorded
transactions from the evidences available, opinion and inference reachable based on his expertise.

Most, if not all, stock market listed companies in this country and, for that matter, around the world, use the
services of one of the so called ‘Big Four’ accountancy firms. These big firms charge huge sums for their
audits, often running into £millions, and the audit teams are lead by high ranking ‘fee earners’. In other words,
as the businesses, banks and financial institutions they audited expanded, so have the fees earned by the auditors
and yet, not one audit firm appears to have asked any questions about what is now being described as
“questionable accounting” practices within the financial services and banking sectors.

For example, do we know of any audit firm that qualified a set of accounts within the banking sector because of
the heavy reliance on a particular financial model, such as in the case of Northern Rock? Has an audit firm
raised any prior concern over the way that ‘bundled’ mortgage debt was traded, sold and then re-sold, with each
party taking a profit or commission, without really knowing the risks or true value of the asset.

You would think that after Enron and Worldcom, auditors would be even more cautious, especially given
investors and business people alike, will have increasingly come to rely on the expertise and the independence
of the auditors before they make financial investment decisions related to the company being audited. It is
absolutely essential that the audits of company’s that rely on external investors for funding are wide-
ranging, thorough and probing, a failure to do this and ask questions, is, in my impinion a dereliction of
the auditors responsibility to the shareholders. If an audit is not indepependent, or in-depth, why on earth do
so many companies pay so much money out every year for their audits?

I personally believe that, when the investigation begins, as it surely will, the part played by company
auditors also needs investigating. Given they will be the only party to have profited in the ‘boom’ as well
as profited out of the ‘bust’, yet they were also the only party, other that the regulatory authorities, that had a
duty to ensure that they reported the facts, discovered questionable practices and reported their findings in an
open, direct and a frank manner. I do not say that any of these accountancy firms are culpable, because I would
have nothing to back this up with (other than logic of course), but I can say that, I believe they have failed, for
the most part, in their duty to appropriately and competently assess the risks associated with some of the more
questionable practices adopted by the banking and financial industries.

I also believe that shareholders that have lost money should consider individual or class actions against
any audit firms that are left wanting in this current mess. For them to be preening themselves in front of the
cameras, whilst rubbing their hands with glee, behind the scenes, is stomach churning. If there job was not to
highlight risks, operating and reporting practices, asset values and profit claims, what on earth were they
charging such massive audit fees for? The Audit Firms must not be allowed to extract themselves from any
form of responsibility whilst the rest of us are left to pick up the tab and the pieces of what is left.