Business Irish

Saturday 10 December 2016

Emmet Oliver: Ernst & Young and the other bank auditors cannot be allowed escape

Published 21/10/2010 | 05:00

NOT many of the 'big four' accountancy practices have emerged from the financial crisis smelling too sweetly, but Ernst & Young had the ignominious distinction of being an auditor to Lehman Brothers and Anglo Irish Bank.

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While auditors like to tell everyone they are "watchdogs, not bloodhounds'', their role in the financial crisis suggests they weren't effective as either.

Ernst & Young has already sustained significant reputational damage over its failure to disclose a controversial transaction at Lehmans -- known as Repo 105 -- which allowed the investment bank to hide huge tranches of assets and keep them out of its accounts in the run-up to its collapse.

But Ernst & Young also has very serious questions to answer here about its role as Anglo auditor, and its response to date has been nothing short of arrogant and evasive. In February 2009 the firm said it would not be "appropriate'' to appear before the parliament of this country to answer questions about its role as external auditor to Anglo.

Why Ernst & Young was so worried about a searching interrogation by an Oireachtas committee is baffling. Questions from most members of these committees are rarely forensic and very few reputations have been destroyed, or even dented, in such fora.

The firm apparently had legal advice preventing it from appearing and since then it has refused to answer any questions about why it missed so many of the controversial transactions that occurred in Anglo in 2008 and further back.

The present concentration on imposing some kind of accountability on David Drumm is very convenient for the professional services firms that were connected to Anglo during its most turbocharged years.

While the decision by Ernst & Young to ignore the Irish parliament is one thing, its public rationale for this decision rubbed further salt into the taxpayer wound.

While it would be understandable if the firm avoided the Dail for the simple reason that it might open itself up to legal challenge from other parties (like disgruntled shareholders), the actual reason appears to have been far more unedifying -- it wanted to duck negative media.

"We didn't believe it was right to be part of the debate around Anglo in the press,'' the firm said last year, displaying an extraordinary insensitivity to the Government and the public who are now burdened with the Anglo problem.

Ernst & Young hasn't managed to leave the scene of the accident entirely yet though. The Government's Commission of Investigation, chaired by Peter Nyberg, is looking at the role of external auditors to Anglo Irish Bank and Irish Nationwide. He will finish his report in March.

Ernst & Young has a lot of explaining to do, although it did one brief interview last year in a magazine claiming that 'bed and breakfast' loans by directors like Sean FitzPatrick were not illegal and it was "proud'' of the auditing work done at Anglo.

It will have to explain, though, how it issued an unqualified audit report for Anglo's infamous 2008 financial results.

It will also have to account for how this report was then withdrawn and a whole new set of audit procedures at Anglo were needed.

And it will have to explain how it either didn't know about the FitzPatrick loans or didn't think their disclosure was required to make the financial statements "true and fair''.

Also, was information about the position of Sean Quinn, an indirect shareholder in and massive debtor of Anglo, not something that should have been included in the financial statements, filed under related party transactions?

Was the lending to key customers of the bank to purchase shares in the bank on only a partial recourse basis not something in need of disclosure, again to make the financial statements 'true and fair'?

Ernst & Young may reject this reasoning, but the problem is that Anglo itself felt it necessary to make disclosures about all these events when it published its annual report covering 2008 in early 2009.

Let's remember that those financial statements were published by Donal O'Connor, himself an accountant and PricewaterhouseCoopers bigwig.

Ernst & Young will also have to comment on why it didn't insist that Anglo refer to the Irish Life & Permanent deposits in the published results released in early December 2008.

The company will no doubt have plenty of legal and accounting ammunition to blast away these queries, but the more vague and dangerous question the commission has been told to ask is: did Ernst & Young, between January 2003 and January 2009, advise Anglo about its lending practices, corporate governance practices and risk management procedures?

At best its defence could be: yes we did warn them, but we were ignored.

Far worse, and deeply damaging for the company in the Irish market, will be if it said nothing at all during those years and was simply happy to pick up its audit fees for acting as a rather poor watchdog.

Irish Independent

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