Analysis

Saturday 2 August 2014

Donal O’Donovan: Auditors determined to avoid blame over Anglo

Published 30/11/2012|05:00

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IT IS not only in Ireland that auditors are under fire for what they saw, or failed to see, on banks' balance sheets. But prosecutions remain rare.

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The decision by the former Anglo Irish Bank, now Irish Bank Resolution Corporation (IBRC), to sue auditors Ernst & Young fits a pattern seen around the world since the start of the banking crisis – but those taking cases have met with limited success.

Previous experience suggests that IBRC should expect trench warfare if and when it gets as far as the High Court with its claims against Ernst & Young.

That may seem strange five years after a global crash but it's at least in large part down to the limited definition of what auditing work really is.

Under Irish company law, the ultimate responsibility for running Anglo, or any company, lay with its own board of directors. Regulators were responsible for monitoring the conduct of the bank, while the job of auditors was essentially to be a second pair of eyes, looking over numbers presented by the board.

How much an auditor's role is to second-guess information, or to try to peel back the layers of even as pungent an onion as Anglo, remains far from clear.

What is clear is that auditing firms have shown a determination to tough it out any time a high-profile accusation of wrongdoing has been made.

This shouldn't come as a surprise. A firm like Ernst & Young has a lot at stake, including 150,000 staff around the world generating billions in revenue each year. A finding of wrongdoing in the US or Ireland could have devastating consequences.

It is also an experienced defendant, not least because it was the auditor of Anglo and Lehman Brothers in the run-up to the crash – the two most costly failures in the entire global crisis.

Since then, Ernst & Young's US branch has been investigated by its own professional body for signing off on the accounts of Lehman Brothers. However, it ultimately escaped any disciplinary action.

A prosecution taken by the New York district attorney over the same issues is still being fought tooth and nail, with grinding 'hand-to-hand' litigation in a US federal court in Manhattan.

Here, Ernst & Young has proved just as willing to fight its corner – including pushing back hard against efforts of the Chartered Accountants Regulatory Board (CARB), a professional body, to bring disciplinary findings against it over its role at Anglo.

It managed to slow, rather than block, the probe, which has been temporarily halted only because of a request from the Director of Public Prosecutions.

The DPP asked the CARB to hold off taking further action until after the trials of three former Anglo Irish Bank directors, including the former chairman of the bank, Sean FitzPatrick, have been concluded.

Presumably much of the same ground will also be raked over in the latest IRBC case.

Ernst & Young is by no means alone in all this.

In June of this year, rivals Deloitte agreed to pay US$19.9m (€15m) to shareholders who had lost a fortune on the collapse of Bear Stearns to settle claims by shareholders who said they had been misled about the investment bank's deteriorating health by its former auditor.

That case has clear echoes of Anglo. But while Deloittes settled the claim, it did so without admitting to any wrongdoing and only after a lengthy legal battle.

Deloitte, by the way, replaced Ernst & Young as auditors of Anglo in 2009.

Irish Independent

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