Tuesday 25 September 2018

Anglo auditors gave 'clean opinion' of accounts after alleged €7.2bn fraud - trial hears

Former CEO of Anglo Irish Bank, David Drumm. Photo: Collins Courts
Former CEO of Anglo Irish Bank, David Drumm. Photo: Collins Courts

Andrew Phelan

ANGLO Irish Bank’s auditors gave a “clean opinion” of the bank’s accounts after a €7.2 billion fraud conspiracy allegedly took place during the 2008 financial crisis, a court heard.

It was open to the auditors to give a “qualified” view of the year's accounts but instead they concluded they were a true and fair representation of Anglo’s financial position.

A former finance manager at Anglo also told Dublin Circuit Criminal Court the money exchange with Irish Life and Permanent that September was the largest transaction he could ever recall at Anglo.

Kevin Kelly was giving evidence in the trial of Anglo’s former CEO David Drumm.

Mr Drumm (51) is pleading not guilty to conspiring to defraud Anglo investors by dishonestly creating the impression that the bank’s customer deposits were €7.2bn larger than they were.

He is alleged to have conspired with Anglo’s former Finance Director Willie McAteer and head of Capital Markets John Bowe, as well as then-CEO of Irish Life and Permanent, Denis Casey, and others. The case centres on a series of interbank loans which circulated between Anglo and ILP in September 2008.

The transfers were routed through Irish Life Assurance, returning to Anglo where they were then treated as customer deposits, which are a better indicator of a bank’s health.

Mr Drumm also denies false accounting, by providing misleading information to the market.

Mr Kelly, head of financial reporting, said he was unaware of the September transactions until the second week in October, 2008, after they had taken place.

His superiors in the bank’s finance division, Colin Golden and Ciaran Cunningham, asked him to join them for a conversation in which they “outlined a high level overview” of the transactions and sought his opinion. They then discussed the accounting treatment.

The outline was broad and the size of the transaction was mentioned - €7.2bn.

He was told that they were settled gross and there was no legal right of set off.

Mr Kelly did not recall the term “cash neutral” being used.

Paul O’Higgins SC, prosecuting, asked Mr Kelly how large the transactions were in the “general run” of things.

“Quite significant,” he replied.

Mr O’Higgins asked where they would have come in the hierarchy of Anglo’s transactions.

“They were certainly the largest transactions that I can recall,” he replied. “In any year.”

His understanding after that conversation was that the transactions were presented gross in Anglo’s system. His “gut reaction” was that “gross was appropriate.”

Mr Kelly said he did not become aware of the order and timing of the transactions until 2009.

He said that generally if the rules of IFRS (International Financial Reporting Standards) were followed then you were adhering to the principle of “fair presentation.”

If someone picked up a financial statement, it would show an institution’s financial position and performance.

Mr Kelly recalled he and Mr Golden met the auditing partner at Ernst and Young Vincent Bergin on October 23, 2008, covering a number of items including ILP transaction.

Mr Golden provided an overview of the ILP transaction to Mr Bergin and Mr Kelly gave an outline of the accounting, saying his understanding was there was no currently enforceable right of set off.

Mr Kelly said it was his understanding at the time that the transaction had been settled gross.

He subsequently found out in 2009 that the initial transaction was settled gross but on maturity it had been settled net.

He could not recall if there was any reference made at the meeting to the Financial Regulator.

Mr O’Higgins asked Mr Kelly what Mr Bergin had said.

“From memory, he indicated… that it sounded like the accounting was technically sound,” he said. “I took it as a reference to the balance sheet position, that it was presented gross on the balance sheet.”

Mr Kelly did not believe there was any discussion other than that at the meeting.

On October 24, Mr Golden asked Mr Kelly to join him on a conference call with IFSRA, he continued in evidence.

Mr Golden called regulatory officer Mary Burke and provided her with an overview of the transaction, mentioning that there had been a discussion with Ernst and Young and indicating that the accounting would present the transaction on a gross basis.

Mr O’Higgins asked how much information was given to the Financial Regulator.

“A high level overview of the transactions which I believed was sufficient to give an understanding of the nature of the transactions,” he replied.

The Regulator was also sent a printout showing the sequence of the transactions.

Mr Kelly said he heard nothing back from the Financial Regulator prior to the signing of the year-end accounts.

He had continued to have ongoing contact with the auditors after the initial meeting and he did not recall the transactions specifically coming up in conversation. However, the auditors would have been provided with a trial balance sheet and disclosure notes, then the draft financial statement.

Mr Kelly said he was at an audit committee meeting on November 18, 2008 and had an input into the preparation of a “matters for discussion” document, which included “customer accounts.”

“The group entered into an arrangement with ILP whereby €7.2bn was placed with Anglo from a non-bank subsidiary and Anglo in turn placed an identical amount with ILP bank," the agenda item stated.

"The transactions were cash neutral, the deals were one over two dates - €3.2bn on Sept 29 (maturing Oct 2 - 3) and €4bn on Sept 30 (maturing Oct 1). ) As a result of this arrangement, loans and advances to banks and customer accounts both increased by €7.2bn.

"IFRS does not allow the group to net the financial assets and liabilities as they were transacted with two different counter parties and there was no legal right of offset. In addition on maturing all accounts were settled on a gross basis.”

Mr Kelly said there was a “number of inaccuracies” in the information provided.

“I believe that was inadvertent, unintentional and unfortunately wasn’t picked up,” he told the court.

He said Mr Golden would have read out or paraphrased what was written and “would have said the auditor had been brought through the transaction and the Financial Regulator was aware of the transaction.”

He later saw various versions of the notes made at the meeting.

Mr O’Higgins asked him what he took “cash neutral” to mean.

“I took it to mean there was no funding or liquidity benefit from the transactions” because “we weren’t any better off in cash terms.”

He recalled non-executive director Donal O’Connor on a conference call at the November 18 meeting asking “is this not window dressing” and Mr McAteer replying that it was “standard or normal balance sheet management.”

Mr Kelly was shown the signed minutes of the meeting which stated of the transactions “it was confirmed they were in the nature of normal balance sheet activity and that the Financial Regulator and Ernst and Young had no issues with them.”

Mr Kelly said he would not agree with this version and that “all that Colin said at the meeting was that Ernst and Young had been brought through it and the Financial Regulator was aware.”

Another version of the minutes stated: “It was noted that the Financial Regulator was fully aware of the transactions and that Ernst and Young had been apprised of the full details.”

“The language is different but the suggestion is consistent with my recollection,” Mr Kelly told the court.

He said Mr Bergin on a later date indicated “that one member of the audit team was having difficulty reconciling some of the detail of the transaction.”

Mr Kelly had suggested the team member speak to Ciaran Cunningham. He was aware that the Isle of Man division was involved and “that might be the issue.”

Mr Kelly also attended an audit committee meeting on November 24, 2008 and shared the draft financial statement for consideration.

On this, the figure for loans and advances to banks was €14.002bn, while customer accounts were €51.499bn . Mr Kelly confirmed these both included the ILP transactions. However, a note included on the statement made no direct reference to the transactions.

The jury was shown a mail sent from Mr Kelly to Mr Bergin on November 26, 2008, with the subject “Can you give me a call to discuss further work needed on customer deposits?”

Mr O’Higgins asked Mr Kelly what that referred to.

“I am at a loss as to what that related to,” he replied. “My gut tells me it didn’t relate to ILP but unfortunately, I can’t recall.”

The statement was presented to members of the Financial Regulator in advance of the announcement in December. The specifics of the ILP transaction were not referred to in its notes, Mr Kelly said.

The ILP transactions were also part of the €51.5bn customer deposits figure in the preliminary results for 2008.

In cross-examination, Mr Kelly agreed with Bernard Condon SC, defending, that a “clean opinion” which the auditors gave was when the accounts were considered “true and fair.”

It was also open to an auditor to give a qualified opinion, and there was a third option where they could “draw the reader’s attention to a particular matter,” Mr Kelly told Mr Condon.

The trial continues.

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