Were US Auditors Told to Fudge Opinions of TBTF Banks?

Francine McKenna is shocked that investigations in the UK have revealed that major auditors were told to make wobbly banks look healthier than they were. Specifically, they issue “going concern” opinions because they were told the banks would be backstopped.

One can only assume the accountants were brought in the loop with the aim of influencing their published reports. And one must further assume that anyone who dared to ask reasonable questions (“How can you be certain bailouts will go through when they’ve become controversial?”), they would have been told a tad more directly that they ought to take it as a given that the rescues would take place (although I doubt anyone would have needed to be direct, the auditors would presumably be delighted to issue opinions that would keep major meal tickets in good favor with the financial markets). From McKenna (hat tip Richard Smith, emphasis hers):

Leaders of the four largest global accounting firms – Ian Powell, chairman of PwC UK, John Connolly, Senior Partner and Chief Executive of Deloitte’s UK firm and Global MD of its international firm, John Griffith-Jones, Chairman of KPMG’s Europe, Middle East and Africa region and Chairman of KPMG UK, and Scott Halliday, UK & Ireland Managing Partner for Ernst & Young – appeared before the UK’s House of Lords Economic Affairs Committee yesterday to discuss competition and their role in the financial crisis….

The Lord’s Committee was more interested in questioning the auditors about the issue of “going concern” opinions and, in particular, why there were none for the banks that failed, were bailed out, or were nationalized.

The answer the Lord’s received was, in one word, “Astonishing!”

Accountancy Age, November 23, 2010: Debate focused on the use of “going concern” guidance, issued by auditors if they believe a company will survive the next year. Auditors said they did not change their going concern guidance because they were told the government would bail out the banks.

“Going concern [means] that a business can pay its debts as they fall due. You meant something thing quite different, you meant that the government would dip into its pockets and give the company money and then it can pay it debts and you gave an unqualified report on that basis,” Lipsey said.

Lord Lawson said there was a “threat to solvency” for UK banks which was not reflected in the auditors’ reports.

“I find that absolutely astonishing, absolutely astonishing. It seems to me that you are saying that you noticed they were on very thin ice but you were completely relaxed about it because you knew there would be support, in other words, the taxpayer would support them,” he said.

I’m about as shocked to read this as learning that there is gambling in Casablanca. But what is more interesting is seeing that the UK, despite having a banking sector that is bigger in terms of GDP than the US, and hence presumably more powerful, still has processes in place that allow this sort of thing to become public.

By contrast, as McKenna correctly points out, we’ve had no such revelations in the US. She wonders whether accountants here got similar orders guidance from the officialdom. I find it hard to believe they didn’t, given that the Paulson-Bernanke-Geithner troika was working far more fist in glove with the financial services industry than their counterparts in the UK. In addition, it was clear from the outset of the Obama administration that they had decided to cast their lot with the banksters.

Even with the will to turn over some rocks, given the ritualization of Congressional hearings (it isn’t hard for witnesses to obfuscate and run out the clock), I doubt we’d see this sort of dirt information come out. Audit the Fed, one avenue that might have shed some light, was watered down to a data dump of credit extended during the crisis. That’s better than nothing, but vastly short of understanding what was done and why at crucial junctures during the crisis.

This episode is a sad reminder that we only have the form of government in the name of the collective interest in the US. The dirty laundry of the banking industry and its enablers among the powers that be is treated as a state secret, on the same level as military intelligence. Dubious rationales like “trade secrets, personnel rules and practices, memos subject to attorney-client privilege and violations of personal privacy” are served up as excuses for failures to provide citizens with disclosures they fully deserve.

Until the public faces up to the ugly changes that have taken place, we will remain in their thrall. From the close of ECONNED:

That brings us to a final outcome of this debacle. A radical campaign to reshape popular opinion recognized the seductive potential of the appealing phrase “free markets.” Powerful business interests, largely captive regulators and officials, and a lapdog media took up this amorphous, malleable idea and made it a Trojan horse for a three-decade-long campaign to tear down the rules that constrained the finance sector. The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history. This campaign has been far too consistent and calculated to brand it with the traditional label, “spin”. This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names — extortion, capture, looting, propaganda — can we begin to root them out.

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  1. Francois T

    5 books ought to become mandatory readings to anyone who call him/herself a citizen:

    Free Lunch
    Money For Nothing
    Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism

    Inside Job and Capitalism: A Love Story should also be included.

    Optional but very helpful:

    Food Inc.
    The Corporation
    The Century of Self

    The Trades:

    Buy: pitchforks, torches and accessories
    Sell: GOP, Obama, DCCC, Congress, the current edition of the Supine Court, Fox news.
    Hold dear: Family and Friends
    Short: Tea Party and Koch Brothers

    1. Toby

      To your book list I’d add:

      Debunking Economics
      The Lost Science of Money
      The Cancer Stage of Capitalism
      The Ascent of Humanity

      To be read in that order, actually…

    2. Progressive Ed

      For the alternative see anything by Robert Conquest. The Federalist Papers are also recommended, but not mandatory as is some places they require some heavy lifting.

  2. Francois T

    Lately, be it in civil rights violations or financial malfeasance, the UK has been giving lessons in democracy 101 to the US of A.

    Such a situation would be considered truly embarrassing to anyone with a minimal sense of shame.

    Of course, this cannot include anyone among the US elites. I am told that they are different from you and I.

  3. DV Williams

    It may actually be the fact that there is less democracy in UK parliaments that has caused this to come out. The House of Lords is not an elected chamber, but entirely appointed, with each individual a member for life. There is no conflict of interest because they do not have to raise funds for elections so can act exactly how they please without fear of upsetting vested interests.

    This process, as well as promoting party hacks and friends of the ruling government, allows for a lot of experts in particular fields to be appointed. This means that some subjects can be thoroughly investigated by people who are actually well informed about the issues, without relying on briefings from lobbyists.

  4. Dave

    Yves … TO FIX THE STRIKE-THROUGH PROBLEM, search for this text in teh post:

    “I doubt we’d see this sort of strike ..” and then CLOSE THE tag correctly (not “<strike dirt ..” as you have currently!)

    1. Yves Smith Post author

      The tag is closed and always was, I’ve looked at the HTML as has Richard Smith. Nothing wrong with it. It renders correctly in every browser except IE. This is an IE problem, I have no control over that.

        1. Alex

          It is possible I am late to the party and the cause has been fixed, but for what it’s worth, it renders correctly in Google Chrome on Ubuntu Lynx.

  5. Nikki Turner

    Some people have been saying for a long time that the credit crunch could only have happened on such a grand scale with the collaboration and complicity of lawyers, auditors and insolvency practitioners. And this is also one of the main reasons there is no ‘blame’ attributed to any individual or organisation for what befell the Country. Exposure of what and who facilitated the success of such outrageous policies and decisions which brought economies to their knees, would mean the unravelling of a ‘global old boys network’ that is entirely sinister. Will it ever happen? I hope so but I’m not holding my breath.

  6. Toby

    What would shock would be proper transparency, honesty and a genuine and ongoing attempt to establish a functioning democracy. Then, to ratchet the shock higher, a truth and reconciliation-style hearing to expose thoroughly past wrongdoing in the financial/political/corporate sphere.

    When it comes to criminality in so-called high office and from the Masters of the Universe, nothing shocks me anymore, not even ignorance of it. I am totally convinced the corruption and decadence run so deep only revolution and/or collapse have a chance of rooting it out.

    1. Yves Smith Post author

      I don’t see any strike-through problem in my browser, only the word “orders” is stricken out. Maybe Richard Smith cleaned it up, he takes that upon himself sometimes.

      1. R Foreman

        You may need to refresh your browser page from the server. If you’re on internet explorer then hit ctrl-F5

        There’s definitely a strike-through problem. It starts with the upper right corner of your page with “Order at:” and goes all the way down.

        1. Yves Smith Post author

          No, the HTLM is clean, I’ve looked at it, as has Richard Smith. It renders correctly in every browser except IE.

          I can’t control for a weird IE bug.

  7. Paul Tioxon

    They killed President Kennedy because he would not go along with the Cold War strategy of perpetual war by invading Cuba, passing the first Nuclear Bomb Testing Ban Treaty with the USSR, did not want the US Army to order tanks to crash through the Berlin Wall, tried to warn Diem of his pending assassination, his personal invitation and meeting with Sukarno in the White House and reciprocal invitation, which JFK accepted to meet Sukarno in Indonesia, which would have made him the first US President to make such a trip. And on and on, and now, its shocking to learn of bank auditors being ordered to see 3 fingers when the ruling class shows them a 5 fingered fist to their face.

    You know, you don’t need to read that many books to know they have been lying, stacking the deck. The FBI wiped out commies from organizing in this country, they have suppressed unions by imprisoning and corruption investigations of their leadership, yet, even with a dedicated Drug Enforcement Agency, we have a bigger and more powerful illegal drug trade and Mexico, well, let’s just say bank auditors aren’t the only ones told to keep dialing it down.

  8. Independent Accountant

    I say, “welcome aboard”. I’ve said many major financial institutions are UNAUDITABLE for about 20 years. The Big 87654 firms are protected by the PCAOB and SEC from the public. The PCAOB is a scam which persecutes small CPA firms so it can appear to do something.
    If Big 87654 firm TBTF financial institution audits were of any value, why the “stress test” kabuki dance? Today’s reality is: most TBTF financial institutions are insolvent, clean Big 87654 firm opinions notwithstanding. This includes the Fed.
    Why do we see the current SEC-DOJ diversionary tactic: the insider trading war? To divert public attention from banking industry politically favored miscreants.

  9. readerOfTeaLeaves

    I hope this post is widely read, widely discussed, and that people in the US get over our collective trust in Faith-Based Economics.

    The sooner, the better.
    Before the current disaster takes us right off the cliff.

  10. Don

    I have wanted just one time during any of the hearings to see anyone ask Hank Paulson just one question: Sir, while you were CEO of Goldman Sachs in 2006, did you know how your company was making money?

    Any answer would be disturbing.

  11. Ishmael

    I spent a long spell working for a Big 4 in a senior role and now consult quite often with one of the next 2. Well, unless you got the instructions in writing that the banks would be bailed by the govt it is rather worthless. I know readers here would find it hard to believe that someone in the govt would verbally say something, but then when it came time for the govt to perform get a statement along the lines of “We never said that.”

    Personally, I believe the next few years (if not already) will prove the audit opinions of the major firms rather worthless. Just recently we were hired to perform a review of a company’s financials by a PE firm after a Big 4 firm gave them a clean opinion. Our practive is different. We say the truth no matter how much it hurts.

  12. HTML Reader

    The problem with the strike-through HTML is in this paragraph:

    “Even with the will to turn over some rocks, given the ritualization of Congressional hearings (it isn’t hard for witnesses to obfuscate and run out the clock), I doubt we’d see this sort of dirt information come out. Audit the Fed, one avenue that might have shed some light, was watered down to a data dump of credit extended during the crisis. That’s better than nothing, but vastly short of understanding what was done and why at crucial junctures during the crisis.”

    At “…sort of dirt information…”, the word “dirt” is between a ‘strike’ and ‘/strike’ tag, but the first ‘strike’ tag is missing its closing angle bracket.

    Please feel free to delete this comment once the problem is fixed.

    1. Yves Smith Post author

      I don’t know what you folks are seeing, this is what my HTML has, and it renders correctly in my browsers (Safari and Firefox):


      And all the needed brackets are there.

      1. R Foreman

        You’re right it looks ok in Firefox, but really bad in internet explorer. The strike-through of the word orders extends beyond the word, into the space after it.

      2. sneezy

        The page looks fine to me in Firefox as well, but when I “view source,” I do see a missing right angle bracket. It reads:

        [left angle bracket]strike dirt [left angle bracket][slash]strike[right angle bracket]

        and should read:

        [left angle bracket]strike[right angle bracket]dirt[left angle bracket][slash]strike[right angle bracket]

        1. wendell

          FWIW, stikethrough is not just present, but fairly bad (on lots of pages, and in links on the right on the home page; it starts in the third line of the “Even with…” paragraph on this page) in Chrome (for Ubuntu), but absent in Opera (for Ubuntu) and Firefox (for Ubuntu).

      3. Yves Smith Post author

        All the needed brackets are there in my HTML compose window in WordPress. I’ve checked multiple times, as has Richard Smith. There is no missing bracket, I’ve indicated that multiple times. The error you see is not originating from my end.

  13. Alan King

    Good for the House of Lords!

    It would do the US a lot of good to get rid of their Senate. Just think of how much more complicated would be the task of the lobbyists as they try to influence a more representative body. You could pretty much say good-bye to farm subsidies and military bloat.

    And you might (as in this case), occasionally, have a higher probability of an intelligent counterweight to government policy.

  14. JohnC

    This may be an inside joke!

    Lord Lawson is of course Nigel Lawson, who was Chancellor of the Exchequer at the time of the “Big Bang” (deregulation of The City in 1986).

    So this REALLY IS Claude Raines all over!

    (Surely you knew this, Richard?)

    1. Richard Smith

      I did.

      I don’t think Lawson had much idea of the forces he was helping to unleash, though. Others in that Govt, definitely.

      Well, it has all come round in one big circle now.

  15. solo

    Presumably author Smith, too, is feigning surprise. At this late stage in the game of capitalism, what on earth could she expect? (“The State is an instrument of class rule.”–V.I. Lenin. “The democratic republic today is the dictatorship of the bourgeoisie.” –Karl Marx. “Politics is the vehicle of economics.” –Rosa Luxembourg. “Those who own the country ought to govern it.” –John Jay. “You can fool all of the people some of the time and some of the people all of the time. That’s good enough for me!” –Anonymous PR executive.)

  16. CGould

    Why waste time on IE?
    The good thing about modern monopoly is the option not to use the monopoly browser when spending time at various sites found through naked capitalism collation site.

  17. AndrewBW

    Yves, the reason the HTML looks good in Foxfire and Safari is that they are designed to understand coding errors and fix them for you. They see the closing strikethrough tag and have figured out how to fix the open strikethrough tag. Trust me, this is not an IE error. Try looking at the page with Chrome as I am. The open strikethrough tag is not properly closed. Open the post up in your editor, delete the closing bracket that you’re seeing there, type it in again, save and refresh, then look at it again with Chrome.

    1. Yves Smith Post author

      No, I’ve checked the HTML, I compose in the HTML window. The code is clean. Richard Smith has checked too, everything is clean on my end. I can’t control for the errors appearing on your end.

  18. Doc Holiday

    Re: “Only when we, the public, are able to call the underlying realities by their proper names — extortion, capture, looting, propaganda — can we begin to root them out.”

    … But, but, but it’s Black Friday and everyone is shopping like crazy, and as we all know, past XMAS sales are proof of how well our economy runs. The correlation between toy sales and banker bonuses has never been wrong. Nonetheless, just because financial clocks appear to have stopped running, doesn’t mean that the black hole has stopped expanding… or that the liquidity freeze has done a 180.

    1. Paul Repstock

      Well Doc…much depends on how well they can spin the sales numbers. There does seem to be some degree of post catastrophy 28% credit fueled euphoria. But there may be some more “Black” days ahead. We know that these sales have been fueled by “spend while you still can”, in past years. I’m still getting new card offers with “cash back” modifiers to mask the new interest rates?? I don’t imagine this is unusual.

  19. Guy Baker

    If Fed is truly perceived as broke then foreign investors will punish US bonds and US stocks and TBTF banks will be severely punished too.

    Friends in high places of TBTF banks may be unable to keep the TBTF banks on life support then.

  20. Francine McKenna


    Thanks for highlighting this blog post and the House of Lords testimony.
    Anyone who reads me regularly probably realizes that my comments are often sarcastic. I am not surprised by the auditors’ admissions of their conversations with the Bank of England prior to their bailouts. I’m astonished they actually admitted it. It appears they didn’t realize the import of their comments and are so jaded and so out of touch with the typical shareholder’s needs that they have forgotten who they are supposed to serve. I’m gratified that others have taken up my line of questioning. Now I wish someone would do it in the US. I would not be surprised to find that similar conversations took place. In fact, I have long suspected they did and have been criticized, called a fool and deemed too singleminded and unreasonably focused on the auditors’ role in the crisis. Well, that’s what I know and that’s what I do. But in this case, I think it’s warranted and it’s a story still not told. Will any legislator, regulator or investigative journalist with more resources than I have take it up. I hope so.

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