The auditors’ role in the financial crisis
In the UK, a Select Committee of the House of Lords has conducted an
investigation into the role of auditors in the financial crisis. The report is
available here:
www.publications.parliament.uk/pa/ld201011/ldselect/
ldeconaf/119/11902.htm
You should review Chapters 6 and 7 of the report (and more if you have
the time and the energy!). This is a hard-hitting report and it made the
profession sit up and take notice. In particular the dominance of the Big
Four was a major source of concern not only because it appears to be an
oligopoly which raises the fear of collusive pricing but also because if one
of the Big Four were to fail (i.e. collapse) it would lead to a dangerously
high concentration in the market for bank audits. It is a fact that the Big
Four dominate the financial services industry as well as others and it is
difficult to defend the position.
When it comes to the role of auditors causing the crisis, or at least
contributing to it, there is more scope for debate. The banks were run
by highly paid directors and managers. Some of these people essentially
took risks with shareholders’ and depositors’ money without fully
understanding or caring about the consequences if their bets did not pay
off. Their objective was to create profits for their banks so that they could
enjoy bigger bonuses and bigger pay packets. Shareholders themselves
were happy provided the share price kept rising and dividends continued
to be paid. Ordinary, private individuals probably are not sufficiently
skilled to be able to understand the risks the banks were running but the
majority of shares are held by financial institutions like pension funds.
These institutions employ highly paid analysts and fund managers who are
expected to have the skills and training to assess accurately the financial
statement and other information coming on to the market – yet these
too failed to raise any concerns about the state of bank finances or their
banking strategies. Finally government and regulators whose jobs include
monitoring the changing positions of major industries should also accept
some portion of the blame. While none of these parties has completely
escaped criticism it is noticeable that it is the role of the auditors in the
financial crisis which has received so much attention.
For a balanced view of the situation, see both the ICAEW’s submission to
the House of Lords Committee:
www.publications.parliament.uk/pa/ld201011/ldselect/
ldeconaf/119/10101904.htm.
And the ACCA’s at:
www.acca.org.uk/content/dam/acca/global/PDF-technical/auditpublications/
pol-af-auf.pdf
The point of recommending these things to students is twofold: first it
makes you aware of the recent concerns which have been voiced at the
highest levels in Parliament rather than simply presenting academic
arguments which can sometimes be rather removed from the real
world; and second, it alerts you to the current stage of evolution of the
perceptions of the role of auditors.
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