Thursday, December 09, 2010

Hard to know what to say about the massive fucked-up-ness of this :

The leadership of the Big 4 audit firms in the UK has admitted that they did not issue “going concern” opinions because they were told by government officials, confidentially, that the banks would be bailed out.

Ie. the auditors who's job was to assess whether the banks were going bust, didn't warn that they were going bust, because they knew that the banks would be rescued!!!!

WTF??? My head is hurting. This is like someone left Karl Pilkington in charge!

Update : BTW, I just noticed that word "confidentially" in the above quote. Why confidentially? If the government wanted to signal that it was willing to support the banks, why not do it in public? Instead we have them secretly saying that they'll support them to the auditors so the auditors can then cover up the fact that the banks are in trouble in the first place!

"silence like a cancer grows".

This is why we need wikileaks.


Scribe said...

Really interesting, in a dull-economics kind of way. Reading through the transcript (pp. 25-40) doesn't clear too much up, but it's interesting to see how the auditors see their role.

Essentially, they say that they're not there to judge the plausibility of a business model, nor the possible "unforeseen" industrial problems that might affect a company - rather, their scope is to say whether a company has tight enough controls on their processes, and enough viable available liquidity, to keep paying off debts.

This keeps them clear of the 2 main causes of the fucked-up-ness: business models which, mostly owing to complexity (which inherently can't be audited, IMHO), then blow up, and liquidity coming from the government. (There remains an argument that says it's better to use taxpayer public money to save companies that citizens (taxpayers with a different hat on) have money invested in.)

At which point one has to think of auditors a little like those levees they build in areas prone to flooding - they're fine up to a certain point, but once things get so bad that they do get over the top/route around this regulation, things really hit the fan.

The ultimate question is - are companies prone to consistently route around regulation (i.e. could the complexity of the banking industry be a form of regulation-avoidance in itself), and how should auditing be "improved" if so?

phil jones said...

Well the obvious way for auditing to be improved would be not to let the auditors off the hook.

There shouldn't be a "we didn't foresee this, but that's ok, because we're only expected to foresee events of certain types". That's a recipe for nothing.

If you say to auditors,
"your job is to assess if this company is going bust whatever the reason", then effectively auditors would be co-evolving the monitoring processes in parallel with the companies trying to innovate regulation avoidance.

Scribe said...

I would say that such an absolute assessment is doomed to failure -

a) prediction is a dangerous game, and anyone being held to account to predict anything and everything will rapidly get out of doing it - auditors would then need to be something of a publicly-funded service, with the publicly-derived rules and guidelines for doing so, which IMHO are no better than avoiding complexity than what we have now.

b) At what point does the auditor's job clash with that of the market - i.e. to *let* companies with bad business models fail - or at least become less valuable.

The way I see it, the auditors should have flagged up the level of complexity and unknowable risk in the model, and the government should never have promised to bail out the banks when it was obvious they were running a bad game.

Unfortunately, this whole economy comes down to a matter of belief. "If we believe it to be valuable, then it is valuable." Mechanisms such as complex financial models which prolong this belief, or stop it from being affected by "reality", need weeding out in any way possible.

"Maintaining the status quo" is no longer an option.

(Well, it is. People have short memories. Give it 10 years or so and the same thing'll happen.)