Having watched the grand finale of the London Olympics, one can never forget the enthusiasm with which the British hosts entertained 23 million viewers with such a spectacular albeit kaleidoscopic experience. In the aftermath, one may be excused for forgetting the bad news that is hitting the financial sector (particularly large banks / auditors) in London.
The EU Commission is spearheading the most radical shake-up of the audit profession in decades, but some believe it fails to go far enough and may not address all the issues for audit liberalisation, especially due to objections by the Big 4 monopoly. Mr Faull, as EU director general for the internal market and services division, was careful in his remarks on the pending audit reform. Critics felt the EC had made a “half-hearted” approach in its proposals to enforce a direct line of communication between auditors and regulators and was “puzzled” it did not include statutory obligation for regulators and bank auditors to share concerns with each other. Some argue that the Big 4 audit lobby wanted a quiet life and bank regulators were very busy and so failed to make enough effort to communicate with each other. But, considering the banking scandals that have ravaged London this year more needs to be done to revive the credibility of the square mile as a centre for financial probity.
At present, the EU proposals set out that companies must change auditor every six years unless they opt for joint audits, which would allow them to keep the same auditors for up to nine years. There is the issue of the Big 4 monopoly and banking covenants praxis, which leads prospective banking clients to use Big 4 auditors when applying for loans. Competition among listed companies all audited by Big 4 will be restricted should there be a collapse or merger among the Big Four, ie., if four became three (previously five now down to four when Andersen failed due to Enron collapse in 2001).
Banks are in the soup again this year. It all started last June with the stark revelation by Barclays that for a number of years it had been fiddling with the Libor inter bank rate. As can be expected, this is a serious admission of fault and caused the resignation of both its chairman, Mr Agius of Maltese parentage, and Mr Diamond, its chief executive. Hot on the heels of this scandal came a larger one involving London’s largest bank − HSBC. This is the “Teflon” coated bank that came through the 2008 banking crisis unscathed and prided itself on its spotless image in probity while other international banks faltered − needed taxpayers bailouts − under the weight of the US sub-prime crisis.
Last month, a US Senate committee attacked HSBC Holdings plc for allegedly handling money for drug gangs and Mexican terrorist groups. Simply put, HSBC admitted to a US senate hearing of laundering money for drug cartels, terrorists and pariah states. Senator Carl Levin, a Michigan Democrat who led the investigation, said: “Banks that ignore money-laundering rules are a big problem for our country. In an age of international terrorism, drug violence in our streets and on our borders, and organised crime, stopping illicit money flows that support those atrocities is a national security imperative.” Following the scathing remarks came HSBC’s contrite submissions. In a statement, HSBC quickly replied: “We will apologise, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.” The bank says it has sharpened up its controls and doubled spending on compliance to £255million. It also said it was closing 20,000 accounts in the Cayman Islands as a result of the investigation. Faced with such serious issues, it came as no surprise that Mr Bagley, as head of compliance with over 20 years of service resigned during the process of investigations. It goes without saying that the scandal subjected HSBC, touted as Europe’s biggest bank, to a humiliating position as it faces a potential $2 billion fine. It stands accused of fostering a “polluted” culture when it became a conduit for criminal enterprises. It was revealed that HSBC let drug gangs launder millions as mentioned in a gruelling 335-page Senate report, which accused HSBC of ignoring warnings and breaching safeguards that should have stopped the laundering of money from Mexico, Iran and Syria. It was reported in the media that it failed to monitor £38 trillion of illicit money moving across borders from places that could have posed a risk, including the Cayman Islands and Switzerland. As reported in the media, the senate hearings discovered how the bank failed to scrutinise dealings with Saudi Arabian bank Al Rajhi, which was linked to the financing of terrorism following 9/11. Media reportage shows that in America, it was HBUS (an HSBC agency) that agreed to supply the Saudi bank with US banknotes after the latter threatened to pull all of its business with HSBC worldwide. This was no joke. The US media reported HBUS knowingly accepted £9.6 billion in cash over two years from subsidiaries without checking its provenance. The unsavoury dealings with Mexican drug cartels makes for shocking news that dwarfs any previous banking scandal.
The next scandal to hit London’s battered image is that of Standard Chartered bank when New York’s bank regulator threatened to revoke its licence for alleged money-laundering violations involving Iran. Things are so bad in London as a financial centre that the UK government had launched a public inquiry into present banking culture. For 10 years up to 2010, the US unit of Standard Chartered is alleged to have operated as a rogue institution. This clandestine activity in “sanction ridden” Iran helped it to earn hundreds of millions of dollars in fees by moving money through its New York branch for Iranian financial institutions. This was alleged last week by the New York State Department of Financial Services, which also implicated the US arm of auditor Deloitte in a scandal involving the bank. Perhaps it is easy to ask the question: how can a Big 4 audit firm not become aware of such malpractices/deception even though these were well hidden by staff? Definitely the internal controls review would have unearthed the tried and tested methods of faking the origins of Iranian client transactions to bypass US money laundering defences. It is a red-letter day for the US auditing profession. The New York State Department of Financial Services’ order found the bank’s actions exposed it as “vulnerable to terrorists, weapons dealers, drugs kingpins and corrupt regimes”. But how can the auditors not detect or become even remotely suspicious of transactions in a massive sum of £160 billion hidden from US regulators for 10 successive years to 2010. The media reported the auditors refused liability for the accusations while DFS said: “SCB carefully planned its deception and was apparently aided by its consultant Deloitte & Touché, which intentionally omitted critical information in its ‘independent report’ to regulators.” Deloitte quickly denied responsibility for such accusations saying: “Deloitte Financial Advisory Services performed its role as independent consultant properly and had no knowledge of any alleged misconduct by bank employees. Allegations otherwise are unsupported by the facts.” The press also reported that the auditors are alleged to have unlawfully provided SCB with confidential historical transaction review reports that it had prepared for two other foreign banking clients that were under investigation for money laundering. Standard Chartered denied the position in the DFS report and said in a statement: “The group strongly rejects the position or the portrayal of facts as set out in the order issued by the DFS.”
In a similar vein, more bad news lit the US financial headlines last month when former Deloitte & Touché LLP partner and vice chairman Thomas P. Flanagan pleaded guilty to one count of criminal securities fraud for insider trading after obtaining non-public information about several Deloitte clients and agreed to pay over $1 million in penalties. The US Attorney’s Office for the Northern District of Illinois filed criminal charges against Flanagan last month in the US District Court for the Northern District of Illinois. Not surprisingly, a spokesman for the Big Four accountancy firm said: “Deloitte categorically denies that it aided in any way any violation of law by Standard Chartered Bank. It forcefully denied being culpable saying “Deloitte properly performed its role as independent consultant and had no knowledge of any alleged misconduct by bank employees.” Adding to its defence, it says such allegations are wholly unsupported by the facts. In conclusion, one hopes that when the dust settles and the markets reach a new equilibrium it will be the right time for the Commission’s reforms aimed to improve efficiency and probity of the audit profession to be voted in by the European Parliament.
[email protected]
The writer is a partner
in PKF an audit and
business advisory firm.