QWill the auditors be held to account for their part in the banking crisis?
External auditors have been severely criticised over their role in the failure of the Irish banks, but no action has been taken against accountancy practices over their pre-crisis role – at least not until this week.
The Irish banks counted three of the “Big Four” accountancy firms – Ernst Young, PWC, KPMG – as their auditors. These blue-chip practices have been sharply criticised since the crisis for failing to warn about the exposure of the banks to the property sector and, specifically in the case of Anglo Irish Bank and external auditors Ernst Young, to flag concerns about the controversial transactions that hastened the bank’s demise in early 2009.
On Tuesday the former Anglo, now called Irish Bank Resolution Corporation (IBRC), issued legal proceedings against Ernst Young in the first case of an Irish bank suing its former auditors over their pre-crisis role.
The proceedings were unexpected, particularly by Ernst Young, the country’s fourth largest accountancy practice in terms of revenue. The bank notified it on Tuesday evening that it had taken the proceedings.
Details of the case emerged in The Irish Times late on Tuesday. IBRC confirmed the action had been taken over the firm’s pre-nationalisation auditing of the bank. Ernst Young said it stood by “the quality of our work performed in the Anglo audit and we will vigorously defend any such proceedings”.
The proceedings were taken this week to prevent the case being blocked under the statute of limitations, which stops cases being taken over events dating back six years.
The firm had audited Anglo’s books for some time, since the early 1990s at least. It earned more than €9 million for its work in the 10 years until the nationalisation of the bank. Eight months later, it was replaced by rival Deloitte.
Ernst Young was criticised in a report last year by an investigator appointed by the Chartered Accountants Regulatory Board, the watchdog for the chartered accountants’ professional body.
Former comptroller auditor general John Purcell said the firm had a disciplinary case to answer over its failure to detect loans owed by former Anglo chairman Seán FitzPatrick and how the loans had been moved temporarily off the bank’s books at its accounting year-ends, which had kept them hidden. The firm rejected Mr Purcell’s opinion and said it would vigorously defend itself.
The failure of auditors to raise more red flags about the banks during their reviews has been criticised by everyone from the Central Bank governor Patrick Honohan to Nama chairman Frank Daly to the author of the third banking crisis report, Peter Nyberg.
