ACCOUNTANTS:THE ACCOUNTANTS who were supposed to act as watchdogs over bank finances generally failed to report that they were lending too much money to property developers in the run-up to the crisis that broke three years ago.
The report into the causes of the crisis shows that, by the end of 2008, the five institutions covered by the Government guarantee had lent €140 billion to property and construction.
This is about €60 billion more than the limit regarded as safe by the Central Bank and the Financial Regulator.
The report states that independent auditors, whose job it was to ensure that the banks kept proper books of accounts and could maintain their businesses as going concerns, stayed silent on the problems that were building up in the Irish financial system before 2008.
The report agrees that auditors fulfilled their “narrow functions” according to existing rules and regulations.
“They did not, however, generally report excesses over prudential sector lending limits to the financial regulator,” the document states.
It concedes: “Even if they had it appears unlikely that anything would have been done about it as, in general, the Financial Regulator was already aware of such limit excesses.”
One unnamed auditor did report excessive lending to property developers to the regulator.
Others either did not realise that limits had been broken or felt no need to report the matter as the authorities were aware of this but took no action.
The auditors were drawn from three of the “big four” accounting firms, Ernst Young, KPMG and PricewaterhouseCoopers.
Auditors review financial statements and give an opinion in the published statutory accounts as to their accuracy and fairness.
They also have to give a view on the company’s prospects of continuing as a going concern.
Mr Nyberg says that this role is, in reality, quite narrow and that the public expects more of this process than it can actually deliver.
The report says it turned out to have only limited use when it came to predicting problems in the Irish banks.
However, the report says there were other avenues open to auditors, including making their concerns known to the banks’ boards or to the Financial Regulator.
Mr Nyberg says that, even accepting that it was difficult to judge precisely when the banks’ lending practices and business strategies would pose a threat to them as a going concern, this should not have stopped auditors raising questions with the banks’ boards.
His report also argues that raising such issues at an early stage might have presented other solutions to the problem, such as facilitating the takeover of a troubled bank by a stronger institution, which happened in some instances in Britain and the US but not in the Republic.
Auditors did react as a group early in 2008, and brought concerns about various issues, including asset values and 100 per cent mortgages, to the regulator via the Institute of Chartered Accountants in Ireland.
However, at that stage the problems were embedded in the banks’ balance sheets, and the options for taking any action to deal with them were limited.
Nyberg’s commission concludes that the auditors’ work did highlight valuable information for the Financial Regulator in the key period between 2003 and January 2009.
The report points out that the banks’ business models and lending practices, including those of Anglo Irish and Irish Nationwide, were visible to varying degrees from audit findings, management letters and other communications. These were available to the regulator.
The report argues that, while the auditors were not obliged to comment on business models and lending practices, doing so from the middle of the key period onwards would have helped to highlight the Irish banks’ growing vulnerabilities.
THE BANK AUDITORS 2003-2009
'Auditors, therefore, did not feel that commenting on the implications of such business model problems fell within their proper remit. In fact, it may be questioned whether they even saw them as problems since very few others appear to have seen them either. On these issues, they appear generally to have stayed silent.' – Nyberg on the auditors
KPMG
AIB; Irish Nationwide; Permanent TSB; EBS (from 2009)
ERNST & YOUNG
Anglo Irish Bank; EBS (to 2008)
PRICEWATERHOUSECOOPERS
Bank of Ireland
