Barclays Libor Scandal; More Client Headaches for PwCBy Francine • Jul 2nd, 2012 • Category: The Case Against The Auditors
Update Tuesday July 3, 7:15 am: The Financial Times is reporting that CEO Bob Diamond has also resigned. Departing Chairman Agius will lead the search for a successor while Sir Mike Rake leads the search for Agius’ successor. It seems Diamond did himself no favors when he obliquely threatened, according to earlier reports, to spill the beans on the role of the Central Bank of England and name names during his testimony to the Treasury Committee of Parliament this week. “Everybody is doing it,” is it seems no longer a sufficient excuse for illegal acts. Barclays board chairman Agius resigned on Monday. Top candidate to replace him? Sir Michael Rake, former global Chairman of KPMG, who presided over the tax shelter scandal that almost put that firm out of business in 2005.
I’ve put a new column up at Forbes this morning, “Barclays Manipulates Libor While Auditor PwC Snoozes.”
The Barclays Libor manipulation scandal is a big deal and we haven’t yet seen the full impact here in the U.S. The Chairman of the bank resigned officially this morning and the interim Chairman is none other than our old friend Sir Mike Rake, former Global Chairman of KPMG.
It’s funny how the Big Four auditor former Chairmen seem to be infiltrating the major banks, in particular. Rake is at Barclays as well as at British Telecom. Former PwC Chairman Sam Di Piazza is a major player at Citigroup, KPMG’s Tim Flynn joins the board – the audit committee (and probably a reconstituted risk committee) – at JP Morgan. Deloitte’s former Chairman Parrett is at Blackstone. KPMG’s UK Chairman Griffith-Jones is heading over to that country’s financial regulator.
The announcements come out often before their retirement is even official.
They’re everywhere, in spite of the fact that they did nothing to prevent, detect, warn, or mitigate the impact of the financial crisis on their true client, the shareholders.
Here’s an excerpt from my column today:
They are all examples of risk management and audit failures and the auditor of all of them is PricewaterhouseCoopers.
Major media has yet to mention the name of PwC, the external auditor, when talking about the Barclays Libor scandal, JP Morgan’s costly “whale” trade, or the woes brought to Chesapeake Energy by its imperial CEO, Aubrey McClendon. There was some mention of PwC early in the MF Global case, but interest in PwC died down quickly as has the general coverage of this scandal as the months wear on. No real truth has come out yet about who has $1.6 billion of customer funds illicitly used to cover CEO Corzine’s risky bets on sovereign debt.
According to PCAOB Auditing Standard Number 5, “When auditing internal controls over financial reporting, the auditor may become aware of fraud or possible illegal acts. In such circumstances, the auditor must determine his or her responsibilities under AU sec. 316, Consideration of Fraud in a Financial Statement Audit, AU sec. 317, Illegal Acts by Clients, and Section 10A of the Securities Exchange Act of 1934.”
I’ve written extensively about the auditors responsibility to plan and perform their audit to address the risk of fraud or material misstatement and theauditors responsibility to report up, then possibly out to the SEC when the engagement team becomes aware of fraud or other illegal acts such as Foreign Corrupt Practices Act (FCPA) violations.
During initial planning for the scope of these audits PwC could have decided to do more rather than less. The auditor must increase the scope of the audit and testing if there are higher risks of material misstatements due to fraud or illegal acts. Then, during the audit itself and certainly during the audit of internal controls over financial reporting, PwC could have caught the risk management and internal control failures such as those that we are seeing at Barclays, JP Morgan, MF Global and Chesapeake.
So let’s talk about what happened in these four cases involving PwC clients…