Explaining its $450 million settlement with U.S. and U.K. regulators, Barclays said it had "inadequate" controls and "had not anticipated the increased risk around the Libor process." Auditor PricewaterhouseCoopers has been negligent in its duties as well.
PwC agreed to the most minimal disclosure of Barclays' potential settlement in the annual report released in March. Barclays "attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the bank's derivatives trading positions by either increasing its profits or minimizing its losses," according to the Commodity Futures Trading Commission. PricewaterhouseCoopers missed, or maybe looked the other way at conduct that was "regular and pervasive."
The CFTC enforcement order says Barclays based its Libor submissions on the requests of Barclays' swaps traders, who were attempting to influence the official published London interbank offered rate and the profitability of their own trades. In addition, certain Barclays swaps traders "coordinated with, and aided and abetted traders at certain other banks to influence the Euribor submissions of multiple banks, including Barclays." Barclays also systematically suppressed its submissions to the Libor committee regarding its borrowing costs to mitigate perceptions of its weakness during the 2008 crisis.
PwC could have caught the faults twice. The auditor should have identified and warned shareholders and the public about increased risk at Barclays. An audit firm has an obligation, according to standards enforced by the Public Company Accounting Oversight Board, the profession's U.S. regulator, to audit disclosures. Generally Accepted Accounting Principles and International Financial Reporting Standards require disclosure of information about risk. (Barclays is subject to the latter set of rules.) If disclosures are materially incomplete or inaccurate, an auditor should not issue a clean opinion.
The "management discussion and analysis" of results for a financial institution must include discussion of: liquidity; capital resources; results of operations; off-balance sheet arrangements; and contractual obligations. Although auditors' obligations are more limited here, the auditor should read this information and consider whether it, or the manner of its presentation, is materially inconsistent with information appearing in the financial statements.
Second, when a bank must comply with Section 404 of the Sarbanes-Oxley Act (and Barclays must, despite being a foreign entity, since its American Depository Receipts trade on the New York Stock Exchange), the auditor expresses an opinion on the effectiveness of the company's internal control over financial reporting. PCAOB's Auditing Standard No. 5 says, "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."
Controls over values created using models, third-party pricing services, and use of market inputs are supposedly supported by elaborate compliance systems to make sure valuations meet accounting standards. Basic assumptions used to assign values such as benchmark interest rates should not be vulnerable to manipulation or collusion. Banks must comply with legal and regulatory requirements to ensure the integrity of data critical to the functioning of the capital markets.
You make a valid point. However, auditors are much closer to the action, more often than regulators. In the largest banks, the audit is a year-round process. Auditors are the first line of defense for shareholders against management self-interest, after internal audit and the Audit Committee of the Board of Directors.
The Internal Audit Department should have reviewed the theory behind how Libor was being determined and monitored its movements.
They should have done the same for the Morgan/Chase Whale Theory.
However, today the Banks Internal Audit Department's are being used a management consultants and not as safeguards/police for the Audit Commitee and the Shareholder.
The Board of Directors and Shareholders now must rely on the Outside Auditor that depend on management and the internal auditors review of internal controls. However, they are relying on the same management that is responsible for the controls and have the most to gain with loss controls.
Lastly you have the Board of Diectors/Audit Committee. They are retired accountants and bankers that are serving at the grace of management and collecting their monthly pay from management. They are protected by Insurance Bonds and they only can be held accountable for what the Internal Auditors or Outside Auditors present to then in Black and White during the Audit or Board Meeting. This is why the Minutes do not included everthing talked about.
Lastly the regulators depend on all the above and review all their reports and minutes and on that they base their decision.
It's the Blind leading the Blind. The Buck does not stop here.
You have explained the current corporate governance dilemma. False assurances all around. And shareholders have been held back by the proxy process. Very difficult to get information or voice heard.
In your experience how much are investors part of the solution or part of the problem when it comes to auditor independence?
What specifically could they do to be less of the former and more of the latter?
Cheers
Raj