Can you count on the emperor’s handpicked ministers to tell him when he’s naked? Banking regulators seem to think so.

The April consent orders against mortgage servicers let the companies pick one or more professional-services firms to review their foreclosure actions for abuses and report the findings to the agencies.

Allowing the banks to choose their own judge, jury, and jailer presents almost untenable conflicts of interest. All of the consulting firms that were initially being considered to do the work serve the banks already. The banks, and their mortgage servicing operations, are existing or prospective clients.

PricewaterhouseCoopers, for example, is the auditor for Bank of America and JP Morgan Chase, two of the fourteen servicers under scrutiny. PwC’s retired Chairman, Sam DiPiazza, is an executive of, and on the board of, Citigroup, another bank with a servicer to be reviewed. Promontory Financial Group and Treliant Risk Advisors are professional services firms that serve the mortgage servicers directly on other consulting assignments.

Complicating matters, as a result of so many mergers and acquisitions, global banks are run by layers upon layers of automated systems – like SAP and Oracle – and legacy applications created from Cobol and other, older programming languages. All this software and hardware is held together by band aids, string, duct tape, manual processes, lots of unsecure spreadsheets, and crossed fingers.

The consulting firms hired under the consent order were also expected to address the bigger and more complicated management information systems issues. But it’s tough to find qualified firms that aren’t already working with the banks on these significant challenges and thus aren’t conflicted. 

The Office of the Comptroller of the Currency says it has been sensitive from the beginning to potential conflicts of interest between the consultants and law firms and the banks hiring them to do the reviews.

“We did reject some consultants and law firms submitted by the banks because of conflicts,” OCC spokesman Bryan Hubbard told me. “We were very aware of the impact of actual and perceived conflicts of interest.”

The banks have contracted with and will pay the vendors directly. Without bank-by-bank disclosure of the reports and the vendors that wrote them, we’ll never know if the process to right these wrongs was truly independent and objective.

Hubbard told me that there has been no final decision by the OCC regarding public disclosure of the action plans, the results of each bank’s reviews, or the vendor names. Of course, the banks could always decide to make public the reports, and the names of the law firms and consultants they employed.

Julie Williams, First Senior Deputy Comptroller and Chief Counsel of the OCC told Congress in July that, “these firms are required to operate independently and avoid interests or priorities that conflict with areas addressed in the Orders [and] to specify in their engagement letters with the servicer that their foreclosure review work will be subject to the direction of the OCC and not the direction, control, or influence of the servicer.”

I’m crossing my fingers.

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.