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Home > Blogs > Ian Fraser > If the FSA wanted a whitewash, PwC was well-placed to deliver it

If the FSA wanted a whitewash, PwC was well-placed to deliver it

Bank regulation | If the FSA wanted a whitewash, PwC was well-placed to deliver it Ian Fraser

This is the second of a two-part examination of the UK Financial Services Authority's (FSA) recent inadequate response to the collapse of the Royal Bank of Scotland (RBS). The first part is "FSA’s attempt to rewrite history over RBS lacks credibility."

The Financial Services Authority's choice of PwC as an “independent third-party investigator" to handle its inquiry into the pre-crash behavior of the Royal Bank of Scotland raises questions about what sort of outcome the FSA wanted from this probe.

The FSA last week declared that, after a 17-month "investigation," it has concluded that none of the RBS directors who led the bank to one of the biggest banking failures in history, costing the British taxpayer a total of £1.3 trillion to bail out, had done anything wrong.

In "FSA’s attempt to rewrite history over RBS lacks credibility," I sought to explain why I suspect this is a cover-up/whitewash that both the FSA and PwC may come to regret.

Scores of people, including investors, analysts, and academics share my views (even Sir Fred Goodwin himself has apparently argued the FSA should now publish PwC's "review" of RBS in full, something it is currently refusing to do, blaming an Act of Parliament). Kamal Ahmed, business editor of the Sunday Telegraph, wrote:

"An 18-month inquiry, a £45bn taxpayer-funded bail-out and the destruction of one of the UK's global giants, merited the type of detail one might expect to mark the launch of a new washing powder ... [senior politicians] argue that information must be made available to the people who have paid and are still paying the costs of the financial crisis—the taxpayer and the shareholders."

In this post, I want to provide a few pointers as to why I believe the FSA's May 2009 decision to 'outsource' the RBS inquiry to PwC was deeply flawed—and may have been motivated by the FSA's desire for a cover up.

Think about it. PwC (global revenues US$26.6bn) may not have been RBS's auditor but it can hardly be considered to be independent or non-partisan where RBS was concerned.

If it had really, forensically got to the bottom of RBS bankers' alleged wrongdoing, it would hardly have been beneficial to its interests. It might, for example, have lifted the lid on a wider can of worms including the performance of audit firms pre-crisis.

If, let's say, PwC had revealed that fellow 'big four' firm and RBS auditor Deloitte had deceived investors by going along with misleading and "racy" accounting treatments; if PwC had proved that Deloitte, Linklaters, and RBS had sought to pull the wool over investors' eyes with RBS's 2007–08 capital raisings, would it really have been in PwC's interests? I don't think so.

In fact PwC would probably have been shooting itself in the foot if it had unearthed and exposed evidence of this sort of activity (if of course it had actually occurred). It might also have been deeply damaging to the FSA/UK government, which routinely turned a blind eye to white collar crime and financial fraud in 2003–08.

I would contend that, given its own lead role in auditing many other banks and financial institutions that failed, PwC was fatally compromised from the start. PwC gave clean audits to Northern Rock, Glitnir, and Landsbanki a few months before they collapsed, and some of the audits are being scrutinized by relevant regulatory bodies for creative accounting and potential fraud.

It's also worth pointing out that PwC boss Ian Powell and other leading auditors made a surprising admission to the economic affairs committee of the House of Lords two weeks ago.

They admitted that, from about December 2007 onwards, the 'big four' effectively colluded with the UK government and banks to misrepresent the solvency of UK banks. Any qualms about claiming near insolvent banks were "going concerns," evaporated when the government told them it would step in and bail out the banks in the event of a crisis.

Given these circumstances and background, can PwC really be perceived as a toothsome investigator champing at the bit to unearth potential negligence, corporate governance failures and fraud at RBS? Or was the accountancy firm more interested in seeking to airbrush inconvenient truths from recent financial history? I suspect the latter is true.

It's also worth pointing out that, far from being independent, PwC is heavily conflicted. It is the largest supplier of consultancy services to RBS and may want more from this particular client.

To overcome the widespread suspicion that he has presided over a deliberate whitewash or a cover up, led by a soft-touch investigator, I think FSA chief executive Hector Sants will, for a start, have to make his investigation public.

To expect the British public to pick up the tab for Goodwin's and RBS's demented excesses and mistakes prior to the bank's collapse in October 2008 without at least making the findings public is simply asking too much. As Andrew Hill wrote in the Financial Times:

"The FSA could help draw a line under the unproductive post-crisis fury by publishing the findings of its review—in redacted form, if necessary—rather than hiding behind confidentiality requirements. The watchdog, which is not long for this world, has nothing to lose by doing so … If nothing else, publication would demonstrate how “good” governance failed to prevent RBS from falling into the mire. It might even help the inheritors of the mess to apply their skill, care and diligence more effectively next time. If that is not in the public interest, it is hard to see what is."

The FSA should also never have opened itself up to ridicule by appointing a deeply conflicted and constrained 'big four' accountancy firm as independent third-party investigator in the first place. Unfortunately it did. Now to remedy the situation, the FSA faces three main choices:

  1. Maintain the veil of secrecy and risk further ridicule and opprobrium, whilst further damaging London's credibility as a properly regulated financial centre
  2. Publish the "review" and allow the public judge its accuracy
  3. Publish the "review," acknowledge this was an ill-judged and misguided attempt to cover up past errors and commission something harder-hitting and more credible.

Of these options, number one is a non-starter; whilst number three would be the most beneficial in the long term. However, I fear that that's not going to happen; banks, auditors, regulators, and governments have too much to lose. Which means it's going to be number two and that the chances of learning anything from the banking and financial crisis have disappeared further into the rear-view mirror.

Further reading on the accounting and regulatory failure

Tags: auditing , banking , Financial Services Authority (FSA) , PricewaterhouseCoopers (PwC) , regulation , Royal Bank of Scotland (RBS) , transparency , UK
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