The Role of Auditors

capall said:
Having said all that the auditors in the case of Anglo Irish I believe did not comply even with the basic duties of auditors as outlined by the CEO of the Institute of Chartered accountants in fridays IT letter
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I can't open the letter but if what you say is true what is the Institute going to do about it?
 
Bronte said:
I can't open the letter but if what you say is true what is the Institute going to do about it?
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There is absolutely nothing at all in the letter that suggests the auditors at Anglo did not do a complete and correct audit.

There is an enormous amount of muddled thinking, guesswork, supposition and hysteria in the media about all of this (and in this thread too). A lot of people seem to have boiled down the situation as follows: Huge loans to Seanie were floating in and out in the month before/after year end and the auditors failed in their duty to spot and report these so the bank collapsed.

I am not too happy to jump to any conclusions unless I can base them on facts. Some facts I know and some are still to be provided.

Fact: The new Chairman of Anglo - Donal O'Connor said at the shareholders EGM that the loans to Seanie were on normal commercial terms and based on the bank's normal lending criteria (security, risk, etc.).

Fact: The new Chairman told shareholders that the terms of the loan facility allowed Seanie to repay part of the loans and draw down amounts subsequently without putting a new agreement in place - he said it was a revolving credit facility. Just like your overdraft and mine, well maybe a bit bigger This means that movements up and down in the balances might not seem unusual or draw attention.

Fact: The auditors do not have to report on loans to bank directors taken out and repaid during the year. I am sure this will now change, but the fact is the auditors did not fail to report something that they were obliged to.

Question: How many individual loan accounts made up the facility? I don't know and I haven't seen anything revealed on this. So how likely is it that individual transactions would be spotted in a review for unusual transactions around year end. If €100m is immaterial in the context of the bank's accounts then if a number of smaller accounts and transactions made up the whole then they are even more immaterial and harder to pick up. I'd be willing to bet this is not as simple as we have been led to believe.

Question: Has the Seanie loan fuss made a single jot of difference to the value of the bank's total loan book? Have the revelations themselves been shown to have had any effect on the underlying assets? If it's all about his borrowing shenanigans can I assume other bank shares have held firm or even risen while Anglo shares fell? Errrr.....

All I know is that I'm holding fire until I know a lot more about all of this...
 
OK let me explain how you would audit director loans

How many directors are we talking about ,less then 10.

You take the bank listing of directors balances and you verify this with the individuals involved and the balance on the banks systems
Then you print out an account history for that director say Sean Ftzpatrick ,lets assume that SF has an account number with the bank and all his loans and balances with the bank are shown under this account number.
How complicated is that ? How long would that take ?

If you think any benign view can be taken of SFs actions you are on your own I think. As for Ernst and Young their audit procedures were deficient to the point of negligence
 
There is a statutory responsibility for auditors to test directors' loans and any related party transactions in their fieldwork, and materiality isn't a consideration.

It would be simple to access SF's account details and they were no doubt accessed.

However, as SF's activities haven't distorted the true and fair view of the financial statements, EY had no reason to report it in their audit opinion. Not to be too cynical, but even if EY were to report it, it is unlike they would want to upset the client in question over something as financially immaterial, and put the huge auidt fee they receive at risk.

It certainly does highlight a flaw in the audit reporting mechanism.
 
Materiality is not just about the size of the loans.

Would investors have appreciated knowing that the chief executive who became the chairman was so heavily personally indebted.

How might they have voted on his appointment if they had been aware of this?

Would they have invested or divested if this information had been made know to them?

Were there conflicts of interest?

Did the credit committee function as indicated in their own procedures?

How come all directors loans come before the Board of a credit union and even if not provided by legislation, a similar principle would not be followed in a financial institution?

Are the Revenue Commissioners satisfied regarding the disclosure they receive from auditors, tax advisors and directors across all financial institutions or are they enjoying principles based taxation?
 
Why do people keeping using the term "director's loan" incorrectly? These were commercial loans, not movements in the directors' loan account.
 
Directors loans are directors loans.

The fact that it is a commercial loan means that there is no taxable benefit to the director and also in the case of a bank that it can exceed the normal 10% rule but it is still correct to refer to them as directors loans

Strangely enough that is why they are required to be disclosed in the accounts as directors loans
 
capall said:
lets assume that SF has an account number with the bank and all his loans and balances with the bank are shown under this account number
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"assume" - that's what I mean, all you can do is assume when you don't have the information.

capall said:
If you think any benign view can be taken of SFs actions you are on your own I think.
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What benign view? All I've said is that I'd like to see the facts. I know that's a boring view and it's easier to rush to judgment, but hey, I'm strange

capall said:
As for Ernst and Young their audit procedures were deficient to the point of negligence
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I take it you were a member of their audit team then? Or you live with one of them, who showed you their work?

I can't think of any other way you could have access to the work done.

Ok, sorry for the sarcasm, but that is a very sweeping statement you've made there.
 
Yes,I am assuming that Sean Fitzs loans were actually recorded on the banks loan system ,because if it wasnt then we are really talking about major league fraud here

I can say that E&Ys audit procedures were deficient because they audited Anglo Irish Bank for 8 years and never detected these loans.
I dont believe that Sfitzs loans were recorded on the back of an envelope so normal correct audit procedures capable of being performed by a first year trainee auditor would have identified what was going on
 
capall said:
I can say that E&Ys audit procedures were deficient because they audited Anglo Irish Bank for 8 years and never detected these loans.
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Why would you have audit procedures to detect something that neither presents a material risk nor is subject to a disclosure requirement?

 
As has been pointed out by a previous poster when something is required to be disclosed in the accounts by specific legislation then materiality is irrelevant it needs to be verified 100%

E&Ys audit procedure for the directors loans was obviously to send out a form to the directors to sign off on the balances at year end and that was the extent of the audit work they did

There is a reason why specific legislation was enacted to disclose directors loans in company accounts,it is important and relevant information for shareholders ,creditors ,employees etc. Even the smallest company is required to disclose directors loans

The market reaction to the Directors loans issue in Anglo despite the amounts being immaterial in terms of the banks overall lending tells you how critical directors dealings with the companies they run are regarded.

The fact that Sean Fitz felt it necessary to do what he did also tells its own story. The fact that he could indulge in this simple cover up over years and years also tells us that he had obviously no fear of this being detected by the Anglo auditors
 
Now I'm clear on your points. You don't actually understand the disclosure requirements for banks. That settles it at last.

Took me a few posts to work out though



capall said:
As has been pointed out by a previous poster when something is required to be disclosed in the accounts by specific legislation then materiality is irrelevant it needs to be verified 100%
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You're absolutely correct. And, of course, there is no requirement for banks to disclose the existence of, or movements in, loan accounts to directors during the year, just the balances at year end (it's different for banks). So the auditors didn't fail as regards disclosure. You can't blame them for the rules, illogical though they may seem.

capall said:
E&Ys audit procedure for the directors loans was obviously to send out a form to the directors to sign off on the balances at year end and that was the extent of the audit work they did
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"Obviously" ??!! Interesting conclusion to draw. I can't see how you'd know what they did to verify the year end balances. I may also respectfully suggest that if auditors adopted your approach to compiling evidence and drawing conclusions they wouldn't last too long...


As noted above, the requirement for banks is different to the requirement for other companies. The latter have to disclose movements, but banks do not.

capall said:
The market reaction to the Directors loans issue in Anglo despite the amounts being immaterial in terms of the banks overall lending tells you how critical directors dealings with the companies they run are regarded.
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I've no argument with that. You should certainly be chasing the legislators and regulator on what seems to be a senseless difference in the disclosure requirements for banks. If the rules were the same it's almost certain that none of this fuss would have arisen at all.

I do appreciate that when a company gets into difficulty or even fails it's common for some quarters to shriek at the auditors. All of the big firms have faced this regularly, but it's still extremely rare for negligence suits to be proven. As I mentioned previously, it would be nice and simple in this case to assume that if the movement on Seanie's loans had been disclosed in the accounts each year that all would be rosy in the Anglo garden. But the truth is that it would not have made a bit of difference to the current situation. Go back 12 months or more and people would simply have said that the fact he was investing in property and Anglo shares just showed that he's as smart as everyone else and was making money from such a wonderful strong, ever-rising market. It would probably have been seen as a sign of his own confidence and would have boosted other shareholders' confidence too.

And I AM NOT condoning his actions in moving loans up and down. Like you, I think he's an a**hole, and I wish we were near the end of the situation where cowboys can rise to positions where they can behave as though they were untouchable. But I don't truly believe we are. We see it all the time in business.

But his loans have nothing to do with the mess. Remember what Joe Moore did with the PMPA group of companies - ignored all rules and common sense and the whole house of cards came down. Now that really was down to the chairman.

I don't know if you saw the recent BBC programme on the 1929 crash and subsequent global depression? The comparisons with recent history were eye-opening. No-one thought the market could ever fall. The global economy (in 1929!!) would keep everything afloat. People borrowed enormous sums to invest in shares and in property. The rest is history...
 
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