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News : Irish Last Updated: Sep 10, 2009 - 5:33:54 AM


Boom or bust - - Big accounting firms still in the money but should they be trusted?
By Michael Hennigan, Founder and Editor of Finfacts
Sep 9, 2009 - 6:39:16 AM

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Whether boom or bust, the big accounting firms are still in the money but given their record of going with the flow during the Irish bubble and providing advice to clients that burned them or failing to warn shareholders of risk exposures in audit reports, should they be trusted now?

During the Irish boom, there were many signals of the classic casino or petro-economy and one was the move by accounting firms into the property and investment business. There was a lot more money to be made than from conventional work, such as producing business plans.

Business plans have got a public airing in recent weeks at the High Court hearing of the second bid by developer Liam Carroll's insolvent Zoe Group for examinership protection.

Big 4 accounting firm KPMG produced a business plan last December, which provides a favourable scenario in 3-5 years, while Zoe is seeking the appointment of a former KPMG partner as the examiner.

Does it matter that big fee firms may have been as wildly optimistic or self-interested as the political leaders and the same people are still selling advice and are still in the prediction business?

On Monday the biggest of the Big 4 accounting firms, PricewaterhouseCoopers (PwC), announced UK turnover for the year ended June 2009 of £2.25 billion up from £2.24 billion, a marginal increase on the previous year, with underlying net revenue increasing 1% to £1.98 billion. 

Ian Powell, UK Chairman, commented: “This year has been one of general economic turmoil and against this backdrop our results represent a solid financial performance as we held our nerve and stayed close to the market and our clients. Despite the challenging environment our advisory business achieved growth of 5% to £737 million with our assurance and tax businesses seeing small declines in turnover of 1% to £861 million and 4% to £650 million respectively.”

PwC Ireland has not yet published its figures but like much else in Ireland, do not expect much transparency - - why should accountants depart from the culture of Victorian secrecy?.

In September 2008, PwC Ireland issued a terse statement saying all-Ireland fee income was €355 million to the end of June 2008. The partners didn't even give the percentage change.

In the UK, while transactional income fell in the year to June 2009, other business lines have boomed. Forensic accounting has grown 77% over the past three years, and the firm has earned £100 million alone from administering Lehman Brothers.

Lex in the FT said on Tuesday that other large accounting firms are also expected to post results similar to last year’s. The resilience is unsurprising. The industry has shrunk from the "big eight” of the 1980s to the “big four” of today, a consolidation that has helped bean counters; PwC earned a juicy 34% profit margin. Much of their work is also required by law, with taxation and audits seen as annuity businesses.

Lex said: "PwC’s role as auditor and consultant for Northern Rock has been questioned, as has Ernst & Young’s audit of Lehman Brothers. Still, past litigation and the demise of Arthur Andersen have boosted accounting work - -  and with margins up by perhaps half since 2002, accountants are raking in the beans."

A margin of 34% is impressive in any business, in particular as a near-monopoly, when you can avoid taking public positions on risk exposures.

In Ireland, there was what was called "light touch" financial regulation but it turned out to be"soft touch."

The Irish banks had increased foreign borrowings to almost 50% of GDP in a few years from 2003 to fuel lending and an economy so dependent on the US, was at risk from a downturn.

Last June, a letter was sent by economists to Queen Elizabeth explaining the credit crunch.

The letter refers to a "psychology of denial" that gripped the financial and political world and says "financial wizards" convinced themselves they had found ways to spread risk throughout the financial markets - - a great example of "wishful thinking combined with hubris."

The letter concludes: "In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

Almost two-thirds of outstanding Irish private sector bank credit in 2008, related to property. For individual banks, what did the accountants in the Big 4 firms regard as a risky exposure, irrespective of the background chorus of the ignorant cheerleaders of the boom?

Seán FitzPatrick was head of the builders' bank Anglo and sat on the council of the Institute of Chartered Accountants in Ireland. In mid-2008, he recruited fellow chartered accountant Donal O'Connor, for the bank board. O'Connor was the outgoing senior partner at PwC Ireland and FitzPatrick who had run the bank for more than two decades, unlikely expected any cages to be rattled.

It was another Big 4 firm, Ernst & Young, that audited the bank and it has questions to answer both on the issue of risk and its failure to discover FitzPatrick's eight-year scheme to hide his large loans from the bank.

So should the big fee firms be trusted now when it was foolish to trust them during the boom?

SEE also: Finfacts article; The big fee "cartels" in Irish professions; Time for Ireland to change "the natural state of things"

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