The argument about auditors’ contribution to the 2008 debt crisis is still unresolved, and it will remain so until the central question of audit scope is addressed.
The traditional perception that auditing has an historic focus merely entrenches its uselessness in the face of a radically altered commercial environment and risk levels that demand a fresh approach to the going concern assumption.
One eminent Big-4 senior partner is on record as asking “what happens if a going concern on 31 March turns into a dead duck on 1 June because of something unforeseeable?” Well, it could just be bad luck, or it could be that the unforeseeable was blindingly obvious if you knew how and where to look.
Whenever I questioned the validity of including parcels of mortgage derivatives in a balance sheet at amounts based on their “market” value, when not one of the market participants had actually opened a single parcel to examine even one mortgage, it was patiently pointed out that it is not an auditor’s job to challenge directors’ valuations that accord with accounting rules and are based on actual, bona fide, arm’s length transactions in a recognised derivative market.
When, similarly, dozens of major banks were carrying, at face value, mountains of purchased debt they had never evaluated because their business model ignored “expected” losses, writing down only losses deemed (by them) to have been “incurred”, I was told that it is not the auditor’s role to evaluate sustainability of a client’s business model. After all, that would require auditors to assume an expertise equivalent to that possessed by the directors.
Northern Rock’s business model, we now know, was to acquire tranches of short-term money and lend it out on long-term mortgages at sub-market rates, with loan-to-value ratios of 125% – all on the unquestioned assumption that property prices would continue upwards indefinitely. Well, they didn’t. Cash providers promptly turned off the tap. Maybe they recognised that the Rock’s business model was unsustainable after all. Was that unforeseeable?
Can you remember when accounting rules made sense, even to accountants? Auditors could not approve what was obviously rubbish. Management’s argument that a debt was “good” because the borrower had not yet thrown keys through the letter-box would get short shrift if repayments were in arrear and had to be rescheduled, and the borrower had been granted an indefinite interest and repayment holiday.
The need to trust reason rather than conventional wisdom applies on all levels. When Anders Borg, the Swedish Finance Minister, applied a stimulus in the form of a permanent tax cut, decried by his critics as an act of fiscal lunacy, he offered his own definition of lunacy as repeating the economics of the 1970s and expecting a different result. He is right. Wherever “stimulus” has taken the form of printing more money, it has led to even greater debt rather than being fed into the economy. Sweden, by contrast, had the fastest growth in Europe last year and its deficit has disappeared.
Yet France now wants “growth” to be financed by debt and higher taxes; Italy favours EU-backed eurobonds to bail everyone out; Greece wants anything except living within its means.
When will they accept the obvious? Lower taxes, lower state spending, fewer regulations and sound money. Now that’s sustainable.