Description
Against the backdrop of the current financial crisis, this paper seeks to stimulate debates
about contemporary auditing practices. It notes that many financial enterprises have
sought state support within a short period of receiving unqualified audit opinion. Auditors
collected large amounts in audit and non-audit fees. The events raise questions about the
value of company audits, auditor independence and quality of audit work, economic incentives
for good audits and the knowledge base of auditors.
Financial crisis and the silence of the auditors
Prem Sikka
Centre for Global Accountability, University of Essex, Colchester, Essex CO4 3SQ, UK
a r t i c l e i n f o a b s t r a c t
Against the backdrop of the current ?nancial crisis, this paper seeks to stimulate debates
about contemporary auditing practices. It notes that many ?nancial enterprises have
sought state support within a short period of receiving unquali?ed audit opinion. Auditors
collected large amounts in audit and non-audit fees. The events raise questions about the
value of company audits, auditor independence and quality of audit work, economic incen-
tives for good audits and the knowledge base of auditors.
Ó 2009 Elsevier Ltd. All rights reserved.
Introduction
External audit is promoted as a trust engendering tech-
nology (Power, 1999) to persuade the public that capitalist
corporations and management are not corrupt and that
companies and their directors are made accountable. In
an uncertain world, corporate audits are expected to pro-
duce comfort by reassuring the stakeholders that the tech-
nology ‘‘provides an external and objective check on the
way in which the ?nancial statements have been prepared
and presented, and it is an essential part of the checks and
balances required. . . Audits are a reassurance to all who
have a ?nancial interest in companies” (Committee on
the Financial Aspects of Corporate Governance, 1992, p.
36).
Accountants, as auditors, have cemented their status
and privileges on the basis of claims that their expertise
enables them to mediate uncertainty and construct inde-
pendent, objective, true, and fair accounts of corporate af-
fairs. This expertise, it is claimed, enables markets,
investors, employees, citizens, and the state to limit and
manage risks. Such claims, however, are precarious as
measures of revenues, costs, assets, liabilities, and pro?ts
are contested technically as well as politically and also be-
cause capitalist economies are inherently prone to crises
(O’Connor, 1987). The claims of expertise are frequently
punctured by unexpected corporate collapses, frauds, and
failures. Such events fuel the suspicions that auditors lack
the requisite independence, expertise and incentives to
construct the promised ‘true’ and ‘fair’ account of corpo-
rate affairs. They also provide an opportunity to re?ect
and (re)construct the role of auditing in contemporary
society.
At the time of writing (December, 2008), major Western
economies are going through a deepening ?nancial crisis,
given visibility by banking failures and massive state inter-
vention to rescue ailing ?nancial institutions. Against the
backdrop of increasing economic turbulence, this paper
seeks to stimulate debates about the quality of auditing
by examining the audit reports issued on the ?nancial
statements of distressed ?nancial enterprises. It consists
of three further sections. The next section contextualises
the ?nancial crisis and shows that a large number of enter-
prises have collapsed within a short period after receiving
unquali?ed audit reports. Auditors also received large
amounts of fees from distressed enterprises. The second
section offers re?ection on the role of auditors and sug-
gests possible areas of research. The ?nal section brie?y
summarises the paper.
Financial crisis and auditors
A salient feature of the current ?nancial crisis is that it
has been incubated by the ?nancialisation of Western
economies, most notably the US economy, which created
an abundance of credit and encouraged excessive risk-
taking through complex ?nancial instruments (derivatives,
credit default swaps) and corporate structures and
0361-3682/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2009.01.004
E-mail address: [email protected]
Accounting, Organizations and Society 34 (2009) 868–873
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
ineffective regulatory mechanisms (Ferguson, 2008; Mor-
ris, 2008; Soros, 2008). Banks, hedge funds and insurance
companies have been key actors in the ?nancialisation of
the economy and are estimated to have lost around
US$2.8 trillion (Bank of England, 2008).
The social cost of the unfolding crisis is dif?cult to esti-
mate, but vast amounts of public money are being used to
prop-up distressed ?nancial enterprises. For example, in
addition to providing huge sums to stimulate banking
liquidity, the UK government has set aside £500 billion
(about US$750 billion) to support ?nancial enterprises
(The Guardian, 8 October 2008). It has closed London Scot-
tish Bank, nationalised Northern Rock and is taking a stake
in a number of other banks. The US government has closed
22 banks,
1
including Lehman Brothers, Washington Mutual
and Indymac. It has rescued Freddie Mac, Fannie Mae, Bear
Stearns and created a bailout fund of $700 billion to pur-
chase stakes in troubled banks (Los Angeles Times, 4 Octo-
ber, 2008). Altogether the US government has committed
nearly $8.5 trillion, around 60% of its gross domestic prod-
uct, to arrest the collapse of its ?nancial system (San Fran-
cisco Chronicle,
2
26 November, 2008). The European
Central Bank has provided around €467 billion to support
banks. Germany has set aside over US$400 billion to bail-
out ailing banks (Wall Street Journal, 11 October, 2008).
So far, Ireland, Iceland, Hungary and Turkey have sought
?nancial assistance from the International Monetary Fund
(IMF) to manage the crisis (The Guardian, 21 October,
2008, 29 October, 2008, 20 November, 2008).
Regulators and investors have traditionally relied upon
corporate ?nancial statements to make sense of bank lia-
bilities, risks and economic exposure, but this has been
highly problematic (Stiglitz, 2003). An early estimate sug-
gested that despite a raft of accounting standards, banks
had around US$5000 billion of assets and liabilities off bal-
ance sheet (Financial Times, 3 June, 2008) though this ?g-
ure is being constantly revised. Citigroup alone has some
US$1.23 trillion of assets in entities which are not shown
on its balance sheet (Wall Street Journal,
3
24 November,
2008). Some banks have shown assets, especially subprime
mortgages, at highly in?ated values and derivatives have
long been a ‘‘powerful tool for in?ating company pro?ts
by hiding losses and hence the risks of company opera-
tions” (Hildyard, 2008, p. 30). The chief executive of a lead-
ing ?nancial advisory business argued that a ‘‘big part of
the problem is that accounting rules have allowed banks
to in?ate the value of their assets. Accounting has become
a new exercise in creative ?ction, with the result that
banks are carrying a lot of ‘‘sludge” assets clogging up
the balance sheet” (Reuters,
4
30 October, 2008).
Attention has focused on auditors because of the belief
that ‘‘a green light from an auditor means that a company’s
accounting practices have passed muster” (New York
Times, 13 April, 2008).
5
Table 1 shows that distressed
?nancial enterprises, whether in the UK, USA, Germany,
Iceland, The Netherlands, France or Switzerland, received
unquali?ed audit opinions on their ?nancial statements
published immediately prior to the public declaration of
?nancial dif?culties. These opinions were provided by
one of the Big Four accounting ?rms – PricewaterhouseCo-
opers (PwC), Deloitte & Touche (D&T), Ernst & Young
(E&Y), and KPMG.
Admittedly, the list in Table 1 is incomplete, but it is
useful for highlighting a number of issues. Adverse ‘‘key
?nancial ratios” are considered to be an indicator of going
concern problems (Auditing Practices Board, 2004a), and
major institutions acquired leverage ratios in the range of
11:1–83:1 (Gros & Micossi, 2008). Excessive leverage has
the potential to increase liquidity risk and jeopardise bank
survival. For example, a report by the US Securities and Ex-
change Commission (SEC) noted that Bear Stearns ‘‘was
highly leveraged, with a gross leverage ratio of approxi-
mately 33 to 1 prior to its collapse” (US Securities
Exchange Commission, 2008, p. 19). One expert informed
the US House of Representatives Committee on Oversight
and Government Reform that Lehman Brothers, the fourth
largest investment bank, ‘‘had a leverage of more than
30 to 1. With this leverage, a mere 3.3% drop in the value
of assets wipes out the entire value of equity and makes
the company insolvent”.
6
The UK auditing standards, closely aligned with interna-
tional auditing standards, state that the ‘‘auditor’s proce-
dures necessarily involve a consideration of the entity’s
ability to continue in operational existence for the foresee-
able future. In turn that necessitates consideration of both
the current and the possible future circumstances of the
business and the environment in which it operates”
(Auditing Practices Board, 2004a, p. 8). Auditing standards
also require auditors to ‘‘perform audit procedures de-
signed to obtain suf?cient appropriate audit evidence that
all events up to the date of the auditor’s report that may re-
quire adjustment of, or disclosure in, the ?nancial state-
ments have been identi?ed‘‘ (Auditing Practices Board,
2004b, p. 3). How the auditors constructed audits to satisfy
themselves that banks were a going concern are open to
conjecture, but the ?nancial dif?culties of many became
publicly evident soon after receiving unquali?ed audit
reports.
For example, Lehman Brothers received an unquali?ed
audit opinion on its annual accounts on 28 January 2008,
followed by a clean bill of health on its quarterly accounts
on 10 July 2008. However, by early August it was experi-
encing severe ?nancial problems and ?led for bankruptcy
on 14 September 2008. Bear Stearns, America’s ?fth largest
investment bank, received an unquali?ed audit opinion on
28 January 2008. However, by 10 March its ?nancial prob-
lems hit the headlines and on 14 March, with state sup-
port, it was sold to JP Morgan Chase (US Securities
1
As per information on the Federal Deposit Insurance Corporation
(FDIC); http://www.fdic.gov/index.html-accessed on 25 November 2008.
2
http://www. sfgate. com/cgi-bin/article. cgi?f=/c/a/2008/11/26/
MNVN14C8QR.DTL; accessed on 26 November 2008.
3
http://online.wsj.com/article/SB122747680752551447.html; accessed
on 24 November 2008.
4
ht t p: / / www. r eut er s . com/ ar t i cl e/ GCA- Cr edi t Cr i s i s / i dUS-
TRE49T77O20081030; accessed on 30 October 2008.
5
http://www.nytimes.com/2008/04/13/business/13audit.html?_r=
1&oref=slogin.
6
http://oversight.house.gov/documents/20081006103223.pdf; accessed
on 14 November 2008.
P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873 869
Exchange Commission, 2008; The Guardian 15 March
2008). Carlyle Capital Corporation received an unquali?ed
audit opinion on 27 February 2008. On 9 March, the com-
pany was known to be discussing its precarious ?nancial
position with its lenders. On 12 March, the company an-
nounced that it ‘‘has not been able to reach a mutually ben-
e?cial agreement to stabilize its ?nancing” and was placed
into liquidation (cited in Sikka, 2008a). Thornburg Mort-
gage, America’s second largest independent mortgage pro-
vider received an unquali?ed audit opinion on 27 February
2008. On March 7, the company ‘‘received a letter, dated
March 4 2008, from its independent auditor, KPMG LLP,
stating that their audit report, dated February 27 2008,
on the company’s consolidated ?nancial statements as of
December 31 2007, and 2006, and for the two-year period
ended December 31 2007, which is included in the com-
pany’s Annual Report on Form 10-K for 2007, should no
longer be relied upon” (cited in Sikka, 2008a).
Table 1 shows that in many cases, auditors provided
non-auditing services and this inevitably raises the age-
old question about auditor independence. The issues were
?agged by the US Senate Committee’s report on the col-
lapse of Enron (US Senate Committee on Governmental Af-
fairs, 2002) and revisited by the UK House of Commons
Treasury Committee report on Northern Rock. The Com-
mittee stated that ‘‘there appears to be a particular con?ict
of interest between the statutory role of the auditor, and
the other work it may undertake for a ?nancial institution”
(UK House of Commons Treasury Committee, 2008, p. 115).
Table 1 also shows that auditors received considerable
income from their audit clients, which may be very signif-
icant for regional of?ces managing the audit. The fee
dependency and related advancement of career can create
con?ict of interests. The insolvency examiner of New Cen-
tury Financial Corporation, America’s second largest sub-
prime mortgage lender, stated that the company was
‘‘engaged in a number of signi?cant improper and impru-
dent practices related to its loan originations, operations,
accounting and ?nancial reporting processes.. . . KPMG
engagement team acquiesced in New Century’s departures
from prescribed accounting methodologies and often re-
sisted or ignored valid recommendations from specialists
within KPMG. At times, the engagement team acted more
as advocates for New Century, even when its practices
were questioned by KPMG specialists who had greater
knowledge of relevant accounting guidelines and industry
practice” (United States Bankruptcy Court for the District
Delaware, 2008, pp. 2, 6, and 8).
Concerns about auditing practices have been ampli?ed
by a number of commentators. A former minister in Ireland
has described auditors as a ‘‘joke and a waste of time. They
are lick-arses for the management of companies, because
corporate governance doesn’t work in our society. . . the
banks are in dif?culty because of their auditing”. [Auditors]
Table 1
Auditors and distressed Banks
Company Country Year end Auditor Date of audit
report
Audit
opinion
Fee (millions)
Audit Non-audit
Abbey National UK 31 December 2007 D and T 4 March 2008 Unquali?ed £2.8 £2.1
Alliance and Leicester UK 31 December 2007 D and T 19 February 2008 Unquali?ed £0.8 £0.8
Barclays UK 31 December 2007 PwC 7 March 2008 Unquali?ed £29 £15
Bear Stearns USA 30 November 2007 D and T 28 January 2008 Unquali?ed $23.4 $4.9
Bradford and Bingley UK 31 December 2007 KPMG 12 February 2008 Unquali?ed £0.6 £0.8
Carlyle Capital Corporation Guernsey 31 December 2007 PwC 27 February 2008 Unquali?ed N/A N/A
Citigroup USA 31 December 2007 KPMG 22 February 2008 Unquali?ed
*
$81.7 $6.4
Dexia France/
Belgium
31 December 2007 PwC + Mazars
and Guérard
28 March 2008 Unquali?ed €10.12 €1.48
Fannie Mae USA 31 December 2007 D and T 26 February 2008 Unquali?ed $49.3 –
Fortis Holland 31 December 2007 KPMG + PwC 6 March 2008 Unquali?ed €20 €17
Freddie Mac USA 31 December 2007 PwC 27 February 2008 Unquali?ed
*
$73.4 –
Glitnir Iceland 31 December 2007 PwC 31 January 2008 Unquali?ed ISK146 ISK218
HBOS UK 31 December 2007 KPMG 26 February 2008 Unquali?ed £9.0 £2.4
Hypo Real Estate Germany 31 December 2007 KPMG 25 March 2008 Unquali?ed €5.4 €5.7
Indymac USA 31 December 2007 E and Y 28 February 2008 Unquali?ed
*
$5.7 $0.5
ING Holland 31 December 2007 E and Y 17 March 2008 Unquali?ed €68 €7
Kaupthing Bank Iceland 31 December 2007 KPMG 30 January 2008 Unquali?ed ISK421 ISK74
Landsbanki Iceland 31 December 2007 PwC 28 January 2008 Unquali?ed ISK259 ISK46
Lehman Brothers USA 30 November 2007 E and Y 28 January 2008 Unquali?ed $27.8 $3.5
Lloyds TSB UK 31 December 2007 PwC 21 February 2008 Unquali?ed £13.1 £1.5
Northern Rock UK 31 December 2006 PwC 27 February 2007 Unquali?ed £1.3 £0.7
Royal Bank of Scotland UK 31 December 2007 D and T 27 February 2008 Unquali?ed £17 £14.4
TCF Financial Corp USA 31 December 2007 KPMG 14 February 2008 Unquali?ed $0.97 $0.05
Thornburg Mortgage USA 31 December 2007 KPMG 27 February 2008 Unquali?ed $2.1 $0.4
UBS Switzerland 31 December 2007 E andY 6 March 2008 Unquali?ed CHF61.7 CHF13.4
US Bancorp USA 31 December 2007 E and Y 20 February 2008 Unquali?ed $7.5 $9.6
Wachovia USA 31 December 2007 KPMG 25 February 2008 Unquali?ed $29.2 $4.1
Washington Mutual USA 31 December 2007 D and T 28 February 2008 Unquali?ed $10.7 $4.3
Notes: Data as per ?nancial statements and statutory ?lings shown on the respective company’s website.
‘Audit fee’ also includes ‘audit related fees’.
*
Denotes that audit report draws attention to some matters already contained in the notes to ?nancial statements.
870 P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873
‘‘are not independent but they are bloody-well paid” (Irish
Times,
7
18 October, 2008). One commentator asked
‘‘What’s the point of having armies of number crunchers
on fancy fees if they cannot spot the difference between
a shack in Alabama and a triple-A security?” (The Daily
Telegraph,
8
22 October, 2008). Another commentator won-
dered, ‘‘. . . did the so-called Big Four accountancy ?rms get
paid by the banking industry to make all those sub-prime
assets seem like they had value? Who was kicking the
tyres and checking the inventories? Surely someone, some-
where with a degree in Adding-Up must have peered into
the loan book and questioned its contents?” (The Daily
Telegraph,
9
17 September, 2008). However, unlike the pre-
vious banking failures (Arnold & Sikka, 2001) auditors have
received comparatively light press scrutiny although the
US authorities are said to be investigating allegations of
fraud (The Daily Telegraph, 24 September, 2008). Some
have argued that ‘‘the crisis may not result in criminal
charges against auditors, but it is certain to renew interest
in how accountants conducted themselves” (New York
Times, 13 April, 2008).
10
Some issues
The ?nancial crisis raises some old and new questions
about auditing practices. Traditionalists have often claimed
that external audit adds credibility to ?nancial statements.
Such claims may be based upon the view that auditors
have ‘inside’ knowledge and are thus able to curb manage-
ment enthusiasm and impart superior information. The
dif?culty with such a hypothesis is that the current ?nan-
cial crisis shows that markets and signi?cant others were
not comforted by unquali?ed audit opinions issued by ma-
jor auditing ?rms. For example, the 2006 ?nancial state-
ments of Northern Rock, UK’s ?fth largest mortgage
provider, carried an unquali?ed audit opinion. On 25 July
2007, the bank’s interim accounts for six months to 30 June
2007 received a positive report from its reporting accoun-
tants. However, this did not prevent a run on the bank dur-
ing August and September (UK House of Commons
Treasury Committee, 2008). Indeed, within days of receiv-
ing unquali?ed audit opinions many banks listed in Table 1
were seeking ?nancial support from the state. Overall, lit-
tle is known about how credibility to accounts is added
and at whose behest, especially as audit evidence is not
available to the general public. It would be useful to ex-
plore how con?dence in auditing is eroded and the circum-
stances that persuaded signi?cant others to ignore auditor
assurances.
The issuing of audit reports is subject to organizational
and regulatory politics. Auditors may be reluctant to qual-
ify bank accounts for fear of creating panic or jeopardising
their liability position. During previous banking failures
legislators argued that auditor silence ‘‘caused substantial
injury to innocent depositors and customers” (US Senate
Committee on Foreign Relations 1992, p. 4). To reassure
markets and promote con?dence in ?nancial institutions,
the UK government has enacted the Financial Services
and Markets Act, 2000. It formalises exchange of informa-
tion between auditors and regulators. It also requires audi-
tors to inform the regulators if during the course of their
audit they become aware of anything that materially af-
fects the regulator’s functions of consumer protection
and maintenance of market con?dence (Auditing Practices
Board, 2007). Within this context, auditors are obliged to
inform regulators of their intention to issue a quali?ed
audit report. Whether auditors did so or were dissuaded
from issuing quali?ed opinions is not known. The politics
of audit opinion beg questions about the value of an audit.
They draw attention to power relations and ideologies that
shape regulation of capital. Perhaps, in the coming months
parliamentary inquiries will address such matters.
Researchers might also consider mobilising the freedom
of information laws to explore the relationship between
the state and accounting ?rms.
Auditors may argue that the ?nancial crisis unfolded
suddenly and they were thus ill-prepared to make judg-
ments about the likely ?nancial distress. The dif?culty
with such an argument is that ?nance capitalism has been
in ascendancy (Ferguson, 2008) and played a leading role
in the banking crises in Latin America (Collyns & Kincaid,
2003), Sweden, Norway and Japan (Basel Committee on
Banking Supervision., 2004; Englund, 1999). The US expe-
rienced a Savings and Loan crisis (Lowy, 1991) and Fannie
Mae has a history of accounting and auditing problems (US
Of?ce of Federal Housing Enterprise Oversight., 2006). The
collapse of the UK based Bank of Credit and Commerce
International (BCCI) was the biggest banking failure of
the twentieth century (Arnold & Sikka, 2001) and the de-
mise of Barings attracted considerable international atten-
tion (Zhang, 1995). Previous episodes have highlighted
issues about earnings management, income shifting,
excessive leverage and failures of conventional auditing
technologies. Yet regulators have paid little attention to
changes in capitalism and emerging issues (Sikka, Haslam,
Kyriacou, & Agrizzi, 2007). It would be useful to explore the
lessons that can be learnt from recent scandals and trans-
formations in the nature capitalism.
Auditing ?rms received considerable income from all
distressed banks, which may be signi?cant for local of?ces
responsible for issuing audit opinions. This raises two
questions. Firstly, there are long standing questions about
auditor provision of non-auditing services and the related
impairment of auditor independence (Powers, Troubh &
Winokur, 2002; UK Department of Trade, 1976; UK Depart-
ment of Trade, 1979; US Senate Committee on Governmen-
tal Affairs, 2002). As a result of scandals, some restrictions
have been placed on the sale of consultancy services to
audit clients (for example, Sarbanes-Oxley Act, 2002), but
the change is always resisted. When, in the aftermath of
7
‘‘Firms ‘have case to answer’ on banks crisis”, Irish Times, 18 October
2008 http://www. irishtimes. com/newspaper/ireland/2008/1018/
1224233216915.html; accessed on 28 October 2008).
8
http://www.telegraph.co.uk/?nance/comment/jeffrandall/3212394/If-
anyone-can-?nd-George-Osborne-tell-him-his-country-needs-him.html;
accessed on 24 October 2008.
9
http://www.telegraph.co.uk/?nance/comment/jeffrandall/2972337/
Fantasy-?nance-cuts-many-of-the-giants-of-global-banking-down-to-
size.html; accessed on 28 October 2008.
10
http://www.nytimes.com/2008/04/13/business/13audit.html?_r=
1&oref=slogin.
P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873 871
the nationalisation of Northern Rock, the UK House of
Commons Treasury Committee (2008) expressed its con-
cerns about the provision of consultancy services to audit
clients, the immediate response from the Auditing Prac-
tices Board (APB), UK’s auditing standard setter, was that
‘‘After Enron we consulted on this question of auditor con-
?icts of interest and there was no appetite for a blanket
ban on non-audit services” (Accountancy Age,
11
7 Febru-
ary, 2008). The APB is dominated by the auditing industry
(Sikka, 2002). Seemingly, control of regulatory bodies is an
important resource in organising unwelcome develop-
ments off the political agenda, especially when they have
the potential to dilute ?rm income (Sikka, 1992). It would
be useful to examine the politics of regulatory change and
particularly the tactics used to resist and dilute auditing
reforms.
The second question relates to the basic auditing model
and total auditor income. The auditing ?rms are capitalist
enterprises and are dependent upon companies and their
directors for income. The fee dependency impairs claims
of independence and has the capacity to silence auditors
(Powers et al., 2002; United States Bankruptcy Court for
the District Delaware, 2008). It poses fundamental ques-
tions about the private sector model of auditing which ex-
pects one set of capitalist entrepreneurs (auditors) to
regulate another set of capitalist entrepreneurs (company
directors). The ?aws of such a model persuaded an earlier
UK conservative government to create an independent
statutory body for appointment and remuneration of audi-
tors for public bodies (Heseltine, 1987). The auditors,
including the Big Four accounting ?rms, are generally pro-
hibited from selling consultancy services to audit clients.
The proponents of such a model hoped to extend it to
the private sector, but this was not done. The ?aws of the
private sector model were also recognised in the US in
the 1930s and the draft legislation creating the Securities
and Exchange Commission (SEC) proposed that the Com-
mission should be the auditor for public companies.
12
However, under the weight of corporate lobbying the pro-
posal was abandoned. The current ?nancial crisis is an
opportunity to consider alternative institutional arrange-
ments for auditing. Alternative models need not directly
involve accounting ?rms and audits of banks could be con-
ducted by statutory regulators. This would also improve
banking regulators’ knowledge of banks.
Audit reports are the publicly visible evidence of an
audit. However, little is known about the processes and
organisational values associated with their production of
an audit. Such processes involve management of labour,
economic incentives and images of clients, public and reg-
ulators. Some prior literature has provided a glimpse of the
ingredients used to produce audits. For example, Hanlon
(1994) argues that audit staff are inculcated to appease cli-
ents and neglect wider social interests. In pursuit of pro?ts,
?rms exert time budget pressures on audit personnel and
some have responded by adopting irregular practices and
even resorting to falsi?cation of audit working papers
(Willett & Page, 1996). Auditing ?rms have shown increas-
ing willingness to violate laws, regulations and assist their
clients to publish ?attering ?nancial statements (Sikka,
2008c). Arguably, a steady stream of auditor liability con-
cessions have also eroded economic incentives to deliver
good audits (Sikka, 2008b). In the words of a former senior
Vice-President of the World Bank, ‘‘there are plenty of car-
rots encouraging accounting ?rms to look the other way. . .
there had been one big stick discouraging them. If things
went awry, they could be sued. . . In 1995, [US] Congress. . .
provided substantial [liability] protection for the auditors.
But we may have gone too far: insulated from suits, the
accountants are now willing to take more ‘‘gambles”. . .
(Stiglitz, 2003, p. 136). The above literature draws atten-
tion to inherent contradictions in the design of audits
and also offers research opportunities for exploring the
production of audits through examination of regulatory re-
ports, court cases, case studies, oral histories and a variety
of social science methodologies.
The intensi?cation of ?nance capitalism poses ques-
tions about the knowledge base of auditors. For over a cen-
tury auditors have utilised methods of an industrial age in
which tangible things could be examined, counted and
measured and their values could be checked from invoices
and vouchers. Such a world has been eclipsed by complex
?nancial instruments (e.g. derivatives) whose value de-
pends on uncertain future events and can be anything from
zero to several million dollars/pounds. Derivatives were
central to the collapse of ?nancial and non-?nancial busi-
nesses such as Barings (Zhang, 1995), Enron (Powers
et al., 2002; US Senate Committee on Governmental Af-
fairs, 2002) and Parmalat (The Times, 17 March 2004).
The US government bailout of Long Term Capital Manage-
ment (LTCM) showed that even the Nobel Prize winners in
economics had dif?culties in valuing derivatives (Dunbar,
2000). It is doubtful that auditor knowledge surpasses that
of Nobel Prize winners. Seemingly, we have reached the
limits of conventional auditing technologies and ought to
be considering alternative forms of accounting, disclosures
and accountabilities.
Summary
The deepening ?nancial crisis poses questions about the
role and value of external audits. Markets do not seem to
have been assured by unquali?ed audit opinions and many
?nancial institutions either collapsed, or had to be bailed
out within a short period of receiving unquali?ed audit
opinions. The events fuel the suspicions that auditors lack
the claimed expertise to render an independent and objec-
tive account of corporate affairs. The episodes encourage
re?ection on the role, value and independence of auditors.
They also present opportunities for research into regula-
tion, independence, politics, production and knowledge
base of auditors.
An independent inquiry into the role of auditing, espe-
cially at ?nancial institutions, would help to highlight the
shortcomings of the current practices. A UK legislator has
accused accounting ?rms of delivering ‘‘dodgy auditing”
11
http://www.accountancyage.com/accountancyage/analysis/2209088/
rock-failure-casts-shadow-3792762.
12
Corporate Crime Reporter 8, February 14, 2007 (http://www.corporate-
crimereporter.com/turner021407.htm; accessed on 24 November 2008).
872 P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873
(Hansard, House of Commons Debates, 13 October, 2008,
col. 553) and demanded ‘‘a full scale inquiry into the con-
duct of the audit work that signed off the banks’ accounts”
(Accountancy Age,
13
23 October, 2008). Unsurprisingly,
such calls are resisted by major auditing ?rms (Accoun-
tancy Age,
14
13 November, 2008) though they are using
the crisis to demand further liability concessions
15
and in-
crease their pro?ts. The auditing regulators have shown lit-
tle interest in exploring the issues raised in this paper and
are content to claim that ‘‘auditing has had a good crisis”,
16
i.e., it has received little sustained press scrutiny.
The auditing industry has mediated previous crises by
revising auditing standards and codes of ethics (Sikka &
Willmott, 1995) and the early signs are that the same strat-
egies will be deployed again. For example, without exam-
ining the processes associated with the production of
audits, changes in capitalism, or limits of auditing, the US
Public Company Accounting Oversight Board (PCAOB)
17
has issued seven new draft auditing standards.
18
Such
myopic policies are unlikely to reinvigorate auditing.
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14
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16
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17
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P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873 873
doc_436826979.pdf
Against the backdrop of the current financial crisis, this paper seeks to stimulate debates
about contemporary auditing practices. It notes that many financial enterprises have
sought state support within a short period of receiving unqualified audit opinion. Auditors
collected large amounts in audit and non-audit fees. The events raise questions about the
value of company audits, auditor independence and quality of audit work, economic incentives
for good audits and the knowledge base of auditors.
Financial crisis and the silence of the auditors
Prem Sikka
Centre for Global Accountability, University of Essex, Colchester, Essex CO4 3SQ, UK
a r t i c l e i n f o a b s t r a c t
Against the backdrop of the current ?nancial crisis, this paper seeks to stimulate debates
about contemporary auditing practices. It notes that many ?nancial enterprises have
sought state support within a short period of receiving unquali?ed audit opinion. Auditors
collected large amounts in audit and non-audit fees. The events raise questions about the
value of company audits, auditor independence and quality of audit work, economic incen-
tives for good audits and the knowledge base of auditors.
Ó 2009 Elsevier Ltd. All rights reserved.
Introduction
External audit is promoted as a trust engendering tech-
nology (Power, 1999) to persuade the public that capitalist
corporations and management are not corrupt and that
companies and their directors are made accountable. In
an uncertain world, corporate audits are expected to pro-
duce comfort by reassuring the stakeholders that the tech-
nology ‘‘provides an external and objective check on the
way in which the ?nancial statements have been prepared
and presented, and it is an essential part of the checks and
balances required. . . Audits are a reassurance to all who
have a ?nancial interest in companies” (Committee on
the Financial Aspects of Corporate Governance, 1992, p.
36).
Accountants, as auditors, have cemented their status
and privileges on the basis of claims that their expertise
enables them to mediate uncertainty and construct inde-
pendent, objective, true, and fair accounts of corporate af-
fairs. This expertise, it is claimed, enables markets,
investors, employees, citizens, and the state to limit and
manage risks. Such claims, however, are precarious as
measures of revenues, costs, assets, liabilities, and pro?ts
are contested technically as well as politically and also be-
cause capitalist economies are inherently prone to crises
(O’Connor, 1987). The claims of expertise are frequently
punctured by unexpected corporate collapses, frauds, and
failures. Such events fuel the suspicions that auditors lack
the requisite independence, expertise and incentives to
construct the promised ‘true’ and ‘fair’ account of corpo-
rate affairs. They also provide an opportunity to re?ect
and (re)construct the role of auditing in contemporary
society.
At the time of writing (December, 2008), major Western
economies are going through a deepening ?nancial crisis,
given visibility by banking failures and massive state inter-
vention to rescue ailing ?nancial institutions. Against the
backdrop of increasing economic turbulence, this paper
seeks to stimulate debates about the quality of auditing
by examining the audit reports issued on the ?nancial
statements of distressed ?nancial enterprises. It consists
of three further sections. The next section contextualises
the ?nancial crisis and shows that a large number of enter-
prises have collapsed within a short period after receiving
unquali?ed audit reports. Auditors also received large
amounts of fees from distressed enterprises. The second
section offers re?ection on the role of auditors and sug-
gests possible areas of research. The ?nal section brie?y
summarises the paper.
Financial crisis and auditors
A salient feature of the current ?nancial crisis is that it
has been incubated by the ?nancialisation of Western
economies, most notably the US economy, which created
an abundance of credit and encouraged excessive risk-
taking through complex ?nancial instruments (derivatives,
credit default swaps) and corporate structures and
0361-3682/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2009.01.004
E-mail address: [email protected]
Accounting, Organizations and Society 34 (2009) 868–873
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
ineffective regulatory mechanisms (Ferguson, 2008; Mor-
ris, 2008; Soros, 2008). Banks, hedge funds and insurance
companies have been key actors in the ?nancialisation of
the economy and are estimated to have lost around
US$2.8 trillion (Bank of England, 2008).
The social cost of the unfolding crisis is dif?cult to esti-
mate, but vast amounts of public money are being used to
prop-up distressed ?nancial enterprises. For example, in
addition to providing huge sums to stimulate banking
liquidity, the UK government has set aside £500 billion
(about US$750 billion) to support ?nancial enterprises
(The Guardian, 8 October 2008). It has closed London Scot-
tish Bank, nationalised Northern Rock and is taking a stake
in a number of other banks. The US government has closed
22 banks,
1
including Lehman Brothers, Washington Mutual
and Indymac. It has rescued Freddie Mac, Fannie Mae, Bear
Stearns and created a bailout fund of $700 billion to pur-
chase stakes in troubled banks (Los Angeles Times, 4 Octo-
ber, 2008). Altogether the US government has committed
nearly $8.5 trillion, around 60% of its gross domestic prod-
uct, to arrest the collapse of its ?nancial system (San Fran-
cisco Chronicle,
2
26 November, 2008). The European
Central Bank has provided around €467 billion to support
banks. Germany has set aside over US$400 billion to bail-
out ailing banks (Wall Street Journal, 11 October, 2008).
So far, Ireland, Iceland, Hungary and Turkey have sought
?nancial assistance from the International Monetary Fund
(IMF) to manage the crisis (The Guardian, 21 October,
2008, 29 October, 2008, 20 November, 2008).
Regulators and investors have traditionally relied upon
corporate ?nancial statements to make sense of bank lia-
bilities, risks and economic exposure, but this has been
highly problematic (Stiglitz, 2003). An early estimate sug-
gested that despite a raft of accounting standards, banks
had around US$5000 billion of assets and liabilities off bal-
ance sheet (Financial Times, 3 June, 2008) though this ?g-
ure is being constantly revised. Citigroup alone has some
US$1.23 trillion of assets in entities which are not shown
on its balance sheet (Wall Street Journal,
3
24 November,
2008). Some banks have shown assets, especially subprime
mortgages, at highly in?ated values and derivatives have
long been a ‘‘powerful tool for in?ating company pro?ts
by hiding losses and hence the risks of company opera-
tions” (Hildyard, 2008, p. 30). The chief executive of a lead-
ing ?nancial advisory business argued that a ‘‘big part of
the problem is that accounting rules have allowed banks
to in?ate the value of their assets. Accounting has become
a new exercise in creative ?ction, with the result that
banks are carrying a lot of ‘‘sludge” assets clogging up
the balance sheet” (Reuters,
4
30 October, 2008).
Attention has focused on auditors because of the belief
that ‘‘a green light from an auditor means that a company’s
accounting practices have passed muster” (New York
Times, 13 April, 2008).
5
Table 1 shows that distressed
?nancial enterprises, whether in the UK, USA, Germany,
Iceland, The Netherlands, France or Switzerland, received
unquali?ed audit opinions on their ?nancial statements
published immediately prior to the public declaration of
?nancial dif?culties. These opinions were provided by
one of the Big Four accounting ?rms – PricewaterhouseCo-
opers (PwC), Deloitte & Touche (D&T), Ernst & Young
(E&Y), and KPMG.
Admittedly, the list in Table 1 is incomplete, but it is
useful for highlighting a number of issues. Adverse ‘‘key
?nancial ratios” are considered to be an indicator of going
concern problems (Auditing Practices Board, 2004a), and
major institutions acquired leverage ratios in the range of
11:1–83:1 (Gros & Micossi, 2008). Excessive leverage has
the potential to increase liquidity risk and jeopardise bank
survival. For example, a report by the US Securities and Ex-
change Commission (SEC) noted that Bear Stearns ‘‘was
highly leveraged, with a gross leverage ratio of approxi-
mately 33 to 1 prior to its collapse” (US Securities
Exchange Commission, 2008, p. 19). One expert informed
the US House of Representatives Committee on Oversight
and Government Reform that Lehman Brothers, the fourth
largest investment bank, ‘‘had a leverage of more than
30 to 1. With this leverage, a mere 3.3% drop in the value
of assets wipes out the entire value of equity and makes
the company insolvent”.
6
The UK auditing standards, closely aligned with interna-
tional auditing standards, state that the ‘‘auditor’s proce-
dures necessarily involve a consideration of the entity’s
ability to continue in operational existence for the foresee-
able future. In turn that necessitates consideration of both
the current and the possible future circumstances of the
business and the environment in which it operates”
(Auditing Practices Board, 2004a, p. 8). Auditing standards
also require auditors to ‘‘perform audit procedures de-
signed to obtain suf?cient appropriate audit evidence that
all events up to the date of the auditor’s report that may re-
quire adjustment of, or disclosure in, the ?nancial state-
ments have been identi?ed‘‘ (Auditing Practices Board,
2004b, p. 3). How the auditors constructed audits to satisfy
themselves that banks were a going concern are open to
conjecture, but the ?nancial dif?culties of many became
publicly evident soon after receiving unquali?ed audit
reports.
For example, Lehman Brothers received an unquali?ed
audit opinion on its annual accounts on 28 January 2008,
followed by a clean bill of health on its quarterly accounts
on 10 July 2008. However, by early August it was experi-
encing severe ?nancial problems and ?led for bankruptcy
on 14 September 2008. Bear Stearns, America’s ?fth largest
investment bank, received an unquali?ed audit opinion on
28 January 2008. However, by 10 March its ?nancial prob-
lems hit the headlines and on 14 March, with state sup-
port, it was sold to JP Morgan Chase (US Securities
1
As per information on the Federal Deposit Insurance Corporation
(FDIC); http://www.fdic.gov/index.html-accessed on 25 November 2008.
2
http://www. sfgate. com/cgi-bin/article. cgi?f=/c/a/2008/11/26/
MNVN14C8QR.DTL; accessed on 26 November 2008.
3
http://online.wsj.com/article/SB122747680752551447.html; accessed
on 24 November 2008.
4
ht t p: / / www. r eut er s . com/ ar t i cl e/ GCA- Cr edi t Cr i s i s / i dUS-
TRE49T77O20081030; accessed on 30 October 2008.
5
http://www.nytimes.com/2008/04/13/business/13audit.html?_r=
1&oref=slogin.
6
http://oversight.house.gov/documents/20081006103223.pdf; accessed
on 14 November 2008.
P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873 869
Exchange Commission, 2008; The Guardian 15 March
2008). Carlyle Capital Corporation received an unquali?ed
audit opinion on 27 February 2008. On 9 March, the com-
pany was known to be discussing its precarious ?nancial
position with its lenders. On 12 March, the company an-
nounced that it ‘‘has not been able to reach a mutually ben-
e?cial agreement to stabilize its ?nancing” and was placed
into liquidation (cited in Sikka, 2008a). Thornburg Mort-
gage, America’s second largest independent mortgage pro-
vider received an unquali?ed audit opinion on 27 February
2008. On March 7, the company ‘‘received a letter, dated
March 4 2008, from its independent auditor, KPMG LLP,
stating that their audit report, dated February 27 2008,
on the company’s consolidated ?nancial statements as of
December 31 2007, and 2006, and for the two-year period
ended December 31 2007, which is included in the com-
pany’s Annual Report on Form 10-K for 2007, should no
longer be relied upon” (cited in Sikka, 2008a).
Table 1 shows that in many cases, auditors provided
non-auditing services and this inevitably raises the age-
old question about auditor independence. The issues were
?agged by the US Senate Committee’s report on the col-
lapse of Enron (US Senate Committee on Governmental Af-
fairs, 2002) and revisited by the UK House of Commons
Treasury Committee report on Northern Rock. The Com-
mittee stated that ‘‘there appears to be a particular con?ict
of interest between the statutory role of the auditor, and
the other work it may undertake for a ?nancial institution”
(UK House of Commons Treasury Committee, 2008, p. 115).
Table 1 also shows that auditors received considerable
income from their audit clients, which may be very signif-
icant for regional of?ces managing the audit. The fee
dependency and related advancement of career can create
con?ict of interests. The insolvency examiner of New Cen-
tury Financial Corporation, America’s second largest sub-
prime mortgage lender, stated that the company was
‘‘engaged in a number of signi?cant improper and impru-
dent practices related to its loan originations, operations,
accounting and ?nancial reporting processes.. . . KPMG
engagement team acquiesced in New Century’s departures
from prescribed accounting methodologies and often re-
sisted or ignored valid recommendations from specialists
within KPMG. At times, the engagement team acted more
as advocates for New Century, even when its practices
were questioned by KPMG specialists who had greater
knowledge of relevant accounting guidelines and industry
practice” (United States Bankruptcy Court for the District
Delaware, 2008, pp. 2, 6, and 8).
Concerns about auditing practices have been ampli?ed
by a number of commentators. A former minister in Ireland
has described auditors as a ‘‘joke and a waste of time. They
are lick-arses for the management of companies, because
corporate governance doesn’t work in our society. . . the
banks are in dif?culty because of their auditing”. [Auditors]
Table 1
Auditors and distressed Banks
Company Country Year end Auditor Date of audit
report
Audit
opinion
Fee (millions)
Audit Non-audit
Abbey National UK 31 December 2007 D and T 4 March 2008 Unquali?ed £2.8 £2.1
Alliance and Leicester UK 31 December 2007 D and T 19 February 2008 Unquali?ed £0.8 £0.8
Barclays UK 31 December 2007 PwC 7 March 2008 Unquali?ed £29 £15
Bear Stearns USA 30 November 2007 D and T 28 January 2008 Unquali?ed $23.4 $4.9
Bradford and Bingley UK 31 December 2007 KPMG 12 February 2008 Unquali?ed £0.6 £0.8
Carlyle Capital Corporation Guernsey 31 December 2007 PwC 27 February 2008 Unquali?ed N/A N/A
Citigroup USA 31 December 2007 KPMG 22 February 2008 Unquali?ed
*
$81.7 $6.4
Dexia France/
Belgium
31 December 2007 PwC + Mazars
and Guérard
28 March 2008 Unquali?ed €10.12 €1.48
Fannie Mae USA 31 December 2007 D and T 26 February 2008 Unquali?ed $49.3 –
Fortis Holland 31 December 2007 KPMG + PwC 6 March 2008 Unquali?ed €20 €17
Freddie Mac USA 31 December 2007 PwC 27 February 2008 Unquali?ed
*
$73.4 –
Glitnir Iceland 31 December 2007 PwC 31 January 2008 Unquali?ed ISK146 ISK218
HBOS UK 31 December 2007 KPMG 26 February 2008 Unquali?ed £9.0 £2.4
Hypo Real Estate Germany 31 December 2007 KPMG 25 March 2008 Unquali?ed €5.4 €5.7
Indymac USA 31 December 2007 E and Y 28 February 2008 Unquali?ed
*
$5.7 $0.5
ING Holland 31 December 2007 E and Y 17 March 2008 Unquali?ed €68 €7
Kaupthing Bank Iceland 31 December 2007 KPMG 30 January 2008 Unquali?ed ISK421 ISK74
Landsbanki Iceland 31 December 2007 PwC 28 January 2008 Unquali?ed ISK259 ISK46
Lehman Brothers USA 30 November 2007 E and Y 28 January 2008 Unquali?ed $27.8 $3.5
Lloyds TSB UK 31 December 2007 PwC 21 February 2008 Unquali?ed £13.1 £1.5
Northern Rock UK 31 December 2006 PwC 27 February 2007 Unquali?ed £1.3 £0.7
Royal Bank of Scotland UK 31 December 2007 D and T 27 February 2008 Unquali?ed £17 £14.4
TCF Financial Corp USA 31 December 2007 KPMG 14 February 2008 Unquali?ed $0.97 $0.05
Thornburg Mortgage USA 31 December 2007 KPMG 27 February 2008 Unquali?ed $2.1 $0.4
UBS Switzerland 31 December 2007 E andY 6 March 2008 Unquali?ed CHF61.7 CHF13.4
US Bancorp USA 31 December 2007 E and Y 20 February 2008 Unquali?ed $7.5 $9.6
Wachovia USA 31 December 2007 KPMG 25 February 2008 Unquali?ed $29.2 $4.1
Washington Mutual USA 31 December 2007 D and T 28 February 2008 Unquali?ed $10.7 $4.3
Notes: Data as per ?nancial statements and statutory ?lings shown on the respective company’s website.
‘Audit fee’ also includes ‘audit related fees’.
*
Denotes that audit report draws attention to some matters already contained in the notes to ?nancial statements.
870 P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873
‘‘are not independent but they are bloody-well paid” (Irish
Times,
7
18 October, 2008). One commentator asked
‘‘What’s the point of having armies of number crunchers
on fancy fees if they cannot spot the difference between
a shack in Alabama and a triple-A security?” (The Daily
Telegraph,
8
22 October, 2008). Another commentator won-
dered, ‘‘. . . did the so-called Big Four accountancy ?rms get
paid by the banking industry to make all those sub-prime
assets seem like they had value? Who was kicking the
tyres and checking the inventories? Surely someone, some-
where with a degree in Adding-Up must have peered into
the loan book and questioned its contents?” (The Daily
Telegraph,
9
17 September, 2008). However, unlike the pre-
vious banking failures (Arnold & Sikka, 2001) auditors have
received comparatively light press scrutiny although the
US authorities are said to be investigating allegations of
fraud (The Daily Telegraph, 24 September, 2008). Some
have argued that ‘‘the crisis may not result in criminal
charges against auditors, but it is certain to renew interest
in how accountants conducted themselves” (New York
Times, 13 April, 2008).
10
Some issues
The ?nancial crisis raises some old and new questions
about auditing practices. Traditionalists have often claimed
that external audit adds credibility to ?nancial statements.
Such claims may be based upon the view that auditors
have ‘inside’ knowledge and are thus able to curb manage-
ment enthusiasm and impart superior information. The
dif?culty with such a hypothesis is that the current ?nan-
cial crisis shows that markets and signi?cant others were
not comforted by unquali?ed audit opinions issued by ma-
jor auditing ?rms. For example, the 2006 ?nancial state-
ments of Northern Rock, UK’s ?fth largest mortgage
provider, carried an unquali?ed audit opinion. On 25 July
2007, the bank’s interim accounts for six months to 30 June
2007 received a positive report from its reporting accoun-
tants. However, this did not prevent a run on the bank dur-
ing August and September (UK House of Commons
Treasury Committee, 2008). Indeed, within days of receiv-
ing unquali?ed audit opinions many banks listed in Table 1
were seeking ?nancial support from the state. Overall, lit-
tle is known about how credibility to accounts is added
and at whose behest, especially as audit evidence is not
available to the general public. It would be useful to ex-
plore how con?dence in auditing is eroded and the circum-
stances that persuaded signi?cant others to ignore auditor
assurances.
The issuing of audit reports is subject to organizational
and regulatory politics. Auditors may be reluctant to qual-
ify bank accounts for fear of creating panic or jeopardising
their liability position. During previous banking failures
legislators argued that auditor silence ‘‘caused substantial
injury to innocent depositors and customers” (US Senate
Committee on Foreign Relations 1992, p. 4). To reassure
markets and promote con?dence in ?nancial institutions,
the UK government has enacted the Financial Services
and Markets Act, 2000. It formalises exchange of informa-
tion between auditors and regulators. It also requires audi-
tors to inform the regulators if during the course of their
audit they become aware of anything that materially af-
fects the regulator’s functions of consumer protection
and maintenance of market con?dence (Auditing Practices
Board, 2007). Within this context, auditors are obliged to
inform regulators of their intention to issue a quali?ed
audit report. Whether auditors did so or were dissuaded
from issuing quali?ed opinions is not known. The politics
of audit opinion beg questions about the value of an audit.
They draw attention to power relations and ideologies that
shape regulation of capital. Perhaps, in the coming months
parliamentary inquiries will address such matters.
Researchers might also consider mobilising the freedom
of information laws to explore the relationship between
the state and accounting ?rms.
Auditors may argue that the ?nancial crisis unfolded
suddenly and they were thus ill-prepared to make judg-
ments about the likely ?nancial distress. The dif?culty
with such an argument is that ?nance capitalism has been
in ascendancy (Ferguson, 2008) and played a leading role
in the banking crises in Latin America (Collyns & Kincaid,
2003), Sweden, Norway and Japan (Basel Committee on
Banking Supervision., 2004; Englund, 1999). The US expe-
rienced a Savings and Loan crisis (Lowy, 1991) and Fannie
Mae has a history of accounting and auditing problems (US
Of?ce of Federal Housing Enterprise Oversight., 2006). The
collapse of the UK based Bank of Credit and Commerce
International (BCCI) was the biggest banking failure of
the twentieth century (Arnold & Sikka, 2001) and the de-
mise of Barings attracted considerable international atten-
tion (Zhang, 1995). Previous episodes have highlighted
issues about earnings management, income shifting,
excessive leverage and failures of conventional auditing
technologies. Yet regulators have paid little attention to
changes in capitalism and emerging issues (Sikka, Haslam,
Kyriacou, & Agrizzi, 2007). It would be useful to explore the
lessons that can be learnt from recent scandals and trans-
formations in the nature capitalism.
Auditing ?rms received considerable income from all
distressed banks, which may be signi?cant for local of?ces
responsible for issuing audit opinions. This raises two
questions. Firstly, there are long standing questions about
auditor provision of non-auditing services and the related
impairment of auditor independence (Powers, Troubh &
Winokur, 2002; UK Department of Trade, 1976; UK Depart-
ment of Trade, 1979; US Senate Committee on Governmen-
tal Affairs, 2002). As a result of scandals, some restrictions
have been placed on the sale of consultancy services to
audit clients (for example, Sarbanes-Oxley Act, 2002), but
the change is always resisted. When, in the aftermath of
7
‘‘Firms ‘have case to answer’ on banks crisis”, Irish Times, 18 October
2008 http://www. irishtimes. com/newspaper/ireland/2008/1018/
1224233216915.html; accessed on 28 October 2008).
8
http://www.telegraph.co.uk/?nance/comment/jeffrandall/3212394/If-
anyone-can-?nd-George-Osborne-tell-him-his-country-needs-him.html;
accessed on 24 October 2008.
9
http://www.telegraph.co.uk/?nance/comment/jeffrandall/2972337/
Fantasy-?nance-cuts-many-of-the-giants-of-global-banking-down-to-
size.html; accessed on 28 October 2008.
10
http://www.nytimes.com/2008/04/13/business/13audit.html?_r=
1&oref=slogin.
P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873 871
the nationalisation of Northern Rock, the UK House of
Commons Treasury Committee (2008) expressed its con-
cerns about the provision of consultancy services to audit
clients, the immediate response from the Auditing Prac-
tices Board (APB), UK’s auditing standard setter, was that
‘‘After Enron we consulted on this question of auditor con-
?icts of interest and there was no appetite for a blanket
ban on non-audit services” (Accountancy Age,
11
7 Febru-
ary, 2008). The APB is dominated by the auditing industry
(Sikka, 2002). Seemingly, control of regulatory bodies is an
important resource in organising unwelcome develop-
ments off the political agenda, especially when they have
the potential to dilute ?rm income (Sikka, 1992). It would
be useful to examine the politics of regulatory change and
particularly the tactics used to resist and dilute auditing
reforms.
The second question relates to the basic auditing model
and total auditor income. The auditing ?rms are capitalist
enterprises and are dependent upon companies and their
directors for income. The fee dependency impairs claims
of independence and has the capacity to silence auditors
(Powers et al., 2002; United States Bankruptcy Court for
the District Delaware, 2008). It poses fundamental ques-
tions about the private sector model of auditing which ex-
pects one set of capitalist entrepreneurs (auditors) to
regulate another set of capitalist entrepreneurs (company
directors). The ?aws of such a model persuaded an earlier
UK conservative government to create an independent
statutory body for appointment and remuneration of audi-
tors for public bodies (Heseltine, 1987). The auditors,
including the Big Four accounting ?rms, are generally pro-
hibited from selling consultancy services to audit clients.
The proponents of such a model hoped to extend it to
the private sector, but this was not done. The ?aws of the
private sector model were also recognised in the US in
the 1930s and the draft legislation creating the Securities
and Exchange Commission (SEC) proposed that the Com-
mission should be the auditor for public companies.
12
However, under the weight of corporate lobbying the pro-
posal was abandoned. The current ?nancial crisis is an
opportunity to consider alternative institutional arrange-
ments for auditing. Alternative models need not directly
involve accounting ?rms and audits of banks could be con-
ducted by statutory regulators. This would also improve
banking regulators’ knowledge of banks.
Audit reports are the publicly visible evidence of an
audit. However, little is known about the processes and
organisational values associated with their production of
an audit. Such processes involve management of labour,
economic incentives and images of clients, public and reg-
ulators. Some prior literature has provided a glimpse of the
ingredients used to produce audits. For example, Hanlon
(1994) argues that audit staff are inculcated to appease cli-
ents and neglect wider social interests. In pursuit of pro?ts,
?rms exert time budget pressures on audit personnel and
some have responded by adopting irregular practices and
even resorting to falsi?cation of audit working papers
(Willett & Page, 1996). Auditing ?rms have shown increas-
ing willingness to violate laws, regulations and assist their
clients to publish ?attering ?nancial statements (Sikka,
2008c). Arguably, a steady stream of auditor liability con-
cessions have also eroded economic incentives to deliver
good audits (Sikka, 2008b). In the words of a former senior
Vice-President of the World Bank, ‘‘there are plenty of car-
rots encouraging accounting ?rms to look the other way. . .
there had been one big stick discouraging them. If things
went awry, they could be sued. . . In 1995, [US] Congress. . .
provided substantial [liability] protection for the auditors.
But we may have gone too far: insulated from suits, the
accountants are now willing to take more ‘‘gambles”. . .
(Stiglitz, 2003, p. 136). The above literature draws atten-
tion to inherent contradictions in the design of audits
and also offers research opportunities for exploring the
production of audits through examination of regulatory re-
ports, court cases, case studies, oral histories and a variety
of social science methodologies.
The intensi?cation of ?nance capitalism poses ques-
tions about the knowledge base of auditors. For over a cen-
tury auditors have utilised methods of an industrial age in
which tangible things could be examined, counted and
measured and their values could be checked from invoices
and vouchers. Such a world has been eclipsed by complex
?nancial instruments (e.g. derivatives) whose value de-
pends on uncertain future events and can be anything from
zero to several million dollars/pounds. Derivatives were
central to the collapse of ?nancial and non-?nancial busi-
nesses such as Barings (Zhang, 1995), Enron (Powers
et al., 2002; US Senate Committee on Governmental Af-
fairs, 2002) and Parmalat (The Times, 17 March 2004).
The US government bailout of Long Term Capital Manage-
ment (LTCM) showed that even the Nobel Prize winners in
economics had dif?culties in valuing derivatives (Dunbar,
2000). It is doubtful that auditor knowledge surpasses that
of Nobel Prize winners. Seemingly, we have reached the
limits of conventional auditing technologies and ought to
be considering alternative forms of accounting, disclosures
and accountabilities.
Summary
The deepening ?nancial crisis poses questions about the
role and value of external audits. Markets do not seem to
have been assured by unquali?ed audit opinions and many
?nancial institutions either collapsed, or had to be bailed
out within a short period of receiving unquali?ed audit
opinions. The events fuel the suspicions that auditors lack
the claimed expertise to render an independent and objec-
tive account of corporate affairs. The episodes encourage
re?ection on the role, value and independence of auditors.
They also present opportunities for research into regula-
tion, independence, politics, production and knowledge
base of auditors.
An independent inquiry into the role of auditing, espe-
cially at ?nancial institutions, would help to highlight the
shortcomings of the current practices. A UK legislator has
accused accounting ?rms of delivering ‘‘dodgy auditing”
11
http://www.accountancyage.com/accountancyage/analysis/2209088/
rock-failure-casts-shadow-3792762.
12
Corporate Crime Reporter 8, February 14, 2007 (http://www.corporate-
crimereporter.com/turner021407.htm; accessed on 24 November 2008).
872 P. Sikka / Accounting, Organizations and Society 34 (2009) 868–873
(Hansard, House of Commons Debates, 13 October, 2008,
col. 553) and demanded ‘‘a full scale inquiry into the con-
duct of the audit work that signed off the banks’ accounts”
(Accountancy Age,
13
23 October, 2008). Unsurprisingly,
such calls are resisted by major auditing ?rms (Accoun-
tancy Age,
14
13 November, 2008) though they are using
the crisis to demand further liability concessions
15
and in-
crease their pro?ts. The auditing regulators have shown lit-
tle interest in exploring the issues raised in this paper and
are content to claim that ‘‘auditing has had a good crisis”,
16
i.e., it has received little sustained press scrutiny.
The auditing industry has mediated previous crises by
revising auditing standards and codes of ethics (Sikka &
Willmott, 1995) and the early signs are that the same strat-
egies will be deployed again. For example, without exam-
ining the processes associated with the production of
audits, changes in capitalism, or limits of auditing, the US
Public Company Accounting Oversight Board (PCAOB)
17
has issued seven new draft auditing standards.
18
Such
myopic policies are unlikely to reinvigorate auditing.
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