Description
Globalization of businesses raises major questions about the regulation of corporations, both in the national and
international context. The debate is marked by two competing views. The ‘hyperglobalists’ claim that in a globalized
world, nation-states cannot take effective actions to regulate multinational businesses, especially those relating to
banking and finance. In response, the ‘skeptics’ accept the view that to regulate corporations, the nation-state has
always had to restructure itself. However, they challenge the contention that globalization has reduced the power,
functions and authority of the state. The paper contributes to the debate through an examination of some of the processes
leading to the forced closure (and the aftermath) of the Bank of Credit and Commerce International (BCCI), a
bank that operated from 73 countries. It particularly focuses upon the role of the banking regulators and their reliance
upon auditing technologies to regulate major banks. The paper sides with the ‘skeptics’ and argues that the nation
states, especially major Western states, remain important players in the regulation of global businesses. It concludes
that the nation-state’s capacity to regulate global enterprises is compromised by history, domestic concerns and relationships
with class and capitalist interests rather than by globalization per se.
Globalization and the state–profession
relationship: the case the Bank of Credit
and Commerce International
Patricia J. Arnold
a
, Prem Sikka
b,
*
a
University of Wisconsin-Milwaukee, USA
b
University of Essex, Colchester, Essex CO4 3SQ, UK
Abstract
Globalization of businesses raises major questions about the regulation of corporations, both in the national and
international context. The debate is marked by two competing views. The ‘hyperglobalists’ claim that in a globalized
world, nation-states cannot take e?ective actions to regulate multinational businesses, especially those relating to
banking and ?nance. In response, the ‘skeptics’ accept the view that to regulate corporations, the nation-state has
always had to restructure itself. However, they challenge the contention that globalization has reduced the power,
functions and authority of the state. The paper contributes to the debate through an examination of some of the pro-
cesses leading to the forced closure (and the aftermath) of the Bank of Credit and Commerce International (BCCI), a
bank that operated from 73 countries. It particularly focuses upon the role of the banking regulators and their reliance
upon auditing technologies to regulate major banks. The paper sides with the ‘skeptics’ and argues that the nation
states, especially major Western states, remain important players in the regulation of global businesses. It concludes
that the nation-state’s capacity to regulate global enterprises is compromised by history, domestic concerns and rela-
tionships with class and capitalist interests rather than by globalization per se. #2001 Elsevier Science Ltd. All rights
reserved.
Globalization is associated with the growing
mobility of goods, services, commodities, infor-
mation, people and communications across
national frontiers. Its intensi?cation is most visible
in banking and ?nance where, with the aid of
information technology, global stock markets,
futures, debt, derivatives, and interest rate swaps
have accelerated the geographical mobility of capi-
tal, money and credit supply (Harvey, 1989; Lash
& Urry, 1994). Increasingly, globalization refers to
processes through which events and decisions, such
as those relating to bank closures, in one part of the
world can have signi?cant consequences for indi-
viduals and societies in distant parts of the world.
The globalization of businesses poses questions
about the social regulation, surveillance and
accountability of corporations, both in the national
and international context. The faceless world of
global trading involves massive uncertainties and
requires frameworks for creating and fostering
‘‘trust’’. One of the responses by Western govern-
ments has been to place considerable reliance
upon accounting technologies, for regulating
0361-3682/01/$ - see front matter # 2001 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 01) 00009- 5
Accounting, Organizations and Society 26 (2001) 475–499
www.elsevier.com/locate/aos
* Corresponding author.
E-mail addresses: [email protected] (Prem Sikka); arnold
@sba.uwm.edu (P.J. Arnold).
commercial and non-commercial enterprises
1
(Arnold, 1991; Auditing Practices Board, 1994;
Auditing Practices Committee, 1989, 1990; Power,
1993; Sikka, Puxty, Willmott, & Cooper, 1998;
Willmott, Puxty, Robson, Cooper, & Lowe, 1992;
Ze? & Moonitz, 1984). Whilst major accountancy
?rms have made considerable economic gains
2
by
encouraging regulators to believe that external
audits by ’world ?rms’ can facilitate the appro-
priate ‘trust’, surveillance and regulation of inter-
national enterprises (Hanlon, 1994), considerable
doubts have been expressed about the social desir-
ability of placing (excessive) reliance upon regula-
tion through ?nancial audits (e.g. Power, 1994).
However, little research has addressed the reliance
placed upon accounting/auditing technologies and
institutions to regulate transnational enterprises.
Any inquiry into the interaction between
accounting/auditing and business regulation within
a global context requires some consideration of
the question of how globalization a?ects the reg-
ulatory power of nation states. In this paper, we
do not seek to review the major theories of globali-
zation.
3
Instead, this paper is located at what
McGrew (1997) calls the two intellectual ‘‘fault-
lines’’ (p. 9), that is the debate between the hyper-
globalists and the ‘skeptics’. The hyperglobalists
(Ohmae, 1995; Zacher, 1992), argue that con-
temporary forms of globalization make a radical
break from the past. In a globalized world, the
traditional territorial borders have become so por-
ous that individual governments cannot take actions
to regulate businesses, especially those relating to
banking and ?nance. As a result the role, powers
and sovereignty of the nation-states has been fun-
damentally compromised. In contrast, the skeptics
(Hirst & Thompson, 1996; Kapstein, 1994; Tabb,
1997a, 1997b; Wood, 1997a, 1997b; Zevin, 1992)
accept the view that to manage a changing eco-
nomic environment, the state has always had to
restructure itself. However, they challenge the con-
tention that globalization has reduced the power,
functions or authority of the state. They argue
that states, particularly the most powerful indus-
trialized nations, continue to play a substantial
role in the governance of global economic a?airs.
Accounting research on international issues such
as harmonization, the International Accounting
Standards Committee (IASC), the accounting
practices of transnational corporations, transfer
pricing and international taxation, can potentially
contribute evidence to the debate on globalization.
In this paper we focus on international auditing
and side with the skeptics who argue that the state,
and by implication the state-accounting alliance,
remain important agents in the governance of the
global economy. As ?nance and banking are often
characterized as the most globalized of all busi-
nesses (Gilpin, 1987; Kapstein, 1994; Lash &
Urry, 1994), we examine some of the issues (and
tensions) relating to regulation of global busi-
nesses through auditing technologies by develop-
ing a case study of the closure of the Bank of
Credit and Commerce International (BCCI), a
third world bank operating on a global scale.
The paper is organized into three sections. The
?rst section develops the theoretical foundation by
considering the extent to which globalization has
weakened the ability of nation states to regulate
economic activity and govern transnational cor-
porations. The second section illustrates our
skepticism concerning ‘the end of the nation state’
thesis through evidence drawn from the BCCI case
study.
4
While the BCCI case reveals serious
weaknesses in the existing structures for governing
transnational banking, it also shows that regulatory
1
Re?ecting the hegemony of the West, similar technologies are
also expected to be adopted by developing countries even though
they have little or no direct in?uence on the process of accounting
change in the industrialized Western nations (Hopwood, 1989).
2
The world-wide income of the Big-?ve ?rms is more than
US $51 billion a year (Financial Times, 19 September 1997, p. 1),
large enough to dwarf the income of many countries.
3
For good reviews see Robertson and Khondker (1998) and
Waters (1995).
4
Our data is drawn from the Bingham report, US Congres-
sional hearings, contents of the Sandstorm report and various
fragments of working papers appended to the Congressional
hearings. The Sandstorm Report was secretly commissioned by
the Bank of England, prior to the closure of BCCI. The report
uses codenames to maintain secrecy. Sandstorm is the code
name used to identify BCCI. The report is not publicly avail-
able in the UK as Prime Minister Tony Blair considers is to be
a con?dential document (Mitchell et al., 2001). The Sandstorm
report is publically available in the US (See US Senate, 1992a,
pp. 95–142). Extracts from this report can be seen on http://
www.visar.csustan.edu/aaba/aaba.htm.
476 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
and auditing failures at BCCI have political and
economic underpinnings that can not be explained
by ‘‘globalization’’ per se, or its impact on the
powers of the state. The concluding section sum-
marizes our ?ndings about globalization and the
capacity of states and accountancy ?rms to reg-
ulate transnational ?nancial institutions. We argue
that though the closure of BCCI stands as an
example of the ability of Western economic pow-
ers to employ the aid of accountancy ?rms to dis-
cipline a third world bank, the political capacity of
the state-accountancy nexus to protect broader
social interests in international bank regulation
remains circumscribed by governance processes
that are shrouded in secrecy and beyond the reach
of democratic politics. The BCCI case suggests that
while the state-accounting alliance plays an impor-
tant role in the governance of global banking, it
promotes and fosters a global regulatory structure
that furthers the interests of capital, rather than
the welfare of depositors and citizens.
1. Globalization in perspective
The globalization of enterprises is best under-
stood within the context of capitalism. In search
of higher economic surpluses, lower costs and new
markets, capitalist enterprises are obliged to roam
the world. As Marx observed, capital is always in
‘‘need of a constantly expanding market for its
products, chases the bourgeoisie over the whole
surface of the globe. It must nestle everywhere,
settle everywhere, establish connections every-
where’’ (Marx, 1977, p. 224). History a?rms that
capitalism has always been a global a?air, and the
state
5
has consistently played a role in fostering
the conditions for capital accumulation in both
the domestic and international spheres. The domi-
nant contemporary discourse on globalization,
however, asserts that the globalization of business
is a radically new phenomenon driven by recent
advances in digital technologies. Globalization is
further said to be restructuring international poli-
tical economy and making the nation state, and
state-based regulation of business, increasingly
obsolete (Held, 1991). This view of globalization,
which we label the ‘‘hyperglobalist’’ perspective,
has become ubiquitous in the popular press
6
,
management literature and business education
curriculums, to the extent that it is fast becoming a
taken for granted, although largely unexamined,
truism.
By citing a huge growth in the volume of global
?nancial trade and the appearance of international
organizations and agreements, the hyperglobalists
attribute historical novelty to contemporary forms
of globalization and argue that the nation-states
are now powerless to regulate capital ?ows and
have been reduced to ‘‘little more than bit players’’
(Ohmae, 1995, p. 12). The hyperglobalists marshal
considerable statistical evidence to support their
claim. For example, Frieden (1991) notes that ‘‘in
April 1989, foreign exchange trading in the
world’s ?nancial centers averaged about $650 bil-
lion a day, equivalent to nearly $500 million a
minute and to forty times the amount of world
trade a day’’ (p. 428). Sassen (1996) observes that
since 1980, the total value of ?nancial assets has
increased two and a half times faster than aggre-
gate GDP of all rich industrial economies, and the
volume of trading in currencies, bonds and equi-
ties has increased ?ve times faster. Similarly,
between the period 1975 and 1990, international
bank lending grew from $40 billion to $300 billion
and the number of foreign banks operating in
London more than doubled to reach over 500 by
1990. Branch banks located outside home coun-
tries now account for the bulk of earnings for
many banks (Kapstein, 1994). Some $6 trillion has
escaped the national boundaries and is nested
in various o?shore havens (United Nations O?ce
for Drug Control and Crime Prevention, 1998)
thus, further calling into question the power of
sovereign nations to regulate ?nancial ?ows.
7
5
The state is, of course, an ensemble of complex and con-
tradictory institutional arrangements. For a discussion of some
of the theories, see Dunleavy and O’Leary, (1987).
6
The popularity of this view is indicated by the front cover
of Newsweek magazine (26 June 1995) which proclaims that
‘‘the state is withering and global business is taking charge’’.
7
Kapstein (1994, pp. 31–37) challenges the conventional
view that o?shore banking originated as a means to circumvent
national bank regulation and taxation. He argues, to the con-
trary, that nation states played an active role in encouraging
the development of Euromarkets in an e?ort to separate
domestic from foreign money markets.
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 477
Hyperglobalists argue that the scale of ?nancial
transactions is so large that states can no longer
e?ectively control the system. From the hyper-
globalist perspective, the unregulated growth and
expansion of BCCI, epitomizes the quintessential
ungovernable international bank, one that operated
‘‘over a large expanses of international space’’ mov-
ing between di?erent ‘‘regulatory spaces’’ in order
to evade the control of any one national regulatory
regime (Leyshon & Thrift, 1997, p. 61).
Globalization skeptics
8
contest the novelty, evi-
dence, arguments and policy prescriptions
advanced by the hyperglobalists on the grounds of
an unhealthy degree of abstraction from history
and geography. They argue that ‘genuine’ globali-
zation does not exist and that the present forms of
globalization are the outcome of intentional poli-
tics and policies pursued by the major nation-
states, rather than technology or market impera-
tives. Amongst the skeptics, Hirst and Thompson
(1996) challenge the core tenets of globalization;
by arguing that today’s ‘internationalized’ econ-
omy is not unprecedented, but rather is, in some
respects, ‘‘less open and integrated than the regime
that prevailed from 1870 to 1914’’. They further
contend that ‘‘genuine transnational corporations
(TNC)’’ are relatively rare, and that ‘‘capital
mobility is not producing a massive shift of
investment and employment from advanced to the
developing countries’’. For most TNCs foreign
investment and sales continues to be less impor-
tant than domestic
9
activity. Of the top 100 ?rms
in the world in 1993, only 18 kept the majority of
their assets outside their host nation (Wade, 1996).
Most of the assets and exports of the TNCs are
located in the First World developed countries,
and not in the developing world. For example, in
the early 1990s, the stock of US capital invested
abroad totaled 7% of GNP— slightly less than the
?gure for 1900 (Wade, 1996, p. 72). Based on data
showing that trade, investment, and ?nancial
?ows remain concentrated in Europe, Japan and
North America, Hirst and Thompson (1996) con-
clude that ‘‘these economic powers . . . have the
capacity, especially if they coordinate policy, to
exert powerful governance pressure over ?nancial
markets’’. In contrast to the somewhat pessimistic
outpourings of the ‘end of the nation-state school’,
Hirst and Thompson (1996) argue that global
economic activities are ‘‘by no means beyond reg-
ulation and control, even though the current scope
and objectives of economic governance are limited
by the divergent interests of the great powers and
the economic doctrines prevalent among their
elites’’ (pp. 2–3).
Even in the case of banking and ?nance, the
most global of all economic activities, the histor-
ical novelty and implications of globalization are
easily overstated. Polanyi’s (1944) classic study of
19th century economic liberalism shows that the
internationalization of ?nance is neither a new
phenomenon, nor one that is independent of
national capitals and the ruling elites of nation
states. Taking a long view of the history of inter-
national ?nance, Zevin (1992) similarly concludes
that today’s ?nancial markets show little sign of
greater ‘‘?nancial openness’’ than they did a cen-
tury ago. Although technology has increased the
scope and volume of global ?nancial transactions,
Zevin argues that economic integration is best
measured by the degree of price conversion since a
single price implies a single market. He shows that
the ?nancial markets of northwest Europe were
highly integrated in the pre-1914 period as evi-
denced by the convergence of interest rates across
national boundaries.
10
Current patterns of inter-
national lending and transnational securities trad-
ing, likewise, have historical precedents. At the
turn of the century, India, Italy, Japan, Russia
and Denmark had ratios of net foreign debt to
8
See Grieder (1997), Hirst and Thompson (1996), Kapstein
(1994), Tabb (1997a, 1997b), Wood (1995, 1997a, 1997b, 1998);
Zevin (1992). These globalization ‘‘skeptics’’ represent various
theoretical schools of thought including both institutionalist
and Marxist view points. Although their analyses of globaliza-
tion diverge on many points, they are united in their critique of
the ‘‘end of the state’’ thesis.
9
In 1993, the US based manufacturers sold 67% of their
output to the domestic market; whilst the German and Japa-
nese sold 75% and 67% of their output to their domestic mar-
kets (Wade, 1996).
10
DuBo? and Herman (1997) take issue with the metric
Zevin uses to measure ‘‘?nancial openness’’. They examine the
level of direct foreign investment, rather than interest rate con-
versions, and argue that the higher proportion of direct foreign
investment today ‘‘makes for greater economic integration’’
when compared to the earlier period.
478 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
GNP of 20–30%; percentages that are comparable
to the debt ratios of the largest debtor countries in
the 1990s (p. 47). Foreign stocks accounted for
59% of the stocks traded in the UK at the end of
the 19th century, while nearly a century later
(1987) only 20% of stocks traded in the UK were
foreign issues. Statistics on stock trading in France
show a similar proportional decrease in foreign
securities trades (p. 51).
Historically, the ‘‘degree of (?nancial market)
openness has oscillated in response to political
factors’’, rather than technological advances
(Schor, 1992, p. 7). The high degree of interna-
tional capital mobility that characterized the 18th
and 19th centuries gave way following the Great
Depression in the 1930s to a relatively unique
period of ‘‘non-integrated ?nancial markets’’ that
lasted until the beginning of the 1970s. The post-
war period of ‘‘non-integrated ?nancial markets’’,
and state-led Keynesian national economic poli-
cies were the product of political forces (Schor,
1992). Likewise, the recent return to an integrated
world ?nancial market can be attributed to poli-
tical forces, rather than technological imperatives
as the ‘end of the nation-state’’ school contends
(Ohmae, 1995). The neo-liberal restructuring of the
global ?nancial markets which has occurred since
1970 is the result of a deliberate, systematic, and we
would emphasize, state led e?ort to dismantle capi-
tal controls, to deregulate and liberalize national
economies, and to open ?nancial markets once
again to international capital investment (Hellei-
ner, 1994). The role of the state in this restructuring
is exempli?ed by the Thatcher government in the
UK, and by the US sponsorship of the structural
adjustment and liberalization programs carried
out by the International Monetary Fund (IMF).
Kapstien’s (1994) institutional history of interna-
tional banking from the collapse of the Bretton
Woods Agreement to the US/IMF management of
international debt crisis, likewise shows that ‘‘the
world economy does not operate somewhere o?-
shore, but instead functions within the political
framework provided by nation-states’’ (p. 184).
Hyperglobalists fail to see the hand of the state
in the governance of international economy, in
part, because they interpret the meaning of state
regulation narrowly as public interest regulation,
i.e. state controls on business imposed to protect
the public interest. They witness the demise of the
welfare state, privatization of state functions,
deregulation of industry and dismantling of public
protections, and conclude that the power of the
state to govern the economy has eroded in the
wake of globalization. This narrow view of reg-
ulation fails to see ways in which the capital has
and continues to rely upon the substantial power
and authority of the state to govern economic
a?airs. Capital needs and depends upon various
forms of state regulation (Kolko, 1963) to main-
tain the conditions of accumulation, to manage
crises, to rationalize market excesses, to liberalize
domestic economies, and smooth the way for
international capital investment at home and
abroad. As Wood (1997a, p. 12) notes:
We can debate about how much ‘‘globaliza-
tion’’ has actually taken place, about what has
and what hasn’t been truly internationalized.
But one thing is clear: in the global market,
capital needs the state . . . Behind every trans-
national corporation is a national base, which
depends on its local state to sustain its viability
and on other states to give it access to other
markets and other labor forces. In a way, the
whole point of ‘‘globalization’’ is that com-
petition is not just — or even mainly —
between individual ?rms but between whole
national economies. And as a consequence,
the nation-state has acquired new functions
as instruments of competition.
Wood (1997a, 1997b) goes so far as to argue that
under contemporary forms of globalization, the
state has become more, rather than less, important
to capital. Hutton (1999) echoes this view of the
state as an agent of globalization when observing
that ‘‘The City [of London] has not just been the
citadel of free ?nancial markets; it has been the
prime bene?ciary of the most determined indus-
trial policy sustained continuously by the British
state in any branch of economic activity. Law,
taxation, regulation and economic policy have
been bent to suit its needs. . . . The global markets
are powerful; but the terms on which they trade
are set by governments.’’ (p. 61 and 64).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 479
The skeptics have advanced a debate on globa-
lization that is by no means settled.
11
They have
been chastised for underestimating the power of
transnational corporations ‘‘to undermine demo-
cratic political institutions’’, and for failing to
acknowledge the ‘‘adverse e?ects of globalization
on politics’’ (DuBo? & Herman, 1997). Whilst
acknowledging the signi?cant power of transna-
tional corporations, our study of BCCI provides
evidence in support of the globalization skeptics’
contention that the power and authority of the
state has not been eroded by globalization. To the
contrary, the state continues to play a signi?cant
role in the governance of the global economic
a?airs and the regulation of international banking.
At the same time, the BCCI case shows how the
capacity of the state, and by implication the state
accounting alliance, to regulate transnational
capital in the public interest is limited, not by the
impersonal forces of globalization per se, but
rather by the dominance of private interests in the
governance process. With few exceptions, critics of
globalization agree that the states’ capacity to
regulate and control capital is limited by political
and economic constraints — by ruling neo-liberal
ideologies, the nature of the capitalist state
(DuBo? & Herman, 1997), and by the waning of
class-politics and socialist struggle for democratic
control over economic a?airs (Wood, 1997a,b).
Geopolitics also limits state authority such that
Western economic powers, like the USA, are far
more capable of shaping international regulatory
regimes to suit the interests of transnational cor-
porations based within their borders, than are newly
industrialized and third world nations.
12
Within
powerful nations, politics limits and shapes state
actions not only because of the disproportionate
in?uence exercised by corporate lobbies on
domestic and international economic policy, but
also because the nation-states increasingly com-
pete to secure inward investment and thus smooth
the path of capitalist development.
For globalization skeptics, like ourselves, the
critical question is not whether the state, or in our
case the state-accountancy nexus, has the capacity
to regulate transnational enterprise (which the
BCCI case shows they do), but whether the poli-
tical will exists to create and enforce regulatory
regimes that serve the needs of a democratic society,
rather than the needs of capital. Accordingly, our
study of BCCI looks beyond the story of when
and how the Bank of England and Price Water-
house closed BCCI to consider the objectives and
interests served by the state-accounting alliance
which governs international banking. The case
reveals the political underpinnings of auditing prac-
tice, and the limits they impose on the ability of state
regulators and their auditors to advance society’s
interests in the regulation of international banking.
2. The Bank of Credit and Commerce International
2.1. BCCI’s expansion: ungoverned or ingovernable?
At ?rst glance, BCCI might well be considered
as the quintessential borderless bank, spanning the
globe and organized to evade state regulation
(Financial Times, 1991; Leyshon & Thrift, 1997).
BCCI’s growth as a world bank was indeed phe-
nomenal. From its origins as a small family owned
bank in pre-independence India and later Paki-
stan, BCCI’s founder, Agha Hasan Abedi, built an
international banking empire which he envisioned
as a Third World bank capable of competing with
Western banks. With ostensible backing from the
Royal House of Abu Dhabi and other Middle
Eastern investors,
13
BCCI was launched in 1972
with o?ces in London, Luxembourg, Lebanon,
Dubai, Sharjah and Abu Dhabi (Bingham, 1992,
Chapter 2). By 1977, BCCI was the world’s fastest
11
For an overview of the debate on globalization see the
series of exchanges between Ellen Meiksins Wood, Richard
DuBo?, Edward Herman, William Tabb, Francis Fox Priven,
Richard Cloward, and Harry Magdo? in the Monthly Review
(November, 1997 and January 1998 editions).
12
Given the nature of the globalization debate, inevitably
there are counter arguments. For example, Giddens (1990)
claims that globalization is not Western and that it heralds
‘‘(t)he declining grip of the West over the rest of the world’’
(p. 52). In contrast, Wade (1996) argues that globalization
involves the worldwide installation of Western rationality,
ethics, theories, and world views.
13
Although BCCI was built on the ?ction that it was capita-
lized by oil-rich Middle Eastern investors, most of them were
acting as nominees providing their names and/or funds in the
form of deposits, rather than investors (US Senate, 1992b, p. 51).
480 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
growing bank, operating from 146 branches in 43
countries. By the mid-1980s, it was operating from
73 countries with balance sheet assets of around
$22 billion.
The bank was intentionally organized as an
‘‘elaborate corporate spiderweb’’ (US Senate,
1992b, p. 1), of holding companies, transnational
a?liates, banks within banks, and nominee rela-
tionships in order to evade government regulation
and control. To this end, BCCI incorporated in
Luxembourg, a place known in ?nancial circles as
a ‘‘loosely-regulated banking centre’’ (Financial
Times, 1991, p. 10) where banking laws provided a
haven for secrecy and con?dentiality (US Senate,
1992b, p. 28). Subsequently, a holding company
was created that split the bank into two parts —
BCCI SA incorporated in Luxembourg, and BCCI
Overseas headquartered o?shore in the Grand
Cayman Islands. This organizational split was
further complicated by the creation of a series of
entities used as ‘‘parallel banks’’ to circumvent
local regulation and facilitate ?nancial manipula-
tion (US Senate, 1992b, p. 38).
Designed to evade regulation, BCCI’s fractured
banking structure provided a mechanism for
facilitating illegal activities by both bank o?cials
and BCCI clients. Investigations following BCCI’s
closure in 1991 (US Senate, 1992b, p. 1) exposed a
host of criminal activities including money laun-
dering in several continents, bribery of govern-
ment o?cials, arms tra?cking, the sale of nuclear
technologies, support of terrorism, tax evasion
and smuggling operations, as well as massive
?nancial fraud. Investigators (US Senate, 1992b,
p. 53) found that BCCI had manipulated
accounts, concealed losses and non-performing
loans, created ?ctitious pro?ts and bogus loans,
misappropriated deposits and failed to record
deposit liabilities. Many of the non-performing
loans were linked to nominee relationships
through which BCCI had illegally acquired bank-
ing operations in the USA and purchased its own
shares to create a ?ctitious capitalization.
Although BCCI’s unchecked growth and ability
to circumvent national laws demonstrates a weak-
nesses in the existing governance structure of
international banking, it would be wrong to con-
clude that global ?nance is intrinsically ungovern-
able. Instead, BCCI’s unregulated growth is best
understood as an exception to the rule (Kapstein,
1994, pp. 155–156). International agreements gov-
erning global banking, inscribed in the Basle
Concordats, establish the principle of consolidated
home country supervision as the framework for
transnational banking supervision. Under this
principle, branch banks operating worldwide are
supervised by regulators in the home country
where the parent resides. Although not explicitly
stated in international agreements, the home
country is expected to act as lender of last resorts
for the worldwide operations of its domestic banks
(Kapstein, 1994). BCCI was exceptional in that it
had no lender of last resort — no national gov-
ernment willing to assume supervisory responsi-
bility and bear the risk of the bank’s failure.
BCCI SA moved its head o?ces to London in
1976 although it remained incorporated in Lux-
embourg. Luxembourg regulators, however,
maintained that ‘‘it was impossible to supervise
(BCCI) e?ectively from Luxembourg’’ (Bingham,
1992, pp. 32–33). Although the Bank of England
resisted pressure to take on a sole supervisory role,
it agreed to license BCCI as a deposit taking
institution (although not a full bank). In 1987,
concerned by BCCI’s extensive treasury losses,
whispers of irregularities, and the inability to ?nd
a single regulator willing to act as lender of last
resort the Basle Committee established a ‘‘College
of Regulators’’
14
lead by the UK and Luxembourg
14
The formation of the international College of Regulators
was permitted by the Basle Concordat, primarily for regulating
banks which might otherwise escape e?ective regulation. Under
the principles established by the Basle Committee, of which the
UK and Luxembourg were members, the Institut Monetaire
Luxembourgeois (IML) was established to regulate BCCI. It
operated with the support and co-operation of the Bank of
England. In 1987, the College of Regulators was formed and had
its ?rst meeting in June 1988. By then the College included not
only the UK and Luxembourg, but also Spain and Switzerland
(BCCI had minor operation in these countries). In July 1989, the
United Arab Emirates (UAE) declined but Hong Kong (then a
British colony) and the Cayman Islands became members. The
College’s meeting in April 1991 was also attended by supervisory
bodies from the UAE and France. Its meeting on 2nd July 1991
was also attended by US observers. India, Pakistan, Bangladesh
and countries from Africa, where BCCI had much larger opera-
tions, were neither part of the College nor invited to attend any
of its meetings (Bingham, 1992).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 481
to scrutinize BCCI operations (Bingham, 1992,
pp. 52–53). Members of the College proved less
than e?ective as they were preoccupied with
respective national interests (Bingham, 1992).
15
But, BCCI ultimately could not evade the reg-
ulatory rule of Western governments. Despite an
organizational structure designed intentionally to
allow BCCI to operate outside national laws, the
College of Regulators, led by the Bank of Eng-
land, formally closed down BCCI’s worldwide
operations on 5 July 1991. Kapstein (1994), thus,
interprets BCCI as ‘‘the exception that proves the
rule’’ that ‘‘state power prevails over transnational
forces, when and if, it is applied’’ (pp. 155–156).
While the bank’s closure illustrates the enduring
power of nation states, BCCI’s unregulated
growth highlights the political antecedents under-
pinning decisions as to how state power is exer-
cised. Given the absence of a lender of last resort,
any nation could have denied BCCI permission to
bank within its borders. BCCI regularly used
bribes and kickbacks to government o?cials to
gain entry into several countries (US Senate,
1992b, Chapter 5). Due to the absence of a lender
of last resort, US regulators blocked BCCI’s
attempts to acquire bank holdings in the US, but
the bank eventually used political connections to
evade regulators and illegally acquire several US
banks through nominee relationships (US Senate,
1992b, Chapter 6). On technical grounds, the
Bank of England could have likewise prevented
BCCI from operating in the UK, but instead it
licensed the bank and allowed it to headquarter in
London in keeping with the then government pol-
icy of encouraging foreign investment in the City.
Several theories have been put forth to explain
the BCCI’s unregulated growth ranging from
speculation that the Bank of England was reluc-
tant to close BCCI because of possible diplomatic
repercussions in the Middle East, to allegations
that BCCI was untouched because of its ties to
ongoing intelligence operations
16
(Kapstein, 1994,
p. 158–159). Alternatively, the bank’s operations
may have been sanctioned by Western states
because of the more straightforward desire to
recycle petro-dollars back in to the Western
banking establishment. Although the particulars
of the motivations remain obscure, BCCI’s
ungoverned growth can not be attributed to the
declining authority of the state, or its inability to
regulate international enterprises. To the contrary,
state sanction and cooperation was essential to
BCCI’s global expansion. BCCI’s unregulated
growth was made possible because national reg-
ulators condoned and facilitated the banks expan-
sion for political ends, not because international
banking is intrinsically ungovernable.
2.2. Regulating BCCI through external auditors
Based upon local history, the role of external
auditors in bank regulation varies from country to
country. In the US responsibility for bank audit-
ing is divided between external and government
auditors with considerable confusion and over-
lapping responsibilities, and with neither accepting
responsibility for detecting fraud.
17
By contrast,
the UK does not employ a force of government
bank auditors, but instead relies extensively on the
opinions of external auditors. To facilitate home
country supervision, the Basle Accords establish
minimal capital adequacy standards and require
international banks to prepare consolidated
?nancial reports covering their worldwide opera-
tions (Kapstein, 1994). To supervise transnational
banks domiciled within their borders, regulators in
most counties, including the Bank of England, rely
15
The College, for example, took no action in 1988 when it
leaned that 72 major banks had suspended credit lines threa-
tening the banks liquidity in the wake of a money laundering
scandal following BCCI’s indictment by US authorities on
charges of fraud, money laundering and falsifying bank records
(US Senate, 1992b, p. 61).
16
By the early 1980s, the US Central Intelligence Agency
was making intensive use of BCCI’s facilities for covert opera-
tions to support Afghan guerrillas in their war against the
Soviet Union (US Senate, 1992b). BCCI was also used to
?nance illegal US arms sales to Iran in what became known as
the Iran Contra a?air (US Senate, 1992a, pp. 356–357).
17
The AICPA (1997, p. 5) Statement on Auditing Standards
(SAS) No. 82 requires only that auditors conduct a risk assess-
ment and ‘‘plan and perform the audit to obtain reasonable
assurance about whether the ?nancial statements are free of
material misstatement, whether caused by error or fraud.’’
There is no responsibility to detect fraud unless it results in a
material misstatement of the ?nancial results (Mancino, 1997).
482 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
upon international accountancy ?rms to audit
these consolidated statements. Private sector
external auditors, thus play crucial quasi-reg-
ulatory role in governing the international bank-
ing system.
18
In compliance with Western banking practices,
BCCI had to submit to external ?nancial audits.
Regulators placed considerable reliance upon
BCCI’s audited ?nancial statements even though
they had no explicit say in auditor appointment
and the auditors did not owe them a ‘‘duty of
care’’.
19
Re?ecting the bank’s organizational split
between Luxembourg and Grand Cayman, BCCI
named two auditors to cover its international
operations: Ernst and Whinney (now part of Ernst
and Young) audited the Luxembourg operation
and the holding company, while Price Waterhouse
(now part of PriceWaterhouseCoopers) audited
the Grand Cayman operations. Although the
appointment of two auditors limited the scope of
each auditors authority and facilitated BCCI’s
?nancial manipulation, neither audit ?rm objected
to this arrangement for over a decade (US Senate,
1992b, p. 259). It was not until the mid-1980s in
the wake of concerns about signi?cant trading
losses within BCCI’s Treasury, that Ernst and
Whinney questioned the split audit and insisted
upon a single auditor. BCCI subsequently
appointed Price Waterhouse
20
as sole auditor of
BCCI’s worldwide group in May 1987 (US Senate,
1992b, p. 266).
Bank regulators relied extensively on the work
of these accountancy ?rms. For example, by the
late 1970s, UK banking circles were concerned
that BCCI’s drive for growth neglected prudential
matters such as solvency ratios and bad debt pro-
visions. Its UK branches were also thought to be
trading at a loss, excessively lending, and doing
too little business with other banks. Nonetheless,
in 1979, the UK government justi?ed its decision
to license BCCI SA as a deposit-taking institution
by the fact that the ‘‘auditors were not qualifying
the reports’’ (Hansard, 6 November 1992, co.
527). In 1970, the Bank of England persuaded
BCCI SA to commission an investigation of its
loan book and the auditors, Ernst and Whinney,
produced a reassuring report in March 1981
(Bingham, 1992, p. 39). By the mid-1980s, in view
of BCCI’s huge treasury losses, the Luxembourg
regulators asked BCCI to conduct a Review of the
Treasury operations. Price Waterhouse undertook
the review and uncovered irregularities, but mis-
takenly attributed deliberate manipulations
21
to
‘‘incompetence, errors made by unsophisticated
amateurs venturing into a highly technical and
sophisticated market’’ (Bingham, 1922, p. 44).
The Treasury episode demonstrates the con?ict
between the accountancy ?rms’ commercial inter-
ests and their quasi-regulatory role in bank super-
vision. In pursuit of private interests, auditing
?rms increasingly sell non-auditing services to
their audit clients and serve their clients as coun-
selors and advisors, at the same time as the state
looks to them to perform the more adversarial
functions of independent auditors. Following the
review of Treasury operations, BCCI hired the
Consultancy division of Price Waterhouse to assist
in improving internal control weaknesses which
the auditor’s had identi?ed. The consultants (Price
Waterhouse) completed their work in 1986, and
the auditors (also Price Waterhouse) reported that
18
The auditors’ role as quasi-regulator was enhanced by the
UK’s Banking Act of 1987. The Act required regular meetings
between bank management, auditors and the Bank of England
to discuss matters of mutual interest. The auditors’ traditional
duty of con?dentiality to client companies was relaxed to allow
them to report matters to regulators provided they acted in
‘‘good faith’’. Auditors’ were required to prepare reports on
banks’ internal controls, and they were given a ‘‘right’’ (as
opposed to a ‘‘duty’’) to report their suspicions to regulators,
even without client knowledge (Auditing Practices Committee,
1989, 1990).
19
Following the House of Lords judgment in Caparo Indus-
tries plc v Dickman & Others [1990] 1 All ER HL 568, UK
auditors do not owe a ‘duty of care’ to any individual, present/
potential shareholder, creditor, employee, bank depositor or
any other stakeholder. They only owe a ‘duty of care’ to the
company — as a legal person.
20
Price Waterhouse was aware of Ernst and Whinney’s
concerns when they accepted the group audit. In 1988, its ?rst
full year as group auditor, the ?rm received audit fees of $4.7
million (US Senate, 1992b).
21
Later the auditors stated that ‘‘We had formed the con-
clusion that the accounting methods adopted were due to
incompetence. However, with the bene?t of hindsight it appears
more sinister in that it now seems to have been a deliberate way
to ?ctitiously in?ate income.’’ (US Senate, 1992a, p. 114;
Sandstorm Report, 1991, p. 17).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 483
they were satis?ed that their recommendations
had been implemented (US Senate, 1992a, p. 175).
In conjunction with the review of the Treasury
operations, the auditors also discovered a poten-
tial tax liability to the UK government and
advised BCCI to move its Treasury operations out
of the UK to avoid payment: Price Waterhouse
workpapers obtained by US Senate investigators
state:
A further feature arising from the review of
Treasury operations in 1985 was the potential
liability to UK Corporation Tax arising from
the Division’s activities in the period 1982 to
1985. Following advice from ourselves and
from the Tax Counsel during 1986 it was
determined that this liability could be sig-
ni?cantly reduced if the Bank ceased trading
in the United Kingdom and claimed a term-
inal loss (US Senate, 1992a, p. 175).
Following this advice, BCCI’s Treasury was
moved from London to Abu Dhabi in 1986 with
Price Waterhouse assisting with the transfer (US
Senate, 1992a, p. 175). The auditors were, thus in
the dual position of acting as private consultants
and tax advisors to BCCI management to further
their ‘private’ interests, while the State was relying
upon them to perform ‘public interest’ functions
by acting as an external monitor and independent
quasi-regulator.
Throughout the 1980s, BCCI auditors con-
tinued to issue unquali?ed reports on the Bank’s
?nancial statements. In 1987, the Bank of England
received reports of fraudulent activity by BCCI
(Bingham, 1992, p. 56), but no decisive action was
taken, in part, because the auditors did not sus-
pect BCCI management of fraud (Bingham, 1992,
p. 57). In May 1988, Price Waterhouse prepared a
substantial report for the College of Regulators.
The report drew attention to the heavy con-
centration of BCCI loans to certain customers,
several of whom were shareholders. The report
also included information concerning BCCI
nominee companies and possible illicit investments
in the United States. The information provided to
regulators, however, was minimal because audi-
tors ‘‘faced the dilemma of seeking to reconcile
their duty to make appropriate disclosure to the
(bank) supervisors with the need to retain the
con?dence of their clients’’ (Bingham, 1992, p. 59).
In a dramatic turn of events, in early 1990, Price
Waterhouse secretly noti?ed the Bank of England
of suspected fraud within BCCI (US Senate,
1992b, pp. 271–273). This was possible under the
Banking Act 1987 which at the time gave auditors
a ‘‘right’’, but not a ‘‘duty’’, to report fraud to
authorities. Various interpretations have been
o?ered to explain the change of course taken by
the auditors who had previously attested to the
integrity of their clients ?nancial records. One
interpretation attributes the auditor’s shift to new
information provided by a senior o?cial of BCCI
who contacted Price Waterhouse in late 1989 and
informed them of various frauds and manipula-
tions, thus, causing the auditors to seek higher
levels of assurance. Another attributes the audi-
tor’s change to the fact that BCCI’s ?nancial pro-
blems had become so severe that the auditors
feared that they might be held liable if they did not
report to the authorities (US Senate, 1992b, pp.
271–271).
However, despite suspicions of fraud, Price
Waterhouse nonetheless issued an unquali?ed
audit report on BCCI’s 1989 ?nancial statements
in May 1990. During the remainder of 1990 and
early 1991, the Bank of England and the govern-
ment of Abu Dhabi worked quietly on plans to
save the bank by recapitalizing and restructuring
it, and Price Waterhouse continued to uncover
evidence of fraud. The plan to rescue BCCI never
materialized.
22
On March 4 1991, the Bank of
England directed Price Waterhouse to prepare a
con?dential report on irregularities at BCCI. The
report was commissioned under Section 41 of the
UK Banking Act of 1987 which allows regulators
to direct external auditors to conduct such probes
in situations where bank depositors might be at
22
Various explanations have been given for the failure of the
plan to recapitalize BCCI. One view credits the decision to
close the bank to the discovery of hidden ?les providing further
evidence of the extent of BCCI’s fraud (US Senate, 1992b, p.
278). Another view attributes the closure to continuing investi-
gations in the US and the threat that an imminent US indict-
ment posed to plans to salvage the bank (US Senate, 1992b,
Chapter 9).
484 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
risk. A draft of the Section 41 report, code named
the Sandstorm Report, was delivered to the Bank
of England on 22 June 1991. It documented
detailed evidence of massive frauds by BCCI o?-
cials over several years. Two weeks later, the Col-
lege of Regulators closed BCCI (US Senate,
1992b, p. 279).
Price Waterhouse’s investigative work and their
action in notifying UK authorities of suspected
fraud was undoubtedly instrumental in BCCI’s
closure. Nonetheless, other aspects of the external
auditors’ role in regulating BCCI were sharply
criticized in subsequent investigations within the
USA. The US Senate Subcommittee
23
on Terror-
ism, Narcotics and International Operation
undertook an investigation of the BCCI a?air that
devoted considerable attention to what it deemed
the ‘‘failure’’ of the audit process which regulators
had relied upon for years to provide an indication
of BCCI’s ?nancial integrity. Based on extensive
hearings and a review of records and documents
including Price Waterhouse audit reports, (parts
of ) working papers, and the Sandstorm report,
the Subcommittee concluded that the ‘‘BCCI’s
accountants failed to protect BCCI’s innocent
depositors and creditors from the consequences of
poor practices at the bank of which the auditors
were aware for years’’ (US Senate 1992b, p. 4).
The following sections review three criticisms
levied against the auditors by USA investigators.
While the Subcommittee’s critique illustrates ser-
ious de?ciencies in the present system of governing
international banking via external auditors, we
argue that these failures can not be attributed to
globalization per se or globalization’s e?ect on the
capacity of the state-accounting nexus to govern
transnational enterprises, but rather to the poli-
tical failures in the regulatory system.
2.3. Auditing failure
The Senate Subcommittee’s conclusion that
BCCI’s auditors failed to protect innocent deposi-
tors and creditors was formed on the basis of the
following ?ndings (US Senate, 1992b, pp. 4–5;
Chapter 10). First, for more than a decade, the
auditors failed to object to BCCI’s practice of divid-
ing responsibility for monitoring the Luxembourg
and Grand Cayman operations between two audit
?rms, thereby enabling BCCI to conceal fraud
during its early years. Second, the auditors compro-
mised their independence by accepting loans and
?nancial bene?ts from BCCI. The Subcommittee
found evidence of loans to two Price Waterhouse
partners in the Caribbean and raised questions
concerning the acceptance of payments and other
bene?ts by Price Waterhouse partners in the Grand
Caymans. Third, the investigators found that
despite BCCI’s complicated subterfuge, there were
numerous ‘‘warning bells’’ indicating irregularities
from the early years, and the auditors ‘‘could and
should have done more to respond to them’’ (p. 4;
p. 259). They concluded that by the end of 1987,
Price Waterhouse (UK) already had su?cient
knowledge of inadequacies in BCCI records to
qualify the audit, and that the auditor’s subsequent
certi?cation of BCCI’s ?nancial statements mis-
lead depositors and regulators (p. 4; p. 259).
These ?ndings do not portray an audit stymied
by the technical di?culties of monitoring a global
enterprise or frustrated by international jurisdic-
tional boundaries or bank secrecy laws. To the
contrary, the Subcommittee found that the audi-
tors were aware of ‘‘red ?ags’’ and internal control
weakness from the early years, and that from 1987
forward they had ‘‘ample reason to recognize that
there could be no adequate basis for certifying
that it had examined BCCI’s books and records
and that its picture of those records were indeed a
‘true and fair view’ of BCCI’s ?nancial state of
a?airs’’ (pp. 4–5; p. 259). These audit failures can,
however, be linked to the contradictions within a
regulatory system that relies on private accounting
?rms as quasi-public regulators. Bank regulators’
reliance on external auditors is premised on the
belief that the auditors are public spirited and will
act on behalf of either the public or the state, and
that auditors are independent of management.
Such propositions are problematic because audit-
ing ?rms themselves are signi?cant capitalist
enterprises driven by pro?t motives to pursue their
private economic interests, rather than public
policy objectives. As Hanlon (1994) notes, within
auditing ?rms ‘‘the emphasis is very ?rmly on
23
A Subcommittee of the Committee on Foreign Relations.
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 485
being commercial and on performing a service for
the customer rather than on being public spirited
on behalf of either the public or the state’’ (p. 150).
If the auditors delayed too long before acting upon
their knowledge of irregularities at BCCI, respon-
sibility must rest, in part, on the political failings
of a regulatory system which depends upon exter-
nal auditors who are appointed and compensated
by the banks they audit, who increasingly depend
on consulting fees earned by advising the man-
agement they audit, and who owe no duty of care
to the regulators or depositors who rely on them.
3. The fallacy of ‘‘world’’ audit ?rms
International jurisdictional boundaries and
bank secrecy laws also played a role in the BCCI
case. Despite its reputation as an ‘‘international’’
?rm, Price Waterhouse proved unwilling to coop-
erate with regulators or investigators outside the
national jurisdiction of local partnerships. USA
investigators criticized Price Waterhouse (UK) for
failing to notify either USA banking authorities or
Price Waterhouse (USA) of BCCI’s illegal US
acquisitions. They found that prior to 1990, Price
Waterhouse (UK) was aware of ‘‘gross irregula-
rities in BCCI’s handling of loans to Credit and
Commerce American Holdings (CCAH), the
holding company of First American Bankshares,
and was told of violations of US banking laws by
BCCI and its borrowers in connection with
CCAH/First American, and failed to advise the
partners of its US a?liate or any US regulator’’
(US Senate, 1992b, p. 5; p. 259). Eventually, the
Federal Reserve heard rumors of a report pre-
pared by BCCI’s auditors that indicated the bank
had outstanding loans to shareholders of CCAH
which were secured by shares in CCAH. Although
Price Waterhouse (UK) initially refused to give
USA authorities access to the report, the Federal
Reserve pressed its demand and was allowed to
review Price Waterhouse’s report in BCCI’s Lon-
don o?ce in late 1990 (US House of Representa-
tives, 1991b; US Senate, 1992b, p.349). Based on
evidence contained in the auditor’s report, the
Federal Reserve initiated a formal investigation
into BCCI’s USA acquisitions.
An investigation of BCCI by New York state
banking authorities was also frustrated by the
auditors’ lack of cross-jurisdictional cooperation.
The New York District Attorney testi?ed to Con-
gress about the extraordinary di?culty his o?ce
had in obtaining information, stating that:
The main audit of BCCI was done by Price
Waterhouse UK They are not permitted,
under English law, to disclose, at least they
say that, to disclose the results of that audit,
without authorization from the Bank of Eng-
land. The Bank of England, so far — and
we’ve met with them here and over there —
have not given that permission.
The audit of BCCI, ?nancial statement, pro?t
and loss balance sheet that was ?led in the State of
New York was certi?ed by Price Waterhouse
Luxembourg. When we asked Price Waterhouse
US for the records to support that, they said, oh,
we don’t have those, that’s Price Waterhouse UK.
We said, can you get them for us? They said, oh,
no that’s a separate entity owned by Price Water-
house Worldwide, based in Bermuda’’. (US Senate
1992b, p. 245).
BCCI’s auditors also refused to cooperate in the
US Senate Subcommittee’s investigation of the
bank (p. 256).
24
Although the BCCI audit was
secured by arguing that Price Waterhouse was a
globally integrated ?rm (US Senate, 1992b, p.
258), in the face of a critical inquiry, the claims of
global integration dissolved. Price Waterhouse
(USA) denied any knowledge of, or responsibility
for the BCCI audit which it claimed was the
responsibility of Price Waterhouse (UK). Price
Waterhouse (UK) refused to comply with US
Senate subpoenas for sight of its working papers
and declined to testify before the Senate Sub-
committee on the grounds that the audit records
were protected by British banking laws, and that
‘‘the British partnership of Price Waterhouse did
24
Price Waterhouse (UK) partners did agree to be inter-
viewed by Subcommittee sta? in PW’s London o?ce. The o?er
was declined due to sta? travel restrictions and concerns that
the interviews would be of little use in the absence of sub-
poenaed documents (US Senate, 1992b, p. 258).
486 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
not do business in the United States and could not
be reached by subpoena’’ (p. 256). In a memor-
andum dated 17 October 1991, Price Waterhouse
(USA) explained that the ?rm’s international
practice rested upon loose agreements among
separate and autonomous ?rms subject only to the
local laws:
The 26 Price Waterhouse ?rms practice,
directly or through a?liated Price Water-
house ?rms, in more than 90 countries
throughout the world. Price Waterhouse
?rms are separate and independent legal enti-
ties whose activities are subject to the laws
and professional obligations of the country in
which they practice . . .
No partner of PW-US is a partner of the
Price Waterhouse ?rm in the United King-
dom; each ?rm elects its own senior partners;
neither ?rm controls the other; each ?rm
separately determines to hire and terminate
its own professional and administrative
sta?. . . each ?rm has its own clients; the ?rms
do not share in each other’s revenues or
assets; and each separately maintains posses-
sion, custody and control over its own books
and records, including work papers. The same
independent and autonomous relationship
exists between PW-US and the Price Water-
house ?rms with practices in Luxembourg
and Grand Cayman (US Senate, 1992b, p.
257).
The Senate subcommittee was eventually able to
secure portions of Price Waterhouse’s audit
records from the Federal Reserve and other sour-
ces. Nonetheless, in their ?nal report (US Senate,
1992b, p. 287), the Subcommittee co-chairs, Sena-
tors Brown and Kerry, noted that:
One of the great di?culties in uncovering
BCCI’s fraud for regulators and investigators
was the fact that its frauds were carried out
through diverse and widespread jurisdictions
spanning the globe, while its activities were
audited by local accounting partnerships’’
(emphasis added).
Consequently, they questioned:
whether the current structure for accounting
?rms as independent partnerships, with
authority and liability limited to the nation in
which they are licensed, is appropriate and
adequate to meet the challenge posed by an
international ?nancial marketplace.
While this lack of cooperation and coordination
between audit o?ces and banking authorities
across national jurisdictional boundaries is
directly related to the global scope of BCCI’s
operations, it would be mistaken to conclude that
globalization per se renders the nation states or
national regulation obsolete. Geopolitical realities
dictate that powerful nations can exercise their
political will in the international regulatory arena
if they so chose. It is signi?cant that the US Fed-
eral Reserve was eventually able to press its power
to obtain documentation where elected o?cials
failed. Both the New York District Attorney’s
indictment of BCCI (US Senate, 1992b, pp. 247–
249) and the US Congressional investigation of
the scandal were made possible by the ability of
the US central bank to use its considerable in?u-
ence to penetrate banking secrecy law of other
nations.
Second, governments, particularly in strong
countries like the USA, have the capacity to reg-
ulate international accounting ?rms either through
sponsorship of international agreements, or more
directly by unilateral state actions. In BCCI’s case,
the US Senate Subcommittee recommended the
creation of new regulatory structures governing
international accountancy ?rms (p. 288) and iden-
ti?ed speci?c actions that could be taken to this
end. The Subcommittee recommended that inter-
national accountancy partnerships be asked to
voluntarily modify their partnership agreements to
provide for information sharing with foreign reg-
ulators, and in the event they failed to do so the
USA (and presumably other countries) could
require accounting ?rms to reach such agreements
with their international partners as a condition of
licensing. Alternatively, legislation could be passed
to prohibit any state agency or regulator from
relying upon audit reports prepared by any
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 487
accounting partnership that was not licensed in
the USA (US Senate, 1992b, p. 288). Any of these
recommendations could have been implemented
by the state unilaterally, without recourse to the
di?cult process of negotiating multilateral treaties
or international agreements. Nonetheless, despite
the Subcommittee’s concerns about weaknesses in
the structures governing international audit prac-
tices, no legislation was introduced to implement
these recommendations for making international
auditing ?rms accountable to state authorities.
The lack of USA action on these recommenda-
tions for reform of international auditing practice
is indicative of political failure, rather than any
constraint globalization imposes on the state’s
ability to regulate transnational capital.
4. Collusion in cover-up
Price Waterhouse’s (UK) decision to sign-o? on
the 1989 audit after notifying UK banking autho-
rities of suspected fraud at BCCI underscores the
political underpinning of the seemingly technical
practices of accounting and auditing. Possibly
fearing that a quali?ed opinion would prompt a
run on BCCI and undermine con?dence in the
banking system, UK regulators wanted the 1989
BCCI accounts to be published with an unquali-
?ed audit opinion. Abu Dhabi provided ?nancial
guarantees
25
(Bingham, 1992, p. 82), and the
auditors agreed to issue an unquali?ed opinion
lending accountings ‘‘aura of objectivity’’ (Gall-
hofer & Haslam, 1991) to the subterfuge. Price
Waterhouse defended its action by arguing that
the Bank of England and Luxembourg regulators
had been informed and wanted BCCI to continue
operations. The auditors believed the extent of
fraud was limited, the royal house of Abu Dhabi
had agreed to recapitalize the bank, and the audit
report disclosed that the auditor’s opinion was
based on guarantees provided by Abu Dhabi (US
Senate, 1992b, p. 275).
The US Senate investigators were, nonetheless,
sharply critical of Price Waterhouse’s decision to
sign the accounts and accused the auditors of col-
laborating with bank regulators to deceive the
public. According to the Senate report (US Sen-
ate, 1992b, p. 276) on the BCCI a?air:
By agreement, Price Waterhouse Abu Dhabi,
BCCI and the Bank of England had in e?ect
agreed upon a plan in which they would each
keep the true state of a?airs at BCCI secret in
return for cooperation with one another in
trying to restructure the bank to avoid a cat-
astrophic multi-billion dollar collapse. Thus
to some extent, from April 1990 forward,
BCCI’s British auditors, Abu Dhabi own-
ers, and British regulators, had now
become BCCI’s partners, not in crime, but
in cover up.
The investigators further argued that the audi-
tors’ certi?cation was ‘‘materially misleading to
anyone who relied on it ignorant of the facts then
mutually known to BCCI, Abu Dhabi, Price
Waterhouse and the Bank of England’’ (US Sen-
ate, 1992b, p. 5).
A similar scenario was played out in Hong
Kong just days before BCCI’s closure. Unlike
most BCCI branch operations, BCCHK was
separately incorporated in Hong Kong (at the
time a UK colony) and supervised by Hong Kong
regulators. When BCCHK’s ?nancial statements
were published (on 30 June 1991), Price Water-
house (UK) had already completed its draft of the
Sandstorm report (dated 22 June 1991). None-
theless, the auditors (again Price Waterhouse)
signed o? on BCCHK’s 1990 accounts after
receiving a ‘‘letter of comfort’’ from Abu Dhabi
promising the ?nancial support required to enable
BCCHK to continue trading (Taylor, Friedland,
& McDonald, 1991, p. 8). Hong Kong regulators
were anxious to maintain con?dence in the bank
despite mounting evidence of fraud. On July 1,
Hong Kong banking o?cials ?ew to London to
attend the meeting of the College of Regulators
(of which Hong Kong was a member) where the
results of the Sandstorm investigation were dis-
cussed. Two days later, the Banking Commissioner
25
In return, the Bank of England permitted BCCI to move
its headquarters, o?cers and records out of British jurisdiction
to Abu Dhabi. It believed that all problem accounts could best
be centralized in Abu Dhabi, a decision that subsequently
hampered the Bank of England’s inquiries.
488 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
announced that the results of the meeting had
‘‘indicated that there were problems which we
were not previously aware of in the BCCI Groups
(Taylor et al., 1991, p. 68), but assured the public
that there was no evidence of fraud at BCCHK
and that it had ‘‘only minor dealings with the rest
of the BCCI Group’’. On Friday, 5 July, the
Commissioner further assured depositors that the
Exchange Fund (Hong Kong’s monetary author-
ity) would continue placing funds with BCCHK, a
promise that was later characterized by the Far
Eastern Economic Review (Taylor et al., 1991, p.
68) as a ‘‘deliberate attempt to deceive the public’’.
The following Monday, 8 July 1991, Hong Kong
bank regulators rescinded their promise, BCCHK’s
assets were frozen and its operations suspended.
Collaboration between auditors and regulators
to conceal a ?nancial institution’s poor condition
in order to maintain public con?dence in the
health of individual banks or the banking system
is not unique to the BCCI case. Young (1995)
documented a similar political use of accounting
in the case of the US Savings and Loan (S&L)
industry where accounting rules were changed to
conceal the poor condition of the S&Ls in order to
‘‘buy time’’ for the industry to work out its pro-
blems. This capacity for ?nancial deception by
bank regulators and auditors raises serious ques-
tions about accountability and the potential abuse
of power. In the global context, it also has geopo-
litical implications as Western nations wield dis-
proportionate power to determine whose interests
are advanced or sacri?ced by both the timing of
and the decision to close an international bank.
The US Federal Reserve, for example, could have
exercised its in?uence to have BCCI shut down
immediately after learning of its illegal holding in
the USA, but it delayed in order to secure the res-
cue of First American.
26
Less powerful nations
and innocent depositors had no such choice; the
BCCI closure was presented to them as a fait
accompli.
27
BCCI had some 1.4 million depositors across
the world, the majority of whom were either resi-
dents of South Asia or Asian immigrants. The
governments of Bangladesh, India and Pakistan
were particularly anxious to rescue the bank since
BCCI served important ‘local’ functions in ?nan-
cing trade and providing capital to small busi-
nesses. In parts of the East, BCCI’s status as a
world class bank with third world origins was
viewed as a source of pride, and its attempt to
blend ‘‘capitalism and Islamic benevolence’’
(Friedland, 1991) was welcomed as an alternative
to the cultural insensitivity of the Western banking
establishment. In Pakistan, where BCCI was the
largest bank in the country with 72,000 depositors,
regulators rebu?ed a Bank of England o?cial sent
to discuss the BCCI closure, and attempted to
rescue the bank by selling it to Bank of Credit and
Commerce Emirates over the objections of British
liquidators
28
(Ali & Dalal, 1991).
The Western banking establishment’s decision
to close BCCI was criticized by Asian business
owners and depositors who saw the action as
overly hasty and cavalier in its disregard of non-
Western interests. Some perceived BCCI as ‘‘a
Third World enterprise that First World reg-
ulators capriciously penalized’’ (Frieldland, 1991,
p. 64), while others saw ‘‘racism’’ in the closure of
a bank that was ‘‘owned by Arabs, run by Pakis-
tanis and did much of its business with traders from
the Indian subcontinent’’ (Taylor, 1991, p. 59).
26
According to Congressional records, the Federal Reserve
did not act to close the bank globally, even after learning of the
scope and nature of BCCI’s frauds, because it needed ‘‘to
secure the cooperation of BCCI’s majority shareholders, the
government and royal family of Abu Dhabi, in providing some
$190 million to prop up First American Bank and prevent a
collapse’’ (US Senate, 1992b, p. 8).
27
Worldwide reaction to the UK-lead closure of BCCI was
mixed. BCCI o?cials voluntarily suspended branch banking
operations in several countries including, the Philippines,
Korea, Japan, and southern China. In Bangladesh, India, and
Hong Kong government regulators intervened to freeze BCCI
branch assets and close down operations. In still other cases,
governments allowed BCCI branch banks to continue opera-
tions as regulators searched for ways to rescue local branches.
BCCI continued operating in Australia and Macau under close
government supervision. BCCI’s 17 branches in the United
Arab Emirates also remained open, as did three branches in
Pakistan although Pakistani regulators were forced to cap
withdrawal to avoid a run on the bank (Taylor et al., 1991).
28
Although the sale did not take place, BCCI’s Pakistani
branches were eventually reorganized as Habib Exchange
Bank. In Bangladesh, BCCI was reorganized as Eastern Bank
(Kamaluddin, 1992).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 489
Many speculated that the crisis would have been
dealt with di?erently had BCCI been a Western
bank, or if it had been more closely integrated
with powerful economic interests in the world’s
?nancial capitals. As one Asian business executive
explained:
At Salomon Brothers, at Nomura, at Con-
tinental Bank and at Bank of New England,
heads rolled. But those institutions did not
have the plug pulled on them overnight . . .
The same should have been done at BCCI. I
have absolutely no sympathy for the men
who fudged the books or played with deposi-
tors’ money, but BCCI did very well in serving
the local community’’ (Friedland, 1991, p. 64).
5. Auditing ‘‘reforms’’ in the aftermath of bcci
The political limits of the state-accounting alli-
ance’s ability to regulate in the public interest is
also evident in the outcome of ‘‘reform’’ attempts
in the UK and USA following the BCCI scandal.
With characteristic secrecy, the Sandstorm report
was suppressed in the UK, and no inquiry into the
auditor’s role in the BCCI scandal has, as yet,
been made public. In previous banking crisis, the
UK state appointed inspectors to investigate
banking fraud/failure and the role played by
accounting and auditing ?rms in such matters
(Sikka & Willmott, 1995a). In the BCCI case,
however, the British government’s inquiry into the
BCCI closure, conducted under the chairmanship
of Lord Justice Bingham (Hansard 19 July 1991, c.
724) examined only the actions taken by UK
authorities (mainly the Bank of England). Lord
Justice Bingham’s terms of reference precluded
him from evaluating ‘‘the professional quality of
audits of BCCI’s accounts conducted over the
years in London or the Caymans or elsewhere, or
to form judgment whether irregularities in its
business should have been discovered by the audi-
tors earlier’’ (Bingham, 1992, p. iii). The task of
examining auditing aspects of the BCCI scandal
was delegated to a professional accountancy body,
the Institute of Chartered Accountants in England
and Wales (ICAEW), which had become a (self)
regulator of the auditing industry following the
implementation of the Companies Act of 1989
(now consolidated in to the Companies Act 1985).
The ICAEW delegated the task to the Joint Dis-
ciplinary Scheme (JDS)
29
(The Observer, 6 June
1993, p. 26). When an investigation appeared
imminent, Price Waterhouse objected on the
grounds that any action by the ICAEW could
prejudice the outcome of lawsuits against it, espe-
cially by the BCCI liquidators (The Accountant,
July 1993, p. 2). Following a series of court actions
and appeals, the auditors won a Court Order pro-
hibiting the JDS from continuing its probe until
the legal action brought by the BCCI liquidator
was concluded.
30
In 1998, a $117 million set-
tlement was reached with BCCI liquidators
(Deloitte & Touche), and a private investigation
is said to be in progress (The Guardian, 8 January
1999, p. 20).
The banking scandal generated some political
pressure in the UK for ‘‘reform’’ of the auditing
process despite resistance from the accounting
industry. In the course of the Bingham inquiry,
the issue of whether auditors should have a
‘‘duty’’ as opposed to a ‘‘right’’ to report to reg-
ulators was revisited (also see Mitchell, 1991). In
its evidence (written and oral), the ICAEW defen-
ded the status-quo and opposed
31
the need for
auditors to have a statutory ‘‘duty’’ to report
fraud and irregularities to the regulators. But,
29
The JDS was formed after the mid-1970s banking crisis,
by major accountancy bodies, to consider the role of major
?rms in high pro?le alleged audit failures. It is ?nanced and
controlled by the UK accountancy bodies. For some informa-
tion about its background see Sikka and Willmott, 1995b.
30
On 27 July 1993, a Divisional Court dismissed Price
Waterhouse’s application (See R v Institute of Chartered
Accountants in England and Wales & Ors, ex parte Brindle &
Ors (1993) 736 BCC). Price Waterhouse appealed against this
decision and the appeal was upheld on December 1993. On 28
April 1994, the JDS sought to take the case to the House of
Lords, the highest court in the UK, but permission to appeal to
the House of Lords was refused (The Accountant, June 1994, p.
5; Accountancy, June 1994, p. 14).
31
The ICAEW has a history of opposing reforms which,
arguably, could have bene?ted some stakeholders and given
greater transparency to corporate a?airs (Puxty, Sikka, &
Willmott, 1994).
490 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
Lord Justice Bingham rejected the ICAEW’s case
and recommended
32
that a statutory duty to
report fraud and irregularities to regulators be
imposed upon auditors. Subsequently, the gov-
ernment legislated (Hansard, 6 November 1992,
cols. 523–594) and a ‘‘duty’’ to report fraud and
irregularities (uncovered during the normal course
of an audit) was imposed on auditors of all ?nan-
cial sectors, including banks, insurance companies,
?nancial services and pension funds. (Hansard, 15
February 1994, cols. 852–875; Auditing Practices
Board, 1994; Sikka et al., 1998).
In the USA, auditing reform e?orts in the
aftermath of BCCI’s closure were, likewise,
opposed by the professional accounting lobbies
and notably unsuccessful. As noted previously, the
Senate Subcommittee recommendations for mak-
ing international audit ?rms answerable to USA
authorities went unheeded. The issue of auditors’
responsibility to report fraud was addressed in a
1991 legislative proposal that would have required
external auditors to report fraud to regulators and
given the Security and Exchange Commission (SEC)
power to direct auditors to investigate their clients
‘‘as necessary’’ to protect investors (International
Securities Regulation Report, August 12, 1991).
The proposal, which was modeled on the UK 1987
Banking Act that enabled the Bank of England to
commission Price Waterhouse to conduct the
Sandstorm investigation, was never enacted.
In addition to Kerry and Brown’s Sub-
committee, several other USA authorities under-
took investigations into the BCCI a?air, including
the Federal Reserve and House Banking Commit-
tee (See US House of Representatives, 1991a,
1991b). As a result of its investigation of BCCI
and other foreign banking operations, the Federal
Reserve proposed legislation that was subse-
quently enacted by the Foreign Bank Supervision
Enhancement Act of 1991. The new law increased
the Federal Reserve’s power
33
to oversee foreign
banks operating within the USA, but did not
address questions related to external auditors.
The issue of external auditor’s responsibility to
report fraud was deferred until passage of the Pri-
vate Securities Litigation Reform Act
34
of 1995.
The American Institute of Certi?ed Public
Accountants (AICPA) lobbied heavily for the 1995
Private Securities Litigation Reform Act which is
primarily concerned with limiting auditor liability.
In exchange for protection from liability, the audit
industry accepted a provision of the Act that
establishes a very weak mandate to report illegal
acts to regulators.
35
The AICPA chose to interpret
the scope of the law very narrowly, arguing that
new law merely ‘‘incorporates the auditor’s pre-
sent responsibility for the detection of material
fraud and direct-e?ect illegal acts and shortens the
time frame for reporting ?ndings to the SEC, if
such reporting is required’’(Guy, 1998).
The AICPA subsequently issued a new auditing
standard on fraud (Statement on Auditing Stan-
dard No. 82)
36
which reiterates the industry’s
long-standing position that auditors are not ordi-
narily responsible for reporting fraud to autho-
rities. Speci?cally,
The disclosure of possible fraud to parties
other than the client’s senior management
and its audit committee ordinarily is not part
of the auditor’s responsibility and ordinarily
32
In so doing, he supported the earlier recommendations of
the Parliamentary Select Committees (see UK House of Com-
mons, 1991, 1992a, 1992b, 1992c, 1992d, 1993).
33
Kapstein (1994) notes that this expansion of the Central
Banks authority was controversial, particularly in view of the
fact that it was the Federal Reserve who initially approved the
sale of First American to BCCI nominees over the objection of
state banking regulators.
34
This Act was vetoed by President Clinton. Subsequently,
the Senate overrode the veto (see Goldwasser, 1997 for some
details).
35
In very limited circumstances, the law requires the audi-
tors to notify the Board of Directors of illegal acts. If the Board
of Directors fails to inform the SEC within 1 day, the auditors
must inform the SEC. Legal scholars (see Sidorsky, 1996), note
that the so-called ‘‘whistle blower’’ provision of the legislation,
leaves the scope of the auditors’ responsibility ‘‘rather murky’’
since the requirement is limited to situations where illegal acts
have a material e?ect on the ?nancial reports and where (in the
auditor’s judgment) company Directors have failed to take
appropriate remedial action. Also, illegal acts are distinguished
from ?nancial fraud and taken to mean violations of regula-
tions (such as a?rmative action, health and safety regulations
and so forth).
36
SAS No. 82 (AICPA, p. 28) notes only that ‘‘duty to dis-
close outside the entity may exist to comply with certain legal
and requirements.’’ A footnote reference is made to the Private
Securities Litigation Reform Act of 1995, but the speci?c pro-
visions of the whistle blower clause are not explained.
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 491
would be precluded by the auditor’s ethical
and legal obligations of con?dentiality. . .
(AICPA, 1997, p. 27)
Given the limitations of the 1995 Act and the
auditing industry’s narrow interpretation of its
mandate, audit ?rms operating in the USA remain
under less obligation to report fraud to bank reg-
ulators than their UK counterparts. Moreover, the
AICPA’s con?dentiality requirements would pro-
hibit USA accountancy ?rms from preparing
investigative reports for bank regulators similar to
the Sandstorm report which exposed the fraud at
BCCI and led to its closure. These failures of sub-
stantive reforms in the aftermath of the BCCI
scandal are suggestive of a state regulatory appa-
ratus dominated by moneyed interests and profes-
sional lobbies, rather than one weakened by the
forces of globalization.
6. Summary and discussion
The BCCI case study shows that as capital
roams the world, nation states are obliged to pro-
vide regulatory and other frameworks to bring it
under political control not merely to protect the
interests of citizens, but also to facilitate and foster
the conditions in which private accumulation can
take root and ?ourish. Such processes operate at
the intersection of a state’s domestic and global
interests. Re?ecting the globalization of ?nance,
the major nation-states co-operated through a
College of Regulators to regulate BCCI. However,
the College itself remained fragmented and some-
what disorganized, not only because of the di?-
culties of negotiating international agreements,
but also because of the possible impact of its con-
siderations on domestic policies and national
capitals. For this reason, ‘‘each regulator tended
to focus on its own domestic concerns rather than
accepting full Collegiate responsibility’’ (United
Kingdom, House of Commons, 1992d, p. ix). The
fragmentation and the tensions in reconciling
domestic and international policies encourage the
regulatory processes to be primarily state-cen-
tered. In the case of the BCCI, its trading activities
had considerable impact on the UK, and conse-
quently, the UK was obliged to accept major
responsibility for regulating the BCCI empire.
The forced closure of BCCI illustrates the power
of the state, particularly strong Western states, to
regulate transnational enterprises when and if they
choose to do so. The Bank of England could have
closed BCCI at any time since its arrival in the
UK, especially as it lacked a lender of the last
resort and an e?ective regulator. Its closure could
also have been prompted by the involvement of
BCCI in money laundering activities. However, in
its keenness to encourage foreign investment in the
UK, the state permitted BCCI to trade. It seems
that only when BCCI’s activities posed a threat to
the legitimacy of UK banking and the reputation
of the City of London, that the UK decided to act
and close it down. The closure of BCCI was due to
the calculated political decisions made by the UK,
its allies on the College of Regulators, and USA
authorities. The Bank of England was the key
player in the decision to close BCCI. Non-Western
states (e.g. in Africa and the Indian sub-continent)
were simply expected to follow suit.
Each nation-state responded according to its
political norms. Following its traditions of greater
openness, the USA authorities undertook public
hearings and a detailed examination of the BCCI
closure. In contrast, in the UK, the scrutiny was
less open and fairly limited. The Bingham Report
was not the result of any ‘open’ hearings and the
submissions made to it remain private. Whilst the
UK and USA authorities co-operated (perhaps
grudgingly) in the decision to close BCCI, they
also remained sensitive to ‘local’ interests. The UK
authorities were reluctant to supply a fuller copy
of the ‘Sandstorm’ Report to the USA authorities,
possibly to shield the UK ?nancial services indus-
try from scrutiny. However, eventually the UK
yielded to pressure from the USA central bank
and a censored copy of the report was supplied to
the USA authorities. In contrast, the UK with its
tradition of ‘secrecy’ has failed to make the report
available to the UK public.
In some respects the BCCI story is a tale of
Western nations and the Western banking estab-
lishment advancing its interests over the less pow-
erful nations. Outside North America and Europe,
the Bank of England’s decision to close BCCI was
492 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
met with criticism on the grounds that the Western
banking authorities were too quick to close a
Third World bank, while other troubled banks
were given state aid and an opportunity to re-
capitalize and reorganize. Yet, the BCCI story
also reveals the political in?uence of class interests
within nations. For example, government support
of e?orts to reorganize, rather than close BCCI
branch banks, was extensive in Pakistan where the
Bank dominated the banking market and was well
linked with the political and economic establish-
ment. Whereas in (British) Hong Kong, where
BCCHK served primarily Indian and small Chi-
nese traders and was not well integrated into the
business establishment, the government did not
intervene e?ectively to save the bank. In line with
its policy of shielding the auditing industry from
critical scrutiny (Sikka & Willmott, 1995a, 1995b),
the UK government has failed to mount an inde-
pendent investigation of the BCCI audits. At best,
there will be an investigation by the Institute of
Chartered Accountants in England and Wales
(ICAEW) and/or other accountancy organizations
(e.g. the Joint Disciplinary Scheme) which are not
independent of the auditing industry.
A common sensical understanding of banking
regulation is that the regulatory mechanisms exist
to protect the interests of investors and depositors.
However, this does not necessarily appear to be
the case for BCCI where the primary shareholders
were the Royal House of Abu Dhabi and BCCI,
itself, through complicated nominee relationships.
It is di?cult to argue that the Bank of England
closed BCCI down to protect the interests of Abu
Dhabi, especially as it was considering a ‘private’
deal to inject more ?nance. Perhaps, indirectly the
Bank of England was interested in protecting
investors, i.e. one needs to protect the interna-
tional banking system as a prerequisite to
encouraging international capital ?ows. However,
it seems that the government’s concern to protect
depositors was secondary to the concern to safe-
guard the interests of the City of London as a
citadel of ?nance capital. The USA investigators
who argued that the auditors and the Bank of Eng-
land concealed suspected problems from depositors
and the public also reach such a conclusion. Their
silence may have given BCCI more time to
restructure itself, but is also possibly increased
losses for depositors who were not privy to the
secret negotiations. The ‘silence’ encouraged the
public to continue to trade with BCCI and, at the
time of this writing, innocent depositors have still
not been able to recover their savings in full and
are unlikely to do so (The Times, 29 September
1999, p. 29 and 33).
The BCCI case study draws attention to the
political role of audit ?rms and auditing technol-
ogies. The Basle Concordats implemented a sys-
tem of consolidated home country supervision
stipulating that branch banks operating outside
their home jurisdiction are supervised by their
home country. Since supervision is facilitated by
the availability of audited consolidated ?nancial
reports, audit ?rms and audit technologies are
deemed to play a quasi-regulatory role in the gov-
ernance of international banking. In the BCCI
case, the UK state relied upon external audits, not
as an objective indicator of the BCCI’s ?nancial
condition, but rather as a mechanism for main-
taining depositor con?dence in a ?nancially dis-
tressed bank. Recognizing that a negative audit
opinion has a potential to prompt a run on a
bank, it wanted to secure an unquali?ed audit
opinion to enhance depositor con?dence and pos-
sibly give the bank an opportunity to recapitalize/
reorganize. This political use of the bank audit
highlights the constitutive role accounting/audit-
ing plays in the economy, and the need to treat the
regulation of auditing ?rms and auditing technol-
ogies as social and political issues rather than as
purely technique oriented problems.
The UK state has shown greater willingness to
negotiate and defend the interests of ?nance capi-
tal than the interests of other stakeholders. For
example, it is notable that to promote con?dence
in the UK banking industry, the UK state only
imposed a ‘duty’ upon external auditors to report
fraud and irregularities to the regulators in the
aftermath of the BCCI closure. After earlier
banking failures (in the mid-1980s), it gave audi-
tors a ‘right’ to report fraud/irregularities to the
regulators (Sikka et al., 1998). After the BCCI
closure, the ‘right’ was turned into a ‘duty’. How-
ever, the ‘duty’ to report fraud/irregularities to the
regulators is primarily con?ned to the ?nancial
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 493
sector auditors only. Even after the BCCI episode,
the state did not require auditors to owe a ‘duty of
care’ to bank depositors, something which makes
it practically impossible for depositors to secure
?nancial redress from negligent bank auditors.
Bank depositors are encouraged to place reliance
on audit opinions, but have not been given any
rights to appoint, remove or interrogate bank
auditors. In the USA, in the aftermath of the
BCCI episode and Savings and Loan Crisis, the
state also imposed only extremely limited fraud
reporting obligations upon auditors, and these
have not been accompanied by any additional
rights for bank depositors.
Many aspects of the BCCI case raise concerns
about auditing practices that exist in either
domestic or international contexts. For example,
the concerns about auditor independence, parti-
cularly in cases where accountancy ?rms serve
simultaneously as external auditors and manage-
ment consultants, is common to both domestic
and international audits. Similarly, the problem of
prescribing auditor’s social responsibilities, their
duty to third parties (including stakeholders) who
rely on their reports, and their duty to report
fraud to regulators have long been issues of con-
cern to states seeking to regulate domestic audit-
ing practices. Globalization, however, adds several
new complexities.
With the aid of organizations such as the Inter-
national Auditing Practices Committee (IAPC)
and the International Accounting Standards
Committee (IASC), accountancy ?rms have
sought to cement their claims of being ‘global’.
They claim to have the technologies to enable
them to provide global surveillance of capital.
Such technologies also enable major ?rms to
reduce their training costs and hence increase
pro?ts. However, this has not been accompanied
by any scrutiny of their ‘global’ accountability and
‘global’ organizational structures. The BCCI case
shows that major auditing ?rms market them-
selves as international and ‘global’ ?rms, but such
claims are dissolved in the face of critical scrutiny.
For example, when challenged by subpoenas from
the USA regulators, Price Waterhouse argued that
it is a collection of disparate national ?rms rather
than a ‘global’ ?rm. To resist the US regulators,
the ?rms sought refuge in the UK’s bank secrecy
laws. The ?rm’s claims of being ‘global’ are fur-
ther diluted when it is noted that various Price
Waterhouse partnership o?ces did not have ade-
quate arrangements for sharing of sensitive infor-
mation between o?ces or with foreign regulators.
Price Waterhouse’s Hong Kong partners signed
BCCHK’s 1990 ?nancial statements (apparently)
without knowledge that Price Waterhouse (UK)
had completed a draft of the Sandstorm report doc-
umenting massive fraud within the BCCI group.
Similarly, Price Waterhouse (UK) did not inform
either Price Waterhouse (USA) or USA banking
authorities when it learned of BCCI’s illicit acquisi-
tion of USA holdings. The above dilutes the accoun-
tancy ?rms’ claims of being ‘global’ organizations.
The BCCI case shows that the structure of
international accounting/auditing ?rms is prob-
ably inappropriate to meet the demands of reg-
ulating integrated international ?nancial markets.
From this one cannot infer that nation states lack
the capacity to regulate international accounting
?rms. Governments have the power to regulate
international accounting ?rms either through
multinational agreements or unilateral state
actions. The lack of action on the US Senate Sub-
committee’s recommendations for reform of the
structures governing international audit ?rms is
indicative of political inaction, rather than any
limitations globalization imposes on the states’
ability to regulate capital. The political capacity of
the state to introduce the structural changes sug-
gested by Senators Kerry and Brown are ham-
pered by liberalist ideologies that make it di?cult
for the state to directly intervene in corporate
a?airs. Therefore, it is obliged to place reliance
upon auditors hired by corporations. This also
enables the state to appease the forces opposed to
increased public expenditure. Accountancy ?rms
are likely to oppose regulatory changes requiring
them to co-operate with international regulators
by citing increased costs and by appealing to
ideologies that oppose the state’s further intrusion
in private a?airs. Audit clients who do not wish
the regulators to become closely involved with
their a?airs may also amplify these objections.
The increased regulatory gaze also has a capacity
to suggest that accountants and their clients are
494 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
corrupt and that their a?airs need to be closely
watched. Given the state’s reliance upon the rev-
enues generated by capitalist enterprises for its
own survival, a combative engagement is unlikely.
At the global level, geopolitical realities dictate
that a multilateral agreement on audit regulation
would require the sponsorship of a hegemon(s),
such as the USA, Europe and Japan. The reluc-
tance of hegemons to underwrite multilateral
agreements that would make their ‘local’ audit
?rms answerable to political authorities in smaller
nations, is a matter of geopolitics, rather than
impersonal forces of technology or global mar-
kets. Even unilateral actions by nation-states face
political problems in both rich and poor countries.
As part of a social contract, the nation-states
could insist that in return for a monopoly of the
state guaranteed market of external audits,
domestic accountancy ?rms revise their interna-
tional partnership agreements and co-operate with
international regulators. They could also enact
legislation prohibiting banking regulators from
relying on reports by foreign auditors who refused
to submit to national laws. Less powerful nations,
however, may be reluctant to jeopardize the
in?ows of foreign capital by excluding foreign
banks whose auditors refused to recognize local
laws. Within economically powerful nations, such
unilateral actions would likely face domestic poli-
tical opposition by the accounting industry and by
home-based transnational banks. In the USA, for
example, USA-based multinational banks have
traditionally opposed any unilateral regulation of
foreign banks that might invite reciprocation by
other nations and lead to restrictions on USA
banking operations in other countries.
37
In the banking industry, the interested parties
include not only bank depositors, but also the
citizens who may ultimately be required to rescue
?nancially distressed banks with tax dollars and/
or bear the consequences of economic disruptions
caused by bank failures. Nonetheless, the audit
industry has traditionally de?ned its primary
responsibility as a duty to bank stockholders (i.e.
bank as a legal person and not to individual
stockholders), rather than to depositors, employ-
ees or other interested parties. This problem is
exacerbated in the international context, not only
because of the geographical wider scope of reli-
ance on auditors’ reports, but also because of jur-
isdictional boundaries. Although individual states
have imposed limited duties on domestic auditors
(such as the ‘duty’ imposed on UK auditors to
report fraud to UK banking authorities), such
duties are not uniform from state to state and do
not extend beyond national boundaries. In the
BCCI case, the British auditors had no enforce-
able obligations to depositors, banking autho-
rities, or polities outside the UK. Interestingly,
neither the US Senate Report nor the UK’s Bing-
ham Report raise any major questions about the
assumed objectivity of ?nancial statements, the
meaning of a ‘true and fair’ audit report, or the
wisdom of relying upon commercially motivated
private sector accountancy ?rms as quasi-reg-
ulators, or their obligations to the public at large.
The BCCI case raises important political ques-
tions about the responsiveness and accountability
of the auditing industry and the state-profession
alliance. As a result of deliberate political decisions,
the governance processes leading up to BCCI’s
closure, remain shrouded in secrecy. The minutes
of the College of Regulators’ meetings remain secret.
The Bank of England was the major regulator, but
it did not owe a ‘duty of care’ to any depositor.
38
British regulators sheltered behind the BCCI
external audits and encouraged the public to trade
with BCCI. Some might argue that such secrecy is
necessary to avoid premature banks runs and
might further argue that auditors’ responsibility is
discharged so long as banking regulators are noti?ed
of irregularities. Another interpretation attributes a
wider signi?cance to the lack of transparency in
the dealings between accountants and regulators.
37
For example, see Citicorp/Citibank’s comments submitted
to US House (1991a, pp. 134–139) hearings on foreign bank
regulation. Citicorp expressed concern that ‘‘US Government
legislation which would e?ectively forbid European banks form
operating through branches here in the US could well provoke
unwelcome restrictions of US banks’ branch systems in Europe
and elsewhere’’.
38
BCCI depositors claim that the Bank of England acted
recklessly in continuing to license BCCI, knowing that deposi-
tors money was at risk. They have sued the Bank of England
for misfeasance and are awaiting the outcome of a ‘‘potentially
groundbreaking case’’ (Financial Times, 17 January 2001, p. 2).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 495
Since the early 1980s, the UK state has been
actively restructuring the UK economy by shel-
tering behind accounting’s ‘‘aura’’ (Gallhofer &
Haslam, 1991) of objectivity, independence and
neutrality. The accounting-led restructuring of the
British economy is evident in processes relating to
privatization of state enterprises, regulation of
utilities and surveillance of the public sector (e.g.
health, education) and the reform of the taxation
system (e.g. self-assessment). During such times,
detailed questions about the expertise and inde-
pendence of BCCI auditors had a capacity to pro-
blematize the government reforms. In addition, the
UK has one of the largest number of quali?ed
accountants per capita in the world (Cousins,
Mitchell, Sikka, & Wilmott, 1998). A critical
scrutiny of the role of external auditors could dis-
rupt the ability of accountancy ?rms (a signi?cant
fraction of capital) to accumulate economic sur-
pluses. Despite these plausible explanations, there
is something profoundly disturbing (to democratic
sensibilities) in the premise that broader social
interests are served by silence, private deals,
secrecy and the benevolent deception by govern-
ments, central bankers and their auditors.
The regulatory processes have sought to legit-
imize the power and in?uence of capital by mini-
mizing the public gaze. Signi?cantly, the auditing
industry, which has been mobilized to secure trust
and con?dence for global mobility of ?nance,
remains largely beyond public scrutiny and con-
temporary democratic practices. Despite its highly
political role, the UK/USA auditing industry is
not regulated by an independent regulator repre-
senting a wide variety of stakeholders. It is pri-
marily self-regulated, with ‘private’ accountancy
bodies controlling licensing, monitoring and dis-
ciplining of the ?rms. External auditors are often
portrayed as public watchdogs, but their public
obligations remain fairly limited. They do not owe
a ‘duty of care’ to depositors, employees or indivi-
dual stockholders. They are not obliged to publish
any information about their a?airs.
39
Neither the
banking regulators nor the representatives of var-
ious stakeholders have any unhindered access of
auditor ?les. Despite the proliferation in the UK
of performance league tables for schools, uni-
versities, public sector organizations, government
departments and commercial organizations, nei-
ther the state nor the profession has devised any
mechanism for measuring the actual performance
and e?ectiveness of audit ?rms. The audit of
BCCI raises serious questions about the ability of
audit ?rms to combine the roles of independent
auditors, counselors of management and agents of
the state. Yet no attempt has been made to exam-
ine the issues, especially whether in pursuit of pri-
vate pro?ts, one set of capitalist enterprises (e.g.
major audit ?rms) have a capacity to secure public
accountability of another set (e.g. corporations).
The terms of an audit contract and auditor
assessment of internal control have a potential
role in alerting depositors, employees and indivi-
dual stockholders of the management-auditor
relationship, the e?ectiveness of auditors and pos-
sible risks to investment. Yet no attempt has been
made to require either banks or audit ?rms to
make their engagement letters, management letters
or working paper extracts available for public
scrutiny (Dunn & Sikka, 1999). Seemingly, the
public accountability of the auditing industry has
been organized o? the political agenda. One can-
not attribute this to the impersonal forces of glo-
bal markets or the weakening of nation states.
In return for a continued enjoyment of the state
guaranteed market of external audit, the state
could negotiate a new social contract with audit
?rms and require them to embrace broader
accountability. But this has not been done. The
state’s inaction, we contend, is not the result of its
waning authority and power in the face of globa-
lization. It is the outcome of deliberate political
choices made under the weight of liberalist ideol-
ogies, which disseminate the belief that regulation
should be light, or that state and state regulation is
obsolete, or that the discourse of public account-
ability is somehow only applicable to major busi-
nesses with limited liability, or that only secret
negotiations amongst the elites have the capacity
to secure con?dence in capitalism. Such choices are
shaping globalization by prioritizing the rhetoric
of higher pro?t and e?ciency and e?ectively dis-
39
With the implementation of the UK’s Limited Liability
Partnership (LLP) legislation, UK-based auditing ?rms con-
verting to LLPs will have to publish conventional ?nancial
statements about their a?airs.
496 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
enfranchise a vast number of people by denying
them an opportunity to shape the institutional
structures appropriate for the regulation of capital.
To conclude, the BCCI case study shows that
the major nation-states remain important players
in the regulation of global businesses. Nation
states have sought to regulate global businesses by
placing considerable reliance upon auditing tech-
nologies and ‘global’ audit ?rms. However, major
auditing ?rms lack ‘global’ organizational struc-
tures to make them responsive and accountable to
international regulators and democratic politics.
The nation-states seem to be advancing a parti-
cular kind of globalization, the one which prior-
itizes the interests of ?nance capital by pursuing
policies of secrecy and covert deals. Making the
regulatory processes more ’open’ generally could
arguably advance the interest of bank depositors
and citizens. Requiring auditors to embrace wider
social accountability and a ’duty of care’ to indi-
vidual audit stakeholders could also advance
them. However, despite banking/audit failures, such
as the BCCI, the state has shown little political will-
ingness to shape new regulatory structures.
Acknowledgements
We are grateful to the editor, two anonymous
reviewers of the journal and participants at the
Critical Perspectives on Accounting and Inter-
disciplinary Perspectives on Accounting Con-
ferences for their comments and suggestions.
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doc_337480563.pdf
Globalization of businesses raises major questions about the regulation of corporations, both in the national and
international context. The debate is marked by two competing views. The ‘hyperglobalists’ claim that in a globalized
world, nation-states cannot take effective actions to regulate multinational businesses, especially those relating to
banking and finance. In response, the ‘skeptics’ accept the view that to regulate corporations, the nation-state has
always had to restructure itself. However, they challenge the contention that globalization has reduced the power,
functions and authority of the state. The paper contributes to the debate through an examination of some of the processes
leading to the forced closure (and the aftermath) of the Bank of Credit and Commerce International (BCCI), a
bank that operated from 73 countries. It particularly focuses upon the role of the banking regulators and their reliance
upon auditing technologies to regulate major banks. The paper sides with the ‘skeptics’ and argues that the nation
states, especially major Western states, remain important players in the regulation of global businesses. It concludes
that the nation-state’s capacity to regulate global enterprises is compromised by history, domestic concerns and relationships
with class and capitalist interests rather than by globalization per se.
Globalization and the state–profession
relationship: the case the Bank of Credit
and Commerce International
Patricia J. Arnold
a
, Prem Sikka
b,
*
a
University of Wisconsin-Milwaukee, USA
b
University of Essex, Colchester, Essex CO4 3SQ, UK
Abstract
Globalization of businesses raises major questions about the regulation of corporations, both in the national and
international context. The debate is marked by two competing views. The ‘hyperglobalists’ claim that in a globalized
world, nation-states cannot take e?ective actions to regulate multinational businesses, especially those relating to
banking and ?nance. In response, the ‘skeptics’ accept the view that to regulate corporations, the nation-state has
always had to restructure itself. However, they challenge the contention that globalization has reduced the power,
functions and authority of the state. The paper contributes to the debate through an examination of some of the pro-
cesses leading to the forced closure (and the aftermath) of the Bank of Credit and Commerce International (BCCI), a
bank that operated from 73 countries. It particularly focuses upon the role of the banking regulators and their reliance
upon auditing technologies to regulate major banks. The paper sides with the ‘skeptics’ and argues that the nation
states, especially major Western states, remain important players in the regulation of global businesses. It concludes
that the nation-state’s capacity to regulate global enterprises is compromised by history, domestic concerns and rela-
tionships with class and capitalist interests rather than by globalization per se. #2001 Elsevier Science Ltd. All rights
reserved.
Globalization is associated with the growing
mobility of goods, services, commodities, infor-
mation, people and communications across
national frontiers. Its intensi?cation is most visible
in banking and ?nance where, with the aid of
information technology, global stock markets,
futures, debt, derivatives, and interest rate swaps
have accelerated the geographical mobility of capi-
tal, money and credit supply (Harvey, 1989; Lash
& Urry, 1994). Increasingly, globalization refers to
processes through which events and decisions, such
as those relating to bank closures, in one part of the
world can have signi?cant consequences for indi-
viduals and societies in distant parts of the world.
The globalization of businesses poses questions
about the social regulation, surveillance and
accountability of corporations, both in the national
and international context. The faceless world of
global trading involves massive uncertainties and
requires frameworks for creating and fostering
‘‘trust’’. One of the responses by Western govern-
ments has been to place considerable reliance
upon accounting technologies, for regulating
0361-3682/01/$ - see front matter # 2001 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 01) 00009- 5
Accounting, Organizations and Society 26 (2001) 475–499
www.elsevier.com/locate/aos
* Corresponding author.
E-mail addresses: [email protected] (Prem Sikka); arnold
@sba.uwm.edu (P.J. Arnold).
commercial and non-commercial enterprises
1
(Arnold, 1991; Auditing Practices Board, 1994;
Auditing Practices Committee, 1989, 1990; Power,
1993; Sikka, Puxty, Willmott, & Cooper, 1998;
Willmott, Puxty, Robson, Cooper, & Lowe, 1992;
Ze? & Moonitz, 1984). Whilst major accountancy
?rms have made considerable economic gains
2
by
encouraging regulators to believe that external
audits by ’world ?rms’ can facilitate the appro-
priate ‘trust’, surveillance and regulation of inter-
national enterprises (Hanlon, 1994), considerable
doubts have been expressed about the social desir-
ability of placing (excessive) reliance upon regula-
tion through ?nancial audits (e.g. Power, 1994).
However, little research has addressed the reliance
placed upon accounting/auditing technologies and
institutions to regulate transnational enterprises.
Any inquiry into the interaction between
accounting/auditing and business regulation within
a global context requires some consideration of
the question of how globalization a?ects the reg-
ulatory power of nation states. In this paper, we
do not seek to review the major theories of globali-
zation.
3
Instead, this paper is located at what
McGrew (1997) calls the two intellectual ‘‘fault-
lines’’ (p. 9), that is the debate between the hyper-
globalists and the ‘skeptics’. The hyperglobalists
(Ohmae, 1995; Zacher, 1992), argue that con-
temporary forms of globalization make a radical
break from the past. In a globalized world, the
traditional territorial borders have become so por-
ous that individual governments cannot take actions
to regulate businesses, especially those relating to
banking and ?nance. As a result the role, powers
and sovereignty of the nation-states has been fun-
damentally compromised. In contrast, the skeptics
(Hirst & Thompson, 1996; Kapstein, 1994; Tabb,
1997a, 1997b; Wood, 1997a, 1997b; Zevin, 1992)
accept the view that to manage a changing eco-
nomic environment, the state has always had to
restructure itself. However, they challenge the con-
tention that globalization has reduced the power,
functions or authority of the state. They argue
that states, particularly the most powerful indus-
trialized nations, continue to play a substantial
role in the governance of global economic a?airs.
Accounting research on international issues such
as harmonization, the International Accounting
Standards Committee (IASC), the accounting
practices of transnational corporations, transfer
pricing and international taxation, can potentially
contribute evidence to the debate on globalization.
In this paper we focus on international auditing
and side with the skeptics who argue that the state,
and by implication the state-accounting alliance,
remain important agents in the governance of the
global economy. As ?nance and banking are often
characterized as the most globalized of all busi-
nesses (Gilpin, 1987; Kapstein, 1994; Lash &
Urry, 1994), we examine some of the issues (and
tensions) relating to regulation of global busi-
nesses through auditing technologies by develop-
ing a case study of the closure of the Bank of
Credit and Commerce International (BCCI), a
third world bank operating on a global scale.
The paper is organized into three sections. The
?rst section develops the theoretical foundation by
considering the extent to which globalization has
weakened the ability of nation states to regulate
economic activity and govern transnational cor-
porations. The second section illustrates our
skepticism concerning ‘the end of the nation state’
thesis through evidence drawn from the BCCI case
study.
4
While the BCCI case reveals serious
weaknesses in the existing structures for governing
transnational banking, it also shows that regulatory
1
Re?ecting the hegemony of the West, similar technologies are
also expected to be adopted by developing countries even though
they have little or no direct in?uence on the process of accounting
change in the industrialized Western nations (Hopwood, 1989).
2
The world-wide income of the Big-?ve ?rms is more than
US $51 billion a year (Financial Times, 19 September 1997, p. 1),
large enough to dwarf the income of many countries.
3
For good reviews see Robertson and Khondker (1998) and
Waters (1995).
4
Our data is drawn from the Bingham report, US Congres-
sional hearings, contents of the Sandstorm report and various
fragments of working papers appended to the Congressional
hearings. The Sandstorm Report was secretly commissioned by
the Bank of England, prior to the closure of BCCI. The report
uses codenames to maintain secrecy. Sandstorm is the code
name used to identify BCCI. The report is not publicly avail-
able in the UK as Prime Minister Tony Blair considers is to be
a con?dential document (Mitchell et al., 2001). The Sandstorm
report is publically available in the US (See US Senate, 1992a,
pp. 95–142). Extracts from this report can be seen on http://
www.visar.csustan.edu/aaba/aaba.htm.
476 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
and auditing failures at BCCI have political and
economic underpinnings that can not be explained
by ‘‘globalization’’ per se, or its impact on the
powers of the state. The concluding section sum-
marizes our ?ndings about globalization and the
capacity of states and accountancy ?rms to reg-
ulate transnational ?nancial institutions. We argue
that though the closure of BCCI stands as an
example of the ability of Western economic pow-
ers to employ the aid of accountancy ?rms to dis-
cipline a third world bank, the political capacity of
the state-accountancy nexus to protect broader
social interests in international bank regulation
remains circumscribed by governance processes
that are shrouded in secrecy and beyond the reach
of democratic politics. The BCCI case suggests that
while the state-accounting alliance plays an impor-
tant role in the governance of global banking, it
promotes and fosters a global regulatory structure
that furthers the interests of capital, rather than
the welfare of depositors and citizens.
1. Globalization in perspective
The globalization of enterprises is best under-
stood within the context of capitalism. In search
of higher economic surpluses, lower costs and new
markets, capitalist enterprises are obliged to roam
the world. As Marx observed, capital is always in
‘‘need of a constantly expanding market for its
products, chases the bourgeoisie over the whole
surface of the globe. It must nestle everywhere,
settle everywhere, establish connections every-
where’’ (Marx, 1977, p. 224). History a?rms that
capitalism has always been a global a?air, and the
state
5
has consistently played a role in fostering
the conditions for capital accumulation in both
the domestic and international spheres. The domi-
nant contemporary discourse on globalization,
however, asserts that the globalization of business
is a radically new phenomenon driven by recent
advances in digital technologies. Globalization is
further said to be restructuring international poli-
tical economy and making the nation state, and
state-based regulation of business, increasingly
obsolete (Held, 1991). This view of globalization,
which we label the ‘‘hyperglobalist’’ perspective,
has become ubiquitous in the popular press
6
,
management literature and business education
curriculums, to the extent that it is fast becoming a
taken for granted, although largely unexamined,
truism.
By citing a huge growth in the volume of global
?nancial trade and the appearance of international
organizations and agreements, the hyperglobalists
attribute historical novelty to contemporary forms
of globalization and argue that the nation-states
are now powerless to regulate capital ?ows and
have been reduced to ‘‘little more than bit players’’
(Ohmae, 1995, p. 12). The hyperglobalists marshal
considerable statistical evidence to support their
claim. For example, Frieden (1991) notes that ‘‘in
April 1989, foreign exchange trading in the
world’s ?nancial centers averaged about $650 bil-
lion a day, equivalent to nearly $500 million a
minute and to forty times the amount of world
trade a day’’ (p. 428). Sassen (1996) observes that
since 1980, the total value of ?nancial assets has
increased two and a half times faster than aggre-
gate GDP of all rich industrial economies, and the
volume of trading in currencies, bonds and equi-
ties has increased ?ve times faster. Similarly,
between the period 1975 and 1990, international
bank lending grew from $40 billion to $300 billion
and the number of foreign banks operating in
London more than doubled to reach over 500 by
1990. Branch banks located outside home coun-
tries now account for the bulk of earnings for
many banks (Kapstein, 1994). Some $6 trillion has
escaped the national boundaries and is nested
in various o?shore havens (United Nations O?ce
for Drug Control and Crime Prevention, 1998)
thus, further calling into question the power of
sovereign nations to regulate ?nancial ?ows.
7
5
The state is, of course, an ensemble of complex and con-
tradictory institutional arrangements. For a discussion of some
of the theories, see Dunleavy and O’Leary, (1987).
6
The popularity of this view is indicated by the front cover
of Newsweek magazine (26 June 1995) which proclaims that
‘‘the state is withering and global business is taking charge’’.
7
Kapstein (1994, pp. 31–37) challenges the conventional
view that o?shore banking originated as a means to circumvent
national bank regulation and taxation. He argues, to the con-
trary, that nation states played an active role in encouraging
the development of Euromarkets in an e?ort to separate
domestic from foreign money markets.
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 477
Hyperglobalists argue that the scale of ?nancial
transactions is so large that states can no longer
e?ectively control the system. From the hyper-
globalist perspective, the unregulated growth and
expansion of BCCI, epitomizes the quintessential
ungovernable international bank, one that operated
‘‘over a large expanses of international space’’ mov-
ing between di?erent ‘‘regulatory spaces’’ in order
to evade the control of any one national regulatory
regime (Leyshon & Thrift, 1997, p. 61).
Globalization skeptics
8
contest the novelty, evi-
dence, arguments and policy prescriptions
advanced by the hyperglobalists on the grounds of
an unhealthy degree of abstraction from history
and geography. They argue that ‘genuine’ globali-
zation does not exist and that the present forms of
globalization are the outcome of intentional poli-
tics and policies pursued by the major nation-
states, rather than technology or market impera-
tives. Amongst the skeptics, Hirst and Thompson
(1996) challenge the core tenets of globalization;
by arguing that today’s ‘internationalized’ econ-
omy is not unprecedented, but rather is, in some
respects, ‘‘less open and integrated than the regime
that prevailed from 1870 to 1914’’. They further
contend that ‘‘genuine transnational corporations
(TNC)’’ are relatively rare, and that ‘‘capital
mobility is not producing a massive shift of
investment and employment from advanced to the
developing countries’’. For most TNCs foreign
investment and sales continues to be less impor-
tant than domestic
9
activity. Of the top 100 ?rms
in the world in 1993, only 18 kept the majority of
their assets outside their host nation (Wade, 1996).
Most of the assets and exports of the TNCs are
located in the First World developed countries,
and not in the developing world. For example, in
the early 1990s, the stock of US capital invested
abroad totaled 7% of GNP— slightly less than the
?gure for 1900 (Wade, 1996, p. 72). Based on data
showing that trade, investment, and ?nancial
?ows remain concentrated in Europe, Japan and
North America, Hirst and Thompson (1996) con-
clude that ‘‘these economic powers . . . have the
capacity, especially if they coordinate policy, to
exert powerful governance pressure over ?nancial
markets’’. In contrast to the somewhat pessimistic
outpourings of the ‘end of the nation-state school’,
Hirst and Thompson (1996) argue that global
economic activities are ‘‘by no means beyond reg-
ulation and control, even though the current scope
and objectives of economic governance are limited
by the divergent interests of the great powers and
the economic doctrines prevalent among their
elites’’ (pp. 2–3).
Even in the case of banking and ?nance, the
most global of all economic activities, the histor-
ical novelty and implications of globalization are
easily overstated. Polanyi’s (1944) classic study of
19th century economic liberalism shows that the
internationalization of ?nance is neither a new
phenomenon, nor one that is independent of
national capitals and the ruling elites of nation
states. Taking a long view of the history of inter-
national ?nance, Zevin (1992) similarly concludes
that today’s ?nancial markets show little sign of
greater ‘‘?nancial openness’’ than they did a cen-
tury ago. Although technology has increased the
scope and volume of global ?nancial transactions,
Zevin argues that economic integration is best
measured by the degree of price conversion since a
single price implies a single market. He shows that
the ?nancial markets of northwest Europe were
highly integrated in the pre-1914 period as evi-
denced by the convergence of interest rates across
national boundaries.
10
Current patterns of inter-
national lending and transnational securities trad-
ing, likewise, have historical precedents. At the
turn of the century, India, Italy, Japan, Russia
and Denmark had ratios of net foreign debt to
8
See Grieder (1997), Hirst and Thompson (1996), Kapstein
(1994), Tabb (1997a, 1997b), Wood (1995, 1997a, 1997b, 1998);
Zevin (1992). These globalization ‘‘skeptics’’ represent various
theoretical schools of thought including both institutionalist
and Marxist view points. Although their analyses of globaliza-
tion diverge on many points, they are united in their critique of
the ‘‘end of the state’’ thesis.
9
In 1993, the US based manufacturers sold 67% of their
output to the domestic market; whilst the German and Japa-
nese sold 75% and 67% of their output to their domestic mar-
kets (Wade, 1996).
10
DuBo? and Herman (1997) take issue with the metric
Zevin uses to measure ‘‘?nancial openness’’. They examine the
level of direct foreign investment, rather than interest rate con-
versions, and argue that the higher proportion of direct foreign
investment today ‘‘makes for greater economic integration’’
when compared to the earlier period.
478 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
GNP of 20–30%; percentages that are comparable
to the debt ratios of the largest debtor countries in
the 1990s (p. 47). Foreign stocks accounted for
59% of the stocks traded in the UK at the end of
the 19th century, while nearly a century later
(1987) only 20% of stocks traded in the UK were
foreign issues. Statistics on stock trading in France
show a similar proportional decrease in foreign
securities trades (p. 51).
Historically, the ‘‘degree of (?nancial market)
openness has oscillated in response to political
factors’’, rather than technological advances
(Schor, 1992, p. 7). The high degree of interna-
tional capital mobility that characterized the 18th
and 19th centuries gave way following the Great
Depression in the 1930s to a relatively unique
period of ‘‘non-integrated ?nancial markets’’ that
lasted until the beginning of the 1970s. The post-
war period of ‘‘non-integrated ?nancial markets’’,
and state-led Keynesian national economic poli-
cies were the product of political forces (Schor,
1992). Likewise, the recent return to an integrated
world ?nancial market can be attributed to poli-
tical forces, rather than technological imperatives
as the ‘end of the nation-state’’ school contends
(Ohmae, 1995). The neo-liberal restructuring of the
global ?nancial markets which has occurred since
1970 is the result of a deliberate, systematic, and we
would emphasize, state led e?ort to dismantle capi-
tal controls, to deregulate and liberalize national
economies, and to open ?nancial markets once
again to international capital investment (Hellei-
ner, 1994). The role of the state in this restructuring
is exempli?ed by the Thatcher government in the
UK, and by the US sponsorship of the structural
adjustment and liberalization programs carried
out by the International Monetary Fund (IMF).
Kapstien’s (1994) institutional history of interna-
tional banking from the collapse of the Bretton
Woods Agreement to the US/IMF management of
international debt crisis, likewise shows that ‘‘the
world economy does not operate somewhere o?-
shore, but instead functions within the political
framework provided by nation-states’’ (p. 184).
Hyperglobalists fail to see the hand of the state
in the governance of international economy, in
part, because they interpret the meaning of state
regulation narrowly as public interest regulation,
i.e. state controls on business imposed to protect
the public interest. They witness the demise of the
welfare state, privatization of state functions,
deregulation of industry and dismantling of public
protections, and conclude that the power of the
state to govern the economy has eroded in the
wake of globalization. This narrow view of reg-
ulation fails to see ways in which the capital has
and continues to rely upon the substantial power
and authority of the state to govern economic
a?airs. Capital needs and depends upon various
forms of state regulation (Kolko, 1963) to main-
tain the conditions of accumulation, to manage
crises, to rationalize market excesses, to liberalize
domestic economies, and smooth the way for
international capital investment at home and
abroad. As Wood (1997a, p. 12) notes:
We can debate about how much ‘‘globaliza-
tion’’ has actually taken place, about what has
and what hasn’t been truly internationalized.
But one thing is clear: in the global market,
capital needs the state . . . Behind every trans-
national corporation is a national base, which
depends on its local state to sustain its viability
and on other states to give it access to other
markets and other labor forces. In a way, the
whole point of ‘‘globalization’’ is that com-
petition is not just — or even mainly —
between individual ?rms but between whole
national economies. And as a consequence,
the nation-state has acquired new functions
as instruments of competition.
Wood (1997a, 1997b) goes so far as to argue that
under contemporary forms of globalization, the
state has become more, rather than less, important
to capital. Hutton (1999) echoes this view of the
state as an agent of globalization when observing
that ‘‘The City [of London] has not just been the
citadel of free ?nancial markets; it has been the
prime bene?ciary of the most determined indus-
trial policy sustained continuously by the British
state in any branch of economic activity. Law,
taxation, regulation and economic policy have
been bent to suit its needs. . . . The global markets
are powerful; but the terms on which they trade
are set by governments.’’ (p. 61 and 64).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 479
The skeptics have advanced a debate on globa-
lization that is by no means settled.
11
They have
been chastised for underestimating the power of
transnational corporations ‘‘to undermine demo-
cratic political institutions’’, and for failing to
acknowledge the ‘‘adverse e?ects of globalization
on politics’’ (DuBo? & Herman, 1997). Whilst
acknowledging the signi?cant power of transna-
tional corporations, our study of BCCI provides
evidence in support of the globalization skeptics’
contention that the power and authority of the
state has not been eroded by globalization. To the
contrary, the state continues to play a signi?cant
role in the governance of the global economic
a?airs and the regulation of international banking.
At the same time, the BCCI case shows how the
capacity of the state, and by implication the state
accounting alliance, to regulate transnational
capital in the public interest is limited, not by the
impersonal forces of globalization per se, but
rather by the dominance of private interests in the
governance process. With few exceptions, critics of
globalization agree that the states’ capacity to
regulate and control capital is limited by political
and economic constraints — by ruling neo-liberal
ideologies, the nature of the capitalist state
(DuBo? & Herman, 1997), and by the waning of
class-politics and socialist struggle for democratic
control over economic a?airs (Wood, 1997a,b).
Geopolitics also limits state authority such that
Western economic powers, like the USA, are far
more capable of shaping international regulatory
regimes to suit the interests of transnational cor-
porations based within their borders, than are newly
industrialized and third world nations.
12
Within
powerful nations, politics limits and shapes state
actions not only because of the disproportionate
in?uence exercised by corporate lobbies on
domestic and international economic policy, but
also because the nation-states increasingly com-
pete to secure inward investment and thus smooth
the path of capitalist development.
For globalization skeptics, like ourselves, the
critical question is not whether the state, or in our
case the state-accountancy nexus, has the capacity
to regulate transnational enterprise (which the
BCCI case shows they do), but whether the poli-
tical will exists to create and enforce regulatory
regimes that serve the needs of a democratic society,
rather than the needs of capital. Accordingly, our
study of BCCI looks beyond the story of when
and how the Bank of England and Price Water-
house closed BCCI to consider the objectives and
interests served by the state-accounting alliance
which governs international banking. The case
reveals the political underpinnings of auditing prac-
tice, and the limits they impose on the ability of state
regulators and their auditors to advance society’s
interests in the regulation of international banking.
2. The Bank of Credit and Commerce International
2.1. BCCI’s expansion: ungoverned or ingovernable?
At ?rst glance, BCCI might well be considered
as the quintessential borderless bank, spanning the
globe and organized to evade state regulation
(Financial Times, 1991; Leyshon & Thrift, 1997).
BCCI’s growth as a world bank was indeed phe-
nomenal. From its origins as a small family owned
bank in pre-independence India and later Paki-
stan, BCCI’s founder, Agha Hasan Abedi, built an
international banking empire which he envisioned
as a Third World bank capable of competing with
Western banks. With ostensible backing from the
Royal House of Abu Dhabi and other Middle
Eastern investors,
13
BCCI was launched in 1972
with o?ces in London, Luxembourg, Lebanon,
Dubai, Sharjah and Abu Dhabi (Bingham, 1992,
Chapter 2). By 1977, BCCI was the world’s fastest
11
For an overview of the debate on globalization see the
series of exchanges between Ellen Meiksins Wood, Richard
DuBo?, Edward Herman, William Tabb, Francis Fox Priven,
Richard Cloward, and Harry Magdo? in the Monthly Review
(November, 1997 and January 1998 editions).
12
Given the nature of the globalization debate, inevitably
there are counter arguments. For example, Giddens (1990)
claims that globalization is not Western and that it heralds
‘‘(t)he declining grip of the West over the rest of the world’’
(p. 52). In contrast, Wade (1996) argues that globalization
involves the worldwide installation of Western rationality,
ethics, theories, and world views.
13
Although BCCI was built on the ?ction that it was capita-
lized by oil-rich Middle Eastern investors, most of them were
acting as nominees providing their names and/or funds in the
form of deposits, rather than investors (US Senate, 1992b, p. 51).
480 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
growing bank, operating from 146 branches in 43
countries. By the mid-1980s, it was operating from
73 countries with balance sheet assets of around
$22 billion.
The bank was intentionally organized as an
‘‘elaborate corporate spiderweb’’ (US Senate,
1992b, p. 1), of holding companies, transnational
a?liates, banks within banks, and nominee rela-
tionships in order to evade government regulation
and control. To this end, BCCI incorporated in
Luxembourg, a place known in ?nancial circles as
a ‘‘loosely-regulated banking centre’’ (Financial
Times, 1991, p. 10) where banking laws provided a
haven for secrecy and con?dentiality (US Senate,
1992b, p. 28). Subsequently, a holding company
was created that split the bank into two parts —
BCCI SA incorporated in Luxembourg, and BCCI
Overseas headquartered o?shore in the Grand
Cayman Islands. This organizational split was
further complicated by the creation of a series of
entities used as ‘‘parallel banks’’ to circumvent
local regulation and facilitate ?nancial manipula-
tion (US Senate, 1992b, p. 38).
Designed to evade regulation, BCCI’s fractured
banking structure provided a mechanism for
facilitating illegal activities by both bank o?cials
and BCCI clients. Investigations following BCCI’s
closure in 1991 (US Senate, 1992b, p. 1) exposed a
host of criminal activities including money laun-
dering in several continents, bribery of govern-
ment o?cials, arms tra?cking, the sale of nuclear
technologies, support of terrorism, tax evasion
and smuggling operations, as well as massive
?nancial fraud. Investigators (US Senate, 1992b,
p. 53) found that BCCI had manipulated
accounts, concealed losses and non-performing
loans, created ?ctitious pro?ts and bogus loans,
misappropriated deposits and failed to record
deposit liabilities. Many of the non-performing
loans were linked to nominee relationships
through which BCCI had illegally acquired bank-
ing operations in the USA and purchased its own
shares to create a ?ctitious capitalization.
Although BCCI’s unchecked growth and ability
to circumvent national laws demonstrates a weak-
nesses in the existing governance structure of
international banking, it would be wrong to con-
clude that global ?nance is intrinsically ungovern-
able. Instead, BCCI’s unregulated growth is best
understood as an exception to the rule (Kapstein,
1994, pp. 155–156). International agreements gov-
erning global banking, inscribed in the Basle
Concordats, establish the principle of consolidated
home country supervision as the framework for
transnational banking supervision. Under this
principle, branch banks operating worldwide are
supervised by regulators in the home country
where the parent resides. Although not explicitly
stated in international agreements, the home
country is expected to act as lender of last resorts
for the worldwide operations of its domestic banks
(Kapstein, 1994). BCCI was exceptional in that it
had no lender of last resort — no national gov-
ernment willing to assume supervisory responsi-
bility and bear the risk of the bank’s failure.
BCCI SA moved its head o?ces to London in
1976 although it remained incorporated in Lux-
embourg. Luxembourg regulators, however,
maintained that ‘‘it was impossible to supervise
(BCCI) e?ectively from Luxembourg’’ (Bingham,
1992, pp. 32–33). Although the Bank of England
resisted pressure to take on a sole supervisory role,
it agreed to license BCCI as a deposit taking
institution (although not a full bank). In 1987,
concerned by BCCI’s extensive treasury losses,
whispers of irregularities, and the inability to ?nd
a single regulator willing to act as lender of last
resort the Basle Committee established a ‘‘College
of Regulators’’
14
lead by the UK and Luxembourg
14
The formation of the international College of Regulators
was permitted by the Basle Concordat, primarily for regulating
banks which might otherwise escape e?ective regulation. Under
the principles established by the Basle Committee, of which the
UK and Luxembourg were members, the Institut Monetaire
Luxembourgeois (IML) was established to regulate BCCI. It
operated with the support and co-operation of the Bank of
England. In 1987, the College of Regulators was formed and had
its ?rst meeting in June 1988. By then the College included not
only the UK and Luxembourg, but also Spain and Switzerland
(BCCI had minor operation in these countries). In July 1989, the
United Arab Emirates (UAE) declined but Hong Kong (then a
British colony) and the Cayman Islands became members. The
College’s meeting in April 1991 was also attended by supervisory
bodies from the UAE and France. Its meeting on 2nd July 1991
was also attended by US observers. India, Pakistan, Bangladesh
and countries from Africa, where BCCI had much larger opera-
tions, were neither part of the College nor invited to attend any
of its meetings (Bingham, 1992).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 481
to scrutinize BCCI operations (Bingham, 1992,
pp. 52–53). Members of the College proved less
than e?ective as they were preoccupied with
respective national interests (Bingham, 1992).
15
But, BCCI ultimately could not evade the reg-
ulatory rule of Western governments. Despite an
organizational structure designed intentionally to
allow BCCI to operate outside national laws, the
College of Regulators, led by the Bank of Eng-
land, formally closed down BCCI’s worldwide
operations on 5 July 1991. Kapstein (1994), thus,
interprets BCCI as ‘‘the exception that proves the
rule’’ that ‘‘state power prevails over transnational
forces, when and if, it is applied’’ (pp. 155–156).
While the bank’s closure illustrates the enduring
power of nation states, BCCI’s unregulated
growth highlights the political antecedents under-
pinning decisions as to how state power is exer-
cised. Given the absence of a lender of last resort,
any nation could have denied BCCI permission to
bank within its borders. BCCI regularly used
bribes and kickbacks to government o?cials to
gain entry into several countries (US Senate,
1992b, Chapter 5). Due to the absence of a lender
of last resort, US regulators blocked BCCI’s
attempts to acquire bank holdings in the US, but
the bank eventually used political connections to
evade regulators and illegally acquire several US
banks through nominee relationships (US Senate,
1992b, Chapter 6). On technical grounds, the
Bank of England could have likewise prevented
BCCI from operating in the UK, but instead it
licensed the bank and allowed it to headquarter in
London in keeping with the then government pol-
icy of encouraging foreign investment in the City.
Several theories have been put forth to explain
the BCCI’s unregulated growth ranging from
speculation that the Bank of England was reluc-
tant to close BCCI because of possible diplomatic
repercussions in the Middle East, to allegations
that BCCI was untouched because of its ties to
ongoing intelligence operations
16
(Kapstein, 1994,
p. 158–159). Alternatively, the bank’s operations
may have been sanctioned by Western states
because of the more straightforward desire to
recycle petro-dollars back in to the Western
banking establishment. Although the particulars
of the motivations remain obscure, BCCI’s
ungoverned growth can not be attributed to the
declining authority of the state, or its inability to
regulate international enterprises. To the contrary,
state sanction and cooperation was essential to
BCCI’s global expansion. BCCI’s unregulated
growth was made possible because national reg-
ulators condoned and facilitated the banks expan-
sion for political ends, not because international
banking is intrinsically ungovernable.
2.2. Regulating BCCI through external auditors
Based upon local history, the role of external
auditors in bank regulation varies from country to
country. In the US responsibility for bank audit-
ing is divided between external and government
auditors with considerable confusion and over-
lapping responsibilities, and with neither accepting
responsibility for detecting fraud.
17
By contrast,
the UK does not employ a force of government
bank auditors, but instead relies extensively on the
opinions of external auditors. To facilitate home
country supervision, the Basle Accords establish
minimal capital adequacy standards and require
international banks to prepare consolidated
?nancial reports covering their worldwide opera-
tions (Kapstein, 1994). To supervise transnational
banks domiciled within their borders, regulators in
most counties, including the Bank of England, rely
15
The College, for example, took no action in 1988 when it
leaned that 72 major banks had suspended credit lines threa-
tening the banks liquidity in the wake of a money laundering
scandal following BCCI’s indictment by US authorities on
charges of fraud, money laundering and falsifying bank records
(US Senate, 1992b, p. 61).
16
By the early 1980s, the US Central Intelligence Agency
was making intensive use of BCCI’s facilities for covert opera-
tions to support Afghan guerrillas in their war against the
Soviet Union (US Senate, 1992b). BCCI was also used to
?nance illegal US arms sales to Iran in what became known as
the Iran Contra a?air (US Senate, 1992a, pp. 356–357).
17
The AICPA (1997, p. 5) Statement on Auditing Standards
(SAS) No. 82 requires only that auditors conduct a risk assess-
ment and ‘‘plan and perform the audit to obtain reasonable
assurance about whether the ?nancial statements are free of
material misstatement, whether caused by error or fraud.’’
There is no responsibility to detect fraud unless it results in a
material misstatement of the ?nancial results (Mancino, 1997).
482 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
upon international accountancy ?rms to audit
these consolidated statements. Private sector
external auditors, thus play crucial quasi-reg-
ulatory role in governing the international bank-
ing system.
18
In compliance with Western banking practices,
BCCI had to submit to external ?nancial audits.
Regulators placed considerable reliance upon
BCCI’s audited ?nancial statements even though
they had no explicit say in auditor appointment
and the auditors did not owe them a ‘‘duty of
care’’.
19
Re?ecting the bank’s organizational split
between Luxembourg and Grand Cayman, BCCI
named two auditors to cover its international
operations: Ernst and Whinney (now part of Ernst
and Young) audited the Luxembourg operation
and the holding company, while Price Waterhouse
(now part of PriceWaterhouseCoopers) audited
the Grand Cayman operations. Although the
appointment of two auditors limited the scope of
each auditors authority and facilitated BCCI’s
?nancial manipulation, neither audit ?rm objected
to this arrangement for over a decade (US Senate,
1992b, p. 259). It was not until the mid-1980s in
the wake of concerns about signi?cant trading
losses within BCCI’s Treasury, that Ernst and
Whinney questioned the split audit and insisted
upon a single auditor. BCCI subsequently
appointed Price Waterhouse
20
as sole auditor of
BCCI’s worldwide group in May 1987 (US Senate,
1992b, p. 266).
Bank regulators relied extensively on the work
of these accountancy ?rms. For example, by the
late 1970s, UK banking circles were concerned
that BCCI’s drive for growth neglected prudential
matters such as solvency ratios and bad debt pro-
visions. Its UK branches were also thought to be
trading at a loss, excessively lending, and doing
too little business with other banks. Nonetheless,
in 1979, the UK government justi?ed its decision
to license BCCI SA as a deposit-taking institution
by the fact that the ‘‘auditors were not qualifying
the reports’’ (Hansard, 6 November 1992, co.
527). In 1970, the Bank of England persuaded
BCCI SA to commission an investigation of its
loan book and the auditors, Ernst and Whinney,
produced a reassuring report in March 1981
(Bingham, 1992, p. 39). By the mid-1980s, in view
of BCCI’s huge treasury losses, the Luxembourg
regulators asked BCCI to conduct a Review of the
Treasury operations. Price Waterhouse undertook
the review and uncovered irregularities, but mis-
takenly attributed deliberate manipulations
21
to
‘‘incompetence, errors made by unsophisticated
amateurs venturing into a highly technical and
sophisticated market’’ (Bingham, 1922, p. 44).
The Treasury episode demonstrates the con?ict
between the accountancy ?rms’ commercial inter-
ests and their quasi-regulatory role in bank super-
vision. In pursuit of private interests, auditing
?rms increasingly sell non-auditing services to
their audit clients and serve their clients as coun-
selors and advisors, at the same time as the state
looks to them to perform the more adversarial
functions of independent auditors. Following the
review of Treasury operations, BCCI hired the
Consultancy division of Price Waterhouse to assist
in improving internal control weaknesses which
the auditor’s had identi?ed. The consultants (Price
Waterhouse) completed their work in 1986, and
the auditors (also Price Waterhouse) reported that
18
The auditors’ role as quasi-regulator was enhanced by the
UK’s Banking Act of 1987. The Act required regular meetings
between bank management, auditors and the Bank of England
to discuss matters of mutual interest. The auditors’ traditional
duty of con?dentiality to client companies was relaxed to allow
them to report matters to regulators provided they acted in
‘‘good faith’’. Auditors’ were required to prepare reports on
banks’ internal controls, and they were given a ‘‘right’’ (as
opposed to a ‘‘duty’’) to report their suspicions to regulators,
even without client knowledge (Auditing Practices Committee,
1989, 1990).
19
Following the House of Lords judgment in Caparo Indus-
tries plc v Dickman & Others [1990] 1 All ER HL 568, UK
auditors do not owe a ‘duty of care’ to any individual, present/
potential shareholder, creditor, employee, bank depositor or
any other stakeholder. They only owe a ‘duty of care’ to the
company — as a legal person.
20
Price Waterhouse was aware of Ernst and Whinney’s
concerns when they accepted the group audit. In 1988, its ?rst
full year as group auditor, the ?rm received audit fees of $4.7
million (US Senate, 1992b).
21
Later the auditors stated that ‘‘We had formed the con-
clusion that the accounting methods adopted were due to
incompetence. However, with the bene?t of hindsight it appears
more sinister in that it now seems to have been a deliberate way
to ?ctitiously in?ate income.’’ (US Senate, 1992a, p. 114;
Sandstorm Report, 1991, p. 17).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 483
they were satis?ed that their recommendations
had been implemented (US Senate, 1992a, p. 175).
In conjunction with the review of the Treasury
operations, the auditors also discovered a poten-
tial tax liability to the UK government and
advised BCCI to move its Treasury operations out
of the UK to avoid payment: Price Waterhouse
workpapers obtained by US Senate investigators
state:
A further feature arising from the review of
Treasury operations in 1985 was the potential
liability to UK Corporation Tax arising from
the Division’s activities in the period 1982 to
1985. Following advice from ourselves and
from the Tax Counsel during 1986 it was
determined that this liability could be sig-
ni?cantly reduced if the Bank ceased trading
in the United Kingdom and claimed a term-
inal loss (US Senate, 1992a, p. 175).
Following this advice, BCCI’s Treasury was
moved from London to Abu Dhabi in 1986 with
Price Waterhouse assisting with the transfer (US
Senate, 1992a, p. 175). The auditors were, thus in
the dual position of acting as private consultants
and tax advisors to BCCI management to further
their ‘private’ interests, while the State was relying
upon them to perform ‘public interest’ functions
by acting as an external monitor and independent
quasi-regulator.
Throughout the 1980s, BCCI auditors con-
tinued to issue unquali?ed reports on the Bank’s
?nancial statements. In 1987, the Bank of England
received reports of fraudulent activity by BCCI
(Bingham, 1992, p. 56), but no decisive action was
taken, in part, because the auditors did not sus-
pect BCCI management of fraud (Bingham, 1992,
p. 57). In May 1988, Price Waterhouse prepared a
substantial report for the College of Regulators.
The report drew attention to the heavy con-
centration of BCCI loans to certain customers,
several of whom were shareholders. The report
also included information concerning BCCI
nominee companies and possible illicit investments
in the United States. The information provided to
regulators, however, was minimal because audi-
tors ‘‘faced the dilemma of seeking to reconcile
their duty to make appropriate disclosure to the
(bank) supervisors with the need to retain the
con?dence of their clients’’ (Bingham, 1992, p. 59).
In a dramatic turn of events, in early 1990, Price
Waterhouse secretly noti?ed the Bank of England
of suspected fraud within BCCI (US Senate,
1992b, pp. 271–273). This was possible under the
Banking Act 1987 which at the time gave auditors
a ‘‘right’’, but not a ‘‘duty’’, to report fraud to
authorities. Various interpretations have been
o?ered to explain the change of course taken by
the auditors who had previously attested to the
integrity of their clients ?nancial records. One
interpretation attributes the auditor’s shift to new
information provided by a senior o?cial of BCCI
who contacted Price Waterhouse in late 1989 and
informed them of various frauds and manipula-
tions, thus, causing the auditors to seek higher
levels of assurance. Another attributes the audi-
tor’s change to the fact that BCCI’s ?nancial pro-
blems had become so severe that the auditors
feared that they might be held liable if they did not
report to the authorities (US Senate, 1992b, pp.
271–271).
However, despite suspicions of fraud, Price
Waterhouse nonetheless issued an unquali?ed
audit report on BCCI’s 1989 ?nancial statements
in May 1990. During the remainder of 1990 and
early 1991, the Bank of England and the govern-
ment of Abu Dhabi worked quietly on plans to
save the bank by recapitalizing and restructuring
it, and Price Waterhouse continued to uncover
evidence of fraud. The plan to rescue BCCI never
materialized.
22
On March 4 1991, the Bank of
England directed Price Waterhouse to prepare a
con?dential report on irregularities at BCCI. The
report was commissioned under Section 41 of the
UK Banking Act of 1987 which allows regulators
to direct external auditors to conduct such probes
in situations where bank depositors might be at
22
Various explanations have been given for the failure of the
plan to recapitalize BCCI. One view credits the decision to
close the bank to the discovery of hidden ?les providing further
evidence of the extent of BCCI’s fraud (US Senate, 1992b, p.
278). Another view attributes the closure to continuing investi-
gations in the US and the threat that an imminent US indict-
ment posed to plans to salvage the bank (US Senate, 1992b,
Chapter 9).
484 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
risk. A draft of the Section 41 report, code named
the Sandstorm Report, was delivered to the Bank
of England on 22 June 1991. It documented
detailed evidence of massive frauds by BCCI o?-
cials over several years. Two weeks later, the Col-
lege of Regulators closed BCCI (US Senate,
1992b, p. 279).
Price Waterhouse’s investigative work and their
action in notifying UK authorities of suspected
fraud was undoubtedly instrumental in BCCI’s
closure. Nonetheless, other aspects of the external
auditors’ role in regulating BCCI were sharply
criticized in subsequent investigations within the
USA. The US Senate Subcommittee
23
on Terror-
ism, Narcotics and International Operation
undertook an investigation of the BCCI a?air that
devoted considerable attention to what it deemed
the ‘‘failure’’ of the audit process which regulators
had relied upon for years to provide an indication
of BCCI’s ?nancial integrity. Based on extensive
hearings and a review of records and documents
including Price Waterhouse audit reports, (parts
of ) working papers, and the Sandstorm report,
the Subcommittee concluded that the ‘‘BCCI’s
accountants failed to protect BCCI’s innocent
depositors and creditors from the consequences of
poor practices at the bank of which the auditors
were aware for years’’ (US Senate 1992b, p. 4).
The following sections review three criticisms
levied against the auditors by USA investigators.
While the Subcommittee’s critique illustrates ser-
ious de?ciencies in the present system of governing
international banking via external auditors, we
argue that these failures can not be attributed to
globalization per se or globalization’s e?ect on the
capacity of the state-accounting nexus to govern
transnational enterprises, but rather to the poli-
tical failures in the regulatory system.
2.3. Auditing failure
The Senate Subcommittee’s conclusion that
BCCI’s auditors failed to protect innocent deposi-
tors and creditors was formed on the basis of the
following ?ndings (US Senate, 1992b, pp. 4–5;
Chapter 10). First, for more than a decade, the
auditors failed to object to BCCI’s practice of divid-
ing responsibility for monitoring the Luxembourg
and Grand Cayman operations between two audit
?rms, thereby enabling BCCI to conceal fraud
during its early years. Second, the auditors compro-
mised their independence by accepting loans and
?nancial bene?ts from BCCI. The Subcommittee
found evidence of loans to two Price Waterhouse
partners in the Caribbean and raised questions
concerning the acceptance of payments and other
bene?ts by Price Waterhouse partners in the Grand
Caymans. Third, the investigators found that
despite BCCI’s complicated subterfuge, there were
numerous ‘‘warning bells’’ indicating irregularities
from the early years, and the auditors ‘‘could and
should have done more to respond to them’’ (p. 4;
p. 259). They concluded that by the end of 1987,
Price Waterhouse (UK) already had su?cient
knowledge of inadequacies in BCCI records to
qualify the audit, and that the auditor’s subsequent
certi?cation of BCCI’s ?nancial statements mis-
lead depositors and regulators (p. 4; p. 259).
These ?ndings do not portray an audit stymied
by the technical di?culties of monitoring a global
enterprise or frustrated by international jurisdic-
tional boundaries or bank secrecy laws. To the
contrary, the Subcommittee found that the audi-
tors were aware of ‘‘red ?ags’’ and internal control
weakness from the early years, and that from 1987
forward they had ‘‘ample reason to recognize that
there could be no adequate basis for certifying
that it had examined BCCI’s books and records
and that its picture of those records were indeed a
‘true and fair view’ of BCCI’s ?nancial state of
a?airs’’ (pp. 4–5; p. 259). These audit failures can,
however, be linked to the contradictions within a
regulatory system that relies on private accounting
?rms as quasi-public regulators. Bank regulators’
reliance on external auditors is premised on the
belief that the auditors are public spirited and will
act on behalf of either the public or the state, and
that auditors are independent of management.
Such propositions are problematic because audit-
ing ?rms themselves are signi?cant capitalist
enterprises driven by pro?t motives to pursue their
private economic interests, rather than public
policy objectives. As Hanlon (1994) notes, within
auditing ?rms ‘‘the emphasis is very ?rmly on
23
A Subcommittee of the Committee on Foreign Relations.
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 485
being commercial and on performing a service for
the customer rather than on being public spirited
on behalf of either the public or the state’’ (p. 150).
If the auditors delayed too long before acting upon
their knowledge of irregularities at BCCI, respon-
sibility must rest, in part, on the political failings
of a regulatory system which depends upon exter-
nal auditors who are appointed and compensated
by the banks they audit, who increasingly depend
on consulting fees earned by advising the man-
agement they audit, and who owe no duty of care
to the regulators or depositors who rely on them.
3. The fallacy of ‘‘world’’ audit ?rms
International jurisdictional boundaries and
bank secrecy laws also played a role in the BCCI
case. Despite its reputation as an ‘‘international’’
?rm, Price Waterhouse proved unwilling to coop-
erate with regulators or investigators outside the
national jurisdiction of local partnerships. USA
investigators criticized Price Waterhouse (UK) for
failing to notify either USA banking authorities or
Price Waterhouse (USA) of BCCI’s illegal US
acquisitions. They found that prior to 1990, Price
Waterhouse (UK) was aware of ‘‘gross irregula-
rities in BCCI’s handling of loans to Credit and
Commerce American Holdings (CCAH), the
holding company of First American Bankshares,
and was told of violations of US banking laws by
BCCI and its borrowers in connection with
CCAH/First American, and failed to advise the
partners of its US a?liate or any US regulator’’
(US Senate, 1992b, p. 5; p. 259). Eventually, the
Federal Reserve heard rumors of a report pre-
pared by BCCI’s auditors that indicated the bank
had outstanding loans to shareholders of CCAH
which were secured by shares in CCAH. Although
Price Waterhouse (UK) initially refused to give
USA authorities access to the report, the Federal
Reserve pressed its demand and was allowed to
review Price Waterhouse’s report in BCCI’s Lon-
don o?ce in late 1990 (US House of Representa-
tives, 1991b; US Senate, 1992b, p.349). Based on
evidence contained in the auditor’s report, the
Federal Reserve initiated a formal investigation
into BCCI’s USA acquisitions.
An investigation of BCCI by New York state
banking authorities was also frustrated by the
auditors’ lack of cross-jurisdictional cooperation.
The New York District Attorney testi?ed to Con-
gress about the extraordinary di?culty his o?ce
had in obtaining information, stating that:
The main audit of BCCI was done by Price
Waterhouse UK They are not permitted,
under English law, to disclose, at least they
say that, to disclose the results of that audit,
without authorization from the Bank of Eng-
land. The Bank of England, so far — and
we’ve met with them here and over there —
have not given that permission.
The audit of BCCI, ?nancial statement, pro?t
and loss balance sheet that was ?led in the State of
New York was certi?ed by Price Waterhouse
Luxembourg. When we asked Price Waterhouse
US for the records to support that, they said, oh,
we don’t have those, that’s Price Waterhouse UK.
We said, can you get them for us? They said, oh,
no that’s a separate entity owned by Price Water-
house Worldwide, based in Bermuda’’. (US Senate
1992b, p. 245).
BCCI’s auditors also refused to cooperate in the
US Senate Subcommittee’s investigation of the
bank (p. 256).
24
Although the BCCI audit was
secured by arguing that Price Waterhouse was a
globally integrated ?rm (US Senate, 1992b, p.
258), in the face of a critical inquiry, the claims of
global integration dissolved. Price Waterhouse
(USA) denied any knowledge of, or responsibility
for the BCCI audit which it claimed was the
responsibility of Price Waterhouse (UK). Price
Waterhouse (UK) refused to comply with US
Senate subpoenas for sight of its working papers
and declined to testify before the Senate Sub-
committee on the grounds that the audit records
were protected by British banking laws, and that
‘‘the British partnership of Price Waterhouse did
24
Price Waterhouse (UK) partners did agree to be inter-
viewed by Subcommittee sta? in PW’s London o?ce. The o?er
was declined due to sta? travel restrictions and concerns that
the interviews would be of little use in the absence of sub-
poenaed documents (US Senate, 1992b, p. 258).
486 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
not do business in the United States and could not
be reached by subpoena’’ (p. 256). In a memor-
andum dated 17 October 1991, Price Waterhouse
(USA) explained that the ?rm’s international
practice rested upon loose agreements among
separate and autonomous ?rms subject only to the
local laws:
The 26 Price Waterhouse ?rms practice,
directly or through a?liated Price Water-
house ?rms, in more than 90 countries
throughout the world. Price Waterhouse
?rms are separate and independent legal enti-
ties whose activities are subject to the laws
and professional obligations of the country in
which they practice . . .
No partner of PW-US is a partner of the
Price Waterhouse ?rm in the United King-
dom; each ?rm elects its own senior partners;
neither ?rm controls the other; each ?rm
separately determines to hire and terminate
its own professional and administrative
sta?. . . each ?rm has its own clients; the ?rms
do not share in each other’s revenues or
assets; and each separately maintains posses-
sion, custody and control over its own books
and records, including work papers. The same
independent and autonomous relationship
exists between PW-US and the Price Water-
house ?rms with practices in Luxembourg
and Grand Cayman (US Senate, 1992b, p.
257).
The Senate subcommittee was eventually able to
secure portions of Price Waterhouse’s audit
records from the Federal Reserve and other sour-
ces. Nonetheless, in their ?nal report (US Senate,
1992b, p. 287), the Subcommittee co-chairs, Sena-
tors Brown and Kerry, noted that:
One of the great di?culties in uncovering
BCCI’s fraud for regulators and investigators
was the fact that its frauds were carried out
through diverse and widespread jurisdictions
spanning the globe, while its activities were
audited by local accounting partnerships’’
(emphasis added).
Consequently, they questioned:
whether the current structure for accounting
?rms as independent partnerships, with
authority and liability limited to the nation in
which they are licensed, is appropriate and
adequate to meet the challenge posed by an
international ?nancial marketplace.
While this lack of cooperation and coordination
between audit o?ces and banking authorities
across national jurisdictional boundaries is
directly related to the global scope of BCCI’s
operations, it would be mistaken to conclude that
globalization per se renders the nation states or
national regulation obsolete. Geopolitical realities
dictate that powerful nations can exercise their
political will in the international regulatory arena
if they so chose. It is signi?cant that the US Fed-
eral Reserve was eventually able to press its power
to obtain documentation where elected o?cials
failed. Both the New York District Attorney’s
indictment of BCCI (US Senate, 1992b, pp. 247–
249) and the US Congressional investigation of
the scandal were made possible by the ability of
the US central bank to use its considerable in?u-
ence to penetrate banking secrecy law of other
nations.
Second, governments, particularly in strong
countries like the USA, have the capacity to reg-
ulate international accounting ?rms either through
sponsorship of international agreements, or more
directly by unilateral state actions. In BCCI’s case,
the US Senate Subcommittee recommended the
creation of new regulatory structures governing
international accountancy ?rms (p. 288) and iden-
ti?ed speci?c actions that could be taken to this
end. The Subcommittee recommended that inter-
national accountancy partnerships be asked to
voluntarily modify their partnership agreements to
provide for information sharing with foreign reg-
ulators, and in the event they failed to do so the
USA (and presumably other countries) could
require accounting ?rms to reach such agreements
with their international partners as a condition of
licensing. Alternatively, legislation could be passed
to prohibit any state agency or regulator from
relying upon audit reports prepared by any
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 487
accounting partnership that was not licensed in
the USA (US Senate, 1992b, p. 288). Any of these
recommendations could have been implemented
by the state unilaterally, without recourse to the
di?cult process of negotiating multilateral treaties
or international agreements. Nonetheless, despite
the Subcommittee’s concerns about weaknesses in
the structures governing international audit prac-
tices, no legislation was introduced to implement
these recommendations for making international
auditing ?rms accountable to state authorities.
The lack of USA action on these recommenda-
tions for reform of international auditing practice
is indicative of political failure, rather than any
constraint globalization imposes on the state’s
ability to regulate transnational capital.
4. Collusion in cover-up
Price Waterhouse’s (UK) decision to sign-o? on
the 1989 audit after notifying UK banking autho-
rities of suspected fraud at BCCI underscores the
political underpinning of the seemingly technical
practices of accounting and auditing. Possibly
fearing that a quali?ed opinion would prompt a
run on BCCI and undermine con?dence in the
banking system, UK regulators wanted the 1989
BCCI accounts to be published with an unquali-
?ed audit opinion. Abu Dhabi provided ?nancial
guarantees
25
(Bingham, 1992, p. 82), and the
auditors agreed to issue an unquali?ed opinion
lending accountings ‘‘aura of objectivity’’ (Gall-
hofer & Haslam, 1991) to the subterfuge. Price
Waterhouse defended its action by arguing that
the Bank of England and Luxembourg regulators
had been informed and wanted BCCI to continue
operations. The auditors believed the extent of
fraud was limited, the royal house of Abu Dhabi
had agreed to recapitalize the bank, and the audit
report disclosed that the auditor’s opinion was
based on guarantees provided by Abu Dhabi (US
Senate, 1992b, p. 275).
The US Senate investigators were, nonetheless,
sharply critical of Price Waterhouse’s decision to
sign the accounts and accused the auditors of col-
laborating with bank regulators to deceive the
public. According to the Senate report (US Sen-
ate, 1992b, p. 276) on the BCCI a?air:
By agreement, Price Waterhouse Abu Dhabi,
BCCI and the Bank of England had in e?ect
agreed upon a plan in which they would each
keep the true state of a?airs at BCCI secret in
return for cooperation with one another in
trying to restructure the bank to avoid a cat-
astrophic multi-billion dollar collapse. Thus
to some extent, from April 1990 forward,
BCCI’s British auditors, Abu Dhabi own-
ers, and British regulators, had now
become BCCI’s partners, not in crime, but
in cover up.
The investigators further argued that the audi-
tors’ certi?cation was ‘‘materially misleading to
anyone who relied on it ignorant of the facts then
mutually known to BCCI, Abu Dhabi, Price
Waterhouse and the Bank of England’’ (US Sen-
ate, 1992b, p. 5).
A similar scenario was played out in Hong
Kong just days before BCCI’s closure. Unlike
most BCCI branch operations, BCCHK was
separately incorporated in Hong Kong (at the
time a UK colony) and supervised by Hong Kong
regulators. When BCCHK’s ?nancial statements
were published (on 30 June 1991), Price Water-
house (UK) had already completed its draft of the
Sandstorm report (dated 22 June 1991). None-
theless, the auditors (again Price Waterhouse)
signed o? on BCCHK’s 1990 accounts after
receiving a ‘‘letter of comfort’’ from Abu Dhabi
promising the ?nancial support required to enable
BCCHK to continue trading (Taylor, Friedland,
& McDonald, 1991, p. 8). Hong Kong regulators
were anxious to maintain con?dence in the bank
despite mounting evidence of fraud. On July 1,
Hong Kong banking o?cials ?ew to London to
attend the meeting of the College of Regulators
(of which Hong Kong was a member) where the
results of the Sandstorm investigation were dis-
cussed. Two days later, the Banking Commissioner
25
In return, the Bank of England permitted BCCI to move
its headquarters, o?cers and records out of British jurisdiction
to Abu Dhabi. It believed that all problem accounts could best
be centralized in Abu Dhabi, a decision that subsequently
hampered the Bank of England’s inquiries.
488 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
announced that the results of the meeting had
‘‘indicated that there were problems which we
were not previously aware of in the BCCI Groups
(Taylor et al., 1991, p. 68), but assured the public
that there was no evidence of fraud at BCCHK
and that it had ‘‘only minor dealings with the rest
of the BCCI Group’’. On Friday, 5 July, the
Commissioner further assured depositors that the
Exchange Fund (Hong Kong’s monetary author-
ity) would continue placing funds with BCCHK, a
promise that was later characterized by the Far
Eastern Economic Review (Taylor et al., 1991, p.
68) as a ‘‘deliberate attempt to deceive the public’’.
The following Monday, 8 July 1991, Hong Kong
bank regulators rescinded their promise, BCCHK’s
assets were frozen and its operations suspended.
Collaboration between auditors and regulators
to conceal a ?nancial institution’s poor condition
in order to maintain public con?dence in the
health of individual banks or the banking system
is not unique to the BCCI case. Young (1995)
documented a similar political use of accounting
in the case of the US Savings and Loan (S&L)
industry where accounting rules were changed to
conceal the poor condition of the S&Ls in order to
‘‘buy time’’ for the industry to work out its pro-
blems. This capacity for ?nancial deception by
bank regulators and auditors raises serious ques-
tions about accountability and the potential abuse
of power. In the global context, it also has geopo-
litical implications as Western nations wield dis-
proportionate power to determine whose interests
are advanced or sacri?ced by both the timing of
and the decision to close an international bank.
The US Federal Reserve, for example, could have
exercised its in?uence to have BCCI shut down
immediately after learning of its illegal holding in
the USA, but it delayed in order to secure the res-
cue of First American.
26
Less powerful nations
and innocent depositors had no such choice; the
BCCI closure was presented to them as a fait
accompli.
27
BCCI had some 1.4 million depositors across
the world, the majority of whom were either resi-
dents of South Asia or Asian immigrants. The
governments of Bangladesh, India and Pakistan
were particularly anxious to rescue the bank since
BCCI served important ‘local’ functions in ?nan-
cing trade and providing capital to small busi-
nesses. In parts of the East, BCCI’s status as a
world class bank with third world origins was
viewed as a source of pride, and its attempt to
blend ‘‘capitalism and Islamic benevolence’’
(Friedland, 1991) was welcomed as an alternative
to the cultural insensitivity of the Western banking
establishment. In Pakistan, where BCCI was the
largest bank in the country with 72,000 depositors,
regulators rebu?ed a Bank of England o?cial sent
to discuss the BCCI closure, and attempted to
rescue the bank by selling it to Bank of Credit and
Commerce Emirates over the objections of British
liquidators
28
(Ali & Dalal, 1991).
The Western banking establishment’s decision
to close BCCI was criticized by Asian business
owners and depositors who saw the action as
overly hasty and cavalier in its disregard of non-
Western interests. Some perceived BCCI as ‘‘a
Third World enterprise that First World reg-
ulators capriciously penalized’’ (Frieldland, 1991,
p. 64), while others saw ‘‘racism’’ in the closure of
a bank that was ‘‘owned by Arabs, run by Pakis-
tanis and did much of its business with traders from
the Indian subcontinent’’ (Taylor, 1991, p. 59).
26
According to Congressional records, the Federal Reserve
did not act to close the bank globally, even after learning of the
scope and nature of BCCI’s frauds, because it needed ‘‘to
secure the cooperation of BCCI’s majority shareholders, the
government and royal family of Abu Dhabi, in providing some
$190 million to prop up First American Bank and prevent a
collapse’’ (US Senate, 1992b, p. 8).
27
Worldwide reaction to the UK-lead closure of BCCI was
mixed. BCCI o?cials voluntarily suspended branch banking
operations in several countries including, the Philippines,
Korea, Japan, and southern China. In Bangladesh, India, and
Hong Kong government regulators intervened to freeze BCCI
branch assets and close down operations. In still other cases,
governments allowed BCCI branch banks to continue opera-
tions as regulators searched for ways to rescue local branches.
BCCI continued operating in Australia and Macau under close
government supervision. BCCI’s 17 branches in the United
Arab Emirates also remained open, as did three branches in
Pakistan although Pakistani regulators were forced to cap
withdrawal to avoid a run on the bank (Taylor et al., 1991).
28
Although the sale did not take place, BCCI’s Pakistani
branches were eventually reorganized as Habib Exchange
Bank. In Bangladesh, BCCI was reorganized as Eastern Bank
(Kamaluddin, 1992).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 489
Many speculated that the crisis would have been
dealt with di?erently had BCCI been a Western
bank, or if it had been more closely integrated
with powerful economic interests in the world’s
?nancial capitals. As one Asian business executive
explained:
At Salomon Brothers, at Nomura, at Con-
tinental Bank and at Bank of New England,
heads rolled. But those institutions did not
have the plug pulled on them overnight . . .
The same should have been done at BCCI. I
have absolutely no sympathy for the men
who fudged the books or played with deposi-
tors’ money, but BCCI did very well in serving
the local community’’ (Friedland, 1991, p. 64).
5. Auditing ‘‘reforms’’ in the aftermath of bcci
The political limits of the state-accounting alli-
ance’s ability to regulate in the public interest is
also evident in the outcome of ‘‘reform’’ attempts
in the UK and USA following the BCCI scandal.
With characteristic secrecy, the Sandstorm report
was suppressed in the UK, and no inquiry into the
auditor’s role in the BCCI scandal has, as yet,
been made public. In previous banking crisis, the
UK state appointed inspectors to investigate
banking fraud/failure and the role played by
accounting and auditing ?rms in such matters
(Sikka & Willmott, 1995a). In the BCCI case,
however, the British government’s inquiry into the
BCCI closure, conducted under the chairmanship
of Lord Justice Bingham (Hansard 19 July 1991, c.
724) examined only the actions taken by UK
authorities (mainly the Bank of England). Lord
Justice Bingham’s terms of reference precluded
him from evaluating ‘‘the professional quality of
audits of BCCI’s accounts conducted over the
years in London or the Caymans or elsewhere, or
to form judgment whether irregularities in its
business should have been discovered by the audi-
tors earlier’’ (Bingham, 1992, p. iii). The task of
examining auditing aspects of the BCCI scandal
was delegated to a professional accountancy body,
the Institute of Chartered Accountants in England
and Wales (ICAEW), which had become a (self)
regulator of the auditing industry following the
implementation of the Companies Act of 1989
(now consolidated in to the Companies Act 1985).
The ICAEW delegated the task to the Joint Dis-
ciplinary Scheme (JDS)
29
(The Observer, 6 June
1993, p. 26). When an investigation appeared
imminent, Price Waterhouse objected on the
grounds that any action by the ICAEW could
prejudice the outcome of lawsuits against it, espe-
cially by the BCCI liquidators (The Accountant,
July 1993, p. 2). Following a series of court actions
and appeals, the auditors won a Court Order pro-
hibiting the JDS from continuing its probe until
the legal action brought by the BCCI liquidator
was concluded.
30
In 1998, a $117 million set-
tlement was reached with BCCI liquidators
(Deloitte & Touche), and a private investigation
is said to be in progress (The Guardian, 8 January
1999, p. 20).
The banking scandal generated some political
pressure in the UK for ‘‘reform’’ of the auditing
process despite resistance from the accounting
industry. In the course of the Bingham inquiry,
the issue of whether auditors should have a
‘‘duty’’ as opposed to a ‘‘right’’ to report to reg-
ulators was revisited (also see Mitchell, 1991). In
its evidence (written and oral), the ICAEW defen-
ded the status-quo and opposed
31
the need for
auditors to have a statutory ‘‘duty’’ to report
fraud and irregularities to the regulators. But,
29
The JDS was formed after the mid-1970s banking crisis,
by major accountancy bodies, to consider the role of major
?rms in high pro?le alleged audit failures. It is ?nanced and
controlled by the UK accountancy bodies. For some informa-
tion about its background see Sikka and Willmott, 1995b.
30
On 27 July 1993, a Divisional Court dismissed Price
Waterhouse’s application (See R v Institute of Chartered
Accountants in England and Wales & Ors, ex parte Brindle &
Ors (1993) 736 BCC). Price Waterhouse appealed against this
decision and the appeal was upheld on December 1993. On 28
April 1994, the JDS sought to take the case to the House of
Lords, the highest court in the UK, but permission to appeal to
the House of Lords was refused (The Accountant, June 1994, p.
5; Accountancy, June 1994, p. 14).
31
The ICAEW has a history of opposing reforms which,
arguably, could have bene?ted some stakeholders and given
greater transparency to corporate a?airs (Puxty, Sikka, &
Willmott, 1994).
490 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
Lord Justice Bingham rejected the ICAEW’s case
and recommended
32
that a statutory duty to
report fraud and irregularities to regulators be
imposed upon auditors. Subsequently, the gov-
ernment legislated (Hansard, 6 November 1992,
cols. 523–594) and a ‘‘duty’’ to report fraud and
irregularities (uncovered during the normal course
of an audit) was imposed on auditors of all ?nan-
cial sectors, including banks, insurance companies,
?nancial services and pension funds. (Hansard, 15
February 1994, cols. 852–875; Auditing Practices
Board, 1994; Sikka et al., 1998).
In the USA, auditing reform e?orts in the
aftermath of BCCI’s closure were, likewise,
opposed by the professional accounting lobbies
and notably unsuccessful. As noted previously, the
Senate Subcommittee recommendations for mak-
ing international audit ?rms answerable to USA
authorities went unheeded. The issue of auditors’
responsibility to report fraud was addressed in a
1991 legislative proposal that would have required
external auditors to report fraud to regulators and
given the Security and Exchange Commission (SEC)
power to direct auditors to investigate their clients
‘‘as necessary’’ to protect investors (International
Securities Regulation Report, August 12, 1991).
The proposal, which was modeled on the UK 1987
Banking Act that enabled the Bank of England to
commission Price Waterhouse to conduct the
Sandstorm investigation, was never enacted.
In addition to Kerry and Brown’s Sub-
committee, several other USA authorities under-
took investigations into the BCCI a?air, including
the Federal Reserve and House Banking Commit-
tee (See US House of Representatives, 1991a,
1991b). As a result of its investigation of BCCI
and other foreign banking operations, the Federal
Reserve proposed legislation that was subse-
quently enacted by the Foreign Bank Supervision
Enhancement Act of 1991. The new law increased
the Federal Reserve’s power
33
to oversee foreign
banks operating within the USA, but did not
address questions related to external auditors.
The issue of external auditor’s responsibility to
report fraud was deferred until passage of the Pri-
vate Securities Litigation Reform Act
34
of 1995.
The American Institute of Certi?ed Public
Accountants (AICPA) lobbied heavily for the 1995
Private Securities Litigation Reform Act which is
primarily concerned with limiting auditor liability.
In exchange for protection from liability, the audit
industry accepted a provision of the Act that
establishes a very weak mandate to report illegal
acts to regulators.
35
The AICPA chose to interpret
the scope of the law very narrowly, arguing that
new law merely ‘‘incorporates the auditor’s pre-
sent responsibility for the detection of material
fraud and direct-e?ect illegal acts and shortens the
time frame for reporting ?ndings to the SEC, if
such reporting is required’’(Guy, 1998).
The AICPA subsequently issued a new auditing
standard on fraud (Statement on Auditing Stan-
dard No. 82)
36
which reiterates the industry’s
long-standing position that auditors are not ordi-
narily responsible for reporting fraud to autho-
rities. Speci?cally,
The disclosure of possible fraud to parties
other than the client’s senior management
and its audit committee ordinarily is not part
of the auditor’s responsibility and ordinarily
32
In so doing, he supported the earlier recommendations of
the Parliamentary Select Committees (see UK House of Com-
mons, 1991, 1992a, 1992b, 1992c, 1992d, 1993).
33
Kapstein (1994) notes that this expansion of the Central
Banks authority was controversial, particularly in view of the
fact that it was the Federal Reserve who initially approved the
sale of First American to BCCI nominees over the objection of
state banking regulators.
34
This Act was vetoed by President Clinton. Subsequently,
the Senate overrode the veto (see Goldwasser, 1997 for some
details).
35
In very limited circumstances, the law requires the audi-
tors to notify the Board of Directors of illegal acts. If the Board
of Directors fails to inform the SEC within 1 day, the auditors
must inform the SEC. Legal scholars (see Sidorsky, 1996), note
that the so-called ‘‘whistle blower’’ provision of the legislation,
leaves the scope of the auditors’ responsibility ‘‘rather murky’’
since the requirement is limited to situations where illegal acts
have a material e?ect on the ?nancial reports and where (in the
auditor’s judgment) company Directors have failed to take
appropriate remedial action. Also, illegal acts are distinguished
from ?nancial fraud and taken to mean violations of regula-
tions (such as a?rmative action, health and safety regulations
and so forth).
36
SAS No. 82 (AICPA, p. 28) notes only that ‘‘duty to dis-
close outside the entity may exist to comply with certain legal
and requirements.’’ A footnote reference is made to the Private
Securities Litigation Reform Act of 1995, but the speci?c pro-
visions of the whistle blower clause are not explained.
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 491
would be precluded by the auditor’s ethical
and legal obligations of con?dentiality. . .
(AICPA, 1997, p. 27)
Given the limitations of the 1995 Act and the
auditing industry’s narrow interpretation of its
mandate, audit ?rms operating in the USA remain
under less obligation to report fraud to bank reg-
ulators than their UK counterparts. Moreover, the
AICPA’s con?dentiality requirements would pro-
hibit USA accountancy ?rms from preparing
investigative reports for bank regulators similar to
the Sandstorm report which exposed the fraud at
BCCI and led to its closure. These failures of sub-
stantive reforms in the aftermath of the BCCI
scandal are suggestive of a state regulatory appa-
ratus dominated by moneyed interests and profes-
sional lobbies, rather than one weakened by the
forces of globalization.
6. Summary and discussion
The BCCI case study shows that as capital
roams the world, nation states are obliged to pro-
vide regulatory and other frameworks to bring it
under political control not merely to protect the
interests of citizens, but also to facilitate and foster
the conditions in which private accumulation can
take root and ?ourish. Such processes operate at
the intersection of a state’s domestic and global
interests. Re?ecting the globalization of ?nance,
the major nation-states co-operated through a
College of Regulators to regulate BCCI. However,
the College itself remained fragmented and some-
what disorganized, not only because of the di?-
culties of negotiating international agreements,
but also because of the possible impact of its con-
siderations on domestic policies and national
capitals. For this reason, ‘‘each regulator tended
to focus on its own domestic concerns rather than
accepting full Collegiate responsibility’’ (United
Kingdom, House of Commons, 1992d, p. ix). The
fragmentation and the tensions in reconciling
domestic and international policies encourage the
regulatory processes to be primarily state-cen-
tered. In the case of the BCCI, its trading activities
had considerable impact on the UK, and conse-
quently, the UK was obliged to accept major
responsibility for regulating the BCCI empire.
The forced closure of BCCI illustrates the power
of the state, particularly strong Western states, to
regulate transnational enterprises when and if they
choose to do so. The Bank of England could have
closed BCCI at any time since its arrival in the
UK, especially as it lacked a lender of the last
resort and an e?ective regulator. Its closure could
also have been prompted by the involvement of
BCCI in money laundering activities. However, in
its keenness to encourage foreign investment in the
UK, the state permitted BCCI to trade. It seems
that only when BCCI’s activities posed a threat to
the legitimacy of UK banking and the reputation
of the City of London, that the UK decided to act
and close it down. The closure of BCCI was due to
the calculated political decisions made by the UK,
its allies on the College of Regulators, and USA
authorities. The Bank of England was the key
player in the decision to close BCCI. Non-Western
states (e.g. in Africa and the Indian sub-continent)
were simply expected to follow suit.
Each nation-state responded according to its
political norms. Following its traditions of greater
openness, the USA authorities undertook public
hearings and a detailed examination of the BCCI
closure. In contrast, in the UK, the scrutiny was
less open and fairly limited. The Bingham Report
was not the result of any ‘open’ hearings and the
submissions made to it remain private. Whilst the
UK and USA authorities co-operated (perhaps
grudgingly) in the decision to close BCCI, they
also remained sensitive to ‘local’ interests. The UK
authorities were reluctant to supply a fuller copy
of the ‘Sandstorm’ Report to the USA authorities,
possibly to shield the UK ?nancial services indus-
try from scrutiny. However, eventually the UK
yielded to pressure from the USA central bank
and a censored copy of the report was supplied to
the USA authorities. In contrast, the UK with its
tradition of ‘secrecy’ has failed to make the report
available to the UK public.
In some respects the BCCI story is a tale of
Western nations and the Western banking estab-
lishment advancing its interests over the less pow-
erful nations. Outside North America and Europe,
the Bank of England’s decision to close BCCI was
492 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
met with criticism on the grounds that the Western
banking authorities were too quick to close a
Third World bank, while other troubled banks
were given state aid and an opportunity to re-
capitalize and reorganize. Yet, the BCCI story
also reveals the political in?uence of class interests
within nations. For example, government support
of e?orts to reorganize, rather than close BCCI
branch banks, was extensive in Pakistan where the
Bank dominated the banking market and was well
linked with the political and economic establish-
ment. Whereas in (British) Hong Kong, where
BCCHK served primarily Indian and small Chi-
nese traders and was not well integrated into the
business establishment, the government did not
intervene e?ectively to save the bank. In line with
its policy of shielding the auditing industry from
critical scrutiny (Sikka & Willmott, 1995a, 1995b),
the UK government has failed to mount an inde-
pendent investigation of the BCCI audits. At best,
there will be an investigation by the Institute of
Chartered Accountants in England and Wales
(ICAEW) and/or other accountancy organizations
(e.g. the Joint Disciplinary Scheme) which are not
independent of the auditing industry.
A common sensical understanding of banking
regulation is that the regulatory mechanisms exist
to protect the interests of investors and depositors.
However, this does not necessarily appear to be
the case for BCCI where the primary shareholders
were the Royal House of Abu Dhabi and BCCI,
itself, through complicated nominee relationships.
It is di?cult to argue that the Bank of England
closed BCCI down to protect the interests of Abu
Dhabi, especially as it was considering a ‘private’
deal to inject more ?nance. Perhaps, indirectly the
Bank of England was interested in protecting
investors, i.e. one needs to protect the interna-
tional banking system as a prerequisite to
encouraging international capital ?ows. However,
it seems that the government’s concern to protect
depositors was secondary to the concern to safe-
guard the interests of the City of London as a
citadel of ?nance capital. The USA investigators
who argued that the auditors and the Bank of Eng-
land concealed suspected problems from depositors
and the public also reach such a conclusion. Their
silence may have given BCCI more time to
restructure itself, but is also possibly increased
losses for depositors who were not privy to the
secret negotiations. The ‘silence’ encouraged the
public to continue to trade with BCCI and, at the
time of this writing, innocent depositors have still
not been able to recover their savings in full and
are unlikely to do so (The Times, 29 September
1999, p. 29 and 33).
The BCCI case study draws attention to the
political role of audit ?rms and auditing technol-
ogies. The Basle Concordats implemented a sys-
tem of consolidated home country supervision
stipulating that branch banks operating outside
their home jurisdiction are supervised by their
home country. Since supervision is facilitated by
the availability of audited consolidated ?nancial
reports, audit ?rms and audit technologies are
deemed to play a quasi-regulatory role in the gov-
ernance of international banking. In the BCCI
case, the UK state relied upon external audits, not
as an objective indicator of the BCCI’s ?nancial
condition, but rather as a mechanism for main-
taining depositor con?dence in a ?nancially dis-
tressed bank. Recognizing that a negative audit
opinion has a potential to prompt a run on a
bank, it wanted to secure an unquali?ed audit
opinion to enhance depositor con?dence and pos-
sibly give the bank an opportunity to recapitalize/
reorganize. This political use of the bank audit
highlights the constitutive role accounting/audit-
ing plays in the economy, and the need to treat the
regulation of auditing ?rms and auditing technol-
ogies as social and political issues rather than as
purely technique oriented problems.
The UK state has shown greater willingness to
negotiate and defend the interests of ?nance capi-
tal than the interests of other stakeholders. For
example, it is notable that to promote con?dence
in the UK banking industry, the UK state only
imposed a ‘duty’ upon external auditors to report
fraud and irregularities to the regulators in the
aftermath of the BCCI closure. After earlier
banking failures (in the mid-1980s), it gave audi-
tors a ‘right’ to report fraud/irregularities to the
regulators (Sikka et al., 1998). After the BCCI
closure, the ‘right’ was turned into a ‘duty’. How-
ever, the ‘duty’ to report fraud/irregularities to the
regulators is primarily con?ned to the ?nancial
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 493
sector auditors only. Even after the BCCI episode,
the state did not require auditors to owe a ‘duty of
care’ to bank depositors, something which makes
it practically impossible for depositors to secure
?nancial redress from negligent bank auditors.
Bank depositors are encouraged to place reliance
on audit opinions, but have not been given any
rights to appoint, remove or interrogate bank
auditors. In the USA, in the aftermath of the
BCCI episode and Savings and Loan Crisis, the
state also imposed only extremely limited fraud
reporting obligations upon auditors, and these
have not been accompanied by any additional
rights for bank depositors.
Many aspects of the BCCI case raise concerns
about auditing practices that exist in either
domestic or international contexts. For example,
the concerns about auditor independence, parti-
cularly in cases where accountancy ?rms serve
simultaneously as external auditors and manage-
ment consultants, is common to both domestic
and international audits. Similarly, the problem of
prescribing auditor’s social responsibilities, their
duty to third parties (including stakeholders) who
rely on their reports, and their duty to report
fraud to regulators have long been issues of con-
cern to states seeking to regulate domestic audit-
ing practices. Globalization, however, adds several
new complexities.
With the aid of organizations such as the Inter-
national Auditing Practices Committee (IAPC)
and the International Accounting Standards
Committee (IASC), accountancy ?rms have
sought to cement their claims of being ‘global’.
They claim to have the technologies to enable
them to provide global surveillance of capital.
Such technologies also enable major ?rms to
reduce their training costs and hence increase
pro?ts. However, this has not been accompanied
by any scrutiny of their ‘global’ accountability and
‘global’ organizational structures. The BCCI case
shows that major auditing ?rms market them-
selves as international and ‘global’ ?rms, but such
claims are dissolved in the face of critical scrutiny.
For example, when challenged by subpoenas from
the USA regulators, Price Waterhouse argued that
it is a collection of disparate national ?rms rather
than a ‘global’ ?rm. To resist the US regulators,
the ?rms sought refuge in the UK’s bank secrecy
laws. The ?rm’s claims of being ‘global’ are fur-
ther diluted when it is noted that various Price
Waterhouse partnership o?ces did not have ade-
quate arrangements for sharing of sensitive infor-
mation between o?ces or with foreign regulators.
Price Waterhouse’s Hong Kong partners signed
BCCHK’s 1990 ?nancial statements (apparently)
without knowledge that Price Waterhouse (UK)
had completed a draft of the Sandstorm report doc-
umenting massive fraud within the BCCI group.
Similarly, Price Waterhouse (UK) did not inform
either Price Waterhouse (USA) or USA banking
authorities when it learned of BCCI’s illicit acquisi-
tion of USA holdings. The above dilutes the accoun-
tancy ?rms’ claims of being ‘global’ organizations.
The BCCI case shows that the structure of
international accounting/auditing ?rms is prob-
ably inappropriate to meet the demands of reg-
ulating integrated international ?nancial markets.
From this one cannot infer that nation states lack
the capacity to regulate international accounting
?rms. Governments have the power to regulate
international accounting ?rms either through
multinational agreements or unilateral state
actions. The lack of action on the US Senate Sub-
committee’s recommendations for reform of the
structures governing international audit ?rms is
indicative of political inaction, rather than any
limitations globalization imposes on the states’
ability to regulate capital. The political capacity of
the state to introduce the structural changes sug-
gested by Senators Kerry and Brown are ham-
pered by liberalist ideologies that make it di?cult
for the state to directly intervene in corporate
a?airs. Therefore, it is obliged to place reliance
upon auditors hired by corporations. This also
enables the state to appease the forces opposed to
increased public expenditure. Accountancy ?rms
are likely to oppose regulatory changes requiring
them to co-operate with international regulators
by citing increased costs and by appealing to
ideologies that oppose the state’s further intrusion
in private a?airs. Audit clients who do not wish
the regulators to become closely involved with
their a?airs may also amplify these objections.
The increased regulatory gaze also has a capacity
to suggest that accountants and their clients are
494 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
corrupt and that their a?airs need to be closely
watched. Given the state’s reliance upon the rev-
enues generated by capitalist enterprises for its
own survival, a combative engagement is unlikely.
At the global level, geopolitical realities dictate
that a multilateral agreement on audit regulation
would require the sponsorship of a hegemon(s),
such as the USA, Europe and Japan. The reluc-
tance of hegemons to underwrite multilateral
agreements that would make their ‘local’ audit
?rms answerable to political authorities in smaller
nations, is a matter of geopolitics, rather than
impersonal forces of technology or global mar-
kets. Even unilateral actions by nation-states face
political problems in both rich and poor countries.
As part of a social contract, the nation-states
could insist that in return for a monopoly of the
state guaranteed market of external audits,
domestic accountancy ?rms revise their interna-
tional partnership agreements and co-operate with
international regulators. They could also enact
legislation prohibiting banking regulators from
relying on reports by foreign auditors who refused
to submit to national laws. Less powerful nations,
however, may be reluctant to jeopardize the
in?ows of foreign capital by excluding foreign
banks whose auditors refused to recognize local
laws. Within economically powerful nations, such
unilateral actions would likely face domestic poli-
tical opposition by the accounting industry and by
home-based transnational banks. In the USA, for
example, USA-based multinational banks have
traditionally opposed any unilateral regulation of
foreign banks that might invite reciprocation by
other nations and lead to restrictions on USA
banking operations in other countries.
37
In the banking industry, the interested parties
include not only bank depositors, but also the
citizens who may ultimately be required to rescue
?nancially distressed banks with tax dollars and/
or bear the consequences of economic disruptions
caused by bank failures. Nonetheless, the audit
industry has traditionally de?ned its primary
responsibility as a duty to bank stockholders (i.e.
bank as a legal person and not to individual
stockholders), rather than to depositors, employ-
ees or other interested parties. This problem is
exacerbated in the international context, not only
because of the geographical wider scope of reli-
ance on auditors’ reports, but also because of jur-
isdictional boundaries. Although individual states
have imposed limited duties on domestic auditors
(such as the ‘duty’ imposed on UK auditors to
report fraud to UK banking authorities), such
duties are not uniform from state to state and do
not extend beyond national boundaries. In the
BCCI case, the British auditors had no enforce-
able obligations to depositors, banking autho-
rities, or polities outside the UK. Interestingly,
neither the US Senate Report nor the UK’s Bing-
ham Report raise any major questions about the
assumed objectivity of ?nancial statements, the
meaning of a ‘true and fair’ audit report, or the
wisdom of relying upon commercially motivated
private sector accountancy ?rms as quasi-reg-
ulators, or their obligations to the public at large.
The BCCI case raises important political ques-
tions about the responsiveness and accountability
of the auditing industry and the state-profession
alliance. As a result of deliberate political decisions,
the governance processes leading up to BCCI’s
closure, remain shrouded in secrecy. The minutes
of the College of Regulators’ meetings remain secret.
The Bank of England was the major regulator, but
it did not owe a ‘duty of care’ to any depositor.
38
British regulators sheltered behind the BCCI
external audits and encouraged the public to trade
with BCCI. Some might argue that such secrecy is
necessary to avoid premature banks runs and
might further argue that auditors’ responsibility is
discharged so long as banking regulators are noti?ed
of irregularities. Another interpretation attributes a
wider signi?cance to the lack of transparency in
the dealings between accountants and regulators.
37
For example, see Citicorp/Citibank’s comments submitted
to US House (1991a, pp. 134–139) hearings on foreign bank
regulation. Citicorp expressed concern that ‘‘US Government
legislation which would e?ectively forbid European banks form
operating through branches here in the US could well provoke
unwelcome restrictions of US banks’ branch systems in Europe
and elsewhere’’.
38
BCCI depositors claim that the Bank of England acted
recklessly in continuing to license BCCI, knowing that deposi-
tors money was at risk. They have sued the Bank of England
for misfeasance and are awaiting the outcome of a ‘‘potentially
groundbreaking case’’ (Financial Times, 17 January 2001, p. 2).
P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499 495
Since the early 1980s, the UK state has been
actively restructuring the UK economy by shel-
tering behind accounting’s ‘‘aura’’ (Gallhofer &
Haslam, 1991) of objectivity, independence and
neutrality. The accounting-led restructuring of the
British economy is evident in processes relating to
privatization of state enterprises, regulation of
utilities and surveillance of the public sector (e.g.
health, education) and the reform of the taxation
system (e.g. self-assessment). During such times,
detailed questions about the expertise and inde-
pendence of BCCI auditors had a capacity to pro-
blematize the government reforms. In addition, the
UK has one of the largest number of quali?ed
accountants per capita in the world (Cousins,
Mitchell, Sikka, & Wilmott, 1998). A critical
scrutiny of the role of external auditors could dis-
rupt the ability of accountancy ?rms (a signi?cant
fraction of capital) to accumulate economic sur-
pluses. Despite these plausible explanations, there
is something profoundly disturbing (to democratic
sensibilities) in the premise that broader social
interests are served by silence, private deals,
secrecy and the benevolent deception by govern-
ments, central bankers and their auditors.
The regulatory processes have sought to legit-
imize the power and in?uence of capital by mini-
mizing the public gaze. Signi?cantly, the auditing
industry, which has been mobilized to secure trust
and con?dence for global mobility of ?nance,
remains largely beyond public scrutiny and con-
temporary democratic practices. Despite its highly
political role, the UK/USA auditing industry is
not regulated by an independent regulator repre-
senting a wide variety of stakeholders. It is pri-
marily self-regulated, with ‘private’ accountancy
bodies controlling licensing, monitoring and dis-
ciplining of the ?rms. External auditors are often
portrayed as public watchdogs, but their public
obligations remain fairly limited. They do not owe
a ‘duty of care’ to depositors, employees or indivi-
dual stockholders. They are not obliged to publish
any information about their a?airs.
39
Neither the
banking regulators nor the representatives of var-
ious stakeholders have any unhindered access of
auditor ?les. Despite the proliferation in the UK
of performance league tables for schools, uni-
versities, public sector organizations, government
departments and commercial organizations, nei-
ther the state nor the profession has devised any
mechanism for measuring the actual performance
and e?ectiveness of audit ?rms. The audit of
BCCI raises serious questions about the ability of
audit ?rms to combine the roles of independent
auditors, counselors of management and agents of
the state. Yet no attempt has been made to exam-
ine the issues, especially whether in pursuit of pri-
vate pro?ts, one set of capitalist enterprises (e.g.
major audit ?rms) have a capacity to secure public
accountability of another set (e.g. corporations).
The terms of an audit contract and auditor
assessment of internal control have a potential
role in alerting depositors, employees and indivi-
dual stockholders of the management-auditor
relationship, the e?ectiveness of auditors and pos-
sible risks to investment. Yet no attempt has been
made to require either banks or audit ?rms to
make their engagement letters, management letters
or working paper extracts available for public
scrutiny (Dunn & Sikka, 1999). Seemingly, the
public accountability of the auditing industry has
been organized o? the political agenda. One can-
not attribute this to the impersonal forces of glo-
bal markets or the weakening of nation states.
In return for a continued enjoyment of the state
guaranteed market of external audit, the state
could negotiate a new social contract with audit
?rms and require them to embrace broader
accountability. But this has not been done. The
state’s inaction, we contend, is not the result of its
waning authority and power in the face of globa-
lization. It is the outcome of deliberate political
choices made under the weight of liberalist ideol-
ogies, which disseminate the belief that regulation
should be light, or that state and state regulation is
obsolete, or that the discourse of public account-
ability is somehow only applicable to major busi-
nesses with limited liability, or that only secret
negotiations amongst the elites have the capacity
to secure con?dence in capitalism. Such choices are
shaping globalization by prioritizing the rhetoric
of higher pro?t and e?ciency and e?ectively dis-
39
With the implementation of the UK’s Limited Liability
Partnership (LLP) legislation, UK-based auditing ?rms con-
verting to LLPs will have to publish conventional ?nancial
statements about their a?airs.
496 P.J. Arnold, P. Sikka / Accounting, Organizations and Society 26 (2001) 475–499
enfranchise a vast number of people by denying
them an opportunity to shape the institutional
structures appropriate for the regulation of capital.
To conclude, the BCCI case study shows that
the major nation-states remain important players
in the regulation of global businesses. Nation
states have sought to regulate global businesses by
placing considerable reliance upon auditing tech-
nologies and ‘global’ audit ?rms. However, major
auditing ?rms lack ‘global’ organizational struc-
tures to make them responsive and accountable to
international regulators and democratic politics.
The nation-states seem to be advancing a parti-
cular kind of globalization, the one which prior-
itizes the interests of ?nance capital by pursuing
policies of secrecy and covert deals. Making the
regulatory processes more ’open’ generally could
arguably advance the interest of bank depositors
and citizens. Requiring auditors to embrace wider
social accountability and a ’duty of care’ to indi-
vidual audit stakeholders could also advance
them. However, despite banking/audit failures, such
as the BCCI, the state has shown little political will-
ingness to shape new regulatory structures.
Acknowledgements
We are grateful to the editor, two anonymous
reviewers of the journal and participants at the
Critical Perspectives on Accounting and Inter-
disciplinary Perspectives on Accounting Con-
ferences for their comments and suggestions.
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