who Will Guard The Guards?
The question is, of course, a purely rhetorical one
, not because it does not require an answer, but rather because there isn't one. The quotation Who will guard the guards?is attributed to the Roman poet Juvenal and whatever circumstances it originally referred to way back then, these days its meaning has come to be understood as how can we be sure that those we entrust to watch over our interests, are not corrupted themselves and in doing so become part of the problem rather than part of the solution. In terms of the banking crisis of 2007/8, it is particularly germane. Sure, eventually we recognised the impending catastrophe and saw how very near to collapse the whole financial system was, as epitomised by George W Bush's immortal phrase This sucker's going down! which certainly owed little to Juvenal, but then why should it? I think there were very few who did not understand his meaning.
Banks are, at least were, private businesses (though many are now partly or totally owned by the state) and have to be treated as such. But there is a distinction between those who buy shares in a bank and thus invest in the business and those who deposit money in the bank in the hope of interest. The former must, as all stock holders, suffer the vicissitudes of the market, but the latter should not. However, the recent banking crisis was characterised by banks which were in some cases hours away from total failure which could have meant that where depositors had more in their account than the level up to which they are protected, they would have lost the remainder. This explains why, for example, there was a run on certain financial institutions in London by depositors anxious to be repaid.
As we are all aware, with corporations of a certain size, qualified auditors must each year go through the transactions of the company and produce both a balance sheet and a profit and loss account.
Looking back there is something almost perverse in arguing that this developing scenario in our large banks was hidden so well amongst the dusty transaction archives that even the most progressive and accomplished auditors never suspected anything. We are asked to believe they had no idea of the precarious position of the banks, no idea that the balance sheets they were charged to prepare, for which in turn they charged considerable sums, were in fact balanced on a knife edge and had about the same level of stability as a house constructed of playing cards. Neither will I make any apology for the metaphor, since there was certainly a high degree of gambling involved in what went on and consequently what went wrong.
It would be unreasonable of me and render my article unbalanced not to put forward what I am sure would be the auditor's response to my criticisms. They would point out that they are not paid to hypothesise, but only to verify that what they have put their name to is an accurate historical record of the transactions which have taken place in the period under consideration. This is certainly true. They might also add that if they were legally obliged to look at whether that particular trading model was sustainable, they may very well have been able to prevent much of what went wrong.
Whilst acknowledging the validity of this argument, when examined closely it appears to me to be drawing too fine a distinction between legal and moral responsibility. Let me give what is perhaps a crude example and allow the reader decide whether it is apt. Let us suppose that a mechanical engineer is given the task of inspecting an aircraft and confirming that all maintenance due within a certain period of time has been performed satisfactorily. During his inspection he notices that one of the engine mountings has a crack. However, the routine maintenance that ought to have been performed has been carried out correctly, but an inspection of the engine mountings is on a future maintenance list. Would the inspector be considered to have behaved correctly, if he ignored that crack and simply reported on what he was instructed to look at?
It may come as a surprise to many, but in reality there are only four firms of auditors in the western world. To expand a little on that, there are only four firms which matter (Deloitte, KPMG, Price Waterhouse Coopers and Ernst & Young). There are of course thousands of very large firms of accountants, but they have no hope of joining these illustrious four whose position is entrenched. Furthermore, if the FTSE Index of the top 100 companies is examined, I believe that 98 of those 100 companies use one of the top four accountants. You may of course point out that they are free to use whom they wish. This is true but in fact these companies historically have only changed accountants once every forty eight years!
In addition to auditing, the accountants (financial services company) may be extensively involved in giving financial guidance to the company they are auditing. However, that guidance is usually confidential since it could be commercially sensitive.
There are various proposals around as to how, what some may describe as this cosy relationship between the banks and their auditors could be ended. One such proposal is to legislate that banks should change their auditors every six years. From my research it appears the banks are opposed to this since they believe it would involve them in a great deal of additional administration costs. This may be true. but perhaps the transparency arising from it would be worthwhile. The same argument was put by many corporations when the Sarbanes-Oxley Act of 2002 was introduced to facilitate more transparency.
In general, I believe, reform is vital and especially when banks are using depositors money for speculation. Unless and until bank deposits are ring-fenced and thus protected, there is going to be public concern.
Finally, just so that I am not inundated with e-mails, I do acknowledge that there were government organisations who should also have been watching the banks but in general they proved incapable of doing so.
by: Francis Meehan
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