Just for the sake of argument, suppose we had no publicly funded police service in this country, but instead had an array of private police forces competing for our custom. And suppose we were allowed to hire one of these independent police forces, perhaps under contract to provide things such as burglar alarms and window locks.
And suppose we subsequently found ourselves accused of some crime. Would we then be able to invite our chosen police force to look into the accusation and pronounce on whether or not we were guilty? And, if we did, would anyone take seriously a not guilty verdict from such a source?
I ask these apparently ridiculous questions because the situation I postulate does actually exist in the field of accountancy. Big-time bean counters such as Ernst and Young, PricewaterhouseCoopers and KPMG all provide expensive consultancy services to clients – and are then brought in to audit the same clients’ books.
And people – in other words, governments, shareholders, competitors and the like – actually take these audited accounts seriously as a reliable guide to whether managements are conducting their businesses soundly, sensibly and within the law. Why, for heaven’s sake? Maybe because accountants are well known to be sound, rather dull chaps who are pillars of society and totally untouched by greed?
Well, possibly. But that preconception about the staid, reliable character of accountants is a trifle out of date, to say the least. A massive proportion of their business nowadays isn’t adding up columns of figures, but consists of hiring people with enormous brains to devise complex schemes of tax avoidance for their clients – schemes which in many cases are only a hairsbreadth within the law and occasionally turn out to be not even that.
Does this fit the image of the bowler hat, the briefcase and the little adding machine of old? No, of course it doesn’t. Indeed, there has been plenty of recent form in this field. Why, for example, didn’t the accountants pick up what was going on at Northern Rock before the implosion? Or at the Royal Bank of Scotland? The accounts were audited. No one seems to have noticed anything odd.
The latest example is perhaps the most outrageous. It concerns the collapse of Lehman Brothers, the cataclysmic event which triggered the worldwide banking crisis. It turns out that Lehman Brothers were able to hide the fact that the firm were essentially broke for months before the crash, by the simple expedient of keeping $50 million-worth of debt off its books by a slick accounting subterfuge.
Their New York accountants seem to have spotted the trick and complained. So Lehman simply moved the whole procedure to London, where Gordon Brown’s notorious “light touch” regulatory regime prevailed. After all, the light touch was intended to attract foreign business. And it did.
So the Lehman Brothers books got the OK from the very grand London firm of Ernst and Young – although, to be fair, not before the City law firm Linklaters had given the legal all clear to the little bookkeeping subterfuge on which it was based. Known in the trade as “Repo 105”, it enabled Lehman to put down short-term loans from other banks as “sales” rather than assets, thus keeping them off the balance sheet. The stage was set for the impending tragedy.
Not surprisingly, there are now demands from MPs, peers and others for a thorough investigation of the whole accountancy “industry” and not least into the widespread practice of letting accountants accept consultancy work from the firms whose books they audit. That deplorable and accident-prone practice, however, is only a small part of the problem. What is all too obvious is that “new” Labour’s light touch carries a large part of the blame for what has happened, not just at Lehman Brothers, but also across the entire financial sector.
Which makes it all the more extraordinary that Alistair Darling and Gordon Brown still seem deeply reluctant to impose anything like the stern regulatory regime which common sense seems to dictate if we are to make sure there isn’t another crash like the last one.
Yes, yes, I know – Ali and Gordon are desperate to get the banks earning big bucks again as soon as possible, not least to get in some sorely-needed tax revenue. But at the risk of blowing up another bubble? Surely not.
As Simon Jenkins pointed out in The Guardian last week, the Chancellor and the Prime Minister are becoming increasingly lonely in their continued attachment to the free market. In a world alive with proposals for curbs on bonuses, on hedge funds and short trading, and for a transaction tax, he claimed, Labour ministers are almost always on the side of unregulated banking and against further controls. “Brown and Darling have gone native and have become puppets on a banker’s string”, he wrote.
All right, that may be a bit over the top. But it is a strange world in which a Labour Government is outflanked on the left by a former editor of Rupert Murdoch’s Times, not to mention by Mervyn King, the Governor of the Bank of England, and by Adair Turner, the former boss of the CBI who now heads the Financial Services Authority.
