The grand inquisitor

AUDIT AND THE BIG FOUR are under the microscope in a House of Lords inquiry. The man setting the tone of the questioning is Lord Nigel Lawson, former chancellor and long-time scourge of bank auditors.

What’s happened?

The inquiry has been running for six weeks and the House of Lords economic affairs committee has had before it an array of experts from the profession, including academics, mid-tier leaders and regulators.

There has been some stiff questioning and persistent probing. But the man leading the charge is

Lord Lawson, former chancellor under Margaret Thatcher and now apparently determined to understand the role of auditors in the banking crisis and whether something needs to be done about the state of competition for big audits.

Lord Lawson’s line of questioning has however been sharp, not short of aggression and has, to some extent, given away his feelings about auditors. In one sitting he said of the crisis: “The auditors were one of the dogs that didn’t bark.”

Singling out the case of Northern Rock, he said: “It’s true that there was a failure of macro-prudential supervision, but there was a failure of micro as well.

“Take Northern Rock as an example. Northern Rock had a business model with an excessive reliance on wholesale funding which was a complete nonsense as a business model…They were taking ever bigger risks. There was a huge failing of micro supervision.”

It is debatable where the audit, or micro supervision as Lord Lawson calls it, is responsible for the business model, but the former chancellor is making his feelings known.

He is yet to question witnesses from the Big Four but Lord Lawson has been demanding answers elsewhere. In what was an almost Donald Rumsfeld-style formulation, Lord Lawson pushed Sally Dewar of the Financial Services Authority to draw a conclusion. “Are you saying that the auditors didn’t notice there was anything wrong with the banks; or are you saying that they did notice but they didn’t get it; or are you saying they did notice and they did get it but they didn’t do anything about it. Which of the three is it?”

In truth, Rumsfeld’s “things we don’t know” comment was more revealing than the contorted language might have you think, and likewise Lord Lawson’s question.

While others on the committee have brought penetrating questions to the table, it is Lord Lawson who has been exhibiting particular energy for the topic and what seems to be an unarticulated opinion that was in place well before the inquiry began.

But a quick look into the past reveals why. When as chancellor back in 1984 Lord Lawson saw merchant bank Johnson Matthey collapse, he promptly ordered the Bank of England – the regulator for banks at the time – to sue Arthur Andersen, the auditors. It won and Lord Lawson seems to be bringing that experience to the Lords inquiry.

Indeed, he has already referred to it in a House of Lords debate in which he asked why the auditors were not being sued. His former cabinet colleague Lord Tebbit asked why the auditors had remained “out of the firing line”.

What happens next?

Lord Lawson is yet to get his teeth into the leaders of the Big Four firms. The showdown with the committee is expected lated this month.

They can expect some tough questioning. It should not be forgotten that Lawson was responsible for standing by some difficult policies while in office. As energy secretary he “set the course” for the privatisation of the electricity and gas industries and headed the preparations for what he anticipated would be a

full-scale strike in the coal industry with the National Union of Miners.

As chancellor he became synonymous with what became known as the Lawson Boom after 1986 because of his enthusiastic tax cutting which many argue helped bring down unemployment significantly.

The six weeks of hearings so far will have primed Lord Lawson’s mind and honed his questions. It is unlikely that he will step into the committee room unarmed with an agenda. But the big question on the committee’s mind will be: could and should the auditors have done more? Have the Big Four had too much of the audit market so far?

An accountancyage.com straw poll asked visitors whether Lord Lawson was right in accusing auditors of being “the dogs that didn’t bark”, and should they share in the responsibility for what happened. More than 300 voted. 70% of them said yes.

So, when the Big Four sit down to face their interrogators it would be no surprise to learn the name Johnson Matthey was echoing in their minds.