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For some bankers, doing well by doing bad has become a way of life. If ever there was a time to raise the cost of wrongdoing, Liborgate is it.
July 3 -
If manipulation of the interest rate benchmark inadvertently benefited borrowers, someone else had to pay the price.
December 15 -
Last week, the Public Company Accounting Oversight Board held its first public hearing relating to its 2011 findings that all of the Big Four CPA firms [Ernst & Young, KPMG, Deloitte & Touche and PricewaterhouseCoopers] have failed to follow generally accepted accounting principles and frequently lack independence from management.
March 29 -
Audit committees must follow rules already on the books that charge them with hiring and firing auditors. That includes booting an auditor that allows executives to put banks at risk of failure for their own enrichment.
March 26
Explaining its $450 million settlement with U.S. and U.K. regulators, Barclays said it had
PwC agreed to the most minimal disclosure of Barclays' potential settlement in the annual report released in March. Barclays "attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the bank's derivatives trading positions by either increasing its profits or minimizing its losses,"
The
PwC could have caught the faults twice. The auditor should have identified and warned shareholders and the public about increased risk at Barclays. An audit firm has an obligation,
The "management discussion and analysis" of results for a financial institution must include discussion of: liquidity; capital resources; results of operations; off-balance sheet arrangements; and contractual obligations. Although auditors' obligations are more limited here, the auditor should read this information and consider whether it, or the manner of its presentation, is materially inconsistent with information appearing in the financial statements.
Second, when a bank must comply with Section 404 of the Sarbanes-Oxley Act (and Barclays must, despite being a foreign entity, since its American Depository Receipts trade on the New York Stock Exchange), the auditor expresses an opinion on the effectiveness of the company's internal control over financial reporting. PCAOB's Auditing
Controls over values created using models, third-party pricing services, and use of market inputs are supposedly supported by elaborate compliance systems to make sure valuations meet accounting standards. Basic assumptions used to assign values such as benchmark interest rates should not be vulnerable to manipulation or collusion. Banks must comply with legal and regulatory requirements to ensure the integrity of data critical to the functioning of the capital markets.
According to the regulators, Barclays had no specific internal controls or procedures, written or otherwise, regarding how Libor submissions should be determined or monitored, and Barclays also did not require documentation of the submitters' Libor determinations.
The CFTC order requires Barclays not only to beef up its compliance processes but to "take on a role as an advocate for increased oversight for the industry," according to the
More than a dozen other banks are under investigation by U.S., Asian and European regulators for collusion in setting interbank lending rates. It will be interesting to see if KPMG, Ernst & Young and Deloitte's banking clients also manipulated Libor – as Barclays suspected – and if those banks also allowed derivatives desks to set the rates.
If so, Barclays has a big job ahead as industry advocate for being good.
Francine McKenna writes the blog