Ian Fraser has written an angry article slamming the Big 4 auditors' appearance in front of the House of Lords last week.  Now there's absolutely nothing wrong with writing angry blog posts (if there were, I'd probably have to retire) and Ian is very well worth following on Twitter.  Yet this isn't his finest hour. The hat-tip to Francine McKenna is a giveaway.

So here are the problems with Ian's analysis, as I see it.

Ian's basic argument is that the banks needed a bailout from the government very shortly after their accounts were signed off by their auditors.  The reason the auditors felt able to do this was that they had been told by government that the banks would bail them out if needed; accordingly the banks were considered a going concern.  Ian suggests that this means the auditors have failed in their responsibility to investors.

Now this is a boiled down version of the argument.  As I said, Ian is angry in his post, and the anger does rather get in the way of the coherence of the overall narrative. So I'm sorry if I haven't entirely done his argument justice.

I think the characterisation of the audit firms in his article is a shoddy rewriting of history, with considerable benefit of hindsight.  Back then, nobody had the remotest idea how the economic crisis would pan out.  Indeed, at the time the auditors were signing off the accounts for their clients, government wasn't even admitting publicly that we had a crisis.

That the firms were discussing these issues with audit committees suggests that, contrary to the McKenna/Sikka narrative, auditors had identified the right issues and were taking steps to deal with them.  And we can see that government was worried that, by doing what they have been tasked to do in auditing standards and in regulations, auditors might have made things worse.  So that's why government encouraged them to withhold their going concern qualifications (on the grounds that government would step in) instead of possibly precipitating the crisis by raising the alarm bells.

Technically the assessment that there's no going concern problem if you know government will step in is correct.  McKenna and Fraser might not like that, but it's a valid assessment.  Ordinarily businesses look to banks to cover their borrowing requirements.  A business that can't renew its borrowings will go bust.  But, if government is prepared to stand in, the going concern problem goes away.  Lloyds and RBS are still in operation. It's just they have government support now.

You might disagree with the audit firms for going along with this.  But the audit process is a legal requirement that is governed by legislation and regulations, passed down by government.  When government seeks desperate measures for desperate times, it's reasonable that auditors should yield to those requests.  If we disagree with government's judgement, it's government that should face the music, not the auditors.

Government did some astonishing things at this stage in history.  Brown encouraged Lloyds and HBOS to get together, because he thought it would lead to a better outcome, and he waived competition requirements to allow it to happen.  I thought at the time and I still think that he was wrong to do this.  But, subject to the scrutiny of Parliament and the force of the Courts, he can do it.  Our only weapons are the disapproval of the ballot box and the mighty force of the Courts.

There is a case to answer over what happened. To some extent, Brown has already faced it in that his political reputation is shredded, partly as a result of the other terrible blunders he made while Prime Minister.  He should face further enquiry and scrutiny.  It's right that the auditors should be asked to answer questions too.  But it's not right that they should be excoriated for supporting government when it asked them for their help.

Filed under: Auditing, Other blogs, Politics with tags big 4, francine mckenna, gordon brown, house of lords, ian fraser, lloyds banking group, prem sikka, royal bank of scotland, twitter
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Thanks to the genius that is Chris Dillow:

Thankfully the dread name of Richard Murphy doesn't appear in this book.

Written on my Android mobile phone. Article may be edited later.

Filed under: Other blogs with tags chris dillow, richard murphy, tim worstall
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Labour leader Ed Miliband was on the Today programme this morning, in a mid length interview with grizzler-in-chief, John Humphrys. And it was a real stinker. Even the party faithful are struggling to maintain a smile in the face of his lack of vision, monodrone delivery and hapless inability to grasp even his own policies (inasmuch as he actually has any). The CiF brigade similarly found little to like. Most ire so far has focused on his refusal to define who he means by the term "squeezed middle".

But there was a far worse howler in there. Humphrys asked about the 50% tax rate, over which Miliband had slapped down his own Shadow Chancellor about whether it should be permanent. Miliband thought it should be permanent because it would help to bring down the deficit and because,  for people earning a lot, a marginal rate of 50% was fair. He then said that 60% would not be fair.

Danger, Will Robinson! The 50% rate only applies to those earning over £150,000 per year. Those earning between £100,000 and £150,000 pay a marginal rate, thanks to National Insurance and withdrawal of the personal allowance, of 61%. There are even worse marginal rates at lower levels of income thanks to the impact of benefits withdrawal.

If a marginal tax rate of 60% is unfair for someone earning £150,000, how can Miliband explain the former Labour government, of which he was part, presiding over the introduction of a marginal rate of 61% on those earning much less (even accepting that it's still a lot of money). And why dither for so long over the effective marginal rates for benefit claimants?

Answers, Ed? He'd better be quick; after today's miserable performance, the vultures in his own party will be circling.

Written on my Android mobile phone. Article may be edited later.

Filed under: Politics with tags bbc, ed miliband, idiots, john humphrys, labour, marginal tax rate, national insurance
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I've long harboured a deep hatred of Howard Flight. Some time ago, I saw him speak on (then) Shadow Treasury policy at an event in London. When the applause at the end was still dying down, he lit up a cigarette. OK, so this was before the ban, but it was still so, well, uncouth.

Not that long thereafter, he got caught briefing supporters before the 2005 election that the Tories would actually cut taxes by more once they were in power. Michael Howard was deeply unhappy with all this and deselected him. While he'd clearly created a shitstorm for the Tories out of nothing, this did feel unreasonably harsh, even at the time. It couldn't be admitted back then, but it did feel like Labour was out of control on spending and Flight offered a hope that their party would get us back on course earlier than Howard felt he could admit.

Perhaps it's how politics has to work. Five years on, Flight has his reward for going (fairly) quietly: a peerage. However, he's managed to upset people again by stating, in rather indelicate terms, that poor people respond to child-related benefits by having more children. Mindful that he doesn't actually have his peerage yet, Flight has beaten a hasty retreat.

But while I don't like the man himself, I admire his determination to say what he thinks, even if it's not politically correct or easy listening. Politics has become appallingly anodyne of late, where every minor misstatement becomes a significant gaffe thanks to stray microphones and Twitter. If politicians are forced to censor vast swathes of political debate because it's "nasty" then we are at risk of making terrible policy errors. So, rather than shouting down Flight or complaining about the way he said
it, shouldn't we worry about the impact of child-related benefits on people's decisions about timing and number of children? Indeed, wouldn't it be astonishing if it wasn't a factor in that decision?

As the saying goes, we should play the ball not the man. Like so many in the UK right now, I don't much care for the man. But I'll concede he's got good balls.

Written on my Android mobile phone. Article may be edited later.

Filed under: Current issues, Politics with tags child benefit, conservatives, deficit, howard flight, smoking, twitter, welfare benefits
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Pointless walks to dismal places was the first album by enigmatic Leicester indie drone rockers Prolapse. It's not actually that good, if truth be told, at least compared to their singles or extraordinary live performances, although it has its moments. But, everyone must accept - it's a great title.

And it's how I feel when I survey the depressing array of sorry and pathetic excuses for public accountancy consultations that are out right now. Regulators and government are wasting our precious, precious time with consultations that cover ground that's already been adequately covered elsewhere, ask stupid, leading questions that aren't relevant, and the findings of which will, in any event, be soundly ignored anyway when it comes to the legislative process.

Take the EC Green Paper on audit. This covers a massive range of topics, from the role of audit, International Standards on Auditing, governance and independence of audit firms, audit supervision, market concentration, and smaller and medium sized practices. The Commission saw fit to give people only eight weeks to respond to all this. It's absolutely ridiculous. Eight weeks is barely enough to work out the parameters of the subject, let alone respond. It means many of the responses, if not all, will necessarily be half baked, and subjective, instead of fully considered and evidence-based. And that means the Commission's policy response can't hope to find the right answer; at best it will forge a consensus of popular views. At worst it will use the figleaf of the consultative process to justify what it wanted to do anyway.

And yesterday we get notification that the Treasury Select Committee wants to investigate tax policy principles. This is mere days after the Mirrlees Review findings have been published. OK, so it references the Mirrlees Review work. But it's surely invalid to give this very learned, academically robust, referenced work only the same status as, say, the drivel that we can look forward to Ritchie producing.

This comes back to something I've complained about before: the desperate need to consult properly. There are well established principles on how to consult properly. Some people do (for example, look how gingerly the Accounting Standards Board is treating the future of UK GAAP). But why do so many public bodies treat these principles, and with them - us - with such disrespect?

We deserve better. Every public body, without exception, should follow and honour the principles of good consultation. And in these constrained times, it would be nice if they could refrain from consulting on the same things over and over. We've addressed these issues already. Let's move on.

Written on my Android mobile phone. Article may be edited later.

Filed under: Auditing, Politics, Regulation with tags asb, european commission, leicester, prolapse, richard murphy, tax policy, treasury committee, uk gaap
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The Auditing Practices Board don't think there's enough of it. The House of Lords don't think there's enough of it. Yep, it's that thorny issue, scepticism, back in the news.

This time, it's about the Euro. George Osborne went to great pains on The Today Programme to say that "I told you so" isn't a sound economic policy. Yet that implicitly accepts that the sceptics were right.

People don't much like scepticism. Sceptics are the sort of people that try to take away the punchbowl when the party is in full swing, or who drone on about house price crashes when you've just committed to buy a house at eight times your salary. For regulators to ask auditors to be more sceptical is rather having their cake and eating it. We want to keep having fun but we want a stool pigeon (the auditors) to blame when it, rather inevitably, blows up in our faces.

Scepticism would be easier to maintain if we could be more tolerant. All too often, people behave zealously about their cause, be it multiculturalism
or climate change. No opposing views are acceptable, even if well argued and presented. It may not be good economic policy, but Osborne might at least have the good grace to admit that he and other politicians were wrong, and we were right.

Filed under: Economics, Politics with tags apb, deficit, george osborne, house of lords, ireland, scepticism
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So we've had a few more weeks and a few more Tuesday afternoons with the Lords.  On 9 November it was the turn of Philip Collins and David Stallibrass of the Office of Fair Trading, Baroness Hogg and Stephen Haddrill of the Financial Reporting Council, Sally Dewar and Richard Thorpe of the FSA.  The uncorrected evidence is available here.

There's a peach of a quote from Thorpe, who was pressed repeatedly to give a view as to whether auditors failed in the crisis by not contacting the FSA to discuss concerns about their clients:

We have no evidence that there were examples of information that they should have given to us, which we didn’t get direct from their clients.

In other words, the disclosure regime seems to have worked properly.  It's just that they got the information they needed from the banks themselves, not from the auditors.  What's to complain about in that?

There's then an odd exchange between Lord Lawson and the witnesses as to whether auditors should have in some way raised the alarm earlier.  I find this idea wholly unconvincing.  There is a point in time, let's call it t, at which the crisis was obvious to all.  So the crash happened.  Does this mean that the crisis could have been averted if someone had said "there's going to be a crash!" at time t-1?  Evidence suggests that it's the interpretation of the same information that changes, not the information itself.  So any early warnings would simply be ignored.  It's vital that we see auditors and their opinions as trusted.  The suggestion that they become watchmen for the rest of society risks turning them into a Cassandra profession.

Filed under: Auditing, Politics with tags audit quality, baroness hogg, david stallibrass, frc, fsa, house of lords, lord lawson, office of fair trading, phillip collins, richard thorpe, sally dewar, stephen haddrill
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Some rather bizarre stuff from our Ritchie:

David Cameron claimed yesterday that “Social unrest would have been likely if housing benefit payments had not been slashed ”.

Oh yes. people were going to be out on the streets saying with demands such as “make people homeless” were they? I doubt it. Very much. The man’s living in cloud cuckoo land

.

Let's unpack this for one second. The housing benefit proposal is to set the maximum benefit at the 30% point rather than the median (which would be 50%). Some people may have to move, but into another property, not a cardboard box. The proposals will cap benefit at about £21,000 annually. That's insanely generous, representing a sum way beyond the means of most families. It's a full 50% higher than my mortgage payments for the year for example.

And I do think such enormous payments were testing the patience of a tolerant, caring society. Why should those who are prepared to work hard have to pay high taxes to fund a lifestyle that they could never hope to enjoy themselves? Isn't it right to expect everyone, whether rich or poor, to live within their means and to cut their cloth accordingly? If that means moving to a cheaper house, like so many taxpayers have had to do themselves, then so be it.

If these proposals are "making people homeless" then I'm a banana. As I appear to have neither a stalk or yellow skin, I suspect that Ritchie's merely a hyperbolic idiot. Again.

Written on my Android mobile phone. Article may be edited later.

Filed under: Other blogs, Politics with tags bananas, housing benefit, idiots, richard murphy, welfare benefits
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Ritchie gets into one of his hyperbolic moods, on the subject of tax's support for society.

Tax is the lubricant of that wellbeing.

I actually agree with this analogy. Tax is rather like a lubricant. Yet, as any engineer will tell you, too much lubrication can be a very bad thing.

Take oil. Engines need it, both to keep their moving parts from grating against each other, but also (in a different form) as fuel. It's an absolutely essential part of modern society. But too much oil kills wildlife and blights the natural world.

Or there's alcohol. A nice pint on a hot day can be refreshing. But too many youths getting wankered in town centres leads to violence, criminal damage and a massive loss of economic output.

Ritchie is right to claim that a certain amount of tax is necessary for good order. For things like enforcing personal property rights and the like. His dream level of tax, though, is the economics of the oil slick and the lager lout. Tax is such a heavy burden that it is now crushing the spirit of the people. We need a lighter load so that tax can again be a lubricant, not a pollutant.

Written on my Android mobile phone. Article may be edited later.

Filed under: Economics, Other blogs with tags bp, idiots, property rights, richard murphy
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Ritchie reports that the TUC shares his enthusiasm for a general anti-avoidance principle in tax.

He then says that it's probably only fair that he discloses that he does quite a bit of work for the TUC.

Well, duh. The TUC has virtually no tax policy making ability itself, which is why it subcontracts it to Ritchie. But it's outrageous to then present it as "the TUC says..."

This is a well known tactic on Wikipedia, called "sock puppeting", whereby one person opens several accounts in order to make it look like lots of people agree with him.

Given Ritchie's long tradition for avoiding even fair criticism of his policies, it's a habit he really needs to break.

Written on my Android mobile phone. Article may be edited later.

Filed under: Other blogs, Taxation with tags idiots, richard murphy, sock puppeting, tuc, wikipedia
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