Auditors worried about litigation over the financial meltdown

Most of us feel that auditors should indeed be worried now. After all, none seem to have been raising any alarms over the extent of bad loans accumulated by major financial institutions, or over risks that banks exposed themselves to through entering into derivatives contracts they claimed they understood but did not. And now many hold auditors at least partially responsible for the ensuing debacle.

For some audit firms, the time of reckoning seems to be approaching fast. However the degree of their concern over legal action will depend on where the firms are operating, and global or US-based firms are at greatest risk of coming under close scrutiny in the courts of law.

Assigning blame for the financial crisis: Auditors on the defensive

Much has been said over the past few months about the responsibility of regulators in the current global financial crisis. I’ve written about it myself back in September suggesting that they are yet to acknowledge their role and their own failings.

Three months on, it still seems that the regulators are either in denial, or suffering from a debilitating shock of their own past incompetence, as we are still not seeing much positive change from them. Even with the current obvious trend for greater regulation promoted on the government level, there is no clear evidence of regulators stepping up their game.

What do I mean by that, I hear you say? Well, there are two aspects to this. The first one is about acknowledging regulators’ failure to prevent the financial crisis – and in this, I am going to specifically focus on auditors in this post. The second aspect is about regulators changing their attitudes immediately, not at some point in the future. That would be the subject of another post.  

UK Bailout plans unveiled for three key UK banks

The UK Government has now unveiled the plans for a £37bn bailout for key British banks, as the BBC reports today.

Terms of the UK Bailout: The key features is that the Royal Bank of Scotland (RBS), Lloyds and HBOS will get cash injections of £20bn for RBS and £17bn between the two latter banks. This money will be used to recapitalise these banks, ie strengthen their reserves in order to withstand financial turmoil and market volatility we are facing at present. However in return the Government is effectively part-nationalising these three banks by taking a large or controlling share in them as these banks sell its shares to the Government in exchange for money.

The objective of part-nationalisation, apart from taking more control in the banks’s affairs now, is to also get income back to the Government and the UK taxpayer once the banking system does recover and shares go up in value.

Banks management changing: On the strength of this effective humiliation, the heads of RBS (Fred Goodwin and Tom McKillop) and HBOS (Andy Hornby and Lord Dennis Stevenson) are resigning, stepping down, or retiring. The UK Government is keen to see proven people with strong and relevant industry experience step into their shoes.

Banking bonuses curbed: One of the conditions of the UK Bailout is that there will be no bonuses to senior executives this year, and a move towards paying bonuses in shares not in cash in future years. However these restrictions do not impact those banks that are not part of today’s headline £37bn bailout proposal.

Barclays route: Barclays has opted to raise the money it needs without Government’s help. It needs £6.5bn. It seems that one of the reasons Barclays is trying to make it on its own, apart from avoiding the humiliation of the bailout, is that it will remain free to set banking bonuses as it sees fit.

US v UK Bailout compared: There are some distinctions between the US and the UK Bailout proposals. Some are driven by the fact the two banking systems have different features - for instance, in the US there are many more banks in existence making individual targeted action possibly more difficult to achieve.