Professional Firm ... PwC
The Maxwell Saga

How Coopers lost the plot on Maxwell, but kept its heads

Burgess COMMENTARY

Peter Burgess

How Coopers lost the plot on Maxwell, but kept its heads Shares 0 The complaints 'reveal shortcomings in both vigilance and diligence' and 'a failure to achieve an appropriate degree of objectivity and scepticism, which might have led to an earlier recognition and exposure of the reality of what was occurring...' 'Earlier omissions may have fostered a climate in which deception was easier to perpetrate, as it became more necessary if the empire was not to be brought down by its borrowings and need for cash...The firm lost the plot.' These are just two of the damning findings of the Joint Disciplinary Scheme of the Institute of Chartered Accountants into the conduct of Coopers & Lybrand, auditors to most of the public and private companies in the business empire controlled by Robert Maxwell. The empire collapsed in the weeks following his death in 1991, revealing a web of stock-lending, illegal borrowing and undisclosed dealings between the various companies, designed to conceal the fact that debt in the empire had spiralled out of control. The report accuses Coopers & Lybrand - now merged into PricewaterhouseCoopers (PWC) - of being too close to Maxwell, who was described by the Department of Trade and Industry in 1971 as unfit to run a public company. It also attacks the auditors for trusting the representations of Maxwell and his senior executives 'without adequate investigation and consideration'. Yet not a single head has rolled. One Coopers partner died during the investigation, but the other four remain in place. Of the £3.4 million penalty suffered by the firm and the four surviving partners, only £1.2m is in fines; the rest is the costs of the inquiry. The firm is being sued by Grant Thornton, which took over that part of the receivership from Price Waterhouse after the merger left them with a conflict of interest, but this case will not be heard until at least 2002. And eight years on, there has been no proper explanation of the failure of the Coopers audit to alert anyone to what was going on, nor a guarantee that it will not happen in the future. The collapse of the Maxwell empire was not the only scandal to hit auditors in the Eighties. Remember Barlow Clowes, Polly Peck, Bank of Credit & Commerce International or British & Commonwealth. While all have been followed by some payment by auditors, these were invariably out-of-court settlements aimed at curbing spiralling legal costs and, perhaps more importantly, ending the bad publicity that dogs a firm associated with a corporate collapse and subsequent legal action. In no case has an auditor admitted that it was wrong or that it should have spotted, and reported on, the disaster in the making. So if auditors can't spot when a company is about to collapse, what exactly is their job? Why do shareholders pay such huge sums for audits when the clean bill of health the accounts are given can be so misleading? Auditors have a ready response: the expectation gap. They've been using it since the end of the last century, when a judge decided their role was to be watchdog, not bloodhound. The expectation gap means that, while the public (and pensioners, shareholders and creditors) think auditors should be able to detect fraud, auditors know they can't and are adamant that no one can force them to. Most frauds, they point out, involve a number of people - often senior executives - colluding to cover their tracks. Unless the collusion is so obvious that it can be spotted straight away, in which case the company should spot it, it will be impossible for an auditor, there for only a brief spell each year, to detect. Indeed, a survey by accountant Ernst & Young found that three in five frauds are uncovered purely by chance, while less than 10 per cent are detected by auditors. The auditor can't check everything. He or she has to look at only a sample of transactions, and assess how easy it would be for staff to circumvent management's internal controls. And he is only looking at 'material' transactions - usually defined as between 5 and 10 per cent of expected profit for the year. Prem Sikka of the University of Essex, a campaigner for stiffer audits, dismisses such excuses. 'Auditors in the public sector have a statutory duty to detect and report fraud. In the financial sector, since BCCI, there has been a statutory duty to report fraud to the authorities - but not to detect it. Elsewhere, there is no duty at all.' Sikka believes case law, particularly the Caparo judgement of 1990, which made auditors responsible only to the company as a whole, not to shareholders individually, nor third parties, means they have no 'economic incentive' to improve procedures, as they can not be held responsible for failures. The Joint Disciplinary Scheme report says that much has changed since the Maxwell collapse. But most of the changes take the form of shouting rather more loudly about what the public should expect, rather than changing the duties of the auditor. PWC managing partner Peter Hazell points out that the problem with Maxwell was not the companies' procedures, but the fact they were not complied with. PWC has, he says, introduced a number of changes in an attempt to ensure this improves in the future. These include: specialist pension fund auditors; tightening the role of the independent partner who reviews the conduct of each audit; encouraging staff to be more sceptical and to insist on independent corroboration; and being more selective about its clients - it has resigned from 50 in the past three years. Jon Grant, technical director of the Auditing Practices Board, which is responsible for setting standards for auditors, lists other measures affecting the profession as a whole, including the creation of his board. Since its inception, the board has created a whole new set of standards, including one which, it claims, was the toughest available on fraud until the US authorities went one step further. But it has also made sure that there is no doubt who is responsible for a company's internal controls: the directors. A raft of corporate governance reports, from Cadbury to Hampel, have re-defined the role of non-executive directors and audit committees, making them stronger and more independent. The aim is to give suspicious auditors somewhere to go to raise the alarm. And the partner in charge of a company audit must now be changed regularly. The APB is, however, attempting to extend the fraud debate with a consultation document. This acknowledges that one way of closing the expectation gap is to put more responsibility on to the auditor. That could mean encouraging auditors to be more sceptical,requiring them to gather more evidence to support their conclusion, or to report separately on all items they could not corroborate independently. But it warns: 'The changes set out in this section will not eradicate fraud nor lead to all frauds being detected. But . . . [they] could provide more assurance that fraud will be detected.' The consequences, it warns, are higher costs and lengthier audits. Neither companies nor their shareholders have shown much enthusiasm for that.