Are Auditors to Blame for the Credit Crunch?

In 2007, the world began to feel the effects of the global credit crunch. A credit crunch we are still struggling to recover from 6 years later. A number of groups and organisations have been blamed for the cause of the crisis, but one such group which has received criticism is that of the auditors. In 2008, Prem Sikka (a Guardian journalist) wrote "Each collapse shows that highly paid directors had little idea of the value of company assets, liabilities  income, costs, profits and financial health. This has been accompanied by one constant factor: the silence of the auditors. Auditors collected large amounts in fees and dished out clean bills of health." But are the auditors really to blame?

In some sense yes. As an auditor your job is to search for evidence to enable reasonable assurance to be given on the truth and fairness of financial and other information provided. Therefore the hidden and undervalued assets on the balance sheet should have been raised as issues as they don't provide a true and fair representation of the real situation. But what is key within the description given of an auditor's job is the words "reasonable assurance". In my opinion reasonable assurance is a subjective term and one person's view on whether they can reasonable assure that something is correct will differ from that of another. So can the auditors be blamed for being reasonably assured that what they is seeing is right?

In my opinion, no they can't. As Sikka said many of the companies being audited didn't know the value of their own assets so how can the auditors know whether, based on the information they've been provided or have requested, the assets are valued correctly? Yes they probably could have dug a bit deeper than they originally did but if the information isn't there within the company for them to dig into how are they supposed to give an accurate judgement?

This leads me to believe that despite a number of groups, organisations and individuals being blamed for the crisis the fundamental cause of the problem was the banks themselves. With a culture and reward packages based around becoming the biggest and best bank in their market it is no wonder that many organisations manipulated their accounts, didn't value their assets properly etc. They were being rewarded extremely large bonuses for doing well, who wouldn't adapt things slightly to suit them better if you were going to get an additional £1 million in bonuses?

So yes, auditors should have been a bit more proactive and aware of tricks being played, but fundamentally the issues lie within the banks and their corporate governance structures and it needs addressing so as to prevent anything like this happening again.

Thankfully, I'm not the only one to realise this. Since the crisis banking corporate governance (BCG) has been investigated and it has been found that typical corporate governance and BCG differs in some ways. Realistically, since the global banking industry is the biggest industry in the world you'd have thought this would have been looked at long before now, but no it was only as a reaction to the crisis that BCG was looked at. Hopefully measures will now be introduced to improve BCG and prevent another crisis in the future. And hopefully, the auditors will take into consideration the lessons they have learnt and be a bit more cautious in the extent that they are reasonably assured the information is correct.