Barclays Libor Scandal; More Client Headaches for PwC

Update Tuesday July 3, 7:15 am: The Financial Times is reporting that CEO Bob Diamond has also resigned.  Departing Chairman Agius will lead the search for a successor while Sir Mike Rake leads the search for Agius’ successor. It seems Diamond did himself no favors when he obliquely threatened, according to earlier reports, to spill the beans on the role of the Central Bank of England and name names during his testimony to the Treasury Committee of Parliament this week. “Everybody is doing it,” is it seems no longer a sufficient excuse for illegal acts. Barclays board chairman Agius resigned on Monday. Top candidate to replace him? Sir Michael Rake, former global Chairman of KPMG, who presided over the tax shelter scandal that almost put that firm out of business in 2005.

I’ve put a new column up at Forbes this morning, “Barclays Manipulates Libor While Auditor PwC Snoozes.”

The Barclays Libor manipulation scandal is a big deal and we haven’t yet seen the full impact here in the U.S.  The Chairman of the bank resigned officially this morning and the interim Chairman is none other than our old friend Sir Mike Rake, former Global Chairman of KPMG.

It’s funny how the Big Four auditor former Chairmen seem to be infiltrating the major banks, in particular. Rake is at Barclays as well as at British Telecom. Former PwC Chairman Sam Di Piazza is a major player at Citigroup, KPMG’s Tim Flynn joins the board – the audit committee (and probably a reconstituted risk committee) – at JP Morgan. Deloitte’s former Chairman Parrett is at Blackstone. KPMG’s UK Chairman Griffith-Jones is heading over to that country’s financial regulator.

The announcements come out often before their retirement is even official.

They’re everywhere, in spite of the fact that they did nothing to prevent, detect, warn, or mitigate the impact of the financial crisis on their true client, the shareholders.

Here’s an excerpt from my column today:

What do Barclays, JP Morgan, MF Global and Chesapeake Energy have in common?

They are all examples of risk management and audit failures and the auditor of all of them is PricewaterhouseCoopers.

Major media has yet to mention the name of PwC, the external auditor, when talking about the Barclays Libor scandal, JP Morgan’s costly “whale” trade, or the woes brought to Chesapeake Energy by its imperial CEO, Aubrey McClendon. There was some mention of PwC early in the MF Global case, but interest in PwC died down quickly as has the general coverage of this scandal as the months wear on. No real truth has come out yet about who has $1.6 billion of customer funds illicitly used to cover CEO Corzine’s risky bets on sovereign debt.

According to PCAOB Auditing Standard Number 5, “When auditing internal controls over financial reporting, the auditor may become aware of fraud or possible illegal acts. In such circumstances, the auditor must determine his or her responsibilities under AU sec. 316, Consideration of Fraud in a Financial Statement Audit, AU sec. 317, Illegal Acts by Clients, and Section 10A of the Securities Exchange Act of 1934.”

I’ve written extensively about the auditors responsibility to plan and perform their audit to address the risk of fraud or material misstatement and theauditors responsibility to report up, then possibly out to the SEC when the engagement team becomes aware of fraud or other illegal acts such as Foreign Corrupt Practices Act (FCPA) violations.

During initial planning for the scope of these audits PwC could have decided to do more rather than less. The auditor must increase the scope of the audit and testing if there are higher risks of material misstatements due to fraud or illegal acts. Then, during the audit itself and certainly during the audit of internal controls over financial reporting, PwC could have caught the risk management and internal control failures such as those that we are seeing at Barclays, JP Morgan, MF Global and Chesapeake.

So let’s talk about what happened in these four cases involving PwC clients…

13 replies
  1. George Smithgolf
    George Smithgolf says:

    Unfortunately, you are beginning to sound more amateurish in your belief that an audit should detect all of a company’s accounting problem/ issues which can occur spontaneously (over a very short period of time), infrequently and unintentionally.

  2. David
    David says:

    It seems that the debate will revolve around the question of whether these acts of non-reporting of the fraudulent acts was in fact willful. The arguments will obscure the overall result. The result being continued malfeasance. You don’t have to use that loaded a comment Francine. But, I can.
    The end result is just that. These firms are lead by and the field audits are performed by some of the most talented accounting types in the field. Yet, they miss these huge mistakes. 1+1=7.
    I would wager that their audit papers were pristine. When they returned to the office the manager on the job reviewed the files to see that the well vetted audit procedures were adhered to. However, everyone turns away from the elephant in the room.
    “Oh, gosh, we lost $1.6 billion.” Or- “geesh, our risk procedures broke down somewhere.” (and there was a $9B loss). At what point do these mistakes become too big to ignore. I do not remember the audit procedures around Sarbanes 404 internal control issues, but risk factors must be part of it.
    Goodness – the frustration for me and I imagine the public is that there is no recourse. No one pays. There is no, dare I say, accountability.

  3. Francine
    Francine says:

    @George Smithgood

    I hardly think that the time period for increased risk and deterioration of controls was “spontaneous” or only over a very short period of time in the Barclays case or or any of the other cases I mentioned. The fact that multiple 10Q and 10Ks were involved means PwC had its head in the sand for a while. Amateurish? Rather you’re sounding quite churlish and intractable in your blind faith.

  4. Francine
    Francine says:


    Actually if the auditor is so negligent that it performs “no audit at all” then scienter or willful acts are not necessary to hold them accountable. See my columns about Deloitte and Bear Stearns or Ernst & Young and the case they are facing over backdating in California.

    Thanks for your additional comments.

  5. Oversight for the Better
    Oversight for the Better says:

    To test Mr. Smithgolf’s assertion, what if we were to adopt L.A. Cunningham’s Financial Statement Insurance (FSI) alternative for the audit of publicly traded corporations (fr. the Columbia Law Review):

    1)Companies will buy insurance policies for a given premium and coverage mix based on a preliminary investigation, yielding a financial statement reliability index that is more informative than the current three paragraph audit report.

    2)The insurer hires an auditor to conduct a full audit, making the auditor beholden to insurers, not clients.

    3)Any financial misstatements will yield policy payouts up to a predetermined policy coverage level.

    Would the auditors then be just as caught by the “spontaneous issues” or would they be diggin’ deep to see what could be threatening the insurers with no fear of losing a client?

  6. George Smithgolf
    George Smithgolf says:

    My point to most uninformed persons, is their lack of understanding of what an audit covers, limitations of an audit, timing of frauds, intentional and unintental mistakes, collusion, etc etc. So now we learn that the NY Fed and European regulators knew of problems with libor since 2007. So the auditor is expected to attest to the conglomeration of libor rates by multiple financial institutions. Auditors do get sued over audit failures but this will not be the case once again IMO. If possible, please lay out the various links of reporting by Barclay’s to the audit of the company’s financial statements. Unless the auditors “certify” the reporting to the European regulators directly responsible for the compilation of LIBOR rates, I fail to see how this is within the scope of the audit of Barclay’s financial statements.

  7. Francine
    Francine says:


    Barclays broke the law in several ways and that’s why they are paying a fine of several hundred million dollars. In breaking the law the firm and its traders caused transactions to be recorded with false and manipulated values.

    The auditor has an obligation under PCAOB audit standards to assess the risk of material misstatement, fraud or illegal acts and adjust its audit program to increase the likelihood that such issues will be detected. If the auditor identifies or becomes aware of fraud or illegal acts then they have an obligation under the Securities and Exchange Act of 1934 Section 10A to report those acts to management and the audit committee and if they are not addressed in good faith to the SEC.

    The fact that Barclays had no policies, procedures and controls over its Libor submission process increased risk that there would be a material misstatement of values of transactions or fraud. Certainly the possibility for the firm to break the law by manipulating the submissions was heightened.

    If you can’t see the auditors’ role in identifying and testing these controls and raising concerns when it is clear there was no control and that the lack of controls was being exploited to manipulate valuations for transactions and to act in an illegal way, I can not help you.

    In addition to manipulating the submissions, Barclays’ violative conduct involved: (From the CFTC order)

    …multiple desks, traders, offices and currencies, including United States Dollar (“U.S. Dollar”), Sterling, Euro and Yen. The wrongful conduct spanned from at least 2005 through at least 2009, and at times occurred on an almost daily basis. Barclays’ conduct included the following:
    (1) During the periodfrom at least mid-200S through the fall of2007, and sporadically thereafter into 2009, Barclays based its LIBOR submissions for U.S. Dollar (and at limited times other currencies) on the requests of Barclays’ swaps traders, including former Barclays swaps traders, who were attempting to affect the official published LIBOR, in order to benefit Barclays’ derivatives trading positions; those positions included swaps and futures trading positions; this same conduct OCCUlTed with respect to Barclays’ Euribor submissions for the period of at least mid-200S through mid-2009 (see pp. 3 – 4, 7 – 11, 13 – 15, infra);
    (2) During the period from at least mid-200S through at least mid-2008, certain Barclays Euro swaps traders, led by a former Barclays senior Euro swaps trader, coordinated with, and aided and abetted traders at celiain other banles to influence the Euribor submissions of multiple banles, including Barclays, in order to affect the official published Euribor, and thereby benefit their respective derivatives trading positions (see pp. 3 – 4, 15 – 18, infra);

    Barclays’ lack of specific internal controls and procedures concerning its submission processes for LIBOR and Euribor and overall inadequate supervision oftrading desks allowed this conduct to occur.


    During the period from at least mid-2005 through mid-2008, certain Barclays Euro swaps traders, led by the same former Barclays’ senior Euro swaps trader, coordinated with traders at celiain other panel banks to have their respective Euribor submitters make certain Euribor submissions in order to affect the official EBF Euribor fixing. These requests to and among the traders were made to benefit the traders’ respective derivatives trading positions and either maximize their profits or minimize their losses.

    Throughout the periods relevant to the conduct described herein, Barclays’ LIBOR submissions for U.S. Dollar, Yen, and Sterling and Euribor submissions were false, misleading or knowingly inaccurate because they were routinely based on impermissible factors such as (1) the management directive to lower Barclays’ submitted rates to manage market and media perceptions of Barclays, and (2) the derivatives positions of swaps traders, and were not based on the costs of borrowing unsecured funds in the pertinent markets, as required. By using these impermissible factors in making its LIBOR and Euribor submissions and without disclosing that it based its submissions on these impermissible factors, Barclays conveyed false, misleading or knowingly inaccurate information that the rates it submitted were based on and related to the costs ofborrowing unsecured funds in the relevant markets and were truthful and reliable. Moreover, Barclays’ submitters knew that Barclays’ LIBOR and Euribor submissions contained falseandmisleadingrates. Bysuchconduct,RespondentsviolatedSection9(a)(2)oftheAct,7 U.S.C. § l3(a)(2) (2006).
    B. Respondents Attempted to Manipulate LIBOR and Euribor
    Together, Sections 6(c), 6(d), and 9(a)(2) of the Commodities Exchange Act prohibit acts of attempted manipulation. Section9(a)(2)oftheActmakesitunlawfulfor”[a]nypersontomanipulateor attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules o f any registered entity . . . . ” 7 U.S.C. § l3(a)(2) (2006). Section 6(c) of the Act authorizes the Commission to serve a complaint and provide for the imposition of, among other things, civil monetary penalties and cease and desist orders ifthe Commission “has reason to believe that any person … has manipulated 01′ attempted to manipulate the market price of any commodity, in interstate commerce, 01′ for future delivery on 01′ subject to the rules of any registered entity, … or otherwise is violating or has violated any of the provisions of [the] Act … .” 7 U.S.C. § 9 (2006). Section 6(d) ofthe Act is substantially identical to section 6(c). See 7 U.S.C. § l3b (2006).

  8. George Smithgolf
    George Smithgolf says:

    So if PWC is not held liable for this LIBOR scandal by regulators, shareholders, etc. would you not concede that you are overreaching???? If not, you must be smarter than all of the national offices, regulators, state boards of accountancy and shareholder attorneys.

    I agree that there are auditing rules that deal with illegal acts, fraud, etc etc but the audit clearly has limitations. Illegal acts can occur, both financial and non financial. So would you expect the auditors of Penn State to have a failed audit for the Sandusky matter. The auditor is required to look for fraud / illegal acts during the course of the audit and deal with those that are believed to be found. Moving boulders vs. pebbles and then grains of sand is the question. And under even grains of sand can be huge huge issues (with financial implications). Even without policies you cite, within the scope of a financial statement audit, there are degrees of audit failure which the public does not understand. My last comment on the subject, so please respond.

  9. Francine
    Francine says:

    @George Smithgolf

    The Sandusky matter is a completely different issue but one I spoke on at the request of a university in an address to accounting and MBA students. In that case, the university wanted me to focus on corporate governance issues. Penn State’s auditor certainly would be liable if they ignored or were complicit in the coverup of illegal acts and bribery. My speech to a large group of students, faculty and visitors was entitled, Who Will Slay The Dragon? Penn State and College Football: How “Ethical” Institutions Have Dropped Their Swords and Shields.

    Just because a case is not prosecuted or regulators do not impose sanctions or disciplinary actions does not mean that laws were not broken or rules and standards not violated. You would have to be completely naïve to think that all of those activities are not fraught with politics, human error and frailties, incompetence, lack of courage of conviction and sheer laziness.

    I, on the other hand, can say what’s right with none of those constraints. 🙂

  10. Kofi
    Kofi says:

    I believe you have failed to realize that auditors with the knowledge and tools available are still limited in being able to detect fraud and intentionally hidden acts, because most of the perpetrators of such acts are also qualified accountants themselves!! they take the same examinations and training as auditors do!! and most of them have been in the auditing field before moving over to the banks. Now think of it how difficult will it be to find something if its hidden by someone of equal knowledge.

    Financial instruments are very complex and even the IASB takes ages to just classify the definition of an instrument and mind you definition and intent is what decides where what goes on the balance sheet.

    Also the misplaced ideology that auditors are fraud investigators is one thing i realize you need education on. Auditors are not to primarily investigate or detect fraud. Fraud by its nature is meant to be hidden and trust me things hidden in financial statements can really get hidden and won’t go noticed in the short term.

    The audit process none the less is designed in a way to detect as much fraud as it can, but naturally this is all depended on the internal control systems of the client, and who knows the intricate workings of these control systems more: the client or the auditor. And mind you regulators FORBID auditors from tweaking or designing and implementing control systems for clients. We may draw their attention to weaknesses noted but the very regulators who are sounding horns demand we cant design them.

    So the client knows their internal control system more than we do, they design it with the help of even more smarter people and with the manuals available we try to test how efficient these systems are. There are limitations; especially I SAY AGAIN IF SOMEONE IS TRYING TO HIDE SOMETHING;

    Internal control systems tests are not the only tools available, but trust me they are the strongest. We can try to learn as much as we can about a clients business and its control systems and this will help with future audits, but there is always a hidden door. Any knowledgeable person in systems design knows the first law. where there is a will there is a way.. Bankers want more profits; it determines how they get paid; and they will always have the will and find the way.

    Instead of blaming auditors ask how did the salary and bonuses of bankers get that high. Ask the share holders most of whom are just snoozing and being dormant, they vote for the pay not auditors. Auditors have over the ages tried to involve shareholders the more and the more have they ignored us.

    Don’t blame auditors for the corrupt nature of bankers. blame the human greed in the bankers.

  11. Francine
    Francine says:


    You’ve really bought the farm. I hope you never show up in an indictment, bankruptcy examination or SEC sanction. To defend the profession by saying that clients will always be smarter than us is to capitulate to them.

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