Of auditors and ambassadors

Craig Murray is the UK’s former ambassador to Uzbekistan. He’s an excellent exposer of evilness in ex-Soviet extremities, and was one of the main figures behind the campaign to stop Alisher Usmanov gaining control of Arsenal. In short, he’s a good man.

However, he’s not a man who should really be writing about financial statements. At the moment, he has a piece on his website that not only misunderstands the nature of auditing and falls for myths from my favourite accountant, Dr Prem Sikka, but is probably libellous to boot…

The saga starts with Jeremy Corbyn, my former MP and another generally excellent chap (he wrote me a letter of thanks after I wrote him a letter of thanks for opposing the Terrorism Act, which strikes me as a decent thing for an MP to do), who’s been in parliament asking for confidential reports that Mr Murray wrote on Mr Usmanov’s alleged corruption, when he was still ambassador in 2004.

According to Mr Murray, one of these reports alleges that Gazprominvest, the Gazprom subsidiary that Mr Usmanov runs, paid an enormous bribe to the daughter of the Uzbeki president. Not altogether surprisingly, Mr Usmanov’s PR men have denied that this is true. Mr Murray’s reaction to that denial was the following post:

Bent Auditors

Usmanov’s PR people claim it would have been impossible for Gazprom to pay a bribe to President Karimov’s daughter Gulnara because

No evidence has ever been forthcoming and the accounts of Gazprominvest [the Gazprom company of which Usmanov is president] are audited by PricewaterhouseCoopers

That of course is deeply reassuring. Usmanov is audited by the people who brought you Robert Maxwell’s accounts

and the BCCI accounts

I hope that you are suitably reassured.

In other words, says Mr Murray, because PwC’s predecessors failed to detect the frauds at Mirror Group and BCCI, everything it does must be corrupt, and therefore its audit report on Gazprominvest is also not worth the paper it’s printed on.

There’sa small problem with this analysis: it’s complete rubbish.

Let’s get the easy bit out of the way first: in both of the cases he mentions, there is no suggestion of corruption on the auditors’ part. It’s a long-established legal precedent that calling someone a crook is libellous unless they are one, and that it’s possible to libel a company just as much as an individual. I’m not sure ‘bent’ has ever made it into court, but it’s clearly being used in the same sense here. It’s lucky that accountants tend to be less litigious than tycoons…

The links are also weird, both coming from the fringe Association for Accountancy and Business Affairs, a miniature NGO with an epically bad website, devoted to revealing that accounting firms are evil corporation-y corporations. Dr Sikka is a board member, along with various other big names in the top-flight academic subject of accountancyology.

Dr Sikka also wrote the Mirror Group piece, an outraged rant confirming his eminent suitability for the medium of blogging. He reveals the terrifying and damning facts: partners who are now dead or retired, in a firm that no longer exists, operating 20 years ago, fell for Robert Maxwell’s charisma [*], and believed his ‘honest’ explanations for accounting quirks that were actually ways of hiding his money-stealing.

The sensible conclusion to draw from this is that determined cheats can sometimes get round the measures designed to stop them, and that better training and regulatory processes can be required to reduce the risk of this happening (and indeed, such measures were brought in). Dr Sikka’s conclusion, on the other hand, is that accounting firms are evil corporation-y corporations. This is known as ‘a creative interpretation’.

The BCCI piece (which doesn’t carry a byline) is even odder. In real life, Price Waterhouse’s auditors were the first people to notice that the bank had a hole in its books, leading to its bail-out by major shareholder the Emir of Abu Dhabi in 1990; they then wrote the damning Sandstorm report in 1991 that led to the bank’s closure. The article doesn’t mention either of these, and instead suggests that Sandstorm was a government report that largely criticised PW for being an evil corporation-y corporation. This is known as ‘a creative interpretation’.

In short, the links Mr Murray provides don’t really do anything major to undermine the credibility of PwC’s work as an auditor, although they do appear to undermine the credibility of the AABA a little…

Let’s get away from the conspiracy theories. The leading accounting firms are all generally good at applying accounting standards to the companies they audit; sometimes they fall down, generally through lack of diligence and occasionally through fraud.

So the fact that a company’s financial statements have been audited by a Big 4 firm makes them more plausible than if they hadn’t been. However, it does not give them ‘ordained by God as sheer truth’ status: if you are a skilled crook, cheat and liar, you can con auditors just as much as you can con everyone else.

And…. so, the fact that PwC haven’t caught Mr Usmanov bribing anybody obviously doesn’t mean that he hasn’t bribed anybody. It is, however, a fairly strong piece of evidence that he at least hasn’t bribed the suggested person in the suggested way: $89 million payments to CASH tend to raise auditors’ suspicions, even in the former USSR.

Writing this post feels slightly fish-barrel-machine-gunnish: Craig Murray is a diplomat, and it’s not reasonable to expect him to be an expert on financial reporting. Nonetheless, it’s a big fat reminder that – whether you’re a journalist or a blogger – if you write scathing posts about things you don’t understand, you run a serious risk of damaging your own credibility…

Note: the views expressed in this piece are exclusively my own views as a private individual. They are not written on behalf of and cannot be attributed to any other person or entity.

[*] An odd phrase, that one, but some quality of Maxwell’s did genuinely seem to work on investors, accountants, hacks, judges and juries alike.

  1. This is a great piece. Sort of why we started this in the first place. It’s enough to make me nostalgic for the good old days, when Iain Dale hadn’t even heard of us.

  2. A very nice piece, John. Except that I read every word that Richard Murphy writes and therefore I know that the Big 4 are always, always crooked and corrupt.

    Go, read him, see the light; they are eeeevil! Evil I tell you! And you know why? Because they tell their clients how to, quite legally, minimise their tax liabilities. Do you see?

    Evil! Burn the Big 4 witches!


  3. I think you are being a bit hyper-critical. Yes, I do know what auditors do. But the fact is that Enron, Polly Peck, Maxwell, BCCI and scores of others all had perfectly reputable auditors who with retrospect were over a period of years, at the most charitable, not very inquisitive, less charitably negligent, or in a more cynicl view quite happy to rub along in exchange for pocketing huge auditing fees.

    I think you agree that the argument that there can’t be fraud because a company uses a top 4 auditor is unconvincing?

    As I am sure you know, with a little more digging you can find some detailed criticism of PWC’s acceptance of some of Gazprom’s very dubious accounting
    practices, and at Yukos too. Good link in a comment on my website.

  4. John B said:

    We need to distinguish between some different classes of statement here.
    “there can’t be fraud because the company uses a top 4 auditor” – yes, unconvicing.
    “a top 4 auditor has looked at this transaction and failed to find any trace of fraud, so it’s unlikely that this transaction was fraudulent in the way it’s being alleged” – rather more convincing.
    “the top 4 auditors are bent” – false.
    AIUI PwC has remained Gazprom’s auditor (based on shareholder votes) from 1997 to the present day, which suggests that an article that says some minority interests were unhappy with its performance five years ago may not be quite the smoking gun you’re claiming. I don’t understand quite how the whole Yukos mess happened, and it would require some serious research to get a decent view, so for the time being I’m going to follow my own advice and say nothing about it…

  5. I do not consider that your restatement of Craig’s post “in other words” is an accurate account of what he seemed to be saying.

    Craig claims that Usmanov claims that being audited by PWC implies you are not crooked.

    Craig also seems to claim the statement that being audited by PWC does not imply you are not crooked.

    The statement you are attacking is the converse: that being audited by PWC implies that you are crooked. This is indeed false, but it’s not the same as Craig’s statement.

    It looks to me as if you have machine-gunned a barrel that you erroneously believed contained fish, having only inspected it in a hurry.

  6. John B said:

    No. Craig is wrong on two counts:

    1) He claims that being audited by a big-4 firm isn’t evidence of lack of crookedness. It isn’t proof of lack of crookedness, but it is certainly evidence of it.

    2) He claims, by titling his post ‘bent auditors’, that big-4 firms are crooked. They aren’t.

  7. 1) He makes no such claim: I read it merely as stating that it is not proof of lack of crookedness.

    2) The title does claim that, but the title of his post seems unrelated to the actual content of the post. Nevertheless, you are still putting some words in his mouth: you have substituted “Big 4″ for “PwC”: none of the 3 Big Others had been mentioned until you decided to start talking about them.

  8. John B said:

    1) In my reading, Craig uses the AABA’s criticism of the auditors to entirely dismiss their report as *evidence*, not just to point out that it doesn’t represent 100% *proof*. YMMV.
    2) I’m charitably assuming that the post is following the AABA’s anti-big-4 agenda rather than defaming a single firm; I’ll continue with that unless Craig specifically suggests that he’s doing otherwise.

  9. Mmmmm –

    I think I am claiming that the problem with the audit system is that the (legal) person being checked on chooses – and pays – the person doing the checking. And that it is not difficult to imagine that auditors may not wish to enrage their clients and lose audit contracts worth millions of pounds, and that on occasion that may have led them to be less rigid than they should in applying thier professional standards.

    I am not suggesting that any firm, or its employees, is particularly prone to this. No am I suggesting that accountants are any more crooked than the rest of the population. But it is a conflict inherent in the system which sometimes has led people – from all kinds of audit firms – to succumb to the temptation of being less rigorous than they should. And that the historical record does not beat out a contention that being audited by PWC is a particular safeguard against corruption on a large scale – I say again, Maxwell and BCCI.

    The linked articles were only referred to as evidence that PWC or its predecessors were ineed the auditors of Maxwell and BCCI. I was not endorsing every last point made, let alone the general argument of the website on which they were found – although I must say they read fairly well to me.

  10. Is there any evidence that an audit in the Russian Federation is conducted to the same standards as one in in the UK, even if done by the same international firm of auditors ?

  11. john b said:

    They’re done to different /accounting/ standards, obviously.

    However, all of the Big 4 firms have global compliance/risk management rules that member firms need to follow in order to maintain their affiliation, and which are checked and enforced (e.g. PwC kicked out its Japanese affiliate ChuoAoyama and started a new Japan firm after CA failed to meet its standards).