As the FT reports this morning:
Rio Tinto and two former senior executives were hit with US fraud charges, and the miner with a UK penalty, on Tuesday for allegedly trying to hide a multibillion-dollar business failure by inflating the value of coal assets in Mozambique.
In a civil complaint filed in federal court in New York, the Securities and Exchange Commission said that Rio, Tom Albanese, its former chief executive, and Guy Elliott, a former chief financial officer, had ignored proper accounting standards and misled investors in their valuation of coal deposits that the company had purchased for $3.7bn and later sold for just $50m.
As they also note:In the UK, the company was fined £27.4m over the affair, the largest fine the Financial Conduct Authority has levied on a company for a listing-rules breach.
So, let’ ask the obvious question: where were the auditors?The allegations largely relate to 2012. The auditors then were PWC, as they are now.
The sums now subject to investigation must be material. So where is the investigation into the audit? I can find no evidence that there is one.
Why not?
In the very same FT article it says:
“Rio Tinto’s top executives allegedly breached their disclosure obligations and corporate duties by hiding from their board, auditor, and investors the crucial fact that a multibillion-dollar transaction was a failure,” said Stephanie Avakian, co-director of the SEC’s enforcement division.
…To avoid a similar black mark on the coal business, the executives hid the problems from the board, audit committee, independent directors and investors, the SEC claimed. In late 2012, they allowed the audit committee to review an estimate of the coal project’s value that had “no basis in reality”, according to the SEC charge.
The basic allegation is that they lied to the auditors. Why should the auditors have picked this up?
From the actual SEC complaint:
Instead, as the project began to suffer one setback after another resulting in the rapid decline of the value of the coal assets, they sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto’s Board of Directors, Audit Committee, independent auditors, and investors.
Well, if the auditors are going to take everything on trust, what’s the point of them? If the accounts were so dodgy that anyone could see there was a problem, PWC should have refused to sign off on them, surely?
“If the accounts were so dodgy anyone could see”
Well, quite obviously they weren’t.
All auditing has limits. Unless you were expecting PwC to go down the mine and count the lumps of coal?
Oddly, auditors do tend to refuse to sign off dodgy accounts. But as the deception was in real time, not historical accounts, the auditors had to rely on the information given. When the historical accounts were reviewed, the fraud became obvious.
I’m no fan of the big accountancy companies, but to imagine that PWC would risk its existence (see what happened to Arthur Andresen) to fudge the accounts of one client (worth a very small proportion of total income) is ridiculous – even crony capitalists wouldn’t take that sort of risk for the plausible return.
Always worthwhile reminding yourself of this expert opinion whenever Ritchie opines on auditing:
“The basic function of an audit as currently practised is to confirm that reported transactions actually took place, not to root out dishonesty. Current thinking in corporate governance puts increasing responsibility for the latter on a company’s directors.”
https://www.theguardian.com/money/2000/jan/16/workandcareers.madeleinebunting1
Noel, is the Great Dick Tater alleging that the auditors are also dishonest? I wonder what PWC would make of that?
I think, Noel, you will find that is version 1 of Richard Murphy, you know the one who, for example, himself engaged in routing UK commercial transactions through countries outside the UK (no artificiality or evasion of UK tax intended) and who provided advice on how to avoid tax to his clients and in articles published in national newspapers.
All of this before his apparent epiphany. Still, God loves a sinner who repents I suppose.
BraveFart – I think its simply he has found joy in judging others. Regardless of reality.
As Brian of Nazareth once said.
Judge not lest ye be judged.
Hang on, he wants auditors to be forensic accountants and detectives rather than just auditors? The point is to check that what’s reported is represented in the paperchase, not to look for possible stuff neither reported nor in the paperchase. Or fraud in the paperchase. That’s what the forensic accountants are for if there’s suspicion.
Or does he view all companies with…..wait, don’t answer that…
So, let’s ask the obvious question: where were the auditors?
Further proof that everything Murphy reads is assimilated quickly and inaccurately.
One does wonder how auditors are meant to spot the absence of something when there is nothing to indicate anything is absent.
Murphy’s hatred of the Big Four is positively pathological.
He turned down a partnership with KPMG once, cough, allegedly.
The mine existed. The problem was how to value it. The usual approach unless you really have doubts is to value it at cost. There was presumably evidence of suitable due diligence activities to support that price. It is only after time elapses that it is possible to determine that you overpaid. Unless this mine formed a material slice of Rio’s balance sheet, which is not suggested, the auditors would be relatively relaxed. As were the audit committee etc. Any expert sent out to evaluate it would probably be subject to “guidance” by the guys trying to do the cover up. Obviously the fraud emerged at point of sale,when the purchasers obviously got an independent valuer in. As Murphy well knows. I wrote to the ICAEW pointing out his habit of libelling his professional colleagues. Their Pilate-like response surprised me
I love this comment:
Richard Murphy says:
October 18 2017 at 1:25 pm
Tim Worstall is not worth engaging with
No one one earth with an ounce of sense takes him seriously
BraveFart,
“I think, Noel, you will find that is version 1 of Richard Murphy, you know the one who, for example, himself engaged in routing UK commercial transactions through countries outside the UK (no artificiality or evasion of UK tax intended) and who provided advice on how to avoid tax to his clients and in articles published in national newspapers.
All of this before his apparent epiphany. Still, God loves a sinner who repents I suppose.”
Isn’t it the other way with Murphy? He’s started out applying the law to the benefit of his clients and now he thinks that’s wrong and wants overturn the rule of law for the rule of Murphy and his gang.
I don’t know what God thinks, but to me that makes him the sinner now, even if we wasn’t a good gut before.
Fair comment on many things. Perhaps not though over economics being about the scarcity of resources rather than a scarcity of money.
@Tim Worstall, October 18, 2017 at 5:57 pm
Yep, Dentistry and Engineering spring to mind 😉
Murphy Logic for beginners: you support Ely Rovers. They have just lost 0-7 to the local cub scouts…..
Spud – the newspaper report makes clear that the cub scouts were awarded a dubious penalty and so Ely were the moral victors.
A N Other – eh? Even accepting that what about the other 6 goals?
Spud – why are you denying that the penalty was dubious? It seems you have no regard for the law and morality of football.
ANO – no, I’m just saying football is judged on goals scored. And Ely lost.
Spud – most right thinking people agree that the rules of football are wrong. An idea I first thought of and others now accept. Your time here is finished.
@Diogenes
ICAEW’s repeated refusal to hold their errant member(s) to account is utterly cowardly, and brings the entire profession into disrepute.
@Watchman
Except for KPMG in South Africa