Anglo Irish Audit

crapmanjoe

Quick question about the anglo report that was released this afternoon

The Auditors, Ernst & Young, Chartered Accountants,
have expressed their willingness to continue in office.

This quote in the directors report, under ifrs, does that mean they are going to continue as external auditors for anglo irish ltd, or will they have to be appointed by the Goverment? Or does the Govt have one auditor for every semi state organisation?

as a side question what did people make of the areport? did it answer any questions? or is the new board just covering the old board?

hivizman

The Anglo Irish Bank Annual Accounts for the year ended 30 September 2008 are available here:

http://www.angloirishbank.com/Investors/Reports/Annual_Report_2008/Annual_Report_2008.pdf

The bank still continues as a corporate entity even though the government has acquired all of its shares. So it still needs to have its accounts audited. The statement in the Directors' Report about Ernst & Young is a standard statement, which simply indicates that Ernst & Young have not indicated that they will not be seeking reappointment as auditors. This doesn't stop the government replacing Ernst & Young. Given that PricewaterhouseCoopers did a big investigation into Anglo Irish Bank for the government, it would not be surprising if Ernst & Young were persuaded to resign and PwC appointed in their place, possibly after the interim accounts to 31 March 2009 (which we are promised will be dreadful, with massive impairment write-downs) come out.

The new board has to tread carefully because it doesn't want to prejudice any actions that may be taken against the old board in the future (whether civil or criminal). The fact that Anglo Irish Bank has had to publish this revised version of its annual report (the original version was approved on 2 December 2008) has allowed for the publication of a lot of additional information, and notes 51 and 53 are worth reading, even though they don't give much detail of what was going on.

seven-iron

I had a brief look at them. They have a general bad debt provision of half a billion, couldnt believe it wasnt higher? They also have .7bn pre tax profit which at first look you wouldnt imagine they needed nationalisation.

Had a quick look at the corporate governance statement too and found that so wishy washy on first look. It said the directors 'believed' the company is complying with the Combined Code on Corporate Governance. Parts of the code will have to be made into law so as the directors/management are exhaustive in their efforts to make sure banks are run well going forward.

You also have to remember that they are the results for the year ended sept 08 and a lot has changed since then. This was reflected in the emphasis of matter paragraphs in the auditors report.

IAASA should review ey and how they audit, they are modern day cowboys

hivizman

seven-iron wrote: »

IAASA should review ey and how they audit, they are modern day cowboys

Problem with modern risk-based approach to auditing is that, if the auditors don't think at the beginning of the audit that there's a particular risk area, they won't do much detailed checking. Although the auditors will have obtained statements from the directors about their transactions with Anglo Irish Bank, some of the transactions would have been structured so that the directors' involvement was difficult to identify, then there was the year-end "window dressing" where directors (and their vehicles) repaid loans just before the year-end and borrowed the loans again just afterwards. If the auditors had a list of loans at the year-end to audit, they would not have picked up these loans (though a review of significant transactions just before and just after the year-end to guard against window-dressing is a fairly standard audit procedure). Also, a dead giveaway is that some of the loans made by Anglo Irish Bank were secured against shares in Anglo Irish Bank - how did E&Y miss this?

The six-montly accounts to 31 March 2009 will give the new board an opportunity to write down anything that isn't nailed down, because if they make what turn out to be excessive impairment provisions, writing these back will boost future profits and make them look good. They can blame the big write downs on the previous mob.

Dave 2008

hivizman wrote: »

Problem with modern risk-based approach to auditing is that, if the auditors don't think at the beginning of the audit that there's a particular risk area, they won't do much detailed checking. Although the auditors will have obtained statements from the directors about their transactions with Allied Irish Bank, some of the transactions would have been structured so that the directors' involvement was difficult to identify, then there was the year-end "window dressing" where directors (and their vehicles) repaid loans just before the year-end and borrowed the loans again just afterwards. If the auditors had a list of loans at the year-end to audit, they would not have picked up these loans (though a review of significant transactions just before and just after the year-end to guard against window-dressing is a fairly standard audit procedure). Also, a dead giveaway is that some of the loans made by Allied Irish Bank were secured against shares in Allied Irish Bank - how did E&Y miss this?

The six-montly accounts to 31 March 2009 will give the new board an opportunity to write down anything that isn't nailed down, because if they make what turn out to be excessive impairment provisions, writing these back will boost future profits and make them look good. They can blame the big write downs on the previous mob.

I take it you mean Anglo Irish Bank Corporation Ltd (formerly Plc) and not Allied Irish Banks Plc.

hivizman

Thanks, now corrected!

censuspro

Three points i'd like to make.

1. It was in E&Y best interests not to raise any concerns about the dirctors loans because they received approx €6 million in fees in 4 years.
2. It's my understanding that auditors of financial institutions can only be a appointed for 5 years. Who were the auditors before anglo and what were their findings?
3. The €300 million in loans that is to be written off. Correct me if I'm wrong but isn't that treated as income in the hands of the individuals aka "the golden circle" once the debt has been written off?

Capt'n Midnight

Ccould someone explain to a non-accountant why the €300 million can be written off if the golden circle still have assets, instead of bankrupting them in an attempt to get the money back ?

hivizman

Here is an extract from note 53 to the accounts of Anglo Irish Bank Corporation Limited for the year ended 30 September 2008 (as revised):

[T]he impairment charge for the six months ended 31 March 2009 will include a charge for losses incurred in respect of lending where the security consisted solely of shares in Anglo Irish Bank Corporation plc. Following the nationalisation of the Bank on 21 January 2009 the value of collateral held against such loans has been significantly reduced, with impairment estimated at €300m, including relevant amounts for Directors' loans. This is a non-adjusting event under IAS 10 as the conditions providing evidence of impairment did not exist at 30 September 2008. No provision is therefore required as at that date.
In addition, while no impairment was recognised in respect of loans to Directors or former Directors at 30 September 2008, the effect of the subsequent permanent deterioration in the share price of the Bank on their financial standing is likely to result in an impairment provision in the six months to 31 March 2009.

An impairment provision is made to reduce the amount at which an asset (in this case loans) is carried in the balance sheet to an estimate of what the company expects to recover in respect of the asset. However, the full amount of the loan is still due. The bank's new management would be failing in their duty to the bank's shareholder (the government) if it did not pursue the borrowers for the full amounts for which they are liable.

The difficulty seems to be that some (not all) of the loans were made on the basis that the bank had recourse only against the collateral offered by the borrowers, and not against the borrowers personally (the new Executive Chairman notes in his statement (page 4) that there is recourse to borrowers personally to the extent of 25% of their borrowings). This means that the bank can take over and sell any collateral, but if this isn't enough to pay off the loan, it's the bank that bears the loss - there is no right, or only a limited right, to recover from the borrowers personally. Also, in some of the loans, there will be special purpose vehicles such as companies and trusts who were legally the borrowers, and these provide an extra barrier between the bank and the "golden circle" personally.

Given that the security for some of the loans was shares in Anglo Irish Bank Corporation, whose value today is, to say the least, speculative, the new management will prudently assume the need for a high level of provision against impairment.

The key question is how did the old management get away with making loans secured by shares in the bank, on a non recourse basis, often to themselves or to entities in which they had a direct or indirect interest, without this apparently becoming a matter of concern to the auditors? The new Executive Chairman states in his statement that the risk management systems "did not identify Directors' loans as a high risk area".

djdeclan

Hold on a minute here lads, would I not be correct in saying that the €300m impairment provision is merely an accounting exercise undertaken to reflect the fact that the security behind certain loans has decreased in value? Not that the bank has decided to actually write off €300m of loans (for the craic!).
As far as i can make out they have provided for possible losses that they would incur if the loans are actually written off - because the shares they hold a charge over are now worth €300m less, which in my view is simple prudence.
So no 'Golden circle'(??) are receiving income as a result and nobody is being declared bankrupt.

djdeclan

Ahhhh I missed Hivizman's detailed reply before posting my response!!

Evertonia

As the anglo shares are now worth zero as it has been nationalised, 75% of the loan will be wriiten off as it is secured on shares that now have gone.

censuspro

hivizman wrote: »

The key question is how did the old management get away with making loans secured by shares in the bank, on a non recourse basis, often to themselves or to entities in which they had a direct or indirect interest, without this apparently becoming a matter of concern to the auditors? The new Executive Chairman states in his statement that the risk management systems "did not identify Directors' loans as a high risk area".

Very well put. I think this goes back to what I was saying earlier. Anglo produced the accounts to the auditors and said this is how we want the accounts to look and we'll pay you €6 million in fees to confirm same.