Accounting Forum 39 (2015) 118

Contents lists available at ScienceDirect

Accounting Forum
journal homepage: www.elsevier.com/locate/accfor

The corrosive effects of neoliberalism on the UK nancial

crises and auditing practices: A dead-end for reforms
Prem Sikka
Centre for Global Accountability, University of Essex, UK

a r t i c l e i n f o a b s t r a c t

Article history: The UKs nancial sector has been the subject of frauds and crisis during every decade since
Received 26 August 2014 the 1970s. The crisis has been fuelled by neoliberal ideologies which emphasise light-touch
Received in revised form 16 October 2014 regulation, individualisation, excessive faith in markets and pursuit of private prots, with
Accepted 17 October 2014
little regard for social consequences. Auditors are expected to ag matters of concern to
Available online 11 November 2014
shareholders and regulators, but that did not happen in the events leading to the 20072008
banking crash or any of the other headline scandals. Despite the failures, banking and audit-
Keywords:
ing reforms continue to be grounded in neoliberal ideology and are unlikely to address the
Financial crisis
crisis.
Banks
Financial sector 2014 Elsevier Ltd. All rights reserved.
Auditing
Neoliberalism
The state

1. Introduction

Crises and crashes are inherent to the capitalist system (OConnor, 1987), and the banking crash of 20072008 triggered
a nancial crisis whose effects have been felt around the globe culminating in unprecedented corporate bailouts and aus-
terity programmes (Stiglitz, 2003, 2010). The crisis related not only to banks and the nancial sector, but also to various
support structures, including regulatory agencies and auditing practices (Sikka, 2009; Turner, 2009; UK House of Commons
Treasury Committee, 2008). The crisis has elicited complex and contradictory national responses, often conditioned by local
antagonisms, ideologies, histories and institutional structures (Laeven & Valencia, 2010). In this context, the UK is a worthy
candidate for study. It is the worlds seventh-largest and Europes third-largest economy, and the state has developed policies
conducive to expansion of the nancial sector (Erturk, Froud, Johal, Leaver, & Karel Williams, 2007; Ingham, 1984; Morgan &
Goyer, 2012). At the height of the crisis, the UK government felt that the country was just two hours away from a nancial
meltdown.1 The government bailed out banks by injecting 375 billion through its quantitative easing programme2 and by
expanding borrowing. In May 2014, some seven years after the crisis hit the headlines; the government was still providing
934.7 billion of loans and guarantees to support the nancial sector. This amount forms part of the ofcial public debt of
some 2219.2 billion, which is about 131.6% of the gross domestic product (UK Ofce for National Statistics, 2014), and has
provided a justication for wage freezes, public expenditure cuts and an austerity programme. Between 2008 and 2014,

I am very grateful to two anonymous reviewers and the editor for their patience and helpful comments.
Correspondence to: Centre for Global Accountability University of Essex Colchester, Essex CO4 3SQ, UK.
E-mail address: prems@essex.ac.uk
1
The Independent, Alistair Darling: We were two hours from the cashpoints running dry, 18 March 2011, http://www.independent.co.uk/news/people/
proles/alistair-darling-we-were-two-hours-from-the-cashpoints-running-dry-2245350.html (accessed 28.02.14).
2
http://www.bankofengland.co.uk/education/Documents/targettwopointzero/t2p0 qe supplement.pdf (accessed 03.03.14).

http://dx.doi.org/10.1016/j.accfor.2014.10.004
0155-9982/ 2014 Elsevier Ltd. All rights reserved.
2 P. Sikka / Accounting Forum 39 (2015) 118

the UK economy stagnated and the gross domestic product hardly increased.3 One of the consequences is that UK workers,
especially those in public services, have experienced the biggest real-term drop in their living standards since the mid-19th
century.4
A variety of explanations for the crisis draw attention to matters such as subprime mortgages, nancial innovation,
inadequate capital, high leverage ratios, reckless risk taking, excessive executive remuneration, market failures, failure of
regulation, business ethics, poor accounting, auditing and corporate governance arrangements (for example, see Admati
& Hellwig, 2013; Bischoff, 2009; HM Treasury, 2009; Independent Commission on Banking, 2011a, 2011b; Stiglitz, 2010;
Turner, 2009; UK House of Commons Treasury Committee, 2008, 2009a, 2009b, 2012; UK Parliamentary Commission on
Banking Standards, 2013a, 2013b; Walker, 2009). A common UK response to the crisis is to restructure the regulatory
bodies. After the revelation of frauds at the Bank of Credit and Commerce International (BCCI) in 1991, the blame for the
regulatory failures was pinned on the Bank of England and the regulation of the nance industry was handed over to the
Financial Services Authority (Arnold & Sikka, 2001). After the 20072008 crisis, the Financial Services Act 2012 abolished the
Financial Services Authority and gave the Bank of England responsibility for stability in the nance industry.5 The revamped
structures continue to be populated by nancial elites,6 possibly in the belief that the industry is best regulated by those
experienced in it, but this can also mean that the worldviews naturalized in the industry may not be scrutinized. The main
legislative response to the banking crash is contained in the Financial Services (Banking Reform) Act 2013. The centrepiece
of the Act is a possible ring-fencing of retail banking from investment banking at some future date, but without details of
any rules for ring-fencing. In a fragmented system, it does not directly address matters relating to capital structure, leverage,
accounting, auditing, corporate governance, executive remuneration, etc., as these are farmed out to a variety of other
agencies. In promoting the legislation, the government said that the reforms would create a stronger and safer banking
system.7 In contrast, a former Chancellor of the Exchequer said that the legislation will not ensure the safety of the nancial
system,8 and the chairman of the House of Commons Treasury Committee, which investigated some of the causes of the
banking crash, said that the legislation was so weak as to be virtually useless9 as it did not constrain excessive risk-taking
by banks, and did not create robust regulatory structures (also see Independent Commission on Banking, 2011a, 2011b; UK
Parliamentary Commission on Banking Standards, 2013b).
Reliance on external auditors10 has been central to regulation of the nancial sector even though arrangements rarely
deliver the promised outcomes (Collins, Dewing, & Russell, 2012; Matthews, 2005; Sikka, Willmott, & Lowe, 1989; UK House
of Lords Economic Affairs Committee, 2011). Once again, despite numerous red ags, auditors gave a clean bill of health
to almost all distressed banks (Sikka, 2009). A well-established approach is to mediate crises by individualising failures,
producing soothing reports with promises of far-reaching reforms and the tweaking of accounting and auditing standards,
the format of audit reports, codes of ethics and disciplinary arrangements (Collins et al., 2012; Matthews, 2005; Sikka &
Willmott, 1995a, 1995b). The same pattern is being repeated again (for example see, European Commission, 2014; Financial
Reporting Council, 2011, 2013; Sharman, 2012; UK House of Lords Economic Affairs Committee, 2011) with possibilities of
auditor rotation and further restrictions on the sale of selected consultancy services to audit clients. Such reforms may well
reassure sceptical stakeholders and secure some improvements in audit practices, but do not amount to any fundamental
changes. For example, there is virtually no scrutiny of the pressures of commercialisation which persuade accountancy
rms to prioritise welfare of client company directors over broader society (Hanlon, 1994), non co-operation with nancial
regulators (Arnold & Sikka, 2001), or organisational dynamics which encourage falsication of audit work (Otley & Pierce,
1996; Willett & Page, 1996).
In contrast to much of the ofcial literature (for example, Bischoff, 2009; Financial Reporting Council, 2011, 2013, 2013;
HM Treasury, 2009; Turner, 2009; Walker, 2009), this papers central argument is that the post-crash reforms of the UK
nancial sector and auditing practices are unlikely to provide a durable solution to the crisis. Typically, regulatory deckchairs
are rearranged, and audit reports, auditing standards, codes of ethics and disciplinary arrangements applicable to auditors

3
Financial Times, GDP estimates set to push UK economy above pre-crisis peak, 20 July 2014, http://www.ft.com/cms/s/0/a2938720-0e88-11e4-b1c4-
00144feabdc0.html#axzz3EFbDOUCM (accessed 24.09.14).
4
Financial Times, When will the big squeeze on wages end? 6 September 2013, http://www.ft.com/cms/s/0/1abaeafe-161e-11e3-856f-00144feabdc0.
html#axzz39VMrgiZi (accessed 29.07.14).
5
The Act created two new structures: the Prudential Regulation Authority (PRA), under the umbrella of the Bank of England, and the Financial Conduct
Authority (FCA). The PRA is responsible for the prudential regulation and supervision of the nancial sector. The FCA is responsible for the promotion of
competition, functioning of markets, preventing market abuse and the protection of consumers.
6
For evidence see http://www.bankofengland.co.uk/pra/Pages/about/prapeople.aspx and http://www.fca.org.uk/about/structure/board (accessed
25.06.14).
7
Financial Times, Osborne backs sweeping reforms for banking industry, 8 July 2013, http://www.ft.com/cms/s/0/c94870ba-e7bf-11e2-9aad-
00144feabdc0.html#axzz32IFckJHI (accessed 20.04.14).
8
The Telegraph, Lord Lawson says banking reforms wont make system safe, 5 April 2014, http://www.telegraph.co.uk/nance/newsbysector/
banksandnance/10747096/Lord-Lawson-says-banking-reforms-wont-make-system-safe.html (accessed 20.04.14).
9
The Telegraph, Andrew Tyrie: bank reform legislation so weak as to be virtually useless, 8 July 2013, http://www.telegraph.co.uk/nance/
newsbysector/banksandnance/10167457/Andrew-Tyrie-bank-reform-legislation-so-weak-as-to-be-virtually-useless.html (accessed 20.04.14).
10
Within the available space, this paper does not examine the role of fair value accounting in the crisis which has also attracted considerable attention
(see Financial Services Authority, 2011; UK House of Commons Treasury Committee, 2009b; also see The Economist, The crisis and fair-value accounting,
18 September 2008, http://www.economist.com/node/12274096 (accessed 29.03.14).
 P. Sikka / Accounting Forum 39 (2015) 118 3

are revised (Sikka & Willmott, 1995a, 1995b), but these pay little attention to the worldviews which frame the crisis. Scholars
have argued that neoliberalist faith in competition, free markets, quest for private gain and light-touch regulation have been
key drivers of the crisis (Harvey, 2005, 2007; Stiglitz, 2003, 2010), but scrutiny of such beliefs is not on the political agenda.
Therefore it is difcult to construct reforms to address the recurring crisis of the nancial sector and auditing failures. Within
the space available here, this paper does not offer a comprehensive critique of UK banking or auditing reforms. Rather its
modest aim is to contribute to the auditing and nancial sector literature by arguing that reforms constrained by neoliberalist
paradigm are unlikely to check crisis, or provide requisite credibility to auditing practices.
This paper is divided into four further sections. The rst section explains the basic tenets of neoliberalism which became a
political dogma and provided the ideological backdrop to corrosive practices. The second section shows that the normalisa-
tion of neoliberalist values leading to high risk-taking, fraud and malpractices in the pursuit of private prots in the nancial
sector has produced serious turbulence and instability. The third section argues that auditing rms, which are private com-
mercial entities, have also embraced neoliberal values and have added to the degree of instability and turbulence. The fourth
section reects on the arguments and concludes the paper with some suggestions for reforms, which have the potential to
provide a paradigmatic shift and check the corrosive effects of neoliberalism.

2. Neoliberal ideology and crisis

Historically, liberalism has been a mixed bag of ideas from the left and the right of the political spectrum. Its lineage
can be traced back to the inuential works of John Locke and Adam Smith (Harvey, 2005), but it has also encompassed
thinkers such as John Maynard Keynes who envisaged constraints on the movement of capital and a key role for the state
in redistributing wealth to create a more equitable and just society. However, liberalism also incubated another strand
of political philosophy which prioritised individualism, markets, competition and severe constraints on the ability of the
state to intervene in the economic sphere. Friedrich von Hayek, the 1974 Nobel Prize winner in economics, excavated
such philosophies and argued that entrepreneurial (and human) freedoms are maximised when institutional frameworks
prioritise private property rights, individual liberty, free trade and unencumbered markets (Hayek, 1944; Tebble, 2010). The
role of the state is primarily conned to facilitating an institutional framework conducive to the above goals. In Hayeks
writings, markets and competition are timeless and key to a stable and moral order. Hayek wrote:
It was mens submission to the impersonal forces of the market that in the past has made possible the growth of a
civilization which without this could not have developed; it is by thus submitting that we are every day helping to
build something that is greater than anyone of us can fully comprehend (Hayek, 1944: 210).
In championing markets and constraints on state intervention, Hayek argued that
The refusal to yield to forces which we neither understand nor can recognize as the conscious decisions of an intel-
ligent being is a product of an incomplete and therefore erroneous rationalism. It is incomplete because it fails to
comprehend that the co-ordination of the multifarious individual efforts in a complex society must take account of
facts no individual can completely survey. And it fails to see that unless this complex society is to be destroyed, the
only alternative to submission to the impersonal and seemingly irrational forces of the market is submission to an
equally uncontrollable and therefore arbitrary power of other men Hayek, 1944: 210).
Competition and neutering of the state, or at least keeping it at some distance from the markets, is a key to prosperity
and stability. Hayek wrote that
The successful use of competition as the principle of social organization precludes certain types of coercive inter-
ference with economic life, but it admits of others which sometimes may very considerably assist its work and even
requires certain kinds of government action (Hayek, 1944: 42)
A major question is how the markets and competition are to be directed or guided, especially as the state is sidelined.
Here neoliberals argued for supremacy of shareholder interests (Berle & Means, 1991; Fama, 1980; Jensen & Meckling, 1976).
An often cited view is that shareholders are the owners of the business and that the responsibility of corporate executives
is to conduct the business in accordance with their desires, which generally will be to make as much money as possible
while conforming to the basic rules of the society (Friedman, 1970: 32).
In the 1970s, after a long Keynesian economic boom, western capitalism faced higher unemployment, ination rates,
commodity prices and wage demands, declining rates of protability and a balance of payments crisis (Armstrong, Glynn,
& Harrison, 1991). Keynesian policies seemed to be unable to address the crisis and some saw this as an opportunity for
the advancement of the neoliberal project (Peck, 2010), and argued that the economy could be revived by placing greater
reliance on free markets, competition, mobility of capital and restrictions on state intervention in the economy (Harvey,
2005). The state, neoliberals argued, had to be rolled back from the economic sphere because it was inefcient, misallocated
resources and got in the way of self-correcting markets. The calls for abandoning post-war Keynesian consensus resonated
with major political parties in the US and the UK, leading to the election of Ronald Reagan as US President (1981-1989) and
Margaret Thatcher as Prime Minister (1979-1990) of the UK. Their brand of neoliberalism redirected the state to seek social
efciency through competition via free markets, mobility of capital, light-touch regulation for nancial markets and reliance
4 P. Sikka / Accounting Forum 39 (2015) 118

on shareholders to call management to account (Hall & Jacques, 1983). Such a break was supported by the nance industry
which has a long history of inuencing UK government policies (Ingham, 1984). Since the 1980s, the nance industry has
become a key component of UK government policies and its priorities have shaped interest rates, the sale of state-owned
enterprises, abandonment of xed exchange rates, scal and monetary policy, the provision of pensions, mortgages, loans
and a general move towards nancialisation of the economy (Morgan & Goyer, 2012).
Neoliberalism not only informed the economic and social policies of governments, but also provided everyday under-
standings of what it means to be successful. It reconstructed nations, communities and individuals as competitive beings
engaged in the endless pursuit of private wealth and consumption, which would somehow lead to vast increases in new
jobs, efciency, afuence and happiness. The spirit of new capitalism had to be inculcated into organisations and individ-
ual through submission to the market principle (Boltanski & Chiapello, 2005). A key element of this is to govern through a
relentless focus on output measurements of performance, which subjects individuals to a disciplinary regime of performance
targets, evaluations and appraisals. Such practices legitimise the logic of markets, competition, choice and private gain, and
performance related pay has become the norm for business executives (Committee on the Financial Aspects of Corporate
Governance, 1992). Neoliberalist ideologies were eagerly embraced by governments in the UK and USA and exported to
other countries through foreign direct investment, trade agreements and nancial institutions, such as the International
Monetary Fund, the World Bank and the World Trade Organization.
A necessary condition for the operation of effective markets is that individuals need to be constrained in some way
by social norms and regulatory structures. Such constraints induce stability, predictability and a sense of fairness that is
essential for any social system to work (Merton, 1938). In the words of Margaret Thatcher, there is no such thing as society.
There are individual men and women and there are families . . . it is our duty to look after ourselves. Theres no such thing
as entitlement . . . (McSmith, 2010: 297). However, this faith in individualisation, competition and the pursuit of private
interests eroded the space for consideration of fairness and morality, as the very notion of success is seen through the lens
of markets and economic entrepreneurship. One consequence of such ideologies, according to Nick Leeson, often blamed
for the demise of Barings Bank a British merchant bank that existed from 1762 to 1995, was that the nancial sector
increasingly became populated by traders who are not always so scrupulous about how they make their vast bonuses. The
job of these traders and brokers is to make millions for big companies. They compete ferociously to maximise prots for
themselves and their masters. But, increasingly, they do so in untried ways or by sidelining the caution and restraint of
previous generations (Leeson, 2007). The neoliberal emphasis on maximising private prots and performance related pay
enabled some to collect large amounts in remuneration, but also sowed the seeds of the nancial crisis. As Harvey (2007)
notes,
The strong nancial wave that set in after 1980 has been marked by its speculative and predatory style. The total daily
turnover of nancial transactions in international markets that stood at $2.3 billion in 1983 had risen to $130 billion
by 2001. . . . Deregulation allowed the nancial system to become one of the main centers of redistributive activity
through speculation, predation, fraud, and thievery. Stock promotions; Ponzi schemes; structured asset destruction
through ination; asset stripping through mergers and acquisitions; and the promotion of debt incumbency that
reduced whole populations, even in the advanced capitalist countries, to debt peonageto say nothing of corporate
fraud and dispossession of assets, such as the raiding of pension funds and their decimation (p.36).
Such practices made the nancial sector bigger and even harder to regulate. In the words of the managing director of the
International Monetary Fund (IMF): In the decade prior to the [200708] crisis, the balance sheets of the worlds largest
banks increased by two to four-fold. With rising size came rising risk in the form of lower capital, less stable funding,
greater complexity, and more trading. This kind of capitalism was more extractive than inclusive. The size and complexity of
the megabanks meant that, in some ways, they could hold policymakers to ransom (Lagarde, 2014). The destructive effects
of neoliberalism were highly visible in the UK nancial sector, but this did not encourage the government to roll-back its
social experiment. If anything, it promoted neoliberal values more vigorously. The next section provides some evidence to
support such a proposition.

3. Neoliberalism and the nancial sector

The UK nancial sector has been the most vociferous champion of free markets, competition and light-touch regulation,
even though it has been mired in scandals. In an environment of light-touch regulation, the UK experienced a secondary
banking crash in the mid-1970s (Clarke, 1986; Moran, 1986; Reid, 1982) and the crisis spread to insurance, property and
other sectors. The crisis revealed uncontrolled speculation and fraud. The state bailed out companies and had to negotiate a
loan from the International Monetary Fund (IMF) for its own survival. The government investigations into frauds tended to
individualise failures and made little attempt to scrutinise systemic pressures that persuaded corporations to pursue higher
prots at almost any cost (for example, Department of Trade and Industry, 1976, 1977, 1983). The government responded
by introducing the Banking Act 1979 to provide a statutory framework for deposit-taking banks, under the supervision of
the Bank of England. The Act was meant to replace the traditional gentlemanly code of self-regulation though in practice
the regulator continued to rely on networks of inuential grandees for information and advice. The Act said little about
regulation of other nancial enterprises (e.g. insurance companies) and such omissions were soon to be source of another
crisis.
 P. Sikka / Accounting Forum 39 (2015) 118 5

The faith in gentlemanly conduct and was further shattered by a stream of frauds and failures throughout the 1980s (and
beyond) at the London insurance market, known as Lloyds of London (Davison, 1987; Hodgson, 1986). The internationali-
sation of the market increased the number of underwriters (traditionally known as Lloyds Names who formed syndicates
to underwrite risks), but many were passive and were more interested in using the market as a tax shelter rather than for
underwriting risks. The arcane structure of Lloyds did not require Names to provide any permanent capital. Instead, the
Names pledged assets and their credit to pay out on insured losses arising from the activities of their syndicate. In the
absence of formal regulation, the underwriters developed ways of not recognising losses and liabilities, especially those
arising out environmental degradation and the use of asbestos, but this could not be postponed for ever. Some of the syn-
dicates were insolvent and some were also found to be engaged in fraudulent practices (Luessenhop & Mayer, 1999). The
governments response was to enact the Lloyds Act 1982 which diluted conicts of interest by separating the ownership of
underwriting syndicates from the ownership of insurance brokers. It granted Lloyds power of self-regulation, though not the
obligation to regulate the market, through a governing Council whose members were granted immunities from lawsuits.
Indeed, self-regulation survived until 2001, and in 2005 regulation of Lloyds became subject to the supervision11 of the
Financial Services Authority (FSA), a general regulator for the entire UK nancial sector (James, 2007).
The inadequacies of the banking supervision were soon highlighted by the failure of Johnson Matthey Bank (JMB). Since
the 1960s, JMB made prots from trade in precious metals. In the late 1970s it entered the unfamiliar world of high-risk
lending to make higher prots. The banks loan-book expanded rapidly from 50 million in 1981 to 500 million by March
1984, and exceeded its capital (Hall, 1987). The prots associated with loans rose from 25% of the groups total to 60% by
1983. The loans were made to relatively few borrowers and most turned out to be bad and fraudulent.12 The Bank of England
had no awareness of such dealings, but rescued JMB by buying it for 1 and subsequently pumped-in more than 100 million
to stabilise the bank. Once again the government sought to revamp the regulatory structures. The Banking Act 1987 replaced
the 1979 Act and bolstered Bank of Englands powers to vet shareholders and controllers of banks.
By the late 1970s, foreign exchange controls were abandoned to aid mobility of capital and welfare of the nancial
sector became central to the government policies for economic revival (Morgan & Goyer, 2012). The nancial sector (banks,
insurance companies, pension funds, etc.) diversied into a variety of nancial services and made vast prots from insider
trading, takeovers, sanction busting, speculation on the price of commodities and land (Clarke, 1986; Moran, 1986; Reid,
1988). Further deregulation was facilitated by the Financial Services Act 1986 which abolished xed rates of commission and
the distinction between stockbrokers and stockjobbers. Electronic trading speeded up trading, and fortunes could be made
by trading on very narrow margins. Prior to the Financial Services Act 1986, speculation by banks was constrained because
gambling debts were generally not enforceable in courts. However, during the parliamentary passage of the legislation, the
government slipped in an amendment that for the rst time ever said that the gaming laws of the land would not apply to
these City gaming contracts.13 The demand for novel nancial products and speculative activity was further fuelled by the
Building Societies Act 1986 which permitted building societies to demutualise and effectively become banks. Historically,
building societies were owned by their depositors and primarily lent money to house buyers and were permitted to invest
surplus cash in low risk securities, such as government bonds. They generally waited for borrowers to repay mortgages
over 20-25 years and then lent the money to others, but now in the nancialised economy they could increase prots
by (re)packaging their assets and liabilities into novel nancial products and trade in risky securities (e.g. derivatives) to
instantaneously raise nance (Klimecki & Willmott, 2009). Deregulation ushered in by the Financial Services Act 1986
changed the nature of banks. For example, in 1969 retail deposits accounted for 88% of bank liabilities, but by 2009 they
stood at just 40%,14 an indication that banks had moved away from their traditional role and become rmly embedded in
speculative practices.
The nancial sectors dealings were further exposed by the 1986 share price rigging scandal involving a takeover of
Distillers by Guinness plc, with members of parliament claiming that some people have entered the City who are long on
cunning but short on morals.15 A subsequent investigation concluded that too many executives at major corporations have
a
cynical disregard of laws and regulations . . . cavalier misuse of company monies . . . contempt for truth and common
honesty. All these in a part of the City [of London] which was thought respectable (UK Department of Trade and
Industry, 1997: 209).
In 1988, under the weight of 100 million frauds, investment broker Barlow Clowes collapsed (Department of Trade and
Industry, 1988a, 1995). The broker marketed a fund which offered higher yields from investment in low-risk government
gilt-stocks. This was not viable and Clowes actually invested in high risk investments. Through complex offshore structures

11
The background is further scandals and also the fallout out from the 9/11 attacks on the World Trade Centre in New York which led to disputes amongst
syndicates about their liabilities.
12
Hansard, House of Commons Debates, 20 June 1985, cols. 384393; 26 July 1985, cols. 1442-1450.
13
Lord Phillips of Sudbury, Hansard, House of Lords Debates, 27 November 2013, col. 1435, http://www.publications.parliament.uk/pa/ld201314/ldhansrd/
text/131127-0001.htm (accessed 21.01.14).
14
Bank of England, Quarterly Bulletin, 2010 Q 4, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb1004.pdf (accessed
15.02.14).
15
Hansard, House of Common Debates, 15 January 1987, col. 412.
6 P. Sikka / Accounting Forum 39 (2015) 118

in Gibraltar and Jersey, Clowes operated a bond washing and tax avoidance scheme that turned highly taxed income into low-
taxed capital gains. As the government outlawed the tax avoidance schemes, the investment strategy operated by Clowes
began to unravel. Some insiders had informed the Department of Trade and Industry of the brokers practices, but it renewed
its licence to trade in 1985, 1986 and 1987. A 1989 report accused the Department of Trade and Industry of maladministration
in its handling of the failed investment broker (UK Parliamentary Commissioner for Administration, 1989).
Ever since the 1970s, the government had been keen to attract foreign banks to cement Londons place as the leading
nancial centre. However, the regulatory apparatus was poorly designed (Arnold & Sikka, 2001). The twentieth centurys
biggest banking frauds took place at the Bank of Credit and Commerce International (BCCI). In July 1991, the Bank of England
closed BCCI. Some 1.4 million depositors lost some part of their savings. However, unlike the previous banking collapses, no
government inspectors have, so far, been appointed to investigate the BCCI frauds. A US Senate investigation into the frauds
at BCCI concluded that British regulators and bank auditors had become partners, not in crime, but in cover up (US Senate
Committee on Foreign Relations, 1992: 276). To manage public anxieties, the government appointed Lord Justice Bingham
to examine the failure of the Bank of England to effectively supervise BCCI operations, but his report (Bingham, 1992) has not
been published in full16 as successive governments have sought to protect the identity of key nancial elites.17 The weakness
of regulation and the consequences of the headlong rush to make prots were further exposed by the collapse of Barings
Bank in 1995 (Board of Banking Supervision, 1995). The bank made considerable prots from speculative activities and its
securities traders were inculcated into the ethos of make prots, prots, and more prots18 One of the banks star traders,
Nick Leeson, got his bets on derivatives wrong and used false accounts to cover his tracks. The linking of remuneration to
performance was a key factor in the frauds (Zhang, 1995).
Further shortcomings of light-touch regulation were exposed by the collapse of Equitable Life, another insurance com-
pany, which had been trading since 1762. In the 1980s, it joined the neoliberal frenzy for greater prots by promising
exorbitant payouts to its 1.5 million policyholders. These could not be maintained, but Equitable continued to declare
bonuses out of all proportion to its prots and assets. The company subsequently faced a shortfall and tried to renege on
its promises, and made unsuccessful attempts to sell the business. From 2000 onwards, a scandal erupted. Various reports
looked at the debacle (Penrose, 2004; UK House of Commons Public Administration Committee, 2008; UK Parliamentary and
Health Service Ombudsman, 2008; UK Parliamentary Ombudsman, 2003) and one of these (Penrose, 2004) said that there
were no internal management checks on the viability of the products sold and, by the end of 2000, the societys liabilities
exceeded its assets by 1.8 billion. The same report said that the Department of Trade and Industry was poorly equipped
to perform its regulatory tasks, and the light-touch regulatory regime was a major cause for concern. Another report (UK
Parliamentary Ombudsman, 2003) said that there was a marked difference between the expectations of the regulatory
regime and the nature of that regime in practice.
The spread of performance related pay in the nancial sector coincided with innovations in nancial products and the
extensive sale of abusive nancial products relating to pensions, endowment mortgages, precipice bonds, split capital invest-
ment trusts and payment protection insurance, just to mention a few (for example, see Mitchell & Sikka, 2006; Ofce of Fair
Trading, 2006; UK House of Commons Treasury Committee, 1998, 2003, 2004). These products were carefully designed and
marketed by executives whose remuneration was linked to prots. Staff were trained to sell them to unsuspecting customers,
with the promise of higher commissions and bonuses. Markets lauded companies for their high prots and dividends, but did
not ask any questions about the quality of prots. Despite having a plethora of non-executive directors, audit committees,
ethics committees and eminent accounting rms as auditors, there was no public disclosure of the aggressive sales practices
or the risks associated with them.
Finance theory has long held that higher leverage can reduce the cost of capital and hence increase the value of the rm
(Modigliani & Miller, 1958; Miller, 1995) and shareholder returns. The difculty is that the theory pays little attention to the
impact of corporate bankruptcy and bailouts on taxpayers, the state and society in general. Still, the theory was extensively
mobilised to argue a case for lower equity or long-term capital to be held by banks (Admati & Hellwig, 2013). Governments
were sympathetic as they increasingly relied on credit boom to stimulate economic growth. Following the Basel II accord,
from 2004 onwards, the regulators decided to rely on the risk assessment models developed by banks themselves with the
help of credit rating agencies. These were based on numerous assumptions about market prices and the presence of buyers
and sellers, and could not easily be veried. Nevertheless, bank assets were categorised in terms of risks, such as Tier 1 and
Tier 2 and each tier had its own capital requirements. For example, Tier 1 originally had a capital ratio (mainly measured by
equity, preference shares and retained earnings, but subsequently included a variety of hybrid nancial instruments) of 4%,
and 8% was the specied ratio for combined Tier 1 and Tier 2 assets. Under pressure from banks, the 4% of equity requirement
subsequently decreased to 2% of equity (Herring, 2011). The need for capital would also be reduced if banks could move
assets and liabilities off balance sheet. Banks were permitted to move large amounts of collateralized debt obligations (CDOs)
off their balance sheets. Just before the 2007 crash, it was reported that more than US $5000 billion of assets and liabilities

16
Financial Times, Darling seeks full release of BCCI report, 12 March 2011, http://www.ft.com/cms/s/0/7f6d5df8-4c0c-11e0-82df-00144feab49a.html
#axzz2qwQJoLbN (accessed 27.02.14).
17
Some aspects of this are brought to light by the case of Prem Sikka v Information Commissioner, EA/2010/0054, 11 July 2011, available from:
http://www.informationtribunal.gov.uk/DBFiles/Decision/i544/20110909%20Decision%20and%20Conf%20Sch%202.pdf (accessed 15.01.14).
18
BBC News, How Leeson broke the bank, 22 June 1999, http://news.bbc.co.uk/1/hi/business/375259.stm (accessed 15.06.14).
 P. Sikka / Accounting Forum 39 (2015) 118 7

were not reported in the balance sheets of major banks.19 Some $1.2 trillion of bad debts and toxic assets were shown as
good assets by banks.20
In 2007, the then UK banking regulator, the Financial Services Authority (FSA) gave Northern Rock (previously a building
society), at the time the UKs fth-largest bank, a waiver from the Basel II requirements. A subsequent hearing on the collapse
of the bank by the UK House of Commons Treasury Committee noted that due to this approval, Northern Rock felt able
to announce on 25 July 2007 an increase in its interim dividend21 of 30.3%. This was because the waiver and other asset
realisations meant that Northern Rock had an anticipated regulatory capital surplus over the next 3 to 4 years (UK House of
Commons Treasury Committee, 2008: 25). Within days, Northern Rock faced a cash ow crisis as the market for mortgage-
backed securities collapsed, and the UK faced its rst bank run since 1866. The neoliberal state rescued and subsequently
nationalised the bank. Abbey National, Alliance and Leicester, Bradford & Bingley, Cheltenham and Gloucester, and Northern
Rock were some of the early building societies to demutualise and subsequently, they all needed rescuing in the 20072008
crash. This was followed by the nationalisation of Bradford & Bingley, Royal Bank of Scotland (RBS) and the state sponsored
rescue of HBOS by Lloyds Banking Group, amongst others. Other banks suffered from capital inadequacy too. For example,
just before the 20072008 crash, Bear Stearns had some $11 billion (6.9 billion) in equity and $395 billion (247 billion)
of assets, most of which could not easily be turned into cash to meet its obligations.22 The bank had a leverage ratio of over
351 ($395 bn/$11 bn) and could barely absorb a decline of around 3% in its assets. Lehman Brothers had a leverage ratio of
more than 301.23 With this leverage, a 3.3% drop in the value of assets would wipe out the entire value of equity and make
the bank technically insolvent. RBS had an even lower leverage ratio of just 2%. The ripples of the banking crisis could be felt
in 2014. In 2009, Britannia Building Society was absorbed into the Cooperative Bank, and in 2012 it was considering plans
to buy branches of the troubled Lloyds Bank. However, its weak capital base was further eroded as it declared a loss of 600
million in 2012. This reduced its leverage ratio to just 1.8%. In December 2013, the banks creditors approved a 1.5 billion
bail-in to shore up its nances. The rescue gave bondholders 70% ownership of the Cooperative Bank while the previous
owners saw their stake fall to 30%. This deal improved its leverage to 2.4% but still left the bank teetering on the brink.24
In nance theory, derivatives are portrayed as instruments of risk-management, but they have also been described as
nancial weapons of mass destruction25 and tools for moving money off balance sheet, and by doing so, concealing enor-
mous risks (Stiglitz, 2003: 132). Most derivatives are clever bets on the price of commodities, interest rates and exchange
rates, whose outcome may not nally be known until 10-15 years into the future and is subject to numerous uncertainties.
This gambling is akin to someone placing a bet on racehorses, and nancial horses cannot and do not always win. An early
indication of the problems was provided by the demise of Long-Term Capital Management (LTCM), a US hedge fund founded
by Myron Scholes and Robert Merton, who shared the 1997 Nobel Prize in Economics for a new method to determine the
value of derivatives.26 Their mathematical models enabled them to make huge prots, but just seven months after receiving
the Nobel Prize, their hedge fund was in trouble (Lowenstein, 2000). At one stage, LTCM had capital of only $4.72 billion,
but borrowed $124.5 billion and thus tied numerous other banks to its risky positions. In 1997-98, LTCM misjudged the
severity of the East Asian and Russian nancial crisis and found itself with $400 million of capital, $100 billion of debts,
$4.5 billion of losses and derivatives with a face value of $1 trillion. The US government persuaded a consortium of banks to
rescue it. Derivatives played a key role in the demise of Barings Bank, Enron and WorldCom, but did not attract a great deal
of regulatory attention.
In June 2008, the notional value of derivatives was around $683.7 trillion and the market value, subject to numerous
estimates was estimated to be around $20.3 trillion (Bank for International Settlements, 2008). The exposure of each bank
is hard to calculate as the whole system relies on the counter parties to honour their obligations, and the failure of one
can set-off a domino effect. In 2007, Northern Rock had derivatives with a face value of 125 billion ($200 billion). It had
opaque corporate structures and held some $50 billion of debt in Granite Master Issuer Inc., a specially created entity in
the tax haven of Jersey. Granite had hardly any employees, but was used by Northern Rock to sell bundles of its mortgages
and obfuscate its nancial risks. In 2008, Lehman Brothers collapsed with 1.2 million derivatives contracts which had a face
value of nearly $39 trillion (24.4 trillion), though the economic exposure may have been considerably less. Its balance sheet
boasted net derivatives assets of $22.2 billion (14 billion), which turned out be equivalent to the bookies receipts. As the
nancial horses did not reach the winning post, all of this became worthless junk and it faced claims from counter parties
for payment of $300 billion (188 billion). For nearly six years before its demise, almost all of the pre-tax prots at Bear

19
Financial Times, US banks fear being forced to take $5000bn back on balance sheets, 4 June 2008, http://www.ft.com/cms/s/0/33cab6b4-31d1-11dd-b77c
-0000779fd2ac.html#axzz2qhGUrpm4 (accessed 27.03.14).
20
BBC News, Credit crunch at $1.2 trillion, 25 March 2008, http://news.bbc.co.uk/1/hi/business/7313637.stm (accessed 11.02.14).
21
This was eventually not paid as the Bank ran into serious nancial difculties.
22
CNN Money, The last days of Bear Stearns, 31 March 2008, http://money.cnn.com/2008/03/28/magazines/fortune/boyd bear.fortune/ (accessed
30.01.14).
23
As per annual nancial statement led with the SEC for the year to 30 November 2007.
24
Financial Times, Tale of two banks exposes pay as wrong target of critics, 14 April 2014, http://www.ft.com/cms/s/0/a9a41d96-c3e1-11e3-a8e0-
00144feabdc0.html#axzz33U4CmaNp (accessed 29.03.14).
25
Quote attributed to hedge fund investor and the worlds second richest man Warren Buffett see BBC News, Buffett warns on investment time bomb,
4 March 2003, http://news.bbc.co.uk/1/hi/2817995.stm (accessed 17.02.14).
26
http://www.nobelprize.org/nobel prizes/economic-sciences/laureates/1997/press.html (accessed 25.03.14).
8 P. Sikka / Accounting Forum 39 (2015) 118

Stearns came from speculative activities. It collapsed in 2008 with shareholder funds of $11.8 billion (7.4 billion), debts of
$384 billion (240 billion) and a derivatives portfolio with a face value of $13.4 trillion (8.4 trillion).
The 20072008 banking crash revealed that light-touch regulation and an explosive mix of competition, pursuit of higher
prots and performance related executive remuneration had encouraged predatory practices. For example, RBS and Socit
Gnrale, JP Morgan and Citigroup have been ned D 1.71 billion (1.42 billion) for participating in illegal cartels27 in markets
for nancial derivatives by xing the London interbank offered rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR).
Credit Suisse pleaded guilty to criminal charges relating to enabling wealthy clients to evade taxes, and paid a ne28 of
US$2.6bn (1.62 bn). UBS has agreed to pay $1.5 billion (940 million) to US, UK and Swiss regulators for manipulating the
Libor interbank lending rate.29 Following a $187 bn (117 bn) bailout of mortgage guarantee rms Fannie Mae and Freddie
Mac, the US Federal Housing Finance Agency has sued a number of banks for making misleading statements relating to
the sale of around $200 billion in mortgage-backed securities. In February 2014, Morgan Stanley settled by agreeing to pay
$1.25bn30 (765.5 m). Previously, JP Morgan Chase paid $13 billion (8.1 billion)31 and Deutsche Bank32 paid $1.925 billion
(1.2 billion) to settle the charges. A number of other banks, including Barclays Bank, Citigroup, Credit Suisse, Goldman
Sachs, HSBC and RBS, have also been sued.33 The US Securities and Exchange Commission (SEC) ned Goldman Sachs $550
million (344 million) for misleading investors in a subprime mortgage product.34 In July 2013, the US Federal Energy
Regulatory Commission ned Barclays Bank $470 million (294 million)35 for the manipulation of electricity prices by its
derivative traders. The Lloyds Banking Group was ned over 28 million for promoting a culture of selling abusive nancial
products.36 HSBC was ned $1.9 billion (1.19 billion) for facilitating money laundering by terrorists and drug kingpins
(US Senate Permanent Subcommittee on Investigations, 2012). Standard Chartered, another UK bank, paid a ne of over
$300 million (188 million) for money laundering and sanction busting.37 The European Union is investigating the Bank
of America, Merrill Lynch, Barclays, Bear Stearns (now part of JP Morgan), BNP Paribas, Citigroup, Credit Suisse, Deutsche
Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, UBS and RBS for possible abuses in xing the price of Credit Default
Swaps38 (CDS). A former Goldman Sachs director has been found guilty39 of providing insider information to a hedge fund
manager.
In the previous crisis, the government used tax revenues to bail out banks, but banks were busy undermining tax revenues
through a variety of tax avoidance schemes. For example, a US Senate Committee reported that Deutsche Bank, HVB, UBS,
and NatWest colluded with major accountancy rms to construct orchestrated transactions to enable their wealthy clients
to avoid taxes (US Senate Permanent Subcommittee on Investigations, 2003). In February 2009, the US Department of Justice
levied a ne of $780 million (488 billion) on UBS to settle charges of defrauding the government of tax revenues.40 In 2013,
UBS was ned D 10 million (8.5 million) by the French authorities for helping wealthy clients to open undeclared bank
accounts in Switzerland and avoid taxes in France.41 RBS had stashed some 25 billion of its cash in tax havens, which could
have deprived the UK of 500 million in tax revenues.42 The bank has been accused of engaging in complex transactions to
avoid tax on prots of 3.8 billion from the sale of various bonds.43 In January 2014, a number of former RBS bankers were

27
European Commission, Commission nes banks D 1.71 billion for participating in cartels in the interest rate derivatives industry, 4 December 2013,
http://europa.eu/rapid/press-release IP-13-1208 en.htm?locale=en (accessed 29.03.14).
28
US Department of Justice press release, Attorney General Eric Holder Announces Guilty Plea in Credit Suisse Offshore Tax Evasion Case, 19 May 2014,
http://www.justice.gov/iso/opa/ag/speeches/2014/ag-speech-1405192.html (accessed 19.05.14).
29
BBC News, UBS ned $1.5bn for Libor rigging, 19 December 2012, http://www.bbc.co.uk/news/business-20767984 (accessed 25.03.14).
30
BBC News, Morgan Stanley to pay out $1.25bn to settle lawsuit, 5 February 2014, http://www.bbc.co.uk/news/business-26043498 (accessed 05.02.14).
31
US Department of Justice, Justice Department, Federal and State Partners Secure Record $13 Billion Global Settlement with JPMorgan for Misleading
Investors About Securities Containing Toxic Mortgages, 19 November 2013, http://www.justice.gov/opa/pr/2013/November/13-ag-1237.html (accessed
13.01.14).
32
US Federal Housing Finance Agency, FHFA Announces $1.9 Billion Settlement With Deutsche Bank, 20 December 2013, http://www.fhfa.gov/webles/
25898/FHFADeutscheBankSettlementAgreement122013.pdf (accessed 13.01.14).
33
US Federal Housing Finance Agency, FHFA Sues 17 Firms to Recover Losses to Fannie Mae and Freddie Mac, 2 September 2011, http://www.fhfa.
gov/webles/22599/PLSLitigation nal 090211.pdf (accessed 19.01.14).
34
SEC press release, Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, 15 July 2010, http://www.sec.gov/
news/press/2010/2010-123.htm (accessed 09.01.14).
35
US Federal Energy Regulatory Commission, Barclays Bank PLC, Daniel Brin, Scott Connelly, Karen Levine and Ryan Smith, 16 July 2013, http://www.
ferc.gov/eventcalendar/Files/20130716170107-IN08-8-000.pdf (accessed 20.01.14).
36
Financial Conduct Authority press release, FCA nes Lloyds Banking Group rms a total of 28,038,800 for serious sales incentive failings, 11 December
2013, http://www.fca.org.uk/news/press-releases/fca-nes-lloyds-banking-group-rms-for-serious-sales-incentive-failings (accessed 20.01.14).
37
BBC News, Standard Chartered hit by $300m in Iran nes, 10 December 2012, http://www.bbc.co.uk/news/business-20669650 (accessed 20.01.14).
38
European Commission press release, Statement on CDS (credit default swaps) investigation, 1 July 2013, http://europa.eu/rapid/press-release
SPEECH-13-593 en.htm?locale=en (accessed 20.01.14).
39
The Guardian, Former Goldman Sachs director Rajat Gupta guilty of leaking insider secrets, 15 June 2012, http://www.theguardian.com/business/
2012/jun/15/rajat-gupta-guilty-leaking-insider?newsfeed=true (accessed 20.01.14).
40
US Department of Justice, UBS Enters into Deferred Prosecution Agreement, 18 February 2009, http://www.justice.gov/opa/pr/2009/February/09-tax-
136.html.
41
BBC News, UBS France ned 10m euros amid tax evasion probe, 26 June 2013, http://www.bbc.co.uk/news/business-23062363 (accessed 20.01.14).
42
The Guardian, RBS avoided 500m of tax in global deals, 13 March 2009, http://www.theguardian.com/business/2009/mar/13/rbs-tax-avoidance
(accessed 22.01.14).
43
The Independent, Zero tax for RBS on massive prots from bond trades, 29 February 2012, http://www.independent.co.uk/news/business/news/zero-
tax-for-rbs-on-massive-prots-from-bond-trades-7462573.html (accessed 20.01.14).
 P. Sikka / Accounting Forum 39 (2015) 118 9

arrested and charged with using a lm-production scheme to avoid 2.5 million in taxes.44 Barclays Bank had been under
public scrutiny because of the mismatch between its prots and taxes. For the years 2010, 2011 and 2012, Barclays reported
pre-tax prots of 5.7 billion, 3.2 billion and 4.8 billion respectively. The headline corporation tax rates for these years
were 28%, 26% and 24% respectively. The bank actually paid UK taxes of 147 million in 2010, 296 million in 2011 and 82
million in 2012 (Salz & Collins, 2013). One of the reasons for the mismatch between prots and tax is that Barclays had an
internal division which was assigned targets to avoid taxes, and its staff was incentivised to meet those targets. This division
generated revenues of more than 1 billion a year between 2007 and 2010. In 2012, the UK government took the rather
unusual step of introducing retrospective legislation to block two of its tax avoidance schemes, which could have enabled
Barclays and/or its clients to avoid around 500 million of UK corporate tax.45 HM Treasurys press release referred to both
schemes as highly abusive and designed to work around legislation that has been introduced in the past to block similar
attempts at tax avoidance.46
Predatory practices harmed shareholders, consumers, taxpayers and society, but performance related pay brought in
riches for executives. One witness told a parliamentary committee that The culture of compensation [in trading] infected
the culture of banking groups generally . . . Chief executive pay was also out of control . . ..47 Goldman Sachs chairman and
CEO, received $23 million (14.3 million) in salary and bonus for his 2013 performance.48 The chief executive of JP Morgan
Chase collected a remuneration package of $20 million (12.5 million) for 2013.49 For 2012, the average remuneration of a
chief executive at 15 leading US and European banks was $11.5 million (7.19 million).50 HSBCs chief executive received
a remuneration package of 7.4 million whilst many front-line staff in branches earned around 14,000 a year. The CEO of
Lloyds Banking Group received 3.8 million in 2012. At RBS, eight senior executives collected 21 million; in fact, 95 collected
more than 1 million each.51 More than 3500 EU bankers were paid more than D 1 million in 2013, of which 75 percent are
based in the UK.52 At Goldman Sachs, 115 senior staff in London received an average pay packet of 2.7 million in 2012, a 50%
rise. At Barclays, 393 executives received an average of 1.3 million and for years, its former chief executive, Bob Diamond
collected in excess of 20 million annually. The beleaguered RBS paid an average of 701,000 to its 368 executives53 and in
2014, 11 directors picked up a share package worth up to 18.25 m.54 The 2013 post-crash bonus pool for the UK nance
industry is expected to top 80 billion.55

4. The role of auditing rms

Major accounting rms have been key players of the construction of post-1970s neo-liberalism and the associated nan-
cial expansion. They advised the UK state on the privatisation of state-owned enterprises and the expansion of market logics
in education, healthcare and other essential services. They became key advisers to corporations on creative strategies for
maximising corporate earnings, performance-related pay and tax avoidance (Mitchell & Sikka, 2011). At the same time, they
play a central role in the construction and operation of regulatory arrangements for corporations and global nancial markets
through governance arrangements, such as those relating to accounting and auditing. In their capacity as auditors, they are
expected to invigilate corporate entrepreneurs to ensure that companies produce meaningful accounts. Such expectations
are legitimised through claims about independence and ethical conduct (Sikka, 2010), but the veneer of respectability is
routinely punctured by silence, collusion and revelations of involvement in questionable practices (Mitchell & Sikka, 2011).
In the neoliberal world, the success of accounting rms is measured by prots and the number of clients, and the emphasis
is very rmly on being commercial. . .rather than on being public spirited on behalf of either the public or the state (Hanlon,
1994: 150). The business model privileges individualism and a partner said that a rm like ours is a commercial organization
and the bottom line is that . . . the individual must contribute to the protability of the business . . . essentially protability

44
Bloomberg, Ex-RBS Bankers Charged Over Movie Tax-Avoidance Scheme in U.K., 30 January 2014, http://www.bloomberg.com/news/2014-01-30/ex-
rbs-bankers-to-be-charged-in-u-k-movie-tax-avoidance-scheme.html (accessed 31.01.14).
45
The Guardian, George Osborne drafts new law on corporate tax dodgers, 28 February 2012, http://www.theguardian.com/business/2012/feb/28/barclays
-conrms-tax-avoidance-scheme-shut (accessed 20.01.14).
46
HM Treasury press release, Government action halts banking tax avoidance schemes, 27 February 2012, https://www.gov.uk/government/news/
government-action-halts-banking-tax-avoidance-schemes (accessed 20.01.14).
47
Financial Times, Volcker criticises UK banking reforms, 17 October 2012, http://www.ft.com/cms/s/0/6d605922-1883-11e2-8705-00144feabdc0.html
#axzz32rH8MJ2u (accessed 20.01.14).
48
The Independent, Goldmans Blankfein Awarded $23 Million for Work in 2013, 4 April 2014, http://online.wsj.com/news/articles/
SB10001424052702303532704579481403058396442 (accessed 22.04.14).
49
The Guardian, JP Morgan doubles CEO Jamie Dimons salary despite billions in nes, 24 January 2014, http://www.theguardian.com/business/
2014/jan/24/jp-morgan-jamie-dimons-salary-billions-nes (accessed 30.01.14).
50
Financial Times, Bank chiefs pay in 2012, 23 June 2013, http://www.ft.com/cms/s/0/37049d24-da58-11e2-8062-00144feab7de.html#axzz2qwQJoLbN.
51
The Herald, Million pound salaries for 95 RBS employees, 9 March 2013, http://www.heraldscotland.com/news/home-news/million-pound-salaries-for-
95-rbs-employees.20449379 (accessed 20.01.14).
52
EU Observer, EU bonus cap to have little impact on bank pay, 23 January 2014, http://euobserver.com/economic/122852 (accessed 28.01.14).
53
The Guardian, Goldman Sachs top staff received 2.7m pay deal on average in 2012, 30 December 2013, http://www.theguardian.com/business/
2013/dec/30/goldman-sachs-top-staff-pay-deal (accessed 20.01.14).
54
BBC News, RBS directors get 18.25m share deal, 7 March 2014, http://www.bbc.co.uk/news/business-26486059 (accessed 27.03.14).
55
TUC press release, City bonus pool twice as big as its corporation tax bill, 11 February 2014, http://www.tuc.org.uk/economic-issues/corporate-
governance/city-bonus-pool-twice-big-its-corporation-tax-bill (accessed 02.02.14).
10 P. Sikka / Accounting Forum 39 (2015) 118

is based upon the ability to serve existing clients well (Hanlon, 1994: 121). Thus, fees and the appeasement of company
directors are a major preoccupation and a source of crisis.
In pursuit of prot, auditing rms have a history of silence and collusion with corporate elites. The mid-1970s bank-
ing crash showed that distressed businesses were given a clean bill of health by audits which were highly decient and
often lacked even the most basic procedures. Almost all of the major auditing rms were accused of delivering decient
audits (Sikka & Willmott, 1995a, 1995b). The government appointed inspectors found that auditors failed to verify assets,
liabilities, income, expenses and secure third-party conformations, corroborate management representations and accepted
inappropriate accounting practices (for further evidence see, Department of Trade and Industry, 1971, 1976, 1983, 1988b,
1993; Matthews, 2005; Sikka & Willmott, 1995a; Sikka et al., 1989; Sikka, Puxty, Willmott, & Cooper, 1998). The inspectors
described auditor conduct as indefensible (Department of Trade and Industry, 1983), tame and negligent (Department
of Trade, 1971) and delivering a poor auditing performance (Department of Trade, 1988b). One inuential commentator
summed-up the crisis by stating that the crash showed
the ease with which eminent rms of auditors turned a blind eye on the wholesale abuse by client company directors
of [legal] provisions. [The directors] operated these public companies for the principal benet of themselves and
their families; and most regrettable of all, on the virtual complicity of their auditors, whose efforts are seen to have
amounted to a whitewash at best, and a fatuous charade at worst (Woolf, 1983).
The auditing profession managed the crisis by creating institutional structures for promulgation of auditing standards
and promises of improved audits, ethics and disciplinary arrangements, all under the control of the auditing industry, with
the big rms playing a leading role (Sikka et al., 1989; Sikka & Willmott, 1995b). However, the auditing standards were
shaped by the economics of the auditing industry rather than any concern about meeting social needs. For example, the
standards that guided auditors to make going concern assessments of enterprises urged them to be passive (i.e. auditors
did not have to design any specic procedures to determine whether a business was a going concern) because this approach
was more economical of audit effort and increased rm prots, but created the impression that auditors were doing more
(Sikka, 1992).
During the late 1970s and throughout the1980s, audits were being heavily discounted and even treated as loss-leaders
in the hope of securing the more lucrative consultancy work (Mitchell & Sikka, 2002). In pursuit of prot, the time budgets
for audits were cut and audit staff had little hesitation in adopting irregular procedures, ignoring awkward time-consuming
items and even resorting to the falsication of audit work (Otley & Pierce, 1996; Willett & Page, 1996). In such an environment,
audit failures continued. In 1984, Johnson Matthey Bank (JMB) collapsed with estimated losses of 220 million and was
rescued by the Bank of England. The bank had fraudulent loans, but this was not noticed by its auditors. One borrower
accounted for 93% of the capital base of JMB, at least nine times greater than the Bank of Englands ofcial guidelines.56
JMB failed to le timely regulatory returns with the Bank of England, but still received unqualied audit reports from its
auditors. In July 1985, the government and JMB asked the police to investigate suspected frauds.57 In January 1986, the
Bank of England, as the new owner of JMB, sued auditors Arthur Young (now part of Ernst & Young) for breach of duty.58
Eventually, Arthur Young paid 25 million to reach an out-of-court settlement.59 The then Chancellor of the Exchequer said
that it rapidly became clear both that the Bank [Bank of England] had fallen down badly in the exercise of its supervisory
responsibilities and that JMBs auditors, Arthur Young, had also failed to do their job adequately. . . (UK House of Lords
Economic Affairs Committee, 2011: 44). Around the same time, attention was also focused on the conduct of the auditors of
Lloyds of London who had been accused of not spotting overstatement of prots60 and lawsuits for large amounts loomed.61
The recurring crisis tarnished Londons position as a trusted nancial centre and the government sought to restore condence
by redening the relationship between auditors and regulators of the nancial sector.
Despite some opposition, auditors for the nance industry (for example, under the Financial Services Act 1986 and the
Banking Act 1987) were given a statutory right (rather than a duty) to report fraud and irregularities to regulators even
without the knowledge of their clients (Sikka et al., 1998). The law mandated that auditors and regulators should have
regular meetings to exchange information (Sikka et al., 1998). The legislation was problematical as regulators did not set
accounting and auditing standards. They did not directly appoint auditors, or vote on their remuneration, resignation or
removal. Auditors could not be forced to share their working papers with regulators, and did not owe a duty of care to
any designated regulator, individual shareholder, creditor or other stakeholder. Still, regulators relied on audited accounts
published for the benet of shareholders for regulatory purposes.
Allegations of audit failures at Barlow Clowes and a raft of other scandals62 were making headlines (Mitchell, Sikka,
Puxty, & Willmott, 1991) and members of Parliament were asking whether one of the greatest problems facing the nancial

56
The Independent, Arrest in Johnson Matthey case, 16 November 1997.
57
The Times, City fraud squad called in to investigate JM Bankers, 18 July 1985.
58
The Guardian, Bank serves JMB writ, 30 January 1986.
59
The Times, Auditor pays 25m pounds to settle JMB dispute, 22 October 1988.
60
The Guardian Lloyds gaffe spurs probe: Insurance market to investigate auditing error in annual results, 6 September 1985.
61
The Independent, Accountants shiver as cover slips away; a legal onslaught is scaring off insurers, 1 August 1993.
62
The Guardian, Garston insurance crash millions of pounds have been telegraphed abroad, 30 January 1990; The Independent, Financial scandals put
spotlight on auditors, 7 August 1990.
 P. Sikka / Accounting Forum 39 (2015) 118 11

services sector is the quality of auditing? Professional regulation does not seem adequate to stop auditors from signing rather
duff dockets.63 The government response was to create the Financial Reporting Council and bring accounting and auditing
standard setting under its umbrella. The concerns about quality of audits were further amplied by the 1991 closure of the
fraud-ridden Bank of Credit and Commerce International (BCCI). Despite evidence of managerial incompetence, fraud and a
guilty plea of money laundering, auditors continued to issue unqualied audit reports (Bingham, 1992; US Senate Committee
on Foreign Relations, 1992). The Bank of England explained that it granted a deposit-taking licence to BCCI because auditors
were not qualifying the reports.64 BCCIs auditor sold non-auditing services to the bank, and the rms partners received
loans and benets from the bank. Commenting on the cosy relationship between the bank and its auditors, the US Senate
Committee said that there were numerous warning bells, and the auditors could and should have done more to respond
to them (p. 4 and 259). The Committee concluded that BCCIs accountants failed to protect BCCIs innocent depositors
and creditors from the consequences of poor practices at the bank of which the auditors were aware for years (US Senate
Committee on Foreign Relations, 1992: 4). In April 2006, nearly fteen years after the closure of BCCI, a disciplinary panel of
the profession ned65 Price Waterhouse 150,000 for audit failures and ordered it to pay hearing costs of 825,000.
The closure of BCCI was accompanied by a restructuring of the UKs auditing standard body, soothing reports and promises
of better auditing standards, code of ethics and disciplinary arrangements (Sikka, 2002). No attention was paid to the
organisational structure of accountancy rms (see below) which enabled the rms to thwart regulatory investigations.
Price Waterhouse secured the audit of BCCI with the claims that it was a globally integrated rm (US Senate Committee
on Foreign Relations, 1992: 258), but subsequently said that it was a loose collection of national rms. The New York District
Attorney told the Senate Committee that
The main audit of BCCI was done by Price Waterhouse UK. They are not permitted, under English law, to disclose,
at least they say that, to disclose the results of that audit, without authorization from the Bank of England. The Bank
of England, so far and weve met with them here and over there have not given that permission. The audit of
BCCI, nancial statement, prot and loss balance sheet that was led in the State of New York was certied by Price
Waterhouse Luxembourg. When we asked Price Waterhouse US for the records to support that, they said, oh, we dont
have those, thats Price Waterhouse UK. We said, can you get them for us? They said, oh, no thats a separate entity
owned by Price Waterhouse Worldwide, based in Bermuda (US Senate Committee on Foreign Relations, 1992: 245).
Price Waterhouse (UK) refused to comply with US Senate subpoenas for documents with the claims that the British
partnership of Price Waterhouse did not do business in the United States and could not be reached by subpoena (US Senate
Committee on Foreign Relations, 1992: 256). It told the Senate Committee that
Price Waterhouse rms are separate and independent legal entities whose activities are subject to the laws and
professional obligations of the country in which they practice . . . each rm elects its own senior partners; neither
rm controls the other; each rm separately determines to hire and terminate its own professional and adminis-
trative staff. . .. each rm has its own clients; the rms do not share in each others revenues or assets; and each
separately maintains possession, custody and control over its own books and records, including work papers (US
Senate Committee on Foreign Relations, 1992: 257).
These issues about securing co-operation from auditing rms also arose after the collapse of Barings. In February 1995,
amidst revelations of 827 million losses, Barings Plc collapsed (Bank of England, 1995). The frauds by one of its derivatives
traders went undetected because of weak internal controls, but the bank continued to receive unqualied audit reports.
Nick Leeson, the trader whose frauds brought down Barings bank, said the regulators, auditors and compliance ofcials are
constantly playing catch-up. Their understanding and knowledge of the markets and instruments being traded are just not
keeping pace (Leeson, 2007). For many years, Barings had been audited by Coopers & Lybrand (C&L). The Singapore ofce of
C&L was appointed to audit the affairs of Baring Futures (Singapore) Pte Limited (BFS) for the year to 31st December 1994.
The 1992 and 1993 accounts of BFS were audited by the Singapore ofce of Deloitte & Touche (D&T) who reported to C&L
London for the purposes of its audit of the consolidated nancial statements of Barings Plc. C&L audited all other subsidiaries
of Barings in 1992, 1993 and 1994 either through its London ofce or other ofces spread around the world. As part of its
inquiry, the Bank of England (BoE) sought access to the auditor les but the audit rms did not cooperate. The BoE noted,
We have not been permitted access to C&L Singapores work papers relating to the 1994 audit of BFS [Baring Futures
(Singapore) Pte Limited] or had the opportunity to interview their personnel. C&L Singapore has declined our request
for access, stating that its obligation to respect its client condentiality prevents it assisting us. . . .We have not been
permitted either access to the working papers of D&T or the opportunity to interview any of their personnel who
performed the audit. We do not know what records and explanations were provided by BFS personnel to them (Bank
of England, 1995: 15 and 153).

63
Hansard, UK House of Commons Debates, 15 October 1990, col. 1021.
64
Hansard, UK House of Commons Debates, 6 November 1992, col. 527, http://www.parliament.the-stationery-ofce.co.uk/pa/cm199293/cmhansrd/
1992-11-06/Debate-1.html (accessed 20.01.14).
65
Accountancy Age, BCCI: auditor hit with 1m in nes and costs, 20 April 2006, http://www.accountancyage.com/aa/news/1790188/bcci-auditor-hit-
gbp1m-nes-costs (accessed 20.01.14).
12 P. Sikka / Accounting Forum 39 (2015) 118

In 2001, just before a High Court hearing, Coopers & Lybrand settled allegations of negligence with a payment of 65
million.66 In April 2002, some seven years after the Barings collapse, Coopers & Lybrand were ned 250,000 by a disciplinary
panel of the profession.67 Deloitte & Touche were found guilty of negligence in the case of Barings Plc & Anor v Coopers &
Lybrand (a rm)& Ors, Court of Appeal - Chancery Division, June 11, 2003, [2003] EWHC 1319 (Ch), and paid a penalty of around
1.5 million, instead of the 130 million sought, on the ground that Barings directors failed to create effective internal
controls.
The frauds at BCCI and Barings did not encourage any reections on the pursuit of prots by accountancy rms. In 2001,
Independent Insurance collapsed due to frauds leaving some 500,000 policyholders without any insurance cover. In 2008,
the companys auditor KPMG was considered to have been negligent and was ordered to pay a ne and costs amounting to
1.6 million by a disciplinary panel.68 The audit partner was ned for failing to check the validity of three vital contracts
which allowed the company to report a 22 million prot for 2000 rather than a probable loss of 105 million. Further
shortcomings were exposed by the collapse of Equitable Life. An investigation concluded that the Society used a higher
rate of interest than that paid on bonus rates to value its assets. This was not consistent with best actuarial practice and was
inconsistent with the Societys own best practice. The Society was slow in updating its mortality factors in valuing annuity
liabilities (i.e. it assumed people would die sooner than they were) and included in its assets items, e.g. computer systems
etc that were not realisable and should have been disregarded on a prudent basis (Penrose, 2004: 48). The audit process
was considered to be inadequate (Penrose, 2004: Chapter 12).
The UK did not take the lead on restricting the auditors ability to sell consultancy services to audit clients. Instead, it
followed the US practices. Following the 2001 collapse of US energy company Enron and the 2002 demise of WorldCom, a
media company, the US enacted the Sarbanes-Oxley Act 2002 and imposed some restrictions on the sale of non-auditing
services by auditors to audit clients. These included (Section 201 of the Sarbanes-Oxley Act 2002) services relating to book-
keeping, the design and implementation of nancial information systems, appraisal or valuation services and internal audit
and management functions, though lucrative services, such as those relating to tax avoidance could still be offered with the
advance approval of the clients audit committee. The Sarbanes-Oxley Act affected UK/EU companies listed in the US and
eventually some elements of the legislation appeared in the UK professional pronouncements (Auditing Practices Board,
2004, 2008). A tweaking of the code of ethics was not accompanied by any reections on the organisational culture of audit
rms or their headlong rush for prots. The continuing concerns about the quality of audits resulted in dilution of the role
of professional bodies in supervising and monitoring major auditing rms. These functions were taken over by the Financial
Reporting Council.
The period leading to 20072008 is marked by considerable changes in the auditor liability regime. The 1990 House of
Lords judgment in Caparo Industries plc v Dickman & Others [1990] 1 All ER HL 568 established that in general auditors only
owe a duty of care to the company or shareholders collectively, and not to any designated regulator, individual shareholder,
creditor or other stakeholder. This principle subsequently became part of the Companies Act 2006. The effect of these changes
is vividly captured by the case of Man Nutzfahrzeuge AG & Anor v Freightliner Ltd & Anor [2007] EWCA Civ 910, in which the
auditing rm admitted that it had been negligent in auditing the accounts, but escaped any liability because it did not
owe a duty of care to any individual stakeholder affected by its negligence. Most of the lawsuits against UK auditors are
by liquidators, usually another accountancy rm, and a government inquiry concluded that there is little or no evidence
suggesting that the courts in the UK have made, or are liable to make, excessive damages awards against auditors (Ofce of
Fair Trading, 2004: 1.2). Lawsuits by individual investors have been rare, but the auditing industry claimed that they were a
threat to competition and prots and secured a series of liability concessions (Cousins, Mitchell, & Sikka, 1999). When the UK
government was less responsive to demands for further concessions, Ernst & Young and Price Waterhouse nanced a private
Bill to secure limited liability partnerships law in Jersey, a tax haven in the Channel Islands, with the threat that unless the UK
government did the same, they would cause economic instability (Sikka, 2008). The UK government eventually obliged with
the Limited Liability Partnerships Act 2000, and gave further liability shields to accountancy rms. The concessions were not
accompanied by any quid pro quo about auditor co-operation with regulators, or public accountability. Accountancy rms
boasted of their prowess to secure desired changes.
The 20072008 banking crash drew attention to the usual failures. None of the unsavoury practices used by banks to
boost their prots were highlighted by auditors. Lord Lawson, former Chancellor of the Exchequers and architect of the
post John Matthey Bank regime which required a dialogue between auditors and regulators said that he was puzzled and
dismayed by the decline of these informal channels of communication, which he believes could have given earlier warning
of problems in the sector.69 In the 20072008 crash, almost all distressed banks received unqualied audit reports (Sikka,
2009). In every case, auditors performed non-auditing services and this increased their fee dependency on clients. Some

66
Accountancy Age, Coopers paid 65m in Barings case, 18 June 2003, http://www.accountancyage.com/aa/news/1786952/coopers-paid-gbp65m-barings
(accessed 20.01.14).
67
The Telegraph, Barings accountants ne cut by 75pc, 30 April 2002, http://www.telegraph.co.uk/nance/2761259/Barings-accountants-ne-cut-by-
75pc.html.
68
The Guardian, KPMG admits negligence over Independent, 26 June 2008, http://www.theguardian.com/business/2008/jun/26/independentnewsmedia.
insurance (accessed 20.01.14).
69
Financial Times, Lord Lawson bafed by bank auditors, 4 January 2011, http://www.ft.com/cms/s/0/8268c0da-1834-11e0-88c9-00144feab49a.html
#axzz33QZBGXKf (accessed 20.01.14).
 P. Sikka / Accounting Forum 39 (2015) 118 13

banks collapsed within days of receiving an unqualied audit report. For example, Lehman Brothers received an unqualied
audit opinion on its quarterly accounts in July 2008 from Ernst & Young, but led for bankruptcy in September 2008. Lehman
Brothers used an accounting gimmick codenamed Repo 105. Under this $50 billion scheme, Lehman sold assets just before
its nancial year-end for around 5% less than the balance sheet value, with an agreement to buy them back shortly into the
next accounting period for the amount of sale plus interest. The resulting cash was used immediately to pay debt and thus
show lower liabilities and improved leverage ratio. The US insolvency examiner said that the only purpose or motive for the
transactions was reduction in balance sheet . . . there was no substance to the transactions (US Bankruptcy Court Southern
District of New York, 2010: 735). The banks auditors Ernst & Young (E&Y) collected $31 million in fees in 2007 and knew
that Repo 105 had been used for several years by Lehman. The insolvency examiner concluded that . . . the rms outside
auditor, was professionally negligent . . . (p. 750). A subsequent writ by the New York attorney general alleged that
E&Y substantially assisted Lehman Brothers Holdings Inc. . . .now bankrupt, to engage in a massive accounting fraud,
involving the surreptitious removal of tens of billions of dollars of securities from Lehmans balance sheet in order to
create a false impression of Lehmans liquidity, thereby defrauding the investing public70
Elsewhere, Bear Stearns received an unqualied audit opinion on its accounts in January 2008 from Deloitte & Touche and
was rescued in March 2008. Carlyle Capital Corporation received an unqualied audit opinion from PricewaterhouseCoopers
on 27 February 2008 and was placed in liquidation on 12 March 2008. Such examples were enough to persuade one com-
mentator to conclude that the conventional audit is probably no longer worth paying for.71 The auditors wheeled out the
usual defences, such as the public does not understand the purpose of an audit, or that the rms cannot qualify the accounts
of a bank because of the fear that to do so could cause a collapse of condence and a run on the bank, to the detriment of
the shareholders and, quite possibly, of the wider public interest (UK House of Lords Economic Affairs Committee, 2011:
39). Nevertheless, a UK parliamentary committee concluded: We do not accept the defence that bank auditors did all that
was required of them. In the light of what we now know, that defence appears disconcertingly complacent. It may be that
the Big Four carried out their duties properly in the strictly legal sense, but we have to conclude that, in the wider sense,
they did not do so (UK House of Lords Economic Affairs Committee, 2011: 40).
The House of Commons Treasury Committee noted the fact that the audit process failed to highlight developing problems
in the banking sector does cause us to question exactly how useful audit currently is. . . .We remain concerned about the
issue of auditor independence. Although independence is just one of several determinants of audit quality, we believe that,
as economic agents, audit rms will face strong incentives to temper critical opinions of accounts prepared by executive
boards, if there is a perceived risk that non-audit work could be jeopardised UK House of Commons Treasury Committee,
2009b: 110).
Further revelations may be expected as the Financial Reporting Council is examining KPMGs audit of the Cooperative
Bank.72 Following a report from a parliamentary committee (UK Parliamentary Commission on Banking Standards, 2013a),
KPMG may also come under scrutiny for its audit for HBOS.73 There may also be spillover effects from other countries
investigating audit failures.

5. Summary and discussion

This paper has argued that neoliberal values of competition, prot and performance related pay are major factors in
the recurring crisis in the nancial sector. The UKs nancial sector has produced a crisis in every decade since the 1970s,
culminating in a major crash in 20072008. Every crisis has revealed that the business empires were built on fraud and
malpractices. In an environment of light-touch regulation and lust for higher prots, bending the rules to make personal
gains became a sign of business acumen. Almost any trick ranging from complex nancial products, insider trading, mis-
selling nancial products and money laundering to price xing and fraud became acceptable, as long as it led to higher
prots and personal enrichment. All this has been the subject of ofcial reports and media coverage, but governments are
not persuaded to scrutinise the neoliberal experiment.
The state is not a passive spectator as its policies facilitated the crisis. Contrary to the claims of neoliberals, the state has
not been rolled back. Instead, it has been restructured and redirected to advance neoliberalist concerns about competition,
markets and private prots. The worldviews of markets, prots and light-touch regulation are now so normalised that they
have crowded out concerns about ethics, morality, civil duty, care, altruism and loyalty (Sandel, 2012). Some semblance of
this could be introduced by regulation, but such values are downgraded in neoliberal ideologies. Ordinary people have been

70
http://amlawdaily.typepad.com/032312e%26ycomplaint.pdf (accessed 20.01.14).
71
London Evening Standard, Its still the human element that counts, 23 January 2008, http://www.standard.co.uk/news/its-still-the-human-element-that
-counts-6672357.html (accessed 27.01.14).
72
Financial Reporting Council press release, Investigation announced in connection with KPMG Audit Plc and The Co-operative Bank plc,
20 January 2014, https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2014/January/Investigation-announced-in-connection-with-KPMG-Au.aspx
(accessed 21.01.14).
73
Financial Reporting Council press release, Statement following Parliamentary Commission on Banking Standards report into failure of HBOS, 10
April 2013, https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2013/April/Statement-following-Parliamentary-Commission-on-Ba.aspx (accessed
20.01.14).
14 P. Sikka / Accounting Forum 39 (2015) 118

the losers at every count. Firstly, they have been eeced by frauds and, secondly taxpayer funded bailouts have facilitated a
massive wealth transfer from ordinary taxpayers to banks and nancial elites.
The UK banking reforms are framed within the neoliberal value system and do not question the corrosive effects of
the dominant worldviews. The most recent reforms hold out the possibility of some kind of ring-fencing of retail banking
from investment banking but even if the proposed split is carried out, investment banking will continue to use ordinary
peoples savings and pensions to speculate. Any failure will infect and destabilise the whole nancial system. As banks are
bailed out, there is little incentive for their directors to curb predatory practices. Shareholder supremacy, a cornerstone of
neoliberalism, is shown to be a source of problems rather than the solution to issues relating to accountability, regulation
and control. With average shareholding duration of just three months in nancial institutions, shareholders do not have a
long-term interest in banks (Haldane, 2011) and even then shareholders provide only a small proportion of a banks risk
capital. For example, the 2012 balance sheets of UKs largest banks, Barclays, HSBC, Lloyds Banking Group, Royal Bank of
Scotland and Standard Chartered show that shareholders provided only 5%, 7%, 5%, 5.5% and 7.25% of the total capital (Sikka,
2014). The UK Parliamentary Commission on Banking Standards concluded that shareholders failed to control risk-taking in
banks, and indeed were criticising some for excessive conservatism (UK Parliamentary Commission on Banking Standards,
2013b: 42). Despite the crisis, shareholder capitalism remains the cornerstone of UK corporate governance (Walker, 2009;
Bischoff, 2009) and the government believes that shareholders can somehow invigilate companies (Financial Reporting
Council, 2012).
Light-touch regulation is central to neoliberalism and remains in place. In the blame game, regulatory deckchairs continue
to be rearranged, but the institutions continue to be populated by nancial elites who have a close afnity to the nancial
sector and are often too sympathetic to its concerns. At the height of the 20072008 crises, the Basel Committee proposed
a leverage ratio of 5%, which would have increased the capital requirements of major banks by about $100 billion, but after
lobbying the ratio has been reduced and set at just 3%74 or at 33:1, not too different from that used by many collapsed banks.
The setting of capital ratios is also problematical because regulators still have little idea of the economic exposure of banks
to derivatives75 and this creates difculties in assessing capital levels. Despite the banking crash, regulators continue to trust
banks own risk-assessment models, which have already failed. Lloyds Banking Group claims to have some 143 billion of
high quality mortgages on its books and in accordance with the current rules it holds just 314 million of capital to cover
the specic risks.76 This means that Lloyds has lent some 455 times the capital earmarked to absorb the losses. It would
only take a default rate of 0.2% for the entire capital of 314 million to be wiped out. There does not appear to be any major
change in direction of regulation.
The auditors are assumed to be eyes and ears of shareholders and regulators, but have a history of silence. They have
rarely exposed predatory practices that enabled nancial enterprises to report higher prots. Since the 1970s, regulatory
structures, codes of ethics, audit reports, auditing standards and disciplinary arrangements have been tweaked, but the
auditing industry is racked with conict of interests. Auditors remain dependent on company directors for their appointment,
sale of consultancy services and fees. In view of this fee dependency, they cannot be independent of the companies or their
directors and bite the hand that feeds them. In a market system, producers of shoddy goods and services can be sued
and replaced by competitors. Such pressures may encourage reections, but they are weak in the auditing industry. The
market for external auditing is guaranteed by the state and the industry is dominated by just four rms who command
considerable nancial and political resources to advance their interests. The audit les are not available to stakeholders
and thus inadequacies do not easily come to light though regulators may occasionally speak about them in a general way.
Lawsuits against negligent auditing rms are difcult as the rms enjoy too many liability shields. Even when they are
found to be guilty the penalties are low. The recurring nancial crisis does not seem to have spurred auditors to improve
quality of their work. Some seven years, after the 20072008 banking crash, regulators claim that audit evidence collected
in more than one in three audits was so decient that the auditors should not have signed off the audit report.77 In its 2014
report, the UKs auditing regulator states that the overall grading of bank and building society audits is, and continues
to be, generally below those of other types of entity (Financial Reporting Council, 2014: 7). The International Forum of
Independent Audit Regulators (2014) stated that the persistence of inspection ndings raises concerns about auditors
satisfactory fulllment of their role in providing assurance on nancial statements (p. 1). Yet the UK remains enamoured
with the age-old approach of tweaking of auditing standards, ethical codes and audit reports. There is little chance that
any of this can roll-back the systemic pressures to generate higher fees and appease clients in the competitive race to

74
Financial Times, Investment banks hail victory in Basel battle, 13 January 2014, http://www.ft.com/cms/s/0/69dd59fc-7c79-11e3-9179-00144feabdc0.
html#axzz33U4CmaNp (accessed 20.01.14).
75
The following exchange took place in the UK House of Commons. Austin Mitchell: To ask the Chancellor of the Exchequer what the notional value
of derivatives held by the banks regulated by the Financial Services Authority is; and what information is held about the maturity and exposure of such
derivatives. Greg Clark: This information is not currently available. The shortfall in information available to regulators on derivatives during the nancial
crisis led the G20 in 2009 to propose that all over the counter derivative trade information should be reported to Trade Repositories. This requirement,
which is expected to enter into force in the EU by the start of 2013, will allow information on all derivatives trades to be made available to the relevant
authorities. (Hansard, House of Commons, 22 October 2012, col. 620W.
76
BBC News, Are banks taking dangerous mortgage risks? 5 October 2012, http://www.bbc.co.uk/news/business-19842201 (accessed 20.01.14).
77
Wall street Journal, One in Three Audits Fail, PCAOB Chief Auditor Says, 24 January 2014, http://blogs.wsj.com/cfo/2014/01/24/one-in-three-audits-fail-
pcaob-chief-auditor-says (accessed 25.01.1414).
 P. Sikka / Accounting Forum 39 (2015) 118 15

be the top-dogs. A former Chancellor of the Exchequer, Lord Nigel Lawson, has called for a broadening of the auditors
duties beyond the narrow concerns of shareholders and said, The question is whether they also have some responsibility
to the public interest. That is a very grey and unspecied area. In my opinion they should have some responsibility.78
Such calls would lead in changes in law, restructuring of auditing practices, liability and accountability, and would be
vigorously resisted by the auditing industry which has become addicted to state guaranteed markets, prots and liability
shields.
The central message of this paper is that reforms circumscribed by neoliberal ideologies are unlikely to address the
systemic problems. A move away from the normalised perspectives or paradigms (Kuhn, 1962) is needed. So how can
some aspects of neoliberalism be rolled-back? This would no doubt require several papers, but some pointers can be
provided to stimulate debates. For example, in the case of banking industry in contrast to the Financial Services (Bank-
ing Reform) Act 2013, there should be a legally enforceable separation between retail and investment (speculative)
banking. Retail banks should be freed from the incessant pressures from stock markets for ever rising prots, a major
cause of many banking scandals and the nancial crash. Market pressures should be replaced by community pressures
by turning them into co-operatives, mutuals, and employee owned enterprises. However, merely separating the bank-
ing arms would not be sufcient as investment banking would continue to be funded by monies from savers, pension
funds and insurance companies. By enjoying the benet of limited liability, nancial traders will be able to dump their
losses onto the rest of society and affect innocent bystanders. This should be addressed by withdrawing the privi-
lege of limited liability from investment banking, and holding the owners of entities personally liable for the debts of
their organisations. The nancial regulators would need to invigilate investment banking to ensure that its speculative
activities are matched by available capital. To prevent innocent bystanders from being caught in the negative conse-
quences of speculative activities, legislation should be enacted to ensure that no retail bank, insurance company or
pension fund is able to provide any nance to investment banking without prior express approval from those directly
affected.
The idea of shareholder supremacy makes no sense as shareholders in banks have only a short-term interest. They do not
necessarily bear the residual risks as the state continues to bail-out nancial institutions. All nancial enterprises should
prioritise stakeholder and social welfare above that of the narrow concerns about shareholders. The Banking Standards
Commission has urged the government to consult on a proposal to amend section 172 of the Companies Act 200679 to
remove shareholder primacy in respect of banks, requiring directors of banks to ensure the nancial safety and soundness of
the company ahead of the interests of its members (UK Parliamentary Commission on Banking Standards (2013: 344). From
a stakeholder perspective, the main priority of any regulator should be to protect the nancial system and consumers rather
than indulging the industry and this cannot be done unless there is some ideological distance between the industry and the
regulator. Therefore, the regulator should be advised by a Board of Stakeholders, representing a plurality of interests. This
Board should not be dominated by the nance industry. In fact, only a minority shall come from the industry, thus ensuring
that other voices are heard and policies are made by consensus. Its meetings would be held in the open and its minutes and
working papers would be publicly available.
Executive remuneration has been a major driver of excesses at banks. This should be managed by appealing to account-
ability and democracy. The executive remuneration contracts of directors of all nancial enterprises (and indeed all large
companies) should be publically available. Employees, borrowers and lenders should be empowered to elect directors and
have a binding vote on all aspects of executive remuneration. Additional bonuses or incentives, if any, should be linked to
matters which emphasise long-term factors, such as freedom from scandals, service to the community, maintaining branch
networks, consumer satisfaction, universal and fair access to nance, innovation and investment. The bonuses, if awarded,
would be payable after ve years and the agreements should contain clauses for claw-backs in the case of subsequent
negative revelations.
Private sector accounting rms have been auditing nancial institutions for over 100 years, but seem unable or unwilling
to alert regulators, shareholders and other stakeholders of problems. After the BCCI scandal, auditors and nancial regulators
were supposed to discuss matters of concern, but this has made little material difference. In a world of instantaneous
movement of money, ex-post audits are of little use and accountancy rms have routinely failed to protect the interests of
regulators, savers and borrowers. Accountancy rms continue to be mired in conict of interests and cases such as Barings
and BCCI show that major rms have developed organisational structures which obstruct investigation of audit failures.
There are never-ending debates about auditor duty of condentiality to clients and obligations to regulators. Such issues
can be swept away by eliminating accounting rms from the audit of nancial enterprises altogether. Instead, audits should
be conducted by the regulator, or a statutory body specically created for that purpose. This way, there would be no issues
about whether regulator can see auditors working papers, or interview key audit staff. This statutory auditor should conduct
real-time audits and monitor signicant transactions at all material locations. Thus, it would be possible to alert regulators

78
Financial Times, Lord Lawson bafed by bank auditors, 4 January 2011, http://www.ft.com/cms/s/0/8268c0da-1834-11e0-88c9-00144feab49a.html
#axzz33QZBGXKf (accessed 20.01.14).
79
Section 172 of the UK Companies Act 2006 states that directors have a duty to promote the success of the company for the benet of its members as a
whole (i.e. shareholder collectively) and in doing so have regard (amongst other matters) to the interests of the companys employees, suppliers, customers,
the community and the environment.
16 P. Sikka / Accounting Forum 39 (2015) 118

of any suspicious practices. This auditor would act exclusively as an auditor and that means no consultancy services for
audit clients. Parliamentary committees, such as the UK House of Common Treasury Committee, should regularly scrutinise
the effectiveness of nancial regulation and as part of that should also examine the effectiveness of auditing arrangements.
The proposal would also help to expand the supply side of audits. It would reduce the size of big accounting rms as they
will no longer be able to conduct audits of nancial institutions and thus create possibilities of meaningful competition in
the auditing industry. Auditing rms would no longer be too large to inhibit regulators from taking effective action, which
should include the possibility of closing down rms routinely involved in audit failures.
The possibilities of any of the above being enacted would depend on power, politics and crisis. The proposals are not
some panacea but help to strengthen regulation and public accountability of regulators and auditors.

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