Ethics and governance in the European Financial centers

In the context of the financial crisis, Véronique Poujol from the Lëtzebuerger Land has recently published a lucid analysis of the situation in Luxembourg that unfortunately leaders deny.

In an article called “La souricière” (“The trap”), she observes that this crisis takes the Luxembourg leaders out of clipper and at the same time occupies them on two fronts:

Initially, it is necessary for them to dissuade the savers to withdraw their money to put it at home.

But the breach for Luxembourg opened on a second front: the contradiction of the Luxembourg model. Nothing is more volatile than the capital. The success of the Luxembourg business model, it is to be business friendly, flexible and pragmatic with the economic operators, including in the banking legislation. Luxembourg was flexible with the investors, more slackness with the savers that have a poor level of the guarantees. There will not be doubt in the arbitration which these people will make between the safety of their funds and discretion with which they are managed. The State have reserves which are not inexhaustible.

I could add the third front. As explained the lawyer Alex Schmidt the investor is not protected in Luxembourg when banks failed in their duty. In a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased with what Luxembourg jurisprudence generally shows very clear-sighted vis-a-vis the investors from day to day (“L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”). In other words in case of litigation because of a bank failure, there is a country risk as the foreign investor will not win in justice.

I could add the fourth front, may be the most important: the international fight against tax havens and offshore jurisdictions with “powerstates” like the USA, France and Germany. These countries lack money to support their respective economy and I do not thing that the Luxembourg business doctrine as expressed by Lucien Thiel (former chairman of the Luxembourg bankers’ association), will be appreciated:
- It is not our duty to control if the taxpayer was honest,
- Luxembourg is not compelled to communicate its clients’ data

If Luxembourg leaders do not realise the paradigm shift to do the required aggiornamento, give them a couple of years not to say months and look them go bust.


Title from La Fontaine

Ernst & Young announced that its combined worldwide revenues increased to US$24.5 billion for the fiscal year ending 30 June 2008. This represented a year-on-year revenue increase of US$3.4 billion and a growth rate of 16.2% (9.5% in local currency [lc] terms). This growth was the result of winning new clients and the introduction of new services, as well as returns on investment in the emerging markets. It was partially offset by audit efficiencies enabled by the new US internal control standard and the economic downturn in many markets.

“This was an important year for Ernst & Young for more than just our continued strong growth,”
James S. Turley (Ernst & Young Global Chairman and CEO )

As I said for PwC such communication on the growth is indecent.

Auditors have a strong responsibility in the current financial mess as accounts certified cannot be trusted anymore.

By the way who audited Lehman Brothers ?

Prem Sikka wrote an interesting article in the Guardian.
"The auditors have failed : No one expects auditors to guarantee the survival of a company, yet they did not even notice any of the red warning flag"

He observes that each collapse shows that highly paid directors had little idea of the value of company assets, liabilities, income, costs, profits and financial health. This has been accompanied by one constant factor: the silence of the auditors.
He explains that auditors continue to act as advisers to the companies that they audit. They are hired and remunerated by the very organisations that they are supposed to be auditing. The auditor's dependence for fees on corporate barons makes it impossible for them to be independent. Their understanding of the businesses that they audited must also be doubted. The auditing industry has consistently failed to provide value for money.
He concludes that no doubt the auditors would point out that that all of the audits in question complied with all extant auditing standards. That, if anything, further confirms the poverty of the present auditing requirements. By all accounts the current auditing model is broken and cannot be repaired. This was also evident from audit failures at Maxwell, Bank of Credit and Commerce International (BCCI), Enron, WorldCom and numerous other scandals. Yet successive governments have always given in to the well-oiled accounting lobby, which prefers feather-duster audits and fat fees. The only effective way forward is for the regulators to take direct responsibility for auditing banks and financial institutions.

Jim Perterson, an international lawyer and consultant on disputes and risk management, had warned almost one year ago in the IHT.
He observed that despite the threat to the survival of the Big Four accounting firms, none of the players - not the Big Four leaders, regulators or politicians, or the community of financial information users - will say it straight out: The large auditors' business model is broken, and their risks are unsustainable. The next large-firm failure will take down the other Big Three as well, just as fast as Arthur Andersen crashed in 2002, leaving large companies unable to obtain the current form of audit report from any source.

The auditor-auditee relationship is a commercial relationship after all (audit firms communicate on their growth) and everyone knows that if his/her audit firm is not flexible enough the auditee may change the auditor and there always will be a competitor to accept and condone problems.