There is something very odd about the way UK governments deal with administrative failures. In earlier times, rulers called upon obedient high-priests to manage their crises. In return for high rewards and protection, the priests engaged in some ritualistic practices and absolved their masters of all wrongdoing. The mutual back-scratching continued.
Rather than creating independent and accountable institutional structures to investigate maladministration, politicians now call upon consultants, the new high priests. A large chunk of the £2.8bn public sector contracts go to accountancy firms and they are not in the habit of blaming themselves or their paymasters for failures.
The outcome of Kieran Poynter's (chairman of accountancy firm PricewaterhouseCoopers (PwC)) investigation into the saga of the data disks lost by Her Majesty's Revenue and Customs (HMRC), is eagerly awaited. Big accountancy firms second staff to most major government departments and have an "inside" track on public policymaking. At £540 an hour (pdf, see p Ev22), the modern high-priests don't come cheap. The relationship between the state and big accountancy firms is too close and has a nasty smell to it. The firms prop up confidence in companies with soothing audit reports. During the years of the Conservative administration, they became key players in the ideological project of privatisations. They collected huge fees from the privatisation of railways, buses, steel, gas, electricity, water, telecommunications and everything else. Most of the privatised companies were grossly undervalued and facilitated a huge transfer of wealth from the taxpayer to private owners. These class warriors were also the architects of the private finance initiative (PFI (pdf)) that guaranteed huge profits to companies and themselves and kept the loans off the government's books. The firms became central to government policies and acquired friends in high places.
The revolving doors between accounting firms, politicians and senior civil servants cement the close relationship. The informed wisdom in business circles is that former ministers provide that extra degree of understanding when dealing with government departments. Before his resignation from the post of the Secretary of State for Trade and Industry, Peter Mandelson granted liability (pdf) to accounting firms. Then within days of his resignation he became an adviser to Ernst & Young. Sir Malcolm Rifkind, a former Conservative minister, is considered to be a pioneer of PFI schemes. In 2003, he became an adviser to PwC. A former head of the Inland Revenue (now HMRC) heads a PwC advisory unit and a former PwC partner is head of the tax anti-avoidance at HMRC. The former head of the UK Treasury's transport team is now KMPG's director of corporate finance. No doubt everything is above board and in accordance with the terms of liberal politics, but a public scrutiny of the power, influence and money flowing through these revolving doors is long overdue.
A US Senate report (pdf) concluded (p7) that "PricewaterhouseCoopers sold generic tax products to multiple clients, despite evidence that some ... were potentially abusive or illegal ...". The firm claims to have global standards and also operates in the UK, but no politician called for an inquiry here. The firm advises the Conservative party on taxation.
In the US, KPMG admitted to "criminal wrongdoing" and paid $456m fine in the largest-ever tax fraud case. A UK tax tribunal declared a VAT avoidance scheme (pdf) marketed by KPMG to be unacceptable. The firm advises the government on taxation.
A UK tax tribunal declared a tax avoidance scheme designed by Ernst & Young to be unacceptable. A Treasury spokesperson said, "This was one of the most blatently abusive avoidance scams most of recent years", which could have cost the taxpayer over £300m a year. No prosecutions or inquiries have followed.
The US administration completed an investigation of Enron, the disgraced US energy giant, within five months of its demise and brought charges against its auditor Arthur Andersen. The UK goes at a snail's pace. In August 2005, an investigation into MG Rover, audited by Deloitte & Touche began. An inquiry into the collapse of Farepak, audited by Ernst & Young, was announced in June 2007. So far no reports.
The late Robert Maxwell, lauded as a "great character" by John Major, then Conservative prime minister, looted over £400m from his employees' pension fund. His business empire was audited by Coopers & Lybrand (now part of PricewaterhouseCoopers). In 2001, some 10 years after the appointment of inspectors, the government eventually published its report. The report contained strong criticisms of auditors, but the auditing firm was not prosecuted though the accountancy trade associations levied a paltry fine.
The Bank of Credit and Commerce International (BCCI, pdf), audited by Price Waterhouse, was the biggest banking fraud of the 20th century. In July 1991, it was closed down by the Bank of England. In 1992, a report by US Senators John Kerry and Hank Brown concluded (ch 10, p 276) that "British auditors ... had ... become BCCI's partners, not in crime, but in cover up". Yet to date, the UK has not launched an independent investigation of the BCCI audits.
The brief evidence cited above shows that there is an unhealthy relationship between the UK state and major accounting firms. Accounting firms have penetrated the state and their many anti-social activities go unchecked. Despite dodgy audits and dubious tax avoidance schemes no UK government has ever prosecuted any major accounting firm. Is it any wonder that the public confidence in political institutions is low?