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The gravy train for consultants and auditors rolls on

Posted on: March 23rd, 2014

‘EVERY idiot who gets fired in the industry shows up as a consultant somewhere. Shoot the consultants . . .”

The speaker was Michael O’Leary, delivering a typically robust rebuke to his hosts, Anglo Irish Bank, at a business breakfast in 2005.

The Ryanair chief has survived all business crises because he has stuck to his convictions. Among them is a contempt for consultants and other parasites. Meanwhile Anglo, part of the dreaded consultancy culture, has sunk into oblivion. O’Leary is a genius who derides the bogus art that passes for “consultancy” in Ireland. Even in his present (hopefully temporary) “cuddly” condition, his philosophy remains unchanged. Sadly its presentation is less entertaining than it was before his handlers tried to transform him into a human being.

Last week, O’Leary’s hostility to parasites was again vindicated. Consultants all over Ireland should be blushing. Sinn Fein finance spokesman Pearse Doherty extracted a highly embarrassing report from the Department of Finance. It revealed that consultants Merrill Lynch – “expert” advisers to the Irish government – had predicted in 2008 that the bailout of Irish banks would cost a mere €16.4bn.

Merrill Lynch, world-renowned for its prescience, globally dubbed as “professional” financial advisers without peer, had boobed big time by undershooting the final tally by a whopping €47bn. It was on such flawed advice that the former Fianna Fail government made mighty decisions at a crucial time in the financial collapse.

Merrill Lynch walked away from the crisis totally unembarrassed, but greatly enriched. Last week Doherty was at pains to point out that the US magicians had been paid no less than €7.3m by the Irish government for banking advice in 2008 and 2009.

A babe in arms would have done better than Merrill Lynch. Professor Morgan Kelly had already loudly warned of the huge cost of a looming banking collapse. He would probably have done the consultancy for 10 grand. But the choice of Merrill was symptomatic of a terminal disease that we suffer in Ireland.

The link between Ireland and Merrill appears to have been initiated after Irish American Daniel Tully landed on the board of the NTMA’s National Pensions Reserve Fund in 2001. In 2003 he assisted in bringing Taoiseach Bertie Ahern to Connecticut where Bertie received an honorary degree.

Fianna Fail liked Merrill. The firm was awarded the plum post as global co-ordinator for the Eircom flotation in 1999, when it divided the €74m fees with AIB. It picked up other government gigs in the following years.

Merrill was not insensitive to the influence of its reports on government fortunes. In March 2008, before the banking collapse, one of its eager young men, analyst Philip Ingram, reported that Anglo Irish Bank was in trouble over property lending. After Anglo exerted pressure the report was sanitised.

Relations between the Irish government and Merrill were good. They understood each other. Naturally enough, Finance Minister Brian Lenihan turned to his US friends as a crutch in his hour of need. They provided it. On the eve of the bank guarantee the Secretary of the Department of Finance, Kevin Cardiff, received an email from a Merrill Lynch adviser claiming that “all of the Irish banks are profitable and well-capitalised”. The adviser did warn that “liquidity” might dry up in a matter of days. Solvency was not an issue.

It may have been the advice that Lenihan wanted to hear, but it was fatally flawed. It may have provided the minister with temporary political cover, but it was absurdly expensive.

Merrill Lynch is no friend of Ireland. Nor are other consultants who still milk the banking crisis for hundreds of millions. Their advice has not just been worthless. It has been damaging. We rightly condemn our bankers, but almost never confront the consultants, nor audit the auditors. Both escape unchallenged and enriched, picking flesh from the nation’s corpse.

The figures for fees are devastating. The usual suspects have been favoured in good times and bad. Poor results, like Merrill’s predictions, have rarely been followed by a reduction in the flow of business or fees. Favoured auditors have cleaned up. In the 2000 to 2010 decade three big accountancy firms PwC, KPMG and Ernst & Young earned €160m in fees from AIB, BoI, EBS, Anglo and Irish Nationwide. During this period all five banks went bust, small shareholders were ruined, the nation’s debt rocketed, the country went belly-up . . . but the auditors raked in huge fees.

They were ‘de facto’ undertakers, well-paid for pretending that the corpses were still alive. They never suggested that there was anything wrong in the balance sheets of their clients.

Just before the bank guarantee in September 2008, PwC told the government that the weaker banks – Anglo, Irish Nationwide and IL&P – could need €5bn for bad loans. Lenihan could relax a bit. The holes in the balance sheets were bad, but manageable. The PwC report had a huge influence on the decision to give the bank guarantee, which eventually left the State on the hook for €64bn.

KPMG and Ernst & Young have been generously indulged by the State. Ernst & Young earned €10m in fees from Anglo between 2000 and 2008, never publicly pointing out that anything might be amiss.

If the bank inquiry ever becomes more than a political circus, we may find out what happened on the night of the guarantee. Yet there is little appetite for unmasking the practices in the big firms that gave the bankers the all-clear for nearly a decade. The Government seems prepared to go to any lengths to put their Fianna Fail opponents in the dock for political advantage, but where is the enthusiasm for probing the deeds of equally flawed consultants and auditors? Senior partners at top accountancy firms do not have the same box-office appeal as Bertie Ahern and Brian Cowen. Nor would their appearances have the same devastating effect on an imminent general election.

So the gravy train for consultants and auditors lives on. Ernst & Young, the deposed auditors at Anglo, have recently landed a €4.6m consultancy gig at Irish Water.

Last week, Pearse Doherty made a formal complaint that KPMG, the former auditors at Irish Nationwide, have popped up as special liquidators of the very same bank whose auditing arm saw no wrongdoing.

Doherty has made his complaint to the Chartered Accountants Regulatory Board (CARB), the accountancy body that investigates accountants. With CARB’s record he need not be too hopeful that his complaint will land in welcoming waters.

Does Doherty not understand the sacred concept of Chinese Walls? In Ireland professional people are of such impeccable integrity that partners in the same firm never exchange secrets in the corridors. Does he not know that such is our unimpeachable professional discretion that in one case – just after the guarantee in 2008 – Arthur Cox solicitors found themselves representing the government, the Bank of Ireland and a predator party in the same case? Is he questioning the independence of the mother of all accountants KPMG?

Hopefully he is, because nobody among the silent elite of Irish business is raising an eyebrow.

Michael O’Leary is a trifle dovish on the issue of consultants. He should extend his solution to auditors, solicitors and so-called “professional” advisers. Ireland’s unhappy experience with Merrill Lynch should stop us falling into the arms of global highwaymen. We are mesmerised by big-name US companies with powerful political connections.

The clean-up of Irish business is cosmetic.