Patricia J. Arnold
University of Wisconsin-Milwaukee, USA
Prem Sikka
University of Essex, UK
Globalization is associated with the growing mobility of goods, services, commodities, information, people and communications across national frontiers. Its intensification is most visible in banking and finance where, with the aid of information technology, global stock markets, futures, debt, derivatives, and interest rate swaps have accelerated the geographical mobility of capital, money and credit supply (Harvey, 1989; Lash and Urry, 1994). Increasingly, globalization refers to processes through which events and decisions, such as those relating to bank closures, in one part of the world can have significant consequences for individuals and societies in distant parts of the world.
The globalization of businesses poses questions about the social regulation, surveillance and accountability of corporations, both in the national and international context. The faceless world of global trading involves massive uncertainties and requires frameworks for creating and fostering "trust". One of the responses by Western governments has been to place considerable reliance upon accounting technologies for regulating commercial and non-commercial enterprises1 (Auditing Practices Committee, 1989, 1990; Zeff and Moonitz, 1984; Willmott et al, 1992; Power, 1993; Arnold, 1991; Auditing Practices Board, 1994; Sikka et al, 1998).
Whilst major accountancy firms have made considerable economic gains2 by encouraging regulators to believe that external audits by 'world firms' can facilitate the appropriate `trust', surveillance and regulation of international enterprises (Hanlon, 1994), considerable doubts have been expressed about the social desirability of placing (excessive) reliance upon regulation through financial audits (e.g. Power, 1994). However, little is known about the reliance placed upon accounting/auditing technologies and institutions to regulate international businesses.
Any inquiry into the interaction between accounting/auditing, business regulation and the State within a global context requires some consideration of the question of how "globalization" affects the regulatory power of nation states. In this paper, we do not seek to review the major theories of globalization.3 Instead, this paper is located at what McGrew (1997) calls the two intellectual "fault-lines" (p. 9), that is the debate between the `hyperglobalists' and the `skeptics'. The `hyperglobalists' (Zacher, 1992; Ohmae, 1995), argue that contemporary forms of globalization make a radical break from the past. In a globalized world, the traditional territorial borders have become so porous that individual governments cannot take actions to regulate businesses, especially those relating to banking and finance. As a result the role, powers and sovereignty of the nation-states has been fundamentally compromised. In contrast, the `skeptics' (Hirst and Thompson, 1996; Kapstein, 1994; Tabb, 1997a, 1997b; Wood, 1997a, 1997b; Zevin, 1992) accept the view that to manage a changing economic environment, the state has always had to restructure itself. However, they challenge the contention that globalization has reduced the power, functions or authority of the state. They argue that states, particularly the most powerful industrialized nations, continue to play a vital role in the governance of global economic affairs.
Accounting research on international issues such as harmonization, the International Accounting Standards Committee (IASC), the accounting practices of transnational corporations, transfer pricing and international taxation, can potentially contribute evidence to the debate on globalization. In this paper, we focus on international auditing, and side with the "skeptics" who argue that the state, and by implication the state-accounting alliance, remain pivotal agents in the regulation of global businesses. As finance and banking are often characterized as the most globalized of all businesses (Gilpin, 1987; Kapstein, 1994; Lash and Urry, 1994), we examine some of the issues (and tensions) relating to regulation of global businesses through auditing technologies by developing a case study of the closure of Bank of Credit and Commerce International (BCCI), a third world bank operating in major Western nations.
The paper is organized into three sections. The first section develops the theoretical foundation by considering the extent to which "globalization" has weakened the ability of nation states to regulate economic activity and govern transnational corporations. The second section illustrates our skepticism concerning `the end of the nation state' thesis through evidence drawn from the BCCI case study.4 While the BCCI case reveals serious weaknesses in the existing structures for governing transnational banking, it also shows that regulatory and auditing failures at BCCI have political and economic underpinnings that can not be explained by "globalization" per se, or its impact on the powers of the state. The concluding section summarizes our findings about globalization and the capacity of states and accountancy firms to regulate transnational financial institutions. We argue that though the closure of BCCI stands as an example of the technical capacity of Western economic powers to employ the aid of accountancy firms to discipline a third world bank, the political capacity of the state-accountancy nexus to protect broader social interests in international bank regulation remains circumscribed by governance processes that are shrouded in secrecy and beyond the reach of democratic politics. The BCCI case suggests that while the state-accounting alliance plays a important role in the governance of global banking, it promotes and fosters a global regulatory structure that further the interests of capital, rather than the welfare of depositors and citizens.
GLOBALIZATION IN PERSPECTIVE
The globalization of enterprises is best understood within the context of capitalism. In search for higher economic surpluses, lower costs and new markets, capitalist enterprises are obliged to roam the world. In pursuit of greater economic surpluses, capital is always in "need of a constantly expanding market for its products, chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere" (Marx, 1977, p. 224). Thus, capitalism has always been a global affair, and the state5 has always played a role in fostering the conditions for capital accumulation in both the domestic and international spheres. The dominant contemporary discourse on "globalization", however, asserts that the globalization of business is a radically new phenomenon driven by recent advances in digital technologies. Globalization is said to be restructuring international political economy and making the nation state, and state-based regulation of business increasingly obsolete (Held, 1991). This view of globalization, which we label the "hyperglobalist" perspective, has become ubiquitous in the popular press6, management literature and business education curriculums to the extent that it is fast becoming a taken for granted, although largely unexamined, truism.
By citing a huge growth in the volume of global financial trade and the appearance of international organizations and agreements, the `hyperglobalists' attribute historical novelty to contemporary forms of globalization and argue that the nation-states are now powerless to regulate capital flows and have been reduced to "little more than bit players" (Ohmae, 1995, p. 12). The hyperglobalists marshal considerable statistical evidence to support their claim. For example, Frieden (1991) notes that "(i)n April 1989, foreign exchange trading in the world's financial centers averaged about $650 billion a day, equivalent to nearly $500 million a minute and to forty times the amount of world trade a day" (p. 428). Sassen (1996) observes that since 1980, "the total value of financial assets has increased two and a half times faster than aggregate GDP of all rich industrial economies, and the volume of trading in currencies, bonds and equities has increased five times faster. Similarly, between the period 1975 and 1990, international bank lending grew from $40 billion to $300 billion and the number of foreign banks operating in London more than doubled to reach over 500 by 1990. Branch banks located outside home countries now account for the bulk of earnings for many banks (Kapstein, 1994, p. 4). Some $6 trillion has escaped the national boundaries and is nested in various offshore havens (United Nations Office for Drug Control and Crime Prevention, 1998) thus, further calling into question the power of sovereign nations to regulate financial flows7. Hyperglobalists argue that the scale of financial transactions is so large that states can no longer effectively control the system. From the hyperglobalist perspective, the unregulated growth and expansion of the Bank of Credit and Commerce International (BCCI), epitomizes the quintessential ungovernable international bank, one that operated "over a large expanses of international space" moving between different "regulatory spaces" in order to evade the control of any one national regulatory regime (Leyshon and Thrift, p. 61).
Globalization "skeptics"8 contest the novelty, evidence, arguments and policy prescriptions advanced by the `hyperglobalists' on grounds of an unhealthy degree of abstraction from history and geography. They argue that `genuine' globalization does not exist and that the present forms of `globalization' are the outcome of intentional politics and policies pursued by the major nation-states, rather than technology or market imperatives. Amongst the skeptics, Hirst and Thompson (1996) challenge to the core tenets of "globalization" by arguing that today's "internationalized" economy is not unprecedented, but rather is, in some respects, "less open and integrated than the regime that prevailed from 1870 to 1914". They further contend that "genuine transnational corporations (TNC)" are relatively rare, and that "capital mobility is not producing a massive shift of investment and employment from advanced to the developing countries". For most TNCs foreign investment and sales continues to be less important than domestic9 activity. Of the top 100 firms in the world in 1993, only 18 kept majority of their assets outside their host nation (Wade, 1996). Most of the assets and exports of the TNCs are located in the First World developed countries, and not in the developing world. For example, in the early 1990s, the stock of US capital invested abroad totaled 7% of GNP - slightly less than the figure for 1900 (Wade, 1996, p. 72). Based on data showing that trade, investment, and financial flows remain concentrated in Europe, Japan and North America, Hirst and Thompson (1996) conclude that "these economic powers ... have the capacity, especially if they coordinate policy, to exert powerful governance pressure over financial markets". In contrast to the somewhat pessimistic outpourings of the `end of the nation-state school', Hirst and Thompson (1996) argue that global economic activities are "by no means beyond regulation and control, even though the current scope and objectives of economic governance are limited by the divergent interests of the great powers and the economic doctrines prevalent among their elites" (pp. 2-3).
Even in the case of banking and finance, the most global of all economic activities, the historical novelty and implications of "globalization" are easily overstated. Polanyi's (1944) classic study of nineteenth century economic liberalism shows that the internationalization of finance is neither a new phenomenon, nor one that is independent of national capitals and the ruling elites of nation states. Taking a long view of the history of international finance, Zevin (1992) concludes that today's financial markets show little sign of greater "financial openness" than they did a century ago. Although technology has increased the scope and volume of global financial transactions, Zevin argues that economic integration is best measured by the degree of price conversion since a single price implies a single market. He shows that the financial markets of northwest Europe were highly integrated in the pre-1914 period as evidenced by the convergence of interest rates across national boundaries10. Current patterns of international lending and transnational securities trading, likewise, have historical precedents. At the turn of the century, India, Italy, Japan, Russia and Denmark had ratios of net foreign debt to GNP of from 20% to 30%; percentages that are comparable to the debt ratios of the largest debtor countries in the 1990s (p. 47). Foreign stocks accounted for 59% of the stocks traded in the United Kingdom at the end of the 19th century, while nearly a century later (1987) only 20% of stocks traded in the United Kingdom were foreign issues. Statistics on stock trading in France show a similar proportional decrease in foreign securities trades (p. 51)
Historically, the "degree of (financial market) openness has oscillated in response to political factors", rather than technological advances (Schor, 1992, p. 7). The high degree of international capital mobility that characterized the eighteenth and nineteenth centuries gave way following the Great Depression in the 1930s to relatively unique period of "non-integrated financial markets" that lasted until the beginning of the 1970s. The post-war period of "non-integrated financial markets", and state-lead Keynesian national economic policies were the product of political forces (Schor, 1992). Likewise, the recent return to an integrated world financial market can be attributed to political forces, rather than technological imperatives as the `end of the nation-state" school contends (Ohmae, 1995). The neo-liberal restructuring of the global financial markets which has occurred since 1970 is the result of a deliberate, systematic, and we might emphasize, state led 11 effort to dismantle capital controls, to deregulate and liberalize national economies, and to open financial markets once again to international capital investment (Helleiner, 1994). In the field of banking, in particular, Kapstien's (1994) history of international banking, from the collapse of the Bretton Woods Agreement to the US/IMF management of international debt crisis, similarly shows that "the world economy does not operate somewhere offshore, but instead functions within the political framework provided by nation-states" (p. 184).
"Hyperglobalists" fail to see the hand of the state in the governance of international economic affairs, in part, because they interpret the meaning of state regulation narrowly as public interest regulation, i.e. state imposed controls on business in the public interest. They fail to see that capital, itself, needs and depends upon various forms of state regulation (Kolko, 1963) to maintains the conditions of accumulation, to manage crises, to rationalize market excesses, to liberalize domestic economies, and smooth the way for international capital investment at home and abroad. As Ellen Meiksins Wood (1997a, p. 12) notes:
We can debate about how much "globalization" has actually taken place, about what has and what hasn't been truly internationalized. But one thing is clear: in the global market, capital needs the state ... Behind every transnational corporation is a national base, which depends on its local state to sustain its viability and on other states to give it access to other markets and other labor forces. In a way, the whole point of "globalization" is that competition is not just -- or even mainly -- between individual firms but between whole national economies. And as a consequence, the nation-sate has acquired new functions as instruments of competition.
Wood (1997a, 1997b) goes so far as to argue that under contemporary forms of globalization, the state has become more, rather than less, important to capital. Hutton (1999) echoes this view of the state as agent of "globalization" when observing that "The City [of London] has not just been the citadel of free financial markets; it has been the prime beneficiary of the most determined industrial policy sustained continuously by the British state in any branch of economic activity, Law, taxation, regulation and economic policy have been bent to suit its needs. ...... (T)he global markets are powerful; but the terms on which they trade are set by governments." (p. 61 and 64).
The skeptics have advanced a debate on `globalization" that is by no means settled.12. They have been chastised for underestimating the power of transnational corporations "to undermine democratic political institutions", and for failing to acknowledge the "adverse effects of globalization on politics" (DuBoff and Herman, 1997). Whilst acknowledging the significance of the power of transnational corporations, our study of BCCI provides evidence in support of the globalization "skeptic's" contention that the state, and by implication the state-accounting alliance, continues to play a pivotal role in the governance of international banking. Nonetheless, we are careful to distinguish between the technical capacity of states and accountancy/audit firms to regulate transnational capital, and their political capacity to do so. (Wood, 1997b). With few exceptions, critics of globalization acknowledge that states' ability to regulate and control capital is limited, not by "globalization" per se, but rather by politics -- by ruling neo-liberal ideologies, the nature of the capitalist state (DuBoff and Herman, 1997), and by the waning of class-politics and socialist struggle for genuine democratic control over economic affairs (Wood, 1997a, 1997b) . Geo-politics also limits state authority such that Western economic powers, like the United States, are far more capable of shaping international regulatory regimes to suit the interests of transnational corporations based within their borders, than are newly industrialized and third world nations.13 Within powerful nations, politics limits and shapes state actions not only because of the disproportionate influence exercised by corporate lobbies on domestic and international economic policy, but also because the nation-states increasingly compete to secure inward investment and thus smooth the path of capitalist development. For globalization "skeptics", like ourselves, the critical question is not whether the state, or in our case the state-accountancy nexus, has the technical capacity to regulate transnational enterprise (which the BCCI case shows they do), but whether it has the political capacity to create and enforce regulatory regimes that serve the needs of democratic society, rather than the needs of capital. Accordingly, our study of BCCI looks beyond the story of how the Bank of England and Price Waterhouse closed BCCI to consider the interests served by the state-accounting alliance. The case reveals the political underpinnings of auditing practice, and the limits politics and economics impose on the ability of state regulators and their auditors to advance society's interests in the regulation international banking.
THE BANK OF CREDIT AND COMMERCE INTERNATIONAL
BCCI's Expansion: Ungoverned or Ungovernable?
At first glance, BCCI might well be considered as the quintessential borderless bank, spanning the globe and organized to evade state regulation (Financial Times, 1991). BCCI's growth as a world bank was indeed phenomenal. From its origins as a small family owned bank in pre-independence India and later Pakistan, BCCI's founder, Agha Hasan Abedi, built an international banking empire which he envisioned as a Third World bank capable of competing with Western banks. With ostensible backing from the Royal House of Abu Dhabi and other Middle Eastern investors,14 BCCI was launched in 1972 with offices in London, Luxembourg, Lebanon, Dubai, Sharjah and Abu Dhabi (Bingham, 1992, Chapter 2). By 1977, BCCI was the world's fastest growing bank, operating from 146 branches in 43 countries. By the mid-1980s, it was operating from 73 countries with balance sheet assets of around $22 billion.
The bank was intentionally organized as a "elaborate corporate spiderweb" (US Senate, 1992b, p. 1), of holding companies, transnational affiliates, banks within banks, and nominee relationships in order to evade government regulation and control. To this end, BCCI incorporated in Luxembourg, a place know in financial circles as a "loosely-regulated banking centre" (Financial Times, 1991, p. 10) where banking laws provided a haven for secrecy and confidentiality (US Senate, 1992b, p. 28). Subsequently, a holding company was created that split the bank into two parts -- BCCI SA incorporated in Luxembourg, and BCCI Overseas headquartered offshore in the Grand Cayman Islands. This organizational split was further complicated by the creation of a series of entities used as "parallel banks" to circumvent local regulation and facilitate financial manipulation (US Senate, 1992b, p. 38).
Designed to evade regulation, BCCI's fractured banking structure provided a mechanism for facilitating illegal activities by both bank officials and BCCI clients. Investigations following BCCI's closure in 1991 (US Senate, 1992b, p. 1) exposed a host of criminal activities including money laundering in several continents, bribery of government officials, arms trafficking, the sale of nuclear technologies, support of terrorism, tax evasion, smuggling operations and massive financial fraud. Investigators (US Senate, 1992b, p. 53) found that BCCI had manipulated accounts, concealed losses and nonperforming loans, created fictitious profits and bogus loans, misappropriated deposits and failed to record deposit liabilities. Many of the nonperforming loans were linked to nominee relationships through which BCCI had illegally acquired banking operations in the US and purchased its own shares to create a fictitious capitalization.
Although BCCI's unchecked growth and ability to circumvent national laws demonstrates a weaknesses in the existing governance structure of international banking, it would be wrong to conclude that global finance is intrinsically ungovernable. To the contrary, BCCI's unregulated growth was an exception to the rule (Kapstein, 1994, pp. 155-156). International agreements governing global banking, inscribed in the Basle Concordats, establish the principle of consolidated home country supervision as the framework for transnational banking supervision. Under this principle, branch banks operating worldwide are supervised by regulators in the home country where the parent resides. Although not explicitly stated in international agreements, the home country is expected to act as lender of last resorts for the worldwide operations of its domestic banks (Kapstein, 1994). BCCI was exceptional in that it had no lender of last resort -- no national government willing to assume supervisory responsibility and bear the risk of the bank's failure.
BCCI SA moved its head offices to London in 1976 although it remained incorporated in Luxembourg. Luxembourg regulators, however, maintained that "it was impossible to supervise (BCCI) effectively from Luxembourg" (Bingham, 1992, pp. 32-33). Although the Bank of England resisted pressure to take on a sole supervisory role, it agreed to license BCCI as a deposit taking institution (although not a full bank). In 1987, concerned by BCCI's extensive treasury losses, whispers of irregularities, and the inability to find a single regulator willing to act as lender of last resort the Basle Committee established a "College of Regulators"15 lead by the UK and Luxembourg to scrutinize BCCI operations (Bingham, 1992, pp. 52-53). Members of the College proved less than effective as they were preoccupied with respective national interests (Bingham, 1992).16 But, BCCI ultimately could not evade the regulatory rule of Western governments. Despite an organizational structure designed intentionally to allow BCCI to operate outside national laws, the College of Regulators, led by the Bank of England, formally closed down BCCI's worldwide operations on 5 July 1991. Kapstein (1994), thus, interprets BCCI as "the exception that proves the rule" that "state power prevails over transnational forces, when and if, it is applied" (pp. 155-156).
While the bank's closure illustrates the enduring power of nation states, BCCI's unregulated growth highlights the political antecedents underpinning decisions as to how state power is exercised. Given the absence of a lender of last resort, any nation could have denied BCCI permission to bank within its boarders. BCCI regularly used brides and kickbacks to government officials to gain entry into several countries (US Senate, 1992b, Chapter 5). Due to the absence of a lender of last resort, US regulators blocked BCCI's attempts to acquire bank holdings in the US, but the bank eventually used political connections to evade regulators and illegally acquire several US banks through nominee relationships (US Senate, 1992b, Chapter 6). On technical grounds, the Bank of England could have likewise prevented BCCI from operating in the UK, but instead it licensed the bank and allowed it to headquarter in London in keeping with the then government policy of encouraging foreign investment in the City. Several theories have been put forth to explain the BCCI's unregulated growth ranging from the speculation that the Bank of England was reluctant to close BCCI because of possible diplomatic repercussions in the Middle East, to allegations that BCCI was untouched because of its ties to ongoing intelligence operations17 (Kapstein, 1994, p. 158-159). Alternatively, the bank's operations may have been sanctioned by Western states because of the more straightforward desire to recycle petro-dollars back in to Western banking establishment. Although the particulars of the motivations remain obscure, BCCI's growth can not be attributed to the declining authority of the state. To the contrary, Western regulators condoned and sanctioned BCCI's expansion for political ends. As such, BCCI is best characterized as an ungoverned, rather than ungovernable global bank.
Regulating BCCI Through External Auditors
Based upon local history, the role of external auditors in bank regulation varies from country to country. In the US responsibility for bank auditing is divided between external and government auditors with considerable confusion and overlapping responsibilities, and with neither accepting responsibility for detecting fraud.18 By contrast, the UK, does not employ a force of government bank auditors, but instead relies extensively on the opinions of external auditors. To facilitate home country supervision, the Basle Accords establish minimal capital adequacy standards and require international banks to prepare consolidated financial reports covering their worldwide operations (Kapstein, 1994). To supervise transnational banks domiciled within their boarders, regulators in most counties, including the Bank of England, rely upon international accountancy firms to audit these consolidated statements. Private sector, external auditors, thus, play crucial quasi-regulatory role in governing the international banking system.19
In compliance with Western banking practices, BCCI had to submit to external financial audits. Regulators placed considerable reliance upon BCCI's audited financial statements even though they had no explicit say in auditor appointment and the auditors did not owe them a "duty of care".20 Reflecting the bank's organizational split between Luxembourg and Grand Cayman, BCCI named two auditors to cover its international operations: Ernst and Whinney (now part of Ernst and Young) audited the Luxembourg operation and the holding company, while Price Waterhouse (now part of PriceWaterhouseCoopers) audited the Grand Cayman operations. Although the appointment of two auditors limited the scope of each auditors authority and facilitated BCCI's financial manipulation, neither audit firm objected to this arrangement for over a decade (US Senate, 1992b, p. 259). It was not until the mid-1980s in the wake of concerns about significant trading losses within BCCI's Treasury, that Ernst and Whinney questioned the split audit and insisted upon a single auditor. BCCI subsequently appointed Price Waterhouse21 as sole auditor of BCCI's worldwide group in May 1987 (US Senate, 1992b, p. 266).
Bank regulators relied extensively on the work of these accountancy firms. For example, by the late 1970s, UK banking circles were concerned that BCCI's drive for growth neglected prudential matters such as solvency ratios and bad debt provisions. Its UK branches were also thought to be trading at a loss, excessively lending, and doing too little business with other banks. Nonetheless, in 1979, the UK government justified it decision to licensed BCCI SA as a deposit-taking institution by the fact that the "auditors were not qualifying the reports" (Hansard, 6 November 1992, co. 527). In 1970, the Bank of England persuaded BCCI SA to commission an investigation of its loan book and the auditors, Ernst and Whinney, produced a reassuring report in March 1981 (Bingham, 1992, p. 39). By the mid-1980s, in view of BCCI's huge treasury losses, the Luxembourg regulators asked BCCI to conduct of Review of the Treasury operations. Price Waterhouse undertook the review and uncovered irregularities, but mistakenly attributed deliberate manipulations22 the to "incompetence, errors made by unsophisticated amateurs venturing into a highly technical and sophisticated market" (Bingham, 1922, p. 44).
The Treasury episode demonstrates the conflict between the accountancy firms commercial interests and their quasi-regulatory role in bank supervision. In pursuit of "private" interests, auditing firms increasing sell non-auditing services to their audit clients and serve their clients as counselors and advisors, at the same time as the state looks to them to perform the more adversarial, function of independent auditors. Following the review of Treasury operations, BCCI hired the Consultancy division of Price Waterhouse to assist in improving internal control weaknesses which the auditor's had identified. The consultants (Price Waterhouse) completed their work in 1986, and the auditors (also Price Waterhouse) reported that they were satisfied that their recommendations had been implemented (US Senate, 1992a, p. 175). In conjunction with the review of the Treasury operations, the auditors also discovered a potential tax liability to the UK government and advised BCCI to move its Treasury operations out of the UK to avoid payment: Price Waterhouse workpapers obtained by US Senate investigators state:
A further feature arising from the review of Treasury operations in 1985 was the potential liability to UK Corporation Tax arising from the Division's activities in the period 1982 to 1985. Following advice from ourselves and from the Tax Counsel during 1986 it was determined that this liability could be significantly reduced if the Bank ceased trading in the United Kingdom and claimed a terminal loss (US Senate, 1992a, p. 175).
Following this advice, BCCI's Treasury was moved from London to Abu Dhabi in 1986 with Price Waterhouse assisting with the transfer (US Senate, 1992a, p. 175). The auditors were, thus in the dual position of acting as private consultants and tax advisors to BCCI management to further their `private' interests, while the State was relying upon them to perform `public interest' functions by acting as an external monitor and independent quasi-regulator.
Throughout the 1980s, BCCI auditors continued to issue unqualified reports on the Bank's financial statements. In 1987, the Bank of England received reports of fraudulent activity by BCCI (Bingham, 1992, p. 56), but no decisive action was taken, in part, because the auditors did not suspect BCCI management of fraud (Bingham, 1992, p. 57). In May 1988, Price Waterhouse prepared a substantial report for the College of Regulators. The report drew attention to the heavy concentration of BCCI loans to certain customers, several of whom were shareholders. The report also included information concerning BCCI nominee companies and possible illicit investments in the United States. The information provided to regulators, however, was minimal because auditors "faced the dilemma of seeking to reconcile their duty to make appropriate disclosure to the (bank) supervisors with the need to retain the confidence of their clients" (Bingham, 1992, p. 59).
In a dramatic turn of events, in early 1990, Price Waterhouse secretly notified the Bank of England of suspected fraud within BCCI (US Senate, 1992b, p. 271-273). 23 The auditors acted under the authority of the 1987 Banking Act, which at the time gave auditors a "right", but not a "duty", to report fraud to authorities. Despite suspicions of fraud, Price Waterhouse nonetheless issued an unqualified audit report on BCCI's 1989 financial statements in May 1990. During the remainder of 1990 and early 1991, the Bank of England and the government of Abu Dhabi worked quietly on plans to save the bank by recapitalizing and restructuring it 24 and Price Waterhouse continued to uncover evidence of fraud. The plan to rescue BCCI never materialized.25 On March 4 1991, the Bank of England directed Price Waterhouse to prepare a confidential report on irregularities at BCCI. The report was commissioned under Section 41 of the UK Banking Act of 1987 which allows regulators to direct external auditors to conduct such probes in situations where bank depositors might be at risk. A draft of the Section 41 report, code named the Sandstorm Report, 26 was delivered to the Bank of England on 22 June 1991. It documented detailed evidence of massive frauds by BCCI officials over several years. Two weeks later, the College of Regulators closed BCCI (US Senate, 1992b, p. 279).
The auditor's investigative work and their action in notifying UK authorities of suspected fraud was undoubtedly instrumental in BCCIs closure. Other aspects of the auditor's role in regulating BCCI, however, raise concerns about the reliance regulators' place on external auditors. The US Senate Subcommittee27 on Terrorism, Narcotics and International Operation undertook an investigation of the BCCI affair that devoted considerable attention to what it deemed the "failure" of the audit process which regulators had relied upon for years to provide an indication of BCCI's financial integrity. Based on extensive hearings and a review of records and documents including Price Waterhouse audit reports, (parts of ) working papers, and the Sandstorm report, the Subcommittee concluded that the "BCCI's accountants failed to protect BCCI's innocent depositors and creditors from the consequences of poor practices at the bank of which the auditors were aware for years" (US Senate 1992b, p. 4). The following sections review three criticisms levied against the auditors by US investigators. While the Subcommittee's critique illustrates serious deficiencies in the present system of governing international banking via external auditors, we argue that these failures can not be attributed to the globalization per se or globalization's effect on the capacity of the state-accounting nexus to govern transnational enterprizes, but rather to the political failures in the regulatory system.
Auditing Failure
The Senate Subcommittee's conclusion that BCCI's auditors failed to protect innocent depositors and creditors was formed on the basis of the following findings (US. Senate, 1992b, pp. 4-5; Chapter 10). First, for more than a decade, the auditors failed to object to BCCI's practice of dividing responsibility for monitoring the Luxembourg and Grand Cayman operations between two audit firms thereby enabling BCCI to conceal fraud during its early years. Second, the auditors compromised their independence by accepting loans and financial benefits from BCCI. The Subcommittee found evidence of loans to two Price Waterhouse partners in the Caribbean and raised questions concerning the acceptance of payments and other benefits by Price Waterhouse partners in the Grand Caymans. Third, the investigators found that despite BCCI's complicated subterfuge, there were numerous "warning bells" indicating irregularities from the early years, and the auditors "could and should have done more to respond to them" (p. 4; p. 259). They concluded that by the end of 1987, Price Waterhouse (UK) already had sufficient knowledge of inadequacies in BCCI records to qualify the audit, and that the auditor's subsequent certification of BCCI's financial statements mislead depositors and regulators (p. 4; p. 259).
These findings do not portray an audit stymied by the technical difficulties of monitoring a global enterprize or frustrated by international jurisdictional boundaries or bank secrecy laws. To the contrary, the Subcommittee found that the auditors were aware of "red flags" and internal control weakness from the early years, and that from 1987 forward the they had "ample reason to recognize that there could be no adequate basis for certifying that it had examined BCCI's books and records (p. 5; p. 259). These audit failures can, however, be linked to the contradictions within a regulatory system that relies on private accounting firms as quasi-public regulators. Bank regulators' reliance on external auditors is premised on the belief that the auditors are public spirited and will act on behalf of either the public or the state, and that auditors are independent of management. Such propositions are problematic because auditing firms themselves are significant capitalist enterprises driven by profit motives to pursue their "private" economic interests, rather than public policy objectives. As Hanlon (1994) notes, within auditing firms "the emphasis is very firmly on being commercial and on performing a service for the customer rather than on being public spirited on behalf of either the public or the state" (p. 150). If the auditors delayed too long before acting upon their knowledge of irregularities at BCCI, responsibility must rest, in part, on the failings of a regulatory system which depends upon external auditors who are appointed and compensated by the banks they audit, who are increasingly depend on consulting fees earned by advising the managements they audit, and who owe no duty of care to the regulators or depositors who rely on them.
The Fallacy of "World" Audit Firms
International jurisdictional boundaries and bank secrecy laws also played a role in the BCCI case. Despite its reputation as a "international" firm, Price Waterhouse proved unwilling to cooperate with regulators or investigators outside the national jurisdiction of local partnerships.
US investigators criticized Price Waterhouse (UK) for failing to notify either US banking authorities or Price Waterhouse (USA) of BCCI's illegal US acquisitions. They found that prior to 1990, Price Waterhouse (UK) was aware of "gross irregularities in BCCI's handling of loans to Credit and Commerce American Holdings (CCAH), the holding company of First American Bankshares, and was told of violations of US banking laws by BCCI and its borrowers in connection with CCAH/First American, and failed to advise the partners of its US affiliate or any US regulator" (US Senate, 1992b, p. 5; p. 259). Eventually, the Federal Reserve heard rumors of a report prepared by BCCI's auditors that indicated the bank had outstanding loans to shareholder of CCAH which were secured by shares in CCAH. Although Price Waterhouse (UK) initially refused to give US authorities access to the report, the Federal Reserve pressed its demand and was allowed to review Price Waterhouse's report in BCCI's London office in late 1990 (US House of Representatives, 1991b; US Senate, 1992b, p.349). Based on evidence contained in the auditor's report, the Federal Reserve initiated a formal investigation into BCCI's US acquisitions.
An investigation of BCCI by New York state authorities was also frustrated by the auditors' lack of cross-jurisdictional cooperation. The New York District Attorney testified to Congress about the extraordinary difficulty his office had in obtaining information:
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 we've met with them here and over there -- have not given that permission.
The audit of BCCI, financial statement, profit and loss balance sheet that was filed in the State of New York was certified by Price Waterhouse Luxembourg. When we asked Price Waterhouse US for the records to support that, they said, oh, we don't have those, that's Price Waterhouse UK
We said, can you get them for us? They said, oh, no that's a separate entity owned by Price Waterhouse Worldwide, based in Bermuda. (US Senate 1992b, p. 245)
BCCI's auditors also refused to cooperate in US Senate Subcommittee's investigation of the bank (p. 256).28 Although the BCCI audit was secured by arguing that Price Waterhouse was "globally integrated" (US Senate, 1992b, p. 258), in the face of a critical inquiry, the claims of `global integration dissolved. Price Waterhouse (USA) denied any knowledge of or responsibility for the BCCI audit which it claimed was the responsibility of Price Waterhouse (UK). Price Waterhouse (UK) refused to comply with US Senate subpoenas for sight of its working papers and declined to testify before the Senate Subcommittee on the grounds that the audit records were protected by British banking laws, and that "the British partnership of Price Waterhouse did not do business in the United States and could not be reached by subpoena" (p. 256). In a memorandum dated 17 October, Price Waterhouse (US) explained that the firm's international practice rested upon loose agreements among separate and autonomous firms subject only to the local laws:
The 26 Price Waterhouse firms practice, directly or through affiliated Price Waterhouse firms, in more than 90 countries throughout the world. Price Waterhouse firms are separate and independent legal entities whose activities are subject to the laws and professional obligations of the country in which they practice ...
(N)o partner of PW-US is a partner of the Price Waterhouse firm in the United Kingdom; each firm elects its own senior partners; neither firm controls the other; each firm separately determines to hire and terminate its own professional and administrative staff.... each firm has its own clients; the firms do not share in each other's revenues or assets; and each separately maintains possession, custody and control over its own books and records, including work papers. The same independent and autonomous relationship exists between PW-US and the Price Waterhouse firms with practices in Luxembourg and Grand Cayman (US Senate, 1992b, p. 257).
The Senate subcommittee was eventually able to secure portions of Price Waterhouse's audit records from the Federal Reserve and other sources. Nonetheless, in their final report (US Senate, 1992b, p. 287), the Subcommittee co-chairs, Senators Brown and Kerry, noted that:
One of the great difficulties in uncovering BCCI's fraud for regulators and investigators was the fact that its frauds were carried out through diverse and widespread jurisdictions spanning the globe, while its activities were audited by local accounting partnerships (emphasis added).
Consequently, they questioned:
whether the current structure for accounting firms as independent partnerships, with authority and liability limited to the nation in which they are licensed, is appropriate and adequate to meet the challenge posed by an international financial marketplace.
While this lack of cooperation and coordination between audit offices and banking authorities across national jurisdictional boundaries is directly related to the global scope of BCCI's operations, it would be mistaken to conclude that globalization per se renders the nation states or national regulation obsolete. Geopolitical realities dictates that strong nation states can exercise their political will in the international regulatory arena if they so chose. It is significant that the US Federal Reserve was eventually able to press its power to obtain documentation where elected officials failed. Both the New York District Attorney's indictment of BCCI (US Senate, 1992b, pp. 247-249) and the US Congressional investigation of the scandal were made possible by the ability of the US central bank to use its considerable influence to penetrate banking secrecy law of other nations.
Second, governments, particularly strong states like the US, have the technical capacity to regulate international accounting firms either through multilateral agreements or unilateral state actions. In BCCI's case, the US Senate Subcommittee recommended the creation of new regulatory structures governing international accountancy firms (p. 288) and identified unilateral state actions that could be taken to this end. International accountancy partnerships could be asked to voluntarily modify their partnership agreements to provide for information sharing with foreign regulators, or the United States (and presumably other states) could unilaterally require accounting firms to reach such agreements with their international partners as a condition of licensing. Alternatively, legislation could be passed to prohibit any state agency or regulator from relying upon audit reports prepared by any accounting partnership that was not licensed in the United States ( US Senate, 1992b, p. 288). Despite the Subcommittee's concerns about weaknesses in the structures governing international audit practices, no legislation was introduced to implement any of these recommendations29. The lack of US action on these recommendations for reform is indicative of political failure, rather than any technical constraint on the state's ability to regulate transnational capital.
Collusion in Cover-up
Price Waterhouse's (UK) decision the sign-off on the 1989 audit after notifying UK banking authorities of suspected fraud at BCCI underscores the political underpinning of the seeming technical practices of accounting and auditing. Possibly fearing that a qualified opinion would prompt a run on BCCI and undermine confidence in the banking system, UK regulators wanted the 1989 BCCI accounts to be published with an unqualified audit opinion. Abu Dhabi provided financial guarantees30 (Bingham, 1992, p. 82), and the auditors agreed to issue an unqualified opinion lending accountings "aura of objectivity" (Gallhofer and Haslam, 1991) to the subterfuge. Price Waterhouse defended its action by arguing that the Bank of England and Luxembourg regulators had been informed and wanted BCCI to continue operations. The auditors believed the extent of fraud was limited, the royal house of Abu Dhabi had agreed to recapitalize the bank, and the audit report disclosed that the auditor's opinion was based on guarantees provided by Abu Dhabi (US Senate, 1992b, p. 275).
The US Senate investigators were, nonetheless, sharply critical of Price Waterhouse's decision to sign the accounts and accused the auditors of collaborating with bank regulators to deceive the public. According to the Senate report (US Senate, 1992b, p. 276) on the BCCI affair:
By agreement, Price Waterhouse Abu Dhabi, BCCI and the Bank of England had in effect agreed upon a plan in which they would each keep the true state of affairs at BCCI secret in return for cooperation with one another in trying to restructure the bank to avoid a catastrophic multi-billion dollar collapse. Thus to some extent, from April 1990 forward, BCCI's British auditors, Abu Dhabi owners, and British regulators, had now become BCCI's partners, not in crime, but in cover up.
The investigators further argued that the auditors' certification was "materially misleading to anyone who relied on it ignorant of the facts then mutually known to BCCI, Abu Dhabi, Price Waterhouse and the Bank of England (US Senate, 1992b, p. 5).
A similar scenario was played out in Hong Kong just days before BCCI's closure. Unlike most BCCI branch operations, BCCHK was separately incorporated in Hong Kong (at the time a UK colony) and supervised by Hong Kong regulators. When BCCHK's financial statements were published (on 30 June 1991), Price Waterhouse (UK) had already completed its draft of the Sandstorm report (dated 22 June 1991). Nonetheless, the auditors (again Price Waterhouse) signed off on BCCHK's 1990 accounts after receiving a "letter of comfort" from Abu Dhabi promising the financial support required to enable BCCHK to continue trading (Far Eastern Economic Review, 18 July 1991, p. 8). Hong Kong regulators were anxious to maintain confidence in the bank despite mounting evidence of fraud. On July 1, Hong Kong banking officials flew to London to attend the meeting of the College of Regulators (of which Hong Kong was a member) where the results of the Sandstorm investigation were discussed. Two days later, the Banking Commissioner announced that the results of the meeting had "indicated that there were problems which we were not previously aware of in the BCCI Groups (Far Eastern Economic Review, 18 July, 1991, p. 68), but assured the public that there was no evidence of fraud at BCCHK and that it had "only minor dealings with the rest of the BCCI Group". On Friday, 5 July, the Commissioner further assured depositors that the Exchange Fund (Hong Kong's monetary authority) would continue placing funds with BCCHK, a promise that was later characterized by the Far Eastern Economic Review (18 July, 1991, p. 68) as "deliberate attempt to deceive the public". The following Monday, 8 July 1991, Hong Kong bank regulators rescinded their promise, BCCHK's assets were frozen and its operations suspended.
Collaboration between auditors and regulators to conceal financial institutions' poor condition in order to maintain public confidence in the health of individual banks or the banking system is not unique to the BCCI case. Young (1995) documented a similar political use of accounting in the case of the US Savings and Loan industry where accounting rules were changed to conceal to the poor condition of the S&Ls in order to "buy time" for the industry to work out its problems. This capacity for financial deception by bank regulators and auditors raises serious questions about accountability and the potential abuse of power. In the global context, it also has geopolitical implications as Western nations wield disproportionate power to determine whose interests are advanced or sacrificed by both the timing of and the decision to close an international bank. The US Federal Reserve, for example, could have exercised its influence to have BCCI shut down immediately after learning of its illegal holding in the United States, but it delayed in order to secure the rescue of First American. According to Congressional records, the Federal Reserve did not act to close the bank globally, even after learning of the scope and nature of BCCI's frauds, because it needed "to secure the cooperation of BCCI's majority shareholders, the government and royal family of Abu Dhabi, in providing some $190 million to prop up First American Bank and prevent a collapse" (US Senate, 1992b, p. 8). Less powerful nations and innocent depositors had no such choice; the BCCI closure was presented to them as a as a fait accompli.31
BCCI had some 1.4 million depositors across the world, the majority of whom were either residents of South Asia or Asian immigrants. The governments of Bangladesh, India and Pakistan were particularly anxious to rescue the bank since BCCI served important `local' functions in financing trade and providing capital to small businesses. In parts of the East, BCCI's status as a world class bank with third world origins was viewed as a source of pride, and its attempt to blend "capitalism and Islamic benevolence" (Far Eastern Economic Review, 26 September, 1991) was welcomed as an alternative to the cultural insensitivity of the Western banking establishment. In Pakistan, where BCCI was the largest bank in the country with 72,000 depositors, regulators rebuffed a Bank of England official sent to discuss the BCCI closure, and attempted to rescue the bank by selling it to Bank of Credit and Commerce Emirates over the objections of British liquidators32 (Far Eastern Economic Review, 8 August, 1991).
The Western banking establishment's decision to close BCCI was criticized by Asian business owners and depositors who saw the action as overly hasty and cavalier in its disregard of non-Western interests. Some perceived BCCI as "a Third World enterprise that First World regulators capriciously penalized" (Far Eastern Economic Review, 26 September, 1991, p. 64), while others saw "racism" in the closure of a bank that was "owned by Arabs, run by Pakistanis and did much of its business with traders from the Indian subcontinent"(Far Eastern Economic Review, 1 August, 1991, p. 59). Many speculated that crisis would have been dealt with differently had BCCI been a Western bank or if it had been more closely integrated with powerful economic interests in the world's financial capitals. As one Asian business executive explained:
At Salomon Brothers, at Nomura, at Continental Bank and at Bank of New England, heads rolled. But those institutions did not have the plug pulled on them overnight ... The same should have been done at BCCI. I have absolutely no sympathy for the men who fudged the books or played with depositors' money, but BCCI did very well in serving the local community (Far Eastern Economic Review, 26 September 1991, p. 64).
Auditing "Reforms" in the Aftermath of BCCI
The political limits of the state-accounting alliance's ability to regulate in the public interest is also evident in the outcomes of "reform" attempts in the UK and US following the BCCI scandal. With characteristic secrecy, the Sandstorm report was suppressed in the UK, and no inquiry into the auditor's role in the BCCI scandal has, as yet, been made public. In previous banking crisis, the UK state appointed inspectors to investigate baking fraud/failure and the role played by accounting and auditing firms in such matters (Sikka and Willmott, 1995a). In the BCCI case, however, the British government's inquiry into the BCCI closure, conducted under the chairmanship of Lord Justice Bingham (Hansard 19 July 1991, c. 724) examined only the actions taken by UK authorities (mainly the Bank of England). Lord Justice Bingham's terms of reference precluded him from evaluating "the professional quality of audits of BCCI's accounts conducted over the years in London or the Caymans or elsewhere, or to form judgment whether irregularities in its business should have been discovered by the auditors earlier" (Bingham, 1992, p. iii). The task of examining auditing aspects of the BCCI scandal was delegate to a professional body, the Institute of Chartered Accountants in England and Wales (ICAEW), which had become a (self) regulator of the auditing industry following the implementation of the Companies Act of 1989. The ICAEW delegated the task to the Joint Disciplinary Scheme (JDS)33 (The Observer, 6 June 1993, p. 26). When an investigation appeared imminent, Price Waterhouse objected on the grounds that any action by the ICAEW could prejudices the outcome of lawsuits against it, especially by the BCCI liquidators (The Accountant, July 1993, p. 2). Following a series of court actions and appeals, the auditors won a Court Order prohibiting the JDS from continuing its probe until the legal action brought by the BCCI liquidator was concluded.34 In 1998, a £117 million settlement was reached with BCCI liquidators (Deloitte & Touche), and a private investigation is said to be in progresses (The Guardian, 8 January 1999, p. 20).
The banking scandal generated some political pressure in the UK for "reform" of the auditing process despite resistance from the accounting industry. In the course of the Bingham inquiry, the issue of whether auditors should have a "duty" as opposed to a "right" to report to regulators was revisited (also see Mitchell, 1991). In its evidence (written and oral), the ICAEW defended the status-quo and opposed35 the need for auditors to have a statutory "duty" to report fraud and irregularities to the regulators. But, Lord Justice Bingham rejected the ICAEW's case and recommended36 that a statutory duty to report fraud to regulators be imposed upon auditors. Subsequently, the government legislated (Hansard, 6 November 1992, cols. 523-594) and a "duty" to report fraud and irregularities (uncovered during the normal course of an audit) was imposed on auditors of all financial sectors, including banks, insurance companies, financial services, pension funds. (Hansard, 15 February 1994, cols. 852-875; Auditing Practices Board, 1994; Sikka et al, 1998).
In the US, auditing reform efforts in the aftermath of BCCI's closure were, likewise, opposed by professional accounting lobby and markedly unsuccessful.37 As noted previously, the Senate Subcommittee recommendations for making international audit firms answerable to US authorities went unheeded. The issue of auditors' responsibility to report fraud was addressed in a 1991 legislative proposal that would have required external auditors to report fraud to regulators and given the Security and Exchange Commission (SEC) power to direct auditors to investigate their clients "as necessary" to protect investors (International Securities Regulation Report, August 12, 1991). The proposal, which was modeled on the UK 1987 Banking Act that enabled the Bank of England to commission Price Waterhouse to conduct the Sandstorm investigation, was defeated.
The issue of external auditor's responsibility to report fraud was deferred until passage of the Private Securities Litigation Reform Act38 of 1995. The American Institute of Certified Public Accountants (AICPA) lobbied heavily for the 1995 Private Securities Litigation Reform Act which is primarily concerned with limiting auditor liability. In exchange for protection from liability, the audit industry accepted a provision of the Act that establishes a very weak mandate to report illegal acts to regulators39. The AICPA chose to interpreted the scope of the law very narrowly, arguing that new law merely "incorporates the auditor's present responsibility for the detection of material fraud and direct-effect illegal acts and shortens the time frame for reporting findings to the SEC, if such reporting is required"(Guy, 1998).
The AICPA subsequently issued a new auditing standard on fraud (Statement on Auditing Standard No. 82)40 which reiterates the industry's long-standing position that auditors are not responsible for reporting fraud to authorities. Specifically,
"The disclosure of possible fraud to parties other than the client's senior management and its audit committee ordinarily is not part of the auditor's responsibility and ordinarily would be precluded by the auditor's ethical and legal obligations of confidentiality...." (AICPA, 1997, p. 27)
Given the limitations of the 1995 Act and the auditing industry's narrow interpretation of its mandate, audit firms operating in the United States remain under less obligation to report fraud to bank regulators than their UK counterparts. Moreover, the AICPA's confidentiality requirements would prohibit US accountancy firms from preparing investigative reports for bank regulators similar to the Sandstorm report which exposed the fraud at BCCI and led to its closure. The failure of substantive reforms in the aftermath of the BCCI scandal are not suggestive of a state regulatory apparatus weakened by globalization, but rather one that is dominated by moneyed interests and professional lobbies.
SUMMARY AND DISCUSSION
The BCCI case study shows that as capital roams the world, nation states are obliged to provide regulatory and other frameworks to bring it under political control. Such processes operate at the intersection of a state's domestic and global interests. Reflecting the globalization of finance, the major nation-states co-operated through a College of Regulators to regulate BCCI. However, the College itself remained fragmented and somewhat disorganized, not only because of the difficulties of negotiating international treaties, but also because of the possible impact of its considerations on domestic policies. For this reason, "each regulator tended to focus on its own domestic concerns rather than accepting full Collegiate responsibility" (United Kingdom, House of Commons, 1992d, p. ix). The fragmentation and the tensions in reconciling domestic and international policies encourage the regulatory processes to be primarily state-centered. In the case of the BCCI, its trading activities had considerable impact on the UK. Consequently, the UK was obliged to accept major responsibility for regulating the BCCI empire.
The forced closure of BCCI was not brought about by the impersonal forces of markets or technology. The Bank of England could have closed BCCI at any time since its arrival in the UK, especially as it lacked a lender of the last resort and an effective regulator. Its closure could also have been prompted by the involvement of BCCI in money laundering activities. However, in its keenness to encourage foreign investment in the UK, the state permitted BCCI to trade. It seems that only when BCCI's activities posed a threat to the legitimacy of the UK banking and the reputation of the City of London., that the UK state decided to act and close it down. The closure of BCCI was due to the calculated political decisions made by the UK, its allies on the College of Regulators, and US authorities. The Bank of England was the key player in the decision to close BCCI. Non-Western states (e.g. in Africa and the Indian sub-continent) were simply expected to follow suit. Each nation-state responded according to its political norms. Following its traditions of greater openness, the US authorities undertook public hearings and a detailed examination of the BCCI closure. In contrast, in the UK, the scrutiny was less open and fairly limited. The Bingham Report was not the result of any `open' hearings and the submissions made to it remain private. Whilst the UK and US authorities co-operated (perhaps grudgingly) in the decision to close BCCI, they also remained sensitive to `local' interests. The UK authorities were reluctant to supply a fuller copy of the `Sandstorm' Report to the US authorities, possibly to shield the UK banking industry from scrutiny. However, eventually the UK yielded to pressure from the US and a censored copy of the report was supplied to the US authorities. In contrast, the UK with its tradition of `secrecy' has failed to make the report available to the UK public.
In some respects the BCCI story, is a tale of Western nations and the Western banking establishment advancing its interests over the less powerful nations. Outside North America and Europe, the Bank of England's decision to close BCCI was met with criticism on the grounds that the Western banking authorities were too quick to close a Third World bank, while other troubled banks were given state aid and an opportunity to re-capitalize and reorganize. Yet, the BCCI story also reveals the political influence of class interests within nations. For example, government support of efforts to reorganize, rather than close BCCI branch banks, was extensive in Pakistan where the Bank dominated the banking market and was well linked with the political and economic establishment. Whereas in (British) Hong Kong, where BCCHK served primarily Indian and small Chinese traders and was not well integrated into the business establishment, the government did not intervene effectively to save the bank.. In line with its policy of shielding the auditing industry from critical scrutiny (Sikka and Willmott, 1995a, 1995b), the UK government has failed to mount an independent investigation of the BCCI audits. At best, there will be an investigation by the Institute of Chartered Accountants in England & Wales (ICAEW) and/or other accountancy organizations (e.g. the Joint Disciplinary Scheme) which are not independent of the auditing industry.
A common sensical understanding of banking regulation is that the regulatory mechanisms exist to protect the interests of investors and depositors. However, this does not necessarily appear to be the case for BCCI where the primary shareholders were the Royal House of Abu Dhabi and BCCI, itself, through complicated nominee relationships. It is difficult to argue that the Bank of England closed BCCI down to protect the interests of Abu Dhabi, especially as it was considering a `private' deal to inject more finance. Perhaps, indirectly the Bank of England was interested in protecting investors i.e. one needs to protect the international banking system as a prerequisite to encouraging international capital flows. However, it seems that the government's concern to protect depositors was secondary to the concern to safeguard the interests of the City of London as a citadel of finance capital. The US investigators who argued that the auditors and the Bank of England concealed suspected problems from depositors and the public also reach such a conclusion. Their silence may have given BCCI more time to restructure itself, but is also possibly increased losses for depositors who were not privy to the secret negotiations. The `silence' encouraged the public to continue to trade with BCCI and, at the time of this writing, innocent depositors have still not been able to recover their savings in full and unlikely to do so (The Times, 29 September 1999, p. 29 and 33).
The BCCI case study draws attention to the political role of audit firms and auditing technologies. The Basel Concordats implemented a system of consolidated home country supervision stipulating that branch banks operating outside their home jurisdiction are supervised by their home country. Since supervision is facilitated by the availability of audited consolidated financial reports, audit firms and audit technologies are deemed to play a quasi-regulatory role in the governance of international banking. In the BCCI case, the UK state relied upon external audits, not as an objective indicator of the BCCI's financial condition, but rather as a mechanism for maintaining depositor confidence in a financially distressed bank. Recognizing that a negative audit opinion has a potential to prompt a run on a bank, it wanted to secure an unqualified audit opinion to enhance depositor confidence possibly and give the bank an opportunity to be recapitalize/reorganize. This political use of the bank audit highlights the constitutive role accounting/auditing plays in the economy, and the need to treat the regulation of auditing firms and auditing technologies as social and political issues rather than as purely technique oriented problems.
The UK state has shown greater willingness to negotiate and defend the interests of finance capital, than the interests of other stakeholders. For example, it is noticeable that to promote confidence in the UK banking industry, the UK state only imposed a `duty' upon external auditors to report fraud to the regulators in the aftermath of the BCCI closure. After earlier banking failures (in the mid-1980s), it gave auditors a `right' to report fraud to the regulators (Sikka et al, 1998). After the BCCI closure, the `right' was turned into a `duty'. However, the `duty' to report fraud to the regulators is primarily confined to the financial sector auditors only. Even after the BCCI episode, the state did not require auditors to owe a `duty of care' to bank depositors, something which makes it practically impossible for depositors to secure financial redress from negligent bank auditors. Bank depositors are encouraged to place reliance on audit opinions, but have not been given any rights to appoint, remove or interrogate bank auditors. In the US, in the aftermath of the BCCI episode and Savings and Loan Crisis, the state also imposed only extremely limited fraud reporting obligations upon auditors, and these have not been accompanied by any additional rights for bank depositors.
Many aspects of the BCCI case raise concerns about auditing practices that exist in either domestic or international contexts. For example, the concerns about auditor independence, particularly in cases where accountancy firms serve simultaneously as external auditors and management consultants, is common to both domestic and international audits. Similarly, the problem of prescribing auditor's social responsibilities, their duty to third parties (including stakeholders) who rely on their reports, and their duty to report fraud to regulators have long been issues of concern to states seeking to regulate domestic auditing practices. Globalization, however, adds several new complexities.
With the aid of organizations such as the International Auditing Practices Committee (IAPC) and the International Accounting Standards Committee (IASC), accountancy firms have sought to cement their claims of being `global'. They claim to have the technologies to enable them to provide global surveillance of capital. Such technologies also enable major firms to reduce their training costs and hence increase profits. However, this has not been accompanied by any scrutiny of their `global' accountability and `global' organizational structures. The BCCI case shows that major auditing firms market themselves as international and `global' firms, but such claims are dissolved in the face of critical scrutiny. For example, when challenged by subpoenas from the US regulators, Price Waterhouse argued that it is a collection of disparate national firms rather than a `global' firm. To resist the US regulators, the firms sought refuge in the UK's bank secrecy laws. The firm's claims of being `global' are further diluted when it is noted that various Price Waterhouse partnership offices did not have adequate arrangements for sharing of sensitive information between offices or with foreign regulators. Price Waterhouse's Hong Kong partners signed BCCHK's 1990 financial statements (apparently) without knowledge that Price Waterhouse (UK) had completed a draft of the Sandstorm report documenting massive fraud within the BCCI group. Similarly, Price Waterhouse(UK) did not inform either Price Waterhouse(USA) or US banking authorities when it learned of BCCI's illicit acquisition of US holdings. The above dilutes the accountancy firms' claims of being `global' organizations.
The BCCI case shows that the structure of international accounting/auditing firms is probably inappropriate to meet the demands of regulating integrated international financial markets. From this one cannot infer that nation states lack the capacity to regulate international accounting firms. All governments have the technical capacity to regulate international accounting firms either though multilateral agreements (e.g. treaties) or unilateral state actions (e.g. legislation, voluntary codes). The lack of action on the US Senate Subcommittee's recommendations for reform of the structures governing international audit firms is indicative of political, rather than any technical, limitations on states' ability to regulate capital. The political capacity of the state to introduce the structural changes suggested by Senators Kerry and Brown are hampered by liberalist ideologies that make it difficult for the state to directly intervene in corporate affairs. Therefore, it is obliged to place reliance upon auditors hired by corporations. This also enables the state to appease the forces opposed to increased public expenditure. Accountancy firms are likely to oppose regulatory changes requiring them to co-operate with international regulators by citing increased costs and by appealing to ideologies that oppose state's further intrusion in private affairs. Audit clients who do not wish the regulators to become closely involved with their affairs may also amplify these objections. The increased regulatory gaze also has a capacity to suggest that accountants and their clients are corrupt and that their affairs need to be closely watched. Given the state's reliance upon the revenues generated by capitalist enterprises for its own survival, a combative engagement is unlikely.
At the global level, geopolitical realities dictate that a multilateral agreement on audit regulation would require the sponsorship of a hegemon(s), such as the United States, Europe and Japan. The reluctance of hegemons to underwrite multilateral agreements that would make their `local' audit firms answerable to political authorities in smaller nations, is a matter of geopolitics, rather than impersonal forces of technology or global markets. Even unilateral actions by nation-states face political problems in both rich and poor countries. As part of a social contract, the nation-states could insist that in return for a monopoly of the state guaranteed market of external audits, domestic accountancy firms revise their international partnership agreements and co-operate with international regulators. They could also enact legislation prohibiting banking regulators from relying on reports by foreign auditors who refused to submit to national laws. Less powerful nations, however, may be reluctant to jeopardize the inflows of foreign capital by excluding foreign banks whose auditors refused to recognize local laws. Within economically powerful nations, such unilateral actions would likely face domestic political opposition by accounting industry and by home-based transnational banks. In the US, for example, US-based multinational banks have traditionally opposed any unilateral regulation of foreign banks that might invite reciprocation by other nations and lead to restrictions on US banking operations in other countries.41
In the banking industry, the interested parties include not only bank depositors, but also the citizens who may ultimately be required to rescue financially distressed banks with tax dollars and/or bear the consequences of economic disruptions caused by bank failures. Nonetheless, the audit industry has traditionally defined its primary responsibility as a duty to bank stockholders (i.e. bank as a legal person and not to individual stockholders), rather than to depositors, employees or other interested parities. This problem is exacerbated in the international context, not only because of the geographical wider scope of reliance on auditors' reports, but also because of jurisdictional boundaries. Although individual states have imposed limited duties on domestic auditors (such as the `duty' imposed on UK auditors to report fraud to UK banking authorities), such duties are not uniform from state to state and do not extend beyond national boundaries. In the BCCI case, the British auditors had no enforceable obligations to depositors, banking authorities, or polities outside the United Kingdom. Interestingly, neither the US Senate Report nor the UK's Bingham Report raise any major questions about the wisdom of relying upon commercially motivated, private sector accountancy firms as quasi-regulators, or their obligations to the public at large.
The BCCI case raises important political questions about the responsiveness and accountability of the auditing industry and the state-profession alliance. As a result of deliberate political decisions, the governance processes leading up to BCCI's closure, remain shrouded in secrecy. The minutes of the College of Regulators' meetings remain secret. The Bank of England was the major regulator, but it did not owe a `duty of care' to any depositor. British regulators sheltered behind the BCCI external audits and encouraged the public to trade with BCCI. Some might argue that such secrecy is necessary to avoid premature banks runs and might further argue that auditors' responsibility is discharged so long as banking regulators are notified of irregularities. Another possible interpretation attributes a wider significance to the lack of transparency in the dealings between accountants and regulators. Since the early 1980s, the UK state has been actively restructuring the UK economy by sheltering behind accounting's "aura" (Gallhofer and Haslam, 1991) of objectivity, independence and neutrality. The accounting-led restructuring of the British economy is evident in processes relating to privatization of state enterprises, regulation of utilities and surveillance of the public sector (e.g. health, education) and the reform of taxation system (e.g. self-assessment). During such times, detailed questions about the expertise and independence of BCCI auditors had a capacity to problematize the government reforms. In addition, the UK has one of the largest number of qualified accountants per capita in the world (Cousins et al, 1998). A critical scrutiny of the role of external auditors could disrupt the ability of accountancy firms (a significant fraction of capital) to accumulate economic surpluses. Despite these plausible explanations, there is something profoundly disturbing (to democratic sensibilities) in the premise that broader social interests are served by silence, private deals, secrecy and the benevolent deception by/of governments, central bankers and their auditors.
The regulatory processes have sought to legitimize the power and influence of capital by minimizing the public gaze. Significantly, the auditing industry, which has been mobilized to secure trust and confidence for global mobility of finance, remains largely beyond public scrutiny and contemporary democratic practices. Despite its highly political role, the UK/USA auditing industry is not regulated by an independent regulator representing a wide variety of stakeholders. It is primarily self-regulated, with `private' accountancy bodies controlling licensing, monitoring and disciplining of the firms. External auditors are often portrayed as public watchdogs, but their public obligations remain fairly limited. They do not owe a `duty of care' to depositors, employees or individual stockholders. They are not obliged to publish any information about their affairs42. Neither the banking regulators nor the representatives of various stakeholders have any unhindered access of auditor files. Despite the proliferation in the UK of performance league tables for schools, universities, public sector organizations, government departments and commercial organizations, neither the state nor the profession has devised any mechanism for measuring the actual performance and effectiveness of audit firms. The audit of BCCI raised serious questions about the ability of audit firms to combine the roles of independent auditors, counselors of management and agents of the state. Yet no attempt has been made to examine the issues, especially whether in pursuit of private profits, one set of capitalist enterprises (e.g. major audit firms) have a capacity to secure public accountability of another set (e.g. corporations). The terms of an audit contract and auditor assessment of internal control have a potential role in alerting depositors, employees and individual stockholders of the management-auditor relationship, the effectiveness of auditors and possible risks to investment. Yet no attempt has been made to require either banks or audit firms to make their engagement letters, management letters or working paper extracts available for public scrutiny (Dunn and Sikka, 1999). Seemingly, the public accountability of the auditing industry has been organized off the political agenda. One cannot attribute this to the impersonal forces of global markets or the weakening of nation states. In return for a continued enjoyment of the state guaranteed market of external audit, the state could negotiate a new social contract with audit firms and require them to embrace broader accountability. But this has not been done. The state's incapacity, we contend, is the outcome of deliberate political choices made under the weight of liberalist ideologies, which disseminate the belief that regulation should be light, or that the discourse of public accountability is somehow only applicable to major businesses with limited liability, or that only secret negotiations amongst the elites have the capacity to secure confidence in capitalism. Such choices are shaping globalization by prioritizing the rhetoric of higher profit and efficiency and effectively disenfranchise a vast number of people by denying them an opportunity to shape the institutional structures appropriate for the regulation of capital.
To conclude, the BCCI case study shows that the major nation-states remain important players in the regulation of global businesses. Nation states have sought to regulate global businesses by placing considerable reliance upon auditing technologies and `global' audit firms. However, major auditing firms lack `global' organizational structures to make them responsive and accountable to international regulators and democratic politics. The nation-states seem to be advancing a particular kind of globalization, the one which prioritizes the interests of finance capital by pursuing policies of secrecy and covert deals. Making the regulatory processes more 'open' generally could arguably advance the interest of bank depositors and citizens. Requiring auditors to embrace wider social accountability and a 'duty of care' to individual audit stakeholders could also advance them. However, despite banking/audit failures, such as the BCCI, the state has shown little interest in such matters.
| 1 | Reflecting the hegemony of the West, similar technologies are also expected to be adopted by developing countries even though they have little or no direct influence on the process of accounting change in the industrialized Western nations (Hopwood, 1989). |
| 2 | The world-wide income of the Big-five firms is more than US $51 billion a year (Financial Times, 19 September 1997, p. 1), large enough to dwarf the income of many countries. |
| 3 | For good reviews see Waters (1995) and Robertson and Khondker (1998). |
| 4 | Our data is drawn from the Bingham report, US Congressional hearings, contents of the Sandstorm report and various fragments of working papers appended to the hearings. The UK authorities have suppressed the Sandstorm report, but a censored version is available in the US (See Senate, 1992a, pp. 95-142). |
| 5 | The state is, of course, an ensemble of complex and contradictory institutional arrangements. For a discussion of some of the theories, see Dunleavy and O'Leary, (1987) |
| 6 | The popularity of this view is indicated by the front cover of Newsweek magazine (26 June 1995) which proclaims that "the state is withering and global business is taking charge". |
| 7 | Kapstein (1994, pp. 31-37) challenges the conventional view that offshore banking originated as a means to circumvent national bank regulation and taxation. He argues, to the contrary, that nation states played an active role in encouraging the development of Euromarkets in an effort to separate domestic from foreign money markets. |
| 8 | See Grieder (1997), Hirst and Thompson (1996), Kapstein (1994), Tabb (1997a, 1997b), Zevin (1992), Wood (1995, 1997a, 1997b,1998). These globalization "skeptics" represent various theoretical schools of thought including both institutionalist and Marxist view points. Although their analyses of globalization diverge on many points, they are united in their critique of the "end of the state" thesis. |
| 9 | In 1993, the US based manufacturers sold 67% of their output to the domestic market; whilst the German and Japanese sold 75% and 67% of their output to their domestic markets (Wade, 1996). |
| 10 | DuBoff and Herman (1997) take issue with the metric Zevin uses to measure "financial openness". They examine the level of direct foreign investment, rather than interest rate conversions, and argue that the higher proportion of direct foreign investment today "makes for greater economic integration" when compared to the earlier period. |
| 11 | The role of the state in neo-liberal restructuring is exemplified by the Thatcher government in the UK, and by the US role in promoting the structural adjustment policies of the IMF. |
| 12 | For an overview of the debate on "globalization" see the series of exchanges between Ellen Meiksins Wood, Richard DuBoff, Edward Herman, William Tabb, Francis Fox Priven, Richard Cloward, and Harry Magdoff) in the Monthly Review (November, 1997 and January 1998). |
| 13 | Given the nature of the globalization debate, inevitably there are counter arguments. For example, Giddens (1990) claims that globalization is not Western and that it heralds "(t)he declining grip of the West over the rest of the world" (p. 52). In contrast, Wade (1996) argues that globalization involves the worldwide installation of Western rationality, ethics, theories, and world views. |
| 14 | Although BCCI was built on the fiction that it was capitalized by oil-rich Middle Eastern investors, most of them were acting as nominees providing their names and/or funds in the form of deposits, rather than investors (US Senate, 1992b, p. 51). |
| 15 | The formation of the international college of Regulators was permitted by the Basle Concordat, primarily for regulating banks which might otherwise escape effective regulation. Under the principles established by the Basle Committee, of which the UK and Luxembourg were members, the Institut Monetaire Luxembourgeois (IML) was established to regulate BCCI. It operated with the support and co-operation of the Bank of England. In 1987, the College of Regulators was formed and had its first meeting in June 1988. By then the College included not only the UK and Luxembourg, but also Spain and Switzerland (BCCI had minor operation in these countries). In July 1989, the UAE declined but Hong Kong (then a British colony) and the Cayman Islands became members. The College's meeting in April 1991 was also attended by supervisory bodies from the UAE and France. Its meeting on 2nd July 1991 was also attended by US observers. India, Pakistan, Bangladesh and countries from Africa, where BCCI had much larger operations, were neither part of the College nor invited to attend any of its meetings (Bingham, 1992). |
| 16 | The College, for example, took no action in 1988 when it leaned that 72 major banks had suspended credit lines threatening the banks liquidity in the wake of a money laundering scandal following BCCI's indictment by US authorities on charges of fraud, money laundering and falsifying bank records (US Senate, 1992b, p. 61). |
| 17 | By the early 1980s, the US Central Intelligence Agency was making intensive use of BCCI's facilities for covert operations to support Afghan guerrillas in their war against the Soviet Union (US Senate, 1992b). BCCI was also used to finance illegal US arms sales to Iran in what became known as the Iran Contra affair. (US Senate, 1992a, p. 356-357). |
| 18 | The AICPA (1997, p. 5) Statement on Auditing Standards (SAS) No. 82 requires only that auditors conduct a risk assessment and "plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud." There is no responsibility to detect fraud unless it results in a material misstatement of the financial results (Mancino, 1997). |
| 19 | The auditors' role as quasi-regulator was enhanced by the UK's Banking Act of 1987. The Act required regular meetings between bank management, auditors and the Bank of England to discuss matters of mutual interest. The auditors' traditional duty of confidentiality to client companies was relaxed to allow them to report matters to regulators provided they acted in "good faith". Auditors' were required to prepare reports on banks' internal controls, and they were given a "right" (as opposed to a "duty") to report their suspicions to regulators, even without client knowledge (Auditing Practices Committee, 1989, 1990). |
| 20 | Following the House of Lords judgment in Caparo Industries plc v Dickman & Others [1990] 1 All ER HL 568, UK auditors do not owe a `duty of care' to any individual, present/potential shareholder, creditor, employee, bank depositor or any other stakeholder. They only owe a `duty of care' to the company - as a legal person. |
| 21 | Price Waterhouse was aware of Ernst and Whinney's concerns when they accepted the group audit. In 1988, its first full year as group auditor, the firm received audit fees of $4.7 million (U.S. Senate, 1992b). |
| 22 | Later the auditors stated that "We had formed the conclusion that the accounting methods adopted were due to incompetence. However, with the benefit of hindsight it appears more sinister in that it now seems to have been a deliberate way to fictitiously inflate income." (US Senate, 1992a, p. 114; Sandstorm Report, 1991, p. 17). The sandstorm report is not publicly available in the UK as Prime Minister Tony Blair considers is to be a confidential document (letter to Austin Mitchell MP, dated 10 December 1998). Extracts from this report can be seen on http://visar.csustan.edu/aaba/aaba.htm. |
| 23 | Various interpretations have been offered to explain the change of course taken by the auditors who had previously attested to the integrity of their clients financial records. One interpretation attributes the auditor's shift to new information provided by a senior official of BCCI who contacted Price Waterhouse in late 1989 and informed them of various frauds and manipulations, thus, causing the auditors to seek higher levels of assurance. Another attributes the auditor's change to the fact that BCCI's financial problems had become so severe that the auditors feared that they might be held liable if they did not report to the authorities (US Senate, 1992b, p. 271-271). |
| 24 | In return, the Bank of England permitted BCCI to move (in 1990) its headquarters, officers and records out of British jurisdiction to Abu Dhabi. It believed that all problem accounts could best be centralized in Abu Dhabi, a decision that subsequently hampered the Bank of England's inquiries. |
| 25 | Various explanations have been given for the failure of the plan to recapitalize BCCI. On view credits the decision to close the bank to the discovery of hidden files providing further evidence of the extent of BCCI's fraud (US Senate, 1992b, p. 278). Another view attributes the closure to continuing investigations in the US and the threat that an imminent US indictment posed to plans to salvage the bank (US Senate, 1992b, Chapter 9). |
| 26 | The report used code names to maintain secrecy. Sandstorm is the code name used to identify BCCI in report. |
| 27 | A Subcommittee of the Committee on Foreign Relations. |
| 28 | Price Waterhouse (UK) partners did agree to be interviewed by Subcommittee staff in PW's London office. The offer was declined due to staff travel restrictions and concerns that the interviews would be of little use in the absence of subpoenaed documents (US Senate, 1992b, p. 258). |
| 29 | In addition to the Senate Subcommittee, several other US authorities undertook investigations into the BCCI affair, including the Federal Reserve and House Banking Committee (See US, House of Representatives, 1991a and 1991b). As a result of its investigation of BCCI and other foreign banking operations, the Federal Reserve proposed legislation that was subsequently enacted by the Foreign Bank Supervision Enhancement Act of 1991. The new law increased the Federal Reserve's power to oversee foreign banks operating within the US, but did not address questions related to external auditors. Kapstein (1994) notes that this expansion of the Central Banks authority was controversial in view of the fact that it was the Federal Reserve who initially approved the sale of First American to BCCI nominees over the objection of state banking regulators. It is also noteworthy that despite extensive public scrutiny of the BCCI case by Kerry and Brown's Senate Subcommittee, the major legislative outcome of the BCCI affair was proposed by the Federal Reserve, rather than by elected officials. |
| 30 | In return, the Bank of England permitted BCCI to move its headquarters, officers and records out of British jurisdiction to Abu Dhabi It believed that all problem accounts could best be centralized in Abu Dhabi, a decision that subsequently hampered the Bank of England's inquiries. |
| 31 | Worldwide reaction to the UK-lead closure of BCCI was mixed. BCCI officials voluntarily suspended branch banking operations in several countries including, the Philippines, Korea, Japan, and southern China. In Bangladesh, India, and Hong Kong government regulators intervened to freeze BCCI branch assets and close down operations. In still other cases, governments allowed BCCI branch banks to continue operations as regulators searched for ways to rescue local branches. BCCI continued operating in Australia and Macau under close government supervision. BCCI's 17 branches in the United Arab Emirates also remained open, as did three branches in Pakistan although Pakistani regulators were forced to cap withdrawal to avoid a run on the bank (Far Eastern Economic Review, July 18, 1991). |
| 32 | Although the sale did not take place, BCCI's Pakistani branches were eventually reorganized as Habib Exchange Bank. In Bangladesh, BCCI was reorganized as Eastern Bank (Far Eastern Economic Review, August 27, 1992). |
| 33 | The JDS was formed after the mid-1970s banking crisis, by major accountancy bodies, to consider the role of major firms in high profile alleged audit failures. For some information about its background see Sikka and Willmott, 1995b. |
| 34 | On 27 July 1993, a Divisional Court dismissed Price Waterhouse's application (See R v Institute of Chartered Accountants in England and Wales & Ors, ex parte Brindle & Ors (1993) 736 BCC). Price Waterhouse appealed against this decision and the appeal was upheld on December 1993. On 28 April 1994, the JDS sought to take the case to the House of Lords, the highest court in the UK, but permission to appeal to the House of Lords was refused (The Accountant, June 1994, p. 5; Accountancy, June 1994, p. 14). |
| 35 | The ICAEW has a history of opposing reforms which, arguably, could have benefited some stakeholders and given greater transparency to corporate affairs (Puxty, Sikka and Willmott, 1994). |
| 36 | In so doing, he supported the earlier recommendations of the Parliamentary Select Committees (see UK House of Commons, 1991,1992a, 1992b, 1992c, 1992d). |
| 37 | In addition to Kerry and Brown's Subcommittee, several other US authorities undertook investigations into the BCCI affair, including the Federal Reserve and House Banking Committee (See US, House of Representatives, 1991a and 1991b). As a result of its investigation of BCCI and other foreign banking operations, the Federal Reserve proposed legislation that was subsequently enacted by the Foreign Bank Supervision Enhancement Act of 1991. The new law increased the Federal Reserve's power to oversee foreign banks operating within the US, but did not address questions related to external auditors. Kapstein (1994) notes that this expansion of the Central Banks authority was controversial, particularly in view of the fact that it was the Federal Reserve who initially approved the sale of First American to BCCI nominees over the objection of state banking regulators. |
| 38 | This Act was vetoed by President Clinton. Subsequently, the Senate overrode the veto (see Goldwasser, 1997 for some details). |
| 39 | In very limited circumstances, the law requires the auditors to notify the Board of Directors of illegal acts. If the Board of Directors fails to inform the SEC within one day, the auditors must inform the SEC. Legal scholars (see Sidorsky, 1996), note that the so-called "whistle blower" provision of the legislation, leaves the scope of the auditors' responsibility "rather murky" since the requirement is limited to situations where illegal acts have a material effect on the financial reports and where (in the auditor's judgment ) company Directors have failed to take appropriate remedial action. Also, illegal acts are distinguished from financial fraud and taken to mean violations of regulations (such as affirmative action, health and safety regulations and so forth). |
| 40 | SAS No. 82 ( p. 28) notes only that "duty to disclose outside the entity may exist to comply with certain legal and requirements." A footnote reference is made to the Private Securities Litigation Reform Act of 1995, but the specific provisions of the whistle blower clause are not explained. |
| 41 | For example, see Citicorp/Citibank's comments submitted to US House (1991a, pp. 134-139) hearings on foreign bank regulation. Citicorp expressed concern that "US Government legislation which would effectively forbid European banks form operating through branches here in the US could well provoke unwelcome restrictions of US banks' branch systems in Europe and elsewhere". |
| 42 | With the implementation of the UK's Limited Liability Partnership (LLP) legislation, UK-based auditing firms converting to LLPs will have to publish conventional financial statements about their affairs. |
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