The auditors of Irish Nationwide Building Society were questioned by the Financial Regulator after describing Michael Fingleton’s €27.6 million pension in its 2007 annual report as a scheme belonging to its “members” rather than belonging to its managing director alone.
Minutes from a June 12th 2008 meeting between Vincent Reilly, a partner in KPMG and Billy Clarke, deputy head of banking in the Financial Regulator, show the accountant promised to "revert back to the Regulator" on the matter.
The minutes state “the accounts should have read ‘member’ rather than ‘members’.” It was not until March 2009 that details of Mr Fingleton’s pension pot emerged in the media.
Minutes taken by KPMG of its meeting with the Regulator provide new insights into how the building society collapsed at a cost to the taxpaper of €5.4 billion.
During the meeting, Mr Reilly said INBS was a “close knit society” that had “no treasury”.
A financial institution lending billions, like INBS was, without any treasury function is highly unusually.
Mr O’Reilly claimed that when it came to INBS “controls - key processes, much improved in the past six years”.
However, Gerry McGinn, appointed by the state to replace Mr Fingleton, said in 2010 that lending practices in the society were “shoddy” and “well below standard.” Reports prepared by forensic accountants from Ernst & Young also dispute KPMG’s benign view.
The regulator was “particularly concerned” about INBS’ description as a “going concern” in its accounts. This meant that in KPMG’s view it was capable of trading for at least another 12 months.
Mr Clarke asked KPMG: “How much change is needed before INBS not suitable for going concern” or what would it take to go bust.
Mr O’Reilly said KPMG “do not foresee an issue” in 2008 for the society in being able to stay trading but 2009 could be “more challenging.”
The Regulator also said it was “concerned” about why KPMG had issued two different management letters in 2007.
KPMG told the regulator that after meeting with INBS’s board it felt reassured about “relevant procedures” and was “satisfied with the documentation and judgement” and so it changed its orginal management letter.
KPMG said the “track record” of INBS was “historically very good”. But it said the society “may need to increase resources in monitoring [OF LOANS].”
The Regulator asked if KPMG was “satisfied with the level of documentation” kept by the society .
Mr Reilly replied “room for improvement...they just don’t document everything at the executive level. Has improved over the last few years.”
Mr Clarke asked KPMG was it “happy with the model” pursued by INBS of aligning itself with developers through profit share deals with developers.
“INBS model has improved,” KPMG and there was an “adequate process of improvement.”
Mr Clarke “raised the issue that there are problems in the current market place in relation to commercial loans, and was concerned with the fact that the top loans in INBS’s books did not appear to be entirely independent, ie loans in different family names.”
KPMG said: “even though same family members, by law were separate individuals. KPMG would have queried certain relationships during the audit, but the top loans are amongst customers with good credit, highly successful individuals, risk is difficult.”
KPMG as liquidators of Irish Nationwide are suing INBS’s executive and non-executive board for damages. It is taking no action against itself as the society’s former auditors.
It is however suing Ernst & Young as former auditors of Anglo Irish Bank.
