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Customers line up outside Northern Rock in 2007, the first run on a British bank in 150 years.
Reuters/Alessia Pierdomenico
In 2007, Northern Rock was the scene of the first run on a British bank in 150 years.
COMING AND GOING

Failed Northern Rock is still making money for former auditor PwC

By Max de Haldevang

In 2011, Britain’s House of Lords accused accounting firm PwC of “disturbing” complacency (pdf) in failing to flag elements of Northern Rock’s “dangerously risky business model” when it was the bank’s auditor as it teetered during the global financial crisis.

Northern Rock’s bankruptcy is remembered as the start of the financial crisis in the UK. Reports that it was over-leveraged in global markets caused the first run on a British bank in 150 years in 2007, with people lining up outside branches to pull their money out. The government eventually stepped in with a £37 billion ($45 billion) bailout.

“We are astonished that PwC appeared not to recognize an amber light that flashed so brightly,” the Lords wrote in the blistering report. Lawmakers separately accused (pdf) PwC of having a conflict of interest when working as a consultant for the bank in addition to serving as its external auditor.

Eight years later, PwC has been given a £16.5 million government contract to help manage the “bad bank” created out of Northern Rock’s remaining assets. 

UK Asset Resolution (UKAR), the institution set up in 2010 to sell off British taxpayer-owned assets in Northern Rock and Bradford & Bingley, another collapsed lender, said in an emailed statement that it has “launched a transaction aimed at selling the remaining assets.” If that is successful, PwC will be put in charge of meeting UKAR’s obligations to the buyer, and “administering other non-loan assets and liabilities,” UKAR said. The contract will run until 2030. As of April, UKAR managed around £8 billion in assets, down from more than £100 billion when it was formed.

“It doesn’t look good,” said André Spicer, founding director of The Centre for Responsible Enterprise at Cass Business School, while noting that there are a number of factors at play. First, PwC may well have the most technical competency and experience in the area, he said, and “the people who run the audits are probably going to be very different to the people who run the bank.”

But it also highlights a lack of competition in the audit and accounting industry—something the Lords pointed out back in 2011. “It ends up that people who create the mess get paid on both sides: They’re paid to create the mess and then to clean it up,” Spicer said. “It also shows how deeply inveigled PwC and those kind of organizations are in the British government. They’re advisors to them in all kinds of ways—you prob wouldn’t so far as to call it corruption but they’re deeply inveigled in the British government.”

Atul Shah, an accounting professor at City University, similarly lamented these relationships, especially when it comes to PwC and other “Big 4” accounting firms. “Conflicts of interest have become normal for the Big 4 and government is fully aware of these, yet it continues to rely on them,” he wrote in an email. “This is highly regrettable. They should not be allowed such abnormal influence.”

PwC declined to comment on client work.