In 2008, Anglo-Irish Bank (Anglo) was Irelands third largest bank. It has since been nationalised

during the financial crisis and subsequently merged into the Irish Bank Resolution Corporation. The

entity was given an entirely new name, in part in order to avoid associations with the wrongdoings

of the former management group of Anglo.

In 2008, the Central Bank of Ireland conducted a routine inspection of Anglo and realised that the

bank had substantially understated its account for loads to directors. Chairman, Sean Fitzpatrick

and board member Lars Bradshaw had taken out loans each year from 2000 to 2008 to buy shares in

the bank. In all these years, Fitzpatrick transferred these loans to another bank just before year-end

audits, so the account for loans to directors was understated yearly. The loans were as much as

87m in 2008, but the transfer of the loans meant that the account for loans to directors appeared

as being only 40m. The loans themselves were not necessarily problematic, but the understatement

meant that Fitzpatrick had conducted accounting fraud.

In 2007, Fitpatricks shares were worth approximately 80m. However, following the revelation of

the director loans as well as the toll of the financial crises Anglo stock fell by 98% until 2009, when

Fitzpatricks shares were worth approximately 1.5m.

Fitzpatrick, Bradshaw and the CEO David Drumm all resigned in December 2008. In the 2009 Annual

Report, Anglo stated that the actual magnitude of its loans to directors was 155.8m at the end of

2009. In addition the bank expected losses on the director loans (as a consequence of the dramatic

stock price drop) of as much as 110m.

The Chief Executive of the financial regulator criticised the external auditor EY for not having

identified the hidden loans. The head of Anglos internal audit claimed that only Fitzpatrick and

Bradshaw knew about the loans. The internal audit procedure in the bank was to randomly select

loans for inspection. None of the director loans were selected.

The Irish government injected 3billion into the company in 2009 and thus became the biggest

shareholder. There was a significant investigation into the matter resulting in fines, prison sentences

and reputational damage for all concerned.

Requirement:

In relation to the scenario above -

1) What is the problem from an accounting and ethical point of view?

2) In relation to the auditor, identify specific principles of the IFAC code of conduct that

apply in this situation and why i.e what principles have been impacted/breached

3) If the loans were not illegal, why was the bank so hesitant to report them? Why did the

stock market react so strongly to the loan information?