Price Waterhouse

Price Waterhouse was an international accounting firm whose British partnership, Price Waterhouse (UK), was the principal auditor of the Bank of Credit and Commerce International (BCCI). It audited BCCI Overseas in Grand Cayman, one of BCCI's two main banks, for more than fifteen years, and handled BCCI's consolidated worldwide audit from 1987; in 1991 it wrote the report for the Bank of England known as the Sandstorm Report, which preceded the bank's closure on July 5, 1991.¹²

Audits

The Kerry-Brown Senate Report recorded two views of the firm's conduct. BCCI's chief financial officer, Masihur Rahman, testified that he relied on the outside auditors as "more my eyes and ears than my own inspection division," and that if Price Waterhouse "had been doing its job, there's no way that this $1 billion exposure [in BCCI's Central Treasury] which was taken to $11 billion exposure in the course of 3 or 4 months [in 1985] could have happened"; he annotated its 1991 report: "Price Waterhouse should have known from their audit of Grand Cayman over many years that deposits of BCCI were being misused." Price Waterhouse (UK) took the position that it had been completely deceived by BCCI until the spring of 1990.¹

In its 1987 audit of the Gulf Group of the Gokal brothers, it found an exposure of 318 million dollars, 23 percent of BCCI's capital, with security "likely unenforceable" and information "inadequate"; its audits found that many of the shares of First American's holding company held by Kamal Adham were pledged as security for BCCI loans to other borrowers, and that it was impossible to determine whether A. R. (Abdul Raouf) Khalil still owned the 13,250 shares attributed to him, which BCCI held against 120 million dollars ostensibly lent to him. It did not require that these loans be classified or provided for, so long as BCCI promised to correct the problems. When it discovered BCCI's treasury losses in 1986 it attributed them to "incompetence"; in 1991 it wrote that "with the benefit of hindsight, it appears more sinister in that it now seems to have been a deliberate way to fictitiously inflate income."¹³ In April 1990, after finding massive deficiencies, it certified BCCI's accounts as "true and fair" under an agreement with BCCI, Abu Dhabi and the Bank of England; the Senate report found that this certification, with a single footnote on the losses, "was materially misleading," and that the firm "would not have made the certification but for the assurances it received from the Bank of England."¹

The Section 41 Report

In March 1991 the Bank of England commissioned the firm to investigate BCCI under Section 41 of the Banking Act. Its draft of June 22, 1991, code-named BCCI "Sandstorm" and its Cayman affiliate ICIC "Fork," found "widespread fraud and manipulation," and its first detailed audit of ICIC, delivered to BCCI's board in draft on June 17, 1991, found that BCCI effectively controlled ICIC.²³ The Bank of England, closing the bank, stated that "it appears from the Price Waterhouse Report [of June 1991] that the accounting records [of BCCI] have completely failed and continue to fail to meet the standard required."¹

Secrecy

Price Waterhouse (UK) refused to give its audit reports to the Senate subcommittee under subpoena, arguing that British law forbade it, and the American partnership said it had no knowledge of or responsibility for BCCI's audit.¹ The Manhattan District Attorney, Robert Morgenthau, testified that the main audit "was done by Price Waterhouse U.K. They are not permitted, under English law, to disclose... without authorization from the Bank of England," so that BCCI's statements had been "audited by auditors who are beyond the reach of law enforcement."⁴ The Senate report found that 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."⁵ The British inquiry, the Bingham Report, concluded that the scale of the fraud "would not have come as a surprise had Price Waterhouse more plainly and comprehensively brought the various elements of the fraud to the notice of the Bank as they emerged."⁶