Question

Assume that the audit for National Australia Bank Limited (NAB), a financial institution, will be coming up for tender. You and your colleagues are required to prepare a client evaluation report based on your research for the senior members of your auditing firm. Your report should provide preliminary information as to whether the auditing firm should consider tendering for the audit of NAB. You should conduct extensive research and perform an analysis of the annual report of National Australia Bank Limited together with its controlled entities for the year ended 30 June 2018 and any other relevant information (Hint: Company’s website and Business news) that you have obtained.

1.. Identify and explain THREE business risks that could have an impact on the audit of NAB.

2.The recent Royal Commission highlighted a number of internal control deficiencies and fraud perpetuated on NAB clients for an extended period of time. These findings have serious ramifications for NAB. How will these findings affect your tendering decision?

Answer 1

1. a.Foreign currency trader staff fraud: In 2004, NAB discovered that as a result of unauthorized spot trades on its foreign currency options desk, losses totaling A$360 million had been covered up. Investigations by Price water house Coopers and the Australian Prudential Regulation Authority highlighted a need for cultural change.

b.Financial planner misconduct: According to ASIC, at least $6.2m was subsequently transferred from the overseas accounts in the Bahamas and the Dominican Republic back to a private company account, held for Strategic Investments Group ACN 080 924 036 and controlled by a single director, the same Paul Drakos. Funds were then applied from this account as loans disguised as investments to a number of failed business opportunities among his familial associates including a golf driving range on the Central Coast of NSW, a plumbing business, and futures and commodities trading.

c.Financed fossil fuel businesses: It has been estimated that since 2008, NAB has loaned A$11.2 billion to the fossil fuel industry in Australia, positioning itself as the 3rd largest lender in this regard. Comparatively, loans to renewable energy are estimated at A$2.2 billion over the same period, or approximately 20% of the amount to fossil fuels.^[92] The Big Four Australian banks, of which NAB is part, are estimated to have provided approximately one third of all loans to the fossil fuel industry in Australia since 2008.^[93] Financed emissions count toward a company's Scope 3 emissions under the Greenhouse Gas Protocol.

2.Tax evasion and customer overcharging in Ireland

The Irish subsidiary of the bank, National Irish Bank was the subject of a six-year Inquiry carried out by Inspectors appointed by the Irish High Court. They established that National Irish Bank had engaged in overcharging its own customers and tax evasion schemes prior to 1998. Mr Justice Peter Kelly, an Irish High Court judge commented following publication of the Report "The edifice of banking is built on a foundation of trust. On the Inspectors findings there was a breach of trust. The operation was carried out over a period of years in a deliberate fashion". The Director of Corporate Enforcement subsequently applied to the High Court to have 9 senior managers barred from being an officer of any company.

NAB booked two write-downs associated with Home Side. First, in July 2001, NAB had a $450 million write down of the value of its capitalised mortgage servicing rights (CMSRs) during the quarter ending 30 June 2001, and was the result of exceptionally high mortgage refinance volumes which lowered the value of the CMSRs, combined with a more challenging capital markets environment in which to hedge interest rate risk.^[91] This was followed shortly by a second write-down reported in September totaling $1.75 billion; this second write-down consisted of US$400 million from an incorrect interest rate assumption embedded in the mortgage servicing rights valuation model, US$760 million from changed assumptions in the model flowing from the continued unprecedented uncertainty and turbulence in the mortgage servicing market, and US$590 million from writing off of the goodwill. In total, NAB booked $2.2 billion in losses due to Home Side.