[by Howard Haykin ] In explaining its $450 million Libor settlement.  Barclays admitted that its controls were not adequate, and the bank "had not anticipated the increased risk around the Libor process."  So far, so good. But what, if any role did Barclays auditor - PricewaterhouseCoopers - have in Barclays' dismal state of affairs that cost the Chairman, the CEO and other key executives their jobs and reputations? For the annual report released in March 2012, PwC disclosed Barclays' potential Libor settlement in the most minimal fashion possible, stating:  Barclays "attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the bank's derivatives trading positions by either increasing its profits or minimizing its losses." CFTC likely surmised that PWC missed or maybe looked the other way at conduct that was "regular and pervasive." In its Enforcement Order, the CFTC said that Barclays based its Libor submissions on the requests of Barclays' swaps traders, who were attempting to influence the official published London Interbank Offered Rate (Libor) and the profitability of their own trades. Further, certain Barclays swaps traders "coordinated with, and aided and abetted traders at certain other banks to influence the Euribor submissions of multiple banks, including Barclays."  Finally, Barclays systematically suppressed its submissions to the Libor committee regarding its borrowing costs to mitigate perceptions of its weakness during the 2008 crisis. What the Auditor Might Have Found. PwC could have caught the faults twice, according to American Banker reporter Francine McKenna. First, PwC should have identified and warned shareholders and regulators about increased risk at Barclays.  This is an obligation that's laid out in disclosure standards enforced by the PCAOB (Public Company Accounting Oversight Board) - the profession's U.S. regulator.  Accepted Accounting Principles and International Financial Reporting Standards require disclosure of information about risk. (Barclays is subject to the latter set of rules.) Yet, if disclosures are materially incomplete or inaccurate, an auditor should never issue a clean, unqualified opinion. With the "management discussion and analysis" ... pertaining to the results for a financial institution, the following issues must be included in the discussion:  (i) liquidity; (ii) capital resources;  (iii) results of operations;  (iv) off-balance sheet arrangements; and,  (v) contractual obligations.  Although an auditor's obligations are more limited here, the auditor should read this information and consider whether it, or the manner of its presentation, is materially inconsistent with information appearing in the financial statements. Second, when a bank must comply with Section 404 of the Sarbanes-Oxley Act - as Barclays must, despite being a foreign entity - because its ADRs trade on the NYSE - the auditor expresses an opinion on the effectiveness of the company's internal control over financial reporting.  PCAOB's Auditing Standard No. 5 says, "When auditing internal controls over financial reporting, the auditor may become aware of fraud or possible illegal acts. In such circumstances, the auditor must determine his or her responsibilities." Controls over values created using models, 3rd-party pricing services, and use of market inputs are supposedly supported by elaborate compliance systems to make sure valuations meet accounting standards.  Basic assumptions used to assign values such as benchmark interest rates should not be vulnerable to manipulation or collusion.  Banks must comply with legal and regulatory requirements to ensure the integrity of data critical to the functioning of the capital markets. Yet, the regulators concluded that Barclays had no specific internal controls or procedures - written or otherwise - regarding how Libor submissions should be determined or monitored.  Further, Barclays did not require documentation of the submitters' Libor determinations. CFTC Sanctions for Barclays. The CFTC settlement order, in addition to the monetary penalty, requires Barclays not only to beef up its compliance processes, but to "take on a role as an advocate for increased oversight for the industry" - that, according to the Financial Times. What do this say about the clean opinions on internal controls over financial reporting that Auditor PwC gave to Barclays – while also giving it to JPMorgan Chase and, hold the phone, MF Global?  Especially since the regulators found Barclays controls to have been seriously deficient.  And it's also questionable how effective MF Global's controls were - given that it lost track of customers' segregated funds. Beyond Barclays. More than a dozen other banks are under investigation by U.S., Asian and European regulators for collusion in setting interbank lending rates. It will be interesting to see if KPMG, Ernst & Young, and Deloitte's banking clients also manipulated Libor – as Barclays is suspected of doing.  If so, might those other banks have allowed their respective derivatives desks to set the rates.  Such findings would give Barclays a big job ahead as industry advocate for being good. For further details, go to: [American Banker, 7/6/12]. Note: Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms.  She worked in consulting, professional services, accounting and financial management for more than 25 years.