When Sir Fred Goodwin took over as chief executive of Royal Bank of Scotland in 2000, one of his first edicts was to clamp down on the use of management consultants. Under “Fred the Shred”, costs were to be kept under control.

McKinsey, the blue-chip strategy firm that had worked closely with the bank for a number of years, was unofficially blackballed, according to former RBS executives. From that point on, the appointment of any consulting firms had to be signed off by Goodwin personally.

“The message we got back from guys at RBS was that using consult-ants was considered a sign of weakness by Fred,” said a partner at one consulting firm.

There was one firm, however, that Goodwin still entrusted with advisory work alongside his merchant bankers Goldman Sachs and Merrill Lynch. Deloitte, the accountancy firm where Goodwin made his name, had been brought in as RBS’s auditor shortly after the acquisition of NatWest, to replace PWC.

John Connolly, Deloitte’s chairman, had been a mentor to Goodwin when he was a young accountant. It was Connolly who promoted Goodwin to partner at the tender age of 29 and gave him a key role in the liquidation of BCCI, the Middle Eastern bank that collapsed in 1991.

As Goodwin went on to build RBS through an acquisition spree, he kept turning back to Deloitte for advice over and above basic audit work.

In 2000, the first year that Deloitte took the account, the firm received £4m for management con-sultancy, tax and other advisory work, in addition to £5m in audit fees. The following year the additional fees climbed to £7m.

As the bank grew bigger, so did Deloitte’s fees. For the 2007 financial year, the last publicly available data, Deloitte’s fees reached £31.4m, having more than tripled in seven years. If rumours in the accountancy world prove correct, this year’s bill will top £40m.

Now that RBS has been forced to surrender a 70% stake to the government, investors are beginning to question whether the auditors should have spotted problems some time ago. The same is being asked of KPMG, which audited HBOS, and PWC, which audited Lloyds TSB – the other two big banks now getting state support.

The three banks have paid more than £390m in fees to their auditors since 2000.

Barclays, which has had to raise money from the Middle East, has paid its auditor, also PWC, £255m over the same period.

“The accounting firms are all trembling in the corner, just waiting for someone to start asking these very awkward questions,” said a City law-firm partner. “The accounts of all these banks were signed off no problem last year.”

In America, the scandal surrounding the collapse of Enron led to a fundamental change in the relationship between companies and auditors.

When Enron began to implode in 2001, staff at Arthur Andersen, its auditor, managed to make a complex scandal simple with an act that would forever taint their profession: they began shredding documents.

What those documents contained may have been beyond the comprehension of most, but anyone could see their destruction proved there must have been something wrong. When shareholder lawyer Bill Lerach carried boxes of shredded evidence into a Houston court, the pictures made world headlines.

Andersen had been more than Enron’s auditor. It was a training ground for many of the firm’s top executives, including Richard Causey, the chief accounting officer.

Its accountants worked closely on the off-balance-sheet partnerships that let Enron hide losses, and signed off on the accounting for them.

Arthur Andersen was effectively destroyed by government prosecutors pursuing it for the document shredding. New corporate rules, the Sarbanes-Oxley legislation, were brought in to stop similar problems occurring again.

Audit firms used to be registered in their own states; Sarbanes put the federal government in charge of oversight and created the Public Company Accounting Oversight Board (PCAOB) to register and inspect public accounting firms. The PCAOB was also given power to enforce action against auditors.

That the changes failed to catch the sub-prime mess is no real surprise, said Professor Thomas Joo of the University of California Davis School of Law.

“The problem is that auditing is still a for-profit business in which the client is the audited entity. Until that is changed there is a built-in problem. The concept of auditing is for the public interest but the client is not the public,” he said.

Nell Minnow, editor of governance watchdog The Corporate Library, said: “I have been concerned that the forest of good corporate governance gets lost in the trees of check lists and compliance, and I think what happened in the run-up to the credit crisis is a good example. We need to focus more on quantifying risk than quantifying value, and that is something that the auditors failed to do in financial services.”

With the return of recession have come fresh financial scandals. Aside from Bernard Madoff’s $50 billion (£36 billion) alleged fraud, there has been the alleged $1 billion accounting scam at the Indian computer services firm Satyam.

In Britain, the postEnron wave of legislation was much more restrained. This gave London a boost and turned the City into more of a rival to Wall Street. Although there were calls to stop UK auditors providing other services to their clients, nothing much happened.

Disclosure of fees improved, but the fees themselves continued to rise. So long as auditors “evaluate threats to their independence and implement appropriate safeguards” nobody bats an eyelid.

Although most companies insist that their auditors are paid more to audit than they are for anything else, there is no legal restriction governing this.

Since 2000, HBOS has paid KPMG £55.8m in audit fees, and £45.1m in other fees. Lloyds TSB has paid PWC £97.4m in audit fees and £50.5m in other fees, which include large sums for due-diligence work on the financial strength of some of its customers.

Personal relationships are also coming back into focus. Barclays’ finance director, Chris Lucas, used to be the bank’s auditor. His former employer, PWC, still audits the books.

Barclays maintains there is no problem with this situation because there was a significant period between Lucas joining the bank and assuming his current position.

This has not prevented concerns being expressed.

In 2007 the bank paid PWC £44m. This year’s accounts are likely to show an even higher figure after PWC did work on the bank’s fund-raising exercises.

“We’ve never been entirely comfortable with the situation at Barclays,” said one of the bank’s large shareholders. “We don’t think there’s necessarily any impropriety but we would have more comfort if they put it out to tender.”

KPMG, Deloitte and PWC all declined to comment.

In recent weeks the big four audit firms have had meetings with City minister Lord Myners and the Financial Services Authority. The audit firms are concerned that they will have to make some kind of qualification on the financial results that will be announced by Britain’s banks in the next few weeks. As the credit-crunch witch-hunt gathers pace, however, they may be asked to go back over the advice they have given in previous years. Additional reporting by Jenny Davey

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