After the complete shambles at the polls on Thursday night, Electoral Commission officials have been busy on television promising a review and calling for clarification in the law.

The truth would appear to be that, in fact, this chaos is their responsibility. And that heads should roll, starting with Jenny Watson, the three day a week, £150,000 per year Chair of the Commission.

For this is an extract from the Electoral Commission's risk and control framework (emphasis added):

4.7 The risk management strategy is available to all staff on the Commission’s
intranet. It provides a definition of risk; raises awareness of the principles and
benefits involved in the risk management process; and identifies the main
reporting procedures. The Executive Team approved revised risk processes
which were also discussed by the Audit Committee.

4.8 The Commission identified strategic, corporate and operational level risks.
The strategic and corporate risks were reviewed by the Executive Team and
the Audit Committee. Operational level risks were managed by the managers
who report directly to members of the Executive Team, and were escalated as
appropriate to the Executive Team.

4.9 Risks were identified and evaluated in the following ways:

• All key decisions have been supported by an analysis of risk, with
  recommendations on actions to mitigate risk. Additionally, the Commission
  Board and Executive Team received two-monthly reports on risk.
• All staff are encouraged to identify risks to the achievement of objectives
  in their area. Risks are also identified from a variety of sources: business
  unit plans, referrals from project boards and groups working on specific
  issues such as health & safety; structured discussions; training activities;
  and audits.
• Each identified risk, its likelihood and impact and the actions to mitigate it,
  is reviewed by a “risk owner” every other month in order to keep the risk
  register up to date.
• Comprehensive budgeting systems and financial reporting are agreed by
  senior management and indicate financial performance against budgets
  and forecasts; they are reviewed by senior management and reported to
  the Commission Board regularly.
• During the year a Capital Programme Board was constituted, chaired by
  the Director of Finance and Corporate Services. The Board co-ordinated
  the planning and delivery of the Commission’s capital programme, which
  includes business critical projects. The Board met monthly and its remit
  included ensuring appropriate detailed plans were in place to deliver
  approved projects and monitor the achievement of milestones and the
  management of risk and resources for each project.

4.10 The most significant risks faced by the Commission continue to be those
which might inhibit our ability to achieve our key objectives of effectively
regulating party and election finance and successfully ensuring that elections
and electoral registration are well run. The Commission Board and the
Executive Team considered the key risks in setting the Commission’s
objectives for the year and reviewed these periodically during the year. The
Commission made good overall progress against these key objectives during
the year.

4.11 Since the end of the financial year we have reviewed our strategic and
corporate risks to ensure that they highlight risks to the updated Commission
objectives as laid out in the 2009-10 Corporate Plan. We are also planning a
full review of the risk management framework to ensure that it remains fit for
purpose and supports the Commission’s work in the appropriate way.

Their biggest risk is that they screw up the operation of elections. And they only have to run elections infrequently. A general election is even rarer, and clearly much more important to get right. They simply shouldn't have screwed this up; the fact that they have can only mean that they mismanaged their responsibilities.

Given the particular sensitivity of general elections, and the especially heightened importance of this election, it's totally unacceptable for so many polls to have been mismanaged in this way.

Filed under: Corporate governance, Current issues, Politics with tags election, electoral commission, jenny watson
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Francine McKenna unloads both barrels on the audit profession.

Every one of the audit firms is a defendant in lawsuits for institutions that failed, were taken over, or bailed out, in addition to several $1 billion plus malpractice, fraud and Madoff-related lawsuits. Any one of these “catastrophic” matters could threaten their viability. However, regulators and the worldwide business community are ignoring this threat or, worse yet, promoting liability caps. Limiting liability only exacerbates moral hazard.

I don't agree.

When companies fail, US lawyers circle like vultures. They bring a case on a no-win, no-fee basis. And then, having argued that auditors were not 100% blemish-free, they claim absurd amounts of compensation for their clients, from which they take an unhealthy cut.

Often auditors, as the last men standing, are the only parties - other than lawyers, of course - who have any money. Yet because they are not permitted to limit their liability to some reasonable amount, they are left to carry the can on damages. Auditors are a small, but important part of the corporate governance process, yet they frequently get hammered financially more than any other participant.

The fact that every Big 4 firm is named in litigation is little more than a function of the greed of US lawyers, the number of US listed companies requiring audit, and the small number of auditors able to do the work. No more.

As for the rest of Francine's article, it's easy with hindsight to say "the auditors should have spotted this stuff". Perhaps they should. And perhaps so should politicians, and banks, and investors, and ordinary borrowers.

I think it's unrealistic to expect auditors to go out on a limb when no other stakeholder is calling a halt to the party. And it's particularly unreasonable to do so with the considerable benefit of hindsight.

I also take umbrage with Francine's comment that:

Why didn’t the auditors question, push back, or raise objections to illegal and unethical disclosure gaps?

While S302 of the Sarbanes-Oxley Act might have pushed us more towards 'fairly presents' and slightly away from 'in accordance with US GAAP', it's unfair to expect auditors to do this on their own. Ultimately these decisions end up in court, many years later, and there's no guarantee that the auditor will win. Where a reporting company has complied with the letter of the standard - and many US standards are meticulously detailed as to what compliance means and requires - it's a tough call to ask auditors to override that in favour of 'fairly presents'.

For this to work, the regulators will need to take unilateral action first, to protect auditors from action from their clients and to be crystal clear that a higher standard than what's written in the standards is expected. We just aren't there yet.

Filed under: Accounting, Auditing, Corporate governance, Other blogs with tags audit liability, big 4, francine mckenna, lawyers
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The Birmingham Post Business Blog has a valiant attempt at trying to stick our failed banks with a charge of failed accounting.

[I]t was somewhat ironic that four parliamentarians were up before the beak last week being charged with False Accounting under the Theft Act. For isn't it the case that the main reason we had a financial collapse and the subsequent credit crunch recession er...false accounting?

One has to wonder why Slipper of the Yard hasn't been doing the rounds of Big Banks and Investment houses and, indeed, their accountants and legal advisors with the same alacrity as with MPs?

The case isn't entirely helped by starting with Lehmans. Arguing that false accounting should apply here, when the UK accounts appear to have been prepared properly is a tough call. And Ernst & Young where not 'labelled as "professionally negligent" by the Court Examiners'; there was a "colorable claim" for negligence, which isn't the same thing.

The article does identify, I suspect correctly, that proving intent may well explain why false accounting doesn't appear to be on the cards. With MPs and their expenses, the very fact that they signed expenses forms that were clearly invalid is enough in itself to prove intent. With false accounting forming merely part of the Serious Fraud Office's armoury, other charges may be more appropriate or easier to get to stick.

The article concludes with a doomsday scenario - that lots of lawsuits are filed by disgruntled shareholders at the false accounting of our dodgy banks. Ah, but now they're underpinned by the bottomless pit of money that is the state. So potentially some very big claims could be raised and we, the people, would have to fund them. As a shareholder of Lloyds Banking Group, strongarmed by an idiotic Prime Minister into a shotgun wedding with a bank with one of the worst loan books in history, I would certainly like Something To Be Done. But ultimately it must be the directors who must face our ire. Robbing one group of shareholders to pay another group can't be the right answer.

Filed under: Corporate governance, Regulation with tags ernst and young, fraud, lehman, lloyds banking group
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Ritchie sets out his seventeen questions that, in his view, need to be answered. So let's answer them.

1. Why we gave up control of accounting disclosure to the accounting profession
2. Why we gave up control of auditing regulation to the auditing profession

There's simply no evidence of this. Yes, the IASB and FASB both contain people who used to be preparers (is this what Ritchie means by the accounting profession? It's not clear) and people who used to be auditors. I think we'd be flabbergasted if this weren't the case. The alternative - regulation being made by people with absolutely no knowledge of the topics they're tasked with regulating - is too awful to contemplate. Only a raving madman would advocate it.

However, there are added controls to ensure that both boards don't get captured by any special interest group, and that they meet their overall strategic objectives. In the case of the IASB, this is the role of the IFRS Foundation (formerly the IASCF), which operates according to a constitution.

At every stage, there are public consultations. Anyone can respond with their points of view. The IASB and FASB are held accountable to the proper operation of their consultative processes.

3. Why we allowed the definition of an audit to be limited to confirmation of compliance with an accounting framework and abandoned the true and fair override

Because we didn't. The UK Financial Reporting Council has obtained Counsel's opinion that has confirmed the centrality of the true and fair requirement to the preparation of financial statements in the UK, whether they are prepared in accordance with international or UK accounting standards.

The European Union endorsement process only permits endorsement of a standard if it "it is not contrary to the 'true and fair principle' set out in Article 16(3) of Council Directive 83/349/EEC and Article 2(3) of Council Directive 78/660/EEC." (source: iasplus.com).

US GAAP, as a result of legal cases (e.g. Global Crossing, see Lehmans Examiner Report vol 3, p.965) and Sarbanes-Oxley (s302) requires financial statements to be not misleading. Merely following GAAP is insufficient to fulfil this requirement.

4. Why we allowed the users of financial statements to be considered the providers of capital alone
5. Why we don’t demand financial statements that meet the needs of other major user groups including:
a. Employees
b. Suppliers
c. Customers
d. Regulators
e. Tax authorities
f. Civil society groups
g. People at large

These two questions go together. Frankly, they're idiotic. Companies produce their annual accounts for shareholders. That's what the annual accounts are for. It's right that the regulations over the form and content of accounts should put shareholders first.

Other people find accounts useful, and it's right that they can access material that's filed on the public record. However it's daft to suppose that you could ever have a one-size-fits-all approach to financial reporting.

Employees, especially those involved in financial management or strategy, will always need a different form of reporting. And they have one - in management accounts. Management can determine the form and content of information needed by employees generally. It's a place regulation doesn't need to be.

Suppliers may find the information in company accounts useful. However, accounts take time to prepare, and by the time the supplier is considering extending credit to a company it may be some 18 months after the balance sheet date. So suppliers will always need additional sources of information, such as credit reference agencies, and will want to increase credit limits only gradually until they trust the company enough.

I don't quite know what Richard has in mind when he says customers need information from accounts. It might help customers in situations such as Farepak or Wrapit, subject to the timing issues identified above. But there are other, better sources of information, and other courses of action they can take, such as using a credit card for added consumer protection.

Regulators and tax authorities are in a privileged information. They often choose to use the financial accounts, because they are signed off by directors who can be fined if they get it wrong and, where audited, have added reliability of an audit report. Both regulators and tax authorities can require additional information to be provided. And both can require companies to submit to inspections. They simply don't need added information to be included in the accounts just for them.

Civil society groups and people at large, to the extent that they are different to any of the aforementioned groups, may also get useful information from financial statements. If they wish, they can buy a small number of shares and then seek further information either directly from the company or at its AGM.

6. Why we limited auditor liability so much

Because audit quality is more important. As of today, auditors of US-listed companies don't enjoy limited liability. I'm not aware of any UK-listed company that has negotiated limited liability for its auditors (that's not to say that there are none). And the Big 4 audit firms are legally separate partnerships. We need to respect the legal form when considering legal liability. It would be perverse to set aside legal process when determining what, legally, is owed to a third party.

7. Why we allowed the concept of limited liability to be porous when it comes to failure and yet so restrictive when it comes to sharing information and reward

I guess we're off auditors' liability for now. It's a one-way street by definition. We permit firms to have limited liability because we all benefit from its existence. Many modern inventions simply wouldn't have been invented at all if investors hadn't been able to protect themselves from future liabilities through the use of limited liability companies. We already dealt with sharing information above. And better profits means more tax revenues for the government.

8. Why we allow limited liability within limited liability i.e. subsidiaries have limited liability distinct from parent companies

Because limited liability pertains to a company and companies can own other companies. Isn't Ritchie supposed to know this sort of stuff?

9. Why we consider group accounts the only useful perspective on corporate activity

Because, by and large, shareholders only own shares in the parent company, which commands the assets of the total group through its subsidiaries. Investors might be interested in subdividing the group, which is why they are required to disclose segmental information, but they're more interested in the overall picture of the consolidated group.

10. Why we allow off balance sheet accounting

And, Ritchie, when did you stop beating your wife?

11. Why we still allow auditors to undertake other commercial activities

Who do you think you are to restrict the purchasing decisions of companies?

In many cases, what is disclosed as non-audit fees are actually intrinsically linked to the audit, and would be considered by the man on the Clapham omnibus as audit work. Thanks to the arcane workings of our regulatory systems, they are not (e.g. see Q21 of the Treasury Committee uncorrected evidence from February 2010).

Non-audit services purchased from the audit firm need to be pre-approved by the audit committee (whereas those that are purchased from other firms do not need pre-approval). If management was genuinely trying to cheat shareholders, they would presumably use anyone other than the auditors, in order to avoid this added level of challenge.

12. Why we don’t increase company registration fees to ensure auditors can always be fairly remunerated from a communally managed purse

Because we're not in a communist country. Thank God.

13. Why we allow companies to not file accounts on public record

All UK limited companies must file accounts at Companies House. Some smaller companies can file abbreviated accounts on the public record.

There's a proposal in the EU to allow member states an option to remove 'micro' (i.e. very small) companies from the requirement to follow the accounting directives, which includes the requirement to file on the public record. Even if it goes through, and there's no certainty that it will, it will still need to be taken up by BIS before it would become law here.

14. Why we accept a lack of transparency on group structures

I seem to recall that UK companies are required to have a registered office, at which they must display the company's full name on a sign. Consolidated accounts list the (parent) company's major subsidiaries. If foreign company law is less good than English company law, then perhaps Ritchie should take that up with them.

15. Why we don’t demand full accounts on public record from all entities created under law wherever they are in the world, whether they be companies, partnerships, all variations on these, trusts, charities, foundations and other such entities. Such information to include full information on ownership, entitlement to assets, establishment, constitutions, management and accounts.

See above. English company law does require information to be filed on the public record. This could, of course, change if the EU micro company proposal goes through. Then we can have a debate about the relative benefits and costs of this requirement.

Other countries have already concluded that there's no need to have accounts on the public record. These aren't "secrecy jurisdictions", but actually the majority of countries around the world.

16. Why we allow companies to be struck off public registers without questions being asked and substantial fees being paid in lieu of accounts.

You've lost me. We fine companies if they don't file accounts on time. Eventually we strike them off if they won't comply.

17. Why fit and proper tests aren’t conducted for all persons incorporating and owning companies.

We prefer to ban them once we're proved they're rotten.

Filed under: Accounting, Auditing, Corporate governance, Current issues, Other blogs, Regulation with tags companies house, european union, farepak, fasb, iasb, idiots, limited liability, micro entities, richard murphy, sarbanes oxley act, us gaap, wrapit
11494 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Faddressing-ritchies-17-questions-on-accounting-regulation%2FAddressing+Ritchie%27s+17+questions+on+accounting+regulation2010-03-16+23%3A10%3A22Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1149

A Guardian editorial argues in favour of mutualisation in the private sector.

Having more mutuals in the private sector would be a fine thing.

Why? The history of mutual organisations isn't exactly a ringing endorsement of the concept.

It's a fabulous ideal - the idea that we can all get along with each other and share nicely. But people simply don't behave like that. Think of Factory records. Wouldn't it be nice if record labels let their artists keep the rights of the music they produce, instead of the big bad record label hogging the lot? Er, no... it meant their biggest artists could run up huge bills recording albums and then walk off with the resulting album, leaving their debts behind. Factory Records went bust as a consequence.

The very idea of the limited liability company sprang from the need to prevent partnerships being broken up unnecessarily because one partner wanted out. Although it was possible (using contract) to draw up partnership agreements that could prevent one partner blackmailing the others, these couldn't survive the death or insanity of a partner. The limited liability company provided a vehicle that would live beyond its owners.

20 years ago, there were many mutual organisations active in the UK financial services sector. Unfortunately, people collectively voted to demutualise them and pocket the proceeds. Many of the demutualised societies were subsequently taken over, or failed. Conversely, the largest mutual, Nationwide Building Society, survived and is still thriving.

We simply can't be trusted to act in our long-term best interests, instead of taking the short-term advantage. And that's why mutualisation is doomed from the start.

Filed under: Corporate governance, Current issues with tags building societies, carpetbaggers, factory records, guardian, limited liability, mutualisation, partnerships
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So, Chester City Football Club, a fine club with a 125 year history, is being wound up after being unable to pay its debts. These included debts of £26,125 owed to HMRC.

Plans are already underway to form a brand new club, spookily also based in Chester, to replace the liquidated club.

People sometimes ask whether it's still ethical to allow companies to fail, leaving creditors out of pocket, only to rise again from the dead to trade once more. Why not seek the views of Chester City's fans? Why should they not be able to set up a brand new club just because they were unfortunate enough to get lumbered with incompetent management who burdened their club with impossible debts?

Filed under: Corporate governance, Current issues with tags chester city, football, hmrc, limited liability, liquidation
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Via Accountancy Age, the news that companies feel they get better client service where their auditor is not from the Big 4 compared to companies with a Big 4 auditor. There are more details here.

One does wonder, though, why companies subject themselves to lower client service when they could just as easily hire another auditor. The tier of firms just below the Big 4 have geographical reach that's good enough to service many global companies. Some investors have even openly supported this view. So why don't companies make the switch?

Could it be that they're actually not that upset, and just used the survey as an excuse to air their complaints?

Filed under: Auditing, Corporate governance, Current issues with tags accountancy age, big 4, competition and choice, hermes
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Richard Murphy tells us gleefully that HSBC retreats on chief’s pay award. He's delighted that HSBC has decided not to increase its chief executive's pay by a third.

HSBC didn't take a penny of stimulus money. So, what it pays its staff is its business, not Murphy's. While one could argue (very weakly, in my view) that HSBC has benefited from the stabilisation afforded by the stimulus, I'm sure a well-run bank like HSBC would rather have had no boom and bust, just like we were promised by Gordon Brown.

Also, let's not forget that wages are taxed more highly than corporate profits. Accordingly the UK will lose tax as a result of this change of heart. Nice one, Richard.

Filed under: Corporate governance, Economics, Taxation with tags banks, deficit, hsbc, idiots, richard murphy
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While Ragging on Ritchie is an enjoyable pastime in itself, accountants can also enjoy the insane wibblings of Richard's close rival for the title of the profession's biggest idiot: Essex University professor and certified accountant Prem Sikka.

Prem is fantastic comedy value. He has a single unified thesis of the world, and he delights in spreading the message at every opportunity. I caught a panel session of his at an academic conference last year, and he ranted for a good half-hour about how the corporate world is bad, auditors are bent and banks are evil. Now, the Guardian seems to have resumed his weekly column at Comment is Free.

This week, the portion of the thesis he has decided to air is the bit about corporate power. He complains that Kraft was terribly terribly mean to its workers (by continuing to close a factory Cadbury was already closing). Then he complains that Barclays was terribly terribly kind to its workers. He thinks that everything would be much better if only the workers controlled everything.

There are a load of comments already on the article. Do look out for the comment by accounting legend, Bob Jensen. He asks where the money will come from if we destroy capital markets and whether Prem's preferred model of governance has ever worked anywhere in the history of the world.

Bob's personal website is a positive cornucopia of accounting knowledge, and you could waste days going through it all. Superb stuff.

Filed under: Corporate governance, Other blogs with tags barclays, bob jensen, cadbury, essex university, guardian, idiots, kraft, prem sikka, richard murphy
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