Thanks for continuing to read my newsletters. April seemed to pass me by so there was no newsletter, but here are my views on what has been happening in the wider insolvency world recently.
Accountants (partly) to blame for the Credit Crisis
Until now, accountants have got off lightly for their involvement in the banking crisis. The recent House of Lords report says that the banks’ auditors were ‘complacent’, accusing them of a ‘dereliction of duty’. In 2006, in the run-up to the banking crisis, there was not a single meeting between the FSA and the auditors of Northern Rock or HBOS. There was just one meeting between RBS’ auditor and the financial regulator. These three banks were bailed out by the taxpayer, at a cost of more than £70bn in direct support alone. With these facts in mind it would be difficult to argue with the Lords’ view.
The ICAEW, of which I am a member, denies that auditors contributed to the severity of the financial crisis. Michael Izza, the head of the ICAEW, has said publicly that the auditors ‘did the job that they were expected to do – provide an audit opinion on banks’ financial statements,” before then acknowledging that auditing had to “evolve to continue to meet the needs of the market and society” (my emphasis).
Many, including the New York Attorney General, think accountants on a firm and profession level were not just asleep at the wheel, they were ‘complicit in a ‘massive accounting fraud’. In one of his more recent blogs Michael Izza said ‘I am convinced that audit will continue to play an essential part in helping maintain the stability of economic behaviour by enabling transparent information to reach the market in a way that builds investor confidence. I also believe the audit profession has a broader role to play in terms of its ongoing interaction with the regulatory community, particularly on systemic risk issues.’
When I challenged Izza on his blog, in his reponse he made little or no admission of ‘we, the profession, could have done better’ or taken more timely action. Frankly, I find such denial deeply troubling indeed. But then again, that’s probably because I expect governing bodies to be ahead of the game, acting with foresight to create the future rather than reacting defensively to the what’s happened in the past. So why does the ICAEW and Izza appear to be in denial? – his profile on the ICAEW website says he joined the ICAEW in 2002, becoming its COO in 2004 before becoming its CEO in 2006. In business, to achieve major changes in areas of extreme difficulty, you often have to change the people who were at the top when the issues occurred. I suspect I am not the only ICAEW member scratching his head when reading the disciplinary section of Accountancy, where individual members and small firms are regularly fined or excluded for minor regulatory issues, while much more serious issues involving the bigger firms such as we have here, which we must remember led to the near collapse of the world economy, receive far less attention. Perhaps us smaller practitioners should get involved more in the ICAEW and not simply relinquish control to the bigger firms who have a vested interest to protect?
Until such time as governments, the regulators, the accountancy profession and the banks recognise they are all jointly and severally responsible for the crisis; they all demonstrate a real commitment to change; and then all take major action to improve the way they do things, the banking sector and thus the economy as a whole will remain very vulnerable indeed.
Can you name half a dozen major changes of note that the culpable 4 have made betwen them? I can’t.
A warning for all your clients whose sole focus is on saving money
During the 25 years I’ve been working in insolvency, I have not seen one company that is in severe difficulties restore its fortunes by just cuttting its costs. A combination of cost focus (not necessarily reduction) and sales and margin improvements can often work, cost reduction on its own doesn’t. Yet, I am still seeing many management teams focus solely on their cost base, cutting their here and now expenditure, leaving the future for another day. They do so because it’s the easier option. Jon Moulton puts it down to what he says is management’s defer and pretend philosophy which sees businesses slowly disintegrate. He sees it as a huge weakness in the make-up of British management. And with the number of new businesses growing, many of which set up by people who have never been in business on their own before, I see his being a growing problem.
I have had several ‘near-dead businesses’ approach me recently whose directors have been following a policy of cost minimisation which included their taking dividends rather than remuneration through the paye system. Several have done this despite there being no accumulated profits to legally pay a dividend. In other cases, there were no relevant accounts proving the dividend to be legal. Management ‘did not know what they did not know’, they were ‘unconsciously incompetent’, a classic indication of a business out of control. One common factor is that management did not communicate regularly with their accountants, typically because they did not want to receive a bill from them. They had no idea they were creating problems for the future, because they were ceating an overdrawn directors’ loan account which any insolvency practitioner appointed to their company has a duty to collect in. Yet in almost every case management were looking to blame their accountant for their ignorance – it’s today’s ‘it’s never my fault’ culture. Here’s a link to an article I recently wrote on this.
Do you know which of your clients, especially your newer ones, have been doing well in the past but are now struggling? Do you know which of these are storing up problems for themselves, either because they are only focussing on their here and now costs or taking money out of the company on a basis that simply doesn’t stand up to scrutiny?
A question of ‘there for the grace of God go we’?
The furore over pre-pack sales in administrations simply refuses to go away. The road transport industry, beleagured by high fuel prices, has seen several pre-packs over the last year, creating much debate in the sector, particularly from competitors arguing that pre-packs give the insolvent an unfair advantage. I recently wrote an article for the magazine Road Transport Today, here’s a link to it, lighting the blue touch paper, arguing that the use of the pre-pack procedure can be compared to when business owners go to their accountants for advice on how to mitigate their tax – they are only doing what is best for them within the ambit of the law. I often see people whose opinions change when circumstances force them the other side of the fence! Frankly, I see the DTI’s report as pretty poor – all it has done is set up unrealistic expectations within an already jaundiced industry sector, read my article to see why I say this.
Other articles I’ve had in the press
Here’s an article I wrote for Business Report, including a picture of me near the top of Italy’s highest mountain, in which I compare the dangers and decisions I then faced with those by small business owners at the moment. Very scary indeed! I only got down safely because of the quality of support I had around me and the tools we had in our armoury when I needed them – I suspect this will be the same for many businesses over coming months and years.
There’s always time for a laugh (especially when it is at the banks’ expense!)
The banks continue to get an awful lot of bad press. As they continually lead with their chin, it would be rude not to take the odd swing at them.
I don’t wish to pick on any particular bank, but here’s Nat West’s charter on Youtube. And to compare, here’s the spoof version, again on youtube. (for those of you easily offended by swearing, don’t listen to the spoof). Don’t you just love the combination of cynical people and the internet? Am I the only one amazed that no one at NatWest noticed their promise ‘Nothing to hide – just the facts’ could be read in two ways? And am I the only one who mocks Lloyds for now lecturing me on creating a sustainable business – mainly about turning the lights off! – when they needed you and me to bail out their own unviable business?
The sad thing is they are all the same, and that’s why we are all losing patience with them.
Finally, I would really appreciate your feedback, good or bad, on my newsletter. I’ve had a comment from a broker who says that he’d like to see the articles shorter, with weblinks to the extended article should people want more. By way of contrast, the comments generally coming from accountants and lawyers are that they like the current format because they preview the newsletter in Outlook, they don’y have to click elsewhere. What do you think?
Midlands Business Recovery
‘Doing more for Black Country Businesses’
If you should like to e-mail me on anything at all, my address is firstname.lastname@example.org
Midlands Business Recovery, Alpha House, Tipton Street, Sedgley, West Midlands, DY3 1HE.
telephone: 01902-672323 fax 0705-343-7063