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Rewards for failure 34: accountancy firm KPMG


Despite the blow to its reputation from the collapse of its major audit client Carillion in January, the FT reported yesterday that accountancy firm KPMG’s revenues in the UK are rising at their fastest rate for a decade. Its sternly criticised auditing of Carillion is not the only ‘reputational setback’ in the UK and overseas over the past 18 months:

  • In South Africa, it has lost audit clients and faced serious criticism over its work for the billionaire Gupta family over the past two decades.
  • It has also become embroiled in a scandal in the US after it emerged the firm was tipped off about forthcoming regulatory inspections by staff it had hired from the US accounting watchdog.
  • Meanwhile the UK accounting regulator has launched two investigations of KPMG’s work this year, including its audit of outsourcer Carillion
  • and of Conviviality, the drinks supplier.

The Financial Reporting Council is also investigating KPMG’s work for:

  • car manufacturer Rolls-Royce;
  • mattress firm Silent Night;
  • US financial services group BNY Mellon;
  • the Co-operative Bank;
  • and insurer Equity Syndicate Management.

In the face of these investigations, it is amazing to read in the FT report today that KPMG has just been appointed to investigate the delays and cost increases on the Crossrail scheme.

 

 

 

 

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Broken Britain 18: captured by corporate interests?

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George Monbiot recently pointed out that the Commons report on the Carillion fiasco is one of the most damning assessments of corporate behaviour parliament has ever published. It trounces the company’s executives and board and laments the weakness of the regulators.

But, as Prem Sikka said in his April article, it scarcely touches the structural causes that make gluttony a perennial feature of corporate life.

Both agree that the problem begins with an issue the report does not once mention: the extreme nature of limited liability. Sikka points out that this system, under which executives are only financially accountable for the value of their investment, has also benefited frauds and led to the self-enrichment of executives at the expense of workers, consumers, creditors, pensioners and citizens.

Monbiot adds that the current model of limited liability allowed the directors and executives of Carillion to rack up a pension deficit of £2.6 billion, leaving the 27,000 members of its schemes to be rescued by the state fund (which is financed by a levy on your pension – if you have one). The owners of the company were permitted to walk away from the £2 billion owed to its suppliers and subcontractors. (Left: the former Carillion chief executive Keith Cochrane in Westminster after appearing before the Commons work and pensions select committee)

Monbiot continues: “There is no way that fossil fuel companies could pay for the climate breakdown they cause. There is no way that car companies could meet the health costs of air pollution. Their business models rely on dumping their costs on other people. Were they not protected by the extreme form of limited liability that prevails today, they would be obliged to switch to clean technologies”.

So what is to be done?

Prem Sikka (right) proposes that the bearers of unlimited risks and liabilities should be given rights to control the day-to-day governance and direction of companies.

He advocates including employees and citizen/consumers on company boards – because both ultimately have to bear the financial, health, social and psychological costs associated with environmental damage, pollution, poor products, industrial accidents, loss of jobs, pensions and savings. Through seats on company boards, they could secure a fairer distribution of income, challenge discrimination, curb asset-stripping and influence investment, training and innovation.

Across the 28 European Union countries (plus Norway), most have a statutory requirement for employee representation on company boards – unlike the UK, Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Malta and Romania.

George Monbiot proposes a radical reassessment of limited liability.

He points out that a recent paper by the US law professor Michael Simkovic proposes that companies should pay a fee for this indemnity, calibrated to the level of risk they impose on society. He adds, significantly, that as numerous leaks show, companies tend to be far more aware of the risks they inflict than either governments or the rest of society. Various estimates put the cost that businesses dump on society at somewhere between 4% and 20% of GDP

His own ‘tentative’ and ingenious proposal is that any manager earning more than a certain amount – say £200,000 – would have half their total remuneration placed in an escrow account, which is controlled not by the company but by an external agency. The deferred half of their income would not become payable until the agency judged that the company had met the targets it set on pension provision, workers’ pay, the treatment of suppliers and contractors and wider social and environmental performance. This judgement should draw on mandatory social and environmental reporting, assessed by independent auditors.

If they miss their targets, the executives would lose part or all of the deferred sum. In other words, they would pay for any disasters they impose on others. To ensure it isn’t captured by corporate interests, the agency would be funded by the income it confiscates.

Monbiot then says “I know that, at best, they address only part of the problem” and asks, “Are these the right solutions?

  • support them,
  • oppose them
  • or suggest better ideas.

He ends: “Should corporations in their current form exist at all? Is capitalism compatible with life on earth?”

 

 

 

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Carillion provokes MP’s broadside: “taxpayer-funded services should be conducted in an ethos of public service rather than for private advantage”

Major banks and credit insurers are calling on the government to ‘step in’, as Carillion’s debts soar and ‘huge write-downs’ are announced on the value of several old contracts.

Some – according to the Financial Times – are seeking a taxpayer guarantee for the company’s debt and assurances that Carillion will be allowed to compete for future contracts, despite the company’s troubled state. Oliver Dowden, newly promoted to the frontbench, says that the government is making contingency plans for Carillion folding.

If Carillion goes under, writes MP Jon Trickett, “We would effectively be paying for these services twice. This government has socialised the risk but privatised years’ worth of profit for shareholders . . . it is allowing firms with public contracts to pay millions to private shareholders as the public suffers from cuts to disability benefits, schools and the NHS”. He adds:

“They are in debt to the tune of £1.5bn, while being valued at less than £100m and are being investigated by the Financial Conduct Authority over financial statements issued in the run-up to July’s profit warning . . .and if they fold, Britain could face a huge bailout so that our schools, hospitals and train lines keep running”.

Will the 99% bail Carillion out?

The government now relies on this contractor for a wide range of services. The Financial Times lists Carillion’s major contracts in the transport, defence/security and health sectors and points out that Labour’s Shadow Business Secretary has asked why ministers continued to sign off major contracts with the company even after it issued a profit warning in July 2017.

Theresa May’s new Cabinet ministers have – nevertheless – confirmed that they still intend to continue with the privatisation and outsourcing of public services to private firms which then make a profit at the expense of the taxpayer.

Some politicians and party members have, through directorships, shareholdings or the employment of family and friends, a vested interest in these companies, many of which donate to Conservative party funds, hoping to ensure another Conservative government.

MP Jon Trickett, shadow minister for the cabinet office, whose principled political life is outlined here, presents the view of ‘Corbyn Labour’, that taxpayer-funded services should be conducted in an ethos of public service rather than for private advantage: “Whether that’s to run welfare payments to those receiving universal credit, running hospitals or administrating schools in huge academy chains . . . “

He points out that when these firms cannot make good on their obligations under these contracts the British public picks up the bill, citing the termination of Virgin’s contracts on the East Coast main line.

The MP adds: “I represent a former mining area, which hasn’t seen meaningful private investment in decades, and little public investment since the 2010 election. Some of the poorest people in the country, with some of the worst prospects due to years of Tory government, live there. They have seen private firms make profit out of their benefits, their schools and crisis-stricken NHS services”. He ends by giving an assurance:

“Labour would reverse the presumption in favour of outsourcing and provide more cost-effective services, treating workers better by running many services in-house”.

Jon Trickett’s article: https://labourlist.org/2018/01/jon-trickett-crisis-at-carillion-reveals-the-risks-in-tory-outsourcing-dogma/

 

 

 

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Closer to home: spotlight on combined authorities and elected mayors – democratise!

A reader brought to our attention the recent article on transport by Richard Hatcher. Before we focus on this, we set it in the context of his reflections on combined authorities for thoughtful people in the seven CAs already established and a further seven proposed – read in detail here

Why government – and employers – want a directly-elected mayor

A directly-elected mayor is a presidential form of local government, accountable only in direct elections every four years with no right of removal.  It means the government can deal with a single leader and one not tied to local political parties as a council leader is – an arrangement that suits the private sector too. Directly-elected mayors offer the possibility of a Tory mayor, or at least an independent, being elected in Labour-dominated urban areas. And they are ideally suited to the media’s fondness for reducing politics to personalities.

Democratise the Combined Authorities: London has an elected Assembly – why not the West Midlands?

 

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Richard Hatcher points out on BATC’s website that there is a precedent, the scrutiny arrangements in London: “There ongoing public accountability of the directly elected mayor and the Greater London Authority is ensured by a directly elected London Assembly.  The London Assembly has 25 elected members. They are not just existing councillors drafted onto a Scrutiny Committee, they are elected by citizens who vote for them specifically because they are going to fight for their interests. And they aren’t just reactive to policy, they act as champions for Londoners proactively investigating concerns through not just one but 15 issue-based committees and raising their findings and their policy demands with the Mayor and with the government itself”.

The Constitution of the West Midlands Combined Authority (WMCA) does not exclude the option of an elected Assembly, Hatcher asks “If it’s right for London why isn’t it right for the West Midlands?”. Three principles are laid down and seven positive steps – read on here.

Scrutiny?

His article written earlier this month describes the WMCA Scrutiny Committee as being ‘seriously incapable’ of carrying out that responsibility: “The Scrutiny Committee only has 12 councillor members. It is scheduled to have only four meetings during the year, for two hours each.  It is inconceivable that the Committee can engage with the huge range of activities of the WMCA, select issues to scrutinise and carry out a serious process of scrutiny in that time. (Each set of documentation for the monthly CA Board meetings typically amounts to a hundred pages or more, let alone those from the other dozen or more committees.)”

Be aware of conflicts of interest

The Scrutiny Committee allocates 3 places to representatives of the 3 Local Enterprise Partnerships (LEPs), the employer-led bodies representing business interests. Hatcher comments: “This is an extraordinary decision which seems unique among Combined Authorities”. For example, there are no LEP representatives on the Greater Manchester CA Scrutiny Committee. The House of Commons Public Accounts Committee report into devolution and Combined Authorities, published in June 2016 said:

“It is alarming that LEPs are not meeting basic standards of governance and transparency, such as disclosing conflicts of interest to the public.

LEPs are led by the private sector, and stakeholders have raised concerns that they are dominated by vested interests that do not properly represent their business communities”.

So far two of the three LEP places have been taken up by named representatives. One is Sarah Windrum, founder and CEO of Warwickshire technology company The Emerald Group, on behalf of the Coventry and Warwickshire LEP. The other is Black Country LEP Board Member Paul Brown, Director of Government Services for Ernst & Young, a global accountancy company.

Ernst and Young serves as auditor and tax adviser to Google, Apple, Facebook and Amazon – the businesses which have come under the most fire for avoiding taxes. As its website says, it is closely involved in the formulation and delivery of policy “across a wide range of central Government departments”.  Given the controlling role of government in the WMCA, Hatcher thinks it inevitable that Paul Brown, as Director of Government Services, would be exercising scrutiny on behalf of the CA over policies which his employer, Ernst and Young, would have been involved in formulating and delivering.

Other members of the Black Country LEP have a direct interest in investment in land for construction. The Chair of the BC LEP is Simon Eastwood, Managing Director of Carillion Developments, Carillion Plc. Carillion plc is a British multinational facilities management and construction services company with its headquarters in Wolverhampton. It is one of the largest construction companies operating in the UK. Among its projects in the West Midlands is the redevelopment of Paradise Circus in Birmingham city centre. Read on here.

Hatcher concludes: “In the absence of an elected Assembly, the Scrutiny Committee is the only instrument of public accountability of the WMCA. Its credibility depends on there being no suspicion in the public mind that there are actual or potential conflicts of interest. For that reason we believe there should be no representatives of LEPs on the Scrutiny Committee”.