Accounting accountability

15 February 2019

How can auditors avoid becoming complicit when they are capitalist companies themselves? 

 

Gregor Gall, an affiliate research associate at the University of Glasgow and editor of the Scottish Left Review, writes for March's ASLEF Journal:

 

Capitalism is, fundamentally, about numbers – income, expenditure, turnover, profit, the rate of return on an investment, the bottom line, and so on. That's why accountancy is critically important to capitalism – it's the oil that lubricates the cogs of the capitalist machine, letting businessmen know how they are doing in terms of profit and loss.

 

The profession is also supposed to play a regulatory role by ensuring honesty and transparency in financial data so when its members sign off the annual company accounts the figures are a true reflection of the balance sheet. This external audit is a statutory requirement in company law.

 

Recent events at Patisserie Valerie threw this into sharp relief as it revealed that many accountants do not adequately perform their regulatory, safeguarding, role. Patisserie Valerie is – or was – an upmarket chain of cafés specialising in handmade cakes which went into administration in January. The original patisserie was founded by Theo Vermeirsch and Esther van Gyseghem in Old Compton Street in the heart of Soho in 1926. For more than 50 years it was part of the fabric of Soho until, in the 1980s, it expanded, slowly, from one cafe to nine.

 

Fantastical Figures

 

In 2006 Patisserie Valerie was bought by venture capitalists - Luke Johnson's Risk Capital Partners - who indulged in a rapid expansion and turned it into a high street, airport, and train station chain of nearly 200 cafes by 2017, funded by borrowing and debt.

 

Late last year, shares in the company were suspended following the discovery of fraudulent accounting irregularities as a result of a material misstatement of the company's accounts. In plain language, there was a whopping £40 million missing.

 

The human cost was high, too, with the loss of 900 jobs with these workers not getting the wages they were due – while the company continues to trade.

 

Auditing is a specialist branch – auditors check the work of the accountants – so it was interesting to hear Patisserie Valerie's former auditor, Grant Thornton, claim at a Parliamentary hearing that it was not the role of accountants to uncover fraud.

 

Patisserie Valerie is only the latest in a long line of misdeeds. These accounting and auditing 'errors' usually come to light when companies collapse, highlighting the role of the 'errors' in – excuse the pun – accounting for the collapses.

 

Carillion was the last big collapse. MPs said in 2018 that KPMG had been complicit in signing off the company's 'increasingly fantastical figures' and that the internal auditor, Deloitte, had missed 'terminal failings' in risk management and financial controls or 'too readily ignored them'.

 

And, because Carillion had so many public sector contracts, the public - you and me and every other taxpayer - picked up the bill for the collapse while the directors, accountants, and auditors aughed all the way to the bank.

 

Spreadsheet Arithmetic Error

 

Conviviality, owners of Bargain Booze, blamed a 'spreadsheet arithmetic error' for the profit warnings it issued just before its collapse. And a £30 million tax bill for which it did not bother to budget. There was a similar story at BHS, and companies such as Rolls Royce, BT, Mitie, Sports Direct, Ted Baker and Quindell have all had their share of accounting and audit woes. Accountants and auditors have a bit of previous, too.

 

Back in the 1980s and 1990s we had Polly Peck, Barlow Clowes  and BCCI. At the root of the problem is one issue - accountancy and auditing firms are capitalist companies themselves, chasing profits. They are not, in any meaningful sense, independent of the firms they audit nor do they really, meaningfully, compete among themselves to get the work that is going. And they do more than just accountancy and auditing – they sell insurance, management consulting, actuary, financial and legal services to their clients. So, naturally, they are complicit.

 

The  situation is made worse by two factors. First, four companies – Deloitte, Ernst & Young, KPMG and PwC – control three-quarters of all the accountancy work in the world. This concentration has increased in the last 30 years and means there is pressure to let them carry on as they are deemed, in government circles, to be 'too big and important to fail'.

 

Clean Up the Augean Stables

 

Second, as we found to our cost during the financial crash of 2008, capitalists are far less regulated than they used to be because of the spread, like snake oil, of the neo-liberal ideology that, in spite of all the evidence, 'the market knows best'. This applies especially to accountancy and auditing in the switch from historic cost accounting to fair value accounting through what they call 'financialisation'.

 

There are proposals from the Competition and Markets Authority to compel all large companies to be audited by two accountancy firms, of which one cannot be from the big four. The big four are lobbying hard against this idea and the authority has already drawn back from suggesting they separate their auditing and consulting arms.

 

A more radical and effective proposal would be to compel companies to use a state auditor and to separate auditing and consulting as the banks had to do with their retail and investment arms. The good news is that the Labour Party is moving towards adopting these two proposals which would clean up the Augean stables of the accountancy world.

 

---

This piece originally appear in the the March 2019 edition of the ASLEF journal.

Back »

By continuing to use this site, you agree to the use of cookies. For more information please refer to ASLEF’s Privacy Policy