Lies, damned lies, and accountants
March 27, 2018
When giant corporation Carillion went bust recently, 45,000 people lost their jobs. Think about it: 45,000 is the population of a decent sized town. While it’s desperately sad for the thousands who lost their jobs, you may still think that it’s not your affair. You’d be wrong.
For a start, if you bank with Barclays you won’t be pleased to hear that they lost £172 million when Carillion imploded, so don’t expect your bank charges to go down in a hurry. And it’s not just Barclay’s customers: what happened with Carillion has implications for all of us. When your car is stolen, you want the insurance company to pay out. When you retire and claim your pension, you want the pension money to be there. But will that happen?
Large companies like Carillion are typically owned in large part by pension funds and insurance companies. So when you retire, you’ll want your pension fund to have invested in companies that are healthy – otherwise there may not be any money to pay the pension you’ve been promised. And if your car gets stolen, you’ll want your insurance company to be able to reimburse you, so you’d be pleased if they’d invested in companies that were succeeding, not in companies that go bust.
“But that never really happens,” I can hear you thinking, “Pensions always get paid.” Oh really? Try telling that to staff in Philip Green’s BHS, which collapsed with not enough money in the bank to honour its pension promises.
When you pay an insurance premium, or a monthly contribution to a pension scheme, your money doesn’t just lie there, to be worn away by inflation. No, it’s invested, so that it can grow, to be sure that you get paid back when you need it. Which is fine, as long as it works – but it didn’t work with Carillion, and it’s important to understand why.
Black Rock are the largest investment fund in the world, so they know a bit about how investments work (or not, as the case may be). Recently they gave evidence to a parliamentary committee looking into Carillion –a business in which they had a big investment. Their evidence was clear, and alarming. They thought the directors spent too much time worrying about their salaries, their pension pots, and their bonuses. And too little time worrying about the company they were supposed to be running. Black Rock were prescient enough to get out while there was still time. Others were less smart.
The big question is how did Carillion get away with it for so long? Surely their books are audited by independent accountants every year, to make sure that their finances are healthy and nothing is going to go horribly wrong?
This is my big point: those accountants simply aren’t doing their job properly. They may be doing it right some of the time, but some of the time is not good enough: they have to be right all of the time. KPMG, one of the largest firms of accountants in the world, signed off Carillion’s books cheerfully, not that long before a series of profit warnings, followed by liquidation. What were KPMG thinking about? Did they just not notice the gathering storm, or did they turn a blind eye to problems because Carillion were an important customer and they didn’t want to offend them?
Peter Kyle, one of the MPs on the Parliamentary Select Committee, said to KPMG, “I wouldn’t trust you to do an audit of the contents of my fridge”.
Yet it looks as if KPMG will emerge from this debacle slightly embarrassed, but otherwise unscathed. That doesn’t seem right to me. A nation with a corrupt police force soon becomes a corrupt nation. And our accountancy firms are the police force of the commercial world. If they don’t do their job properly, the system collapses.
In 2001, the global conglomerate Enron went bust, in spite of revenues of over $100 billion. Their accountants were Arthur Andersen, then one of the largest and most admired accountancy practices in the world. Once the scandal erupted, Arthur Andersen’s clients disappeared as fast as their reputation and the firm collapsed. It was only what they deserved. But most times a company goes under, the accountants who told us everything was OK a while before emerge unchallenged.
It’s time for that to change. You may not have an accountant (and if you do it’s unlikely to be KPMG) so you may think it’s for others to worry about. But it’s your pension that won’t pay out if your funds are invested in companies that go under. And that’s just what can happen if those companies have accountants who don’t see the warning signals soon enough. Until the big accountancy firms really take responsibility for their actions, there’ll be more Carillions and more people out of work.
So we must all demand change. Harrass your MP about it. Get on Twitter and Facebook. Spread the word.
We need our accountants to be accountable.