Parliamentary committees are meant to expose conflicts of interest in all areas of public life and private business. Sometimes they only expose it in their own: the backbench MPs grandstanding to raise their promotion prospects at the expense of meaningful corporate scrutiny — think recent sessions with Melrose, Facebook and TSB.
But in their 100-page report on the collapse of government contractor Carillion, MPs have focused forensically on the multiple conflicting interests that were to blame — within the company, its pension trustees and the audit firms it hired. In fact, so powerful is their main conclusion on removing conflicts within auditors— whose interests are still better served by contract renewal than accounting rigour — that the firms have reached it themselves. KPMG, EY, PwC and Deloitte all admit they have contingency plans for breaking themselves up, to create separate or more numerous audit providers.
However, this is only half the problem. Conflicting numbers, as much as conflicting interests, also make spotting a collapse too difficult.
Numbers in company accounts for pensions, debt, cash conversion and dividend affordability can all be highly misleading — no matter how well or badly they are audited.
Pension deficits — and the payments to clear them — can be reported in conflicting ways. Despite Carillion’s pension trustees calculating its 2011 deficit at £770m, requiring £65m a year for 14 years, the company reckoned it was £620m and £33m for 15 years, and refused to pay more. A more meaningful cash figure for the liability must be highlighted and audited. More should be made of the net present value of deficit payments.
Net debt figures can conflict with true indebtedness — by completely excluding “ other creditors”. In Carillion’s case, these creditors were lending it another £472m to pay suppliers. But by being classified separately, that sum was not counted in the company’s debt to earnings ratio — a key metric, and warning sign, for banks and investors. A true total debt figure must be calculated and audited.
Cash conversion was also a number that conflicted with reality because of this classification of “other” credit. Carillion’s supplier payment facility could be presented as a cash inflow from operations, rather than financing. That suggested Carillion converted 100 per cent of operating profit into cash. Without the facility, it was really only 7 per cent. Cash conversion must be more strictly defined and audited.
Dividend affordability was disclosed in terms of how many times the payout was covered by earnings, but not in terms of conflicting priorities. In six years, Carillion paid £441m in dividends against £246m in pension deficit payments, still less in debt repayments. There is no requirement to publish ratios of these three numbers — but there should be, and they should be audited.
It means more work for auditors. But there may soon be more firms to do it.
Nine out of 10 for Martin Gilbert, joint-chief executive of Standard Life Aberdeen, deputy chairman of Sky and non-executive director of Glencore, writes Kate Burgess. He has just performed a classic Martin sidestep, taking leave from Glencore’s board until October. In so doing, he observes the letter of his commitment to the Staberdeen board to give up one of his directorships . His glissade assumes the protracted bid for Sky concludes and he can quit the broadcaster’s board this summer. Then he can dance back on to the Glencore dais in compliance with the UK’s corporate governance code.
But that perhaps shows a less than perfect understanding of why the code frowns upon chiefs of FTSE 100 businesses taking more than one non-exec position. One Nedship may enrich the day job; two risks impoverishing it. And for the past year, Mr Gilbert has been juggling three big jobs — the least of which was sitting on Glencore’s audit and remuneration committees. The machinations of the Murdoch family could outsell several box sets of Game of Thrones. A more cautious man than Mr Gilbert would have waited for the credits to roll at Sky before joining another troupe last May.
It is hard to hold someone to account when they so elegantly pirouette away from direct questions. This is the man who said of Staberdeen “two and two . . . make four, or four and a half, or five”. But investors in two, if not three, of the companies where he is a director have reason to feel short-changed.
SSP: first-class profits
Airports are among the few places in Britain where it is OK to drink lager at 9am and charge £5 for a sandwich. But it is the former rather than the latter driving a 47 per cent rise in pre-tax profit at SSP, caterer to 1m plane and train passengers a day. Higher spending contributed more than higher margins. If only more travellers were like classy Brits. Less than a third of SSP’s revenue is now from UK outlets.
Martin Gilbert: firstname.lastname@example.org
Get alerts on Carillion PLC when a new story is published