Auditors must be held to account

The shareholder spring is the perfect time to challenge the poor performance of unscrutinised accountancy firms

• 
• • Prem Sikka
  • guardian.co.uk, Thursday 31 May 2012 15.04 BST

'KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young, collectively known as the Big Four accountancy firms, audit around 99% of FTSE 100 companies.' Photograph: Action Press / Rex Features

Shareholder spring is in the air, with increasing numbers voting against fat-cat executive rewards for failure and mediocre performance. However, the same scrutiny is not being applied to the business advisers and consultants implicated in headline failures. They continue to receive huge financial rewards. Company auditors are good example.

PricewaterhouseCoopers (PwC), Deloitte, KPMG and Ernst & Young, collectively known as the Big Four accountancy firms, audit around 99% of FTSE 100 companies. These firms audited all distressed banks. At the height of the banking crisis they gave the customary clean bill of health to Northern Rock, Abbey National, Alliance and Leicester, Bradford & Bingley, HBOS, Lloyds TSB and Royal Bank of Scotland (RBS). Bear Stearns and Lehman Brothers went bust shortly after receiving the all-clear. A subsequent inquiry by the House of Lords economic affairs committee accused auditors of "dereliction of duty" (para 161) and "complacency" (para 167) and basking in a culture of "box ticking" (para 6) rather than delivering meaningful audits. Despite the damning criticisms, some partners in audit firms still charge over £700 an hour for their services.

In 2011, Barclays, the bank that forced the government to introduce retrospective legislation to combat its tax avoidance schemes, paid £54m to its auditors PricewaterhouseCoopers, including £15m for consultancy and advice on tax matters. PricewaterhouseCoopers, which once audited Northern Rock, collected another £48m from Lloyds Banking Group , including £10m for consultancy. HSBC has paid a whopping £56m, including about £8m for tax and consultancy services to its auditors KPMG, the firm that audited HBOS and Bradford & Bingley. RBS has paid £41m, including £7.4m for consultancy to Deloitte, the firm that audited Abbey National, Alliance & Leicester and Bear Stearns. Ernst & Young, the firm that audited Lehman Brothers, earned £36m in audit and consultancy fees from BP and another £28.5m from Aviva. At major companies, the fees paid to accountancy firms are larger than CEO salaries, but rarely attract sustained media attention. The auditor dependency on companies for vast fees neuters any impulse to deliver an independent opinion on company accounts. No one at any accountancy firm is ever promoted for blowing the whistle on dubious practices of companies and losing a client.

At company AGMs auditors are appointed often without any discussion. The resolutions on auditor appointment are not accompanied by any information on the composition of the audit teams; time spent on the job, audit and consultancy contracts, information obtained from directors, list of faults found with company accounts, regulatory action against auditors or anything else that might shed light on the quality of audit work or conflict of interests. With weak accountability measures, auditors deliver little of any social value.

The charges of "dereliction of duty" and "complacency" have not led to any worthwhile UK reforms though there is plenty of spin about encouraging auditors to be sceptical and tweaking auditing standards. There is no scrutiny of the basic auditing model which requires entrepreneurial accountancy firms to somehow invigilate giant corporations. The success of auditors is measured by private profits and they have no obligations to the state, or the public, which eventually bears the cost of bailouts and fraud. This mutual back-scratching has been a key factor in the debacles at Enron, WorldCom, Lehman Brothers and the banking crash. Yet no real change is in sight.

The EU is proposing minimalist reforms to check the collusive relationship between auditors and companies. These include a ban on the sale of lucrative consultancy services to audit clients and forcing companies to regularly change their auditors. At present, FTSE 100 companies change auditors every 48 years on average. Inevitably, major firms are using their financial and political resources to oppose even these modest proposals.

Major accountancy firms have got used to collecting mega fees for failure and mediocre performance. Shareholders should check that by turning the spotlight on them and demand refunds for poor performance. The government should sharpen liability laws so that auditors are forced to make good the damage done by their silence.

We know that to understand politics and the peddling of influence we must follow the money. So it’s remarkable that the question of who funds the thinktanks has so seldom been asked.

Think Of A Tank

George Monbiot

 

Nadine Dorries won’t answer it. Lord Lawson won’t answer it. Michael Gove won’t answer it. But it’s a simple question, and if they don’t know it’s because they don’t want to. Where does the money come from? All are connected to groups whose purpose is to change the direction of public life. None will reveal who funds them.

When she attempted to restrict abortion counselling, Nadine Dorries MP was supported by a group called Right to Know. When other MPs asked her who funds it, she claimed she didn’t know(1,2). Lord Lawson is chairman of the Global Warming Policy Foundation, which casts doubt on climate science. It demands “openness and transparency” from scientists(3). Yet he refuses to say who pays, on the grounds that the donors “do not wish to be publicly engaged in controversy.”(4) Michael Gove was chairman of Policy Exchange, an influential conservative thinktank. When I asked who funded Policy Exchange when he ran it, his office told me “he doesn’t have that information and he won’t be able to help you.”(5)

We know that to understand politics and the peddling of influence we must follow the money. So it’s remarkable that the question of who funds the thinktanks has so seldom been asked.

There are dozens of groups in the UK which call themselves free market or conservative thinktanks, but they have a remarkably consistent agenda. They tend to oppose the laws which protect us from banks and corporations; to demand the privatisation of state assets; to argue that the rich should pay less tax; and to pour scorn on global warming. What the thinktanks call free market economics looks more like a programme for corporate power.

Some of them have a turnover of several million pounds a year, but in most cases that’s about all we know. In the US, groups claiming to be free market thinktanks have been exposed as sophisticated corporate lobbying outfits, acting in concert to promote the views of the people who fund them. In previous columns, I’ve shown how such groups, funded by the billionaire Koch brothers, built and directed the Tea Party movement(6,7).

The Kochs and the oil company Exxon have also funded a swarm of thinktanks which, by coincidence, all spontaneously decided that manmade climate change is a myth(8,9). A study in the journal Environmental Politics found that such groups, funded by economic elites and working through the media, have been “central to the reversal of US support for environmental protection, both domestically and internationally.”(10)

Jeff Judson, who has worked for 26 years as a corporate lobbyist in the US, has explained why thinktanks are more effective than other public relations agencies. They are, he says, “the source of many of the ideas and facts that appear in countless editorials, news articles, and syndicated columns.”(11) They have “considerable influence and close personal relationships with elected officials”. They “support and encourage one another, echo and amplify their messages, and can pull together … coalitions on the most important public policy issues.” Crucially, they are “virtually immune to retribution … the identity of donors to think tanks is protected from involuntary disclosure.”(12)

The harder you stare at them, the more they look like lobby groups working for big business without disclosing their interests. Yet throughout the media they are treated as independent sources of expertise. The BBC is particularly culpable. Even when the corporate funding of its contributors has been exposed by human rights or environmental groups, it still allows them to masquerade as unbiased commentators, without disclosing their interests.

For the sake of democracy, we should know who funds the organisations which call themselves thinktanks. To this end I contacted 15 groups. Eleven of them could be described as free market or conservative; four as progressive. I asked them all a simple question: “Could you give me the names of your major donors and the amount they contributed in the last financial year?”. I gave their answers a score out of five for transparency and accountability.

Three of the groups I contacted – Right to Know, the International Policy Network and Nurses for Reform – did not answer my calls or emails. Six others refused to give me any useful information. They are the Institute of Economic Affairs, Policy Exchange, the Adam Smith Institute, the TaxPayers’ Alliance, the Global Warming Policy Foundation and the Christian Medical Fellowship. They produced similar excuses, mostly concerning the need to protect the privacy of their donors. My view is that if you pay for influence, you should be accountable for it. Nul points.

Civitas did fractionally better, scoring 1. Its website names a small number of the donors to its schools(13), but it would not reveal the amount they had given or the identity of anyone else. The only rightwing thinktank that did well was Reform, which sent me a list of its biggest corporate donors: Lloyds (£50k), Novo Nordisk (£48k), Sky (£42k), General Electric (£41k) and Danone (£40k). Reform lists its other corporate sponsors in its annual review(14), and earns 4 points. If they can do it, why can’t the others?

The progressives were more accountable. Among them, Demos did least well. It sent me a list of its sponsors, but refused to reveal how much they gave. It scores 2.5. The Institute for Public Policy Research listed its donors and, after some stumbling, was able to identify the biggest of them: the European Union (a grant of E800,000) and the Esmee Fairburn Foundation(£86k). It scores 3.5. The New Economics Foundation sent me a list of all its donors and the amount each gave over the past year, earning 4 points. The biggest funders are the Network for Social Change (£173k), the department of health (£124k) and the Aim Foundation (£100k). Compass had already published a full list in its annual report(15). The biggest source by far is the Communication Workers’ Union, which gave it £78k in 2009. Compass gets 5 out of 5.

The picture we see, with the striking exception of Reform, is of secrecy among the rightwing groups, creating a powerful impression that they have something to hide. Shockingly, this absence of accountability – and the influence-peddling it doubtless obscures – does not affect their charitable status.

The funding of these groups should not be a matter of voluntary disclosure. As someone remarked in February 2010, “secret corporate lobbying, like the expenses scandal, goes to the heart of why people are so fed up with politics … it’s time we shone the light of transparency on lobbying in our country and forced our politics to come clean about who is buying power and influence.”(16) Who was this leftwing firebrand? One David Cameron.

I charge that the groups which call themselves free market thinktanks are nothing of the kind. They are public relations agencies, secretly lobbying for the corporations and multi-millionaires who finance them. If they wish to refute this claim, they should disclose their funding. Until then, whenever you hear the term free market thinktank, think of a tank, crushing democracy, driven by big business.

www.monbiot.com

We can all learn from Gwyneth Paltrow

Terence Blacker in The Independent Friday, 9 September 2011





The scavengers who live off the scraps of celebrity scandal will be paying particular attention to the marriage of Gwyneth Paltrow and Chris Martin over the next few weeks. Not only are the couple blessed with talent, looks and success – provocation in itself – but she has just made a statement which has caused considerable outrage in some quarters.





Prepare to be shocked. "The more I live my life, the more I learn not to judge people for what they do," Gwyneth has said, quite openly and without apology. "I think we're all trying to do our best but life is complicated." As if that were not controversial enough, she added: "I know people I respect and admire and look up to who have had extra-marital affairs."



The response to these dangerous and reckless remarks has been predictable. There has been clammy speculation about the state of Paltrow's marriage. Seven years of married life, and suddenly she's relaxed about infidelity. What could be going on there? Then, naturally, there have been gusts of moral disapproval from the media. Famous people who express sane, reasonable views are instinctively mistrusted – we expect our celebrities to be out of touch and entertaining – and sneering reference has been made to Paltrow's "latest flirtation with controversy", not to mention her "superhuman compassion".



Paltrow is, though, making a worthwhile point. It is a very contemporary habit, the need to stand in judgment over every little muddle in which a public figure finds herself or himself and draw sorrowful conclusions from them, as a vicar does in a sermon. Scandal and misadventure have always been part of the media, but the busy drawing of moral lessons, the pious scolding from the sidelines, is something new. Disapproval is to the 21st century what primness was to the Victorians.



Both, to a large extent, are propelled by sexual frustration. Prurience, today as over a century ago, tends to disguise itself as moral concern – we need to know every excitingly shocking little detail, in order to condemn it. When a photograph was published recently of a uniformed American cop having sex with a woman on the hood of her car, it was published around the world – it was funny and played to some well-worn erotic fantasies. The story accompanying the picture, though, was the scandal, the abuse of power, the controversy. The randy cop was quickly fired.



It is worth remembering who is doing the judging on these occasions. Unlike the Victorians, today's wet-lipped moralists are not eminent politicians or churchmen. They are journalists.



Such is the hypocrisy when it comes to public misbehaviour that it is now taken for granted. When MPs were being pilloried for taking liberties with their allowances, the moral outrage was orchestrated by those who belonged to a profession in which, over the previous decades, the large-scale fiddling of expenses was a matter of competitive pride. Nor, for all their shrill moralising when a celebrity is caught in the wrong bed, are those who work in the media famous for their high standards of sobriety or sexual fidelity.



Here, perhaps, is the truth behind the new need to judge. Commentators scold, and readers allow themselves to be whipped into a state of excited disapproval, for reasons of guilt about their own less-than-perfect lives.



As Gwyneth Paltrow says, life can indeed be complicated. Taking the high moral ground is only worthwhile when something truly bad has been done. It is fine to be interested and excited by scandal, but why do we have to condemn quite so much? Since when have we all become so sanctimonious?



Few lives would bear the closest scrutiny day by day. Indeed, in a world more full of temptation and dodgy role-models than ever before, a bit of complication along the way may simply be a sign that you are living it to the full.

The problem with the Anna Hazare plan

By C P Surendran in The Times of India

A most comical anti-corruption opera is being staged all over the country under the leadership of Anna Hazare, who in his moral tyranny is actually beginning to look like Mahatma Gandhi. This itself is a bit of laugh: when a man wants to be someone else eventually transmigration of the soul and nose happens. It only remains for Anna to hold the Dandi March.




But the real reason why this anti-corruption campaign is looking like an over-stretched Johnny Lever joke is that the people largely constituting the movement have happily externalized corruption as if it's an event happening outside themselves.



The fact is that the petite bourgeoisie-auto rickshaw drivers, and constables, if Haryana Police Sangathan support for Jan Lok Pal's bill is any indication, and low paid government officials and assorted elements-have no idea that they are very much part of the corruption. They believe it is a disease outside them, primarily endemic to the government and its institutions, when they are active players in the drama.



The others who are a part of the movement, including the youngsters, who this lookist country swears by, are there for an opportunity to hold candles and chant Sarojini Naidu kind of poems which normally begin: O, deliverer… The youth will hold a candle and even burn a finger from the dripping wax, but when it comes to admission, if an IIT director or an engineering college dean will accept cash for seats, they will gladly part with it.



For one with passing interest in the Lokpal politics, the only major difference in the bills drafted by the government and Anna apart from bringing the PM into the bill's ambit, seems to be that the government wants to set up a separate investigative agency while Anna and his team want an existing investigating agency like the CBI to report to the Lokpal committee. That would eventually mean the Lokpal evolving into a parallel power vortex, and might make Parliament redundant.



In other words, those whom you elected will not be of as much consequence as those self-appointed or government nominated Lokpal committee members. That is a fraught process, and actually might create more unaccountability and corruption.



That is one part of the joke. The other, equally entertaining part has been the Congress-led UPA government's complete and visible bankruptcy of ideas to tackle an agitation outside party structures. Much the same happened before the Emergency when Jayaparakash Naryan led a movement that cut across party lines against the Indira Gandhi led Congress government, which panicked and declared an Emergency.



Anna's movement is mostly apolitical. And the support it has drawn, for all its faults, is an indication how political parties and other democratic institutions have failed to represent people, or inspire faith. Across the world, memberships of political parties are decreasing. Alternate people's groupings with environmental and ethical themes are gaining strength. In Europe and America where democracies are institutionally stronger and fairer than in India, this could be explained as an evolution.



But, in India where fairness woven into the system is at best fraying, when a movement is directed primarily against its institutions and the political party in power as well as the ones in Opposition are fumbling in their response, a movement like this can have dire consequences. Clearly, the parties have failed to represent the people, which is why a moral tyrant like Anna is holding the government to ransom. When institutions fail, individuals take up their role. .And if Anna wins, the nature of Indian politics will change.



It'd be fun to see who were the advisors who landed a wimp like Prime Minister Manmohan Singh into the Lok Pal soup. A party that can't argue its case against a retired army truck driver whose only strength really is a kind of stolid integrity and a talent for skipping meals doesn't deserve to be in power. Power goes to people who love it. Anna Hazare loves nothing more than power.

How to prepare a Public sector firm for Privatisation - the Air India story

Air India, India’s national carrier-turned-cadaver, is waiting for its last rites. When last heard of, the airline had turned in a loss of Rs 7,000 crore in 2010-11, and was investing in an oversized hat to hit the government for yet another bailout masquerading as a turnaround package.




Only, the amounts this time are too staggering for Pranab Mukherjee to agree to without a fight. According to a report in The Times of India, the airline will need equity support of Rs 43,255 crore just to stay afloat over the next 10 years. Mukherjee is hoping to raise that kind of money by selling public sector equity this year. If he agrees to bail out Air India, it’s as good as kissing goodbye to this moolah.



With liabilities of over Rs 47,000 crore, the airline is on the verge of defaulting on its loans. Mukherjee will thus have to chip in with some money willy-nilly – even if he is not asked for the full sum that SBI Caps has suggested as part of its revival plan for the airline. The newspaper says Air India will require Rs 8,372 crore this year itself – Rs 6,600 crore to pay its bills for 2011-12 and Rs 1,772 crore to keep up with loan payments.




But for all this, the airline still won’t be able to make a profit till 2017-18. Air India, it seems, has been fixed – and fixed for good – by former Civil Aviation Minister Praful Patel, who has often been accused by the unions of batting for Air India’s rivals till the ministry was prised away from his grip last January.



When Patel took over as Minister of State for Civil Aviation in 2004, the domestic carrier (then Indian Airlines) was market leader with a 42% share, but slipping. Today, it is No 5 – behind Jet, Kingfisher, IndiGo and SpiceJet – fighting extinction.



Here’s how Praful Patel did it – ruin Air India that is – and there’s nothing his successor Vayalar Ravi can do to rescue it.



First, load it with debt so high that it can never raise its head again. It is now clear the Air India’s financial problems began in 2004 when Praful Patel chaired a meeting of the board in which the airline suddenly inflated its order for new aircraft from 28 to 68 without a revenue plan or even a route-map for deploying the aircraft, says an India Today report.



An airline with revenues of Rs 7,000 crore was being asked to take on a debt of Rs 50,000 crore. Today, it’s losses themselves are Rs 7,000 crore. And the bailout it is seeking is as big as the cost of those 68 aircraft. The government might as well have gifted those birds to Air India.



Second, Patel presented a merger of Air India with Indian Airlines as the panacea for all ills. It is surprising how often ministers suggest mergers when public sector companies head for ruin. When telecom company MTNL was sliding, then Communications Minister Dayanidhi Maran was suggesting a merger with Bharat Sanchar Nigam Ltd. That didn’t happen, but both MTNL and BSNL are in the sick bay anyway. Praful Patel used the losses of Air India and Indian Airlines to push for their merger, claiming there would be cost savings from synergies. Worldwide, mergers usually destroy value. The Air India-IA merger has been the biggest man-made disaster in aviation history – thanks to their varying cultures and employee costs.



Says Gustav Baldauf, former COO of Air India who fell foul of Patel’s successor and had to quit: “The management never resolved the pending human resource (HR) issues related to the merger. I had warned the Chairman-cum-Managing Director and the Aviation Ministry of the consequences of introducing a single code without resolving issues first. But they never listened,” he told Mid-Day.


Third, Patel seemed to be batting for Air India’s rivals. He handed over lucrative routes to private players. Though Air India had no birthright to every lucrative route, Patel’s overnight manoeuvres in this regard suggested that he had a clear conflict of interest by being both Aviation Minister and board member in Air India.




A Tehelka report quotes Capt Mohan Ranganathan, an aviation expert, as saying that the airline handed over “flying rights on lucrative sectors in the Gulf to foreign airlines, including Etihad Airways, Qatar Airways, Air Asia, Singapore Airlines and several others…” One glaring instance of a sudden handover could not have come without Patel’s nod. Tehelka says that in October 2009, the airline sent “letters…to its stations in Kozhikode, Doha and Bahrain stating that it was withdrawing operations on the route” – a route in which the airline was making money hand over fist. Very soon, Jet and Etihad stepped in to fill the gaps, and so did Emirates.



Fourth, Praful Patel’s own airline preferences made it clear who he favoured. According to replies received under the Right to Information Act by one Jagjit Singh, Patel used mostly private airlines. Between June 1, 2009 and July 2, 2010, 26 of the 41 flights he took between Delhi and Mumbai were with Kingfisher. “It is intriguing that the minister who stresses the need for revival of the national carrier himself chooses to ignore it,” said Singh. And this happened just when the Finance Ministry was asking all government employees to use Air India for their official travel to help revive the carrier.




Patel’s haughty reply when asked about this preference of private airlines: “I am the Union Civil Aviation Minister and not the minister in charge for Air India. As a minister, it is not binding upon me to fly only one particular airline. I fly according to my convenience.” But when he ordered so many places for Air India, was he acting as Minister or superboss of the airline?



Fifth, Patel used his clout with Air India often for personal ends. Another RTI query showed that Patel’s kin used the Air India Managing Director’s office to regularly upgrade from economy to business class. Business class is a cost Patel’s family, which is rolling in wealth, can easily afford. So what does this say about Patel’s attitude to the airline?



But is the new Civil Aviation Minister going to reverse the rot set off by Patel?



According to a Financial Express report, the new turnaround plan does not look any more viable than the deadweight Patel cast on Air India by getting it to buy planes it could not afford. The newspaper quotes a Deloitte review of the SBI Caps revival plan which says it’s simply not viable.



Reason: Air India again wants to buy too many aircraft, just like Patel did. “Aviation consultancy Simat Helliesen & Eichner, which carried out a detailed route planning and capacity exercise, has suggested 87 narrow-body aircraft for Air India by 2015, but the carrier has proposed 143, according to Deloitte’s report dated February 11, 2011,” says the newspaper.



Deloitte’s comment: “The only justification that one can have for going in for such capacity expansion can, therefore, be the adoption of a strategy of buying market share through deploying high capacity into the market (with corresponding lower yields and consequent financial implications).”



This means Air India is planning to sink further into losses for years to come.



Over to you, Mr Ravi. Do you want to go down the same path Praful Patel pushed Air India?



The government’s best bet now is to cut its losses. Air India should be privatised or closed down.