Nils Pratley in The Guardian
Apart from the junior director who tried to speak against the delusion in Carillion’s boardroom, nobody emerges with credit from the two select committees’ post-mortem on the contracting firm. The other directors, led by chairman Philip Green, chief executive Richard Howson and finance director Richard Adam, were directly responsible for the failure because they were either “negligently ignorant of the rotten culture” or complicit in it. But the entire system of checks and balances failed.
The auditors, KPMG, were useless, as was the audit industry’s passive regulator. The government, in the form of the Crown Representative, was asleep. The Pensions Regulator was feeble. City advisers to Carillion were paid to be supine. Big shareholders were not inquisitive. None of those judgments will surprise those who followed the evidence sessions, but the MPs’ report will count for little unless it forces action from government. Three areas are priorities.
First, reform the auditing industry. The public lost faith in auditors when HBOS and Royal Bank of Scotland collapsed without a squeak of warning from the people signing off the accounts. Now there’s Carillion, where the report accuses KMPG, which had the auditing gig for 19 years, of failing to exercise professional scepticism – the basic requirement of the job.
The MPs’ prescription is not original, but is correct. Get the Competition and Markets Authority to look at two specific proposals: a breakup of the big four auditors or a separation of the auditing arms from their consultancy operations.
Concentration in this market has now reached absurd levels – the big four are auditors to 97% of FTSE 350 companies. Carillion perfectly illustrated the closed shop in action. KMPG approved the accounts, Deloitte advised the board on risk management, and EY was consulted on turnaround plans. That left the field clear for PwC to name its price as adviser to the Official Receiver.Quick guide
All you need to know about CarillionShow
A proper shakeup of the industry would probably mean an increase in the cost of audits, but that will be money well spent if it means more competition and higher standards. “KPMG’s long and complacent tenure auditing Carillion was not an isolated failure,” says the report. “It was symptomatic of a market which works for members of the oligopoly but fails the wider economy.” Spot on.
Second, ministers need to understand the risks they take when they outsource work to companies of Carillion’s size. The failed firm had 450 government contracts and the Crown Representative, looking out for taxpayers’ interests, had no insight into how badly things were going wrong. The huge profit warning in July 2017, which marked the beginning of the end, was a complete shock in Whitehall.
The report is short on specific proposals, other than telling ministers to appreciate that “the cheapest bid is not always the best”. But there are good ideas around, and some have even come from the contractors’ side of fence.
Rupert Soames, the chief executive who led the rescue of Serco to prevent an earlier Carillion-style calamity, has suggested a few: open-book accounting so that the Cabinet Office and National Audit Office have the numbers; bank-style “living wills” so that contracts can be handed back to government without huge costs to the public purse; and a code of conduct that, on the supplier’s side, would involve conservative financing, timely payment of subcontractors, and adequately funded pension schemes.
The government is free to demand all that and more. It just requires the penny to drop that, when you’re buying £200bn of goods and services from the private sector each year, you can change the way business is conducted.
The third priority is pensions, since Carillion dumped an £800m liability on the industry lifeboat. The Pensions Regulator’s threats were hollow and its bluff was called, the report says. The directors were allowed to keep paying a dividend to shareholders that was plainly unaffordable.
It’s now too late for excuses or pleas about insufficient powers. The MPs’ hard judgment is that “a tentative and apologetic approach is ingrained” at the regulator and “the current leadership” may not be equipped for cultural change. That sounds like a call for Lesley Titcomb, the chief executive, to go. It would be personally tough on her, since she arrived in 2015, by which time the worst mistakes on Carillion had been made, but she should take the hint. A pensions regulator needs to be feared.
The overall report is impressive – it drips with anger and is strong on detail. It would be disgrace if it fell between the cracks of Brexit. It is essential that the government makes a point-by-point response – starting with the auditors, who escaped from the scene of the banking catastrophe but whose moment in the spotlight is now.
Showing posts with label oligopoly. Show all posts
Showing posts with label oligopoly. Show all posts
Wednesday 16 May 2018
Wednesday 21 March 2018
Should the Big Four accountancy firms be split up?
Natasha Landell-Mills and Jim Peterson in The Financial Times
Yes - Separating audit from consulting would prevent conflicts of interest.
Auditors are failing investors. The situation has become so dire that last week the head of the UK’s accounting watchdog said it was time to consider forcing audit firms to divest their substantial and lucrative consulting work, writes Natasha Landell-Mills.
This shift from the Financial Reporting Council, which opposed the idea six years ago, is welcome. But breaking up the Big Four accountancy firms — PwC, KPMG, EY and Deloitte — can only be a first step. Lasting reform depends on auditors working for shareholders, not management.
Auditors are supposed to underpin trust in financial markets. Major stock markets require listed companies to hire auditors to verify their accounts, providing reassurance to shareholders that material matters have been inspected and their capital is protected. In the UK, auditors must certify that the published numbers give a “true and fair view” of circumstances and income; that they have been prepared in accordance with accounting standards; and that they comply with company law.
But audit is failing to meet investors’ expectations. The failure of Carillion, linked to aggressive accounting, is just the latest high profile example. And this is not just a UK phenomenon. The International Forum of Independent Audit Regulators found that 40 per cent of the audits it inspected were sub-standard.
Multiple market failures need to be addressed. The most obvious problem is that audit quality is invisible to those whom it is intended to benefit: the shareholders. It is difficult to differentiate good and bad audits. Even with the introduction of extended auditor reports in the UK (and starting in 2019 in the US), formulaic notes about audit risks often hide more than they convey.
Even when questions are raised about the quality of audits, shareholders almost always vote to retain auditors, with most receiving at least 95 per cent support. Last year, 97 per cent of Carillion shareholders voted to re-appoint KPMG. Lack of scrutiny creates space for conflicts of interest. Auditors who feel accountable to company executives rather than shareholders will be less likely to challenge them. These conflicts are exacerbated when audit firms also sell other services to management teams, particularly if that consultancy work is more profitable.
The dominance of the Big Four in large company audits is another concern: when large and powerful firms are able to crowd out high quality competitors, the damage is lasting.
Taken together, these failures have resulted in a dysfunctional audit market that needs a broad revamp. Splitting audit from consulting would prevent the most insidious conflict of interest. When non-audit work makes up around 80 per cent of fee income for the Big Four (and just over half of income from audit clients), the influence of this part of the business is huge.
Current limits on consulting work have not eliminated this problem. They are often set too high or can be gamed, while auditors can still be influenced by the hope of winning non-audit work after they relinquish the audit mandate.
There is quite simply no compelling reason why shareholders should accept these conflicts and the resulting risks to audit quality introduced by non-audit work. But other reforms are necessary.
Auditors should provide meaningful disclosures about the risks they uncover. They need to verify that company accounts do not overstate performance and capital and that unrealised profits are disclosed.
Engagement between shareholders and audit committees and auditors should become the norm, not the exception. Shareholders need to scrutinise accounting and audit performance, and use their votes to remove auditors or audit committee directors where performance is substandard.
Finally, the accounting watchdogs must be far more robust on audit quality and impose meaningful sanctions. Even the best intentioned will struggle against a broken system.
No — Lopping off advisory services would hurt performance
The recent spate of large-scale corporate accounting scandals is deeply worrying and raises a familiar question: “Where were the auditors?” But the correct answer does not involve breaking up the four professional services firms that dominate auditing, writes Jim Peterson.
Forcing Deloitte, EY, KPMG and PwC to shed their non-audit businesses would neither add competition nor boost smaller competitors. Lopping off the Big Four’s consulting and advisory services would degrade their performance, weaken them financially, and hamper their ability to meet the needs of their clients and the capital markets.
Although the UK regulator is raising competition concerns, the root problem is global. The growth of the Big Four, operating in more than 100 countries, reflects their multinational clients’ needs for breadth of geographic presence and specialised industry expertise.
The yawning gap in size between the Big Four and their smaller peers has long since grown beyond closure: even the smallest, KPMG, took in $26.4bn in 2017, three times as much as BDO, its next nearest competitor. If pressed, risk managers of the smaller firms admit to lacking the skills and the risk tolerance even to consider bidding to audit a far-flung multinational.
The suggestion that competition and choice would be increased by splitting up the Big Four is doubly unrealistic. Forcing them to spin off their non-auditing business would not create any new auditors. We would continue to see dilemmas like the one faced by BT last year when it set out to replace PwC after a £530m discrepancy was uncovered in the accounts of its Italian division. The UK telecoms group ended up picking KPMG for want of alternatives, even though BT’s chairman had previously been global chairman of KPMG.
Similarly, Japan’s Toshiba tossed EY in favour of PwC in 2016, only to suffer disagreements with the second firm — this led to delays in its financial statements and an eventual qualified audit report. Wish as it might, Toshiba has no further choices, because of business-based conflicts on the part of Deloitte and KPMG.
A split by industry sector — say, assigning auditing of banking and technology to Firm A-1, while manufacturing and energy go to new Firm A-2 — would be no better. Each sector would still be served by just four big firms. If each firm were split in half, the two smaller firms would struggle to amass the expertise, personnel and capital necessary to provide the level of service that big companies expect.
Splitting auditing from advisory work is a solution in search of a problem. Many jurisdictions, including the UK, EU and US, restrict the ability of firms to cross-sell other services to their audit clients. Concerns about inherent conflicts of interest are overblown.
The enthusiasm for cutting up the Big Four also fails to recognise how the world is changing. The rise of artificial intelligence, blockchain and robotics is reshaping the way information is gathered and verified. Auditors will need more — rather than less — expertise.
Warehouse inventories, crop yields and wind farms will soon be surveyed rapidly and comprehensively in ways that could easily displace the tedious and partial sampling done for decades by squadrons of young audit staff. But to take advantage of these advances, auditors need to have the scale, the financial strength and the technical skills to develop and offer them.
These tools will also deliver data that management needs for operational and strategic decision making. If auditors are to be barred from providing this kind of advisory work, the legitimacy of methods that have prevailed since the Victorian era is under threat. Investors will require some sort of audit function, but who would provide it? Splitting up the Big Four will achieve nothing if they fail and are replaced by arms of Amazon and Google.
Auditors should be held accountable for their mistakes, but these issues are too complex for simplistic solutions. Rather than a quick amputation, we need a full-scale re-engineering of the current model with all of its parts.
Yes - Separating audit from consulting would prevent conflicts of interest.
Auditors are failing investors. The situation has become so dire that last week the head of the UK’s accounting watchdog said it was time to consider forcing audit firms to divest their substantial and lucrative consulting work, writes Natasha Landell-Mills.
This shift from the Financial Reporting Council, which opposed the idea six years ago, is welcome. But breaking up the Big Four accountancy firms — PwC, KPMG, EY and Deloitte — can only be a first step. Lasting reform depends on auditors working for shareholders, not management.
Auditors are supposed to underpin trust in financial markets. Major stock markets require listed companies to hire auditors to verify their accounts, providing reassurance to shareholders that material matters have been inspected and their capital is protected. In the UK, auditors must certify that the published numbers give a “true and fair view” of circumstances and income; that they have been prepared in accordance with accounting standards; and that they comply with company law.
But audit is failing to meet investors’ expectations. The failure of Carillion, linked to aggressive accounting, is just the latest high profile example. And this is not just a UK phenomenon. The International Forum of Independent Audit Regulators found that 40 per cent of the audits it inspected were sub-standard.
Multiple market failures need to be addressed. The most obvious problem is that audit quality is invisible to those whom it is intended to benefit: the shareholders. It is difficult to differentiate good and bad audits. Even with the introduction of extended auditor reports in the UK (and starting in 2019 in the US), formulaic notes about audit risks often hide more than they convey.
Even when questions are raised about the quality of audits, shareholders almost always vote to retain auditors, with most receiving at least 95 per cent support. Last year, 97 per cent of Carillion shareholders voted to re-appoint KPMG. Lack of scrutiny creates space for conflicts of interest. Auditors who feel accountable to company executives rather than shareholders will be less likely to challenge them. These conflicts are exacerbated when audit firms also sell other services to management teams, particularly if that consultancy work is more profitable.
The dominance of the Big Four in large company audits is another concern: when large and powerful firms are able to crowd out high quality competitors, the damage is lasting.
Taken together, these failures have resulted in a dysfunctional audit market that needs a broad revamp. Splitting audit from consulting would prevent the most insidious conflict of interest. When non-audit work makes up around 80 per cent of fee income for the Big Four (and just over half of income from audit clients), the influence of this part of the business is huge.
Current limits on consulting work have not eliminated this problem. They are often set too high or can be gamed, while auditors can still be influenced by the hope of winning non-audit work after they relinquish the audit mandate.
There is quite simply no compelling reason why shareholders should accept these conflicts and the resulting risks to audit quality introduced by non-audit work. But other reforms are necessary.
Auditors should provide meaningful disclosures about the risks they uncover. They need to verify that company accounts do not overstate performance and capital and that unrealised profits are disclosed.
Engagement between shareholders and audit committees and auditors should become the norm, not the exception. Shareholders need to scrutinise accounting and audit performance, and use their votes to remove auditors or audit committee directors where performance is substandard.
Finally, the accounting watchdogs must be far more robust on audit quality and impose meaningful sanctions. Even the best intentioned will struggle against a broken system.
No — Lopping off advisory services would hurt performance
The recent spate of large-scale corporate accounting scandals is deeply worrying and raises a familiar question: “Where were the auditors?” But the correct answer does not involve breaking up the four professional services firms that dominate auditing, writes Jim Peterson.
Forcing Deloitte, EY, KPMG and PwC to shed their non-audit businesses would neither add competition nor boost smaller competitors. Lopping off the Big Four’s consulting and advisory services would degrade their performance, weaken them financially, and hamper their ability to meet the needs of their clients and the capital markets.
Although the UK regulator is raising competition concerns, the root problem is global. The growth of the Big Four, operating in more than 100 countries, reflects their multinational clients’ needs for breadth of geographic presence and specialised industry expertise.
The yawning gap in size between the Big Four and their smaller peers has long since grown beyond closure: even the smallest, KPMG, took in $26.4bn in 2017, three times as much as BDO, its next nearest competitor. If pressed, risk managers of the smaller firms admit to lacking the skills and the risk tolerance even to consider bidding to audit a far-flung multinational.
The suggestion that competition and choice would be increased by splitting up the Big Four is doubly unrealistic. Forcing them to spin off their non-auditing business would not create any new auditors. We would continue to see dilemmas like the one faced by BT last year when it set out to replace PwC after a £530m discrepancy was uncovered in the accounts of its Italian division. The UK telecoms group ended up picking KPMG for want of alternatives, even though BT’s chairman had previously been global chairman of KPMG.
Similarly, Japan’s Toshiba tossed EY in favour of PwC in 2016, only to suffer disagreements with the second firm — this led to delays in its financial statements and an eventual qualified audit report. Wish as it might, Toshiba has no further choices, because of business-based conflicts on the part of Deloitte and KPMG.
A split by industry sector — say, assigning auditing of banking and technology to Firm A-1, while manufacturing and energy go to new Firm A-2 — would be no better. Each sector would still be served by just four big firms. If each firm were split in half, the two smaller firms would struggle to amass the expertise, personnel and capital necessary to provide the level of service that big companies expect.
Splitting auditing from advisory work is a solution in search of a problem. Many jurisdictions, including the UK, EU and US, restrict the ability of firms to cross-sell other services to their audit clients. Concerns about inherent conflicts of interest are overblown.
The enthusiasm for cutting up the Big Four also fails to recognise how the world is changing. The rise of artificial intelligence, blockchain and robotics is reshaping the way information is gathered and verified. Auditors will need more — rather than less — expertise.
Warehouse inventories, crop yields and wind farms will soon be surveyed rapidly and comprehensively in ways that could easily displace the tedious and partial sampling done for decades by squadrons of young audit staff. But to take advantage of these advances, auditors need to have the scale, the financial strength and the technical skills to develop and offer them.
These tools will also deliver data that management needs for operational and strategic decision making. If auditors are to be barred from providing this kind of advisory work, the legitimacy of methods that have prevailed since the Victorian era is under threat. Investors will require some sort of audit function, but who would provide it? Splitting up the Big Four will achieve nothing if they fail and are replaced by arms of Amazon and Google.
Auditors should be held accountable for their mistakes, but these issues are too complex for simplistic solutions. Rather than a quick amputation, we need a full-scale re-engineering of the current model with all of its parts.
Friday 27 October 2017
Publicly owned energy minnows take on big six in troubled UK market
Adam Vaughan in The Guardian
A wave of new publicly owned companies is taking on the big six energy suppliers, as local authorities search out new revenue and seek to restore faith in public services and tackle fuel poverty.
Islington council last week launched a not-for-profit energy firm, London’s first municipal operator in more than a century, while Doncaster’s energy company will start early next month.
Portsmouth is also on the verge of becoming the first Conservative-controlled council to launch one, to bring down residents’ bills as well as bringing investment to the city.
The first and best-known publicly owned energy companies, Robin Hood Energy in Nottingham and Bristol Energy, started two years ago. But the growing trend came to the fore this month when Nicola Sturgeon promised to create a Scottish public energy company by 2021.
“No shareholders to worry about. No corporate bonuses to consider. It would give people – particularly those on low incomes – more choice and the option of a supplier whose only job is to secure the lowest price for consumers,” Scotland’s first minister said, in an echo of the marketing used by the councils who have already started their own energy companies.
Sturgeon’s firm will be entering an increasingly crowded space: publicly owned firms include Liverpool’s Leccy, Derby’s Ram, and Leeds’ White Rose. Councils in Sussex are clubbing together to launch Your Energy Sussex latter this year.
The driving forces for these councils stepping into the complex, heavily regulated energy space are largely twofold. One is the need to create a new revenue stream in a time of austerity, as well as rebuilding the public sphere – councils are perhaps most visible to residents when they close libraries and cut other services.
But there is also a political project afoot as well, as Labour-controlled councils such as Nottingham push an agenda that has since been picked up by Jeremy Corbyn during the last election.
There is also genuine concern over fuel poverty, and a hope that local authorities will be more trusted than the usual energy suppliers, that even Theresa May says have ripped customers off.
“It’s about councils trying to provide a trusted and better service for people to switch. We want a challenger model to the big six,” said Labour MP Caroline Flint, whose Doncaster constituency will see the launch of publicly owned Great Northern Energy on 7 November.
The flurry of such firms showed Labour’s manifesto pledge of a publicly owned energy supplier in each region was happening regardless of the party’s failure to win power in June’s snap general election, Flint said.
Tackling the growing amount of households in fuel poverty, which number 2.5 million in England and Wales, is another big motivation.
Steve Battlemuch, chair of the board of Robin Hood Energy and a Labour councillor, said: “Nottingham has a lot of fuel poverty, lot of people on prepayment meters [which people in energy debt are often moved on to]. That was what drove us: coming into the market and driving down prices for the customer.”
Like other public firms, part of his sales pitch is that there are no corporate masters to pay.
“There’s no shareholder bonuses, because there’s no shareholder apart from Nottingham city council. There’s no director bonuses. I had a cupcake on our first anniversary,” he said.
Peter Haigh, managing director of Bristol Energy, said his organisation was more inclusive than private companies, and its physical presence in the city was a big attraction.
“Customers can and do walk in, sign up and pay a bill. That often attracts customers who have never switched, people who can pop in face to face,” he said.
Part of the reason councils are getting into energy is the barriers to market are not as great as they once were.
Mark Coyle, strategy director of Utiligroup, which has provided services to most of the publicly owned energy companies, said: “We’ve been able to lower the barriers for them, without lowering compliance.”
But while the sector appears to be burgeoning, combined these companies are a minnow compared with the blue whales that are the big six firms, which between them account for 80% share of the market.
Bristol Energy is biggest publicly owned energy supplier, with about 110,000 customers; Robin Hood has just over 100,000. Both have created more than 100 jobs locally, but neither has yet recovered their start-up costs.
Moreover, while such firms appear to be proliferating, most are simply rebranding off Robin Hood rather than setting up as fully licensed suppliers which can buy energy on the wholesale market. The approach has its critics.
“Islington are doing a good thing but it’s a shame that they’ve had to go to Nottingham to buy the energy,” said Caroline Russell, a Green party London assembly member.
Sadiq Khan, London’s mayor, has promised to create an energy company for Londoners, but has been slow to deliver.
Last month he was advised by experts to piggyback off an existing supplier, rather than create his own licensed company. While cheaper and quicker to do, it would also mean he had less power and flexibility to offer something genuinely new and different compared with the 50-plus private firms already in the market.
Nigel Cornwall, founder of energy analysts Cornwall Insight, said that while he was supportive of publicly owned energy companies, it was revealing that many councils were opting to ride on Robin Hood’s coat-tails rather than set up their own licensed firm.
“This is high-risk stuff. The sector is complicated. You [the council] probably don’t have the resources. You’ve probably underestimated the costs. And that’s with costs of entry falling dramatically,” he said.
Cornwall said he was also sceptical as to whether the companies would be sustainable and would become a permanent fixture in the market – but that would not stop them trying.
Battlemuch said: “What we need to do is break through into the mass market. That’s what we’re trying to do.”
A wave of new publicly owned companies is taking on the big six energy suppliers, as local authorities search out new revenue and seek to restore faith in public services and tackle fuel poverty.
Islington council last week launched a not-for-profit energy firm, London’s first municipal operator in more than a century, while Doncaster’s energy company will start early next month.
Portsmouth is also on the verge of becoming the first Conservative-controlled council to launch one, to bring down residents’ bills as well as bringing investment to the city.
The first and best-known publicly owned energy companies, Robin Hood Energy in Nottingham and Bristol Energy, started two years ago. But the growing trend came to the fore this month when Nicola Sturgeon promised to create a Scottish public energy company by 2021.
“No shareholders to worry about. No corporate bonuses to consider. It would give people – particularly those on low incomes – more choice and the option of a supplier whose only job is to secure the lowest price for consumers,” Scotland’s first minister said, in an echo of the marketing used by the councils who have already started their own energy companies.
Sturgeon’s firm will be entering an increasingly crowded space: publicly owned firms include Liverpool’s Leccy, Derby’s Ram, and Leeds’ White Rose. Councils in Sussex are clubbing together to launch Your Energy Sussex latter this year.
The driving forces for these councils stepping into the complex, heavily regulated energy space are largely twofold. One is the need to create a new revenue stream in a time of austerity, as well as rebuilding the public sphere – councils are perhaps most visible to residents when they close libraries and cut other services.
But there is also a political project afoot as well, as Labour-controlled councils such as Nottingham push an agenda that has since been picked up by Jeremy Corbyn during the last election.
There is also genuine concern over fuel poverty, and a hope that local authorities will be more trusted than the usual energy suppliers, that even Theresa May says have ripped customers off.
“It’s about councils trying to provide a trusted and better service for people to switch. We want a challenger model to the big six,” said Labour MP Caroline Flint, whose Doncaster constituency will see the launch of publicly owned Great Northern Energy on 7 November.
The flurry of such firms showed Labour’s manifesto pledge of a publicly owned energy supplier in each region was happening regardless of the party’s failure to win power in June’s snap general election, Flint said.
Tackling the growing amount of households in fuel poverty, which number 2.5 million in England and Wales, is another big motivation.
Steve Battlemuch, chair of the board of Robin Hood Energy and a Labour councillor, said: “Nottingham has a lot of fuel poverty, lot of people on prepayment meters [which people in energy debt are often moved on to]. That was what drove us: coming into the market and driving down prices for the customer.”
Like other public firms, part of his sales pitch is that there are no corporate masters to pay.
“There’s no shareholder bonuses, because there’s no shareholder apart from Nottingham city council. There’s no director bonuses. I had a cupcake on our first anniversary,” he said.
Peter Haigh, managing director of Bristol Energy, said his organisation was more inclusive than private companies, and its physical presence in the city was a big attraction.
“Customers can and do walk in, sign up and pay a bill. That often attracts customers who have never switched, people who can pop in face to face,” he said.
Part of the reason councils are getting into energy is the barriers to market are not as great as they once were.
Mark Coyle, strategy director of Utiligroup, which has provided services to most of the publicly owned energy companies, said: “We’ve been able to lower the barriers for them, without lowering compliance.”
But while the sector appears to be burgeoning, combined these companies are a minnow compared with the blue whales that are the big six firms, which between them account for 80% share of the market.
Bristol Energy is biggest publicly owned energy supplier, with about 110,000 customers; Robin Hood has just over 100,000. Both have created more than 100 jobs locally, but neither has yet recovered their start-up costs.
Moreover, while such firms appear to be proliferating, most are simply rebranding off Robin Hood rather than setting up as fully licensed suppliers which can buy energy on the wholesale market. The approach has its critics.
“Islington are doing a good thing but it’s a shame that they’ve had to go to Nottingham to buy the energy,” said Caroline Russell, a Green party London assembly member.
Sadiq Khan, London’s mayor, has promised to create an energy company for Londoners, but has been slow to deliver.
Last month he was advised by experts to piggyback off an existing supplier, rather than create his own licensed company. While cheaper and quicker to do, it would also mean he had less power and flexibility to offer something genuinely new and different compared with the 50-plus private firms already in the market.
Nigel Cornwall, founder of energy analysts Cornwall Insight, said that while he was supportive of publicly owned energy companies, it was revealing that many councils were opting to ride on Robin Hood’s coat-tails rather than set up their own licensed firm.
“This is high-risk stuff. The sector is complicated. You [the council] probably don’t have the resources. You’ve probably underestimated the costs. And that’s with costs of entry falling dramatically,” he said.
Cornwall said he was also sceptical as to whether the companies would be sustainable and would become a permanent fixture in the market – but that would not stop them trying.
Battlemuch said: “What we need to do is break through into the mass market. That’s what we’re trying to do.”
Tuesday 30 September 2014
Awkward questions for Tesco should be answered by its accountants too
Auditors are vital to the financial markets. But when they miss a catastrophe in the offing, they’re not doing their job
So the supermarket that shoved horsemeat in its burgers now admits to sprinkling horse manure on its balance sheet. That quip has been doing the rounds since Tesco confessed last week to exaggerating its profits by £250m, and it strikes at the heart of the scandal. Just as a meat patty is manufactured, so too are a set of accounts. Neither falls from the sky, or gets slung together by a solitary bloke at twilight. They are instead a huge co-production of staff, auxiliaries and quality controllers, and they reflect the culture of the environment in which they are assembled.
Conversely, whoppers as large as the one Tesco has been caught telling won’t suddenly have popped out of the mouths of a mere handful of managers. Profits forecast for the biggest of FTSE 100 retailers will have been chalked up by advisers working to standard company practice, sweated over by executives and signed off at top levels of the company. Yet the result, according to new chief executive, Dave Lewis, is the kind of accounting he hasn’t seen during 27 years in business.
The horsemeat disgrace exposed a systemic dysfunction in capitalism: the abuse of suppliers by all-powerful supermarkets resulting in dinners that families couldn’t trust. Last week’s accounting scandal opens the door on another systemic breakdown: how one of those same giant businesses, struggling to pep up a flagging stock price, produced numbers that the business world couldn’t believe.
For understandable reasons, the press has largely spun this as the latest episode in the downfall of Tesco. Who wouldn’t tell that story? It’s simpler, starker and focuses on a high-street institution – what could be more satisfying than a tale of hubris at one Britain’s last remaining world-leading companies, especially if it allows a moist recollection of former Tesco boss Terry Leahy, one of the country’s dwindling number of business people of international repute.
But then awkward questions arise that force us to pull back the frame. The one that foxes me: where were Tesco’s auditors in all this? PwC is one of the Big Four accountancy firms who between them carry out around 90% of all audits for FTSE 350 companies. The £2.7bn-turnover partnership went over Tesco’s accounts for the 12 months to February this year, and gave the supermarket chain a clean audit in May. Just a few weeks later, on 29 August, Tesco executives issued their now infamous forecast – the one that exaggerated their likely profits by 25%.
You can imagine that in the course of a not-so-balmy summer, one of Europe’s biggest businesses suddenly went off its collective trolley and put out a confected set of figures – which, let me emphasise, were not checked over by its auditors. But consider this: back in May, PwC plainly was not entirely comfortable with the numbers it was signing off for Tesco. It went so far as to note its concern over commercial income – the fees paid by suppliers for Tesco giving their products prominence within their stores, and the income overstated in August by the supermarket chain.
On page 66 of the annual report, the auditors note that “commercial income is material to the income statement and amounts accrued at the year end are judgmental. We focused on this area because of the judgment required in accounting for the commercial income deals and the risk of manipulation of these balances.” In the polite, formulaic world of company reporting, this is a warning klaxon. And yet the auditors then went on to list the measures they’d taken to allay their concerns – and to sign off the numbers.
PwC has been Tesco’s auditor for over 30 years. For that service, Tesco paid PwC £10.4m in the last financial year – plus another £3.6m for other consultancy work. Of the 10 directors on the supermarket’s board (leaving aside the chief executive and the chief financial officer, both of whom are relatively new), two are ex-PwC: Mark Armour, a non-executive director, and Ken Hanna, chair of the company’s own audit committee.
Now imagine yourself as a senior executive at Tesco. The business has never been the same since Leahy left. The slump has dampened consumer spirits, some of the company’s foreign adventures now look ill-judged, and Aldi and Lidl are eyeing up your customers. And your remuneration partly depends on the share price – which is listing, badly. How and when to count commercial income is already one of the greyest of grey areas in accounting. Why wouldn’t you be a bit more “aggressive” in your forecasting?
To be clear, we don’t know that anything like this happened – yet it’s exactly to avoid such suspicions arising that we have auditors. This is why the government demands the vast bulk of limited companies (and hospitals and charities) have their accounts audited.
Just as with credit-rating agencies, auditing is a necessary part of the financial markets – but the auditors are paid by the very companies they are judging. Just as with S&P and Moodys, they form a small but powerful “oligopoly” – what was once the Big Eight shrank to the Big Five and, after the Andersen debacle at Enron, to the Big Four. And just as with the credit-raters, the result is often so unsatisfactory as to be useless.
All those banks that collapsed in the crisis were signed off as perfectly sound by PwC and its fellow auditors. But then, as Jeff Skilling, chief exective of Enron, said in 2004: “Show me one fucking transaction that the accountants and the attorneys didn’t sign off on.”
Nor was that a one-off lapse: in May this year, the regulators at the Financial Reporting Council noted that PwC audits, while generally of “a good standard”, were also too accepting of management fudge. As Prem Sikka, professor of accounting at the University of Essex, argues: “If some used car dealer was engaged in a fraction of the shortcomings, warnings and scams that big accountancy firms have been involved in, he would be put out of business.”
For their part, accountants are often aware of their industry’s shortcomings. For his book Accountants’ Truth: Knowledge and Ethics in the Financial World, Matthew Gill interviewed 20 young accountants at the Big Four firms. He found a bunch of men well aware of the boredom of the audit and of the shortcuts they were forced to make.
Some defended what they did. One told him: “I don’t think there’s anything unprofessional in giving views of facts directed by whoever it should be.” Another described his discomfort at working in his firm’s corporate-finance department and supporting what he described as “immoral” and “borderline corrupt” tax wheezes. But rather than voice his qualms, he simply moved department. Whistleblowing was not for him: “I would have felt I would look slightly ridiculous.”
Read that last sentence and recall that the person who blew the whistle this month on Tesco wasn’t the company’s audit committee or ethics committee – and they don’t appear to be from PwC either. As far as we know, the anonymous whistleblower worked for Tesco’s UK finance director, Carl Rogberg, and their report was at first ignored.
When last week’s scandal broke, Tesco chair Sir Richard Broadbent airily opined: “Things are always unnoticed until they are noticed.” He forgot to mention that that goes double if people are paid to turn a blind eye.
Thursday 23 January 2014
The banking industry's biggest problem isn't bonuses or market share
The only way to make the sector pursue long-term viability instead of short-term greed is to change the rules of the game
‘The fact that the political class, including Miliband himself, cannot even imagine state-owned banks ditching the business model that caused this crisis is a testimony to the power of the financial industry lobby.’ Photograph: Stefan Rousseau/PA
Last Friday, in another of those agenda-setting speeches for which he has rightly become famous, Ed Miliband took on the biggest of what he describes as "the broken markets" in the UK economy – the financial market.
Taking his "cost of living crisis" theme to another level, the Labour leader emphasised that the issue is not just about oligopolistic firms fleecing their customers; it is also about the lack of jobs with decent wages that can support decent standards of living. The problem with the British banking industry, Miliband pointed out, is not just about the concentration of financial power in the personal account market, but also in the business loan market.
According to Miliband's analysis, the dominant banks are not lending enough to small and medium-sized enterprises because they form a cosy oligopoly (controlling 85% of small business lending) that does not want to take any risk; enterprise loans are inherently riskier than mortgage and personal loans. Given that small businesses create most jobs in the UK (as they do in all countries), lack of finance for them is limiting the creation of decent jobs. The solution, he argued, is to introduce more competition into the small business lending market by capping the share of individual banks.
This proposal has caused much controversy. However, one thing is certain: it is going to be slow-acting. It may be years before proper "challenger" banks emerge, given the time necessary for the review by the Competition and Markets Authority – which takes over the roles of the Competition Commission and Office of Fair Trading from April – and for the process of selling branches.
But there is a quicker and simpler solution to this problem. It is for the government to use its ownership of two of the big four banks, RBS and Lloyds, to direct more lending to small businesses. Thanks to the bailout following the 2008 financial crisis, RBS is 81% owned by the government. This means it can tell RBS what to do. It also owns 33% of Lloyds, and while this does not give it a total control over the bank, it is well above what is normally considered a "controlling stake" in an enterprise.
Now, if you can basically tell two of the four largest banks what to do – say, to increase lending to small businesses – why go through the rigmarole of calculating their market shares and forcing them (and the other two) to sell off some of their branches?
The usual refrain is that Westminster cannot make RBS and Lloyds do things differently because, in order to survive, these banks need to behave like other competitors: generating as much profit and paying their staff as much.
This argument may be right if the existing business model of British banks and other financial companies is fine. But it is not. It is a business model that has caused the biggest financial crisis in 70 years and created imbalances and inequalities that threaten the future viability of the British economy. The fact that the political class, including Miliband himself, cannot even imagine state-owned banks ditching such a model is a testimony to the power of the financial industry lobby.
From the day when RBS and Lloyds were bailed out, the Labour government was at pains to emphasise it would run them along the same lines as before nationalisation. The only thing for which Labour and, subsequently, the coalition government have used the government's dominant shareholding position has been to restrain bonuses. But this is really missing the point.
The problem with bonuses in the financial industry is not about their levels – if someone makes a huge contribution to the economy, he or she should be richly rewarded. The main problem is that these bonuses are given to people for doing the wrong things well – things that harm the economy in order to enrich the shareholders, the top managers of banks and other financial firms.
So the real question is how we make banks and other financial firms pursue the right goals, rather than how much people should be paid, whether in bonuses or salaries. And the only way to make them pursue different goals from those they pursue now is to change the rules of the game.
Unfortunately, few regulations have been introduced since the crisis that have materially changed the goals of financial companies. The result has been "business as usual".
All those complex and risky financial products that were at the centre of the 2008 financial crisis – such as mortgage-backed securities, collateralised debt obligations, credit default swaps and other financial derivatives – are back in vogue again.
The credit rating agencies, whose incompetence and cynicism in rating those financial products has become legendary after the crisis, are still operating in the same way.
Thanks to Help to Buy, the mortgage-lending market is nearly back to its old self. Now you can get loans that are 95% equal to the value of the house – not quite the 125% you could get before the crisis, but nearly there.
In the absence of measures to encourage longer-term shareholding – for instance, by granting more votes or tax advantages – short term-oriented shareholders are still reigning supreme, putting pressures on banks to generate short-term profits, whatever the consequences.
The main problem with the British financial industry is not the level of bonus, or even the concentration in the banking sector; it is that the industry is pursuing goals that are detrimental to the long-term economic viability of the country, in the process enriching only a tiny minority and sapping human and financial resources from the rest of the economy.
Unless those goals are changed through better regulation, the industry will remain harmful to the rest of the economy, whatever we do about bonuses and market concentration.
Saturday 18 January 2014
The hijacking of cricket, once again!
Tell the administrators you're watching them
International cricket's top three seem to be planning a hostile takeover of the game. Do you want to stop them?
Jarrod Kimber
January 18, 2014
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The fact that Australia, England and India have formed a cabal to choke the game of cricket is not exactly new. Like a bum with a sandwich board, myself and others have been walking the streets of cricket shouting this message for a long time. During the Champions Trophy I wrote that only the top threein cricket matter. Before that I started making a documentary on the death of Test cricket. And during this Boxing Day Test at the MCG, I was chatting toABC Grandstand about it.
If you follow cricket politicking at all (and I do, so you don't have too), you could see this coming. So it was nice that Sharda Ugra showed that it was not just a conspiracy theory by a few nut jobs. That it was a real takeover of cricket by the greedy and wealthy.
But what does this leaked draft actually mean, and is the ICC financial and commercial committee actually run by giant lizards? I tried to answer a few questions that people had.
In a word, good or bad for Test cricket?
Bad, not just for Tests, but for all international cricket.
Bad, not just for Tests, but for all international cricket.
If there is promotion and relegation in Test cricket, but Australia, England and India can't be relegated, isn't that cheating?
It's not just cheating, it's organised fixing. Any individual who signs off on a regulation like this is corrupting the game, and should be banned by the ICC for their action. They are ensuring the result of the competition before a game is played. The integrity of the game is corrupted as much as by any huge no-ball. They might as well only let other teams use five batsmen, bowl with beach balls and field with sponsored flippers on. As long as the sponsorship money is split unfairly, favouring the stronger nation.
It's not just cheating, it's organised fixing. Any individual who signs off on a regulation like this is corrupting the game, and should be banned by the ICC for their action. They are ensuring the result of the competition before a game is played. The integrity of the game is corrupted as much as by any huge no-ball. They might as well only let other teams use five batsmen, bowl with beach balls and field with sponsored flippers on. As long as the sponsorship money is split unfairly, favouring the stronger nation.
Who are the people involved in this secret dossier for cricket's potential kidnapping?
The names of the people on the committee that the draft came from are Giles Clarke (chairman, ECB), Alan Isaac (ICC president), Dave Richardson (chief executive), N Srinivasan (BCCI), Neil Speight (Associate and Affiliate member, Bermuda Cricket Board), Wally Edwards (CA), Dave Cameron (WICB), Campbell Jamieson (GM, commercial) and Faisal Hasnain (CFO).
The names of the people on the committee that the draft came from are Giles Clarke (chairman, ECB), Alan Isaac (ICC president), Dave Richardson (chief executive), N Srinivasan (BCCI), Neil Speight (Associate and Affiliate member, Bermuda Cricket Board), Wally Edwards (CA), Dave Cameron (WICB), Campbell Jamieson (GM, commercial) and Faisal Hasnain (CFO).
But the big winners, if the draft was implemented, would be Clarke, Srinivasan and Edwards. It is they who will be taking over cricket officially on behalf of their boards. We don't have the details of who the architects of the plan are, but being that these men and their boards get the best deal, it's not a big stretch to believe they were behind it. I doubt the Bermuda chairman acted alone in this.
What did the FTP do? What does FTP stand for and why does it matter?
The FTP is (was?) the Future Tours Programme. It essentially meant that teams would have to play everyone, and not just who they wanted to play with. It was brought in to ensure that teams had a schedule to play each other and ICC tournaments. It helped sell TV rights and aided smaller nations financially by drawing them up against teams with larger markets and on the cricket field through experience against the best teams. It was a flawed but well-meaning system of sharing the wealth and making cricket fairer.
The FTP is (was?) the Future Tours Programme. It essentially meant that teams would have to play everyone, and not just who they wanted to play with. It was brought in to ensure that teams had a schedule to play each other and ICC tournaments. It helped sell TV rights and aided smaller nations financially by drawing them up against teams with larger markets and on the cricket field through experience against the best teams. It was a flawed but well-meaning system of sharing the wealth and making cricket fairer.
Wasn't the FTP ignored?
Occasionally. It was more a nagging aunty than a scary prison guard. I know Australia have played Bangladesh, I just can't remember when. And Bangladesh have never toured India. Things are moved around on a whim quite often, but it at least meant that if something did happen, like Sri Lanka and West Indies cancelling their Test series, they had to come out and say it, not just silently agree never to play again. No FTP makes it all a bit more covert and easier for board members to ruin things without us noticing.
Occasionally. It was more a nagging aunty than a scary prison guard. I know Australia have played Bangladesh, I just can't remember when. And Bangladesh have never toured India. Things are moved around on a whim quite often, but it at least meant that if something did happen, like Sri Lanka and West Indies cancelling their Test series, they had to come out and say it, not just silently agree never to play again. No FTP makes it all a bit more covert and easier for board members to ruin things without us noticing.
| We have no vote in cricket. All we have is our passion, which is what makes the money that gives these men their power | |||
Why does it matter if the big three countries make more money from ICC tournaments and share the ICC top jobs? Don't they already own and run cricket?
Yes, they do. But it matters because cricket isn't limited to three nations, or even ten. There are 106 member nations of the ICC. If this structural upheaval happens, less money and no power will escape this evil cricket cabal. These dirty three will be able to continue to rule cricket forever for their own good. And they'll have the backing of cricket's governing body, which will essentially be them in all but name.
Yes, they do. But it matters because cricket isn't limited to three nations, or even ten. There are 106 member nations of the ICC. If this structural upheaval happens, less money and no power will escape this evil cricket cabal. These dirty three will be able to continue to rule cricket forever for their own good. And they'll have the backing of cricket's governing body, which will essentially be them in all but name.
Will cricket's best interests really be looked after by these three nations?
One recently got involved with a fraudulent crook; the second stopped players picking who they wanted to represent them at the ICC level; and the final one wanted all the other nations locked out of the World Cup.
One recently got involved with a fraudulent crook; the second stopped players picking who they wanted to represent them at the ICC level; and the final one wanted all the other nations locked out of the World Cup.
Isn't the current ICC set-up terrible anyway?
If by that you mean there are no votes at ICC boardrooms, that it's run by the ten Test-playing boards who are all out for their own good and that India have all the financial muscle, then yes. The Woolf Report, an independent evaluation of the ICC (that the boards never wanted, and of which they ignored all but the bits that helped them keep their stranglehold), suggested that cricket needed to be independently run, instead of by the member boards. But at least the current set-up, as pointless and ignored as it is, gave ten nations a say.
If by that you mean there are no votes at ICC boardrooms, that it's run by the ten Test-playing boards who are all out for their own good and that India have all the financial muscle, then yes. The Woolf Report, an independent evaluation of the ICC (that the boards never wanted, and of which they ignored all but the bits that helped them keep their stranglehold), suggested that cricket needed to be independently run, instead of by the member boards. But at least the current set-up, as pointless and ignored as it is, gave ten nations a say.
Sport is a business, and this is just a business decision, isn't it?
It is a business decision. A bad one. A short-term one. Like most decisions made by cricket officials, it follows the money where it is right now. It doesn't look ahead. It doesn't grow the game or improve it. It picks cricket up by its underwear and takes what is in its pocket.
It is a business decision. A bad one. A short-term one. Like most decisions made by cricket officials, it follows the money where it is right now. It doesn't look ahead. It doesn't grow the game or improve it. It picks cricket up by its underwear and takes what is in its pocket.
Surprisingly, most billion-dollar businesses aren't run by unpaid men who face absolutely no consequence if they completely stuff up the business. Who would have thought a billion-dollar business run by amateurs with no independent management could be taken over so easily?
Should Bangladesh prepare for a five-Test match tour of Australia, England or India shortly?
No.
No.
Which Full Members outside the trio will be playing Test cricket by 2020?
It is impossible to tell. But this is not a move to lock in the future of the current Test-playing nations. It is a move to lock in the future of three of them. The rest can go to hell, and by hell, I mean more Champions Trophy tournaments.
It is impossible to tell. But this is not a move to lock in the future of the current Test-playing nations. It is a move to lock in the future of three of them. The rest can go to hell, and by hell, I mean more Champions Trophy tournaments.
I'm from outside the cricket cabal but don't really like Test cricket. Why should I care?
Because the FTP and ICC restructuring isn't just about Tests. It's about stopping your country from getting money. It's about ensuring through financial means that while three countries will have every single advantage, the others will have to live on far less. Money doesn't guarantee success. But it certainly helps in sport.
Because the FTP and ICC restructuring isn't just about Tests. It's about stopping your country from getting money. It's about ensuring through financial means that while three countries will have every single advantage, the others will have to live on far less. Money doesn't guarantee success. But it certainly helps in sport.
I'm from inside the cabal. Why should I care about the other nations?
Maybe you shouldn't. You'll have all the IPL, Big Bash and Ashes you can eat. But if the other seven teams stop playing Test cricket, or don't play enough to make it relevant, you're going to get pretty damn bored pretty damn quickly. And while you may only watch for your own players, do you really want to live in a world that involves less Sri Lankan mystery spin, New Zealand pluckiness, Misbah-ul-Haq, and the current best Test team on earth?
Maybe you shouldn't. You'll have all the IPL, Big Bash and Ashes you can eat. But if the other seven teams stop playing Test cricket, or don't play enough to make it relevant, you're going to get pretty damn bored pretty damn quickly. And while you may only watch for your own players, do you really want to live in a world that involves less Sri Lankan mystery spin, New Zealand pluckiness, Misbah-ul-Haq, and the current best Test team on earth?
What will happen to the non-Test playing nations?
Not much will actually change for them. Life wasn't exactly free beer and endless casual sexual encounters before. If anything, now they have seven new friends who also have no power.
Not much will actually change for them. Life wasn't exactly free beer and endless casual sexual encounters before. If anything, now they have seven new friends who also have no power.
Can saner people in the future undo this mess?
Yes, probably. Even the old veto was eventually taken away from the ICC. Things can change. If the chairmen of the three cricket boards were to change, it could change very quickly. There is also little doubt that at least one of Clarke, Srinivasan and Edwards wants to eventually run the ICC once the main job there is made more powerful. Which means this reign of bullying and grabbing for power may not end anytime soon.
Yes, probably. Even the old veto was eventually taken away from the ICC. Things can change. If the chairmen of the three cricket boards were to change, it could change very quickly. There is also little doubt that at least one of Clarke, Srinivasan and Edwards wants to eventually run the ICC once the main job there is made more powerful. Which means this reign of bullying and grabbing for power may not end anytime soon.
Should these three men step down?
Yes. Anyone who agreed with this draft, whether it was their idea or not, should leave cricket immediately. They won't, obviously. But they should.
Yes. Anyone who agreed with this draft, whether it was their idea or not, should leave cricket immediately. They won't, obviously. But they should.
Is there any light at the end of the tunnel?
Someone leaked this draft. Someone who saw it realised that cricket fans wouldn't like this, and instead of it being announced through an ICC press release, it was blurted out before they had a chance to lock it in. In fact, there are many good people working in cricket all around the world. They don't like this situation any more than we do. Hopefully more of them will step forward with details. That gives us a chance.
Someone leaked this draft. Someone who saw it realised that cricket fans wouldn't like this, and instead of it being announced through an ICC press release, it was blurted out before they had a chance to lock it in. In fact, there are many good people working in cricket all around the world. They don't like this situation any more than we do. Hopefully more of them will step forward with details. That gives us a chance.
What can I do?
Contact them. Don't be rude, don't abuse the people who are answering the emails, calls or letters, but contact them. Tell them what you think of all this. CA can be contacted here, the ECB here, the BCCI here. We have no vote in cricket. All we have is our passion, which is what makes the money that gives these men their power.
Contact them. Don't be rude, don't abuse the people who are answering the emails, calls or letters, but contact them. Tell them what you think of all this. CA can be contacted here, the ECB here, the BCCI here. We have no vote in cricket. All we have is our passion, which is what makes the money that gives these men their power.
They are banking on you not knowing or caring about any of this. Giles Clarke regularly tells young cricket writers to stop writing about administration because it's boring and fans don't care about it. What this does is allow cricket's most important men to run the game while no one is watching. Show them you're watching.
If you have time to complain about a shocking DRS decision or a terrible cover drive, surely you have time to send an email to the men running the game. Show them you care. Tell them what you think. You have no vote in cricket's future. But you do have the contact pages.
Friday 21 June 2013
Our banks are not merely out of control. They're beyond control
Jailing reckless bankers is a dangerously incomplete solution. The market is bust. Institutions that are too big to fail are too big to exist
'The banking system is highly dysfunctional, deeply entrenched, and enormously abusive, both to its own workers and the society it operates in.' Photograph: Adrian Dennis/AFP/Getty
Seeing the British establishment struggle with the financial sector is like watching an alcoholic who still resists the idea that something drastic needs to happen for him to turn his life around. Until 2008 there was denial over what finance had become. When a series of bank failures made this impossible, there was widespread anger, leading to the public humiliation of symbolic figures. But the scandals kept coming, and so we entered stage three – what therapists call "bargaining". A broad section of the political class now recognises the need for change but remains unable to see the necessity of a fundamental overhaul. Instead it offers fixes and patches, from tiny increases in leverage ratios tobonus clawbacks and "electrified ring fences".
Today's report by the parliamentary commission on banking standards (to which I gave evidence) is a perfect example of this tendency to fight the symptoms while keeping the dysfunctional system itself intact. The commission, set up after last year's Libor scandal, identifies all the structural problems and nails the fundamental flaw in finance today: "Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility." Indeed, as they like to say in the City, running a mega-bank these days is like "Catholicism without a hell", or "playing russian roulette with someone else's head".
In response, the commission proposes jailing reckless bankers. Restoring the link between risk, reward and responsibility is a crucial step towards a robust and stable financial sector. But the report's focus on individual responsibility is also dangerously incomplete because it implies that the sector is merely out of control. This plays into the narrative that things can be fixed by tweaking rules and realigning incentives; in other words, by bargaining.
In reality the financial sector is not out of control. It's beyond control. During the past two years I have interviewed almost 200 people working in finance in London: "front office" bankers with telephone-number bonuses as well as those in "risk and compliance" who are meant to stop them being reckless. I have also spoken to many internal and external accountants, lawyers and consultants.
The picture emerging from those interviews is of big banks not as coherent units run by top bankers who know what they are doing. Instead these banks seem, in the words of Manchester University anthropologist Karel Williams, "loose federations of money-making franchises". One risk analyst talked about her bank as "a nation engaged in perpetual civil war", while a trader said, "You have to understand, it's us against the bank."
I could give 50 similar quotes. Taken together, they leave but one conclusion: employees at the big banks themselves do not believe their top people know what's going on; the big banks have simply become too complex and too big to manage. If this is true, the solution is not so much to jail the top bankers when something goes wrong, it is to break up the banks into manageable parts. But the British establishment still seems incapable of accepting the notion that a bank that is too big to fail or manage is a also bank that is too big to exist.
The same seems to apply to the need to restore market forces in the financial sector: the second source of structural dysfunctionality. Imagine a restaurant had served up product as toxic as that which big banks, credit rating agencies and accountancy firms were churning out until 2008. You would expect that restaurant to have closed. You would also expect new restaurants to have opened up in the area. This is how a free market should work: competition drives out bad practices.
But where are the new credit-rating agencies, accountancy firms or big banks? Even worse, not only are there just four major accountancy firms, they are also financially dependent on the very banks they are supposed to audit critically. It's the same with thethree credit-rating agencies dominating the market.
And it gets worse. Imagine that a restaurant in your neighbourhood made the kind of money paid to top employees in banking, credit-rating and accountancy firms. You'd expect people rushing to open more restaurants, and with that increased competition you'd expect wages to come down. Again, this is how competition works. There are thousands and thousands of young graduates aching to get into investment banking, so no shortage of prospective chefs. So where are the new players in high finance?
The reality is that global high finance is de facto a set of interlocking cartels that divide the market among themselves and use their advantages to keep out competitors. Cartels can extract huge premiums over what would be normal profits in a functioning market, and part of those profits go to keeping the cartel intact: huge PR efforts, a permanent recruiting circus drawing in top academic talent; clever sponsoring of, say, an ambitious politician's cycling scheme; vast lobbying efforts behind the scenes; and highly lucrative second careers for ex-politicians. There is also plenty of money to offer talented regulators three or four times their salary.
Capitalists have an expression for this, and it's "market failure". Here is the source of so many of the perversities in modern finance, and the solution is not only to denounce those who can't resist its temptations, it's to take away those temptations. That probably means smaller banks, smaller and independent accountancy firms and credit-rating agencies, simpler financial products, and much higher capital requirements.
Before studying bankers I spent many years researching Islam and Muslims. I set out with images in my mind of angry bearded men burning American flags, but as the years went by I became more and more optimistic: beyond the frightening rhetoric and sensationalist television footage, ordinary Muslim people go about their day like all other human beings. The problem of radical Islam is smaller and more containable than Islamophobes believe.
With bankers I have experienced an opposite trajectory. I started with the reassuring images in my mind of well-dressed bankers and their lobbyists; surely at some basic level these people knew what they were doing? But after two years I feel myself becoming deeply pessimistic and genuinely terrified. This system is highly dysfunctional, deeply entrenched, and enormously abusive, both to its own workers and the society it operates in. The problem really is exactly as bad as the "banker bashers" believe.
Wednesday 7 March 2012
It's David Cameron that's anti-business
Campaigners against business abuse believe in wealth creation, not corporate abuse of so-called free markets
David Cameron has condemned 'anti-business snobbery'. Photograph: Pool/Reuters
David Cameron will use today's speech to the Business in the Community charity to warn that "we've heard some dangerous rhetoric creep into our national debate that wealth creation is somehow antisocial, that people in business are out for themselves".
Cameron's on dodgy ground here. First, he's flip-flopping, which is amusing to see when Labour has opened a clear lead on this issue. But more important, he's completely missing the point.
The problems that those of us who campaign against business abuse have are that there aren't free markets, and as such wealth creation is not taking place but has been replaced by corporate abuse and that is not socially progressive and has instead proved to be massively socially destructive.
Let me explain. When Cameron refers to business leaders he's invariably talking about the leaders of big business. All, just about without exception, are monopolists or oligopolists. They exploit markets to make excessive profits at cost to consumers. They use those excessive profits to pay themselves vastly inflated sums. That's not wealth creation – that's rent-seeking behaviour that is straightforwardly abusive.
In fact, it's just an act of redistribution, but from the 99% to the 1%. We object to that. We demand information so we can appraise what's going on so it can be stopped. That's one of the reasons for demanding country-by-country reporting – which Cameron and the Tories have been cool about. Cameron has shown himself to be on the side of abuse as a result.
And those big business leaders exploit their position to avoid tax using tax havens. Cameron and the Tories are encouraging that. First they're doing it by passing new legislation that is going to positively encourage large companies (and only large companies, mind: smaller ones are excluded) to set up their treasury functions outside the UK in future and pay just 5.75% tax on them as a result.
Second, while Labour strongly supported country-by-country reporting that would require companies to disclose just what profits they made in tax havens and other countries, and where they do or don't pay their tax, the Tories have gone out of their way to support proposals from big accountants like PWC that do just the opposite because their proposals would ignore all places where no tax was paid – like tax havens. To break monopoly power and rent-seeking behaviour that exploits tax loopholes by exposing it would support wealth creation rather than wealth abuse, but Cameron isn't taking the steps to support that wealth creation. He seems to prefer the continuing secrecy that has supported the abuse.
And there are also aren't free markets because government won't provide the regulation to make sure all businesses comply with regulation or pay their taxes, as I've shown. So there's an unlevel playing field. That's a profoundly anti-business policy on the part of the Tories.
The result is that Cameron's policies encourage shifting of profits to the greedy, the monopolist, the abuser of the consumer, those who ignore regulation and those who are fraudulent. That's not socially progressive. That's socially harmful.
That's why we object to his policies. And whatever the story, while he does not walk the walk, those campaigners like the Tax Justice Network – who believe that being pro-business means being pro-transparency and accountability, being pro-everyone paying their tax and being anti-market abuse measures like tax havens and opacity – will continue to pursue their arguments. Because they're the real pro-wealth creators and real pro-free marketeers, when free means people have the information they need to make proper decisions freely available to them – which is the pre-condition of free markets as anyone who has done some training in economics knows.
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