When scandal sells.
The Government recently revealed statistics to show that despite the many corporate failures in the UK over the last few years, not one single director of a publicly listed business has ever been imprisoned for failing to spot fraud in their business.
In Business, scandal sells. Over the last few years there has been plenty of material for scandal watchers to feast upon.
Carillion, a construction and outsourcing firm that provided a host of services to the public sector, issued a profit warning in July 2017. Within six months it had collapsed. This was no small matter. Carillion had 43,000 employees, 19,000 of whom were in the UK; the government had to deal with the sudden loss of a major supplier; some companies that had provided goods and services to Carillion were themselves forced into bankruptcy as their bills went unpaid; and there was a hole in the Carillion pension fund that had to be plugged by other, quite blameless, businesses that contributed to the pool underpinning pensions.
Meanwhile, a second scandal was brewing. In October 2018, AIM-quoted Patisserie Holdings, owner of the Patisserie Valerie chain, delivered a shock. The company said it had been “notified of significant and potentially fraudulent accounting irregularities and therefore a potential material misstatement of the company’s accounts.” Within a few months, the company was in administration. There were allegations – as yet to be tested in court – that fictitious sales had been recorded, minutes had been forged to secure overdrafts and invoices for shop refurbishments had been faked.
Just the sort of scandals that provide a rich diet for the financial press, the cases triggered a flurry of headlines, many blaming the firms’ auditors. But the two cases are very different.
At Carillion there was no suggestion of outright fraud. An examination of the company’s financial results would not have sounded alarm bells: operating income appeared to cover interest expenses. But digging a little deeper revealed signs of financial fragility.
The Carillion collapse prompted a joint investigation by two House of Commons committees. The conclusions were damning, finding that:
Carillion’s directors had supported an unsustainable business model, paying more in dividends than the business generated in cash;
- Pension deficits were insufficiently funded;
- Executive pay was based on over-optimistic assumptions;
- The business was given an image of respectability by advisory firms reluctant to speak the truth to Carillion’s directors;
- The government failed to recognise Carillion’s fragility when doling out outsourcing contracts;
- Regulators for pensions and accountancy were too passive; and
In short, this was a company doomed to fail.
For Patisserie Valerie, the fallout continues and there will be more content for the media organisations once the court cases begin.
Post-failure investigation is important: it is not acceptable for auditors to fall short of professional standards. But neither should we rush to judgement that a business failure, a financial misstatement, or even a fraud is necessarily an auditor failure. Starting with the basics, each organisation should ensure that their personnel are trained and competent in spotting the key signs so that more can be done to protect businesses and jobs. Auditors should be trained to be assertive and challenging at the right points, not overly passive or too aggressive. Businesses who want to uphold corporate governance standards should look to ensure that they invest in their training and development of staff to carry out robust investigations and ensure next steps are actioned.