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English Pages 174 Year 2018
(1D
The Investic:. Journalist’s (I
—_,
Company Accounts by Raj Bairoliya Published by the Centre for Investigative Journalism with the support of the Lorana Sullivan Foundation
fre The Investigative Journalist’s Guide to
‘Company Accounts by Raj Bairoliya
Published by the Centre for Investigative Journalism First edition published 2014
© 2018 Raj Bairoliya The moral rights of the author have been asserted.
This guide is aimed at investigative journalists who do not work day-to-day with financial matters. By necessity many complex points have been simplified to illustrate accounting topics of potential journalistic interest. Throughout this guide examples have been drawn from published accounts and other publicly available information and commented on by the author. For the avoidance of doubt, the inclusion of a person, company or entity as an example or illustration does not imply any allegation of wrongdoing. This guide must not be copied in part or in whole without the express
written permission of the author. The author does not accept any liability whatsoever for any use that is made of the information provided herein. From 2015 a major new Financial Reporting Standard consolidated thousands of pages of disparate rules, guidance and standards developed ina piecemeal fashion over the years into a single 335-page document.
Many familiar terms, such as Profit & Loss Account, Balance Sheet, and Stock, gave way to more modern terms. Accounting Standards are also being
more closely aligned to the International Financial Reporting Standards (“IFRS”). This guide mostly uses the familiar terms and, where necessary, the new terms. Appendix One lists the main
changes.
Contents
Acknowledgements Introduction Glossary of Accounting Terms
4 5
8
How to Get the Best from this Guide Chapter One: The World of Business
20
Chapter Two: What is a Profit and Loss Account?
38
Chapter Three: Understanding a Balance Sheet
46
Chapter Four: How to Read the Cash Flow Statement
63
Chapter Five: Notes to the Accounts
68
Chapter Six: Auditors and the Audit Report 107 Chapter Seven: Why Directors Cook the Books
122
Chapter Eight: What Happens When Companies Fail 134
Chapter Nine: Finding Clues in Abridged or Abbreviated Accounts
141
Chapter Ten: Recap 150
Appendix One: Financial Reporting Standard 102 Terms 160 Appendix Two: Sample P&L, Balance Sheet and Cash Flow Statement 161 Appendix Three: What Company Data Can Be Found Where 164
Appendix Four: An Offshore Guide 169
Acknowledgements The initial encouragement for this guide came from an investigative journalist Khadija Sharife, a former commissioning editor at the Forum for African Investigative Reporters (FAIR), who attended a training seminar onon illicit finance and asset recovery in London. That training course was organised by the Tax Justice Network and the Centre for InvestigativeJcJournalism
(CIJ) in
2013 and was part ofa series of training seminars being organised on financial
secrecy and corruption, aimed at practising journalists who have an interest in investigating businesses and the flow of money.
My thanks to Jeffrey Katz and corporate investigations company Bishop International Limited (www.bishop-group.com) for providing the offshore registration data in Appendix Four.
Introduction carn
Thank you for buying this guide. A little history is in order. Some fifteen years ago, I was complaining to my friend Michael Gillard about the standard of financial investigative journalism in the UK — it was a matter of serious concern to me as I made my living from
investigating wrongdoing. If journalists aren’t exposing wrongdoing, I can’t be investigating it. Michael suggested that rather than complaining, I should do something. This developed into a course specially designed for journalists
and researchers provided by the Centre for Investigative Journalism (CIJ). We have been presenting that course since 2003. I was often asked if there was a suitable book aimed at investigative journalists — I was not aware of one. So, this is the result.
This guide is definitely not for anyone who knows anything about accounting and the world of finance. It is aimed at complete beginners. If you are an experienced financial journalist,,0or worse still, an accountant, you are unlikely to derive any benefit. By necessity I shall present many complex ideas in a simple and non-technical manner. Like any profession, accountancy has its fair share of jargon and unnecessarily complex terminology. However,
unlike medicine, it uses many common sounding words that often have a
very technical meaning. So who is this guide for? It is primarily for investigative journalists, but also those who need to make sense of a set of company accounts or to obtain an overview of a business in order to ask “on-the-money” questions. To do this at an expert level is difficult, if not impossible, without years of specialist
rounts : to Companyif Acco Journalists $ Guide i
i
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i
Investigatiy-¢
you that it is However, I want to relatively training and experience. persuade of a know what to obtain enough working straightforward know when and its accounts, and to Atte a the company about to ask questions answers. over your eyes by the wool is being pulled at the It depends on why you are What are those questions? looking not even pick up aa set of its accounts. Nobody, accountants, company and in news? Is it for a very good reason. Is the company accounts other than the Do the have Has it won a big an important local employer? directors contract? raised about its activities? Are there questions being political connections? that raise questions as to its credibility? Are Is the company making claims of a complex web? Despite there a number of related companies forming part does it pay little or no tax? being wildly successful, whether the company is making In all of these cases the questions include liabilities and is generating cash. What a profit or loss, has more assets than what is hiding behind the is revealed by the small print in the accounts, numbers, and who is in charge? This guide will seek to demystify company accounts so that you should be able to answer all of these questions and find out where the real story is in
howe
a set of company accounts, even
if they run into hundreds of pages, without
drowning in the detail. Swimming in it, but hopefully not drowning! I will deal essentially with company accounts as produced by UK registered — companies or those quoted on the London Stock Exchange (LSE) companies that play by the rules set down by the Companies Act 2006, the LSE listing
requirements and UK accountancy regulator's
UKGAAP (Generally Accepted
Accounting Principles). Company accounts around the world are produced in a similar fashion, so once you understand a set of UK company accounts you can apply that understanding to foreign
company accounts. Many accounting
concepts and presentations are universal. Only the amount of disclosure may differ.
I will also concentrate on trading companies rather than banks, insurance or investment companies and mining or oil companies. The accounts of these types of companies are in many ways similar to those of trading companies that make or sell goods or services. But there are certain essential differences and complexities for which a journalist would need to seek specialist advice from those knowledgeable about that particular industry, such as investment
Introduction
analysts or commentators. So what skills do you need? You will need some appreciation for commerce
—
how simple businesses
such as a corner shop or a market trader work. You certainly don’t need to be a mathematician or statistician. As you
will see later, accounting is mainly about words and often aa little sleight of hand- something most journalists are good at! But you will need to be comfortable with numbers and not glaze over when they appear. Numbers are like a foreign language. It is difficult to start but the more conversant you become, the easier they become.
This is not “company accounts for dummies”. Journalists should be better than that. It is not simple. There is no easy way. However, it can be done. I hope this guide is indeed helpful in demystifying company accounts. If you have any comments or suggestions you are welcome to email me at the address below.
A number of people have contributed extensively to this guide becoming a reality rather than just remaining an unanswered request from journalists
attending my courses. I am particularly indebted to Michael Gillard for helping to make it happen. Many thanks to Juliet Ferguson and Minal Da Gama Rose for ensuring that everything was on track and ready in time for the 2018
CIJ Summer Conference. Finally, thanks too to friends and family who have read drafts and offered corrections and suggestions. Was it foolish for a man of numbers to offer words of wisdom to masters
of words? Time will tell.
Raj Bairoliya [email protected]
June 2018
8
Terms Glossary of Accounting ee ita shady Fa
to be familiar below are the terms The accounting terms provided you need of company accounts or Financial Statements, with while looking at a set You probably know many of them already, Think of it as the basic vocabulary. term means, please review the terms a but if you are not sure what specific the guide. Please bear in mind that these below before diving into the rest of rather than technical definitions and are are “journalist friendly” definitions
designed to cut through the accounting jargon.
Abridged (formerly Abbreviated), Accounts “Micro” and “Small” UK
Loss Account (P&L), they can file a companies do not have to file a Profit & less detailed Balance Sheet and fewer Notes (see Chapter 9). Accounting Policles The first Note in the Accounts. Rules of the game. The basis for how the numbers have been calculated. This is where to spot “aggressive” accounting that works the system to make numbers look better. Should answer when “a sale is a sale” and
highlight judgement
issues,
Accruals Amounts added to the creditors at the year-end in respect of goods/services received but not yet invoiced. Frequently abused. Also see Prepayments. Accrued Income This is income that the company thinks it has earned in accordance with its accounting policy but not yet invoiced. Can be manipulated easily. If the revenue figure is cooked, parts of it are likely to be sitting here. of Amapét
Opposite
ar |
number
of years, have a significant
r
Deferred Income. lation Spreading the cost of an asset over a
Results in an annual charge against revenue. The rate can impact on profits.
Glossar of Accounting Terms
Annual Accounts Companics produce annually audited accounts showing their trading results and financial health. Consists of Directors’ Report, Audit Report, P&L, Balance Sheet, Cash Flow, Notes. UK Companies have to file them at Companies House. Annual Report Provided by directors to shareholders to go with the
Annual Accounts. Contains statutory information such as directors’ sharcholdings, political donations and other good stuff, But with listed companies there is often more heat than light, showing what directors want sharcholders to focus on. Annual Accounts are in the unexciting second part.
Assets What the company owns and is owed. Assoclate Company CompanyBBis an Associate of CompanyAA if A holds more than 20% but less than 50% of Share Capital of B or exerts “significant influence” on Company B.
Audit Opinion Statement legally required with every set of audited accounts stating that the numbers add up and give the legendary “true & fair view” that all necessary information has been provided by the directors and comply with the Companies Act 2006. Auditors Accountants technically appointed by shareholders to opine whether the Accounts produced by the management fairly represent reality. In practice, they are appointed by management and rubber-stamped by the shareholders.
Audit Report Non “Small” companies must have an annual Audit where the auditor certifies that “Accounts showaa true & fair view and comply with the Companies Act”. 99.9% of Audit Reports are of this type. Others are “Qualified” — a warning sign that all is not well. Balance Sheet or Statement of Financial Position Snapshot of
everything a company owns minus everything it owes on one day (the financial year-end date) — not the day before or the day after. Often “window dressed” (see below).
Borrowings Loans or overdrafts from banks, other financial institutions or individuals including directors, plus bonds issued to investors. Called Up Share Capital or Equity Amount invested by the owners of the company in shares. Same as issued capital. Shares have a “par” or face value, which is usually 1p to £1. Shares can be (and usually are) issued at
Guide to Company Accounts The Investigative Journalists'’s
to raise money for the more than par. Shares are issued company to fun di ls for shares when first issued goes to the operations. Money Company. It jg that when shares are bought on the Stock understand to important Market
it does not affect the Share Capital.
Capital Redemption Reserve If company buys back its own shares the nominal value of the shares purchased must be put into this a
reserve,
Cash Flow Change in company’s cash position from the previoys year by calculating money in and money out. Increasing sales but decreasing cash flow is a warning sign.
cumulative
summary showing Teasons Cash Flow Statement Annual for money in and money out of the company. Shows how much cash was to it. Important to check generated during the year and what happened whether sales have been converted into cash. Large disproportionate increases in Stocks, debtors or creditors are warning signs.
Chairman's Report Public companies often include a “Chairman's Report”. Since this is voluntary information, it does not have to be checked by the auditors. This report is often used to present a rose-tinted view of the company’s prospects. Think of it as an advertorial focusing on the positive. Companies House Source of information on all UK Companies and Limited Liability Partnerships (LLPs). Every UK Company/LLP has to file annual Accounts and changes in details of directors and shareholdings.
Consolidated Accounts Produced for a Group (where one company owns other companies (subsidiaries]) combining all their individual accounts so that the overall performance of the Group is seen. To avoid double counting, any transactions within the group are excluded so as to show only the trading with third parties.
Contingent Liabilities Potential liabilities which the company believes will not arise but if the Directors’ belief is proved wrong, could result in “material” payments. Most commonly unexpected outcome of legal actions. These potential liabilities are not included on the Balance Sheet. Always of interest to journalists.
Cost of Sales (COS) The costs associated with producing items or manufacturing company this is materials, labour and factory overhead. For aa retail business, it is the purchase price of the goods that it sells to customers, For a service company, it is the direct cost of
Services sold. For a
Glossary of Accounting Terms
providing the services. Creditors or Trade Payables Those to whom the company owes money, e.g. suppliers, employees, banks, lessors, landlords, taxman, councils.
A creditor is a liability in the books of the company. Current Assets Assets that arc likely to be turned into cash within
12
e.g. cash, Stock, trade debtors. Current Liabilities Amounts which must be paid to creditors within
months
—
12 months.
Current Taxation Amount of Corporation Tax liability/refund due for the financial year. Not the same as Corporation Tax rate x Profits Before
Tax due to various allowances and adjustments. Debtors or Trade Receivables Those who owe the company money. Customers, borrowers, other group companies. books of the company.
A debtor is an asset in the
Deferred Income/Revenue Amounts invoiced but not yet earned. Receipts in advance ~ for example, football club season tickets or a publisher receiving a year’s magazine subscription in advance. Deferred income is part of creditors/liabilities section of the Balance Sheet. Companies cooking their books may pretend that the income has already been earned.
Deferred Taxation Amount of Corporation Tax due or receivable which has been postponed due to the differences in accounting and tax treatments. Often due to differences in depreciation and capital allowances. Directors (Executive) Those who are in charge of running the company, usually full-time. In very small companies they are often the same as shareholders (owner managers). In listed companies they are professional managers nominated by the Board of Directors and elected by the shareholders.
Directors (Non-executive) Experienced businessmen or people with particular skills (e.g. experience of politics or government) who are appointed by the Board to provide a wide range of experience and counsel to Executive directors. Also to ensure that the Board functions as a Board
and is not dominated by one executive. They have no executive or active role in running the company. Dismissed by the Lonrho tycoon “Tiny” Rowland as “Baubles on a Christmas tree”.
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A Arevjew of the year by the directors. Usually quite Directors’ ‘Report auditors must check that anve been audited, ha short . | f } ye accountSs Accoul nts Als Os ec hait mans Rep ort the with istent nformatio is con This decided by share paid to shareholders. Dividend Amount per cash available at year-end. If funded and on ds directors and depen ; profits Most technology in reserves, no +a good sign. from past profits held & as a % par value 25% not pay dividends. Described of companies do would be 5p/share. See also Yield. dividend on £1 share each share: Profit After Tax (PAT) earned Earnings Per Share (EPS) for of shares during the year. This measure PAT divided by average number — all listed companies aka “The Number”, drives the stock market price of and Amortisation. EBITDA Earnings Before Interest, Tax, Depreciation and technology Often a measure of earnings used by start-up companies not make profits if they include above items. companies because they do which due to the size or Exceptional Items Almost invariably expenses view. Companies nature need to be shown separately to give a “true & fair” Rep
a
s
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12
often use this category to invite the reader to ignore “one-off” expenses.
Financial Statements Second half of the Annual Report. Financial statements comprise the Profit & Loss Account, Balance Sheet, Cash Flow Statement and the explanatory Notes. The audit report will usually refer to the pages that comprise the Financial Statements. Companies include an “advertorial” and other information in front of the Financial Statements in
the “Annual Report” or “Annual Accounts” they send out.
Fixed Charge Lenders often take a “Charge” on a Fixed Asset. This if the company is unable to pay the debt, the lender can sell
means that
the asset to recover its loan. In an insolvency, the good assets are usually taken by the banks with charges, leaving “unsecured” creditors with little.
A charge is registered at Companies House. Fixed Intangible Assets Assets you cannot touch. Brands, trademarks, research and development, software, goodwill. Often worth little in insolvency. Should be amortised (see above) over expected useful life. Fixed Tangible Assets Assets you can touch. Buildings, land, plant, equipment, furniture, fittings used for long-term business. In insolvency
likely to produce a fraction of their cost. That cost is amortised (see above) over the useful life of the asset.
Glossary of Accounting Terms
Floating Charge A Floating Charge cannot apply
to
individuals or
partnerships. It is a security given to a lender on all the borrower's assets present and future except for those assets that are already under a Fixed Charge. The charge “crystallises” when specific terms in loan agreements
-
are breached
—
at this point the charge is akin to a Fixed Charge. The charge A Charge is “floating” because the
is registered at Companies House.
underlying assets are changing all the time — c.g. inventory. Fully Diluted EPS Same as EPS above except it takes into account shares that the company may have to issue in future as a result of Share
Options (see below).
Going Concern An assumption that the Company will continue to trade for the foreseeable future (12 months from the date the accounts are signed by the auditors). If there is doubt, this must be stated. A big warning sign if there is doubt. Sometimes Going Concern is dependent on funding from the
parent company or owner. Goodwill Premium or difference between the price the company paid for
acquiring the Net Tangible Assets — such as another business — and the fair value of those assets. The larger the difference, the larger the goodwill. Gross Profit Difference between sales and direct cost of materials and labour for producing the company’s products or services. Very bad news
if
the company is making aa.loss at this level as it means they are selling even below the cost of buying/producing. The more they sell the more they lose!
Gross Profit Margin Gross profit expressed as a percentage of Turnover — Cost of Sales divided by Turnover x 100. In a competitive market,
or Sales
generally not controllable by company unless it can set its own prices. Should be compared between companies in the same industry and reasons a
for any large differences understood.
insolvent Inability to pay debts as and when they fall due. Leverage Total assets divided by shareholders’ equity. Ifa company is highly leveraged the proportion of capital in relation to debt is very low. This means that even small losses can wipe out the company’s equity — this is what happened in the 2008 banking crisis. Additionally, large amounts of a
operating profits go towards interest payments. Increases in interest rates can have a very serious impact on highly leveraged companies. Individuals with high loan to value (LTV) mortgages are highly leveraged — a small
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The compan) is subject Corporation ms sown right. (LLP) A hybrid between aI artnership Limited Liability Partnership The key differences from a company are that a Limited Company.
"
and
14
and therefore, are treated as me mbers (similar to partners) self-employed do not pay minimum 12% unlike with employees, LLPs Employers However, unlike a Partnership they still National Insurance for Members. The LLP Act (2000) allows for different benefit from Limited Liability. LLPs are not subject to taxes classes of Members. Like Partnerships, between the Members and the themselves the profit/loss is divided share. Members are taxed according to their individual If an asset is liquid it can readily be sold without much loss of
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Liquidity
value. Cash is the most liquid asset. Some companies have poor liquidity as they cannot sell their assets quickly to pay debts.
Listed Company A company whose shares are quoted on aa: stock exchange. All UK listed companies are PLCs (see below).
Market Capitalisation Current share price x number of shares in issue. Materiality Information is material if its omission or misstatement could influence the economic decision of users of the accounts. Provides a threshold or cut-off point beyond which the accounts stop being “true
& fair”. Usually an auditor will not require company to correct an error that is not “material”. The level is a matter of professional judgement a
for the auditor who does not have to disclose it. Traditional benchmarks include: 0.5 — 1% of Turnover; 5 — 10% of profit before tax; 1 — 2% of gross assets.
Net Assets Everything a company owns minus everything it owes.
Same as Net Worth.
Net Current Assets Current Assets minus Current Liabilities (see above). Good news if large number without brackets. If this number is small or in brackets there is increased risk that the company could go bust unless it has a rich parent/owner willing to pay. Net Current Liabilities When what is owed within the next 12 months
Glossary of Accounting Terms
is greater than what can be realised in that period. A bad place to be. Net Profit Sce Profil after tax.
Non-Current Assets Asscts the company does not expect lo convert to cash within 12 months. Fixed and intangible asscts, amounts receivable after 12 months. Investments unless held for sale.
Non-Current Liabilities Long-term bank or other loans or leases. Anything due for payment more than 12 months after the financial yearend.
Notes The small print at the back of the Annual Report and accounts, which often tell the real story. Like any “small print” inconvenient details and convenient assumptions are often buried here. Revenue Recognition (see below) is particularly important. Operating Profit Profit after deducting all other related non-production costs such as administration, office rents, depreciation, bad debts, etc. but before interest. More within a company’s control than Gross Profit. Should be compared with others in the same business, usually bad news if a loss
a
— because the company has sold a lot less than it expected or suffered large unexpected costs. Operating Profit Margin Operating Profit expressed as a percentage of
Sales. Operating Profit divided by Turnover x 100. Par Value Face value of shares (or other financial instruments) as distinct from market value. Sometimes also called the Nominal Value.
Acompany might sell one 10p share for £1, of this 10p will go to the Share Capital Account and 9op will go to the Share Premium Account. Par value has absolutely no connection with the share price on a stock exchange. Part Pald Shares Shares where only part of the face value of the shares has been paid. The shareholders of part paid shares remain liable for the
balance.
PLC AAlPublic Limited Company having a Share Capital of at least
£50,000 of which at least 25% is paid up. Must file full audited accounts. All listed companies are PLCs but not all PLCs are listed. Post Balance Sheet Events Important matters which occurred between the end of the financial year and the date that the accounts are signed. Directors (reviewed by auditor) decide what is important or “Material” and therefore what must be disclosed. See Materiality.
Gui an Accounts Guide to Comp \ -
's
ative Jour nalists The Inves ti
Ss
in debtors at the year-end relating to Amounts included of the following year. Typically cogts in respect advance m payments Also see Accruels. and service charges. rates rent, such as investors. Calculated by E Ratlo) Used by (P Ratio Price Earnings the share by EPS. So if the price of the f 0 market price dividing current In other words, the market is 10, PE ratio is 20.
Prepay
me
-
Accounts |
assets
better-qu han more assets (01 they have some of their debts. Going Either by pretending jude ing to 1n “forgetting” have and/or include my mortgage, my they actually I forget to Sheet on page “Off-Balance Shee back to my Balance £95,000. Fa ther hannjust ts would be £120,000 vin liabilities off the Balance large to keep technique used Financing "is a major undoing. . . ~ such hidden debts were Enron’s increase 1n Tangia on the right shows large Sheet Balance forma ur ro the relevant Notes to see the worthwhile looking at ble Assets _ 50 it will be as the Revaluation revalued of this is due to assets being ing
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if
an
in
|
Os
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50
reason.
|
£30k
our Stock values
are £20k to £50k. Interestingly, Reserve has increased fro m — earlier the perhaps noted we sales in the same despite the 25% increase but they still represent four better levels Stock its company is managing are up slightly, as would be expected months’ worth of sales. Trade debtors the increase in sales would suggest as much as not but sales given the higher better at collecting from customers. Cash — perhaps the company is getting of Net Current Assets levels are quite low but there is an increased level thanks to last year’s overdraft of £36k being converted into a long-term loan. — Net Assets have increased significantly from £86k to £145k but we must
remember that £30k of this increase is just due to the revaluation discussed above. Given that we only added £9k to our Retained Profit, where did the
balance of the increase in Net Assets come from? A review of the Share Capital/Share Premium Account shows that the shareholders put in a further
£20k. So, the bulk of the increase in Net Assets is due to revaluations and the shareholders putting in more money. For journalists, the complexities of a complicated Balance sheet can be reduced to the pro forma Balance Sheet shown on the right. You will notice that Total Net Assets of £145,000 match the Total of Capital and Reserves also £145,000. Therefore, this Balance Sheet balances. The Companies Act of requires a Balance Sheet to have items defined in a certain order. For Assets, one from less liquid assets to the most liquid assets. moves
reese
A
et abit
then (
Caret As
Cc
Assets (“NCA”). Current assets and ities that can be converted int 0 cash from the Balance Sheet date.
caren
en Caen is Net Curren!
es are defined as assets and liabil. receipt/or P paymen e t within 12 months
Chapter Three: Understanding
a
Balance Sheet
Sample Limited Balance Sheet as at 31 March 2018
2018
2017
Note
£
£
10 Intangible assets Tangible assets/Property, plant & equipment 11 12 Investments/ Financial assets
20,000
15,000
120,000
Fixed Assets
10,000
45,000 10,000
150,000
70,000
50,000 60,000
Current Assets
Stocks/Inventories Trade debtors/Trade receivables
1,000
50,000 56,500 4,000 10,000 2,000
131,000
122,500
Trade creditors/Trade payables Other creditors
(75,000) (11,000)
Bank overdraft
(5,000) (5,000) (96,000) 185,000
(50,000) (8,000) (36,000) (4,500) (98,500) 24,000 94,000
(35,000) (5,000)
(8,000)
145,000
86,000
20,000 30,000 50,000
10,000 20,000 20,000
45,000
36,000
145,000
86,000
Other debtors
14
Investments/ Financial assets Cash
10,000 10,000
Current Liabilities
Taxes and social security Net Current Assets
35,000
Total Assets less Current Liabilities Creditors: Amounts falling due after more than one year
Provision for liabilities and charges Net Assets Capital and Reserves Called up Share Capital
17
18
22
Share Premium account
Revaluation reserve Profit and Loss Account
Shareholders’ Funds
23
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51
Journalists’s The Investigative
Accounts Guide to Company
Fixed Assets for long-term use in the business, which are re quired Fixed assets are assets to be sold other than for They are not designed of usually fora number years. not machines, cars ete, factories, Examples are buildings, replacement or scra p. of sub-categories. Typically, they are a number are there Within Fixed Assets, Assets an d Investments. as follows: Intangible Assets, Tangible ra
a
52
Intangible Assets
;
most common assets under this These are assets that cannot be seen. The brands. According to of values heading are Goodwill and the accounting or brand valuation can intellectual property Goodwill, rules, only purchased to buy my want be put in the Balance Sheet. What is Goodwill? Suppose you are relatively minor: business of assets The business. my physical consulting |
a few computers, desks and chairs. You want to buy my business because it has a good reputation, some established customers and a track record. This is
termed “Goodwill”. By definition, Goodwill is the premium or difference between the market value of physical assets and the price paid for the business.
The assumption is that any deal is done at arm’s length. Suppose you paid £5 million for my business and the value of the physical assets is £200,000. The goodwill is the difference of £4.8 million and it will sit in the Balance Sheet as an Intangible Asset. It should be amortised or “written off” over the useful life of the asset, often up to 20 years — each year the P&L will be with
charged
amortisation/depreciation of £240,000. Accounting rules require the value of such assets to be assessed
periodically
to ascertain whether they have permanently dropped (become “impaired”) below the value in the Balance Sheet. Companies that are acquisitive will have very large amounts of purchased goodwill as an asset in the Balance Sheet resulting from taking over other companies. Details of these purchases will be found in the Notes. But
impairment suggests over- payment and directors if the auditors agree. That can
have a discretion not to reduce goodwill ~ result in over-stated assets.
In the
Sheet all the assets are totalled together as if Balance they had the relative value. However, some assets are much more robust than others a company with lots of intangible assets goes broke, chances are that the
me
Chapter Three: Understanding
a
Balance Sheet
intangible assets will realise next to nothing. Compare this with £4.8 million — cash remains cash, but Goodwill can vanish instantly. Yet a Balance Sheet adds them together as if they were of the same quality. In evaluating a Balance Sheet, I mentally remove the value of the intangicash
If that leaves me with a weak Balance Sheet, particularly negative net assets, I consider it to be an unsafe company unless the value of intangibles is readily realisable — it rarely is. Mayflower Corporation, which collapsed in 2004, and, more recently, Carillion are good bles from the Net Assets.
examples.
Tangible Fixed Assets Since 2015, this category in the accounts became known as “Property, plant & equipment”. In a typical company these will form the bulk of its fixed assets. Usually these will be assets purchased for long-term use in the business. Almost always there will be a reference under the Notes column that provides further details. Usually these assets will be shown at the purchase cost less accumulated depreciation. The usual exception is freehold buildings
which are often shown “at valuation”
—
this is because unlike most working
assets, freehold buildings often increase significantly in value, particularly if they have been held for a long time.
In the Notes, Tangible Assets are further categorised between — Freehold buildings, leasehold buildings, plant and machinery, fixtures and fittings. This is an appropriate place to explain “Depreciation”. You will know that the moment you buy a new car or a new laptop the value falls once it leaves the showroom and continues falling. That is Depreciation. For a company,
Depreciation is an annual charge in the P&L account for the use of a fixed asset. For example, if a machine is purchased for £16,000 and it has an estimated working life of five years when it can be sold for scrap for £1,000, its annual depreciation charge will be £3,000 ((16,000-1,000)/5). If such a charge was not made, then when the machine needs to be replaced in five years’ time, the P&L will have to be charged with the whole £15,000 for that year whilst the benefit of the machine was derived over the five years.
In accountancy there is an attempt to match revenue with associated costs. For asset heavy businesses like manufacturing, Depreciation can be a very
significant charge each year.
The Investizative
ol
sGu
o comp
4
Wv
cee
mnits
Ly
the useful life of th h as to estimate th the compan If the machine jp You will have noted judgement. a degree 0 f subjective asset. This introduces I 10 ye ars rather than five years, for d be to goo he above -ample was judged than £3,000. halve at £1,500 rather charge would de the annualepreciation the same sector it is useful to in s companie Therefore, when comparing, longer life is likely to show one policies, as using compare their Depreciation policy as 0 eee many their Depreciation can use greater profits. Companies for class Details of Depreciation policy each levers to manage their profits. its A airline depreciates If Note. of asset is shown in the Depreciation planes 20 years, B is going to show much higher over 10 years and airline B over all else is equal, because its Depreciation expense profits than A assuming A. of that half be will
:
Investments
and Current Investments can sometimes be found both under Fixed Assets are meant to be for Assets, the difference being that under Fixed Assets they the long-term rather than held for sale. Examples of long-term investments are shares in subsidiary companies or strategic shareholdings. These are usu-
ally held at cost unless there has been a “permanent diminution in value” if an investment has suffered what is considered to be a permanent fall in value, —
it is reduced to its market value. When an investment is listed under Current
Assets it is usually at market value and is considered to be held for trading.
Current Assets These are defined as assets that are expected to be converted
into cash within
12 months
from the Balance Sheet date. Once again, the order of listing is from most illiquid to liquid. The first entry is usually Stock, being the most illiquid current asset as it still needs to be sold when it will become debtors and eventually, hopefully, cash.
Stock or Inventory are materials, goods that the raw company has manufactured or purchased which are available for sale. Stock is valued at the lower of cost and
eee
Chapter Three: Understanding
a
Balance Sheet
it is the purchase price or “net realisable value”. Cost should be obvious manufacturing cost. Net realisable value is the price it can be sold for less any —
— relevant when there is obsolete Stock which can costs incurred in selling a loss, e.g. a three-year-old new mobile phone. at sold be only
a
In any review, the total value of Stock should be closely examined. How much Stock is too much Stock? Divide the Cost of Sales (“COS”) by the Balance Sheet listed value for the Stock. That will show how many times that
amount of Stock was sold during the year. So, if COS is 100 and Stocks are 25, the Stock has been “turned over” four times. In other words, the company
carries three months’ worth of sales as Stock. More can often mean less. Slow moving Stock is never a good sign.
What are the consequences of too much Stock? If the trade cycle is three — the time it takes for Stock to be sold and debtors to pay, it follows
months
that a company should not carry much more than three months’ worth of Stock. Trade cycles are very industry specific, supermarkets for example,
turnover their Stock very rapidly. Excess Stock ties up a company’s capital, costs money in terms of interest and storage costs. Perhaps most importantly
ifa company is selling high-end mobile phones, and has three years’ worth of sales as Stock, we can be fairly certain that the company is headed for trouble. In a fast-changing industry there is a risk of obsolescence. For example,
a
like mobile phones, there may no longer be a market for Stock with an older operating system or capabilities. Something that costs several hundred pounds to purchase could realise next to nothing. The recoverability of obsolete Stock is subject to judgement and therefore this is another area that can be manipulated fairly easily. As with many other indicators, the thing to do is find other companies in the same sector and compare how many months’ sales in terms of cost are being carried as Stock in the Balance Sheet and talk to people who are knowledgeable about that sector.
Trade debtors or Receivables This is the amount due from customers who have purchased a company’s goods or services. Again, customers can take up to three months to pay although the most typical credit period is one month. It is important to ascertain what is typical in a particular industry. Sainsbury's is very unlikely to have three months’ sales outstanding as customers effectively pay cash
i
The
we
By
Jon ga ive
y
an Accounts G ul le rto Comp i
7
two ¢lays’ sales. This demonstrates the \ yas less than ~ for 2017, the figure another in the same industry. companyWiith
of
your
the more key importance comparing cus tomer takes to pay, ) that the longer a It is a fact of life after the ue d date tinging Amounts full. in al outstan it is that he will not pay the or an inability to pay- Whilst drawing uP might indicate a dispute amounts owing tl at are to identify are expected accounts the management and make provior are known to have issues an appropriate past due date the P&L “Bad Debt as amounts sion” by charging irrecoverable in account. be received, months ago and is yet For example, if £10,000 was due three to is still unpaid and when it amount the why should enquire the management due
ee
56
full payment will be made ~ for will be received. If they are not certain that were say £1,000 worth, they will faulty, of goods supplied example if some this cost to the P&L account and reduce the amount due to £9,000.
charge In the event full payment is received, the £1,000 previously taken as aa cost will be written back as “bad debt recovered”. Similarly, banks sometimes
pretend that a bad loan is not yet bad because recognising it as a bad debt will hit their profits whereas hoping the customer will pay does not. Auditors are expected to pay particular attention to debtors outstanding. If sales have been cooked, there will inevitably be false debtors included within trade debtors.
In nearly every large fraud case, where sales are manufactured, there are trade debtors that cannot be recovered or “accrued revenue” meaning that the customer has not actually been billed.
Other Debtors These are non-trade debtors and there will nearly always be a Note showing a breakdown. Typical categories are amounts due from related companies within the same group. If these amounts are large, and the group hits trouble not be recoverable. This is what they may happened with Farepak, which took in advance from over 100,000 people for Christmas money hampers and lent It to related companies which could not repay
Cash
Chapter Three: Understanding
a
Balance Sheet
the recent banking crisis put this in doubt as far as bank balances are
concerned!). It should be quite difficult to misrepresent cash balances as auditors
should enquire directly with the bank and physically count any large amounts of actual cash at company premises. However, there are recent examples of huge amounts of fictitious cash being included in the Balance Sheet. Satyam, a large Indian IT company, allegedly provided its auditors with concocted bank statements which the auditors reportedly did not confirm directly with
the banks (see Chapter 7). The collapse of the Italian food giant Parmalat in
2003, Europe’s biggest fraud, reportedly involved aa fictitious bank account for $4.9 billion! I am suspicious if I see huge amounts of cash in the Balance Sheet. Most companies are able to put it to good use rather than have it on deposit at the bank, especially when interest rates are low, as since 2008.
If a company is trying to “window dress” its cash, it will often stop paying its creditors just before year-end so that its cash position is flattered. Payments will resume just after the end of the year — sometimes it may do this with the knowledge of its suppliers. Even banks have been known to ask other banks to place deposits with them “for year-end purposes” Lehman Brothers and Anglo Irish Bank.
Current Liabilities ORES OD
¥
*
SACRA
—
as with
REN
ME
In many ways,this is probably the most important art‘of.a Balance Sheet as far as solvency of the company is concerned. You will recall that compai
nies almost always go bust because they cannot pay their debts as they fall due rather than because they stop making profits. Creditors are always a “hard” number — that money is owed, and it will have to be repaid — whereas
Debtors may turn out to be a very “soft” number. Not everyone who owes the company money will or can pay, just as some fixed assets or investments may not be worth the value in the books. A bad debt provision is another
judgement. Current liabilities are defined as amounts that are payable within 12 months from the end of the year, usually much sooner. Current assets are
i
yc Journ alists
The Invest
s Gunde to
Company
ccou nts
From the above, jt cash within 12 months. be turn ed into much as current as amounts that can least at are assets that un less current should be obvious Lenders are usually difficulties. to experience is likely liabilities, a company dreason for the cash flow issues, unless there isasoun rather reluctant to lend seller they are unlikely to realis forced a as If Fixed Assets have to be sold, 7
a
58
There are their Balance Sheet value. circumstances more than aa fraction of can become immeloans, for example long-term when long-term liabilities, are breached, terms, known as bank covenants, diately payable if certain a reason for focused be should always Liabilities For journalists Net Current liabilities will be met. questions on how the
Trade Creditors or Payables Trade Creditors are a These are the flip side to Trade Debtors/ Receivables. on credit. Typically 30 days’ have who goods provided company’s suppliers credit will be offered. Companies usually ensure that they pay key suppliers not be so lucky. promptly so that they keep supplying. Other suppliers may If suppliers get a hint of problems, they will often stop providing goods on credit and demand cash upfront before supplying. This can exaggerate problems for a company that is already short on cash as unfortunately they are not able to demand cash from their customers without fear of losing them.
Customers who also detect problems may be slow to pay. The often-terminal cash squeeze ensues and the loss of confidence starts the death spiral — no one provides credit so there is nothing to sell so there is no cash to Stock.
buy
The 2016 collapse of High Street shop chain BHS is an example. Companies will try to get longer credit from suppliers than
they give
to
customers in order to generate “positive cash flow” to minimise their own borrowing. For example, supermarkets often have a large positive cash flow because they get months of credit from their suppliers but sell to their for cash. If the company has significant interest income, it is a customers likely sign of this.
Other Creditors This will include bank
loans, amounts owed to related companies and various tax liabilities. Typically, t Notes will contain a breakdown by category. A e foreign owned company will often be loaded up with expensive debt from
:
Chapter Three: Understanding
a
Balance Sheet
its non UK group companies because interest payment reduces UK taxable a profit elsewhere. The Notes on borrowings should profit while creating be reviewed carefully, distinguishing between short and long-term loans, interest rates and any onerous terms. This is another heading where Related
Party Transactions bear close scrutiny.
Called Up Share Capital or Equity This is the paid nominal value of shares issued in the company. If 600 shares were issued at its face or par value (sometimes called Nominal Value) of 10 pence, the fully paid up total Share Capital will be £60 being 600 x £0.10. “Called Up” means that the company has required the payment to be made.
In certain circumstances, it is possible for only part of 10p to be required to be paid with the remainder being outstanding. There is then part-paid and unpaid Share Capital. These amounts are due if the company collapses.
Share Premium Account
If the 10p shares were sold for 15p, the Called-Up Share Capital would still be £60. The extra 5p per share, total £30, would go into another capital account named the share premium account. Journalists often confuse Share Capital and the price of shares if the company is listed on a stock exchange. The only money the company gets is the price it issues the shares at — 10p or 15p in our example. Whatever price the holders of those shares choose to sell those shares to other people, via or without a stock exchange, has absolutely nothing to do with the company. It has no impact whatsoever on its Share Capital. An analogy would be you
buying a brand new phone at its list price of £600 from Apple by queuing up all night on the release date. If you then choose to list it on eBay and sell it for £800, that profit does not go to Apple, but to you.
Revaluation Reserve freehold buildings for a company has revalued some of its assets example — it is not allowed to book aaprofit until it sells the asset. Instead, the increase must be put into this reserve. Otherwise it might prove too tempting
If
for companies looking to meet their targets!
—
59
Journ The Investigative
Accounts alists’s Guide to Company
and Loss Acc ount Accumulate Prrofit the start of the company of ative total amount since cumul This is simply the the business and not paig in retained was t each year tha the Profit After Tax ' i successful or loss. a nin dication of how gives total figure as ‘vidends. The For example, by 20) 6, since inception. have been mahing the company may million in accumulated losses. £265 amassed had . Coffee Co.(UK) |
|
a Starbucks
60
Some Tips on Reviewing Balance Sheets el”. tNrr, ret ay. it
“NWS
Pag
ee
z
:
Se
eT
ed
issues I have discussed above (“Can they pay their Apart from the solvency the trend of a Balance Sheet over a number examine to useful it is debts?”), of years. If you are looking at a listed company, you will often find a five-
if company year summary towards the back of the accounts. Particularly is highly acquisitive, its Balance Sheet will show increasing amounts of — Intangible Assets in return for paying out real cash fine if the acquisitions a
turn out to be good ones. Quite often they are not — what does the company do then? You guessed right! It acquires more companies! These trends happen over a period of years rather than suddenly and can best be appreciated by
reviewing several years’ Balance Sheets together.
Some questions to consider: Mi
Have Intangible Assets increased significantly over the years as a percentage of assets? If so have the acquisitions been successful? Is there an increased cash flow?
Have Net Current Assets been decreasing? increasing more than the increase in sales? M@ Have Stock levels been rising disproportionately to Sales? @ Have Creditors increased more than they should? @ When are loans due for repayment? What is the impact if they are not renewed? What will be the impact if the interest rate rises by 2%?, @ Did the company repay its borrowings? If SO, was it becaus e it had surplus cash flow or because it was forced to repay? Mi
@ Have Trade Debtors been
: A general point about ge
;
assets is that it should be much easier for auditors
Chapter Three: Understanding a Balance Sheet
their existence, because if they check them they will find to confirm they either exist or not. If, very unusually, the auditor was to check every asset, he should identify any false assets that have been included in the Balance Sheet.
ifa company has failed to include a liability in its Balance Sheet By contrast, itis much more difficult to identify something that should have been included but is not as it will not be within the company’s accounting records. How does the auditor detect something owed which is missing? Where does he look? a
So,
if it is much easier for the auditors to check for false assets why do we
see them time and time
again? Firstly, the auditors only check a very small — too often the company being sample of assets rather than all of them audited is only too aware of the transactions the auditors are going to check.
if the existence of the asset is confirmed, its valuation may be subjective — anything apart from cash is likely to have a degree of subjectivity attached to it.
The second difficulty is that even
A Brief Comment on Company Valuation Balance sheets are often key to the question of how much a company is worth. Along with the growth prospects for its products, services or assets. Valuation of businesses, especially private companies, is a topic that often baffles jour-
nalists. Many people who appeared in Rich Lists before 2008 had suddenly disappeared by 2010. The reason — change in sentiment leading to vastly lower valuations and perhaps the lists only counted assets, omitting unseen
liabilities such as personal bank loans. To find out how much somebody is really worth you need to know what they owe not just what they own.
Many accountants are also equally confused by valuation as it is a very subjective process with lots of guesses and assumptions. Two accountants valuing the same company from different perspectives very frequently arrive at wildly different valuations. One has to feel sorry for judges in the Family
Court who ask “expert” witnesses to value the main asset of divorcing couples.
Even for relatively small businesses, the husband’s accountant can be millions apart from the wife’s accountant, although assuming it is the husband running the business, his expert’s valuation is likely to be lower than that of the wife’s expert!
61
ative The l nvestiif
Journalists’s
an al y Accou ntsS Guide lo Com]
WwW
seems an easy task of valuing a stand. even for what Valuation is difficult be 20-30% apart. But surely, th, easily can ts the agen flat, ard two-bedroom Net Worth, which as we know; the as is thes ame val ue of a private company nies owning quoted shares this will h, compa tment For inves the Net Assets? assets in the Balance Sheet are showy it is a big f) all the if pretty close (and that price. Let’s take an example of at sold be can at market value and they £1m worth of Marks & Spencer anq at price, today’s a company that owns, an d nothing else. Its value should not be much rth of Sainsbury shares
-
62
Tax. If instead the company held would be around the its 20 freehold mortgage-free properties, value market them less a of for costs selling the minus value of the properties reduction freehold The could the tax, uncertainty and trouble involved. properties — so possibly the Balance be in the Balance Sheet at their original value i sifoon
Gains to £2m less any Capital
still
Sheet will show a fraction of the real value.
For listed companies, the stock market has already placed aa kind of valu— you would simply look up the share price and multiply it by the total
ation
number of shares. That is called the market capitalisation. So,
if 2m shares
are issued, and the price is £2 a share, the value is
£4m. Right? Wrong! A takeover bidder may be prepared to pay a fat premium to obtain the business, as in 2014 when Pfizer was prepared to pay £55 a share
for AstraZeneca
whose shares were £37 before the failed bid. Melrose’s initial bid in 2018 for GKN was worth 403p compared with the pre-bid GKN share price of 326p. Its final bid was worth 467p a share. the stock market a
Alternatively
have over-valued the company’s prospects boom and bust — and the price
—
may
as happened with the Dotcom
evaporates, Fashions in valuation also change over time. Asset value. Dividend yield. Price earnings ratio. Cash flow. EBITA. Enterprise value. Future revenue streams. Private equity funds or a management buyout will use different metrics to listed companies when making a takeover. Much will depend on whether you are buying or selling. alue is defined as the amount an arm’s len gth buyer would be prepared to pay for the whole busines s. Or put another way, something is only worth what somebody else will pay for it. And that can b e a long way from what a Balance Sheet or a share Price says — as Is proven when companies die and the assets have to be sold. More on thi Ss in Chapter 8,
Chapter Four 63
How to Read the Cash Flow Statement Over the page is the third main Financial Statement in a typical set of Large company accounts. You are unlikely to find it for a small company. It must be provided for every listed company. Subsidiary companies do not have to
prepare one provided the parent agrees and the parent prepares accounts that are available to the public.
I explained earlier that most companies that go bust do so because they run out of cash rather than profit — as with Carillion. The Cash Flow Statement is an attempt to shine some light on how much of sales were actually turned
into cash, and what use was made of that cash.
Ifa company’s solvency is in a
doubt, this together with the Balance Sheet are the key statements to focus on. If solvency is in doubt, the P&L is likely to be fairly meaningless. As I say
in my lectures, Profit is Vanity, Cash is Sanity!
Cash Flow Statements used to be quite complicated because they could take a number of forms and hadaa.large number of classifications. Fortunately, from 2015 they were simplified considerably, using the following three cash flow classifications:
Sample
Limited
Cash Flow Statement
ended 31 March (or the yeat
t
A Operating profit
Adjustments for: Depreciation
2018
2017
£
£
20,000
14,000
5,000 000
20 000
Note
2018
expense
(Increase) in inventories trade and other receivables (Increase) in other payables Increase in trade and (Decrease) in provisions
500
(5 oo
. Amortisation expense of properties (Profit) on disposal capital changes in working cash flows before Operating Changes in working capital:
-
251500
16,500
(9,500)
(20,000)
28,500
3,000
(5,000)
7
_(3,000) B
Cash flows from operating activities
Interest paid
Corporation tax paid in) operating activities Net cash generated from/ (used
C
Cash flows from investing activities Purchase of property, plant & equipment Purchase of intangible assets
& Proceeds from disposal of property, plant equipment Investment income Net cash (used in)/generated from investing
activities
D
41,500
(5,500)
(8,000) (2,500)
(2,000)
31,000
(9,000)
(50,000) (6,000)
(10,000)
(1,500)
(54,500)
(24,000)
i
iviti
Net cash (used in)/generated from fi nancingactivities
E
Net (decrease)/increase in cash a nd cash equivalents
F
equi
and cash equi quivalents at the beginning of year
Cash and cash equivalents at end of year
-
_
79 (2,750)
35 00
Dividends paid
Ceash
20,000 |
Repayment of short-term borrowings Proceeds from long-term borrowings -
-
1.000
Cash flows from financing activities Proceeds from issuance of ordinary shares
(15,000)
500 1,000
G
Q1,500)
(1,250)
53,500
(4,000)
30,000
(37,000)
(34,000)
3,000
(4,000)
(34,000)
we
Operating activities
Investing activities
g Financing activities One good thing about a Cash
Flow Statement is that unless a company is being completely crooked (see Satyam example in Chapter 7) it is difficult to manipulate the amount of cash being generated in the business since falsely booked sales do not result in real cash. It is a repeated feature: companies that massage earnings struggle with their cash flow. Real taxes have to be
paid on false profits. Company analysts pay particular attention to cash flow.
In our pro forma Cash Flow Statement on the left the first thing to note is that the operating cash flow
[B] is strongly positive compared to last year. This increase has been achieved by squeezing the payables/creditors (up by £25.5k) and restricting the amount tied up in receivables/debtors (despite 25% increase in sales). We note aa large increase in interest costs. Looking at [D], we see that very significant investments were made in plant and equipment and at [E] we see that they were funded by long-term funds (a good thing) from shareholders and long-term borrowings. The overall results at [G] show a much-reduced overdraft.
The pro forma example explains the key figures.
Cash flow from Operating
activities
Operating activities are the day-to-day revenue-producing activities that are not investing or financing activities. We start with the “Profit for the year”
[A] from the P&L account and adjustments are then made to arrive at a sub-heading “Cash flows from Operating Activities” [B]. These adjustments are needed either because the profit figure includes items that have not resulted in cash flow (such as Depreciation) or represent changes in working capital (money tied up in debtors, Stock etc.). Some items are removed (e.g. interest and taxation) as they are shown separately later on.
If the increase in debtors is far larger than the increase in sales, it suggests — this is a classic sign of company with difficulties its collecting payTurnover or manipulating experiencing ments from its customers — perhaps because a major customer is struggling
that customers are not actually paying up
a
65
Jou t nalissis ‘s
§
T
tigative Ir vesil h cin
Accounts mn Guide to Compa ly
0f Il not pay because to pay or Wl
a
are are near nearly alwa AYS dispute. Old debts
bag
news.
increased amounts to last year, there are tied when com pared imilarly, ys wn Sim increase In sales. Companies jn this a corresponding ks without up in Stoc slow in paying their creditors so that they cay situation Wiwill often be very need paying soon after the year-end. If Cash will but they sh preserve cas Activities [B] is small or worse, a large figure in brack. ty,
les
in
thi
srating
it re hechould raise alarm bells because 66
indicates that
insufficient
amounts
cash and this company is well on its way to of sales are being converted to it raises loans or raids shareholders fo, unless issues experiencing cash flow
funding. . From [B] any interest and taxes actually paid during the year are deducted to arrive at “Net Cash generated from
operating activities” [C]. If [B]
is
small, look at entries before [C] carefully as struggling companies will often fail to pay taxes and interest. [C] represents the net cash that has actually been generated from the year’s activities and is available to be invested into
the future growth of the company and reduce existing borrowings.
A negative
number here indicates that the company is likely to need new sources of funding. It might be making profits, but it is not generating cash if [C] is negative or near zero!
Net Cash used in or generated from investing This section summarises “Cash flows from
activities [D]
investing activities”. Usually this number will be negative unless there has been a large disposal of assets, asa
proportion of excess cash flow is invested in expanding the business
—
new
factories, machines etc. The idea here is to
identify these separately from the day-to-day operating activities. In respect of outflows (in brackets), these are amounts the company actually paid out in res pect of a factory, new
plant and machinery, etc. — this is often large for growing companies as they gear up to cope with future demand. If these outflows are very small, it might indicate that the company is not ex
growth. On the other hand, ifthese pecting significant re very rand, ry large, it might indicate that the company is likely to need further large amount of cash on an ongoing basis — if it does not have large liquid assets, it might need to j raise funds om ne It Sof arrange further long-term loans. |
mi
»
from
arenes
Chapter Four: How to Read the Cash Flow Statement
The total of these items gives us [D]. If the company spent a huge amount or sold off some major asset, you will find it here. Ifthe total buying new plant is in brackets it indicates an overall outflow of cash.
Cash flow from financing activities Finally, we come to Financing activities. Any amount received from issues of shares will be found here, as will any repayment of borrowings and any dividends paid. Large repayments of loans, unless the cash flows suggest surplus cash, is often the first sign of trouble as lenders insist on payment rather than extending facilities. The total of this category gives “Net Cash used in/generated from financing activities” [E]. If this figure is in brackets it indicates that more cash was paid out than received in respect of such transactions. If [E] is negative and [B] is also aa.large negative, the chances are
that the company is heading for trouble unless it has a rich parent standing
by with lots of cash.
Adding up [C]+[D]+[E] gives us the “Net increase/(decrease) in cash and [F] — if this total is in brackets then it is a reduction in cash
cash equivalents”
from the previous year. If we now deduct the cash balance we had at the end of the last year, we get to the [G] the Cash (net of any overdraft) we have at the end of the year in the Balance Sheet.
So, when it comes to the Cash Flow Statement
—
always check that Net
Cash generated from operating activities [B] is positive. A successful business
should be generating cash. There are some businesses that just eat up cash
for example, oil exploration or early stage technology businesses they would be wise to choose very cash-rich shareholders!
—
—
however,
It is also worth comparing the operating profits with the cash flow figures to see how much of those profits are real and how much may be the result of
“aggressive” accounting.
67
Chapter Five 68 ba
Notes to the
Accounts This all-important section is always at the back of the accounts. To aa casual reader, this is likely to be seen to be the most boring and dull part. The font size will make it barely readable, it will look like the “small print” of a credit card application form. Unlike the front section, there will be no pictures of smiling people or faraway outposts with strange sounding names. In fact, there will be no pictures at all. There will instead be lots of tables full of numbers and closely spaced text. But this is where most stories are hidden.
There can be 30 to 40 different Notes. Here is a typical list for a Large company: 1,
Accounting policies Revenue Recognition Going Concern
2. Turnover
3. Group operating profit
4. Auditors’ remuneration 5.
Exceptional Items
6.
Staff costs
7:
payable and similar interest Charges
8. Other finance costs 9. Tax 10. Profit attributable to the members
of the parent
company
Chapter Five Notes to the Accounts
Intangible fixed assets Tangible fixed assets
13.
Investments
14.
Stocks
15
Debtors
2.4.
5 . Pensions and other post-
retirement benefits 6. Share-based payments
16.
Creditors: amounts falling duc within one year
17.
Creditors: amounts falling due after more than one year
18. Loans
Obligations under leases and hire purchase contracts 20. Provisions for liabilities 19.
21. Allotted and issued Share 29.
Notes to the statement of cash flows
ho
12.
to
11,
Capital Dividends and other
27. Capital commitments
28. Contingent tlabilities 29. Off-Balance Sheet
arrangements 30. Financial instruments 31. Directors’ advances, credit
and guarantees 32. Events after the reporting period aka Post Balance Sheet Events. 33. Related party transactions
34. Ultimate Controlling Party
appropriations 23. Reserves
But not all Notes are equal for the journalist. So, with assistance from my journalist friends, I have selected the nine Notes (marked in bold) where a story is most likely to be found if there is one. Notes follow a prescribed order andI will keep to that order in my selection.
-
It is possible that occasionally one of the other Notes will be of interest. Hopefully, as we go through the nine, you will pick up what kind of information to look for. To recap, Notes provide further and better information about the figures in the P&L and Balance Sheet and certain other information that the law requires to be provided. This is also a great place to bury the bad news
using weasel words. The first Note is always the one stating the Accounting Policies used to produce the accounts. This will state whether the accounts are consolidated group accounts or just for that particular company, even if it is the parent company of a group. It will state which Accounting Standards they follow: IFRS, UKGAAP, US GAAP or some other — this will tell you what rules they are supposed to be following, or
if there is a tailored non-GAAP version.
T
he Invess tigative
JournalistsS'S
i any Accounts Guide to Comp y
Revenue Recognition on, See PERSIEear ete
neers
|
has
involved misy,se over 20+ years Nearly every I inflate my sales If nition policies. Recog jus ding or Revenue : of s ales recording on the industry I am in, I coulg no other nu mber), depending by 2% (and PAT this is particularly the risk for companies double or triple m y There is particular pressure on listed companies casi iste on a Stock Exchange. sales and meeting hate as they revenue their to increase their forecasts for not forecasts their share price is assured their miss do profits. If these companies company I
hav e investigated
-
ily
|
70
ing. most challenging in when is a sale a sale is one of cecetion of the of sales remains the most abused recognition and premature accounting rules were introduced. accounting trick. Which is why new It sounds very simple — how can the question of when a sale has been made be complicated? Surely it is obvious? For some types of sales it is indeed coffee at Costa, it is obvious straightforward. For example, if I buy a cup of a sale has been made after I have placed my order, paid for it and have been
ee1e
handed my coffee. All three activities happen within minutes. So, working out the sales for such transactions is straightforward.
Now consider a company making custom made software for the Government. Let us imagine that it will take the supplier five years to develop the software, bits of software will be delivered over time and there is a payment schedule. When has the software company made a sale? Is it when the Gova ernment has agreed to purchase the software, when it has signed aa contract, when the software has been developed, when the software has been accepted by the customer, or when it has been paid for? There may be years between these events. And the period within which to recognise a sale could span from the very outset to the end of five years. The here
is that it introduces key point judgement into the question of deciding when aa sale is made. clever companies manipulate their Turnover by Some
ote um prven
a large
bundling products.
with licenses for some off the shelf client Some training and finally some bespoke software take three years to develop. You and your customer have been »
ne ipfor months and lating
nego-
: finally you have agreed a price of £2 m for the whole package and the contract i S Signed in November, just before your year-end
Chapter Five: Notes to the Accounts
How much of the £2m can be taken as Turnover? The bespoke is years away. The customer is only concerned with the total price software the company splits up the £2m cost between the and not how products in its accounts. A company looking to make its revenue own internal target may be much higher value to off the shelf software and tempted to allocate computers the £2m can be recognised as income straight so that more of away. in December.
Carter & Carter sold Government-sponsored vocational training courses. policy is shown below from page 77 of its 2006
Its Revenue Recognition
audited accounts. It deserves to be read carefully. There is one thing about a set of accounts,
particularly those of large companies, you should be aware
that every word in those Notes to the accounts is there for a reason. This is not
journalists exercising a flair for words! Let us see if we can decipher the policy. CARTER & CARTER ACCOUNTS 2006 Revenue recognition Revenue, which is stated net of value added tax, represents revenues and fees earned in respect of services provided during the period. Where amounts have been earned but not invoiced during the period, the amount included in revenue is the proportion of the anticipated net sales value earned to date.AcAcorresponding balance is recognised in debtors as amounts recoverable on contracts or accrued income as appropriate. To the extent that fees invoiced exceed the value of work performed, they are included in creditors as payments on account. Revenue includes expenses recharged
atcost.
Where revenue is determined by reference to performance criteria which are achieved over a period of time, it is only recognisad once itis probable that the performance son
aly
sare < gel
— Taxation or the lack of it paid by corporates both at home and in develhas become of increasing interest to countries oping journalists, especially since the credit crunch and recession put many Government's fiscal plans into deficit and forced individuals to tighten their belts. Patience is limited for those perceived not to be good corporate citizens by refusing to pay their fair share. Some businesses have even been boycotted!
—
A globalised economy with significant differences between national tax regimes provides ample opportunities for well-advised multinationals to manage their affairs in such a way as to legally have to pay little or no tax in high tax countries. Companies engage in both “regulatory arbitrage” and “tax arbitrage”. For a detailed discussion on corporate tax avoidance I recommend
Richard Brooks’ excellent book, the Great Tax Robbery — highly readable and accessible. COSTA 2017 ACCOUNTS
Operating profit
5
89,777
104,167
Other interest receivable and similar income
6
13,619
13,337
Interest payable and similar charges
7
(9)
Profit before tax
Tax on profit on activities Profit for
the year
10
(6)
103,387
117,498
(24,748)
(27,756)
78.639
A UK company must show in its P&L account the annual Corporation Tax charge, this is an estimated liability based on that year’s profits. Costa’s 2017 accounts (P&L extract above) show a charge of £24.748m on profits of — £103.4m. Tax will always have a Note providing further detail in this case Note 10. It is important to realise that this tax charge will never be the same as the actual tax payments made during the year. For two reasons. Firstly, the
tax payments are due and paid some months after the year-end. Secondly, in many cases tax liabilities are not finally agreed for some years. So, the charge in P&L reflects the best estimate for the current year and any adjustments
arising from previous years. If the company is part of a group of companies under common control, and
87
i
we The Investiga
.
h
oy
urnalists
ui
«
i
Acc ounts
made aa loss, it can often offset that loss in the group has ri co mpany Tax losses
are just one 1n the group. anot of another company againsst the profits for capital investment, those as such legal tax reliefs, of se veral perfectly COSTA 2017 ACCOUNTS
account ted) in the p profit and loss Tax charged/(credited) the in
vearendea? March 2017 £000
Current taxation
veareouas March 2016 £000
189
UK corporation tax UK corporation tax adjustment to prior periods
oo
22.399 3,816)
26,279
28,583
of temporary differences Arising from origination and reversal laws Arising from changes in tax rates and tax credit or temporary Arising from previously unrecognised tax loss,
(2,316)
(1,525)
Total deferred taxation
(1,531)
(827)
Tax expense in the income statement
24,748
27.756
Deferred taxation
difference of prior periods
448
281
337
47
The tax on profit before tax for the year is higher than the standard rate of corporation tax in the higher than the standard rate of corporation tax in the UK) of 20% (2016: 20.08%).
UK
(2016:
The differences are reconciled below.
Profit before tax Corporation tax st standard rate Increase (decrease) in current tax from adjustment for prior periods Decrease (increase) from effect of revenues exempt from taxation
(decrease) from effect of expenses not deductible in Increase determining taxable profit (tax loss)
Deferred tax expense (credit) from unrecognised (emporary difference a from prior period Deferred tax expense (credit) relating to changes in tax rates or laws Other tax effects for reconciliation between accounting profit and tax expense (income)
Tota! tax
charge
Year ended 2
Year ended 3
Mareh 2017 £000
March 2016 £000
ee
93,387
eae!
7,498
20,677
23,599
(2,910)
(3,816)
1,520
*
4,676
7,269
337
417
448
28!
24,748
27,756
6
for a UK company must The explain why and how the actual tax tax Note charge is different from the result from a pplying the current headline corporation tax rate to PBT. Going back to Co Sta, we see at Note 10 (page 24-5 of the 2017 Accounts), above, that the tax of £24.74m consists of a charge charge of £29.189m in respect of 2017 and a credit of £2.91m in respect of a refund
Chapter Five: Notes to the Accounts
due in respect of prior periods
— so the estimate for prior years was £2.91m higher than the actual liability. This gives a total of £26.279m. The tax charge is then further reduced by aa credit in respect of Deferred Tax, (see below) giving a figure of £24.748m which matches the charge in the P&L In the next part of Note 10, the company explains that the charge the company suffered is higher than the standard rate of Corporation Tax and then they explain the difference. They start off with the PBT of
£103.387m. The headline tax charge would have been at 20% — equivalent to £20.677m. However, the Current Tax charge (ignoring Deferred Tax) was £24.748m — so more than the headline rate. The £1.6m extra charge is then itemised —two tax credits of £2.91m and £1.52m; £4.676m not allowable against tax as an expense (such as entertaining customers), another £337,000 deferred tax expense and £448,000 due to tax changes. COSTA 2017 ACCOUNTS Deferred tax movement during the year:
Recognised in other Recognised in comprehensive Intercompaoy income income transfer £000 £000 £000
At 4March 2016
£000 Accelerated tax depreciation Revaluation of property Revaluation of cash flow
2.594
hedges Net tax assets/(liabilities)
124
Deferred Tax is
1,165
(7))
366
:
2,646
a
.
1,531
(18) (18)
(141)
-
At 2
March 2017
£00n 3,618 294
:
10S
(141)
4,018
complex topic, generally only understood by tax special-
ists. In simplistic terms it relates to future tax liabilities or assets that arise due to differing accounting and tax treatments. One of the main components is the difference between Depreciation and Capital Allowances. We see with
Costa’s Note 10 above that an amount of £3.618m is shown as due in future of having received allowances in excess of the tax relief rate.
as a result
A Practical Example You will recall that I have repeatedly counselled that when examining a company of interest to you, you should find a comparator company in the same business and compare them. Let us do this in respect of taxation and compare
89
Accounts Guide to Company -
’
igative T he Investig’
‘ Journalists
A COMPARISO
w OF
s
AND STARBUCKS COSTA LTD
UK PROFIT & LOSS ACCOUNTS
Starbucks Coffee Co. (UK) Ltd
Costa Ltd Year ended arch 201 2 March
2017
Accounts profit & Loss
Turnover Cost of Sales
Period ended 2 Octob ober 2016
£’000
£’000
886,366
379,864
6.441)
(208 298,954)
639,925
80,910
(246,441)
Gross Profit
90
(411,586)
Distribution costs Administration costs
(74,538)
(105,406)
(3:
Exceptional costs Operating Profit Net profit on sale of tangible
156) 89,777
6,372
89,777
13,082
6,710
fixed assets
Profit on ordinary activities before interest
13,619
0.301
Interest payable and similar charges
(0.009)
(0.001)
Profit on ordinary activities before taxation
103,387
13,382
(24,748)
6,719
income Interest receivable and similar
Tax on profit on ordinary activities
6,663
78,639
Profit for the financial period
Costa and Starbucks. Costa is wholly-owned by a
——————
UK listed
company
Whitbread. Starbucks UK is owned by US listed Starbucks Corporation. Their P & L accounts are compared above and could not be more different. Comparing Costa (year ended 2 March 2017) with Starbucks UK (53 weeks
£886m compared with £380m, Costa made a Gross Profit of £639m but Starbucks only
ended 2 October 2016), despite Costa having sales of
ee ,a .
ortunately, neither company offers much of an insight into the cost
HeHowever, we see
that Costa has enormous “Distribution Costs” ,
a
£412m. Adjusting for thi s, Costa’s profit margin to just over 21% for Starbucks. }
i
reduced
of
to2etoms
q
Chapter Five: Notes to the Accounts
Costa received interest income of £13.6m whereas Starbucks only received little in interest. In previous years Starbucks showed £301,000. Both paid — in 2011. Purchase of coffee by customers is large interest payments £2.75m
usually a cash affair and so it was interesting that Starbucks needed to borrow {unds whilst Costa had surplus funds on deposit. The bulk of Starbucks’ interest cost (nearly £2m) was paid on “borrowings from group companies”
A year earlier the charge was over £4.6m. Let’s move on to Operating Profit. Costa’s is £89.77m whilst Starbucks shows only £6.37m. Looking at Administration Costs we see that for Costa
at Libor+4%.
that was £105.4m but for Starbucks £74.5m. Examining the Operating Profit Notes (Costa’s below and Starbucks’ on the next page) we find that Costa spent £225m on inventories, £93.8m renting premises and equipment and about £48.65m charged for depreciation and amortisation plus £216m in staff costs
—
see Note 8. Starbucks spent £41.5m renting premises; £90m on staff
costs; about £12.45m on depreciation/impairment plus £26.9m on “Royalty COSTA 2017 ACCOUNTS § Operating profit Arrived at after charging/(crediting)
Depreciation expense Amortisation expense
of inventories recognised as an expense Operating lease expense property Cost
Operating lease expense Sub-lease income
- plant and machinery
Foreign exchange (gains) / losses Other non-underlying items Other non-underlying items can be further analysed as follows:
impairment loss/(reversal) (Profit)/loss on disposal of property, plant and equipment Accelerated amortisation on intangible assets Settlement
of historic VAT claim
Restructuring Privity Of Contract
Year ended 2 March 2017 £000
Year ended 3 March 2016 £000
47,770 877
41,047 1,216
225,145 909
212,146 86,712 886
(230) (251) 33,156
25,590
92,944
(204) 482
2
Year ended 3
March 2017 £000
March 2016 £000
29,788 1,733
23,761 962
-
867
Year ended
(5,264) $,328
-
1,571
-
33,156
25,590
91
to Company Accounts Journalists’s G uide The Investigative
ACCOUNTS STARBUCKS 2016
PROFIT FOR THE YEAR
4,
been arrived at after charging/(crediting): Profit for the year has
Period ended 2 October 2016
Period ended 27 September 2015
_—_—
£ auditor (see note 5) Fees payable to the Company’s - land and buildings Operating leases fecs license and Royalties
4
Foreign exchange losses/(gains)
1309 667 036 10°693 075,
Share-based payments assets of tangible fixed Depreciation i i irment)of of impairment)
tangible iE ble
Impairment(Reversa l
note
507 4
£
46 a
aD
hee 343 eee
(50s 50m 5 405
1604
~
"813
fixed fixe
fixed assets (see disposal of tangible 8
Staff costs (see note 6)
say 3d 36921 977
1.755.897
(7,441,700)
(6,710,469) 90,157,663
101,223,303
(6,209,990)
and license fees”. Significantly, Costa does not show suchaa royalty cost. These two companies in the same business have many similarities but some stark differences. The one that stands out is the £26.9m Starbucks UK
paid in Royalty and license fees and the large interest cost paid to group companies. It also appears that Starbucks’ cost of sales are higher. My suspicion here would be that transactions with other group companies have a large a
impact on Starbucks. Unfortunately, as Note 24 below shows, Starbucks has claimed an exemption from showing transactions with wholly-owned group companies. STARBUCKS 2016 ACCOUNTS 24.
RELATED PARTY TRANSACTIONS
The Company has taken advantage of the i exemption granted by FRS 101 Reduced Disclosure Framework in to 17 of LAS 24 Related paragraph relation Party Disclosures not to disclose related party transactions with wholly owned Starbucks group companies.
However a clue was given in the 2009 Deferred Tax Note 8 (extract right, above). The Mail on Sunday picked up that story in August 2010 reporting that the taxman was questioning how much Starbucks UK paid other grou companies for beans and other services. So, who were the fellow Starbucks owned companies with which the UK
Chapter Five: Note s to the Accounts
ACCOUNTS STARBUCKS 2009 8,
DEFERRED TAX
The company ts in discussion with HM Revenuc and Customs (HMRC) regarding its transfer The company believes its transfer pricing policy is reasonable and can defend pring policy its position The company belicves it has sufficient unrecognised deferred tax assets that 11 the event of a transfer pneing adjustment by HMRC The in utilise could unrecognised deferred tax asset position disclosed above 1s pnor to any adjustment that may anse from these discussions with HMRC
subsidiary did business, buying beans, paying royalties and borrowing money? The Financial Times in 2012 showed that the trail led to Switzerland, the Netherlands and back to the US.
US companies like Starbucks provide aa list of their subsidiaries, including those in tax havens abroad, attached to their Form 10K.
When examining the local subsidiary of a US multinational it is important US, particularly the 10K, and see
to study the parent company’s filings in the
how they report on that subsidiary. Why did Starbucks stay in business in the
UK if they were losing tens of millions year after year? They are a commercial company not a charity! Looking at Starbucks UK 2016 Balance Sheet we see that it has accumulated £264.9m (page 12 — extract below) in losses. Costa on the other hand had accumulated profits of £595m by 2017. The answer
probably lies in those other revenue streams for beans, interest and royalties STARBUCKS 2016 ACCOUNTS
CAPITAL AND RESERVES Equity share capital
17
Share premium Retained deficit
19
18
SHAREHOLDER'S FUNDS
316,985
316,985
330,789,024
330,789,024
___ (264,907,209) _ (273,400,360)_ 66,198,800
_57,705,649
COSTA 2017 ACCOUNTS Capital and reserves 33,000 767
33,000
Hedge reserve Profit and loss account
595,224
511,055
Shareholders’ funds
628,991
545,353
Called up share capital
21
1,298
93
‘ Accounts Guide to Company tigative Journalists’s Guic te’e
The Investigative
ACCOUNTS HOLDINGS 2017 ITALIAN COFFEE Taxation
to the following tax payments de The UK group has made 2017
vat taxes Employment Business rates
ree
paisofa8
£'000
£'000 28,118
i
13,808
962
in the year:
2016
30,011
— F114
___56,580, 14,654
for the year. nt shows no corporation tax
tes
wider
UK government entities
“Rome
This is because the UK groy is Group") and corporate tax
(formerly Pikco ap (Caffe Nero Group Holdings” where interest charges on
debt arise. Caffe Nero third party at this wider group level, ms evaluated therefore no entity within Caffé Nero Group 8 loss before tax of £25.5m and Holdin1B penerated Nero Group Holdings" taxable loss arose due to third Caffe forthe tax year. to due was pay Holdings Nero interest payments to banks. Caffe Group Holdings has not included any interest party, arm’s length in its corporation tax ultimate shareholder companies, only third party banks, payable to internal computations.
UK coffee shops but paid to other Starbucks
generated from the
companies
in low tax jurisdictions. In 2012 Reuters reported that Starbucks
UK had paid just £8.6m in Cor-
poration Tax since 1998 and reported losses in years when its ultimate parent company, Starbucks Corporation, had told investors that its UK operations were profitable. Subsequent public criticism seems to have led Starbucks into
“volunteering” to pay £20m in Corporation Tax for 2013 and 2014, which it did — on UK sales of around £400m per annum. Its estimated total tax
liability for 2015 and 2016 was £15m. Starbucks also moved its European headquarters to London from the Netherlands — perhaps to benefit from the lower UK tax rate.
Costa, being a UK owned company, does not have access to many of the opportunities available to multinationals to legally arrange their affairs in a efficient manner”. Of course, I am not for a moment suggesting that St arbucks are doing anything illegal or breaching any tax regulations. They i appea be Pp rto merely doing what many multinational companies do — arrangtheir ing affairs in such a way as to tak e full advantage of differing tax rules in different c ountries (“tax arbitrage”) ensuring that profits are maximised in low or no-tax countrj untries by channelling costs such as interest, royalties of payments for goods and services j nto high tax jurisdictions. The aim of the game for tax efficient multinat; ) nationals is to As gam other in high tax jurisdictions have su fficient costs from from other group companies t0
_
ies
idiari
|
|
Chapter Five: Notes to the Accounts
if possible, build a large pool of losses to future profits. mop up any Caffé Nero, a UK High Street rival to Costa and Starbucks, legitimately no Corporation Tax for a decade despite being profitable. The reason? paid The losses of its parent company due to interest payments arising from porrowings to fund its “going private” in 2007. It is owned via companies in Luxembourg (see Italian Coffee Holdings left). eliminate the profits and reduce or
Other examples can be seen by studying the accounts of the UK operations for Amazon, Apple, Facebook, Google and Microsoft, who all appear to legally
mitigate/reduce their
UK Corporation Tax liabilities through transactions
with group companies in Ireland, Luxembourg and Bermuda which have
lower or zero tax rates. —
All use the same mantra to justify these arrangement
we pay all the tax that is due in every jurisdiction. The Tax Note will usually
show if there is a dispute with the taxman.
The public outcry about corporate tax avoidance, especially by Big Tech UK accounts
companies, resulted in an interesting change in the Google between 2012 and 2016. GOOGLE UK 2012 ACCOUNTS Principal activites
Google UK Limited (“Company”) 1s engaged in the provision of marketing services to Google Ireland Limited and the provision of research and development services to Google Inc There were no significant changes in the operation of the Company dunng the financial year under review
As the above extract from 2012 shows, the main profits were said to be made in Ireland which has a much lower tax rate. But by 2016 (below) that
statement was no longer made. GOOGLE UK 2016 ACCOUNTS 1. General information Google UK Limited (or the ‘Company') is engaged In the provision of research and development services and the provision of marketing services to other group undertakings. The Company is a private company and Is incorporated and domiciled in the UK. The address of Ite registered office is Belgrave House, 76 Buckingham Palace Road, London, SW1W 8TQ.
A review of the Google UK accounts from 2007-2011 showed that the Turnover over the five years was more than £1bn. Yet the company made a
95
The Investigative
Accounts to Company Jourt inlists's Guide
after tax of £84m. cumulati ve loss T ax Note 8 revealed a £24m charge fo, cl ranged. The 2012 as But that has share-biised compensation. The Note int espect of employee Corporation tax ts discussing with HMRC in an ¢ he Company matter a continues “This is has made a provision The ©
a
Company of initiated in 2010. ongoing review Taxfor the years under review Corporation £24.0m for potential underpaid (2005-2011)”. PAGE 2 GOOGLE UK 2016 ACCOUNTS audit with Her
Majesty's Revenue the closure of an ongoing tax in January 2016, the Company agreed million in respect of additional in a liability to HMRC of £130 and Customs (HMRC’). This resulted and reflected in the £100 £130 million, the Within taxes and Interest due for prior accoun ting periods. ended June 2015 was £69 million in respect of additional million tax charge for the 18 month period of £25 million reflects a decrease of £75 million (from taxes due for prior periods. The tax on profits £69 million charge from prior periods and the the comparative Including a £100 million), artsing from reduction from 18 months to a 12 month accounting perlod.
The 2016 Google accounts disclosed a settlement with HMRC introduction in 2015 of £130m (see page 2 above). This followed the
for the
Diverted Profits Tax, quickly called the “Google Tax”. If HMRC considered profits have been artificially diverted from the UK, then a special 25% tax rate is chargeable.
Because company accounts have to show a geographical market split in the Turnover Note, the Google 2016 accounts (below) also showed that £784m of the £1bn Turnover was still generated from Ireland. For 2017 Ireland was said GOOGLE UK 2016 ACCOUNTS NOTE 3 TURNOVER 3.
Tumover
The 6 total total
tumover of the Company for the year has been derived from Its principal activity ny
fo
Geographical market
Year ended 30 June 2016
GBP i Research and development service fee (US)
Marketing and services fee (Ireland)
te tu
18 month period ended
30 June 2015 GBP
246,658,304
286,373,505
783,865,891 ,885,
889,681,794
,
6,735,929
—
ex !,037,260,024
1,178,055,209
Chapter Five: Notes to the Accounts
L869m from the total Turnover of £1.26bn, Compared with the losses, Google made a near £150m pre-tax Profitin 2016 and previous L200m a 2017. Its estimated tax liability for 2017 almost doubled to £47m. Large tax settlements were also done with HMRC by Apple. Apple for 2017 was £192m compared with a Europe's tax liability previous tax credit of £1.35m following a £136m settlement (see Apple Europe 2017 accounts to contribute
The Apple page 1 below).
UK accounts to 2017 showed an £81m similar settle-
HMRC also covering the years up to September 2015. This resulted in a current tax liability for 2017 of £117m compared with £6.5m in ment with
2015.
APPLE EUROPE 2017 ACCOUNTS Follawing an extensive audit hy Her Majesty's Revenue and Customs (HMRC), the Company agreed to pay 2 corponite invome tax adjustment of £136n) covering prior years up to September 26, 2018. This payment of additional tax anc interest reflects the Company's increased activity and is recognized in the current financial period which ended on April 2017. As u result of this adjustment the Company's , enrporatc income Ina payments will increase going forward. |
APPLE UK 2017 ACCOUNTS Following an extensive audit by Her Majesty ’s Revenue nnd Customs (HMRC), the Campany agreed to income tax adjustment of covering prior ycars up 1 September 26. 2005, This
pay A compomiy
payment of additional tas and interest reflects the Company's increased activity and is recognized m the current finnncial period which cuded on April 2007. As a result of this adjustment the Company “s |
curporate income tas payments
will tacrease going fonvard,
For 2016 Amazon UK Services’ accounts disclosed sales of £1.46bn ($2bn). However, it was aa fifth of the 2016
UK sales reported in Note 11 at page 70 of
the US parent company’s 2017 Form 10K of $9.5bn. The explanation? Amazon
UK's income represents payments for the use of its warehouses by Amazon Luxembourg which books the actual sales and profits in a low to no tax zone. The Amazon UK accounts for 2014 and 2016 show large tax payments relating to “previous periods”.
US multinationals are under pressure in the EU to
relate profits to where sales occur, resulting in higher tax charges.
Since a 2013 EU directive, financial institutions and mining or oil companies must provide in their Annual Reports a regional and country by country
breakdown of the taxes they pay. The Barclays report can be read at:
https://www.home.barclays/citizenship/reports-and-publications/ country-snapshot.html
97
H G uiidIc lo i
11i]eC
In
t
res
VC
‘ honyip valists a
an
Post Balance Sheet Events
HII ‘ V
)
unt S ( A ceca
,
Rides 36
Ee
with Companies House file their accounts and LLPs mus t Private companies Many non-listed Companies year-end. ancial of the fin . thin m ne months within although increased in recent years, accounts and fines, are late in filing the accounts within four file their comp anies must relatively small. Listed ni
are
months of the year-end.
and the accounts being between the year- end Given the significant delay take place in between. So, there is q can much shareholders, filed or sent to in the period between “material” events that take place requirement for any off the accounts to be disclosed. If for of date signing the and the year-end burnt down and it was the year ended the main factory example, a month after of the accounts learn of this imporreaders the that is it important uninsured, on their view of the company. tant fact because it will have a significant impact it often contains interesting because review a worth is Note This always had such events occurred during the developments described in some detail; to provide such a detailed account. needed have not the might company year CAMEC 2008 ACCOUNTS 36. Post balance sheat events 0.1 pence 1© | In Apri 2008 B the company raised £100 milion through the placing of 200 milion new ordinary shares of each in the company at 60 pance per share, with both new and exdsting Institutions. 150,000,000shares were issued 8 Apri 2008. on 7 April 2008 B and 60,000,000 were issued on
6
a British Vi Islands company. On 11 Aprt 2008, the Company ecquired 100% % of Lefever Finance Lid (‘Lefever’), Lefovor owne 60% of Todal Mining (Private) Limited (‘Toda’), a Zimbabwean company, Which It turn Flag tho diggs to certain platinum concessions in Zimbabwe. The purchase consideration was a cash payment of USS5 milion end tho lesue of 215 milion new ordinary shares in the Company. in addition the company agreed to advance to
IE
to
teto
. LotererGovernment an amount of the USS100 maion enabletoLefover Republic of by wey of foan Repayment Lefever Development Corporation's 40% share of dividends from Todal.
with lis contractust obligations iscomply to be made from the Zimbabwe Minerel
The Post Balance Sheet Note for the mining group CAMEC for 2008 shown above disclosed details of several interesting transactions in Zimbabwe, ahead of that year’s contested elections. The first transaction refers to the company raising £100m by selling 200m shares to existing and new shareholders. Shortly thereafter it issued a further 215m shares, then worth more £100m, and paid $5m in cash fora British which Islands
a om
a
Virgin
company
company, Todal Mining (Private) Zimbabwean owned 60% IT.© *o* held by the state-owned Zimbabwe Mineral Develo pment was ment Corporation. Todal held “certain mining of
platinum
Chapter Five Notes to the Accounts
in Zimbabwe. Additionally, $100m from the Lioom raised was lent BVI company to “enable it to comply with its obligations to the imbabwe" with Z of repayment to be made out of any future Government to the 40% shares held by ZMDC. So, a very “soft loan” dividends accruing to have been made to the Government, which controls appears mining rights The timing of the loan was fortuitous. Unstated is the in Zimbabwe. beneficial owner of those 215m shares or how the BVI company came to control the mining rights. These were all clues for further investigation which Private
rights”
to the
led to the influential circle around President Robert Eye in 2009 claimed Mugabe. The loan was also the reported subject of a subsequent investigation by the US Department
of Justice.
5 or it Contingent Liabilities ¢or Contingencies cane tenes)ea rNRe Ri, |
These are material aka significant potential liabilities that could be payable depending on the outcome of future events, such as litigation. These liabilities are
NOT recorded in a company’s Balance Sheet as liabilities or charged as Profit & Loss Account. They are only disclosed in the Notes
a cost in the
to the
Accounts. No information has to be provided, even in the Notes, if liability is considered to be remote. If for example, there are
the potential
significant unresolved tax disputes, or other litigation then this is the most likely place to find the details.
The test as to whether the potential liability should be provided for in the just disclosed in the Notes) is whether it is probable
accounts (rather than
that a liability will crystallise and it is possible to make aa reliable estimate of the amount involved. Notice the number of judgements involved here —
remote, potential, probable, estimate.
Very often these will involve commer-
cial disputes and litigation. Details of litigation against the company are not usually disclosed in UK in company accounts unless they are material (although they can appear the company’s prospectus).
This may require an Internet search. UK banks, —
see however, have to disclose “legal, competition and regulatory matters” Note 29 of Barclays 2017 Annual Report, which runs to eight pages. All US
listed companies disclose litigation in their Financial Statements.
99
The Investigative
to Company Accounts Joumalists's Guide
because if company has misjud SU ged to re view this Note continued operations costs m ay threaten its the
It is important
,
the risk, the unexpected
Liability is such that it threatens the existe Xistence Ifthe impact of 4 Contingent it up to long-term investigations by regular LOTS m or open ay of the company auditors will likely “disclaim” an opinion on consequences, the and uncertain in the event o f the the accounts because
liability crystallising, the
accountts
will be meaningless. 2016 GPT SPECIAL PROJECT MANAGEMENT 12 Contingencies with a subco t we Tr connection with the Company's dealings Cenain allegations have been made in in August 2012 the UK Scrious Fraud Office been notified to the UK authorities and allegations have into these allegations. The Directors are not in a position to an decided to that it open investigation had mee itis the nor are they in a position to assess the financial implications, ; if an and of investigation, on the financial statements potential outcome thethe Directors to state the impact, if any, of this matter not practicable for i
inati
ctor group were terminated. Thi The SFO investigation is ongoing. . The contracts with the subcontra as referred to in the
nd
previous years* financial statements wlachim from the subcontractor group fordidamages, breach and misrepresentation were determined in 013 wiih vately oon are adequately res bel repadiatory The any remaining liabilities liablilty to GPT Direc irectors T. the is claim The statements. financial ait open until the SFO wereld eeemain subcontractor's i
in
believe
i
that
for in provitee vestigation is concluded.
i
i
The Company’ Ministry of Defence, has the ability to levy financial penalties and/npanyiyar not achieved. Certain contracts of the C Co The Cor pany's customersthe UK standards are not probable at the balance sheet date. The Compa vs, outflow of event in performance exposed to this resources is veer rronitors Tinagement performance on a regular basis The Compa perk against anticipated luction in contract revenue in the period in which the change in recognises the finanetel penalice romance probabil 5
cis
he
ai
PT Spesal Project
the 2016
for defence equipment provider accounts explains a Contingent Liability in respect of
2m
with anext corruption allegations “with
The Note, which frst « ject of an hnvestigatonbbe
group” relating to Saudi Arabia. subcontractor in 2012 accounts, also reveals it is the subthe the: e Serious Fraud Office. Notice that they say that
yt
they are unable t O quantify the financial impact. This led to an Emphasis of i Matter paragraph in the e audit report. Th e SFO investigation remains ongoing but no charges have yet been brought audi
igati
Related Party Transactions This is one of .
more complex Notes hd
of auditors to not
It
:
and
e relevant accounting standard
not unhear d of for some very small firms Properly understand the requirements and leave out full 1s
Chapter Five Notes ta the Accounts
of transactions, Vhis Note is designed to counter abuse by disclosure persons/ control several other companies but do not Provide a that entities full
picture
or relationships. of their business dealings is almost Turnover as always manipulated by those Just looking to cook is very often carried out the books, manipulation by using Related Parties Related Party Transactions.
should be obvious that
If a single party controls multiple companies,
/
it
transactions between them carry additional risk. The
risk with transactions between Related Parties is that the transactions may not be at “arm’s length” or the arms are very short! This is a Note that can be fertile territory for journalists.
There are three concepts to get to grips with. Firstly, who are Related Parties? Secondly, what are Related Party Transactions? Finally, what are the disclosure requirements? The last part is the easiest to grasp; the details provided must be sufficient for a reader to appreciate the true nature and impact of the transactions. These are the Who are
UK rules:
Related Parties?
Arelated individual is a person or a close family member (broadly defined as spouse/partners, their children and their partners) who: (i) has control or joint control over the company; (ii) has significant influence over the company; or (iii) is a member of the key management personnel of the company a
or its parent company.
A related company is one where (i) both it and the reporting company are (ii) it is an associate or joint venture of the other
;
members of the same group
company; (iii) both companies are joint ventures of the same third party; (iv) the company is controlled or jointly controlled by a related individual;
(v) that person has significant influence or is a member of the key manage(vi) that person provides key management personnel services to the company or its parent. Not “related” are two companies that ment personnel; or
have a director or key manager in common or two individuals who share joint
control over a joint venture.
For journalists, Related Party Transactions are likely to be of more interest in private or smaller listed public companies.
101
,
11oTTytg
I
\
Journalists CST cligative
s
Guide to (
‘
‘
oOMpanys
Accatints
t
PLC 2017 METRO BANK 36 Reloted pertios Other
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Chatiar
k PLC (above) disclose on Page 125 that The 2017 accounts for Metro Ban th almost £8m were provided to the bank wor ices serv and branding design ed by the wife of the bank's chairman, in 2017 and 2016 by a company own l to £21m. tota the ar n-ye Hill on seve Vern taking Clear so far? What are Related Party Transactions? A Related Party Transaction is a transfer of resources, services or obligations between Related Parties, regardless of whether a price is charged.
Still with me? Then there is one last concept to grasp. What has to be disclosed about Related Party Transactions? If there have been transactions between Related Parties, the nature of the Related Party relationship as well as information about the transactions and
of the potential any outstanding balances necessary for an understanding effect of the relationship on the Financial Statements must be disclosed, ese disclosures Should be made of Related arately for each
Category transactions the amount of outstanding balances inclu ng terms and conditions Suarantees; pro sions for doubtfy] debts rela ted tothe amount of outstan in alances; any Sep
Parties and would includ
the amount of
€
xpense recognised during th © period in respect of bad or doub tful debts The €xample on the Next Page lists € transactions IN 2002 and 2003 disclose Phoenix Venture Holdings, hecompany at owned carmaker Rover a4 er MW sold It In 2000 8Toup coll psed in 2005 owing creditors £ 13bn The first a aragraph relate S to the Group’s dealings with business in which a directo ad an Interest The sec s lose disc Paragraph
Chapter Five Notes to the Accounts that the
Group purchased over £53 million worth of ¢ ats from a company
common directors. The final paragraph discloses that Jo wl ich had an notes with interest by the group to the directors. It is not specifihad been repaid
—
transactions were at arm's length. These Were benefits directors in a personal capacity in addition to their salaries
that the cally stated received by the and other
perks.
PHOENIX VENTURE HOLDINGS LIMITED RELATED PARTY TRANSACTIONS The following transactions took place during the year with companies related to the directors of the Group. The Group purchased £510,715 (2002 - £897,476) of consultancy services from Mira, end balance due to Mira was £511 (2002 Stephenson is a director. The year £271,972).
of which N
The Group purchased £53,408,588 (2002 - £63,164,526) of uscd vehicles from MGR Capital Limited, of which J Edwards and P Beale are dircctors and J Towers, P Beale, J Edwards, N Stephenson and K Howe are significant sharcholders. The year end balance with MGR Capital Limited was a creditor of £324,021
(2002
-
£5,272,764).
As part of the Group reconstruction on 18 December 2000, J Towers, P Beale, J Edwards and N Stephenson were each issucd with loan notes to the valuc of £2,500,000 by Phoenix Venture Holdings Limited os part consideration for their shares in Techtronic (2000) Limited. These loan notes were repaid during the ycor. lnterest payments amounting to £312,000 (2002 - £625,000) were made to the loan note holders.
In total the Phoenix directors received more than £40m from the loss-
making MG Rover. After MG Rover collapsed there was a Government appointed investigation costing £16m over four years. This resulted in the Phoenix Four (Towers, Beale, Stephenson and Edwards) agreeing to be banned as directors for three to six years in 2011.
Examples of the kinds of transactions to be disclosed if they are with a Related Party are: purchases or sales of goods, property and other assets, the rendering or receiving of services and leases. There should be a statement that the Related Party Transactions were made on terms equivalent to those that prevail in arm’s length transactions
—
if such terms can be substantiated.
The 2016 accounts for the private company Fordstam (on the next page), through which Russian billionaire Roman Abramovich controls Chelsea FC, revealed that he paid £1m that year and in 2015 for corporate hospitality boxes at the club’s Stamford Bridge ground at “current market rates”. For a much more extensive Related Party disclosure it is worth studying Note 19 for the privately owned, international telecom company Lycamobile UK in its December 2016 accounts. It runs to seven pages — two more than the previous accounts.
. Guide to tigative ’ Journalists’s The Investig
.
Cc Company
Account S
voy
2016 FORDSTAM ACCOUNTS Related party transactions
2
1d Transactions with relate parties
.
transacbons with rolated parties Group entered into the folowing Dunng the year the
Sale of goods 2016 £000
mre Mr R Abramovich
1.000
& Flom UJK Skadden, Arps, Slate, Meagher
1,000
Purchase of
2015 £000
2016
£000
m5 toon
.
1,000
»
1,000
90
Transactions between companies that are wholly-owned by a common of those companies are consolidated, do not parent and where the accounts have to be disclosed. For Abbreviated Accounts, the Related Party Trans. actions did not have to be disclosed, except for transactions with directors which are required to be disclosed by the Companies Act. The new Abridged
Accounts have to include Related Party transactions.
Toresearch frauds using Related Parties, Versailles Trade Finance PLC and the Bank of Credit & Commerce International, although old, provide excellent case studies.
Ultimate Controlling Part This
often the very last Note in a set of accounts Unfortunately, like Related Party disclosure, this is another requirement that seems to cause some accountants difficulties and I have seen some instances where the full requirements do not appear to have been met. In seems
particular, there Controlling Party has to Abridged Accounts.
to be some debate as to whether the Ultimate disclosed in Abbreviated or now
If
be
part of a group, a UK private or public company must disclose the identity of its immedi ate parent company and if the parent company 1s owned by other companies, also the Ultimate Controlling Party and where its
Ultimate
if
If neither the parent Conta!arty Publiclyitsavailable. accounts available to the public
example bean ©
of
i
nor the
makes
where the
controlling company is based
—
(for
e.g. the BV])
disclosed.
HOLDINGS 2017 caFFe NERO GROUP 26. Ultimate
Al
parent undertaking
the year end, the ownership structure
1s
a3
follows
Immediate parent company
( The Nero Company
is a company incorporated in Luxembourg. Copies obtained from Avenue 46a JF Kennedy, Luxembourg, L-1855.
(©
G
‘
Rome PIK Holdco Limited The Nero Company
Parent company of the largest group for which accounts are prepared Majority shareholder of The Nero Company
GW Ford®
of these Group accounts can be
W Ford is the ultimate controlling party of the company.
The extract above shows the ultimate ownership Note for the parent company of the Caffé Nero chain
—
founder Gerry Ford, via a Luxembourg
company, whose accounts are available. In some cases, the Ultimate Controlling Party is not the same as the ultimate beneficial owners. The Ultimate Controlling Party is the individual or family who control the company. Where the identity
of this individual is
not known then that fact also needs to be disclosed.
If someone owns more than 50.1% of the voting shares, then clearly they Party because they can enforce their will on the company.
are the Controlling
If two shareholders each own 50%, if they usually act in concert then they together are the Controlling Party — if they do not, then there is no Controlling Party. If there are three shareholders owning 1/3 each, then unless two usually act together all three together will be the Controlling Party. Often, ownership of companies may lie with family trusts either in the UK or offshore. In this case the beneficiaries of those trusts should be disclosed
shown below in the trail of ownership of the Virgin empire of Sir Richard VIRGIN ATLANTIC 2013 ACCOUNTS 28
Related party transactions
As at 28 February 2013, the Company’s ultimate parent company was Virgin Group Holdings Limited, whose principal shareholders are Sir Richard Branson and certain trusts, none of which individually has a of those trusts are Sir controlling interest in Virgin Group Holdings Limited The principal beneficiaries Richard Branson and his immediate family The shareholders of Virgin Group Holdings Limited have interests directly or indirectly in certain other companies, which are considered to give rise to related party disclosures under Financial Reporting Standard 8
105
The
‘
f ative
0
alists
mn Ic teo Comp Gului Ar
Ww
Ol "1Mn \ccounts
BVI revealed in the 2013 accounts from Virgin the UK to the Branson from Atlantic.
real owners being hidde n, at le ast if not in practice, To prevent, in theory the UK has introduced a new [a, LLPs, and lay for private companies especially House of any owner of more than 25% o at Companies requiring disclosure with Significant Control” anq These are termed “Persons thecompany or LLP. Statement. Confirmation annual the are to be listed in Statement for Virgin Atlantic (below) identifies §;; The 2017 Confirmation with Significant Control holding “directly of Person Richard Branson as the than 75% of the shares in the company’, less but than 50% more
indirectly,
STATEMENT VIRGIN ATLANTIC 2017 CONFIRMATION Notification Detalls Date that person became 06/04/2016 registrable:
BRANSON SIR RICHARD CHARLES NICHOLAS
Name:
Service Address:
Country/State Usually Resident:
Date of Birth:
P O BOX 71
CRAIGNUIR CHAMBERS ROAD TOWN TORTOLA VIRGIN ISLANDS, BRITISH VIRGIN ISLANDS, BRITISH **107/1950
BRITISH
Nationality:
Nature of control
me om
in the holds, directly or indirectly, more than 50% but less than 75% of the shares
But while larger companies may be complying with the new law, all too especially with offshore owned private companies, the real Person with often, Significant Control is not identified. The reason — lack of enforcement by Companies House. In 2018 the NGO Global Witness estimated more than 10% of
UK companies had failed to identify their Persons with Significant
Control.
Chapter Six
Auditors and the Audit Report Audit Reports used to be quite short, typically about six lines. However, over the years they have expanded considerably due to a combination of regulation and litigation. Some of the background is now explicitly stated.
Costa’s audit report, shown in full on the next pages, is a typical example. § The first paragraph states what has been audited and under what rules the accounts have been prepared UK GAAP (UK Generally Accepted Accounting Principles) in-this case. For listed companies it’s IFRS. @ The second paragraph explains to whom the audit report is addressed (shareholders as per the Companies Act). The auditors Deloitte also specifically disclaim liability to anyone other than the company and the shareholders as a whole
—
it is settled UK case law that auditors do not have a duty of care
to an individual shareholder. W
The third paragraph repeats that it is the directors’ job to prepare the
“true and fair” accounts and the auditors’ job to express an opinion on them in accordance with applicable laws and standards.
Accounts Journalists’s Guide to Company The Investigative COSTA 2017 ACCOUNTS Costa Limited Independent .
We have
|
audited the
In
wy
ial st
Fran
Auditor's Report to members of Costa Limited ts of Costa Limited for the year ended 2 March 2017, which comprise the
the Statement of cme of Comprehensive Income, the Balance Sheet,has Changes
been applied in their The financial reporting framework that notes and the related Standards (United Kingdom Generally Accepted is applicable law and United Kingdom Accounting Disclosure Framework’, including FRS 101 "Reduced
Ea
1
to 24.
Accounting Practice),
i
, dance with Chapter 3 of Part 16 of the in Company's members, as 3 body, accor has been undertaken so that we might statc to the Company's members them in an auditor's report and for no other purpose. To the fulley or assume responsibility to anyone other than the Company and the rmined by law, we do not accept for our audit work, for this report, or for the opinions we have formed. Company's members asa body, lely
10 the
work "3006. Our audit oonpa mane we are required to state to a t those
i sibilities of directors and auditor the in the Statement of Directors’ directors are responsible for the Responsibilities, As eaplalned more fully a true that they fair and for being give and view. Our preparation of the financial statements satisfied
with on the financial statements in law responsibility is to audit and express an opinion accordance applicable and Internetions! Standards on Auditing (UK and Ireland). Those Standards require us to comply with the Auditing Practices Board's (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements An audit involves obtaining evidence about the smounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or matcrially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencics we consider the implications for our report.
Oplaioa on the financial statements In our opinion the financial statements:
give a true and fair view of the state of the Company's affairs as at 2 March 2017 and of its profit for the year then ended;
been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice;
have °
have been prepared in accordance with the requirements
of the Companies Act 2006.
Opinion on other matter prescribed by the Companles Act 2006 In our opinion, based on the work undertaken in the course of the audit: *
’
the information given in the i i Strategic Report and Directors' R epor for the financial year for which the financial statements are prepared is consistent with the financial statements; and the Strategic Report and Directors’ i i Report in accordance with po have been a
*
|
urements
prepared
applicable legal
and
the
of the Company and its environment obtained in the course of tiew ofhathe knowledge understanding not identified any material misstatements in the have
»
Suntegic Report and the Directors’ Report.
We
Matters om which we sre
required to report by exception We have nothing to report in respect of the followi allowing matters where the Companies Act 2006 report hear you if requires us to *
in con
adequate accounting records have Not been k OF retums from branches not visited adequate for our audit have not been received by us: or . th € financial statements are hot in agreement with the
aa
sccounting records and returns; or
ACCOUNTS (continued) COSTA 2017 of directors’ remuneration specified by Jaw are
.
certain disclosures
»
all the information and explanations we we have not received require for our audit
not made; or
entor Statutory Auditor) Nicola Mitche For and on behalfof Deloitte LLP, Statutory Auditor 2 New Street Square
London
EC4A 3BZ
109
The next paragraph explains the scope and aims of the audit and some indications of how the work is carried out. They do not check everything included in an Annual Report but only starting from the Directors’
Report (including some information in the new Strategy Report) and up to the end of the Notes. For this reason, any hyperbole is usually in the Chairman’s Report and not in the Directors’ Report. So far, so standard. Now follows the actual opinion paragraph. If there are no issues, as — Accounts give a “true and fair view”, have
with Costa, this is very short
been “properly prepared” under UKGAAP and comply with the Companies Act 2006. They go on to say that the information in the Directors’ Report is “consistent with the financial statements”. @ The final paragraph is about specific matters on which they must report if there have been breaches of some requirements of the Companies Act —
inadequate accounting records kept, the Accounts do not agree with the
underlying accounting system, inadequate disclosure of directors’ remuneration or if they have not received all the information they required.
At a guess, over 99% of Audit reports you will examine will be similar to this one in their form and content. They are termed “a clean audit report” or an “unmodified report”. Accountants are not given to exaggeration and most casual readers are likely to think that there is not much difference between the audit reports of the best and the worst set of figures. Unfortunately, accountants have not yet got round to colour coding their audit reports green, amber and red. do take it up, you read it here
first!
If they
Journalists’s lnves The Investigative
ide to Company /Accounts Guide any
he
AUDIT REPORTS DIFFERENT TYPES OF
Modified Audit Report
Qualified Audit Opinion
of Matter Emphasis mp “Subject to”
|
e.g. Going Concern
|
|
Not Pervasive
Pervasive
Don’t Know
Misstated
‘ a
t
i Bl
trveand view”
fi
°
Unable to form an
Misstated “EX
Except for
.
Don’t Know “Except for” ept
Qualification
fc
Qualification
opinion”
Ifit is nota “clean” aka “unmodified audit report” (as in the example shown on the previous pages), it will be a “modified audit report.
This will either be
an “Emphasis of Matter” or “qualified audit opinion”. Notice the subtle difference! The diagram above neatly summarises the different types of
modified audit reports that are possible. From a journalistic perspective, unlike accountants, you are probably not interested in the fine distinctions. So, I will try and be brief, and show you examples of types you might come across.
An
“Emphasis of Matter” report (see diagram) is a “Modified Audit Report” that covers the situation when the auditor is persuaded that nothing is really wrong with the accounts but the auditor thinks that the shareholders should be made aware of some
important judgement issue, which if wrong could
have a big impact. It is often in respect of Going Concern. There will be a paragraph headed “Emphasis of Matter” (see Fastjet example, right). Although technically not a qualification, in practi cal journalistic terms this is a qualification — the auditor is pointing at a Re d Flag. Then we move onto “
a
modified
—
Qualified Audit Opinion” where the audit opinion is
these are t echnically and practically “qualified” audit reports. There are two scenario s. Either the problem is “pervasive” or it is “not perva-
Chapter Six: Auditors and the Audit Report
ve", “Not pervasive” covers situations where something import ant
is wrong but it is limited in its impact — in this case the audit opinion for [subject matter that is takes the form “Except wrong or or unexplained
unexplained]...
a true & fair view”. “Pervasive” is the worst C ase scenario
accounts showa
the accounts are
effectively worthless.
the
where
We get to worthless accounts by either having definite errors resulting in “adverse Opinion” (Accounts do not showaa true & fair view) or by not having enough information to satisfy the auditors (Insufficient evidence — so auditors form an to opinion” on whether the accounts show aa true &“a fair are “unable view and “disclaim” an opinion) about something fundamental. Let us look at some “modified” and “qualified”
examples. The example below and on the next pages is from the 2016 accounts for the
London listed low-cost African airline operator Fastjet. FASTJET 2016 ACCOUNTS
Independent auditor’s report INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FASTJET PLC
We have audited the financial statements of fastjet Pic for the year ended 31 December 2016 set out on pages 29 to 79. The financial reporting framework that has been applied in the preparation of the group financial statements Is applicable law and International Financial Reporting Standards (IFASs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FAS 101 Reduced Disclosure Framework. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 25, the directors are sesponsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility Is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements Is provided on the Financial Reporting Council's korivat website at www frc.org Basis for qualified opinion on financial statements
At 31 December 2015 fastjet Pic had an investment of 60% in Fly S40 Angola, a foreign subsidiary whose immediate parent company Is fastjet Aviation Umited. An announcement was made In April 2014 that fastjet
111
T «e hnV 8S
i
igi
i
ists'sS
ve JouWtnalists
Guide to Company Accounts
(continued) FASTJET 2016 ACCOUNTS has not provided any further funding to Fly S40 Angola an dithas In Angola. fastjet books and records were not was suspending operations local Prepared. in office in Angola. Therefore, accounting the minority shareholder in not maintained a local any received nor Fly $49 sought neither communication with of 540 addition, fastjet has financial for the the in position no change preparation Fly Angola fastjet Pic assumed therefore and Angola transactions 8 during 2015 Involving other financial statements except for consolidated 2015 mber of the 31 accounting records, we were unable to obtain sufficient appropriate in the absence of proper Dever and the completeness of liabilities of US$18.1m related to Group oo value of assets of US$1.4m over the detalled in note 3. We qualified our audit opinion on the financia) as 2015, ag at 31 December with regar d to this limitation. December 2015 for the year ended 31
sveements
112
to fastjet Aviation Limited, which is 2036 a liquidator has been appointed the As detailed in note 3, on 6 June of Fly $40 Angola. This part of the fastjet Group has now been deconsolidateg immediate parent company Limited and subsidiaries are of the fastjet and to the liquidator, Aviation results following the loss of control with the comparatives restated accordingly. The amounts reported in the presented as discontinued operations 540 Angola, reflect the 2016 in respect of discontinued activities, which includes Fly year ended 31 December liabllities of fastjet Aviation Limited and subsidiaries and are based on the deconsolidation of the assets and sheet as at 1 January 2016. As described above, we were balance in the opening included assets and liabilities audit evidence over the related assets and liabilities as at 31 December unable to obtain sulficient appropriate obtain sufficient appropriate audit evidence over the amounts reported in 2015, and therefore were unable to including the reported profit on in the year ended 31 December 2016, respect of discontinued operations result from discontinued operations of US$14.3m. disposal of US$18.0m and the comparative of the assets and liabllities of Fly 540 Angola during the year ended 31 December Following the deconsolidation affect the evidence available to us in respect of the balance sheets as at 32 2016, the above matters do not December 2016.
Qualified opinion on financial statements In our opinion, except for the possible effect solely on the comparative information for the year ended 31 December 2015 of the matter described In the basis for quallfied opinion on financial statements paragraphs, the financial statements give a true and fair view of the state of the group and parent company’s affairs as at 31 December 2016. In our opinion, except for the possible effects of the matters described in the basis for qualified opinion on financial statements paragraph:
the financial statements give a true and fair view of the state of the group's loss for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the parent company financial statements have been property prepared in accordance with UK Generally Accepted Accounting Practice; °
the financial statements have been prepared in accordance with the requirements of the Companies Act
Emphasis of matter
- Going concern
In our opinion on the financial statements, which is not further modified in this respect, we have forming considered the of the disclosure made in note 1 to the financial statements concerning uncertainties adequacy and the to continue as a going concern; In particular the substantial ability parent company’s as Including higher foad factors and yields, and cost savings from the relocation of head office. ra Uonalisation et, and changes to fleet and, if needed, the successful receipt of additional equity funding appropriate im the Gn roup’s needs. These matters along with the other matters explained in note 1 to the financial statements+ ind ndicate the existence a material uncertainty which may cast significant doubt on the of Broup’s and the parent company’s ability to continue as a going concern. The financial statements do not Include the adjustments that would result Hf the and
athena
group
concem,
Qualified opinion on other
tf
Except for thep
the parent company were unable to continue as
Matte rs prescribed by the Companies Act 2 af consequentia leffacte fects of the matter described in the basls for
f
a going
ne
qualified opinion on financial
Chapter Six: Auditors and the Audit Report
FASTJET 2016 ACCOUNTS (continued) on the related disclosures in the Strategic Report and Directors’ Report, based statements paragraphs solely on be undertaken, In the course of the audit of the financial the work required to Statements and from reading 8 the Strategic Report and the Directors’ Report: °
we have not identified material misstatements in those reports; and
e
in our opinion, those reports have been prepared in accordance with the Companies Act 2006.
in our opinion the
information given in the Strategic Report and the Directors’ Report for the financial year is
consistent with the financial statements.
Matters on which we are required to report by exception In
respect solely of the limitation on our work relating to Angola, described above:
¢
we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
*
we were unable to determine whether adequate accounting records have been kept.
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: *
returns adequate for our audit have not been received from branches not visited by us; or
*
the parent company financial statements are not in agreement with the accounting records and retuens; or
*
certain disclosures of directors’ remuneration specified by law are not made.
Lynton Richmond (Senior Statutory Auditar) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Forest Gate Brighton Road
Loloord.
Crawley RH11 SPT
30 May 2017
In the above audit report the auditors are expressing two concerns. Firstly, in the paragraph Emphasis of Matter — Going Concern, they want you to know
that if the company does not achieve its revenue and cost targets or, if needed,
extra equity funding, it will go bust (“casts significant doubt”).
The accounts are also qualified because they lacked information on the company’s operations in Angola. But in the auditors’ opinion, although important, it was not fundamental in its impact on the accounts. Hence, the qualification takes the form “Except for the possible consequential effects” If this matter had been deemed
rather than a complete disclaimer of opinion.
to be “pervasive”, the opinion would instead have said “we are unable to form an opinion as to whether the accounts give a true & fair view”.
Fastjet is still flying.
Guide to Company Accounts The Investigative Journalists’s
UK, in its accounts to Ke Private telecom company Lyeamobile bran of a “disclaimer of opinion” ( as shown 2016, provides a rare example in the extract below). LYCAMOBILE UK 2016 ACCOUNTS to the members of Lycamobile UK Limited Independent auditor's report of Lycamobilc UK Limited for Wo were ongaged to audit the financial statements
the year ended 2 to 48. The financial reporting framework that has been applied in their Fobruary, set out on pages 14 Preparation Accounting Stendards (UK Generally Accepted Accounting Practice) , inchud| applicable law and United Kingdom ng UK di in the FRS 102 The Financial Reporting Standard applicable and Republic of ireland. in accordance with Chapter 3 of Part 16 This report is made solely to the Company's members, as a body, ofthe eudit work has been undertaken so that we might state to the Company's members those Companies Act 2006. Our auditor’s report and for no other purpose. To the fullest extent permitted matters we are required to state to them in an assume responsibility to anyons other than the Company and the Company's members, by law, we do not accept or the opinions we have formed. as a body, for our audit work, for this report, or for
:
and auditor Respective respoosibilities of directors Statement set out on page 11, the directors are responsible Ascxplained more fully in the Directors’ Responsibilities for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our the financial statements in accordance with applicable law aud responsiblity is to audit, and express an opinion on, standards require us to comply with the Those end Ireland). International Standards on Auditing (UK Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the financial statements
A description of the scope uk/audit site at www. fre. org
of an
audit
of financial statements is provided on
kprivat
the Financial Reporting Council's web-
Basis for disclaimer of opiuton on financial statements
The audit evidence available to us to confirm the appropriateness of preparing the financial statements on the going concem basis, which the directors explain in note | to the financial statements, was limited. This is because the group may need financie! support from its related pasties, as described in note I, and whilst for those related parties together there is central oversight of trading forecasts and liquid resources there is no equivalent information available for the aggregate possible need for financial support for that network of related parties. Accordingly, we were unable to sufficient, appropriate audit evidence as to the ability of the group to access financial support should it need to jo 80, oben
Bacis for disclaimer of opinion on financial statements
The audit evidence available to us to confirm the appropriateness of preparing the financial statements on the going concern basis, which the directors explain in note I to the financial statements, was limited. This is because the group may need financial support from its related parties, ae described in note I, and whilst for those related partics together there is central oversight of trading forecasts and liquid resources there is no equivalent information available for the aggregate possible nced for financial support for that network of related parties. Accordingly, we were unable to
abla
buflicient, appropriate audit evideace as to the ability of the group to access finencial support should it need to
as the result of the above we do not express an opinion on the financial statements, there are the that would have peragreph required modificatlon of our audit opinion following on from the otherwise those matters our audit report on the financial statements for the in year ended 28 Pebrusry 2015. hin* eb due year" as at 28 February 2015 is an amount of £134,134k owed by related hich Oe¢bors: audit evidence available one orton to us was limited because of the complex nature of the related party truoture the ee witbio. Owing to the nature the company’s records at that dato, we were unable to oblaln of wullicieat «7 proprio audit evidence regarding the measurement end disclosure of these related party balances by using other an, As @ consequence we have been unable to determine whether the impairment of £5,963k weuinst procedures. year amounts owed by related parties recorded in the . ended 29 i 2016 to th sppropeigay’berongs nant February t or whether part of f thisthis impairmeot should have been recorded rfin the years ended 28 ry 20} $ of prioyear
praia
mmodifiec:Hons as
°
for
within
ee
err
e
As
lai
ri
to
financialyryear ondea 21iyFetan
al
Feb
there was an adjustment of £2.4m to increass tumover Inthe 15. statements, The directors were unable to determine the nature of the balance and 8s
Chapter Six: Auditors and the Audit Report LYCAMOBILE
UK 2016 ACCOUNTS (continued)
were unable to obtain the directors fo obtaln
evidence regarding its profit and loss eccou: wlth regards to ite correct
sufficient evidence wien were unsdle2015 using other sudit procedures.
clasalfleation Fer
ended 28 Pebrusry
Disclaimer Because
of opinion on flaaneial statements
of the significance of the matter described in the first paragraph of the basis for disclaimer of opintan
financial stetoments for an audit opinion.
Opinion
_
aefin,we I year
on
section, we have not been able to obtain sufficient appropriate audit evidence to provide a basis Accordingly wo do not express an opinion on the financial statements,
on other matters prescribed by the Companies
Act 2006
our disclaimer of an opinion on the financial statements, in our opinion the information given inthe and the Directors’ Report for the financial year for which the financial statements are Strategic report prepared Is with the financial statements.
Notwithstanding consistent
to report by exception Matters on which we are required In respect solely of the limitation
of our work referred to above:
we have not obtained all the information and explanations that we considered necessary for the purpose audit; and e
of our
we wore unable to determine whether adequate accounting records have been kept by the parcat corppany.
We have nothing to report in respect you If, in our opinion:
of the following matters where the Companies Act 2006 requires us (o report to
e
setums adequate for our audit have not been received from branches not visited by us; or
e
the parent
©
certain disclosures of directors’ remuncration specified by Jaw are not made.
company financial statements are not in agrecment with the accounting records and roturas; or
N
an
David Neale (Sesior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Charteredd,Accountants 15 Canada Square London
EI4 SGL
A month after signing that opinion, KPMG resigned as auditors in April 17 (see letter below). Dear Sirs
ceasing to hold office ae auditors Statement to Lycamobile UK Limited (no. 06903820) on Act 2006 pursuant to section 619 of the Companies The reason connected with our ceasing to hold office fs the difficulties In obtalning sufficient, as of Its related UK appropriate audit evidence at this company and for related audits companies a result of the governance structure and oversight of the companies’ system of Intema statemen cone! over financial reporting, as indicated, for example, in our audit report on the financial the Company for the year ended 29 February 2016. of Yours faithfutty
Keme LUZ KPMG were replaced by PKF Littlejohn . Such letters are the exception. MG had written one before, see “When Auditors Resign” below.
But
115
Guide to Cc Company Accounts The Investigative Journalists’s
from the audit report of Let us now look at the extract below Longboroy 4 h where an Adverse Opinion of “Accounts do not for PLC 2007 Capital show a true & fair view” was issued. Longborough had invested in several US com. of the audit report explain the problem panies. The earlier paragraphs
and
the extract below concludes: LONGBOROUGH CAPITAL PLC 2007 AUDIT REPORT Adverse opinion in note 1 b) to the accounts ‘Basis of Consolidation’ we were unable to obtain financial information for the company's subsidianes (Global Technologies Inc, Corrosion Control inc and Advanced Digital Components Inc) for the year ended 31 January 2007 As a result the group accounts were consolidated using year ended 31 January 2006 accounts in respect of the subsidianes and the 31 January 2007 accounts of the parent company
As more fully explained
In wew of the failure to provide the accounting information required in order to prepare accurate consolidated accounts and the consequent failure to prepare accurate consolidated accounts, and also in view of the possible effect of limitatons in evidence available to, as set out above, in our opinion the fmancial statements do not give a true and fair view of the state of tha company’s affairs, in accordance with United Kingdom Generally Accepted Accounting Practice, as at 31 January 2007 and of its loss for
the year ended
Further, in our opinion the financial statements have not been properly prepared tn accordance with the
Companies Act 1985 In
respect solely of the limitations in our work referred to above e
we have not received all the information and explanations that we considered necessary for purpose of our audit
the
Notwithstanding our adverse opinion on the accounts, in our opinion the information given in the directors’ report ts consisten! with the financial statements
No further accounts were ever filed. The company was dissolved in 2015.
When Auditors Resign If an auditor resigns, the Companies Act
requires that they file a statement at Companies House explaining the reason and whether there are any matters that ought to be brought to the shareholders’ attention. If there are no such matters, that fact should be stated. A letter stating that there are matters that should be brought to shareholders attention is even rarer than adverse audit reports. So, the letter should always be checked for the reasons. fc
Bed
Ae ?
ster
f
UK, KPMG had issued such aletter (right) in respect a renamed XL Leisure (discussed in the previous chapter
KPMG Audit
pana
20 Faangcon
Steet
London EC4A APP Un.ted Kingdom
of Excel Airways Group ple the Statement to (No. 4513359) (“the directors to hold office as auditors pursuant to section 394 of the Company”) on ceasing
Companies Act 1985
394 of the Companies Act 1985 we sct out below the circumstances office that we consider should be brought to the attention of
with in accordance section to hold connected with our ccasing the
Company’s members or creditors.
to the
financial statements of the Company for the Our statutory audit opinion relating year ended 31 October 2005 was signed on 28 February 2006. We have since advised the Company matters referred to below, our opinion is not to be relied on as we are that, in the light of the no that the financial statements give a true and fair view of the longer able to conclude profit of the Company and its subsidiaries (“the
Group”) and the state of affairs of the Company and of the
Group. In May 2006 we reccived information from a third party which indicated that certain arrangements between the Group and a supplier (which were reflected in the financial statements) might not have commercial substance. At the request of the Company's ultimate parent company “the Parent Company’’) we undertook a short investigation. It was clear to us
that the full extent of these and other arrangements had been withheld from us and that the of the supplier arrangements had been misrepresented to us by certain directors of the Company. We concluded that the financial statements were likely to contain material errors as a
nature
result.
A committee was subsequently established by the Parent Company with the intention of commissioning a comprehensive independent investigation of the arrangements with the supplicr and other potential accounting irregulanties within its UK subsidiaries. In its preliminary report the committce concluded that the arrangements between the Group and the supplier had no commercial substance and that, on this basis, the financial statements of the Company, certain of its subsidiaries and the Parent Company needed to be revised. The committee also noted that the investigation was not complete and that further matters might come to light. We understand that no further investigation work was carried out. We have advised the Company and the Parent Company that this initial investigation has not satisfactorily addressed the concerns we had raised about other arrangements and potential informed accounting irregularities in the financial statements of the Company. We have been that the Company and the Parent Company do not intend to investigate these matters any further; nor will they permit us to undertake the programme of additional audit and investigative work which we consider is necessary to enable us to issue an opinion on the revised financial statements of the Company and the Group. The Company has informed us that its reasons for that the investigation not investigating these matters further are that, inter alia, it is satisfied covered all relevant issues and that the costs of a further investigation would be disproportionately high. In light
of the above circumstances we have resigned as auditors with immediate effect.
KOWIC LEP
KPMG LLP
Chartered Accountants Registered Auditor
16 October 2006
Journalists's The Investigative
Accounts G uide to Company
in October 2006 over the 2005
resigned , when they re Exceptional Exception: Items) their opinion on those accounts. awn withdr h accounts a after aving ts
anies House the KPMG letter did not attract attenAlthough filed at Comp in September 2008. collapsed Leisure tion until XL of ethics requires the accountants When auditors resign or change, code auditor should enquire the proposed the appointment that before accepting whether there are any reasons, professional or from the current auditor the engagement. Usually a new auditor will be otherwise, for not accepting listed for companies. found, especially advice to journalists is not Before I leave the subject of audit reports, my between various audit reports, to worry too much about the fine distinctions is a serious issue with [ usually counsel those I advise to conclude that there should be made. the company for the auditor to raise a flag and due enquiries In practice any type of non-standard audit report is often a sign of deeper |
118
|
issues, particularly when Going Concern is involved.
Independence of Auditors In recent years questions have been raised over the independence of auditors. Many, including me, are concerned that time and again companies that have been given aa clean bill of health by their auditor, with the accounts showing large profits and strong Balance Sheets, collapse (see the 2018 report by
MPs into the Carillion collapse). The problems in the world’s biggest banks exposed by the global financial crisis went undeclared by their auditors (HBOS'’s auditors were KPMG, RBS's auditors were Deloitte) as did those at the Co-operative Bank (auditors KPMG).
Consulting services, corporate finance advice during boom times, insolvency assistance during bust times and tax advice provide the highest paid stars of the accountancy industry. In the UK not only can the auditor assist with his client’s internal account preparation and internal audit checks but he can introduce his fellow partners who can provide clever schemes to avoid millions in taxes as well as many other expensive services. Wearing his audit hat he can then return after the year-end to, as some say, check his own firm’s work. Auditing is dominated by just four firms — PricewaterhouseCoopers,
Chapter Six: Auditors and the Audit Report
and Ernst & Young (now EY). Deloitte, KPMG They audited 99 of the in 2016, more than 85% of FTSE100 companies top European companies of US companies while controlling two-thirds of and over 60% the global accountancy market. EU regulators have tried to increase competition. Listed UK companies have to put their audit out to tender every ten years. EU companies must change auditors after twenty years. Ten years. Twenty years. That is a very long time. Since 2013 an increasing number of leading companies have changed their auditors after a tender. But this has largely produced pass the fee parcel between the Big Four. BDO had the sole FTSE100 client not audited by the Big Four. Grant Thornton had previously had aaiclient in the FTSE100 (Grant Thornton announced in 2018 it would not bid for any new
FISE350 audits.) Other second tier firms
such as Mazars,
Baker Tilly, and Smith & Williamson, have so far not managed to break into the magic FTSE100 circle. Indeed, only nine of the UK’s 350 largest companies are not audited
by PwC, Deloitte, KPMG or EY. The Big Four lobby remains
highly effective. Some worry that audit firms wear too many hats. Even their regulator, the Financial Reporting Council. It has suggested “audit only” firms to increase
competition and prevent conflicts of interest. Following the collapse of Enron, the US Sarbanes-Oxley Act 2002 prohibited auditors from carrying out certain other
work for their audit clients. Audit fees increased substan-
tially. Sarbanes-Oxley also required the CEO and CFO of US listed companies to certify the accounts were correct. Such restrictions were not imposed in the UK. Enron was seen by the profession as a US specific failure, arising from its “rule based” accounting, UK accounting was “principle-based”. in Although nominally it is the shareholders that appoint the auditors,
whereas
substance the auditor is appointed by the Board, on the recommendation of the finance director.
The Board also decides the fees. The sums involved for non-audit work are substantial. For example, Note 33 of the mining group Anglo American PLC 2016 Annual Report page 156 showed that it paid its auditor Deloitte $8.9m for audit and a further $4.5m for non-audit work. For 2015 these figures were $10m and $4.4m.
From 2016 EU rules limited non-audit fees to 70% of the audit fees for
Journalists’s ligahive ‘ The I Invest)
Guide
to
: wints Company Accs
rrtain services services fo audit clients, Critics Cry certain . , ree vears and yanned the previous ban. total a be believe there should for
|
three
|
.
When
I
I always review the quantum of fees am analysing the accounts should beClconcerned 7about potential to ascertain whether I
auditor paid to the
120
—
issues of independence. at the Irish operations of leading insurer RSA ‘The black hole that emerged the too of what some feel is an example in 2013 highlighted perhaps continued Deloitte and paid Etom management. auditor between relationship cosy was tax advice in 2012 compared with less than for management consultancy and scale of full the problems the before £6m in audit fees. The firm was replaced,
— KPMG partner until 2011 was Chairman of the emerged, by KPMG a former RSA (Irelend) audit committee. still fee] entirely comfortaIn the UKat least, it appears that Big Four firms a large long-term fraud at their audit client, which arguably, ble
investigating their audit procedures should have discovered over the years. Brunei's Prince Jefri’s dispute with KPMG (a House of Lords judgement), while nothing to do with auditing, is a good case if you wish a perspective on conflicts of interest for accountants. (Bolkiah v. KPMG [1998] UKHL 52; [1999] 2 AC 222; [1999]
All ER 517; [1999] 2 WLR 215 (16th December, 1998) That brings me to what auditors politely call the “perception gap”. They complain that the public simply does not understand that the auditor is “nota 1
bloodhound”. They cannot pick up every little error and fraud. They gothrough due diligence and only take on clients of good character who can be trusted. It is simply not possible for auditors to examine every single transaction
entered into over the year. Finally, any system is susceptible to occasional failure and the vast majority of audits are successful. Very few companies
experience bad audits, and large-scale frauds are often due to deception by directors or collusion between the company and suppliers or customers. No
system, say auditors, can cope with high-level deception or collusion. A 2018 report by the International Forum of Audit Regulators found fault with 40% of more than 900 audits of firms in 2017. The most common issue
of assumptions. Followed
of information from
listed companies by leading audit was the failure to assess the reasonableness
by the failure to test the accuracy and completeness
management. The most recent review of UK audit
quality by the Financial Reporting
Chapter Siw Auditors and the
\ucdit Repart
Council in 2017 declared only 81% of FTSE350 audits “Rood or requiring lima ’ Both KPMG and Deloitte had two of ated improvement”, 23 audits reviewed which required “significant improvement”,
https://www.{re.org.uk/news/june-2017/ftse-350-audits-improvedwith-further-action-neede The FRC found in an earlier review breaches of auditor independence audits of banks and building societies were below
and in particular that the
average due to insufficient challenging of management. Perhaps they have discovered “He who pays the piper calls the tune!”
Some have suggested that a more accurate definition of an audit translates client says the accounts are fine and I believe him”!
to “my
Disciplinary cases against auditors tend to take many years with the audit firms fighting “tooth and nail”. Quite often the partner responsible has long retired and become a distant memory. Until recently the fines have been
trivial, at least in the context of Big Four partners who take home £500k+ with their firms’ revenues running into billions. Many failures go uninvestigated. That being said, fines for audit firms who get it wrong have been increasing
following a tougher stance from the
FRC since 2013. A record breaking £14m
fine was levied against Deloitte in September 2013 for its failures in advising
Phoenix Venture Holdings and its directors (previously mentioned in Chapter 5 re
Related Party Transactions) while auditing MG Rover. On appeal the To put the fine in context, Deloitte billed
fine was slashed to £3m in 2015.
£31m for advice to the ‘Phoenix Four’, while Maghsoud Einollahi, the partner on MG
Rover, was fined £250k. The record fine is £5.1m imposed on PwC in RSM Tenon. The previous record fine
2017 for misconduct over its audit of
was £5m, also for PwC, over its audit of collapsed housing services group Connaught. A 2017 FRC report suggested future fines could exceed £10m. As my audit colleagues will no doubt wish me to remind you, most of companies produce perfectly respectable accounts and pay their fair share taxes. A of audits are shown to be unreliable and the small
very
percentage
staff carrying out audits are highly qualified professionals. We must keep a sense of perspective and not focus just on the failures. They might suggest that as a Forensic deal with things that have gone bad and I
Accountant, only have mine. They will have their perspective, I
my experience is atypical.
Chapter Seven 122
Why Directors Cook the Books Now that we have coveredaa typical set of company accounts, we are ready to learn how and why people manipulate accounts. Generally motivations for a
private company are rather different from those of a listed public company.
Private Companies
Public Companies
Depress Earnings (unless selling the business)
Enhance Earnings
Why?
Why?
B Delay taxes
“The
Number”:
Earnings per Share (EPS) Hide data from customers and competitors
Impacts on: Performance Bonus
M@
@
Stock Options
@ Share Price
Chapter Seven Why Directors Cook the Rooks
owner-managed companies, taxation is often ‘a Major drivrer ay manipulating profits. Sometimes accounts are falsified in order to obtain lenders, but lenders usually suspect them to be works of jnans from fiction and guarantees or a charge over assets, such as personal require private houses who have assets. or guarantors Let us consider a company that is in the last week of its accounting year. 1 is offered a substantial contract for the supply of goods ata healthy profit, Let us also imagine that the contract can be fulfilled and that the Kor private,
(or
instantly
of £100,000 on this contract. If the company fulfils the contract in the last week of the current year it will need to pay Corporation Tax on a further £100,000 nine months later, a company will make a profit
However, if it manages to delay fulfilling this contract by a week so that it is completed in the next financial year, it delays having to pay tax on this amount by aa full year.
Private companies on the whole are financially motivated to under-report their profits. It is suspected that a significant number of owner-managed businesses regularly fail to include a proportion of their sales in their accounting records to evade
transaction is in cash. out and
paying taxes — this is particularly the case if the Of course, there is a risk that the company will be found
fined/prosecuted.
The other main method to manipulate or reduce taxable profits is to load up expenses by charging the business with personal costs. Some years ago I
investigated a care home where the company owner had huge amounts of
work done on his palatial house and asked the builder to bill the care home
company.
NowI move onto substantial companies that are listed on a Stock Exchange.
Apart from general stock market fluctuations, what determines the value of a company’s shares on the stock exchange? The stock market is all about
expectations. If a company is perceived to be performing and likely to perform better than expectations, its share price is likely to rise. The reverse
that is also applies. Up in greed, down in fear is an old market saying still true. What do we mean by expectations? Similar to horse racing, investors are far more looking for evidence of past “form” but future prospects
are
°
he
nve sit a
¢
J "I )
.
. IH le n Wstsc's ( aT mW
m
ra mn
’ IIH
MCCOUnNES
so if performance nmarket overreacts -also said that the sstock is to fall dispro. share the likely price than exp ectations. wo are al its price than expected, better performs ifa company rtionately. ©Similarly, portionately. strongly. is likely to rise disproportionately determined? For listed companies Balance So how are future prospects for most trading companies the share price rects are important. . However, Sheets of future profits. And that tends to translate into is driven by the expectation and its trend. the Earnings Per Share (EPS) will increase. Not surprisingly, If the EPS trend is rising, the share price of attention to the EPS and amount a therefore company managers pay huge own pay and bonuses may depend on their as (especially market expectation in EPS or the share price or both by way it). These will likely be tied to growth which as mentioned in Chapter 5 on Plans (LTIPS) Incentive of Long-term in executive remuneration have been aa significant element in the explosion Atlantic. the of sides both on pay LTIPS usually provide the executive with the option to buy or be awarded i
important. is0only slightly i
i
to
dis
|
124
shares at a fixed price at future dates. The potential value of LTIP awards are
calculated at the time they are awarded to directors. If later the company share — price is above that fixed price when the director can exercise the option when the shares are said to “vest”, i.e. ownership passes from the company to the director — then there is an instant profit from being able to sell those shares.
Such options are “in the money”. If the shares have not performed and the market price is below the option price, there is no instant profit to be made and the option is “under water” so there is no incentive to exercise. Profits from vested share awards are the biggest element of many directors’ pay rather
than fixed salaries or bonuses. As mentioned earlier with WPP, Persimmon and Melrose.
Typically, listed companies will provide “guidance” in terms of their sales and profits up to a year in advance. Additionally, analysts covering the company for investment banks and stockbrokers will come with their own up
forecasts to encourage investors to buy. Statistically, the overwhelming percentage of analyst research reports result in a “Buy” recommendation. If you are interested in a particular company, it is always worthwhile to study at least one “Buy” and, if it can be found, one “Sell” report. As you read the reports, you might wonder whether they are talking about the same company.
Chapter Seven Why Directors Cook the Rooks
eectors may be motivated to try all they ean to ensure sure Direct that their own and the expectations of the analysts are met. In any . event, . they y v1 DY ill no illusion as to what will happen to the share be under price (and the value ¢;
Y
estimates
should they fail to meet the target! Meeting “the Number’ is “aggressive” or “creative” accounting techniques — such metrics. A 2017 academic study of US as non-GAAP companies accused of manipulating profits between 1985 and 2010 identified the two oftheir options)
use why companies
biggest
over-powerful CEOs with a reputation to keep for beating analyst forecasts and escalating stock market expectations. Read “A reputation for beating analysts’ expectations and the slippery slope to earnings manipulation” by Chu, Dechow, Hui and Wang via the Social Sciences Research factors as
Network website.
A “Sell” report may be the basis for a story if the analyst has spotted something that the company has covered up or the stock market failed to realise.
“short sellers”
Research by professional
—
who are betting a share price will
fall
- often uncovers hidden truths in company accounts. The black holes in
the
Enron accounts were first said to be spotted by hedge fund manager Jim
Chanos, who specialised in “short selling”. Problems in Chinese companies
by “short sellers”, such as Carson Block of Muddy Waters Sino-Forest Corporation (once valued at $5bn, it collapsed in
were first noted
Research with
a useful source of information for journalists — so they are coming from. They want to drive down a share price and publicity can help. But that does not mean their facts are — as seen with Enron, Sino-Forest, pharmaceutical group Valeant, wrong 2012). “Short sellers” can
bea
long as you realise where
commodity trader Noble Group and Carillion.
Having explained that everybody wins
if the EPS is steadily and smoothly
to increasing and the best outcome for the share price is for the company consistently exceed “market expectations”, not surprisingly, “good” managers
skilled in delivering to expectations. Investors also want rising Everyone wins from what is euphemistically termed “earnings is management” — until it leads to trouble! Fear of a hostile takeover another are often
share prices.
incentive to manage the share price and rely on “creative accounting”.
125
The
.
B
nu
.
Guide o Com ]
‘
WV
AC UES
How Companies Cook the Books of cooking the books are: to inflate/ As shown below, the two classic ways costs. understate/hide invent profits and/or be done. It is important to understand Let us look at some of the ways this can want to increase their that it is not the case that the companies always once they have met the current year’s expectations, profits. Many companies, will want to put something away for a “rainy day” or assure themselves of a discussed many of the components. good start next year. We have already
Like any skilled player, it helps Fortunately, it is relatively straightforward. to know the rules in detail so that you can get close but not break them.
Ifa company wants to increase its EPS (and therefore PAT), it can pretend that its sales are higher than they actually are by “borrowing” sales from next a
year. It might take in and recognise a large order being discussed before all the formalities are completed for it to be properly recognised asa sale.
It might offer a regular customer an additional discount and most commonly, if its accounting policy for recognising Turnover is subjective, it might interpret some of these in a way that suits its objective. For example, some
To increase earnings and so EPS
Overstate Revenue
or
Understate Cost of Sales Expenses
This leads to Assets that do not exist Or are
overvalued
or
Liabilities that are understated
Chapter Seven Why Directors Cook the Rooks
might be deemed to be more complete than they actually are. If the the goods to leave the warchouse, it might arrange for policy requires be driven around at the vear-end so that auditors the Stock to have “dispatch even rent a third-party warehouse to Store the notes”. It might m. You willjust when 1 say it is relatively straightforward. have to trust me projects cqles
I
Indeed, one of the customers of a company I looked at some years ago was so smart that it ordered its entire year’s supply of products for the year just
following before the end of the current year. It negotiated extraordinarily good
it
have
may suspected that without its order the prices (because supplier would not make its numbers) but it also negotiated for the seller to keep the Stock it had “purchased” in its own warehouses and deliver it over the next year as and when needed.
Surprisingly, it also managed to negotiate monthly
payments over the next year as well as the swapping of any goods that failed to sell or became out of date. For all practical purposes it seemed to be no
different to a monthly order over the next year, with the crucial difference being that the seller managed to recognise the entire “sale” in the current year.
This seemed to happen year after year.
One of the biggest accounting scandals involved the Dutch supermarket group Ahold. It revealed in
2003 that profits had been inflated by $500m,
later revised to more than $1bn, through taking credit upfront for promotional
volume rebates from food suppliers thereby reducing costs.
Companies may also pretend that some of their costs/expenses that should accounts as expenses are actually much lower than they really are.
be in the
They do this by not processing invoices received, by inflating the value of Stock (thereby lowering cost of sales) or not recognising costs which have been incurred (say advertising costs) but no invoices have yet been received (known accruals). It may fail to reflect sales returns or refunds for customers who services costs such as have to record or as
complained
legal bills.
forget
fully professional
If expenses have not been recorded fully, it is difficult for auditors
since they are not in the accounting records. Auditors will see whether they typically look at costs recorded just into the next year to should have been recorded in the earlier year but companies are usually well aware of the checks the auditor is likely to carry out. Only an inexperienced to find them
cook would make that mistake!
.
the westt
NamIwt
IN (;aTmI
1
t
m Cc mn
W
4 Xt
nN
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This means that instead of reducing is often a red flag. lising, costs ‘apil alising into the Balance Sheet as an asset. Because the is it put an expense profits by of future value, This may be iustitied creauing some thing cost is said to be oil field. But it also may be a device to inflate an or mine a — such as with with WorldCom which in 2002 revealed jt seeme d to be the case profits. This connection costs, thereby boosting network cable in had capital ised $3.8bn a pub ch ain that capitalised some of the pay for across came also I revenues. and put it as an asset in the Balance its bar staff in newly refurbished pubs P&L. the in company’s costs Sheet, again reducing costs are both much easier EEnhancing or inflating sales and deflating income and expenses in in recognising of flexibility element if there is an have seen earlier, when issues of judgement the Accounting Policies. As we is possible! It is always worth and very clever people are involved, anything when companies suddenly announce remembering the “cockroach theory” hidden problems soon bad news. That is often just the start. Other previously one cockroach. is there as Just rarely just emerge.
a
costs
|
q
ion
128
|
In my experience, it is often easier for a “man in the street” to conclude that there wasn’t a valid sale than for a highly educated audit partner whose equally highly educated client, the finance director, proposes a novel way of
recognising aa sale. In this consulting era we all want our clients to be happy and they are much happier when we agree with their judgements than when we challenge them. Elephants in the room are sometimes missed. If the P&L account has been flattered by including sales that should not
have been included (and as explained earlier a clever manipulator would ensure that he also manipulated the cost of sales so as to not change the Gross
Profit Margin significantly) and/or by pretending some of the costs did not exist, this will always result in the Balance Sheet containing assets that are inflated (for example trade debtors and cash) and/or amounts owed by the
company that have not been recorded. When it comes to manipulating accounts, the
manipulation is not random. It will relate to key dates. For UK listed companies that usually means the half year and final year figures. For US companies it is the quarterly results. If it’s a performance orientated company, chances are the sales people will already be trying to make sure that they “close” any deals on the right side of the quarter’s end. round to Similarly, the finance director will be ringing
Chapter Seven: Why Directors Cook the Books find
bit thal extra
market
Enron and 1
of profit if it looks like “The Number” might fall short of “We must hit The Number" was the
expectations.
WorldCom exccs to jail.
have been
refrain that sent
training journalists since 2003 about how accounts are
and explaining that inflated sales and
unrecognised costs always and unrecognised liabilities. I think my students always wondered whether it really is that straightforward. That was until Satyam hit the news in 2009. Computer Services manipulated
assets ead to false
Satyam was established in 1987
with just 20 employees and became By 2003 it employed over 13,000 staff and had high-profile customers worldwide. Its founder Ramalinga Raju was Entrepreneur of the wildly successful.
Satyam became India’s “fourth largest” company. It was a star Indian “outsourced” IT-services industry, with a Wall Street listing. was audited by the world’s largest accountancy firm, PwC. Satyam in
Year in 2007. of the It
Sanskrit means
“truth”. The name alone was worthy of suspicion!
In September 2008,
Satyam won the ‘World Council for Corporate Govern-
ilexcellence in corporate accountability. five months later it was exposed as India’s Enron. What was unusual about this fraud was that its alleged architect, Ramalinga Raju, the departing chairman, reportedly wrote a confessional A
ance’s Global Peacock Award’ for global
Less than
letter to the
Satyam Board of Directors copied to the Indian Stock Exchange
regulator. The letter provides a better summary thanI can of the points I have outlined above and is
far more entertaining!
EXTRACTS FROM LETTER TO SATYAM BOARD AND REGULATOR
From B. Ramalinga Raju
Chairman, Satyam Computer Services Ltd.JeJanuary 7, 2009 Dear Board Members, on my It is with deep regret, and tremendous burden that I am carrying
notice: conscience, that I would like to bring the following facts to your 1. The Balance Sheet carries as of September 30, 2008 a.
Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books).
b.
An accrued interest of Rs. 376 crore which is non-existent.
129
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c.
igi
An n Al
ts VC. J ( ’ urnali:SIS
. &
mn nny ( nide to} ¢ ar ¢
Nae
Ww
Tari
yout
crore on account of funds arranged ) of Rs. 1,230 understated liability
by me. of Rs. 490 crore (as against Rs. 2651 d. An overst ated debtors position reflected in the books). we reported a revenue of crore 2. For the September quarter (Q2) Rs.2,700 as the Rs. 649 crore (24% of and an operating margin of revenues) against and an actual operating margin of Rs. 61 actual revenues of Rs. 2,112 crore cash and bank balances of r evenues). This has resulted in artificial,
Crore (3%
130
crore in Q2 alone. going up by Rs. 588 on account of inflated profits The gap in the Balance Sheet has arisen purely to Satyam standalone, books over a period of last several years (limited only What started as a marginal gap of subsidiaries reflecting true performance). in the books of accounts between actual operating profit and the one reflected continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby
significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like ridingaa tiger, not knowing how to get off without being eaten.
Let us go through the letter in detail. To aid our understanding, a Crore is 10 million Rupees and there were about Rs80 to 1 GBP in 2009. a) “Inflated (non-existent) cash and bank balances of Rs. 5040 Crore (as against Rs. 5361 Crore reflected in the books).” The Balance Sheet showed cash balances of £670m but the real figure was only £40m. So £630m of the cash simply did not exist. You will recall, I said earlier that if a company has included fictitious sales, it will inevitably have fictitious assets. You will not get a better example to prove this point! Cash is one of the easiest assets tc audit — the auditor can visit the bank and
check.
b) “An accrued interest me ans that an
of Rs. 376 Crore which is non-existent.” “Accrued’ amount has been earned but not yet received. So this was £477
Chapter Seven: Why Directors Cook the Books
interest. Ifone has £630m of fictitious cash, it should generate interest. It is poignant that the fictitious interest figure exceeds fictitious the balance. Again, this went undetected, real cash in
anreceived
c) “An
understated liability
of Rs. 1230 Crore on account offunds
arranged
In accountancy speak “Understated” means something is recorded value than it should be and “Overstated” is lower ata something recorded at by me.”
it should be. An auditor would typically check “Assets” and “Liabilities” for Understatement. Satyam owes £154m more than its Balance Sheet suggests. Raju says he arranged the funds and but the amount borrowed was not recorded on the Balance gave it to Satyam a
value higher than
for Overstatement
Sheet.
As explained earlier, it is difficult for auditors to check for unrecorded
borrowings. d) “An
over stated debtors position of Rs. 490 Crore (as against Rs. 2651 books).” Here he tells us that the real amounts owed to
reflected in the
Satyam from its customers was £61 as £331m.
million but the Balance Sheet showed it
So £270m of fictitious amounts due from customers. As explained
whether assets should be less is much easier than checking liabilities should be more. If a company has false sales it will invar-
earlier, checking
whether
iably have fake debtors. e)
“For the September quarter (Q2) we reported a revenue ofRs 2,700 Crore
and an operating margin ofRs 649 Crore (24 per cent ofrevenues) as against
actual revenues of Rs 2,112 Crore and an actual operating margin of of revenue). This has resulted in artificial cash and bank balances going up by Rs 588 Crore in Qz2 alone.” Here Raju, almost proudly tells us that the real revenue for three months ended 30 September 2008 was Rs2112 Cr and not the £337m shown in that quarter's the
Rs 61 Crore (3 per cent
[£264m]
Profit accounts, so inflated by £73m. He also tells us that the real Operating of this fraud is for the quarter was The £81m. simplicity not and only £7.6m
breath taking — £73m was added to sales but cost of sales was left unchanged,
that the real giving a much larger profit margin. Rather helpfully, he explains that was than 24% rather revenue Profit of was Operating only 3% recorded. we have inflated margin Not only do we have inflated margin on real sales, but on inflated sales!
131
T ve I INV csstigative Journalists
,
Guide to Comp any\ Accounts i
s
4
|
has arisen purely on account of inflated “ in the Balance Sheet f) “The g a several years (limited only to Satyamm standalone, last of 4 ove ts aperiod
What started as a
true performance). mar. ooks of subsidiaries reflecting Pre and the one reflected in the books profit actual operating between al g gap ginal sf ac accounts continued
of
to grow over the years. It has attained unmanageable
size of the company operations grew significantly (annuproportions as the Crore in the 2008 alized revenue run rate of Rs 11,276 September quarter, Almost as if he wrote letter to Crore).” Rs 8.392 and official reserves of this assets to my readers, he confirms that help me explain things the fictitious of resulted from many profits. He have (and missing debts) years inflating its started when Satyam failed to by explains that the fiddling meet targets the but targets/expectations continued to a small amount (“marginal gap”) increase and the fiddling had to follow suit to an extent that it could no longer be sustained with annual revenues running at over $1.4 billion per year.
g) “The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.” Here he tells us that he had to hire extra staff to do nothing because readers of his accounts would need to see an appropriate staff numbers to service that volume of sales shown. So real surplus staff to
service fictitious sales!
The above letter shows how easy it is even for large listed companies to fiddle their accounts by hundreds of millions even when the audit is carried out by one of the largest global accounting firms. Raju realised that, as with any long running fraud, once started it is very difficult to stop without eventually revealing the crime. Often the endgame is to sell the company and hope that the fraud is not detected or if detected not
publicised because of embarrassment. More often such frauds are eventually exposed but rarely by the perpetrator. It was 2015 before Raju was eaten by the tiger years, despite reportedly
—
he was jailed for seven
denying sending the above confession. PwC were reported to have paid $25.5m in 2011 to settle a claim brought by Satyam investors in the US. In 2018 PwC was ordered to disgorge wrongful gains
Chapter Seven: Why Directors Cook the Books
of $2!
nand banned
from auditing Indian listed companies for two years by
indian regulators.
include fictitious profits and
amounts which the company is ever to receive, then this puts pressure on the company’s cash flow. unlikely of profits but not enough cash and will be digging into its reserves ithas lots if the profits
or borrowing
money. In Satyam’s case they simply created fictitious cash! Revenue Recognition has been a major problem with too
Appropriate many growth
panies, being
hungry companies, particularly services and technology comable to anticipate revenues at will. As explained in
Chapter 5, accountancy regulators have tightened up since 2017. No doubt other ruses will be discovered by the creative. Where there is a will, there is always the
a
way!
If you would like to research some cases to get a better understanding of points I have made, you could do aa lot worse than Google the stories
the
behind the
I
companies in the accounting scandals since 2000 listed below.
Ahold
Globo
Anglo Irish Bank
Gowex
Steinhoff International
Autonomy
Healthcare Locums
Tesco
Toshiba
Sino-Forest
BT Italia
Lehman Brothers
Carter & Carter
Olympus
Torex Retail
Connaught
Parmalat Pescanova
Versailles Trade Finance
Enron
WorldCom
Another useful source of information about how and why company found among the past disciplinary cases
accounts do not add up can be brought by accountants’
Council. regulator, the Financial Reporting
https://www.fre.org.uk/Our-Work/Conduct/ Professional-discipline/ Past-cases.aspx to 2008 can be A detailed global list of accounting scandals from 1980 edited by Scandals”, found in “Creative Accounting, Fraud and international Michael Jones.
Chapter Eight 134
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What JHappens \When Companies Fail Journalists (and many accountants) are baffled as to how it is possible for a company, such as Carillion in 2018, that was making large profits, had a solid looking Balance Sheet with many millions in Net Assets suddenly to crash, just months after the auditor has given it a clean bill of health, and then Administrators or Liquidators barely recover sufficient to cover their own bills and pay pennies in the £ to unsecured creditors, if they pay anything at all. This section examines the process companies enter into and the public
documents available when they encounter financial difficulties leading to administration or liquidation.
Insolvency arises when a company is “unable to pay its debts as and when they fall due”. This can happen in a number of ways. The most logical scenario is when a company’s liabilities exceed its assets — it is said to be Balance Sheet
insolvent.
However, let's focus on a company that is Balance Sheet solvent but still cannot pay its debts when due. This could happen for many reasons: a major debtor is unable to pay the amount owed to the company or the company
Chapter Fight: What Happens When Companies Fai]
s
sell its assets for the prices required to cover unable to debts. It is
8 aid went bust not because it did not have enough assets but bec ause them into sufficient cash as no one could not convert would buy at the ed price or timing for the bank to survive.
tehman
t
requit
Directors have a legal duty not to continue to trade whilst insolvent. Under certain circumstances they can beheld personally responsible for debts incurred if the company continues to trade. So usually they will seek expert an insolvency specialist. help from Often the first step comes when aa bank or lender refuses to continue to support the company. They often hold security, suchas debentures, mortgages
or floating charges, which enable them to appoint a Receiver whose of the charged assets to recover money for the lender.
or fixed
job it is to sell enough
Fixed charge holders get paid first from the sale of the asset secured by that — usually a property or other tangible asset. Floating charge holders
charge
effectively hold aa first right to be paid out from the company’s assets after the
In a distressed situation, charged assets may not realise and further action may be necessary. If the directors are of the view that the company is insolvent or likely to
fixed charge holders. the amount due
and/or secured creditors can appoint an Administrator. He of the company, carries out a review and proposes a plan of action which he feels is to the creditors’ advantage. This often means the become so, they
takes over control
creditors taking a “haircut” on a proportion of what they are owed so that of its difficulties and pay something back to the
the company can trade out
creditors. He may attempt to sell the company as a going concern. There is also a procedure known as a “pre-pack” sale where a buyer (often the existing
its liabilimanagement) agrees to buy the business with none or a fraction of ties before the Administrator is appointed. The Administrator then completes
Where the assets are being sold to existing management or Related Parties there is a risk of a sale at undervalue to the detriment of creditors and susceptible to being outside assets are the sale.
shareholders. Intangible
particularly
undervalued.
If the entire company cannot be sold, parts or assets that can be sold are
sold and then the company is liquidated. The Receiver /Administratororor Liquidators get their fees paid out first. If anything is left over secured creditors get paid out next. In the
monies still left, the unlikely event of there being
135
to Company Accounts Journalists's Guide The Investigat ive
to their debt. The shareholders are paid outa proportion unsecured creditors make any recovery from the Share Capital rarely and rank last for payment for their shares on the stock market. from the price they paid they put in or been has tightened over the years, and further Act Insolvency Although the discussion, wily directors can sometimes creditors are under protections for to the detriment of genuine Administrators still manage to appoint “puppet” assets at undervalue to related owners or creditor 5. Asset stripping or selling » deals is not uncommon. Insolvency practitioners are managers via “pre-pac : online report with the Insolvency Service of any inan file to law required by Around 1200 directors have been banned dicators of misconduct by directors. over 1400 in 2010. But in just over 80% with since compared 2014 each year director to simply undertake not of such cases the penalty is for the offending to beaa director for a period
—
on average under six years.
A restriction about
using the computer but leaving disabling, no! Inconvenient, yes; the with him smartphone! as effective as a parent banning his child from
Case Study One: XL Leisure Group Earlier on we discussed the fate of XL Leisure Group. It entered Administration in 2008 and as is required the Administrators drew up a statement of the company’s assets and liabilities, known as the Statement of Affairs. This is shown on the right.
Assets were listed at their recorded book value in the Company’s Balance Sheet. Then they estimated how much they will be able to realise by selling
those assets. As you will see the difference was staggering. Of the £135m recorded in the Balance Sheet as assets in November 2008
(Column marked “Book Value”), the Administrators considered a mere £4,166,497 recoverable. Looking at specific assets, of those pledged and in the books at over £111.921m, only £3m was considered recoverable — a recovery rate of 2.67%. This is because the assets were “investments in subsidiaries
including intellectual property”. As the Group was in liquidation, these assets were worth next to nothing. In fact, there was a fixed charge against all of these assets securing a loan to the group of £11.47m. The anticipated recovery of £3 million was even insufficient to repay that loan. Moving on. Fixtures, fittings & equipment were in the Balance Sheet at over £543,000 but this was Even worse, expected to realise
only £33,680.
Chapter Eight: What Happens When Companies Fail
PLC STATEMENT OF AFFAIRS XL LEISURE GROUP
XL LEISURE GROUP PLC A- Summary of Assets Assels
Book Value
Assets specilically pledged:
Estimated to R
ease
Property Assots Invesiments In subsidiaries Including intellectual property
11,052,151 869.511 111,921,661
;
Straumur loan covered by fixed charge
3,000,000
(1,470,771) 100,450,890
(11,470,771) (8,470,771)
137
Assets not specifically pledged: Fixtures, fittings
&
equipment
Inlercompany receivables - XL France Hokéngs
Sal
«
Exploror Houso Umited
»
Excel Aviation Limaed
+
Jontace Limied
+
Xa
33,680
343,058 2,183,660
IT systems
:
9.019.304 275,805 733,554 11,307,325 9,019,304 667,085
Weways
Prepaymenis Basclays accounts
-
6
2,691 : -
37,891
| ___1,092,230] 14,841,323
Estimated total assets available for preferential creditors
Signature
|
unt
BWA
|
(4-
1,166,497
1,166,497
«195,292,213
pac
4,092,230 |
(Lh
- 2008
IT systems valued at over £2.183m were considered to be worth absolutely nothing. Then followed a number of receivables from related companies. As the entire group was in trouble, these companies were not in a position to pay.
A small part of prepayments was thought to recoverable. The only asset
expected to realise its recorded value was the bank balance at Barclays Bank
~as I said before, the second-hand value of £100 is still £100. Everything else is pennies in the pound.
The liabilities on the other hand, stand at their full value. Given that these exceeded assets by over £256m (see website for Statement of Liabilities
—
Page 29/39), not even the secured creditors would get their money back. It is interesting to get an insight into the costs of carrying out an administration. These must be shown in the Statement of Affairs. As the extract on were charging the next page shows, back in 2008 the Administrator's staff hourly rates averaging £296. The individual staff rates ranged between £80
Journalists’s The Investigative rontive
Ciide to Company Accounts Gulc
AFFAIRS PLC STATEMENT OF XL LEISURE GROUP 8 8.1.
Joint Administrators’ Remuneration 2008 are £824,529 plus disbursements time costs at 24 November The Joint Administrators’ hours at an average rate of £296 per hour. £191,101. This represents 2,783 of
138
for the Partner. In less than 10 weeks for the most junior staff and £495/hour averaging over £82k per week. over £824,000, Zolfo Cooper had run up or Liquidator must file regular reports as to the money
The Administrator
out. In March 2010 aa final report was issued by the gathered in and paid Their work done, they requested the courts sanction XL. for Administrators were available. Naturally there the liquidation of the company as no funds incurred. costs further were This sorry saga shows that when companies go bust, very little of the assets in the Balance are recovered at anything approaching their earlier value Sheet. This illustrates the importance of Going Concern being fundamental to a company’s future and why any doubts in this respect expressed by the
auditor need to be taken seriously.
Let us look at another example.
Case Study Two: Carter & Carter You will recall that we discussed this company and its Revenue Recognition policy in Chapter 5. Carter & Carter’s market capitalisation (no of shares x market price of shares) in April 2007 was £526m at £12.50 per share. The share price began to slide following the death of its founder in May 2007 and in October 2007 its shares were suspended at 82.5p. In March 2008 the bankers pulled the plug and Deloitte were called in as Administrators.
In April 2008, just 12 months after the company was riding high on the stock market, the Administrators filed a Statement of Affairs showing those shares were worthless! The extract on the shows that all of the assets of
right
the PLC were subject to fixed and floating charges. They estimated a shortfall of some £127.4m for the fixed charge holders — So there would be nothing left over for the unsecured creditors never mind the shareholders. Even the freehold property in the books at £9.7m was expected to only realise £7.5m. The remaining assets in the books at over
Chapter hight: What Happens When Companies Fail CARTER & CARTER SUMMARY OF ASSETS —_— Carter
Company neme:
and Carter
Group pic }
Summary of Assots Assols
a-
Book Value
ee
Assets subject to fixed charge Freeehold property Short leasehold premises Investment in subshanes Software
Less
Amounts due to fixed charge holders Deficit due to fixed charge holders carned
Assets subject to floating charge Fixtures and fitungs Plant and machinery Computer equipment Prepayments Other debtors Corporation tax Deferred tax intercompany accounts
Estimated to Realise
9.772.514
7,§00.000
599.500
-
76.504 .793 169.744
-
(134,917,797) (127,417,797)
forward
869,002 64,114 400,314 338,809 56,168 13,223,100 8,355,168 25,527,938
130,000 : 20.000 °
-
Uncharged assets
Estimated total assets avaltable for praferential creditors
150,000
£49m, also subject to a floating charge, were only expected to raise a mere £150,000. The total estimated shortfall for creditors was almost £153m (Schedule Al — see website). Carter & Carter Group PLC’s investments in its subsidiaries of £76.5m were expected to realise nothing.
The PLC’s unsecured creditors of £21.5m (see website) included £11m in PAYE and National Insurance which the company had
respect of unpaid
deducted from its employees’ wages but not handed over to the taxman, (a not
unusual situation when companies are struggling for cash flow) and nearly
fam in trade creditors. It is important to realise that even though there were a number of companies within the group (some were solvent) each limited company stands limited on its own unless it has guaranteed another company’s debts. Each
the company would pay its own debts first and anything leftover would go to Parent company owning the shares.
Parts of the business were sold and then in March 2009 the PLC entered
ists’s
The Investigative Journalists’s
yany Accounts Guide to Company Gui
role changed from Administrator to that of 4 Li 4 uid ation. Deloitte's : to complete. does ta ke ye ars for a liquidation and can It Liquidator. “Joint the from Liquidators Trading The following key points emerge at the end of the liquidation of the website) (see 2014 in Account” filed May :
imto a
PLC:
.
a total of £4,937,900 in assets. This Deloitte as Liquidators realised took over from the administration, included £2,953,897 cash which they and £1,212,906 (£852,204 + 360,702) account escrow £300,000 held in an 140
recovered from other group companies. the above amount. Of this, £529,617 plus Bi It cost £1,645,811 to recover in its role as Administrators. A further Deloitte to went in expenses £14,288 went to Deloitte in its role as the Liquida£285,112 plus £20,502 in expenses on “Agents/ tor. £228,550 was spent on lawyers advising Deloitte, £129,966 Valuers” and aa total of £172,765 in irrecoverable VAT, presumably mainly
in respect of the above bills. Of the balance of £3,292,089 (4,937,900
—
1,645,811), £1,109,603 went
to the preferential creditors and the remaining amount to secured creditors. Each company within the group will have filed a similar statement.
In summary, a company with capitalisation of over £500m within 12 months had disappeared in a puff of smoke leaving nothing for its shareholders and nearly nothing for its unsecured creditors. Even the secured creditors received only a tiny fraction of their money back. As far as I am aware, no one has looked into who was responsible for the very different numbers Carter & Carter published in its last set of accounts. Perhaps the dead man did it! Once a company has collapsed the documents filed at Companies House by Administrators or Liquidators — the Statement of Affairs, the Administrators’
Proposals and Progress reports, Liquidators’ statement of receipts and pay— provide an essential paper trail.
ments
Chapter Nine 141
Finding Clues in Abridged and
Abbreviated Accounts For Accounting Periods beginning on or after 1 January 2016, the Abbreviated
Accounts option was abolished for Small Companies and replaced by the new
Accounts. However, as with Abbreviated Accounts, these are still of Abridged litle practical use to journalists as there is no requirement to provide a P&L Account. So what is shown and what can be learned? It is perhaps worthwhile to first
refer back to P26 in Chapter
1
regarding the statutory requirements.
Now let us look at a real but anonymised example. Below are the filed The Notes have been reduced from Abridged Accounts for a Small
Company.
one per page,
but all the available information is shown.
Company Registration Number: (England and Wales)
Guide tipative Journalistss Gute The Investigauive
to
Company Accounts
accounts for the year ended 31 March 2017 Unaudited abridged Period of accounts Start date: 01 April 2016 End date: 31 March 2017
LIN TED Contents of the Financial Statements for the Period Ended 31 March 2017 Balance sheet Notes
Balance sheet As at 31 March 2017 Notes
2017
2016
£
£
9,297
244
9,297
244
Fixed assets 3
Tangible assets
Total fixed assets:
Current assets 2,750
750
13,989
1,777
Cash at bank and in hand:
48,175
6,456
Total current assets:
64,914
8,983
(88,273)
(1,134)
Stocks: 4
Debtors:
Creditors: amounts falling due within one year
5
Net current assets (liabilities):
(23,359)
7,849
Total assets less current liabilities:
(14,062)
8,093
Total net assets (liabilities):
(14,062)
8,093
Capital and reserves Called up Share Capital: Profit and Loss Account:
Shareholders funds:
The Notes form part of these Financial Statements
100
1
(14,162)
8,092
(14,062)
8,093
Chapter Nine: Finding Clues in Abridged and Abbreviated Ac ‘counts
statements falance shect ending 31 March 2017 the company was entitled to cxem Ption under secti Kor the yeaT Setion 477 of Act 2006 relating to small companies. Companies
the
have not required the company to obtain an audit in accordance The members with section 476 of Act 2006. the Companies
their responsibilities for complying with the requirements of the The directors acknowledge records and the preparation of accounts. with respect to accounting
Act
to the preparation of abridged accounts for this The members have agreed accounting BP period in i accordance with Section 444(2A). These accounts have been prepared in accordance with the Provisions applicable to companies small companies regime. subject to the
143
This report was approved by the Board of Directors on 22 November 2017 and signed on behalf of the Board by: Name: Status: Director
The Notes form part of these Financial Statements
Notes to the Financial Statements for the Period Ended 31 March 2017 1. Accounting
policies
These Financial Statements have been prepared in accordance with the provisions of Section 1A (Small Entities) of Financial Reporting Standard 102
2. Employees Average number of employces during the period
2017
2016
1
1
i 3 Tangible assets
Total £
Cost
437
AtO1 April 2016
Additions At31 March 2017
___10,049
__
10,486
Depreciation 193
At Of April 2016 Charge for year
At 31 March 2017
____—
996
__1189
Net book value
At 31 March 2017 At 31 March 2016
9297
wir
4. Debtors
on
L 0
than one year: Debtors duc after more
due within one year note §. Creditors: amounts falling — — Trade creditors £3,750. Amounts Bank loans and overdrafts £2,000. ~ (£8,752). Other creditors
company
duce
£ |
;
to an associated
- £91,275
communications and authenticated in accordance This document was delivere d using clectronic nic form, authentication and manner of delivery under with the registrar's rules relating to electro section 1072 of the Companies Act 2006. ns
it
The Balance Sheet starts off with the Fixed Asset. In the example given, detail given in Note 3. This tells us that Tangible Fixed Assets are shown and of fixed assets and the Depreciadded £10,049 the company during the year ation Charge was £996. Next the cost of Stock is given. After that Debtors of £13,989 are shown and Note 4 shows how much of this is due after one year.
Similarly amounts owing to Creditors of £88,273 are shown and Note 5 shows a breakdown, although this is not required to be provided. As will be seen, this Balance Sheet provides aa little more detail than the previous Abbreviated Accounts example shown below, but the Notes are
significantly more detailed than Abbreviated Accounts and, for example, will show details of any dividend paid. For the example of Abridged Accounts, despite the fact that the P&L Account is not provided, we can calculate that the company made aaloss of £22,254 for the period, because at March 2016 it had £8,092 in reserves and by March 2017 it had a negative reserve of £14,162 (14,162 + 8092 = 22,254). This is always a way to calculate the scale of any a company which does not publish a P&L. But that net profit or loss is after all charges, including to directors. We also see net profit or loss for
payments
that it had one employee.
The new concept of Micro beginning on or after
companies was introduced for accounting periods
January 2016. These very small companies, known as “Micro-entities”, can file a Balance Sheet with even less information than 1
a
Chapter Nine: Finding Clues in Abridged and i Abbreviated Account counts
Accounts fora Small Company. So what information do accounts . 1.9 provide? The real but anonymised example below r Micro-entitics shows of interest to little journalists. ill be very d
abridge
The
there
Registered
Number LIMITED
Micro-entity Accounts 31 October 2016
145
Number
LIMITED Registered Micro-entity Balance Sheet as at 31 October 2016 Notes
Fixed assets
Current assets
Creditors: amounts falling due within onc year Net current assets
¢
(liabilities)
2016
2015
£
£
7
7
8,989
14,179
(8,989)
(14,179)
0
0
Total assets less current liabilities
7
7
Total net assets (liabilitics)
7
7
Capital and reserves
7
7
For the year ending 31 October 2016 the company was entitled to exemption under section 477 of the Companies Act 2006 relating to small companies.
e The members have not required the company to obtain an audit in accordance with section 476 of the Companics Act 2006.
e The directors of the acknowledge their responsibilitics for complying with the requirements Companies Act 2006 with respect to accounting records and the preparation of accounts. @
and The accounts have been prepared in accordance with the micro-entity provisions delivered small companies in accordance with the provisions applicable to companies subject to the regime.
Approved by the Board on 25 June 2017
And signed on their behalf by: ,
Director
i i i This document was delivered ications and a uthenticated in accordance using 0 electronic communications of delivery under with the registrar’s rules relating to electronic form, authentication an d manner Section 1072 of the Companies Act 2006.
The Ww
Investigative ‘ lournalists’s
Guide to Company Accounts
basic summary Balance Sheet needs to be filed a As can be seen, only very Tot al Current Assets, Total Current Liabilities, and Assets, Fixed Total Merely are required to be shown. No Notes are required, Total Capital and Reserves shows is that there was £7 of Share Capital accounts the example So all that Liabilities. Not even the cash balance js and and £8,989 in Current Assets advances, credit or guarantees granted are there if any discernible. However, commitments, guarantees and contingencies to directors and any financial of the Balance Sheet. these must be disclosed at the foot 146
a Small Company needed only Before the introduction of Abridged Accounts Notes. The Directors’ Report,
to file an Abbreviated Balance Sheet and related P&L and other related Notes were not required.
For the Balance Sheet only a limited number of Notes were required. If there were amounts receivable in more than aayear’s time, these needed to be detailed separately. Similarly, amounts payable within one year and over one year needed to be shown, in total, separately. Let us look at a real but anonymised example. Below are the entire filed accounts for an anonymised “Small Company”.
Limited Unaudited Abbreviated Accounts for the Year Ended 31 July 2012
Limited Contents Abbreviated Balance Sheet
i
Notes to the Abbreviated Accounts
2
imited (Registration number: Abbreviated Balance Sheet at 31
July 2012 31
Current assets Debtors i Creditors: Amounts falling due within one year Net liabilities
Capital and reserves Profit and Loss Account Shareholders’ deficit
Note
July 2012 £
31
July 2011 £
43,624
33,924
(557,916)
(34,432)
a (514,292) inl
(508)
(514,292)
(508)
(514,292)
(508)
hdd
i Chapter Nine: Findingzg Clues in Abridged and Abbreviated Accounts Abr
ending 31 July 2012 the company was entitled to exe Mplion under seeti Section 477 of 2006 relating to small companies. Companies Act
For the year the
have not required the The members Act 2006. $76 of the Companies
company to obtain an audit in accordance with section
his responsibilities for The director acknowledges complying with the Tequirements records and the preparation of accounts. Act with respect to accounting
of the
These accounts have been prepared in accordance with the provisions applicable to to the small companics regime. companies subject
the director on Approved by
Director
The Notes on page 2 form an integral part of these Financial Statements. Page
|
Limited Notes to the Abbreviated Accounts for the Year Ended 31 1.
July 2012
Accounting policies
Basis of preparation The full Financial Statements, from which these abbreviated accounts have been extracted, have been prepared under the historical cost convention and in accordance with the Financial
Reporting Standard for Smaller Entities (effective April 2008). Exemption from preparing a Cush Flow Statement The accounts do not include a Cash Flow Statement because the company, as a small reporting entity, is exempt from the requirements to prepare such a statement.
Turnover Turnover represents amounts chargeable in respect of the sale of services to customers. Turnover from the supply of services represents the valuc of services provided under contracts to the extent that there is a right to consideration. Turnover is recognised on a Straight line basis over the length of the contract. 2.
Company status
have does The company is a private company limited by guarantee and consequently not Share Capital. Each of the members is liable to contribute an amount not excecding £1 towards the assets of the company in the event of liquidation.
3. Control The company is controlled by 4. Going concern As a result of restructuring at
Limited, the sole member of the company.
Limited the company intends to commence on trading again in 2013/14 and expects to be profitable. The accounts have been prepared ort the 4 going concern basis, the director believes this is appropriate as he intends to supp Company for the foreseeable future. Page 2
The Investigative Journalists’s
Guide to Company Accounts
clectronic communications and authenticated in as delivered using document was This authentication and manner rules relating to electronic form, strar’s ne dan with the registrar’s accordance the of Companies Act 2006. of delivery under section 1072
2012 accounts. Unlike listed The above is the entirety of the company’s there is very little information, companies even or private many companies, than you are likely to get for a US private However, this is more information
148
company. Everything is relative! we find out and where do So given aa set of accounts like these, what can we start?
we observe that the Creditors figure Firstly, looking at the Balance Sheet to from £34k £558k. We see that the company has has increased substantially no cash — always a bad sign. Its debtors have gone up by about £10k. The other interesting fact is that Profit & Loss Account reserve is now £514,292 having increased from £508 before. Unfortunately both these — never good news in accounting! So we can deduce that figures are in () the company suffered a loss of £513,784 during the year and is insolvent in a
major way. Clearly, the bulk of that loss is sitting in Creditors. The accumulated Profit and Loss Account is one of the few useful financial disclosures in Abbreviated Accounts. The difference between the accumulated
profit and loss figures for the present and previous years shows whether, after all costs and deductions, such as payments to the private company owners, the company managed to make aa profit and add to its reserves. The Turnover Note is occasionally interesting: Turnover Turnover represents amounts chargeable in respect of the sale of scrvices to customers. Turnover from the supply of services represents the value of services provided under contracts to the extent that there is a right to consideration. Turnover is recognised on a straight line basis over the length of the contract.
It gives us a clue that there might be long-term contracts involved as “Turnover is recognised ona straight line basis over the length of the contract”. Then there is a Note re Control: 3. Control i Th € company is controlled by
Limited, the sole member of the company.
Chapter Nine: Finding Clues in Abridged and Abbreviated Accounts
lead to another company to follow gives us a the story, is company “limited by guarantee” and this that so does not have a Note, go this
a
instead it has Members (just one in this case) whose liability is £1 in the event of liquidation. contributing to These are usually social limited / non-profit enterprises. the that company appears to be insolvent, Going Concern Finally, given would be an issue: —
shareholder
Going concern Limited the company intends to commence Asaresult of restructuring at trading again in 2013/14 and expects to be profitable. The accounts have been prepared on a going concern basis, the director believes this is appropriate as he intends to support the company for the foresceable future. 4,
This tells us that the owner company has been restructured and expects profitable and therefore the accounts have been prepared on a Going
to be
Concern basis.
Since these accounts are unaudited, no one is in aa position to challenge the
director’s view.
director is involved in a number of companies may need to pull the strings together to build a picture. A search at Companies House showed the director as having 15 active directorships, 10 In such cases, often the
and you
directorships of dissolved companies and 9 former directorships. An examination of those companies (some of which may well file full accounts) will
background information to progress an investigation. of Abbreviated Accounts and Small Companies was initially introduced, the Turnover and Asset limits were rather modest. They have been increased to quite significant amounts (see page 26). It would provide a reasonable
When the concept
appear that it is now quite common
for people to incorporate a number of
“Small” companies to take advantage of this loophole. As is clear above, Abbreviated Accounts do not yield much but it can still be
worthwhile reviewing them all as occasionally people unwittingly provide — in any case it does not take long to check.
useful information
Chapter Ten 150
Recap 1.
all Earnings are not the be all and end
2. Quality of assets not just quantity
3. Cash is King
4. What is happening to the cash? 5. “The Devil is in the detail”
6. Check out the directors’/shareholders’ history.
Once a bad penny, usually always a bad penny 7. Frequent changes of directors often indicates bad news
8. Finance director resignation often a sign of trouble
g. Check out Non-executive directors’ backgrounds
Chapter Ten:
Recap
Financial Check-Up
Have the Vv
Auditors expressed any concerns?
Check the Auditors’ Report
How independent
are they
if they are paid for non-audit work?
V Check the Operating Profit Note How much debt does Vv
the company have, and what is the nature of the debt?
Review the Balance Sheet and Long-Term/Short-Term Creditors Notes
company generating cash? If so, what is it doing with the money? V Review the Cash Flow Statement
Is the
What is the management’s previous
history? V Review Company Prospectus and public records
of directors’ remuneration? V Review Notes on Directors
What is the level
Related Party Transactions? V Review Related Party Transactions Notes
Have there been any
What has happened since the
financial year-end? V Review the Post Balance Sheet Events Notes
and investor Luke That's a Bean Counter’s perspective. Serial entrepreneur a
Johnson, also gave his useful take on “How to spot an impending calamity in the Financial should know where to look. Times in 2011. Now
you
Putting it All Together 152
ope
Re Be
owe
OS Rese
NES Dt,
a
a
ase
py.
little quiz. Imagine Finally, to test your understanding, I have designed a of either shares in the it invest must and £100 Company AA.or have spare you Company B. To make things easy the shares of either company are currently trading at £1 each Both companies have the same number of shares and as far as you can tell, apart from the slightly higher profit of Company A (EPS 30 pence rather than 25 pencefor B) everything else is the same. You have talked to everyone you can find and there is no adverse information about either company. They have the same risks attached to them and their future prospects are
identical. Both companies pay out 50% of their EPS as Dividend. The Accounting policies of both companies are identical. Question: Which company would aa rational investor choose? You must choose either A or B before you turn the page. Please write down why you have chosen that particular company and not the other. Please make sure that
you have made your choice only based on the information I have provided you in the paragraph above (italicised) rather than relying on your instincts or prejudices!
Chapter Ten. Recap
Company A
Company B
P&L
P&L £
10,000
Share capital
Turnover
5,000
(2,000)
Costs
£
Share capital
Turnover Costs
10,000
5,000
(2,500)
Profit /Earnings
3,000
Profit /Earnings
2,500
EPS
£0.30
EPS
£0.25
Please turn over when you have decided.
154
A. Based on the information given, any rational Congratulations if you chose cost £1 and the risks are identical, would shares investor, given that both A would earn 5p per share choose A because for the same £1 investment, assertion that more than B. If you chose B, you probably did not accept my must be You expensive” “reassuringly same. the was thought else everything a better bet. Let us get back to your investment. You have had the good judgement to ask Forensic Accountant to review the company’s accounts and he suggested
a
that you should never invest on the basis of P&L alone and you should at least ask for a detailed Balance Sheet and if possible, a Cash Flow Statement. After several requests the Balance Sheets have just been sent to you and are a
shown opposite. Please review the Balance Sheets closely bearing in mind the advice I have given you throughout this guide. Clearly, the part in italics above no longer applies as all things are not the same despite the fact that they both have £17,500 in Net Assets. Once again, please write down as many observations as seem relevant to you and makeaa final choice of AAor B, before you turn over the page whereI discuss the differences.
Chapter Ten. Recap
company A
Company B
P&L
P&L
f Share capital
Turnover Costs
10,000
5,000
(2,000)
£
Share capital
Turnover Costs
10,000
5,000
(2,500)
Profit/Earnings
3,000
Profit/Earnings
2,500
EPS
£0.30
EPS
£0.25
Company A
Company B Balance Sheet
Balance Sheet £
£
Fixed Assets
6,000
Fixed Assets
7,500
Stock
4,000
Stock
2,500
Trade Debtors
1,500
Cash
8,500
Trade Debtors
Cash
Creditors
Net Assets
15,000 100
(7,600)
Creditors
(2,500)
17,500
Net Assets
17,500
155
c Investigative
Accounts Journalists’s Guide to Company
Company B
Company A
P&L
P&L £
Share capital
Turnover Costs
10,000
5,000
(2,000)
E£
Share capital
Turnover Costs
10,000
5,000
(2,500)
Profit/Earnings
3,000
Profit /Earnings
2,500
EPS
£0.30
EPS
£0.25
Company A
Company B
Balance Sheet
Balance Sheet £
£
Fixed Assets
6,000
Fixed Assets
7,500
Stock
4,000
Stock
2,500
Trade Debtors
1,500
Cash
8,500
Trade Debtors
Cash
Creditors Net Assets
15,000 100
(7,600)
Creditors
(2,500)
17,500
Net Assets
17,500
Chapter Ten: Recap
the rhave repeated
P&L and Balance Sheets opposite so
that you do not
lave flicking back. There are numerous points to be made. This is a highl example and you are unlikely to come across stylised something quite is but it is helpful for extreme in practice, learning purposes. to
}
keep
if Congratulations you chose B. So why this time was B not A the right choice? Here are some observations: 1,
Cash
A has nearly run out of cash (just £100) whereas
—
swimming in it. You
B (£8,500) is will recall, companies go bust because they run out of
cash. Cash is needed to pay the Creditors.
A owes £7,600 and BB owes only £2,500. B could easily pay lots of cash. A on the other hand has only £100. Where would it get the cash to pay? Well, it is owed aa lot of money by its Trade Debtors — 2.
Creditors
—
up as it has
£15,000. Ifit can get this back, it can pay its creditors. So, let’s look at Debtors.
A is owed £15,000 but B is owed only £1,500. Let us look a How many months’ sales is B waiting to receive payment? Annual sales were £5,000 and it is owed £1,500 monthly sales are (5,000/12) £416.66. So, it is owed about 3.6 months’ worth of sales. A on the 3. Debtors
—
little deeper.
-
36 months’ sales. Translated, it means that it has not yet collect money for anything it has sold for at least the last 3 years!
other hand is owed been able to
Generally, the longer customers take to pay the less likely it is that full or any payment will be received. Companies that falsify their sales will inevitably need to falsify their debtors, who naturally will not pay as they do not exist! Perhaps we could sell our
4. Stock
—
Stock to get cash.
A has £4,000 and B has £2,500. You might think that having thing as the company can only generate cash if it has
lots of Stock is a good
Stock to sell. Up to a point but too much Stock can be very bad for corporate health. Firstly, it ties up funds and creates Creditors regardless of whether have sold or not). The
(and they want payment is biggest risk with Stock
you
that it will not sell or it is
—
if goods are perishable, e.g. fruit, it must be sold quickly
worthless. It could become obsolete
—
last year’s mobile phones that
157
Accounts to The Investigative Journalists’s Guide Company
sell and might only fetch £100 on eBay. cost £500 each would be difficult to sell as novelty paperweights. Cost of Sales Two-year-old phones, would only at £4,000 AA has two years’ for A were £2,000. So, it means, based on cost, of Stock which would normally sell at £10,000. It is likely that much of that Stock will never sell at anything approaching normal prices or even the price has a year’s Stock — that is still far they paid for it. B on the other hand only have more than three months’ not should a too much. Typically, company worth of Stock. Perhaps we could sell the fixed assets? a
5. Fixed Assets
—
A has £6,000 and BB has £7,500. As we see AAis well on its
way to going bust and the chances are that it will get only a fraction of £6,000 shown on the Balance Sheet.
So, what have you learned? Not how to be an accountant certainly. But hopefully how not to be mystified by company accounts and as an investigative journalist how and where to spot the story amid those many pages of corporate waffle and endless numbers.
Appendices
Appendix One. Financial Reporting Standard 102 Terms, p.160
Appendix Two. Sample P&L, Balance Sheet and Cash Flow Statement, p.161
Appendix Three. What Company Data Can Be Found Where, p.164 Appendix Four. An Offshore Guide, p.169
Rep orting Standard 102 Terms Appendix One: Financial Financial Reportin 1 January 2015, a new From accounting periods beginning in the UK. The Standard introduced new terms for Standard (FRS 102) took effect in the Profit & Loss Account, Balance Sheet and Cash a number of long used terms statements changed. The key changes in Flow Statement. Even the names of these terminology are shown below:
Compantes Act 2006 (Old term)
FRS 102 (New Term)
Accounting reference date
Reporting date Financial statements
Accounts Associated undertaking Balance sheet
Capital and reserves Cash at bank and in hand Debtors
Diminution in value (of assets)
Financial year Group (accounts)
IAS Individual (accounts) Interest payable and similar charges Interest receivable and similar income
Minority interests Net realisable value (of any current asset)
Associate Statement of financial position
Equity Cash
Trade receivables Impairment
Reporting period Consolidated (Financial Statements) EU-adopted IFRS
Individual (Financial Statements) Finance costs
Finance income/investment income
Non-controlling interests Estimated selling price less costs to complete and sell
Parent undertaking Profit and Loss Account
Related undertakings
Stocks Subsidiary undertaking
Parent Income statement (under the twostatement approach) Part of the statement of comprehensive income (under the single statement approach)
Subsidiaries, associates and joint ventures Inventories
Subsidiary
Tangible assets
and Includes: property, plant equipment; investment property
Trade creditors
Trade payables
pendix imple
Two:
P&L, Balance Sheet and Cash Flow Statement
Sample Limited Profit and Loss for the
Account/Income Statement
Year Ended 31 March 2018 Note 2
Turnover Cost of Sales Gross Profit
Operating Costs
2018
2017
£
£
250,000
200,000
(150,000)
(126,000)
100,000
74,000
(80,000)
(60,000)
Operating Profit
3
Exceptional Items
4
-
Income from investments
5
1,000
1,000
Interest payable
6
(8,000)
(2,000)
13,500
11,800
7
(3,000)
(2,500)
Profit on disposal
of asset
14,000
(1,200)
500
Profit on ordinary activities before taxation
Tax
20,000
Profit on ordinary activities after taxation
10,500
9,300
Dividend
(1,500)
(1,250)
9,000
8,050
Retained profit
Sample Limited
2018 Balance Sheet as at 31 March
Note
Fixed Assets 10
Intangible assets 11 & Tangible assets/Property, plant equipment 12 assets Investments/Financial
2018
2017
£
£
20,000
15,000
120,000
45,000
10,000 150,000
—°70,000
10,000
Current Assets
Stocks/Inventories Trade debtors/Trade receivables
13
Other debtors
14
Investments/Financial assets Cash
50,000 60,000 10,000 10,000
50,000 56,500
4,000 10,000
1,000
2,000
11,000
122,500
(75,000) (11,000) (5,000) (5,000) (96,000) 35,000
(50,000) (8,000) (36,000) (4,500) (98,500) —_
185,000
94,000
(35,000) (5,000)
(8,000)
145,000
86,000
Current Liabilities
Trade creditors/Trade payables Other creditors
15
Bank overdraft
Taxes and social security
16
Net Current Assets
Total Assets less Current Liabilities Creditors: Amounts falling due after more than one year
17
Provision for liabilities and charges
18
Net Assets
Capital and Reserves Called up Share Capital
22
Share Premium account
Revaluation reserve Profit and Loss Account
Shareholders’ Funds
23
24,000
-
20,000
10,000
30,000 50,000
20,000
45,000
36,000
145,000
86,000
20,000
sample Limited
Cash flow statement
March 2018 year ended 31
2018
2017
Note
£
£
A
20,000
14,000
Depreciation expense
5,000
2,000
Amortisation expense
1,000
500
for the
Operating profit
Adjustments
for:
(500)
_
25,500
16,500
-
(5,000)
(Increase) in trade and other receivables
(9,500)
(20,000)
Increase in trade and other payables
28,500
3,000
(Decrease) in provisions
(3,000)
-
41,500
(5,500)
Interest paid
(8,000)
(2,000)
Corporation tax paid
(2,500)
(1,500)
31,000
(9,000)
(50,000)
(10,000)
(6,000)
(15,000)
(Profit) on disposal of properties Operating cash flows before changes in working capital Changes in working capital:
(Increase) in inventories
Cash flows from operating
activities
Net cash generated from/(used
in) operating activities
B
C
163
Cash flows from investing activities
Purchase of property, plant & equipment Purchase of intangible assets Proceeds from disposal
of property, plant & equipment
Investment income Net cash (used in)/generated from investing activities
D
500
-
1,000
1,000
(54,500)
(24,000)
Cash fiows from financing activities
20,000
Proceeds from issuance of ordinary shares
-
Repayment of short-term borrowings
35,000
Proceeds from long-term borrowings
(2,750) ~
(1,500)
(1,250)
Net cash (used in)/generated from financing activities
E
53,500
(4,000)
Net (decrease)/increase in cash and cash equivalents
F
30,000
(37,000)
(34,000)
3,000
(4,000)
_ (34,000)
Dividends paid
Cash and cash equivalents at the beginning of year
Cash and cash equivalents at end of year
G
Joumaticts’s Guide to Ts
The lnvestizative
ants Company Nccormnts
What Company Data Can Be Found Where Ap pendix Thre ce: |
re = Bey ngeweue? We
pa
Say FRE Edis
boys
abl
oe
ete
and limited liability UK In the UK three million plus limited companies which is accessible House, at accounts Companies file partnerships must General information about online via https://beta.companieshouse.gov.uk. www. companieshouse.gov.uk. services, booklets and prices can be found at: A wide range of company documents and information (mortgage charges,
current directorships, insolvency changes of directors, director’s previous and service. Companies documents) can be obtained free online through the Beta House Direct subscription service at www.direct.companieshouse.gov.uk. can provide access to older documents at a cost of £4 per month. Plus £1 per document downloaded. A monitoring service at 50p per company per annum will alert you any time a particular company files
a
document. This is free with WebCheck.
The information that is available: (a) Incorporation documents — Articles and Memorandum of Association. Basically, these are usually standard “Boiler Plate” documents governing the operation of the company. Often, they will be amended when the company gets going. There will also be details of initial shareholders. Very often companies are incorporated by agents who then sell them on and initial shareholders are often just nominees. If the documents are non-standard
they are worth a review. (b) Changes in officers of the company (directors and secretary) from the incorporation of the company to date. You can also look up the officers’ history — a string of failed companies is a good clue. You might also identify a string of related companies.
(c) Confirmation statements — shows shareholders controlling more than 25% of the company and changes in shareholders. (d) Annual Return — shows any changes in shareholdings. Very useful for private companies. No longer filed afterJ1June 2016. (e) Accounts ~ If the company is these will be dormant accounts. inactive,
If the company is small, it will likely be
Abridged/Abbreviated Accounts.
(f) Ifan auditor has resigned, he is required to file a “Statement of Circumstances” detailing the circumstances or
confirming there are none
- 99.9% of
A Prif v¢
the time
nel
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hat ( OMpanr Dat
qa
( an Re Found Where
there are none.
(2) Register of Charges if the Company has Charges over its ass assets. th rh and assets who holds the charge willbe here of the but not theamount i
identity
8,
(h) Ifa company has entered administration or
liquidation, you should find “Statement of Affairs” and reports from the Administrators or Liquidators These prove in graphic detail how little assets previously in the Balance Sheet at millions actually recover. a
should add that if you are chasing crooks, sometimes the information fictional, as it does not carry out any checks. I have often been out looking for, say 143 North Road when the road ends at 135! Sometimes even some of the accounts are fictional — research by one of the information provider companies revealed dozens of companies with an identical P&L and Balance Sheet but different names. I
held by Companies House is
The Companies House website also has a very useful links page to worldwide company registries:
http://www.companieshouse.gov.uk/links/introduction.shtml#reg Other places worth checking for UK companies are: (a) www.duedil.com: You can get quite aalot of information for free. Directors’ names, summary financials and other related companies. If you want the actual documents you have to pay. You can search for directors and identify
companies they are involved with.
(b) www.investegate.co.uk: archives all announcements by companies either British or foreign listed on the London Stock Exchange.
USA Information on American incorporated companies can be divided into If you are after listed companies, you will have more
two divergent categories.
data than you can ever get through and all of it will be free. The magic fount of all this knowledge is EDGAR (Electronic Data Gathering, Analysis and Retrieval), the company accounts filing system under the umbrella of the Securities and Exchange Commission (SEC) which regulates the US stock
market.
The key documents: Form 10K — Annual report including litigation, risk factors. — Quarterly Reports update data in 10K.
Form 10Q
Form 8K — Current Report (major events announcement).
165
Ginde to Company Accounts The Investigative Jourmaliste’s
with a US listing. Report filed by foreign companies in the Annual home at Report due not published Often contains information disclosure. US to more exacting ahead of annual sharcholders — Proxy statement filed Form DEF1gA directors’ salary, benefits and details more regarding meeting. Often contains the CEO/emplovee pay ratio. include also will Now shareholdings. and changes. Forms 5 and 13 — Beneficial share ownership Form 20F
166
-
Annual
Kind it all here: www.sec.gov/edgar/searchedgar/companysearch on a state not federal Private companies are registered and incorporated ofState’s department the held Secretary are by records usually basis. Company One reason is that in each state but are accessible online and usually for free. there usually will For companics information. little Incorporated is there very be details of the directors and the registered address. For Limited Liability Corporations often there will just be the local agent. a
Three of the most popular states for US incorporations are Delaware, — details in Appendix Four.
Nevada and Wyoming
http://soswy.state.wy.us/Business/Business50.aspx provides aa link to company information in all other US states outside Wyoming. Surprisingly, you are more likely to find information about traditional tax —
haven companies from the BVI, Jersey and Luxembourg than you are for US private companies. Very often people listed at the US state registries are nominees and you are unlikely to find any meaningful information from the
local agents, as no one knows who is behind the companies. If you area crook, forget BVI, an LLC in the state of Oregon is the vehicle of choice and it is a damn sight cheaper.
Canada www.sedar.com — contains free information on Canadian listed companies with accounts and details of directors and major shareholders. Very useful for mining and oil companies.
South Africa Details on companies listed on the Johannesburg Stock
Exchange can be obtained free from www.jse.co.za/current-companies/ listed-companies Details on South African private companies can be obtained in limited . circumstances from outside South Africa at www.ciproza.co.za. Accounts are
Appendix Three
\W) at
.
Company Data Can Re Found Wa
WwW)
herp
A director search can also be m ade. But all not available. require credi Tedit tard However, company names ¢ an be checked free online. payments. For other information, the price depends o n the nature and number of can be obtained by bank tr documents but they ansfers (a SA bank ' account not necessarily required), Same with Windeeds — Which provides CIPRO/ cIPC data immediately provided there is payment which can be done via bank deposits, documents are around Rio. ¢
|
|
Australla www.asic.gov private companies.
—
provides free details on Australian listed and
Again, useful for mining and oil companies.
Hong Kong www.hkex.com.hk
—
provides free information on companies
Stock Exchange. Details of directors and shareholders of private companies can be bought from www.icris.cr.gov.hk www.irasia.com — provides free information on companies listed on not just the Hong Kong stock exchange but also stock exchanges in China, listed on the Hong Kong
Malaysia, New Zealand, the Philippines, Singapore, Taiwan and Thailand. Tax Havens Appendix Four lists what, if any, company data is available in most of the “usual suspects” from the world of low to no tax and secrecy havens around the globe
—
not all of which are offshore sunny places for
onshore shady people.
Recent years have seen the creation of a particularly opaque offshore company species, the International Business Corporation or Company, which has spread from the Caribbean to the Pacific providing minimal information, secrecy and flexibility. IBCs from Nevis for example do not require the local regulator to even know the beneficial owner, to retain company records locally or to inform the of changes in directors or shareholders from the
registry
any
original nominees.
A search in the Marshall Islands will produce only the name and date of incorporation, nothing on directors or shareholders. Try your luck at https: //www.register-iri.com/miCorporate/ In the Seychelles
—
https://eservice.egov.sc/ BizRegistration/WebSearch-
Business.aspx — you can obtain the name of the IBC, its date of incorporation,
167
The Investigative Journalists’s
Guide to Company Accounts
and whether it is still live but no Share Capital, local agent, and any charges minimal information will cost that But dircctors or shareholders or accounts.
$100. a useful free source of limited The Swiss business register (www.zefix.ch) is and Ireland (www.cro.ie) (www.rcsl.lu) Luxembourg corporate information. for a fee. Probably more useful, free sources provide more information but for offshore company data are: The database of documents from the BVI, 168
(a) https://offshoreleaks.icij.org Cook Islands and other tax havens published by the International Consortium of Investigative JeJournalists was greatly expanded in 2016 by the Panama from Bermuda. These “data Papers and then in 2017 by the Paradise Papers dumps” are not a comprehensive source from the offshore centres involved but a tremendously useful means of checking company names and their beneficial owners plus the deals for which the offshore companies were used. — (b) www.opencorporates.com/companies this amazing free resource has details of over 60 million companies worldwide. It is great for researching global companies and finding their offshoots in various countries. In my
experience some people who are up to no good have remarkably little
imagination and very often use the same name in many jurisdictions, making it easier to link companies and get an idea of their footprint.
If you are going to be searching frequently, an investment in a “How to search Google” course will pay for itself multiple times over. I am amazed by what turns up by doing focused searches. This is particularly useful if the names involved are slightly unusual and not very common. Smith or Patel will possibly drown you in spurious results unless you know how to do aa skilled search.
The other key tools are social networking sites — Facebook, Linked-in and Twitter. Itisamazing how much information people (ortheir friends /relatives) give away. On one of my cases, we tracked down a key witness backpacking in Australia from a Twitter handle. A Tweet will very likely also pinpoint their location to within a few hundred metres. I highly recommend the ClJ courses on advanced online research and using open source intelligence gathering techniques — having attended them I can vouch for them personally.
Appendix
Four: An Offshore Gude xy ce
jurisdiction Name of Registry Lite
Website
7
andorra Oficina de Marques No online searches
Anguilla Commercial Registry
www.commercialregistry.ai Antigua FFinancial Services Regulatory Commission No online searches I
Bahamas (Nassau) Registrar General's
Department www.bahamas.gov.bs Belize Registrar of Companies No online searches Bermuda Registrar
a »roe ey we 3 ws Py
G
\S
RS
se”
v
Cayman Islands General Registry
www.ciregistry.gov.ky
es
vv
YT
Vv
v
x
Vv
x
C
Y
xX
vw
x
F
Xx
xX
xX
X
D
vy
169
B
Y
WX
YX
Y XV Xv
X
XxX
D
B
Cook Financial Supervisory Commission Islands No online searches
x
x
x
x
E
Cyprus Department of Registrar of Companies and Official Receiver www. mcit.gov.cy
Y¥
Vv
Vv
wv
F
Delaware Delaware Department of State Division of Corporations
v
x
¥
xX
G
iv
F
delecorp.delaware.gov
Gibraltar Companies House www.companieshouse.gi
&©
Bishop International Ltd. 2018
Y¥Y
|
A
B
of Companies
Commission No online searches
|
®
V¥
www.roc.gov.bm British Virgin Islands Financial Services
eo
C)
The Investigative Jomrnalists¢
¢
ade to
Compans Accounts
e
Ny
Jurtediction Name of Reqistny Website
Vv
x
Vv
Vv
treland Companics Registration ( Mffice WWW.cro.e
Vv
¥
Vv
v
iste of Man* Companics Registry www.companiesregistry.gov.im
Vv
¥
Vv
v
Jersey Financial Services Commission
Vv
Y
WX
ov
i
XV XV
xX
K
Quernsey Grucrnscy Reqistru WWW.
BE
www.jerscyfsc.org/registry
Liberla LISCR (Liberian International Ship & Corporate Registry) www.liscr.com/liscr
Y¥
Liechtenstein Commercial Register Division
¥
xX
VY
X
B
Luxembourg Registre de Commerce et des Societes www.resl.lu
Y¥
WX
VY
Vv
F
Malta The Registry of Companies, Financial Services Authority registry.mfsa.com.mt
Y¥
Vv
Vv
Vv
F
Marshall Islands International Registries Inc in US represents the Marshall Islands Maritime and Corporate Registries www.register-iri.com
x
x
x
x
Mauritlus Companies Division http://companies.govmu.org
¥ XV XV XV
B
Netherlands Trade Register www.kvk.nl
Y VX
Vv
Vv
F
Netherlands Antilles (Curagao) Chamber of Commerce & Industry www.curacao-chamber.cw
¥ XY
VY
Xx
B
xX oY
xX
wwvw.oera.li
Nevada Secretary ofState’s Office — Corporation Division
nvsos.gov/sosentitysearch/corpsearch.aspx
¥
H
é jurisdiction
Name of Reqistry
éoe
yo rr
Website
Services Regulatony Commissio on Nevis Financial xo online searches
Y
x
www. registro-publico.gob.pa
Seycholies inancial Services Authority
http://companies.govmu.org Singapore ACRA (Accounting and Corporate Regulatory Authority)
°
eS ee
Yt
"4
F
v
F
XV x
iB
x
Nive Companies Office www.ayCOMPANIES. ZOV.NU
panama Kegistro Publico de Panama
2
v
Xx
Y¥
x
V
Vv
Y
xX
ov
xX
I
v v
Vv
v
J
x
Vv
Vv
x
F
¥
xX
WY
X
H
x
x
L
F
WwWw.acra.gov.sg
Switzerland Federal Commercial Registry Office but each canton has own registry www.zefix.ch Turks & Caicos islands Commission No online searches UAE (Dubal)
Financial Services
Dubai Chamber of Commerce
www.dubaichamber.com
of State's Office Business Division wyobiz.wy.gov/business/filingsearch.aspx Wyoming Secretary
—
Index of Notes A Documents can only be obtained locally through a lawyer. B Basic information available online free. Documents need to be obtained by a local agent. C Documents can only be ordered locally in person or by email: registrydepartment @fsrc.gov.ag D Basic information (date of incorporation/status/Share Capital) available for alfee. a No directors/shareholders/accounts. E No documents available. F Documents can be ordered and delivered online for a fee. a G Basic information available online free. Documents can be requested in writing and delivered
by post. H Basic information available online free. Documents can be requested and delivered by email. I Basic information available online free. Documents only available from local company registry. Documents available by email. K Documents can be obtained from LISCR in Zurich. L Searches can be conducted helles.sc by emailing enquiries@f
J
WY
&
© Bishop International Ltd. 2018
172
Institute of Chartered Accountants in England Raj Balrollya is a Fellow of the the London Business School. He started his from MBA an and Wales. He has Deloitte Haskins & Sells (now PwC) after was what with career accounting from Imperial College in London. He graduating in Computing Science with PwC he audited a wide range his 15 in years During 1988. qualified of companies and institutions and subsequently specialised in forensic accounting. He spent a number of years assisting the Serious Fraud Office, in particular over four years investigating the infamous BCCI bank. Whilst completing his
MBA at the London Business School, he had the idea of setting up an independent forensic accounting firm, imaginatively named Forensic Accounting
LLP. The firm, having grown to be the biggest independent forensic firm in the UK, was acquired by a US-listed firm in 2008. After completing his tiein period he is once again an independent forensic accountant and is the Managing Director of Expert Forensic Accountants Limited. Raj has specialised in forensic accounting investigations for over 25 years.
As well as assisting law firms, he has been involved in investigating fraud and regulatory offences on behalf of the SFO, Financial Conduct Authority, Department of Trade and Industry’s Company Investigation Branch, the Insolvency Services and regulators in the UK, Ireland, BVI, Bermuda and
Trinidad.
A well-known forensic accountant, he has been teaching How to Read Company Accounts at the CIJ for 15 years. He has held a number of intensive weekend courses for the ClJ, as well as frequently helping journalists and broadcasters to decipher the accounting/business aspect of their stories.
This
j
:
is ] primarily for i larily INVestigative journalists, but alse other jourNeec lo make Came sense ofa set of company accounts or to obtain iULOVErViEW i Yemiew Of ofa business In order to ask ‘on-the-money” questions. To do this a in EXD rt level is difficult, if not Impossible, without years of Wst traimime and experience. However, Lw ant to persuade you that Was Delativedy: Stra iv htforward to obtain enough ofa guide guide
SUSIS atwh nalists WHO
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working knowledge Guestions stoask about iaccompany its Nnpany accounts, pany a and itsSaee and te tc tee the bene pulled over vour eves by the answers. lo detosstifs company accounts so thatyyouUI should Pesto nd find out where the real story
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Raj Bairoliya is a Fellow of the Institute of Chartered Accountants in England & Wales. He started his accounting career with what was Deloitte Haskins & Sells (now PwC). During his 15 years with PwC he audited a wide range of companies and institutions and subsequently specialised in forensic accounting. He spent a number of years assisting the Serious Fraud Office, in particular over four years investigating the infamous BCCI bank. Whilst completing his MBA at the London Business School, he had the idea of
setting up an independent forensic accounting firm, imaginatively named Forensic Accounting LLP. The firm, having grown to be the biggest independent forensic firm in the UK, was acquired by a US-listed firm in 2008. Raj has specialised in forensic accounting investigations for over 25 years and has investigated many of the high over this period. profile accounting failures
www.telj:ord
Published by the Centre for Investigative Journalism with the support of the Lorana Sullivan Foundation
—_Lorana
Sullivan Foundation
DESIGN. IAN DENNING
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