Prem Sikka has this in the Guardian today:
Satyam is India's fourth largest software company. It complied with the latest accounting standards and boasted audit committees, independent directors and a global accounting firm as its auditor.
The resignation letter of Satyam's chairman explained that he inflated cash and bank balances by about $1bn, understated liabilities by $253m and improved profits by accruing non-existent interest and overstating debtors. For the quarter to September, the company inflated its profits by 97%. It published an operating margin of 24% against an actual of 3%. Its profit should have been $12.5m instead of $136m. Such frauds can't easily be perpetrated by one person.
Satyam's accounts received a clean bill of health from the Indian arm of auditors PricewaterhouseCoopers (PwC). The firm received a fee of $1.92m from Satyam, including $325,000 for consultancy.
The case is made: the current model of auditing has failed.
Now we need to move on to something else.
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There has been much discussion recently of corporate excess and collusion by auditors. Of course, in theory, shareholders have the final say. However, ordinary shareholders do not have the time, knowledge or clout to challenge the establishment. All they can do is buy and sell their shares. Institutional investors are perceived to be part of the the ‘fat cat’ hegemony.
It seems to me that there is an answer here. If Corporation Tax is 30%, one can argue that the Inland Revenue represents the citizens of the UK in their de-facto 30% interest in each and every enterprise in the UK. Thus, the Inland Revenue (with or without the assistance of the National Audit Office) should have 30% of the voting powers on each and every board and remuneration committee in the UK. In addition, the same bodies should have sole discretion on the appointment of the auditors.
The Inland Revenue is in it for the long run (i.e. it cannot increase or reduce its ‘share holding’), and their interests are aligned directly with those of the ‘normal’ shareholders (i.e. long run returns). I believe they would adopt a more hard-nosed attitude to corporate excess and vainglorious ambition than the incumbent management and ‘insider’ board members, and would accurately reflect the long-run interests of the ‘normal’ shareholders, as well as the ‘tax’ shareholders. Thus, they should control all voting powers not specifically voted elsewhere, as well as the ‘tax’ 30%.
One is not looking here for inspired entrepreneurial talent. That is the job of the incumbent management team. Nor is one looking for meddling interference. The role here is solely to moderate the instinct for self-interest when it conflicted with shareholders’ interests, to appoint the auditors, to provide an ‘honest broker’ opinion in the annual report, and to ‘mark the cards’ of board members seeking re-election. Above all, it is to be on the inside track whilst (potentially self-serving) proposals are being planned and reviewed in confidence, and before they become ‘done deals’.
Of course, one would have to ensure that the Inland Revenue (and/or the National Audit Office) were obliged to consider only the interests of the ‘ordinary’ shareholders, and were protected from direct trade union and/or political influence. However, I believe that that is already the established culture of both the Inland Revenue and the National Audit Office.
Tim
I like a lot of this
I do not agree that “Of course, one would have to ensure that the Inland Revenue (and/or the National Audit Office) were obliged to consider only the interests of the ‘ordinary’ shareholders, and were protected from direct trade union and/or political influence. However, I believe that that is already the established culture of both the Inland Revenue and the National Audit Office.”
Why ignore everyone else but the shareholders? Stakeholders have rights too – and right now it is very, very clear, that they bear a much bigger burden than the suppliers of equity.
We need a broader basis of responsibility if this is to work
Richard