I share two tweets from friends who are also colleagues, both just published:
https://twitter.com/lenseabrooke/status/1377174330170241029?s=21
Much of my work is a long, slow, patient haul. This work on audit reform is part of that.
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Feel the indifference expressed to the conclusion that social class and family structure make a big difference to outcomes in life.
The speed of the reports is remarkable in itself given how very long many other reports take, especially any into deaths in police custody for example! and in some instances never seem to actually get reported.
Given the make up and views of the people on the race report its conclusions are no surprise.
I think we should not be fooled into thinking this Government is incompetent- its a great disguise for their true aims and objectives which are being achieved at speed.
This is certainly a difficult area. The analysis above is useful, but does not touch on the question of high (but commercially reasonable?) contractual interest rates on acquisition finance provided by overseas entities which may or may not be related parties.
On Leonard’s example if the debt on the first acquisition bore interest at 10%, that would mean £5m pa going straight out of the door, not as a dividend (which should be withheld if payment would prejudice creditors) but as a payment to a creditor who would rank equally with all others (maybe even prior to, depending on security arrangements.
The problem boils down to thinly capitalised companies lacking the financial resilience to withstand shocks and finance restructuring or changes of direction.
I am not sure how this can be addressed through company law or auditing standards, unless a requirement is introduced for a ‘medium term resilience statement’ could be introduced. Getting the scope of this right so it is practical and useful and agreeing an assurance framework to underpin it would be a huge and, I suspect, hugely long term project.
Good luck to all involved!
We are working on it
Another point after reading the FT article.
When FRS102 was being introduced I was on the Accounting Standards Committee for my Institute, and recall raising my surprise and concern that explicit disclosure of distributable reserves was being lost in the mix of ‘comprehensive income’ which included realised and unrealised gains and losses together.
Some on the Committee, with significantly greater working knowledge of PLC accounts than me, countered by saying that for the largest companies, this information had not been clearly illustrated for many years, if ever, and therefore it was no great loss. It was not considered to be information which was wanted or needed by users of accounts. The suggestion was therefore not taken forward in our consultation response.
This surprised and disappointed me at the time, as it seemed eminently reasonable for companies to be able to illustrate to current shareholders, potential investors and creditors their capacity to pay dividends. Equally importantly, I thought that such a disclosure requirement would illustrate that the company itself knew what capacity existed.
It is essential – not least to comply with the law, and yet not disclosed
The latest audit proposals do suggest its restoration – largely as a result of a lot of work by a few of us
I have only read the Exec Summary (the weather is too good for a longer read!).
The problems you identify are correct and I am intrigued that the first recommendation is to suggest that Directors’ primary duty should be “Capital Maintenance”.
If one looks at Banks since 2008 this has been the key change. Capital requirements have been raised substantially and if they fall there are sanctions; first no dividends; second, direct intervention in running the bank; third, closure.
In addition, we see (a) delayed bonus payments and clawbacks to try and prevent “short-termism” (b) limits to risk with a much enhanced monitoring system (c) a “backstop” limit on leverage just in case (b) is not working so well (d) the ability of regulators to prevent dividends (used recently during COVID) (e) sanctions against individuals, not just companies, for bad behaviour.
Of course, I am not suggesting that these measures are perfect (far from it) but the changes implemented have made the banking system a lot safer and the measures, despite howls of pain from bankers, have been sufficiently practical to get implemented.
I think this might be a template for the broader corporate world.
The rest have been busy hollowing themselves out for more than a decade now
Bankers may lead in the “Greed Stakes” and changes since 2008 may have clipped their wings but where they led, others have now followed….. and that is a shame. One can’t legislate against greed but we can try to insulate “innocent bystanders” from that greed…. and the key to that is equity capital in large enough amounts to ensure that they bear first and ALL losses…. I also think John McLeod makes a salient point about high coupon debt to related parties as “disguised dividends” that rank pari passu with “real” creditors.
Finally, tax relief on debt. Clearly that is a non-starter for banks but other companies?
It could be ratcheted in over time
I would welcome the change
This gaslighting item seems to have been taken down Richard, a shame I felt, as I was going to share it widely, because I felt you captured the moment perfectly (so I’ve no idea where this replybis going)
Bizarrely I found that a later post overwrote it
That has never happened before
I have recreated it
Oh! Well, more good stuff I see.