I have this morning posted this video on YouTube, addressing an issue of accounting and transparency that matters to me.
I think the format for accounting used by large companies might provide data of use to financial markets. However, the impression that these accounts give to the world is also seriously misleading, not least because they suggest that a company undertakes transactions that it has never had legal responsibility for.
Most people need different data from that which large companies provide about themselves. They need detailed information about the individual trading entities that those large companies own, wherever they might be in the world, and a great deal of that data is still too often hidden from view by the accounts that large companies present. It's time that these largest companies were a great deal more transparent about themselves.
The transcript is here:
The accounts of large companies in the UK are complete works of fiction. Now, I don't make that claim lightly. I make it because that's, well, completely true.
If you pick up the accounts of any large company - the bank that you probably save with, or an energy company like BP or Shell, or the companies who are going to supply you with your water if you live in some parts of the country, or the energy suppliers, or a retailer - the accounts that you'll pick up are really big.
If you've got a physical copy, hundreds of pages - and they are literally a work of fiction. Why? Because those accounts are presented as if they are the financial performance of the parent company. Call it Marks and Spencer PLC, call it Tesco PLC, or Barclays PLC, whoever it might be. It literally makes no difference. Those accounts pretend that they are the trading of that particular parent company. But, every single one of those companies operates through very large numbers of subsidiary companies.
In other words, if you go into a supermarket, you don't buy from Tesco PLC. You'll buy from Tesco Stores or something like that.
If you go into a bank in the UK, you will probably not trade with the parent company but with its banking subsidiary.
If you deal with a manufacturing company, you won't deal with the parent company. You'll deal with the company that operates the particular site where you are buying from or selling to.
Now this really matters because, first of all, there is literally no company that undertakes the transactions that are reflected in those accounts, which is why I call them a work of fiction. They are simply created by adding together in a very particular way the accounts of all those subsidiary companies.
And I say in a very particular way because in accounting we call it consolidation, and that means we take out of view all the transactions between the subsidiary companies - which is where vast amounts of tax abuse takes place, by the way - and exactly how tax abuse in tax havens always occurred.
So first of all, we don't see the true picture about what's going on with regard to the true level of trading within the group and between group companies.
And secondly, if we're trading with a particular subsidiary, or if you're employed by a subsidiary, the fact that the group as a whole might claim to have great performance doesn't mean to say that the part of the group that you're interested in - who might owe you money, who might employ you, who might be polluting your environment, or whatever else it might be - you don't know how they're doing.
Nor do you know if they're paying tax.
And you also don't know if you look at the group as a whole, how much of its activity is hidden in tax havens or anywhere else. Where in the world is it operating?
Large companies might want to present this particular view to the world as if they are a single entity, which makes their shareholders very happy. But the rest of us who deal with that group need to know, who are you?
What companies do you own?
Where are you?
Where are you trading in the world?
What do you do? Because no group does just one thing.
How many people do you employ?
How much profit you make in that activity?
So, will that particular activity survive?
Do you pay your tax?
How much is invested in this? Because if that money is withdrawn from your community, it might have a real impact.
Something called country-by-country reporting, an idea that I created in 2003, and which was endorsed by OECD - the Organisation for Economic Cooperation and Development, based in Paris, in 2015 - would deliver that information for us, but as yet, it's not on public record in the UK.
We need it because we need to end the fiction that one set of accounts will tell us everything that a large company is doing and we need to find out what it is doing in every single one of its subsidiaries as well. And we can never do that at present because they aren't required to even put the full list of their company names in their accounts.
And they aren't required to put a copy of the subsidiary accounts for every company that they own on their website.
Those last two things will make a big difference. Talking about what is going on in all their subsidiaries in clear, unambiguous language to everybody they engage with is critical if they're to have the license to operate that we as a society give them. And we aren't, as yet, getting a fair bargain in that process.
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Are you saying the likes of Tesco are breaking the law? Or are they breaking “the law” in what you have made up in your head? Obviously the two are are nowhere near the same thing.
I never said anything about the law
Their accounts are lawful, but they also do not represent the transactions undertaken by Tesco plc. That is my point. They instead represent a very particular and decidedly particular viewpoint on transactions it might influence. That is something very different.
There are perfectly good rules for accounting and consolidation of subsidiary company activities. These rules have been created and evolved over many years by huge teams of appropriately qualified individuals.
We don’t need the additional complexity of changing reporting on the basis of one ex-accountant no long practising.
Particularly when that ex-accountant has no financial or professional interest and simply thinks that he should have certain information ‘because he’s worth it’.
I am not an ex accountant.
I am no longer in the ICAEW.
I am still a professor of accounting practice. And you do know we make things better my suggesting reforms don’t you?
Search Companies house using “Tesco” and it returns 124 results (I exclude dissolved companies – otherwise you get to 371!)…. and this is just the UK. One does have to wonder why so many are needed.
Clarity is not the aim.
I am saying we need it.
Looks like the trolls have moved from boxers to footballers. Jack Taylor’s just bitter because Ipswich are in danger of missing out on automatic promotion to the Premiership.
Who have I missed now?
I didn’t know this; I’ve never had the inclination to read a large company’s accounts. I am appalled.
I would have expected that a parent’s company accounts would be just that, the accounts of the parent company. That is, for example, the number of staff employed specifically by the parent, not the subsidiaries, the parent’s specific office buildings (not subsidiaries), etc. And I would expect it to include the value of subsidiary companies (unlisted I guess, but no reason to to estimate their value like any other asset) and income from that subsidiary. Then, if I wanted to find out about a subsidiary, I would expect to consult the accounts of the subsidiary.
You say “Large companies might want to present this particular view to the world as if they are a single entity”. If they wanted to do this they could do so by operating as a single company without subsidiaries. Clearly subsidiaries are for a different purpose. Prima facie this appears to be to obscure what is going on and, presumably, for tax avoidance and to more easily manage public relations (by hiding information).
Either you should have a single company and report it as such, or a hierarchy of subsidiaries, and report for each subsidiary (and the parent). I suppose I should not be surprised that large company’s wants to do both and have contrived for this to be accepted.
I’m very ignorant about the nature of accounting, but my initial reaction is “sad”.
Thanks for highlighting the issue.
I appreciate you saying what you have – it is useful evidence that people do not know this stuff.
Like Tim Kent, I had no idea that company accounts were constructed like this and have to agree with his conclusion that it is not done in the interests of consumers or investors. It sounds like a version of the observation, as Adam Smith wrote in “The Wealth of Nations”, that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. In this case we simply substitute ” group of companies” for “trade” in the original.
May I suggest that you offer your readership the opportunity to confess their degree of knowledge on this topic by running one of your readership polls? This time the question would be along the lines of: “Before reading my post on company accounts, how well did you appreciate that they were largely works of fiction?” You might get more evidence of the general state of (non) awareness.
Good idea….
Investors don’t seem to have a problem with the format of accounts – they aren’t the ones asking for these changes.
Not sure why consumers should have a say in how accounting rules.
It seems to be a noisy minority with their own agenda, supported by people who confess to have next to zero knowledge about the current format of accounting in the first place!
Fortunately, accounting rules are created by groups of professional bodies, not by noisy lefties online!
I am, I think, the only person in the world right now who can claim to have created an accounting standard in use in more than 70 countries.
Politely, I think you might be ignoring what well reasoned thinking from someone outside the mainstream can do.
I enjoyed this video. It’s often only when chasing money (from, for example, a Plc) that I realised that my then employer didn’t fully know who they had transacted with.
I also wondered whether your “work of fiction” comment might have been more to do with valuations placed on things like stock etc. The whole “going concern” idea. Which is fine in good times – but I wonder how many companies are basically bust when one tries to imagine what a break up value would be.
The “rules” about what consolidated accounts should look like were produced by accounting professional bodies.
These represent those same people who are providing the tax services to those same large companies, so I would say that there may well be some conflict of interests here.
Accountants basically act in the interests of their employers – large companies and have been complicit in shrouding large companies in secrecy for decades if not centuries.
Those rules let tax haven abuse happen.
Need I say more?
There’s always the old adage “There are only two sets of figures that reflect reality in a set of accounts – the date, and the cash in the bank. The rest are pure conjecture”. These days I am not sure we can even trust the cash in the bank!
If you looked at Parmakat and Wirecard you would know trusting the bank figure is most unwise.
As usual, you overstate your own involvement.
There is quite a difference between a ‘think tank’ having an idea about reporting and creating new accounting standards.
You were JOINTLY involved in the former, but had next to nothing to with the actual standards and regulations currently in place.
I solely created the idea, solely wrote all versions of it, and negotiated it through the OECD as they acknowledged.
That’s a claim that doesn’t seem to be acknowledged by the OECD or the Tax Justice network, at least not in writing.
So we only have your word on this. And you’re not widely known for understating your own knowledge and achievements!
That’s why the THN had me edit their 2014 edition of Tax Justice Focus on the issue. ]
And that’s why the OCED had me lead for civil society on this in May 2020 – acknowledging my role.
And I guess trhat’s why I am the second most consistemnt member of the Global Top 50 on tax from the International Tax Review – form about 2008 to n2023 – after Pascal St Amans from the OECD
Shall we stop being silly here?
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