Search Result for is the incompetence — 105 articles

The economic consequences of no deal

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I know I said I would not be blogging over the last few days, but that gave me time to think. I thought about the economic consequences of no deal on Brexit, which I am beginning to believe by far the most likely outcome, simply due to the sheer incompetence of the government and the inability of anyone to force a change upon them due to the disabling of parliamentary democracy by Cameron and Clegg.

No one, of course, has a crystal ball, but the consequences of no deal are not hard to imagine.

If we resort to WTO rules and the EU does impose tariffs, as they inevitably will, the price of goods exported from the UK will rise. The only way that they will remain competitive is by the value of the pound falling. We know that the pound has already fallen in anticipation of Brexit. No deal will, I suggest, mean it will fall somewhat further, where 'somewhat' means by a significant amount. I would expect at least another 10%, and maybe more.

It will not matter what the UK does on tariffs in that case: the price of imports will rise. That is inevitable. That does not mean that all prices will rise by the same amount: we do not, of course, import all we consume. But there will be a knock on effect. And it will be significant. But remember, we will notbget an export boost; the tariff will absorb that.

Of course, it can be argued that in the long term this might be good for us. As Nick Shaxson argues in his book 'The Finance Curse', we have long suffered from overvaluation of the pound as a result of the harmful activities of the City of London and this has had cost to us all. Adjustment to be more appropriate exchange rate levels may be overdue. But that does not mean it will be easy, especially if as unmanaged and chaotic, as this adjustment is going to be.

Chaos has a considerable price. I suggested some time ago that it will not be cost that will push businesses under in the case of no deal. A lack of liquidity will do that instead as supply chains lengthen, goods get stuck in transit and critical processes fail, including cash flow. I imagine substantial fall out from this. Given that 'no deal' will be punished by the EU this is inevitable. I simply cannot imagine them making life easy on a border. Why should they? In that case, expect a substantial number of businesses - including many in the transport sector, who will be hit especially hard as all their capital assets will simply sit still for long periods on behalf of customers who will not b able to pay for them to do so - to fail during the early summer of 2019. That is pretty much inevitable.

But that is only the direct impact of no-deal. There is, for example, the Bank of England reaction to consider as well. Falling exchange rates will give rise to a knee-jerk increase in the interest rate on their part in a hopeless and entirely misplaced attempt to support the value of the pound. Whatever Carney has said to date can be ignored: central bankers raise rates when currency values fall unless ordered to do otherwise. Philip Hammond has the power to over-rule such rises (there is no independence for the Bank of England in reality; it is all a sham, as I have previously explained) but will he? Given Tory loyalty to the City and Hammod's deep and innate desire to see ‘normal’ interest rates restored, which is a sentiment that runs deep through his party, I cannot see that happening.

The impact of these rate rises will be dramatic and quite rapid. Many households will be immune from the shock at first because of fixed-rate mortgages, but not all will enjoy that advantage. And most businesses will not. Rapidly rising interest costs at a time of inflation, resulting from rising import costs,  with the resulting likelihood of real incomes being in free-fall when personal debt levels are already very high and net saving has disappeared will be catastrophic. If border chaos does not create an insolvency crisis then increasing interest rates will.

Insolvency crises are personal, traumatic and always costly for society at large. But they also have systemic consequences, and that risk is transmitted through and to the banking system. The Bank of England says the UK banking system is now more robust than it was. I think there is some truth to that: it would be churlish not to agree. But banking faces its own shocks in the event of no deal. No one can be sure what the end of financial services passporting really means. And no one can be sure whether or not all derivatives will be legally enforceable when EU regulation ceases to apply. The scale of the shock to banking is already hard to assess in the case of no deal. We can be fairly sure that given the scale of the City’s enthusiasm for staying in the EU they think that the risk without the spillover from liquidity and interest rate induced crises is significant. Add an insolvency crisis into that mix and who knows what will happen? All that can be safely said is that the scale of the risk is real and significant.

And all this is before three other factors are taken into account. The first is the disruption to supply chains. The second is, then, contractual failure with consequent loss of profit claims. And the third is skill shortages as people, quite reasonably, refuse to come to the UK any more to take work. This also has a fourth, knock-on effect, which may be rising wage costs, although if businesses fail to the extent that I imagine it is actually possible that the exact reverse may happen, and there may be a spike in unemployment and no net wage increases.

Out all this together and there is only one possible consequence of no-deal and that is economic mayhem. I wish it were otherwise but unless the EU decided to impose no sanctions on the UK for leaving without a deal  (and I cannot see a legal way that they could do that) then nothing else is at all likely, especially as they will seek to maintain a border even of the UK is likely to be almost wholly unable to do so.

What to do in this situation? That's the subject for another blog. But nothing will really save the day.

It is time to replace the Financial Reporting Council’s self-interested myopia

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As the FT has noted:

Britain’s accounting watchdog will consider whether to ban firms from doing any consulting work for the companies they audit in an attempt to stamp out conflicts of interest in the scandal-ridden sector. The Financial Reporting Council said on Monday it would assess whether new action was needed to prevent the independence of auditors being compromised, “including whether all consulting work for bodies they audit should be banned”.

Like others who have campaigned on the issue of audit reform, I was amused by the sheer, brazen incompetence of this announcement.

Firstly, the FRC is trying to make claim for its survival by saying it will look at the issues being complained about. It is not saying it will actually do anything.

Second, the announcement made entirely misses the cause for concern. The problem is not just that Big 4 audit firms are doing consulting work for their own audit clients, although that, of course, is a matter of concern. Instead the problem is that any audit firm in this market is doing consulting work at all, which work then cuts down or even eliminates audit choice for a company seeking to change auditor to the point where conflicts of interest even prevent such change being possible. This is market failure and the dying FRC cannot spot it from a mile off.

In that case there is but one thing to do, and that is recognise that the FRC is well past its usefulness. It is time to replace it and its self-interested myopia with a new regulator, fit for purpose and structured to deliver the public interest.

The divided UK

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The following was posted by Charles Adams on Progressive Pulse a couple of days ago, and I thought it well worth sharing: 

Something that I knew, but it still shocks me, is illustrated in this data from The Economist.

Exhibit 1

In terms of regional inequality, the UK is more divided than the US. The situation in the UK is extreme. It is as if a great crime has been committed on large parts of the UK population. The regions have become sacrifice zones, feeding the finance monster in London. The same crime committed on the heartlands in the US. The crime began in 1970s and it is still happening. As inequality drives political instability, it is vitally important for all, wherever they live that something is done. As the Economist suggested nearly two years ago, “Regional inequality is proving too politically dangerous to ignore”
– The Economist, 17 December, 2016.

Depending on where you live, and how much you travel, you may not have noticed how extreme the situation is. I live on the edge of the Durham coalfield and travel daily through old pit towns and villages. If you live where I live, London is another world. Compared to much of the North East, much of the South East plus westwards to Bath seems like another country. Both the statistics and the reality have been known for a long time. In 2014 the Mail published an article with the headline, “Parts of Britain are now poorer than POLAND” with a series of graphics based on Eurostat data including this one where the British Isles appears twice!

Exhibit 2

The numbers correspond to the percentage difference of local GDP per capita to the EU average. Similarly to the more recent Eurostat data presented in Sean’s post on Northern Ireland

Exhibit 3

We can see that North East, Northern Ireland, and Wales have not been doing as well as say Slovenia. Now you could argue that this is more the fault of London than Brussels, but may be this data does help explain why some people in these regions might not be so emthusiastic about the EU. The wider EU context is discussed in more depth here.

In the UK regions, any disenchantment that was already brewing was further fermented by austerity (as discussed here by Peter). Austerity further disadvantaged those regions that were already suffering. The map below is from a paper “Did Austerity Cause Brexit?” by Thiemo Fetzer of the University of Warwick. It shows the loss of income due to asuterity across different regions of the UK. Again, we see that it is Cornwall, Wales, Northern England and Lincolnshire that have been hit the hardest.

Exhibit 4

The case is black and white, Britain is divided by extreme regional inequality. This problem has been building since the 1980s and political parties of both colours have not done enough to stop it. Inequality drives politically instability and eventually everyone suffers. Ideas such as the Green New Deal could be a part of a solution. Land value tax is another. We desparately need more than one.

The PWC BHS Audit failure reveals a system rotten to its very core

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It is not every day that a classic that will be read for years to come is published. Yesterday was such a day. And the classic in question? The Financial Reporting Council's report on PWC's audit of BHS. I have read all 39 pages this morning.

It's hard to describe how shocking the report is. It's especially shocking to me as a former audit partner, and when I compare just how weak PWC's systems were when compared to the procedures my own firm used to follow to ensure audit quality control.

Let me focus on some facts, first of all. These, on hours recorded on the audit, are interesting:The focus has been given by many to the near absence of time expended by the partner and senior manager. But I am shocked by the tiny total hours: just 154.5 hours, or less than five weeks work, much if it by very junior staff, was expended on this audit. The audit fee was £355,000. The average charge per hour was, then, £2,297. That is either daylight robbery, or someone at the FRC is misreporting facts.

If the hours recorded were true then at every possible level of work this audit could not have been properly undertaken. And gross mischarging took place.

It may have been both. But let's stop the pretence that audit is not profitable in that case.

Overall, there can be no doubt that Sir Philip Green and his companies were of considerable value to PWC:

This ratio is shocking. And what is more shocking is that the audit partner headed the supply of the non-audit services. There was no pretence at a separation of duties and so any audit objectivity. The same person who could give 2 hours to the audit could, over the same period, given 15 times that amount of effort to non-audit services.

And there was basic fraud:

False statements were made.

This is shocking enough, but the gross negligence of the actual audits, outlined in some detail in the report is also incredible. The turnover of BHS was basically not audited: it was only checked as part of the group but individual accounts were also signed off, of course. This was just wrong. Nor were large parts of the cost of sales audited. And major intra-group adjustments were simply ignored. Whilst the basic question of whether a company in such obvious trouble was a going concern or not, and so able to meet its financial obligations, was simply not tested at all. Indeed, the auditor who did most of the work, who had only one year's post qualification experience and may, therefore, have had just four year's experience in all, was not even aware that a sale was planned and did not allow for it in the audit work. Her manager and the audit partner did not apparently notice that deficiency. Which was not surprising as they could hardly have looked at the file at all.

This is not just a tale of woeful incompetence, although it is that.

It's also not just a tale of fraud, although that happened.

It has to be a tale of systemic failure: I cannot believe that this was just the proverbial 'rotten apple', yet again. For such a situation to have arisen here it must have been sufficiently commonplace for no one to have noticed anything amiss in what was happening. The implication is for the firm as a whole, and not just this audit and this partner.

And what of the penalty for such utterly gross incompetence and fraud? At £6.5 million for PWC it was less than a per cent of profit. It was a cost of doing business at more than £2,000 an hour. An inconvenience if the rest of the show can stay on the road.

My suggestion is the Financial Reporting Council has also failed here. PWC should have been barred from taking on new audit work. The FRC should have ordered a review of all its major audit files. Evidence of replication of the risk should have been sought: how many other audits were signed off with just two hours of partner time, for example? It would hardly be hard to identify them, and so pick the files for review, after all. But nothing of the sort has happened. Despite such gross failure, PWC is still selling audit services today.

And the question has, then, to be asked as to why that is, and why this business model is permitted to exist?

I discussed rent-seeking in the context of CEOs yesterday. I will suggest there is rent-seeking in these firms as well. What is very apparent is that just as CEOs cannot justify their salaries these firms cannot justify their fees. But they, or rather their partners, get away with them because they can exploit the rent that their firm name permits them to charge.

There is no value added.

There may be no service at all.

There is just a fee and a veneer of service that the FRC will not disrupt and so the rent-seeking, rather than the service, goes on.

This country; our financial system, and all the people who depend on it; they all need real audit services. I suspect, very strongly, that they are not getting anything close to that service and that BHS is not atypical in any way. PWC just made the mistake of being found out.

This rotten system needs root and branch reform. Of the regulator. Of the obligations of the auditor. Of the law. On the way firms are permitted to operate. And on their accountability.

Will we get it? Or will the rents just continue to flow to those who have not earned them? What do you think?

Is the incompetence of May and Trump deliberate?

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I argued yesterday that the UK is now rudderless  because of May’s willingness to change policy on a whim in an attempt to retain power. Her ability to shift position for no other reason than appeasement of whoever appears her most immediate threat is quite extraordinary.

Unless, of course, it is compared with Trump’s ability to deny the meaning of all he says, even when he cannot deny having said it. Yesterday he claimed the comments made about Putin on Monday were all just a mistake. Who doesn’t, after all, say ‘would’ when they mean ‘wouldn’t’?

Leave aside for a moment the idea that both are just expedient. Leave aside too the idea that they are people of such little principle that they can renege on themselves without a moment’s hesitation. Dismiss too any suggestion of incompetence. Maybe all such ideas are far too convenient. And come to that, just exactly what May and Trump may want believed.

Suppose instead that the aim really is instability: that they read Naomi Klein’s ‘Shock Doctrine’ and thought they’d get themselves some of that.

I’ve never wanted to believe that there were those who would create chaos for its own sake. But if you really wanted to destabilise liberal democracy, why wouldn’t you do just that?

We know democracy is in retreat, and not just as an ideal. The pretence that it exists in Russia is just that; i.e. a pretence. Within the EU it is in retreat in Poland and Hungary. The two party systems of the US and UK have always been vulnerable. Suppose they fall? And suppose the fall is already in planned progress?

I don’t want to accept this possibility. But there have been other possibilities in my life that bitter experience has required that I address. The possibility that the process of democratic failure in the UK is much further advanced than I had thought possible is one that I have to, at least, consider possible. The time has come when it would be negligent not to do so.

The Scottish Growth Commission gets its economics very badly wrong

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The 354 page report of the Scottish Growth Commission was published this morning. But you don't need to read it all. I admit I had an advance copy and as I read it last night I remained vaguely optimistic until I reached page 47. Then I knew the SNP has a disaster on its hands and that if it was to become independent on the basis of this report the last thing that the people of Scotland would enjoy would be growth.

That’s because on page 47 the report says:

The Commission recommends that the currency of an independent Scotland should remain the pound sterling for a possibly extended transition period.

Admittedly it then adds:

A future Scottish Government should put in place the arrangements and financial infrastructure that would support a move to an independent Scottish currency at such time as this was considered appropriate for the Scottish economy.

Which is a sop, because most depressing is this comment, which comes next:

What happens with respect to currency the day before an independence vote would happen the day after and continue to happen until such time as the elected Scottish Government seeks to do something differently.

In other words, this Commission recommends that Scotland use the currency created by another country. That will mean five things.

The first is that Scotland will have no control over its money supply after independence.

Second it will have no control over its interest rate.

Third, if London decides to trash the rUK economy to support The City, or some other cause, Scotland will go down with it.

Fourth, all the negative impacts of Brexit will be imported directly into the Scottish economy.

Fifth, Scotland will effectively have to earn the currency of another state to service its debts.

All of these are devastating decisions by a Commission that is supposedly dedicated to independence. As that list shows, by choosing sterling as the Scottish currency Scotland would have no effective hope of achieving that status: it would remain enslaved by the pound and tied to the apron strings of London.

Depressingly, in support of their proposal the Commission says:

We note that this was the approach taken by Ireland for an extended period, albeit in a different period of history.

I know plenty enough about Irish economic history to describe the consequnce of this policy succinctly: it was a disaster that oppressed Ireland economically for decades.

I thought my mood could not go lower, but then it did. I read the recommended objectives for macroeconomic management of the Scottish economy in paragraph B12, which says Scotland should:

  • Target a deficit value of below 3 per cent within 5 to 10 years.
  • National debt should not increase beyond 50% of GDP and should stabilise at that level.
  • Borrow only for public investment in net terms over the course of the cycle.
  • During the transition period real increases in public spending should be limited to sufficiently less than GDP growth over the business cycle to reduce the deficit to below 3% within 5 to 10 years. At trend growth and target inflation rates this would mean average annual cash spending increases of above inflation in contrast to the Scottish budget experience under the UK regime of recent years and that scheduled for the remainder of the current planning period.

In other words, the Scottish economy will, after indepdence, be run to keep the London money markets happy.

The ability of a country with its own currency to issue debt to finance growth will be foregone by Scotland not having its own currency. Forget full employment then. But worse, what the Commission is saying by adopting these objectives, which will cruise all others in the report, that Scotland should welcome austerity in its place. That’s what a deficit of 3% is guaranteed to deliver. This is literally importing George Osbrone’s economics into Scotland.

Except its worse than that because spending will be cut to meet this target. This is what the fourth bullet point means. The new government of Scotland would, then, crush the economy for years to keep the money markets of London happy.

And Gordon Brown’s Fiscal rule, that clearly worked so well before the crash of 2008, is exactly what the third bullet point describes. When the Commission stops importing Tory economic incompetence it supports Labour’s failed policies instead.

Finally, and for good measure, the goal of keeping debt to 50% of GDP means invetsment in anything in the new Scotland will just be a pipe dream.

I could have gone on to plough throught the rest of this report, but why bother? Any quantity of graphs, and any number of comparisons with states broadly similar in size to Scotland are utterly irrelevant if this Commission that is supposed to be about growth has decided to remove any chance that Scotland could use monetary policy to control its economy, and has crushed any chance of a fiscal stimulus by committing Scotland to decades of austerity with the sole purpose of keeping the old oppressor in London happy.

The Scottish Growth Commission has proved to be a fantastic policy agent for the financial elite. But for those who hoped for a bright independent future it offers nothing but despair.

This Commission’s suggestions are a disaster for Scotland, the SNP and the cause of independence. The Commission has proved itself the slave of pre-crash economics and a proponent of everything that is oppressive about neoliberalism. It’s really hard to imagine how it could have been much worse or more out of kilter with what I sense the people of Scotland want.

This is a sorry day for Scotland.

HMRC is descending into chaos

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Philip Fisher, writing for AccountingWEB (of which I was once an editor), has reported this morning that:

On 4 April HMRC announced that EU State Aid had not been renewed for the EMI share scheme, which means that no EMI share options issued from 7 April 2018 onwards will qualify for tax relief.

This does not bode well for the UK’s attempts to leave the EU smoothly. Compared with the administrative nightmare of changing most of this country’s legislation, the need to renew EU State Aid approval for the EMI scheme would be a mere drop in the ocean.

Bizarrely, we are informed by Employment-related securities bulletin No 27 (April 2018) that our legislators have failed to complete this relatively simple task by the deadline of 6 April 2018, on which the old approval expires.

You can view this at all sorts of levels. As someone who is not much bothered about EMI I will not make the fuss many accountants might on that issue. But I can make considerable fuss at three other levels.

The first is the incompetence of HMRC in letting this happen without notice. That is not what tax certainty requires.

Second, there is the issue of the EU. If we cannot get such things right now, what will happen as the chaos of Brexit descends?

Third, what does this say about the management resources available top HMRC? In the clearest way possible it is saying that they are inadequate.

The signs are deeply worrying. HMRC is descending into chaos and I see little chance of it coming out again for a long time to come.

The nails are being driven into the coffin of the Financial Reporting Council

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I have over the last few years been one of a small group who have supported Tim Bush at the Local Authority Pension Fund Forum (who I advise on tax issues) with regard to his campaign for reform of the UK Financial Reporting Council.

Our criticisms have been multifold, ranging from corporate capture from the accountancy profession and business who they were meant to regulate, to failing to act in the public interest, to straightforward incompetence, to failing to address issues of public concern, like country-by-country reporting, on which they could have taken a stand. There have also been considerable criticisms of their governance structures. It was therefore welcome to note this report in the FT this morning:

The UK’s accounting watchdog is facing a formal inquiry into its independence and competence after being criticised by Greg Clark, the business secretary.

Mr Clark said in evidence to a committee of MPs that the Financial Reporting Council should be examined, after concerns about its “toothless” regulation of the industry.

“There is a strong case for reviewing the operation of the FRC and that is something that I intend to require,” said Mr Clark. “We should look at the operations of the FRC to see whether there are changes that are required — this should be done independently.”

Bring it on, as I think some say. It's long overdue. And the language is so clear that the chance it will survive looks to be very limited.

That's the good news.

The bad news is that they will probably appoint PWC to do it.

John Redwood admits it: there never was a reason for austerity

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I think this is worth reading:

I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills. Mr Osborne, originally a critic of this in opposition, then discovered its charms in office as well. It turned out to have no adverse consequences on shop price inflation, though of course it caused massive price inflation in government bonds, because it was accompanied by severe pressure against bank lending to the private sector to avoid an inflationary blow off. I always adjust the outstanding debt by the £435 bn the state has bought up, as this is in no sense a debt we owe. So our government borrowing level (excluding future state pensions which some here worry about and which have always been pay as you go out of taxation) is modest by world standards at around 65% of GDP, and at current interest rates is affordable.

Most of the state debt we owe to each other anyway. The government owes it to taxpayers who own the debt in their pension funds and insurance policies. The state can always raise enough money to pay the domestic bills backed by the huge powers to tax, and as we have just seen when credit expansion and inflation are low it can also use liquidity created by the monetary authorities.

To many who read this blog that will be unsurprising stuff. Except, that is, for the fact that it comes from far-right Tory MP John Redwood, who put it in his blog yesterday. He follows it with some usual xenophobic comments on the EU and aid, meaning the man is not reformed in any way, but what he has done is let an enormous cat out of the bag.

He has admitted there is no need for a government to balance its books.

He has admitted QE cancels debt.

He has then admitted the whole ‘passing debt to the next generation’ phobia is wrong.

And he has admitted as a result that there was no reason for austerity, the imposition of which served no economic purpose.

As a result he has, in two paragraphs, shredded the whole economic rationale on which he has been elected to Parliament.

And in so doing he has driven coach and horses through all those who still say that austerity must continue, because what he has done is make clear that if this is economically unnecessary then  it can only be driven by incompetence, or a hatred of government, or class warfare, or all three.

He is right on this. Deficits do not matter if there is less than full employment. And governments can cancel debt, at will. Debt, in fact, only exists as a favour to financial markets, who desperately need it but have no hold over government as a result.

What does matter is that people like him do not want to use this knowledge for the good of people in this country and elsewhere.

It is time others did.