Historically it’s been the top-layer bosses who have been responsible for many corporate irregularities – now it’s the turn of their more junior executives, suggests Peter Williams
This article was first published in the March 2017 UK edition of Accounting and Business magazine.
The UK is ushering in a new golden era of accounting and corporate scandals with three stand-out cases headlining.
In January 2017, six people – including two former HBOS bankers along with turnaround consultants – were found guilty of bribery and fraud in an asset-stripping conspiracy that may have cost small businesses and the bank up to £1bn.
In autumn 2014, Tesco said that it overstated profits by £263m after revenue recognition irregularities. The Serious Fraud Office charged three former Tesco executives and the investigation is ongoing. The trial of the Tesco three is due to start in September 2017, almost three years after the SFO started its work. All three have pleaded not guilty, and the nature of their defences will only become clear at the forthcoming trial.
The latest entrant to the corporate scandal is BT Group, 17th-largest company in the FTSE 100 index. The group has more than trebled the financial cost of ‘inappropriate behaviour’ in its Italian unit to £530m, causing its shares to plummet.
The last round of show-stopping corporate scandals was in the late 1980s and 1990s: Polly Peck, Guinness and Maxwell. Tycoon Asil Nadir was found guilty of stealing millions from Polly Peck International, the company which he founded. In August 1990 Ernest Saunders, former Guinness chairman, was found guilty along with others of involvement in a conspiracy to drive up the price of shares in the drinks company during a 1986 takeover battle for its rival Distillers. In 1991 it was discovered that press baron Robert Maxwell had plundered the Mirror Group Newspapers’ pension fund to the tune of £400m.
These scandals rocked the British business establishment and the their criminal actions changed the way British public companies are run. The trio invented modern corporate governance.
Of Guinness, Robin Leigh-Pemberton, then governor of the Bank of England, said that the affair had caused ‘great anxiety’ and posed a ‘threat to the entire basis of trust which predominates in our business life’. To address that anxiety the Corporate Governance Committee was set up in May 1991 by the Financial Reporting Council, the Stock Exchange and the accountancy profession in response to continuing concern about standards of financial reporting and accountability.
A quarter of a century later, corporate governance in the UK can be heralded as an unqualified success. The accountancy profession did itself a favour by managing to rebalance attention away from just blaming the auditor when trouble broke out and instead drew in the wider board, articulating and upping directors’ responsibilities. More crucially, companies – often reluctantly at first – were required to bring in controls, checks and balances that brought to heel the unfettered power and ego of the chief executive. Of course, egos still bounce around boardrooms, but other directors now have the mechanisms and processes to call them to order.
The standout feature of corporate failures of the 1980s and 1990s was that they were perpetrated by the bosses, with Maxwell, Nadir and Saunders as supreme examples. In contrast, the accounting irregularities surfacing in the 2010s seem to be emanating from elsewhere in the organisation than the boardroom. Indeed, in the three cases – HBOS, Tesco and BT – of 2017, it could be argued that the bosses are as much a victim of these irregularities as the shareholders and bondholders.
Corporate governance seems to have dampened outright misbehaviour in the top tier. Instead it seems it is the more junior executives – the marzipan layer – who are creating a nasty taste.
Peter Williams is an accountant and journalist