I've been talking to a lot of people this week about executive remuneration and about how its calculated.
A contact suggested I go back to the report written by the Bankruptcy Court Examiner on New Century, the giant sub=prime mortgage company that went bust in the US last year.
The report raises some interesting questions about the relationship between 'accounting failures' and executive pay.
However, it was a quote from the engagement audit partner at KPMG that caught my eye.
The report from the US bankruptcy court quoted an email from the partner to a junior member of staff who had raised concerns about certain accounting practices at New Century.
The partner is quoted writing: 'I am very disappointed we are still discussing this. As far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off.'
I couldn't help but think, well, yeah, you will piss someone off, but then that's emphatically the auditor's job - ask brutally difficult questions.
And then it occurred to me, who did he think the clients were? I believe he thinks the company directors are. However, I can't conclude that what he should have been thinking is, what's the best thing for the shareholders here? It strikes me that the offending email embodies as a disturbing conception of the role of the auditor.
The scary thing is that KPMG in the US stands accused of contributing to the failings at New Century (denied by the firm), including accounting failures, which in turn contributed to performance bonuses for directors being 300% above what they should have been, according to the report.
My worry is that if it is a widespread belief among auditors that they are working for company directors alone, and not there to 'piss everybody off' on behalf of shareholders, the profession has moved onto very unstable ground. People will be entitled to ask whether more bonuses have been won on the back of 'failures' contributed to by auditors. And then I think we may be back at a point in 2001 (you know the one I mean) which we should have left behind long ago.
Of course, we have no evidence that this awful misconception is widespread, and let's hope its not. But it is something audit firms need to monitor and keep in check.

Click here to read the full report

 

June 19, 2008 | Permalink | Comments (1)

Rarely has there been such a scathing attack. Tim Bush, director at Hermes Asset Management, and scurge of regulators, chose today to air forthright views over fair value accounting and, in particular, IAS39, the standard that deals with ‘financial instruments’, or mortgages.

On IAS39 he said: ‘It’s like watching drunks getting in a car after crashing another, and it was the regulators who gave them the car keys.’ That drew a sharp intake of breath from the breakfast gathering at

Moorgate Place

, who found themselves choking on their morning pastries .

Bush’s next move was to describe IAS39 as ‘legitimised market abuse’.

 

Then he turned on the International Accounting Standards Board comparing it to a ‘tractor factory’. ‘It’s a command and control model from the 1970s.’

 

And just as everyone thought they could eat in peace he said: ‘Change the board – they’re yesterday’s men.’

 

Never has the IASB and one of its standard had such a public malling (actually, that may not be true. IASB chairman Sir David Tweedie has been brutalised in the

US

on more than one occasion and appears to thrive on it) by someone in such a public place as

Moorgate Place

’s Great Hall.

In fact Bush’s presentation was not just mud slinging, he went at some substantive issues pretty vigorously too, which, I can say, at least impressed the people sitting immediately around me.

But it is worth bearing in mind IAS39 will change. The IASB is consulting and yesterday hosted a webcast, involving 600 people, to discuss the issue. The top brass at the IASB is well aware that something is wrong and I am told they look forward to seeing Tim Bush’s submission to the consultation.

 

June 11, 2008 | Permalink | Comments (0)