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)

If there's one topic of conversation among mid-tier firms this week its the future prospects of troubled Birmingham firm Wenham Major.

It's now a little over a week since the firm was forced to put out a statement that 'financial irregularities' had been unearthed in the Wenham Major Private Client practice and that legal proceedings were being planned against executive chairman John Joyce, understood to be recovering in hospital from a bout of illness.

At the moment all thoughts on the future of Wenham Major amount only to speculation, though some of it will be better informed than others.

What is clear though is that the firm and its bank, HBOS, have been talking to outside advisers about what to do, including corporate restructuring specialists at Vantis. It's probable that conversations have been held with other potential advisers too.

What these discussions will produce is unclear. Corporate restructuring people have an armoury of things they can do. But much of it will have to do with the scale of the 'irregularities', as yet not published, and the level of damage perceived to have been wrought on the reputation of the firm, if any.

And that will be a crucial factor in the next stages of the Wenham Major recovery.

During the Enron collapse damage to the reputation of Andersen was thought to be so severe, the firm could not continue as it was and partners in member firms around the world quickly started merger/takeover deals. Here in the UK, you'll remember, much of what was Andersen became part of Deloitte, seen as something of a coup among the other Big 4 firms at the time.

However, KPMG in the US survived its own brush with notoriety when the authorities pursued the firm over various tax schemes. Key individuals acted quickly, damage was limited, and the crisis subdued. Few outside the profession, as important as its view is, remember that particular debacle.

These are poor comparisons in the sense that these firms were of an entirely different magnitude to Wenham Major but KPMG, at least, illustrates that reputational damage can be headed off and the crisis contained.

Wenham Major, it is understood, is keen to point out that the 'accounting practice is profitable, growing and meeting its operational and financial targets'. The message has also come out that a 'business as usual' approach is being taken with staff and clients. And if we know anything about what to do when accountancy firms hit troubled times, it is that clients need a lot of attention. In fact, it could be argued that it is clients and their approach to difficulties that can represent the difference between rescue and an increasingly uncertain future.

But Wenham Major is interesting for another aspect of its problem. From the outside it could be argued that there is a uniquely 'personal' flavour to the difficult.

When Wenham Major Global Capital Partners first made its irregularities statement it said that Ammar Azam, joint owner of the firm, had uncovered the problem. And, of course, Azam jointly owns the business with John Joyce.

With threats of legal action kicking around that's a business relationship that appears to have reached an abrupt end. Of course, it must be said, that Joyce has passed no comment in public so we are yet to hear his side of the story. And his account may prove crucial to what happens next at the firm.

 

May 10, 2008 | Permalink | Comments (0)

What will happen to Martin Stewart, chief financial officer, at music group EMI. The group, which represents acts like the Rolling Stones, Joss Stone and Lily Allen, looks on the brink of being bought by private equity vehicle Terra Firma, with Warner Music lurking in the background threatening to launch a spoiler bid.

But what of Stewart? Reports say current EMI boss Eric Nicoli is unlikely to stay post takeover, but will the rest of his executive team, including Stewart, weather the storm?

He’s an experienced man, having worked at BSkyB as CFO and at Polygram, but has he been around long enough to have been tainted by the Nicoli era?

Well he started in February 2005,  in many respects he’s something of a new boy, so he might be in the clear. He might well be attached to his £525,000 salary as well. But the sale is still unravelling, so worth watching to see what happens and whether Stewart will be handling the finances for the next crop of new bands.

 

May 24, 2007 | Permalink | Comments (0)