Rewarding failure

I read with interest an article by Prof Adam Leaver of Sheffield University published by Open Democracy recently.

For anyone interested in financial reporting and auditing, and why they have failed to prevent corporate greed and business failures it is essential reading.

In the article he looks at how Interserve, which has now failed, paid management bonuses on the basis of re-stating profits in ways wholly inconsistent with the accounts, triggering a liability for massive payments to directors when the company was facing insolvency. 

Two executive directors at Interserve earned a combined £1.99 million by the end of the 2018 financial year, roughly one third of which was annual variable performance related bonuses. But by April 2019 Interserve had been taken over by its lenders in a pre-pack administration.

Which raises questions about whether the reward structures at board level in public companies over the long term may have actually contributed to corporate failures.

The whole article is worth reading, but this comment in particular is part of Adam’s conclusion:

Interserve illustrates how the beneficiaries of shareholder value driven strategies are not necessarily shareholders, but boardroom elites and their intermediary helpers.

 There is also a really interesting diagram, which was in this instance is offered by Interserve’s auditors KPMG on where the audit risk they faced was located, in their opinion. It shows this:

At Interserve the fair value rules in financial reporting were interpreted in such a way, that management errors of judgement (overpayment for firms, over-booking of contract profits etc.) are considered one-off, non-recurring, exceptional costs and are then stripped out of bonus calculations. What Adam call a ‘heads I win, tails you lose’ remuneration practice.

The case for an overhaul of financial reporting and auditing is growing.

Noel Guilford, Principal at Guilford Accounting
Noel Guilford is the principal of Guilford Accounting a small business accountancy practice specialising in advising owner-managed businesses on current accounting, finance, and tax matters. You can reach him via email at noel@guilfordaccounting.co.uk or by phone at 01244 660866. He is the author of the 'Figure it out - an entrepreneurs guide to understanding your business numbers' which you can obtain by visiting guilfordaccounting.co.uk.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ His latest book, How to Build a Successful Business' will be published in 2018.

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