A long-running dispute between the UK’s Local Authority Pension Fund Forum (LAPFF) and its accounting watchdog over accounting standards was raised by politicians during a heated select committee hearing last week.
During an inquiry into the collapse of engineering firm Carillion, Antoinette Sandbach – a member of parliament’s Business, Energy and Industrial Strategy (BEIS) committee – put Financial Reporting Council (FRC) chief executive Stephen Haddrill on the spot with the charge that “your accounting standards don’t enable anyone to have a meaningful assessment of a going concern”.
Haddrill, however, dismissed the claim as “too broad a statement”.
He said: “I don’t accept that it’s impossible to have [a meaningful assessment]. I think that’s too broad a statement. I think where the problem lies is that a ‘going concern’ judgement is seen by the public and many investors to be a judgement over the next year.”
Sandbach raised the findings of a report from top commercial barrister George Bompas, commissioned by the LAPFF, which flagged a number of “substantial legal flaws” with International Financial Reporting Standards (IFRS). The LAPFF has long argued that accounts prepared under International Financial Reporting Standards (IFRS) do not give a true and fair view of a company’s financial health.
Haddrill said: “We have had our own counsel’s opinion. Ministers in 2013 gave their own views on that matter and they thought that our interpretation was appropriate.
“We think that we have interpreted [company law] right in relation to dividends and the true and fair judgement, and we’ve made that clear.”
Haddrill’s comments came during a joint inquiry of the BEIS and Work and Pensions Select Committees to assess the fallout from the collapse of Carillion. The UK-listed company went into liquidation on 15 January. Politicians on the committee have argued that the board prioritised dividend payouts as the funding deficits in its pension schemes widened.
Current and former company directors and senior staff are due to face the joint inquiry tomorrow.
LAPFF previously flagged Carillion concerns
Meanwhile, IPE has learned that Carillion was among the FTSE 350 companies contacted by the LAPFF in September 2016 regarding so-called ‘illegal dividends’.
In the letter, the LAPFF urged FTSE 350 boards to disregard the FRC’s guidance on distributable reserves before paying out dividends. It also advised them to consult their lawyers and “have a boardroom discussion”.
The LAPFF has argued that accounts prepared under “defective” international standards put companies at risk of paying dividends out of illusory profits – a view rejected by the FRC.
The pension fund forum was emboldened by a redacted freedom of information request showing government officials had been forced to restrain the FRC’s public statements.
In addition to the row over dividends, research by IPE has established that the International Accounting Standards Board, which sets the accounting rules followed by Carillion and other listed companies in the UK, dropped a project to develop guidance on ‘going concern’.
Agenda papers from an IASB meeting held in London March 2013 show that the board was made aware of the work by the Sharman Panel in the UK on going concern. The FRC set up the Sharman Panel in March 2011 with a remit to make recommendations for both companies and auditors arising from the lessons learned from the financial crisis.
Also during 2012, in June, the IFRS Interpretations Committee received a request from the International Audit and Assurance Standards Board (IAASB) to clarify the board’s guidance on the disclosure of uncertainties about going concern.
In March 2013 during an IASB discussion of proposed rule amendments aimed at tackling the problem, Prabhakar Kalavacherla, partner at KPMG, urged the board to act. He warned board members that “saying we are going to shut our doors and not worry about it is foolhardy”. In November that year, based on the board’s reluctance to take the matter forward, the committee voted to wind down the project.