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LAPFF presses FTSE companies to ignore ‘illegal’ FRC guidance

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The Local Authority Pension Fund Forum (LAPFF) has written to all UK FTSE 350 companies, advising them to ignore accounting guidance on distributable profits and the true and fair view issued by the UK’s audit watchdog, the Financial Reporting Council (FRC).

Following the FRC’s guidance, the LAPFF warns, could mean “UK listed company accounts are at risk of being contrary to the requirements of the law”.

The LAPFF has now enlisted not only top commercial barrister George Bompas QC in its bid to undermine the FRC’s position but also high-profile public-law specialist Cherie Booth QC.

LAPFF chairman councillor Keiran Quinn said: “It should not have had to take a leading QC in company law, under instruction from a QC acting for public pension funds, to point out that the financial reporting regulator is reading the basic legislation wrongly.

“But that is the essence of Mr Bompas’s further opinion – the law is not as the FRC, nor Mr Moore, have said it is.”

The FRC strongly rejects the LAPFF position in the letter.

In a statement, the FRC said: “[We are] aware the LAPFF has written to company chairmen. Their letter deals with a very narrow point of company law in terms we cannot support and raises uncertainty unnecessarily.

“The FRC and the government have confirmed the Companies Act 2006 does not require the separate disclosure of a figure for distributable profits.”

Meanwhile, the LAPFF letter to FTSE boards warns that a “correct interpretation of the company law is central to you and your fellow directors discharging your duties in an unimpeachable way”.

It continues that “it can only be in your interest to follow advice that is not only correct but demonstrably independent from a defective position that seems to have taken root with the FRC’s position for whatever reason”.

The move marks the latest salvo in an increasingly bitter war of words involving the FRC and leading players in the UK long-term investor community.

The LAPFF is an umbrella body for some 65 UK public sector pension fund members, with approximately €235bn in assets under management.

The organisation has for some time been concerned that what it says are defective IFRS accounting standards helped fuel and worsen the fallout from the financial crisis.

The LAPFF position is broadly that IFRS accounts allow directors to pay out dividends from illusory profits, meaning shareholders’ equity is eroded.

In June 2013, the LAPFF, together with Threadneedle Investment and USS Investment Management, published a barrister’s opinion from top commercial lawyer George Bompas QC.

Bompas agreed that IFRS fails to protect the interests of providers of capital and does not comply with UK company law.

The FRC hit back by posting a statement on its website declaring that Bompas was wrong.

“On the specific issue of its legality,” the statement read, “the Department for Business (BIS) has today confirmed that the concerns expressed by some are misconceived.”

Alongside this, the FRC obtained its own legal Opinion from Martin Moore QC, which, the watchdog said, “accords with” the BIS view.

The LAPFF has pointed out that it merely wants companies to apply the letter of the law rather than rely on guidance documents from non-statutory bodies such as the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland.

The LAPFF also believes it is a conflict of interest for the FRC to rely on guidance from the ICAEW, which it regulates.

As an example of an area of the law that the FRC has misapplied, the LAPFF points to what it says is a “defective version” of ‘true and fair view’.

The LAPFF claims the FRC has applied this requirement to the accounts in general, rather than the specified items in the accounts as is actually required by Section 393 CA2006.

“The LAPFF notes,” the letter reads, “that FRC literature transcribes Section 393 incorrectly, including in its model wording for the ‘Statement of Director Responsibilities’.”

It concludes: “The mistaken position that results is that companies can keep two ‘sets of books’ in order to discharge the net asset and distributable profits tests of company law.

“But this leaves shareholders and creditors in the dark as to what the fundamental position relevant to solvency and lawful profits actually is.”

Ahead of the LAPFF move to publish the letter, the FRC’s Financial Reporting Lab last week released a report on dividend policy and practice disclosure.

The report was the culmination of an 18-month project that took in contributions from 19 companies and 31 investors.

This latest war of words between investor interests and the UK accounting establishment will be seen by some as underlining the long-standing tensions between the two camps.

In April 2005, the chairman of the UK Accounting Standards Board, Ian Mackintosh, wrote in a letter to the Department of Trade and Industry: “Current restrictions on distributions create a rigid link between the amount that may legally be distributed and a company’s statutory accounts.

“This creates an unnecessary obstacle to the development of financial reporting that has adopted as its focus the provision of information that is useful to participants in the capital markets.”

Mackintosh, who is now deputy chairman of the International Accounting Standards Board, pressed for the law to be changed.

He wrote: “In short, the Board is firmly of the view that outmoded and costly company law rules must swiftly be brought up to date to facilitate continued improvement in EU financial reporting, in line with IFRS, and to remove unwarranted burdens on business.”

A full statement of the LAPFF’s position is available here.

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