The magnifying scope is focusing on all aspects of the sector
The multitude of reviews, some of which are ongoing, are being conducted by regulators, politicians and government departments, each separately looking at audit’s effectiveness, competition across the sector, and its future in general.
High profile failures of big high street names have captured the headlines and raised questions of ‘where were the auditors?’ resulting in some having a lack of confidence in the sector’s effectiveness.
Concerns have also been raised over a conflict of interest in firms selling consultancy services, while their auditing arms are carrying out an audit in the same company.
This has prompted suggestions that a full structural or operational split could be the answer.
Outside of the reviews and reports, the general public have identified what they see as one answer to improving corporate reporting; a good and clean audits.
Despite audit being under growing and intense scrutiny, the public still regard it as part of the solution to what is perceived as unacceptable corporate behaviour.
The purpose of an audit is to ensure that financial statements give a true and fair view, ensuring that material fraud is detected, and appropriate levels of professional scepticism are applied.
Everyone with an interest in financial reporting and strong corporate governance has a responsibility to work together to address the public’s legitimate concerns about audit.
It is clear that the profession must continue to focus on improving audit quality, working proactively with other stakeholders to support better understanding of the auditor’s role.
But, most importantly, all stakeholders connected to the audit process; such as regulators, professional bodies, investors, governments and the media; have a responsibility to inform the public in a fair, balanced and understandable way about audit regulations and standards. It is in the public interest that they do so.
For all your business and corporate needs give us a call on 0870 228 1999
Businesses have repeatedly demonstrated their capacity to adopt and adapt to changes in business practices, statutory regulations and technology. The flexibility and technical proficiency this demands is part of the professional DNA. However, in the digital age, the speed of change and its fundamental nature can make keeping pace difficult, even for the best resourced and tech savvy company. The ways in which accountants and their clients connect, collaborate, and communicate are being reshaped and these strategies are in need of a reset for the evolving digital age. Today, more than ever, a proven solution is needed to connect accountants and their clients and bring together individual components such as Apps, logins and portals into a centralised place that’s easily recognisable in the firm’s brand.
App creation can help the accountancy firms engage with clients
The move to digital technology has become a mobile first experience with over 900 billion hours spent on Apps last year, and the number of Smartphone users expected to reach 48.26 million in the UK this year. Because Apps are being used for all kinds of business activity, their sheer number on Smartphones and tablets is giving rise to a new problem.
Own the digital relationship with your clients
Across the globe, accounting firms have been giving away control of their client base to software companies and as a result, the emotional bonds between business owners and software houses are intensifying.
A key question to ask is who owns the client digital relationship? Accountants need to protect their position as the most trusted adviser and rather than giving away control of the data associated with Cloud bookkeeping and accounting software, they should adopt a strategy that puts them right at the centre of that client relationship.
A simple and straightforward way to add value and to make interaction easier is have a firm branded App. Giving a powerful single App to a client for free that acts as a single contact point for all things financial, sends out a very strong message that the accountant is embracing change and wants to interact with in the way most businesses prefer on their Smartphones.
The App creates a connection between the firm and the client at all times with their own tax data and key financial dates stored within and with access to useful tools such as GPS mileage tracking and receipt management. All online portal and accounts software logins can be held in it too, creating a single interface the client needs.
We believe that putting the accountants’ interests first and building a powerful differentiator strengthens unique client engagement and provides the strategic framework needed to gain control of this new App world.
The potential for the accountant to take on the new role of App integrator by bringing everything into one single environment, the firm’s own App will simplify the client’s life and add more value. With a pro-active digital strategy, the firm can choose which Apps to make part of their clients’ Add-on community and as a result, strengthen the relationship.
It is no longer good enough for accountants to just have new technology; they need to tap into its full potential to stay ahead in the market and help drive business success for their clients.
Accountants and the use of technology to help their clients
When running a practice, it is easy to forget that you should treat your firm as a business rather than just a service. Businesses focus on growth and productivity, and so should accounting firms. A key way to ensure maximum growth is the optimisation of technology for multiple purposes.
Today’s technology can be adapted to your business, and here are seven ways you can use it to grow faster in 2018.
Automate processes for daily efficiency
The accounting and bookkeeping tools on offer today are transformative for both accounting firms and their clients. They can make tasks up to five times quicker than if they are completed manually, ensuring bookkeeping is automated and effortless, and there is no longer any need to spend time on mundane yet necessary actions.
The benefits of this automation are significant. The labour-intensive processes of yesterday only enable bookkeepers to have a limited number of clients, but with automation freeing up much of their time, they are able take on more clients, therefore growing their firm.
Offer real-time advice
Cloud technology enables accountants to give their clients anytime, anywhere access to their data within just a few clicks. This empowers the client to find out information for themselves instead of contacting their accountant, therefore releasing more of the accountant’s time.
One barrier to cloud accounting is security; there are still clients out there, who will be sceptical about the cloud. It is the accountant’s job to be knowledgeable about how cloud security works and stay up-to-date with changes so they can reassure their uncertain clients.
By providing clients with a way to access their data easily, accountants can spend more time growing relationships with current clients and looking for prospects.
Be contactable anytime, anywhere
There are many ways to reach current and prospective clients now. Traditional face-to-face meetings, telephone calls, and emails are now mixed with messaging apps, video calls, and social media. Accountants must be contactable and active on all platforms. Listen to your clients and establish their preferred way of contact.
Accountants can be in contact with clients even when the client is not actively seeking their services. Social media is an effective and sometimes even free way to market yourself. By posting content clients want to see, establishing a strong brand, and even reacting to comments from customers and prospects, firms can grow their business.
By advising your clients that they can contact you whenever they need to, and ensuring you always answer them or get back to them as soon as you can, they will trust your services and be more likely to recommend you to others.
Optimise services for millennial clients
Since millennials now make up 35% of the workforce according to a KPMG report, all businesses must ensure that every aspect of their services meet the preferences of these workers. This includeshowthey receive their invoices and other communications, and the overwhelming preference is for digital.
Out of the millennials surveyed, 82% would prefer if their accounting firm went totally paperless. It is easy to agree that removing paper receipts from the mix would be easier, not least because it prevents the issue of losing them, but actually making the switch is another story. Now, with products out there like Receipt Bank’s scanner app, clients can snap receipts and invoicing and send them to their accountants quickly.
Always consider the preferences of each individual client and cater to this. Show potential clients you can adapt to their specific needs, and be aware that many will favour digitisation.
Embrace mobile working
Apps are the friends of accountants and clients alike. If customers can use a smart phone, they will find using accounting apps, such as Receipt Bank, easy. By installing these apps on their phones or other mobile devices, clients can make use of them wherever they are; if they have a busy day planned they can still send paperwork while waiting for the train!
The benefits for the accountant are also clear. Clients can get receipts, bills, and other paperwork to accountants via apps in real time rather than sending everything at once at the end of the month. Accountants can then process them as they come in, and provide their customers with outstanding service by giving them the information they need to run their business successfully all the time.
By encouraging your clients to use mobile apps, you will reduce their responsibilities as well as making your job easier and giving you the chance to deal with bills as you go along.
Impress current clients, and gain new ones
According to 80 percent of high-performing accountancy firms, adding value to existing clients is the most effective means of growth. For this reason, accountants should not only look to implement new technology with prospective clients. They also need to get current clients on board.
Book in some time with your current clients to talk about their pain points and how you could help them grow their business. Introduce the new technology they could make use of to save them time and make their jobs easier. Sell them a package they cannot turn down because doing it themselves would be more expensive and time-consuming.
Excel during tax season
By making full use of automation tools and accounting apps, firms can always stay one step ahead of their clients’ needs. Technology leaves more time to consider advanced improvements to client services, such as rolling out a monthly recurring revenue model instead of dealing with a mad rush at tax season.
Accountants should actually see tax season should as an opportunity, rather than a nightmare. It is a chance to convert year-end customers into monthly paying customers, therefore providing the accounting firm with a steady cash flow.
Technology can be the difference between a good and a great business. Accountants can use technology to bring maximum benefits to both their firms and their clients, enabling their practices to become thriving businesses in 2018.
Find out how Stanley Carter can help your business work smarter, grow faster, and go further contact us on 01612056655 or send us an email info@stanleycarter.co.uk or check our website for further details www.stanleycarter.co.uk
Since the UK voted to leave the European Union (EU) in 2016, there has been one thing on the minds of HR professionals and business leaders alike the issue of hiring and maintaining overseas staff.
Planning to move or expand your business overseas?
Brexit has cast a question mark over the future of the global workforce and with VISA issues for existing staff looking to be problematic and hiring overseas talent going to become more difficult, businesses need help.
To achieve this, Human Resource (HR) departments and those responsible for recruitment must be aware of the options available to them to enable the business to easily expand and hire the people they want, where they want. This is where organisations should look towards partnering with a direct Employer of Records (EOR) service provider.
With a potential economic slump on the cards, preparation is key. A third party service used by businesses looking to expand and create entities overseas, an EOR takes care of all of the issues traditionally associated with the minefield that is global recruitment. Helping make the transition into new territories more simple, these service providers speed up the process of setting up shop abroad in a cost effective way. So how does it work and how can it really help in a post-Brexit world?
Time saving
Carrying out HR tasks is time intensive and it’s no wonder that companies often wildly misjudge the time it takes to carry out processes which are traditionally the expertise of HR professionals during periods of global expansion.
Sorting out documentation and translations, hiring new staff, and getting to grips with local payroll and tax regulations are all obstacles that can take a relatively long time to work through when setting up a new office abroad. Underestimating the time it takes to establish a business overseas is a key pitfall faced by organisations expanding globally.
But this is where an EOR service provider can help. Taking responsibility for all processes relating to employment contracts, payroll and tax compliance away from HR departments, EORs can save them time and prevent unnecessary stress when it comes to dealing with the nuances in specific regions.
Outgoings
The costs associated with expanding overseas can be crippling, especially for small business wanting to ride the wave of success onto pastures new.
Unforeseen costs can come from multiple sources, depending on the country you are looking to expand into. These include, but are not limited to, recruiting staff, funding health or housing benefits and complying with the legal requirements for annual leave outlined by the host country.
For instance, in China, an employer is required by law to foot the bill for an employee’s housing fund and social healthcare programmes and in Switzerland, those under the age of twenty are entitled to one week more annual leave than the rest of the population. And those are countries that aren’t even in the EU, so add the other twenty seven member states and the nuanced ways they do business into the mix and you can see how complex things get. Especially as the UK does much of its business with EU countries.
It’s factors like these that not only mean business owners are confronted with costs they were not expecting, but also are at risk of legal repercussions should they not comply with these country specific regulations.
EOR service providers can help here too. Setting up an entity abroad no longer needs to be decided on the basis of the financial reserves; time or legal expertise a business has available to it. Instead, this will be the only time that hiring another entity won’t actually cost the company money, but help it make savings.
Legal compliancy
Ensuring the decisions a company makes are above board is paramount to both its financial success and the longevity of its trading. The process of ensuring legal compliancy can be a daunting one and can put companies off recruiting staff and setting up shop in overseas territories altogether, or lead them to cut corners. The principal issue with this is that by bypassing the aforementioned formalities, businesses then run the risk of breaching both employment and tax laws.
EOR service providers can not only save businesses time, money and prevent them from breaching these local laws, but now the once-daunting process of setting up an entity abroad has never been easier. With EOR, companies can embrace the opportunities that lay ahead of them overseas with open arms, rather than confining them to function on a national basis only and HR departments and recruiters can rest assured things will be done correctly without affecting the talent pool.
If you expanding overseas and require help and assistance registering your company and/or employment contracts give us a call on 01612056655 or send us an email info@stanleycarter.co.uk or check our website for further details www.stanleycarter.co.uk
If the Brexit negotiations last year seemed tense, they are likely to pale in comparison to the upcoming discussions regarding the terms of the new trading relationship between the UK and Europe.
UK politicians are not in agreement about what would replace the EU Single Market and Customs Union memberships.
The uncertainty surrounding London Stock market
Negotiations need to be completed within nine months to leave enough time for any new agreement to be ratified by parliaments before the UK leaves the EU on 29 March next year.
Given the stakes, there is a high probability of a breakdown in talks and of the economically damaging “hard Brexit” materialising.
In such a scenario, the UK would lose tariff-free access to its largest export market and have to fall back on World Trade Organisation rules. This would entail the imposition of mid-single digit tariffs on UK exports to the EU.
More importantly, exports would also have to abide by complex rules of origin regulation, a heavy burden that would be both time consuming and costly, particularly for SMEs. A hard Brexit would likely lead the pound to retest its post-referendum lows. Higher inflation would likely push gilt yields up.
Another risk, with arguably a wider range of consequences, is the spectre of early elections. With Brexit negotiations dividing the government, there is a material probability of a general election before the end of 2019, particularly as Theresa May has a razor-thin working majority of only 13.
A Labour Party win cannot be dismissed, given its surge in the polls since mid-2017.
A wide array of outcomes would then be possible for financial markets. On the one hand, should Labour win a sweeping majority and push for a hard Brexit, UK financial markets would almost certainly come under pressure due to nationalisation and £500bn fiscal spending programme.
In a more benign scenario, Labour would emerge victorious, but without a majority of seats, making it more difficult to pass extreme policy measures. Should it also shift its stance on Brexit and opt for a Norway style agreement where access to the Single Market is retained, it is conceivable the pound and economy could both strengthen.
In our view, UK equities present a less attractive proposition than those of other regions, despite having more appealing valuations.
UK equities lagged in 2017 and we think this is set to continue in 2018, given the unappetising stew of severe political risk and a comparatively weak economy. UK equities look especially cheap compared to other markets, particularly on a price-to-book value basis. This is partly due to the structural derating of banks and commodities.
On a forward price to earnings basis, excluding commodities, the UK trades at a 10 per cent discount to global markets; a level it hasn’t seen in nearly a decade. In our view, such cheapness is warranted, given the risks enumerated above. The earnings growth expectation of less than six per cent for 2018 is comparatively uncompelling. With the number of profit warnings at a six-year high in the third quarter of 2017, earnings expectations may well be reined in further.
As a high dividend paying market, yielding four per cent overall, the UK has tended to underperform when monetary policy is tightened. UK equities are also still largely exposed to commodities and emerging markets, which are both highly sensitive to the US dollar. Should the dollar rally, as we expect, it could also contribute to restraining UK equity performance.
Should the pound weaken due to a breakdown in negotiations, some argue that UK equities could rally, much like they did after the referendum results. But we think this could be interpreted as the worst scenario, in which case, equities may well dissipate. The outlook is finely balanced.
We remain selective, preferring high-quality businesses with sound balance sheets, robust cash flow generation, and a track record of compounding returns to shareholders. We maintain our bias towards international exposure, focusing on companies exposed to the robust European economy, or US tax reform.
We struggle to be enthusiastic about domestic stocks. Domestically focused FTSE 350 stocks have underperformed their peers with international exposure by more than 15 per cent over the past three years.
With the barrage of pressures unlikely to fade in the short term, we believe it is too early to step back into domestic stocks. The UK outlook is mired in uncertainty, and we expect volatility to increase. This could mean better entry points for equity, fixed income, and foreign exchange investors in the months ahead.
We can assist and advise on how to invest on London stock market. send us an email on info@stanleycarter.co.uk or contact us on 01612056655
HMRC collected £819m in additional tax through payroll investigations last year, as it continued to crack down on organisations that wrongly classify workers as self-employed.
Employers Payroll
It was a 16% increase on the additional tax generated in 2015/16 and was recovered following payroll investigations by its employment status and intermediaries team, which was set up to investigate businesses that have declared a high number of self-employed workers.
The team looks into the use of self-employed workers in the gig economy and organisations that classify workers as self-employed in order to avoid paying tax and national insurance contributions, acting on intelligence and complaints about alleged misuse of self-employed workers.
HMRC, which released the information following a freedom of information request, also revealed that investigations into the payrolls of large businesses specifically generated £503m in additional tax in 2016/17, up 31% from £383m the previous year.
HMRC is making no secret of its suspicions of how companies classify their workers. Considering the scale that the gig economy has grown to, it is no surprise that it is now under intense scrutiny by HMRC.
As well as its broader brush investigations in which HMRC aims to collect millions at a time, it is also combing carefully through the minor details of payroll. Even the most trivial of expenses are now being investigated.
We feel that it was more productive for HMRC to target employers and intermediaries than individual workers, and therefore it is vital that employers kept up to date with HMRC initiatives and reviewed their PAYE systems.
If you require assistance with your Payroll systems contact us on 01612056655 or send us and email info@stanleycarter.co.uk or check our website for further details www.stanleycarter.co.uk
November’s last year the Finance Act introduced two major changes to the use of corporation tax losses both of which were effective from 1 April 2017.
Preparing tax accounts and corporations tax returns
A restriction on the amount of brought forward losses which can be offset in any one year
A relaxation allowing carried forward losses to be used more flexibly. The restriction should only impact the largest companies and groups – an annual deduction allowance enables up to £5m of profits per company or group to be offset by brought forward losses each year before any restriction. By contrast, the relaxation applies equally to all sizes of company. This represents a win-win scenario for small companies and groups, who can benefit from increased flexibility as to the use of their losses going forward without suffering from the restriction.
We will look here at some of the practical things to consider when it comes to preparing tax accounts and corporation tax returns under the new rules. It should be noted that the measures set out here apply to corporation tax losses only; there are no corresponding changes to the treatment of income tax losses for the self-employed.
New relaxed carry forward rules
From 1 April 2017:
Trade losses can be carried forward against total profits of the company, and not just profits of the same trade.
Non-trading loan relationship deficits (NTLRDs) can be carried forward against total profits of the company, and not just non-trading profits.
Certain carried forward losses may be available for group relief, including trading losses, non-trading losses on intangible fixed assets, management expenses, NTLRDs and property business losses. There are however some terms and conditions to be aware of. Importantly all of these relaxations only apply to losses arising on or after 1 April 2017 (“post-April 2017 losses”). Losses arising before this date (“pre-April 2017 losses”) continue to be subject to the previous rules for relief. There are a number of conditions which must be met for post-April 2017 trade losses to be set off against total profits, including:
The company must continue to carry on the trade in all subsequent accounting periods up to and including the one in which the losses are offset.
The trade must not have become small or negligible in the loss making period.
The trade must be commercial or carried on for statutory functions (e.g. a marketing board created by statute) in both the loss making period and period of set off. If these conditions are not met, it may still be possible to set the trade losses off against profits of the same trade under the old loss relief rules, or, where the trade has ceased, claim terminal loss relief. There are also a number of terms and conditions around group relief for carried forward losses, including:
A company can only surrender carried forward losses as group relief if they cannot be deducted from its own profits in the accounting period.
A company cannot claim carried forward losses as group relief if it has its own carried forward losses which it could set off. As with any relaxation in tax, the new rules on carried forward losses are accompanied by a host of new and updated anti-avoidance provisions, including:
A new Targeted Anti-Avoidance Rule (TAAR).
New and strengthened rules to preventloss-buying.
Practical considerations
The application of the new rules is relatively straightforward if a company had no carried forward losses at 31 March 2017. Any losses incurred after this date can potentially be relieved against total profits or group relieved, subject to the restrictions noted above.
However, if a company had losses carried forward at 31 March 2017 these will continue to fall under the old loss relief rules, and will therefore have to be tracked separately to any later losses.
Where a company has an accounting period which straddles 1 April 2017 then the periods falling before and after that date are treated as two separate accounting periods. Special commencement and apportionment rules apply, which are described in detail in HMRC’s draft guidance. There are also changes in the way claims for carried forward losses operate under the new rules, including:
If trade losses are carried forward against profits of the same trade (typically because they are pre-April 2017 losses) then relief is automatic, but a claim can be made to dis-apply this.
Where carried forward losses are set against total profits, the company must make a claim for the relief. It should be noted that, although the restriction on the set off of carried forward losses will only affect the largest companies, new compliance rules require all companies to specify the amount of their annual deduction in their corporation tax return and groups to nominate the member responsible for allocating the deduction. Finally, the new relaxed rules may provide an opportunity for companies to recognise more deferred tax assets. For example, before April 2017, a deferred tax asset may not have been recognised in respect of carried forward trading losses if the company had no prospect of making future trading profits against which it could be utilised. There may now be the potential to recognise a deferred tax asset for post-April 2017 losses if the company has other income or is a member of a group.
If you need help preparing your tax return or corporation tax contact us 01612056655 or send us an email info@stanleycarter.co.uk or check our website for further details www.stanleycarter.co.uk
The accountancy industry is trying to push back against accusations that it is old-fashioned and stuck in its ways. It is embracing technology and digitisation, and it is working hard to improve diversity in the profession.
The UK’s future prosperity depends on the expansion of professions, and part of this is about recruiting bright new talent to develop into the business leaders of tomorrow. The accountancy profession needs to become more representative, at all levels, of the wider socio-economic development of society.
Social mobility in accounting has decreased in recent years. In fact, the profession has had the largest decline of all in social mobility between the 1958 and 1970 cohorts. If this continues, then the future accountant will come from a family richer than seven in ten of families in the UK.
Some accountancy firms have already introduced some useful initiatives. To ensure that the best young candidates are coming into the sector, some firms are improving their targeting and widening their outreach and work experience programmes.
Focus on the progression of students on these various schemes into more permanent roles in the firms has also increased.
Recruitment methods have started to change as well. Some firms have scrapped A-Level requirement in certain roles, and others have introduced contextualised recruitment, in which candidates’ backgrounds will play a part in the final choice.
Many firms are already publishing in-depth reviews of their workforce, which will allow them to look at the extent to which they are adopting best practice around diversity, and make any necessary improvements.
Here at Stanley Carter we are always looking for fresh talent to come into the sector
We take a look at the key skills accountants need to develop to pursue a successful career.
Skills required for accountants
If you are striving for a successful career in accountancy, there are a number of key skills which you should look to develop and build upon throughout your career.
A combination of accredited qualifications and excellent interpersonal and professional skills will enable you to pursue the successful career you are aiming for.
Adaptability
The accounting industry is changing rapidly. The role of the accountant is becoming more of an advisory one as technology automates processes and removes the need for paper. Clients have new expectations, and accountants can now collaborate and work with their customers in real time.
With technology bringing constant change, accountants need to be able to adapt quickly and react to whatever curve ball is thrown at them.
Openness
Honesty is highly valued in the accounting world. Accountants and the firms they work for pride themselves on adhering to the highest ethical standards and always treating their clients with honesty and integrity.
It is important to be transparent when making decisions, providing advice, and completing tasks. This is true of every workplace relationship, whether with clients, your manager, or when working in a team of colleagues.
Strategic decision-making
Automation of many administrative tasks means accountants have more time to focus on the strategic decision-making side of their role; and clients know this.
Individuals who have strong commercial skills and have invested in their accounting training will be considered highly valuable by clients and firms alike.
Information technology expertise
Accountants should look to be knowledgeable in general IT and accounting software, especially when it is likely your client will know how to use it too.
Cloud accounting is the latest technology break-through in the accounting industry. Working in the cloud means data and software are available anytime and anywhere, so clients can keep their finances up to date across different platforms. Many clients will also be technically savvy about the cloud, but for those who aren’t, the accountant needs to step in and explain it clearly.
Communication
Clients and colleagues can communicate with you at any time they want to from anywhere in the world. Accountants need to be willing to interact with people across all mediums, from phone to video conferencing. It is a good idea to master social media as well as the more traditional email.
While clients may contact you regularly via the phone, most will also value face-to-face meetings. This is also the best way to build a trusting relationship. When it comes to complex financial or technical discussions, accountants must be able to relay information clearly and concisely.
Creative problem-solving
Change is likely to bring about challenges as well as positives. Therefore, firms need accountants who can think outside the box and come up with effective ways to solve new problems.
Initiative, a skill which can be developed in professional, educational, and personal situations, is highly valued by employers. Firms are keen to recruit staff who want to share ideas to continually improve business performance.
Customer service skills
For accountants working in public practice, it is essential to be able to build a strong relationship with current customers, in order to retain them, as well as being able to attract new customers.
In corporate accounting, individuals must meet the needs of the organisation’s other departments and their managers. In both instances, strong customer services skills are invaluable.
Here at Stanley Carter we are a highly skilled and experienced accountancy firm. If you require any help or information please contact us on 0161 2056655 or send us an email info@stanleycarter.co.uk or check our website for further details www.stanleycarter.co.uk
Carillion, the second largest building contractor in the UK and the lead on a number of key public service contracts, entered into liquidation last week. Various commentators have highlighted poor governance at the company but would the revised UK Corporate Governance Code recently announced by the Financial Reporting Council (FRC) have prevented its collapse?
What caused the collapse?
There are differing views as to what caused Carillion’s problems but many have pointed at internal failings and a poor governance culture. Roger Barker, Head of Corporate Governance at the Institute of Directors said “it is clear that major providers of public services must be governed in a prudent manner”. He suggested that the collapse highlights a lack of effective governance at Carillion and questioned whether the board and shareholders acted appropriately before the collapse.
The Government has acknowledged these worrying signs and has ordered an investigation into the conduct of Carillion’s directors. Executives at the company are said to have tweaked rules in the firm’s bonus scheme to make it harder for those bonuses to be clawed back if the company failed. This sounds like the executives were trying to preserve their own position at the expense of shareholders’ interests. The bonuses have been branded ‘exorbitant’ in the House of Commons.
Further concerns related to the excessive pay of former chief executive Richard Howson who received £1.5 million in 2016. Carillion also agreed to continue paying his remuneration until October this year, handing him a £600,000 salary.
Many believe that the directors of Carillion did not follow responsible internal processes. Recognising the crippling debt, and other significant problems the company was facing, they should have acted in the best interests of the company and looked to minimise the risk of collapse, which eventually became unavoidable.
The revised corporate governance code
Poor corporate governance, particularly excessive executive pay, has been a hot topic for reform in the last 12 months. The FRC has opened a consultation on those proposed revisions after undertaking a ‘comprehensive review’ of the code.
In the consultation document, the FRC highlights the heightened public scrutiny faced by the country’s largest companies and the impact poor internal governance can have on a wide range of stakeholders. So could the proposed changes help to prevent another Carillion failure?
The revised, ‘shorter and sharper’ code aims to encourage high standards by being clearer and more concise. It focuses on the application of principles relating to stakeholders, integrity, corporate culture and diversity.
Excessive pay
A significant change, introduced in an attempt to tackle excessive levels of executive pay, relates to shareholder dissent and the percentage of votes against a resolution. So when more than 20% of shareholders vote against a resolution, the company should: explain the actions it intends to take following the vote; publish an update on the position within six months of the vote; and provide a final summary in the company’s annual report setting out the steps taken as a result of the vote.
To increase transparency, the Investment Association has introduced a public register that lists companies which have experienced high levels of shareholder dissent. The first published list shows that, at their last AGMs, 24 FTSE All-Share companies received significant shareholder votes against their remuneration policies and 43 had 20% or more votes against their remuneration report.
The new code should give shareholders more say in how company executives are remunerated. The excessive pay levels at Carillion may have been tackled earlier had the directors had a greater responsibility to address shareholder concerns.
Employee engagement
The new code will require boards to establish a mechanism by which they can engage with the company’s workforce and gather its views. The collapse of Carillion will have serious repercussions for its 20,000 employees whose jobs are now in limbo. Perhaps if the board had engaged more directly with those employees and been required to listen to their concerns, steps could have been taken to safeguard their position.
Section 172 duty and stakeholder engagement
The Government intends to introduce legislation which would oblige companies to explain how they have complied with the requirements under section 172 Companies Act 2006 to take account of stakeholder interests when making decisions. This is needed to increase transparency and ensure the internal processes adopted by a company promote its success and are for the benefit of its members as a whole, whilst also taking account of wider stakeholder interests.
Carillion’s supply chain is thought to include up to 30,000 small businesses who had already suffered persistent late payments before the firm’s final collapse. The changes to the section 172 duty are intended to highlight that it’s not just the shareholders who are affected by the decisions of a company’s board of directors.
The future of governance
Whilst a range of factors contributed to Carillion’s collapse it is right that poor governance practices are being highlighted as a key contributor. But whether the new corporate governance code would have prevented the collapse is unclear. Ultimately, the new requirements will only bite if shareholders and investors are prepared to step in and hold boards to account.
The new code should help to increase transparency in a number of key areas, helping stakeholders to understand what is going on behind closed doors. Preventative action could then be taken to stabilise any struggling company before it reaches the point of no return as Carillion did earlier this month.
