Short-term remedies and quick fixes

Our short-term remedies and quick fixes

In terms of possible scenarios, there is only one conclusion: more and more regulations, eventually notwithstanding the wishes of the current government and Brexit deal. Failures will continue to occur, hastened in some cases by the pandemic and its aftermath, and regulations will, eventually, tighten. In that spirit, we offer our alternatives and recommendations. This is based on our combined knowledge and the evidence provided to us, our own original research and analysis. We also have taken the best ideas and solutions, in our view, found in the literature - including the latest FRC suggestions. In terms of recent reviews, we summarise the recommendations by the Kingman Review1 and others in Appendix 3.07.1.

These are our 23 suggestions for some short-term remedies which might lead to better quality of financial and corporate reporting in the shorter run. Each ‘quick fix' stands on its own so that one might cherry-pick the quick fixes that find favour, viewed appropriately, or might be adopted in some way from the bare bones outlined in what follows. Each is relatively easy to implement but may require more work from (a) management and (b) auditors. That, however, is the cost for better quality and safer reporting and auditing.

We assume the FRC transformation into ARGA is in place and that a part of the Kingman report2 has been adopted and that there is an operational split between auditing and consultancy and that consultancy is banned from audit clients.

Greater control on management

Although Rod Sellers generally supports the integrity of management, the failures discussed earlier in the book (Volume 2: Financial Failures & Scandals: From Enron to Carillion)3 as part of this series show that some boards and managements do have problems. The plethora of failures in 2019 and the more than 50 failures during 2020 described in www.fin-rep. org/which-book/financial-failures-scandals-from-enron-to-carillion/ show that financial scandals and failures, despite increasingly tightening regulation in the UK, are still occurring, and, if anything, are accelerating. That may be helped by COVID-19.

Tesco (overstated profits) may have been a case of not wanting to report lower profits in the face of new lower-priced competition. Conviviality was a case in which the systems lagged behind the growth of the company and the spreadsheets had not been sufficiently checked. (As the earlier surveys show, they were not the only ones.) Carillion’s issue was an overestimate of revenues coming in and insufficient margins to cover problem contracts and too much debt - accumulated over time by aggressive accounting, perhaps. Steinhoff and Satyam were a pure management failure. General Electric was probably an internal reporting and management failure. Sig was employee related. Petrobras was corruption. In all these recent cases, there is a measure of management failure. Wirecard is a case in which senior management pulled the wool over the eyes of everyone - regulating bodies included. Only the whistleblowers, a hedge fund, and the FT saw through this deception. Then there are the overseas (often Chinese) companies.

Patisserie Valerie was a failure of multiple-faceted areas like lack of gov-ernance/controls, lack of information, and top management being unaware of what was going on in the whole arena of accounting, finance, and banking. There is even the hint of management being part of the whole debacle of a £40 million hole in the balance sheet and unauthorised bank loans of £10 million or so.

Coupled with these failures, we have found that the narrative section of annual reports is more often than not biased, unbalanced, not particularly fair (despite the FRC’s pronouncements) and can have some notable omissions. This is a value judgement, of course, but our findings and evidence seem to show that this is not a one-off. For listed companies, this seems to be more the norm than the exception. That is not so true for private companies, for which the length is very short but fairer and more balanced (we found).

The short-term remedies on management and the preparers of reports

1) Penalties on management

FRC/ARGA needs to be able to prosecute directors whether they belong to a professional accounting body or not. Previously we noted the asymmetric nature of the approach to auditors and management (the situation faced by the old FRC). These should be made symmetric and not just to those members of a company that are part of one of the professional accounting associations. That would include members of boards and their major subsidiaries, the non-executive directors (NEDs), the internal auditing staff, and any external firm offering internal auditing as a service (a la Deloitte with Carillion). The NEDs and external service providers would be under scrutiny if they were not being sufficiently challenging or sceptical of the main board’s or management's assumptions.4 This seems to be the current direction of the government and new regulations.

As Fiona Wilkinson (ICAEW president in 2020) says, it is the fault of the directors:5

We also need to remind the world that when companies fail unexpectedly. it’s not primarily the fault of the auditors. It's a failure of corporate governance and, in the first instance, the fault of the directors. They should know when a company is no longer a going concern, but are they being transparent enough with the auditors? Possibly not. It seems to me that we need to step up the pace of culture change in the corporate world. This is why encouraging diversity (another issue close to my heart) is so important. We need people in the boardroom who not only bring insight from a range of social, educational and ethnic backgrounds but who are prepared to challenge ‘group think'.

2) Temporary sanctions

To ensure that the ARGA does enforce rules speedily (rather than the FRC’s older investigations, which went on for year), there should be temporary sanctions whilst the full investigation occurs. Temporary fines in the form of withholding salaries or claiming back bonuses should be enforceable during this process. Banning from working temporarily should also be possible. To ensure that ARGA acts quickly, they would be subject to ARGA and select committee interrogation and also, if necessary, direct action by the Busmess Minister. The select committee chairperson should be able to make recommendations (publicly) to the Department of Business if he or she feels ARGA is not taking action quickly enough or is not levying temporary fines and/or exclusions. Board members who are not members of a professional accounting body could still be fined or temporarily banned from being a director.

3) Pension payments and dividends

We would like to see the possibility of ARGA fining members of the board if dividends are paid in preference to pension contributions without good and justifiable reasons. This is not an all or nothing issue, just that dividends and pension gaps should be made in some sort of proportion. Dividends should not be paid if no contribution to any pension’s gap is being made. For example, Carillion continued to pay dividends without closing the pensions gap, as shown in the case study of Carillion in Chapter 6 of Volume 2: Financial Failures & Scandals: From Enron to Carillion.6 This should be part of the FRC/ARGA guidance and perhaps necessitates a change in law.

4) Comprehensive income report

Mandatory standardised and audited comprehensive income report.

5) Off-balance sheet items

An audited statement of all off-balance sheet items without exception.

The short-term remedies on the balance sheet

6) Multiple balance sheets

Discussions between Krish Bhaskar and Rod Sellers led to this possible solution - involving the concept of an average balance sheet based on three balance sheets i.e. opening and closing balance sheets (audited as per nonnal) and one interim balance sheet during the year, probably after six months and with more disclosures than in tire current interim financial statements.

If there are any special circumstances that change during the period, then these should be clearly stated with a closing like-for-like balance sheet and then the closing balance sheet with the changes (for example, a rights issue or major acquisition and/or with significant changes in goodwill).

The opening and closing balance sheets are a given and audited. We would like the intermediate balance sheet(s) to be audited/reviewed as well. Even if they are not, there is some merit to providing the average of all of the balance sheets alongside the closing balance sheet and prior years' of both (preferably for three years).

Short-term remedies on length of report including brevity, comprehensibility, meaningfulness [1]

The basic idea here is that there are multiple reports geared to the needs of different classes of users and stakeholders. Muddy Waters Research fund (head: Carson Block) may want to plough through pages of remuneration of directors to see what bonus payments have been paid and why. However, most users will just want to see the overall scale of remuneration and not dwell on the detail. Both should be available. Hence the CORE and MORE approach outlined in Chapter 4 or what we refer as hybrid reporting - multiple reports for different users. We return to the Kingman concept of ‘brevity, comprehensibility, meaningfulness, and proportionality’ later. We agree totally with this type of paradigm.

Short-term remedies on survival (going concern, viability, and resilience)

10) Better neutrality on narrative sections

The FRC decided to strengthen the going-concern statement (affecting external auditors).[2] The Brydon review made the suggestion to replace the going-concern and viability statements with a resilience report. See Appendix 3.07.2 for further details. We argue that a longer-term solution is to have a numerical forecast with sensitivity analysis stress testing.

11) Audit of the whole report including narrative sections

This quick fix is to adopt the suggestion of Stephen Haddrill, ex-chief executive of the FRC, to expand auditors' responsibilities, by requiring them to examine companies’ financial reports from ‘front to back'. Nigel Sleigh-Johnson, head of the financial reporting faculty at ICAEW, said. ‘It is entirely possible for an auditor to give an opinion over the whole of an annual report'. This would be a quick fix but not wholly satisfactory. We consider another alternative below. Kingman also supports the whole report being audited, and so do we.

However, there are issues to be decided. Words are imprecise, debatable, and ambiguous. We believe that there is a need for some sort of neutral independent review/report on the narrative sections of the annual report -not undertaken by the auditors. The problem remains that auditors are not independent enough, and words are imprecise.

In the first instance, this could be an external auditor and was discussed by the FRC/ARGA/Kingman review.10 Aberdeen Standard Investments support this concept. GT (Grant Thornton, one of the smaller challenger firms to the Big Four) is against, but if it means higher audit fees (which we think are low in any case) then that will cover the additional cost and overcome any practicalities.11 The three authors support the greater neutrality for the narrative text - though we are happy that simulacra are left in, and each advocates a slightly different approach. See Appendix 3.07.3 to see our longer-term suggestions on narrative solutions in the audit process.

12) Numerical forecast

Forecasts for several years including at least three previous years’ forecasts versus actuals (where available) should be provided. These should include, at the minimum, a simplified cash-flow forecast and a profit forecast. Additional audit/assurance fees for this aspect could be charged. To preserve proportionality a set of the largest or most important large private companies would have to undertake the same hurdle. Adding non-listed companies is a departure from the current norm.

Bhaskar and John Flower would like the forecast period to be for the current year and 5 future years. Sellers argues for only 3 years. He feels that forecasts should be meaningful rather than an accountants’ extrapolation of figures. Senior management and the chief executive should buy into the forecast. There should be a reconciliation each year of actuals against forecasts. Also, a profit forecast for the current year should be published on the company’s website (to be included in the annual report).

The measure of profit should be net income before tax including all exceptional and non-recurring items, an operating profit figure, an underlying operating profit, and perhaps an EBITDA. It may be appropriate for the forecast to be summarised in the annual report and for there to be documented change control and for the details to be available on the firm's website. If the website profit forecast is changed, then the reason and data for that change plus the previous profit forecast for the last 12 months should be shown alongside.

13) Signing off the report and website information

The chief executive should sign off by name the above forecasts in the annual report and any accounting information, metrics, or reports on their website.

Short-term remedies for the TPR and BEIS Insolvency service

14) The Pensions Regulator (TPR)

TPR insists on trustees for defined benefit pension schemes where the trustees have various duties to perform.12 Guidance for these trustees is comprehensive.13 The trustee has to examine forecasts that show sufficient financial resources to fund pensions or any shortfall. If the pensions' trustees are satisfied with their review, then this should be stated and signed by the named trustee hi the report.

15) The Insolvency Sendee

This service coupled with the Department of Business (BEIS) should have a special division to investigate the closures of companies and also in some extreme cases company voluntary arrangements (CVA) -as is occurring with restaurants chains and high street retail outlets/ chains/stores in 2020 hastened by the pandemic. They may refer to FRC/ARGA for disciplinary action as well if this body has powers as in quick-fix point number 1 (penalties on management). If not, this unit should have fining and exclusion powers on non-accountant individuals (BEIS already has exclusion powers for company directors, but this is weak and is rarely used and needs to be beefed up).

Short-term remedies on the ability’ of professional investors and hedge funds/shorters gaining privileged information -dissemination of information from management to certain classes of investors

Despite horrific penalties for inside trading, the evidence shows that certain, often privileged classes of professional investors and fund managers do regard informal, off-the-record meetings with management as the most important source of information - not necessarily published information available to all. So this may not be insider trading, but it is certainly fairly close, and regardless of whether it actually influences share purchase/hold/ sale decisions, we think the playing field should be levelled.

16) Management meetings with report users to be available

All meetings, however informal, to be recorded and a summary published on the firm’s website, including meetings over lunch but within reason (bumping into someone on the way to a station may not count).

17) Management presentations

All (without exception and even informal and off-the-record) analyses and other presentations by management to be shown on the website except for presentations to bankers, investment banks, or anyone seriously providing finance, and in connection with share issues, loans, any sort of borrowing or mortgages, and leases. In the latter case, sensitive information could be redacted.

Short-term remedies for private companies to avoid

BHS-type events

The BHS scandal is covered and discussed in the book Volume 2: Financial Failures & Scandals: From Enron to Carillion.14 BHS was sold by Sir Philip Green for next to nothing but had substantial pension liabilities. BHS then failed, leaving a substantial pension shortfall close to £700 million (and perhaps more). In the end, Sir Philip made a voluntary contribution for some of this shortfall (around £363 million).

18) Extension to private companies

To avoid the sort of issues found with BHS, we would like to see all such large private companies brought into the reporting and auditing framework of listed FSTE 100 companies. Adding private/non-listed companies is a departure from the current norm. Appendix 3.07.4 has a list of large private companies which should produce the full PIE report. However, there are others, and we think a threshold revenue of £100 million and more than 1,000 employees should be included. These include Frasers Group (formerly Sports Direct), John Lewis, Swire, JCB, Arcadia, Virgin Atlantic, Iceland, and more than 100 others. Krish Bhaskar did make several written recommendations to the various reviews over the years, but they were all ignored.

One of the problems of private companies is that they often hide their principle company away or under different names. Cambridge Analytica15 is an example, where the real business is conducted under the name SCL, with a host of companies (at least seven UK and many more overseas), each of which owes other companies money and some of which have bought one another - also Ember Data, Firecrest Technologies, which look as if they may continue after the closure of the other companies.16 There are also subsidiaries in the US, Romania, Canada, and a few other countries.

Another is the famous JCB manufacturer. There are many companies listed with the JCB name. The actual master consolidated accounts are under the name JCB Sendee. JCB also has substantial overseas operations in India - which are consolidated into the UK company accounts - but the extent to which the overseas operations will be consolidated in the funire may be in doubt. Dyson is now under Weybourne Group, where the HQ/ holding company is located in Singapore.

Trying to fathom the totality of these linked companies under common management will always be difficult. Some sort of order needs to be

Short-term remedies and quick fixes 101 brought to such private companies (which includes companies with multiple defence contracts). Similarly, Cambridge Analytica used confidential Facebook data for political purposes. The set of companies allied to Cambridge Analytica had a combined turnover of well over £100 million for 2016 (we estimate).

Short-term remedy on comparative historical data

19) Mandatory financial history

Six-year or 10-year history of income statement and balance sheets even if in simplified form, all to be stated using the same valuation methods and with notes under each year showing any major changes due to expansion or contraction, acquisitions and/or mergers, or disposals.

20) Non-financial information

Should include a range of (to be agreed) standard and industry standard APMs and KPIs.

Short-term remedy for whistleblowers

21) Protection for whistleblowers

They are an important source when management or others attempt to deliberately do something wrong - whether fraud or manipulation of the financial statements - so some action that causes someone some financial harm. We think it regrettable that Barclays Bank's chief executive, Jes Staley, was able to use the full power of his position and Barclay’s resources to uncover a whistleblower about a senior appointment. Jes Staley was reprimanded and fined (sum undisclosed) by the FCA and the PRA (Prudential Regulation Authority [for banks]) - though his salary was £3.9 million with a bonus of more than £1 million in 2017 (he has a right of appeal, which is pending).17

The point is that the watchdogs (FRC/ARGA, FCA, PRA, and TPR) should have some power to protect and safeguard a whistleblower. For a chief executive of many FTSE 100 companies, a fine of £1 million would not be a significant burden. So far, the watchdogs have been reluctant to even reprimand let alone fine chief executives. Wirecard is another example.

Short-term remedy on sectors that are suffering from severe disruption

22) Different information for businesses facing different risks

Most retail outlets are suffering from the switch to online, plus changing demographics and shopping patterns, and in many towns, the effects of austerity are still present. The pandemic may also cause similar or accelerated changes.

Burnley-based retailer The Original Factory is a retailer that has had to put together a rescue package.18 This outlet is actually owned by Duke Street Capital. (That and the shop only have dormant accounts, so we cannot check.) The point is that many of such retailers will have had to report on their strategy and risks. Many of them will know they are suffering a systemic decline in revenues. Somehow, we do not think that they will always be that truthful in their annual report and financial statements. Often, the external auditors will sign off the business as a going concern when it might not be that straightforward. Rescue packages and company voluntary arrangements (CVAs) with debtors are now commonplace.

We think that all retailers without a growing, stable, and viable online business should give some sort of health warning about the disrupting effects of online businesses. That health warning should be echoed by the external auditors in terms of a comment on going concern and viability. The same might apply to businesses that might be affected by Brexit or changes due to the coronavirus pandemic.

If a retailer signs a lease agreement and then argues for a CVA, if there was a health warning in the accounts, the property owner might have no right of claim. But if there was no health warning in their accounts, then we think a CVA should be questionable in the courts. The law may need to be changed to accommodate this change - both in the annual report and to the law governing CVAs. This would allow the landlords so affected (many now) to be able to take out some sort of insurance or to come to some compensation arrangement with the retailer.

COVID-19 and its aftermath should also have a special financial health warning. The K-shaped recovery looks as if some segments of the economy have recovered sharply, while others have continued to downtrend. Those in a downward spiral need to be able to warn all stakeholders of the impact of COVID-19.

See Appendix 3.07.5 for a discussion on the question of proportionality.

Wirecard - suggestions arising out of this failure

23) Graded opinions for audit qualification

Graded opinions for audit qualification rather than the current, in effect, just pass or fail should be available. At the moment, there are mainly two outcomes:19 unqualified or qualified. Or worse still, as in the case of Wirecard, the auditor EY (Ernst & Young [Germany]) refused to sign off the audit. Unqualified is assumed to mean a clean bill of health. Qualified is so rare that it might mean an immediate drop in share price (for a listed company) or difficulties in raising new loans or even maintaining existing loans. Certainly, it could indicate the collapse of the company, as indeed EY’s failure to pass the accounts of Wirecard led to Wirecard’s collapse.

Would it not be sensible at a time of extreme uncertainty to have an audit grading system - say 1 to 10 rather than just the pass/fail? No one predicted the coronavirus. And no one is going to be able to say how the future will hold for many sectors in the economy. Surely we need to bring the auditing stamp into this new ‘normal' world. Whilst a qualified audit report or a failure to pass the accounts could cause, in effect, the demise of the company, a reduced grade would not cause the same havoc for an audited company.

Wirecard's problems arose much earlier with whistleblowers, hedge funds, and the FT warning of possible problems. This rose to a crescendo from 2015/16. KPMG conducted a special report handed over to Wirecard in April 2020. Then it was reported that EY could have provided an unqualified audit report when KPMG’s special audit report (to allay rumours) had stunned investors after the firm was unable to verify the existence of half of the payment group’s business. The FT report claims that EY may have demanded certain conditions to pass their accounts.20

This seems to smack of two concerns: Firstly, how could EY have countenanced providing an unqualified report given the number of rumours, whistleblowers, and the KPMG report? (Although EY now claim that they were responsible for exposing the fraud. Polite cough here.)

The second concern is although there are, in theory, four possible outcomes to an audit report (see endnote 19), in practice, it is pass or fail, unqualified or qualified. A finer granular system would provide better information and a more nuanced approach with less severe reactions (such as Wirecard’s closure).

FRC’s response

The FRC’s Future of Corporate Reporting21 essentially deals with the long term. The shorter terms issues were discussed in their regular annual review of reporting. Their 2019/20 review22 concentrated on a few key aspects (apart from the new IFRS 15/16):

  • • Judgements and estimate: These should be tailored and relevant especially for the uncertainty embodied with the pandemic and Brexit.
  • • Impairment of assets - also impacted by the above. Specifically test the judgements on investments, tangible and intangible assets.
  • • Revenue from contracts with customers: The Rolls-Royce engine problem discussed in the next chapter. When revenue is recognised over time, rather than at a point in time, companies should explain the basis for selecting this accounting policy.
  • • Financial instruments: More information about liquidity risk in the current or risky circumstances.
  • • APMs: Users should be able to relate reconciling items to GAAP measures in the report and accounts.
  • • Strategic Report: Not always fair, balanced, and comprehensive view of the performance and position of the business.
  • • Statement of Cash Flows: The major source of restatements. Companies should also pay attention to: the classification of cash flows from unusual transactions, the inappropriate netting of gross cash flows and the disclosure of non-cash changes in financing liabilities.
  • • Provisions and Contingencies: Opaque and not transparent.
  • • Fair Value Measurement: Should be provided for all relevant areas of the financial statements, with explanations supporting judgements, and assumptions with sensitivity analyses where appropriate.
  • • Business Combinations: Companies should explain how acquired assets and liabilities, and any contingent consideration, are measured.

Where are we now?

These short-term remedies are a collection of changes that can produce better reporting during the next 3 to 5 years. However, there are longer-term changes: a move away from profit maximising; the valuation issues of intangibles; companies where the market capitalisation has no bearing to book value; and so on. These we now examined in the last two chapters together with what we regard as more significant and fundamental changes.


  • 1 Kingman Report, Kingman report: Independent review of the financial reporting council, government, December 2018, available at: government/publications/financial-reporting-council-review-2018, accessed December 2018.
  • 2 Ibid.
  • 3 K. Bhaskar and H. Flower, Financial Failures & Scandals: From Enron to Caril-lion, Vol. 2, Routledge, 2019, available at: Financial-Failures-Scandals-Carillion-Disruptions/dp/0367220733/ref=sr_l_l?keywords= krish+bliaskar&qid= 1565533613&s=gateway&sr=8-1.
  • 4 Op. Cit. Kingman Report, 2018.
  • 5 F. Wilkinson, From the top/restoring trust in audit, Econoniia, 17 July/ August 2019, available at: restoring-trust-in-audit-fiona-wilkinson, accessed July 2019.
  • 6 Op. Cit. Bhaskar and Flower, 2019.
  • 7 FRC. FRC strengthens going concern audit standard, FRC News, 30 September 2019, available at:, accessed June 2020.

The new standard can be accessed at:'getattaclmient/T3bl9 e6c-4d2c-425e-84f9-da8b6c 1 a 19c9/ISA-UK-570-revised-September-2019-Full-Covers.pdf and several additions in December 2020 uk/news/december-2020/frc-highlights-importance-of-a-challenge-culture-i,-audit-areas-of though the audit firms are responding with enhanced measures to form their evaluation of companies’ going concern assessments: audit-firms-enhance-going-concern-assessments.

  • 8 D. Brydon. Assess, assure and inform. Improving audit quality and effectiveness. Report of the independent review into the quality and effectiveness of audit, December 2019, pages 80-82, pages 10 and 80-82, available at, https://assets. publishing, service, data/file/852960/brydon-review-final-report.pdf. accessed December 2019.
  • 9
  • 10 Op. Cit. Kingman Report, 2018.
  • 11 M. Marriage, Accounting watchdog eyes ‘front-to-back’ audit of annual reports. Financial Tinies, 4 April 2018, available at:, accessed May 2018.
  • 12 The Pensions Regulator website, available at: uk/trustees.aspx.
  • 13 The Pensions Regulator website, available at: ukzguidance/guidance-for-trustees.aspx#s23610.
  • 14 Op. Cit. Bhaskar and Flower, 2019.
  • 15 Cambridge Analytica was a British political consulting firm that combined misappropriation of digital assets and violated privacy using Facebook data.
  • 16 Firecrest dissolved, but Ember Data was still trading in 2020.
  • 17 P. Collinson and Agency, Barclays CEO Jes Staley faces fine over whistleblower incident. The Guardian, 20 April 2018. available at: business/2018/apr/20/barclays-ceo-jes-staley-facing-fine-over-whistleblower-incident, accessed May 2018.
  • 18 M. Ribbeck, Burnley-based bargain store is putting together rescue package. The Business Desk, 30 April 2018, available at: north-west/news/2020308-burnley-based-bargain-store-latest-retailer-hit-problems, accessed May 2018.
  • 19 In reality, there are four types of opinion: unqualified opinion - clean report; qualified opinion - qualified report; disclaimer of opinion - disclaimer report; and adverse opinion - adverse audit report. But they are rarely used. It is a question of an audit opinion (unqualified) or one qualified.
  • 20 O. Storbeck, EY prepared unqualified audit for Wirecard in early June, Financial Tinies, 23 July 2020. available at:, accessed July 2020.
  • 21 FRC, The future of corporate reporting discussion paper, FRC News, 8 October 2020, available at:, accessed October 2020.
  • 22 FRC, Annual Review of Corporate Reporting 2019/20, FRC News, 202, available at:, accessed October 2020.

  • [1] Separating reports Over time, an expanded number of standardised reports may be set by e.g. standard-setting bodies and the ARGA, but integrated reports may be abandoned gradually over time (as is happening already). 2 Sustainability' Separate the sustainability element in to a separate report - as many companies already do - with a one-page summary in the main report. 3 Remuneration One-page summary with the detail as a separate remuneration report.
  • [2] 2 3
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