30 October 2016 by Kieran Quinn
Peter Swabey’s article raises interesting issues – I am pleased to respond, says Kieran Quinn
|Last month, Governance and Compliance published an article (‘True and fair accounting’) looking at George Bompas QC’s assertion that s393 of the Companies Act 2006 requires that the accounts should enable a determination of what is or is not available for distribution by reference to amounts stated in them and the Local Authority Pension Fund Forum’s (LAPFF) letter to FTSE 350 companies. The LAPFF contacted Governance and Compliance regarding the article and we are happy to publish its response.|
In the conclusion of his article, Peter says that LAPFF should have requested that the government provide a view on the law. However, the government is constitutionally unable to do that as interpretation of the law is reserved for the judiciary. Even MPs asking parliamentary questions of government have to accept that.
Because George Bompas QC had systematically refuted the position of the FRC, we were intrigued by FRC claims that the government had said that LAPFF and Mr Bompas were wrong; the FRC also made that claim to Parliament.The Freedom of Information disclosures are not ‘irrelevant’ but reveal what the FRC was thinking, as well as what the government has actually said. The government told the FRC it has never said LAPFF, or Mr Bompas, was wrong.
What Mr Bompas’ opinion says is this: ‘…as to the justification of distributions, where the last annual accounts are in point, what falls to be considered is the amount of specified items “as stated in” the accounts, resort to further supplementary records or documents not being required or permitted. It would follow that the contemplation of these provisions was and is that any realised profits (potentially distributable) would be an item separate and distinct from any unrealised profits
(an undistributable reserve).
‘In the circumstances, so long as UK companies legislation relating to company distributions remains as it is at present, it seems to me to be difficult to assert that accounts which fail to enable a determination of what is or is not available for distribution by reference to amounts stated in them can give a true and fair view of a company’s assets and liabilities, financial position and profits or losses, as they will fail to meet one of the central purposes for which the accounts are required.’
FRC assertions changed the subject to whether there is a requirement in the legislation for a single/separate number for distributable reserves. But, Mr Bompas does not say that distributable reserves need to be one number – any more than suggesting that undistributable items should be one number too. Mr Bompas is clear that conflating realised and unrealised profits gives a problem and there cannot be ‘two set of books to unpick’. Indeed, isn’t ‘two sets of books’ false accounting?
Finally, the FRC’s position is silent on the ‘net assets test’ for making distributions. That test has to be by reference to the undistributable reserves as stated in the accounts. That test also fails if realised and unrealised items are mixed up.
We look forward to working with ICSA on these issues. LAPFF’s letter was not ‘hectoring or threatening’, but precise because not complying with the law is a problem for directors. Indeed, where directors rely on the auditors then they may have a claim on them. Therefore for companies, or ICSA, to seek advice from auditors on this matter is inappropriate, as interests may well be conflicting.
‘I am grateful to Councillor Quinn for his clarification, although I disagree about the tone of the LAPFF letter. Mr Bompas is clear in his views, but my concern is that another QC takes a different view; one which appears to support the FRC approach to this issue. As Councillor Quinn says, the correspondence disclosed under the Freedom of Information Act indicates that the Government did not say that Mr Bompas is wrong, but neither does it say that he is right. The situation is, therefore, not cut and dried and it is likely it will have to be settled in Court.
‘I understand the potential conflict of interest for the auditors but, as the independent appointee of shareholders, they are the closest thing the board has to an independent professional adviser on accounting issues. Hence, our suggesting this point be referred to them if the directors are in any doubt as to what they should do.’
Peter Swabey is Policy and Research Director at ICSA: The Governance Institute