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Financial failings

19 December 2018 by Simon Osborne

Financial failings

Combining the roles of finance director and company secretary is a fatal flaw

Financial misconduct seems to be the ordre du jour with Nissan and Mitsubishi Motors sacking chairman Carlos Ghosn from his post over financial misconduct claims and Patisserie Holdings Plc accepting the resignation of finance director Chris Marsh after a gaping hole was discovered in the firm’s accounts that required the executive chairman to inject £20m of his own money to keep the company afloat.

If the allegations against Ghosn are proven, it will be a spectacular fall from grace for the man who was formerly credited with turning Mitsubishi’s fortunes around. Claims that he conspired with another executive, Greg Kelly, to understate his income by as much as $71m could see him face 10 years behind bars and/or a 10-million-yen fine.

He must also answer claims that Nissan has paid $100,000 annually since 2002 to his sister for a non-existent ‘advisory’ role and that he has used corporate money to pay a donation to his daughter’s university and charged family trips to the company. If the allegations are genuine and proved, the boards of both Nissan and Mitsubishi will doubtless be cogitating, as a matter of urgency, how fraud on such a scale could have been allowed to occur.

Those who have followed the travails of the Patisserie Holdings group may have wondered how the CEO and non-executive directors remained blissfully unaware that HM Revenue & Customs had served a winding up petition on Stonebeach, one of the group’s key subsidiaries. It seems that the finance director acted also as company secretary. That unhealthy combination of roles could give a director control over virtually everything from ‘the sublime to the gorblimey’ or between the boardroom and the mailroom. As Luke Johnson, the executive chairman of the Patisserie Valerie companies, remarked in his column in The Sunday Times on 9 September, ‘Clever scammers exploit people within their circle of acquaintances – because they are trusted and familiar.’

Far too many organisations make the basic error of combining the roles of finance director and company secretary. There is no synergy between the two roles but, in the hands of one person, they confer immense power and authority. In the hands of the wrong person, that authority can be abused. It is elementary good governance that the two roles should be held by different people and that the company secretary ought not to be an executive director.

Attention is also being focused on why the auditors, Grant Thornton, did not raise the alarm. They signed off on accounts dated September 2017 declaring the financial statements to be in agreement with the accounting records. As Simon Jack, business editor at the BBC news channel rightly opined on 11 October, the day after the story of HMRC’s winding-up petition broke, this raises another question mark ‘over the quality of the whole accountancy profession after high-profile busts from the blue like Carillion.’

“ Clever scammers exploit people within their circle of acquaintances – because they are trusted and familiar”

Furthermore, as pointed out by the Financial Times’ Kate Burgess on 11 November, the FRC’s recent report into the accounts of companies at the bottom end of the main market and on the AIM, which found that small companies are making too many basic accounting errors, failed to even reference Patisserie Holdings Plc. The FRC report also neglected to mention Conviviality, which collapsed in the spring, having uncovered an unpaid £30m tax bill or Yu, the gas and energy group, which revealed in late October that it had overstated profits by £10m and its shares fell four-fifths.

While the FRC has tended to favour a somewhat gentle approach towards companies in sectors where there are obvious challenges to head off potential mishaps, I cannot help feeling that Kate Burgess’ assertion that there is nothing like naming, shaming – and fining – businesses to encourage finance directors to think harder about whether what they add up and subtract may be right.

Attention must also be turned to ensuring that AIM’s reputation as a more lightly regulated market with companies that indulge in shaky governance has no substance in fact. The demise of Conviviality seems to be down to the failure of an over-ambitious top team to install sufficient controls and systems after a transformative acquisition was made.

Tough rules for major acquisitions exist for the main market, with buy-in required from shareholders and FTSE companies having to appoint sponsors to report on integration plans and working capital assumptions to the regulators. The two markets should be more closely aligned in this respect and it is gratifying that the London Stock Exchange has been stepping up its oversight of nominated advisers or NOMADs.

However, a NOMAD’s experience in a lead corporate finance role does not assure that an adviser appreciates the nuances of good governance or will impart sound advice on governance to companies in its care. Assuring the breadth and depth of NOMAD teams by the LSE should help to reduce the blow-ups and blunders that have been all too apparent this year.

Simon Osborne FCIS is CEO of ICSA: The Governance Institute

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