Memorandum submitted by Professor Prem
Sikka, University of Essex
Further to the Select Committee's announcement
of an inquiry into the financial regulation of public limited
companies, I am enclosing some evidence which may be of interest.
1. A large number of major British companies
operate through offshore financial centres that have poor financial
regulation. As a result, people dealing with them have little
opportunity to identify the parties they are dealing with, or
the financial status of the companies. Corporate regulation also
makes demands upon taxpayers. But many companies are avoiding/evading
taxes by locating in offshore financial centres. Some details
of the issues are included in the attached monographs, "No
Accounting for Tax Havens".
The hope is that one learns from major financial
scandals. The frauds at the Bank of Credit and Commerce International
(BCCI) represented the biggest financial scandal of the twentieth
century. The bank was closed in 1991. However, to this day there
has been no independent investigation of all aspects relating
to it. In particular, the government has shielded the auditing
firms from scrutiny. For his inquiry, Lord Justice Bingham stated
that his terms of reference did not invite him to "evaluate
the professional quality of audits of BCCI's accounts conducted
over the years in London or the Caymans or elsewhere, or to form
judgement whether irregularities in its business should have been
discovered by the auditors earlier".
In common with Polly Peck, Levitt, Resort Hotels
and many other cases, the DTI did not appoint inspectors to investigate
the auditing or other aspects. If has passed the matters to the
Institute of Chartered Accountants in England & Wales (ICAEW),
which has not independence from the auditing industry. Indeed,
it is part of the problems.
In the US, a report by Senators Kerry and Brown
said that auditors Price Waterhouse were engaged in a cover-up
and that their independence was compromised. The report noted
that "BCCI provided loans and financial benefits to some
of its auditors, whose acceptance of these benefits creates an
appearance of impropriety, based on the possibility that such
benefits could in theory affect the independent judgment of the
auditors involved. These benefits included loans to two Price
Waterhouse partnerships in the Caribbean. In addition, there are
serious questions concerning the acceptance of payments and possibly
housing from BCCI or its affiliates by Price Waterhouse partners
in the Grand Caymans, and possible sexual favours provided by
BCCI officials to certain persons affiliated with the firm".
In addition, the report also noted that Price Waterhouse were
key players in enabling BCCI to shift its Treasury functions from
the UK to Abu Dhabi, something which made it very difficult (almost
impossible) to investigators to obtain documentation and prove
Any questions about financial regulation have
to have regard for the contents of auditor's files. What do they
know? Such matters are crucial for investigators. However, the
BCCI case showed that auditors Price Waterhouse did not co-operate.
In common with other Big-Five firms, their ultimate ownership
structure leads to offshore financial centres, places which have
been reluctant to share information with other jurisdictions.
The New York district Attorney told the Congressional hearings
that "The main audit of BCCI was done by Price Waterhouse
UK. They are not permitted, under English law, to disclose, at
least they say that, to disclose the results of that audit, without
authorization from the Bank of England. The Bank of England, so
farand we've met with them here and over therehave
not given that permission. The audit of BCCI, financial statement,
profit and loss balance sheet that was filed in the State of New
York was certified by Price Waterhouse Luxembourg. When we asked
Price Waterhouse US for the records to support that, they said,
oh, we don't have those, that's Price Waterhouse UK We said, can
you get them for us? They said, oh, no that's a separate entity
owned by Price Waterhouse Worldwide, based in Bermuda".
Somewhat mistakenly, people have been led to
believe that major corporations are audited by global auditing
firms. However, this is not the case. Firms win business by parading
their "global" credentials. However, such credentials
dissolve in the face of questions about responsibility and accountability.
To avoid questions, Price Waterhouse told the Senate inquiry that
"The 26 Price Waterhouse firms practice, directly or affiliated
Price Waterhouse firms, in more than 90 countries throughout the
world. Price Waterhouse firms are separate and independent legal
entities whose activities are subject to the laws and professional
obligations of the country in which they practice. . . No partner
of PW-US is a partner of the Price Waterhouse firm in the United
Kingdom; each firm elects its own senior partners; neither firm
controls the other; each firm separately determines to hire and
terminate its own professional and administrative staff. . . each
firm has its own clients; the firms do not share in each other's
revenues or assets; and each separately maintains possession,
custody and control over its own books and records including work
papers. The same independent and autonomous relationship exists
between PW-US and the Price Waterhouse firms with practices in
Luxembourg and Grand Cayman".
The enclosed monograph, "The BCCI Cover-up"
draws attention to the above and other aspects of the case and
its implications for financial regulation of companies.
2. Another worrying aspect of financial
regulation is the insolvency practices. The whole industry consists
of some 1,800 practitioners and is dominated by the Big-Five accountants
firms. The industry has eight separate regulators, but there is
little effective control and the practitioners can continue to
spin out insolvencies to earn lucrative fees. There is no independent
complaint investigation procedure or an ombudsman to adjudicate
For example, in March 1982, Stone-Platt Industries,
a major engineering company, which once employed more than 30,000
people in the North of England, went into bankruptcy. Most of
the assets were sold-off, piecemeal, by the liquidators from a
Big-Five firm, within a very short period. However, nearly eighteen
years later (November 2000), the liquidation has still not been
finalized. The liquidators have drawn fees of £235,375. Amidst
revelations of fraud, Barlow Clowes, an investment company, collapsed
in May 1988 and in July 1988 it was placed into liquidation. By
November 2000, the liquidation had still not been finalized. The
liquidators have collected fees (excluding Value Added Tax and
administrative disbursements) of some £2,044,331. The Manchester
base J.S Bass Group was placed into receivership in 1988 and the
receivers/liquidators have collected more than £3 million
in fees. It shows no sign of ending. Atlantic Computers was placed
into administration in April 1990 and subsequently into liquidation.
By November 2000, the liquidation was still in process. The liquidators
had collected fees (excluding Value Added Tax and administrative
disbursements) of some £18,641,698. The Coloroll Group and
its fifty-four subsidiaries were placed into receivership in June
1990. By November 2000, the liquidation was still in progress
and the liquidators had collected fees (excluding Value Added
Tax and administrative disbursements) of £7,496,625). There
are many other examples.
The insolvency industry is full of unprofessional
and anti-social practices. Its practices have been resulted in
the loss of jobs, savings, investments, pensions and homes. Yet
the DTI has shown little inclination to call it to account. Seemingly,
its main concern is to appease major firms. It rarely provides
any worthwhile information as evidenced by the following question
and answer in parliament.
Mr. Mitchell: To ask the Secretary of
State for Trade and Industry if he will list the receiverships
and liquidations begun more than 20 years ago and still not finalised.
Dr. Howells: This information could be
provided only a disproportionate cost.
Mr. Mitchell: To ask the Secretary of
State for Trade and Industry what inquiries his Department has
made into (a) receiverships and (b) liquidations started more
than 10 year ago but still not finalised; and how many liquidators
come into this category.
Dr. Howells: This information could be
provided only at disproportionate cost. (Hansard, House of Commons
Debates, 20 June 2000, col. 139).
The enclosed monograph titled, "Insolvent
Abuse: Regulating the Insolvency Industry" draws attention
to some of the institutionalised abuses.
3. Any inquiry into financial regulation
should also look at the DI's responsibility for presiding over
the system of financial reporting, auditing and insolvency. The
DTI's relationship with the whole accountancy industry is very
cosy. The failures of financial reporting, auditing and insolvency
continue to make headlines. Yet the DTI's main concern appears
to be the appeasement of major firms. It has ended up creating
nearly 30 regulators to deal with the matters. This is an absolute
mess. The system is financed and dominated by major firms and
businesses. It rarely looks at the issues from the perspective
of the public that is affected by regulations. All regulators
meet behind closed-doors and do not owe a "duty of care"
I very much hope that the above information
and the enclosures would be of interest to you. Should you require
any further information please do not hesitate to contact me.
I am also very willing, if asked, to provide oral evidence to