Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 226-239)




  226. Can I open up this session. First of all, apologies that we have overrun, but I think it was very interesting material; heads are nodding there, so that is very good, thank you for sharing that opinion with us. First of all, could I ask you to introduce yourselves, for the sake of the shorthand-writer?
  (Mr Simms) Certainly. My name is Andrew Simms and I am the Policy Director with the New Economics Foundation.
  (Ms Doane) I am Deborah Doane, and I am Head of Corporate Accountability at NEF.
  (Mr Simms) And our colleague, to our left, who will not actually be speaking, is Julian Oram, who is the Senior Researcher with us at the New Economics Foundation.

  227. Andrew, thank you very much for coming to the Committee this morning, and also for providing us with a copy of your paper, "The Rise and Nemesis of the Big Bean Counters".[6] You do not pull your punches, and in the Preface I read: "This report is another torch to reveal what lies in the cellar. It is aimed at increasing awareness of one of the least accountable, yet most influential players in corporate-led globalisation—the accountants." Do you wish to expand on that?

  (Mr Simms) I would be delighted. You will certainly have some comments of a different tone from your previous witnesses, and maybe, if we get the chance, we might comment on one or two of the things that came out of there. What I would quite like to do is begin by explaining, very, very briefly, what the background to this report was. My particular background is working with development organisations, overseas development, third world development organisations.

  228. Jubilee 2000, is it?
  (Mr Simms) The New Economics Foundation chaired the Jubilee 2000 campaign, and its successor, which is called "Jubilee Research", is based with us, at the New Economics Foundation. And I worked previously also for Christian Aid, where Jubilee 2000 was based, we were the sort of nursery for that organisation. I have worked also for the likes of Oxfam and WDM and other organisations. And some of the work that we have done in the past, that led me in this direction to wanting to produce this report, was on a range of issues, from eliminating child labour in the manufacturing of sports goods, for example, setting up the Jubilee 2000 campaign, and we ran a successful campaign to bring in extraterritorial prosecution of child sex tourists, for example. And in one of our campaigns, which was looking at introducing codes of conduct for major multiple retailers in the UK when they source goods from developing countries, it was my job to go to the Dominican Republic, and when I was in the Dominican Republic I visited an export processing zone; while I was there, I spoke to people who worked in the factories in the export processing zone, and something was mentioned to me which surprised me and brought the accountancy profession to my attention. And that was that one of the Big Five firms had been employed to carry out a research into the potential for labour amongst young women aged 12 to 16, to work in the factories in the export processing zones in Haiti, neighbouring the Dominican Republic, and it struck me, because I had never really given much thought to accountants before, that there was something staggeringly amoral about even thinking about conducting such a research, and that brought me to looking into them in more detail. And when we started to look into them in more detail, we found, rather like coming across chewing-gum on the pavement, that their footsteps were everywhere, and I believe The Economist has referred to them as "the back office of the global markets"; one of your previous witnesses, Prem Sikka, has talked about them as "management's private police force" and some academics from the Warwick and Aston Business Schools have commented that, in effect, they run corporate Britain. And, as we started to look more deeply, a number of concerns sort of emerged and came to our attention; one of which was, ironically, considering their omniscience, their growing irrelevance. And what I mean by that is that, increasingly, what appears in audits bears little relation to the real value of corporations; that is one concern. The rise in the proportion of intangibles as a proportion of corporate value; intangibles can make, we believe, up to 70 per cent of the value of the FTSE 350 companies. These are things for which there is no meaningful measure, no comparable and comparative standards to apply. So what appears in the audit of a company bears little relation to the full and true worth of a company. The second concern, on growing irrelevance, is that public expectations of corporate behaviour have risen to expect far more social and environmental reporting, which my colleague, Deborah, then will go into in a little bit more detail later; this, of course, is something for which there is, as yet, no mandatory requirement to include in audits. And the other things that we have touched upon are the rising off-balance sheet risks, which companies face. The other concern which we have particularly in mind is the way in which accountancy firms are facilitating the consolidation and concentration of major corporate sectors around the world, at a time when the checks and balances we take for granted at the national level do not exist at the global level, there is no effective competition commission which can operate on a global level. And the second concern is the way in which consolidation and concentration has taken place within the accountancy profession itself. We believe that, in spite of all the fallout from Enron, the fundamental issue of conflicts of interest has also not been properly addressed, and yet the accountancy firms, in spite of some of their public statements about hiving off their consultancy arms, still continue to provide a wide range of services in addition to the basic audit, which we believe represents dangerous and also inefficient conflicts of interest. Then there is the issue of revolving doors, which we believe needs addressing, both in the way in which they operate between the accountancy profession and Government and the accountancy profession and the companies that they audit. And we have already touched upon, in the earlier session, the potential appearance of impropriety, and we think that is still a major issue; and it is still all too easy for the major accountants to slip into a spin doctor role for their corporate clients, when they both provide a range of additional services, which usually bring to them more revenue than the basic audit, and when there is a revolving door, in staff terms. The other issue which has been raised and touched upon is the issue of, we talked about the aggressive maximisation of earnings, there is another issue which is perhaps a mirror of that, which is the aggressive minimisation of tax; and this is something which I think is a concern that, although not always ideological bed-fellows, we share with The Economist, which has gone into it in some detail.

  Chairman: I will ask my colleagues to ask questions and then we will take other areas into account.

Kali Mountford

  229. I am particularly interested in what you have had to say about the Big Five, or shall we say the Big Four, since we are seeing the demise of Andersens, and I am looking at the summary you have given us of each of the companies. And as I have looked through I have noticed that not only are they extremely large, with KPMG in 152 countries, going down to Andersens, which was in only 80, and, in spite of that, if you took all the other companies in the top 60 together, I understand that they run probably second in the UK, so we are talking about a huge penetration in the market. Then, if I look further and look at the areas of business that each of them cover, they have actually also developed niche markets, so that there is no true competition, so you have got five companies, down to four, and within those, especially, now, if I look at Andersens, I do not know where their business will ultimately lie, but if we take those out of the equation, the concentration of work in niche markets becomes even worse. So here we have greater and greater concentration, less and less competition, so that leads me to think that we need to increase competition, but, with the power of these companies, how would you suggest we went about it?
  (Mr Simms) One of the things that we call for in the report, and it would require a collaboration between the major anti-trust and competition authorities, especially amongst the OECD countries, we have called for an ad hoc, and, if you like, experimental, competition investigation that would look at this issue in a global context. To answer one of your specific questions, we can tell you that quite a lot of the Andersen pie has gone to Ernst & Young and Deloitte Touche Tohmatsu, in particular, I think increasing their own staff by about 15,000 each and nabbing offices worth about two billion dollars in book value, or at least it was before the crash. I think there is no short-cut to having a root and branch review of the implications of the increasing concentration of the market, and certainly, if we reprint our report, we will have to change the title to the "Four Brothers", because I think the court ruling, in Houston, has effectively dealt one of the final death knells to the future of Andersen. I think there is simply not a short-cut to having a fundamental root and branch review of the implications for the full range of markets that they still occupy, and I know this is something that both Karl Van Miert an EU Competition Commissioner, had wanted to do, and it is also something that Frits Bolkestein, the Commissioner for taxation and the single market, even though it is not his specific area of competence, has said that he thinks is necessary.

  230. Where would the legitimacy lie, and how internationally would we go about achieving this change?
  (Mr Simms) I think this is a challenge which faces us across the professions and across the architecture, the perhaps now fading debate on the new international economic architecture. I think there is no short-cut to having the kind of institutions at a global level which we take for granted at the national level now, in one or two areas with the World Trade Organisation, the IMF and the World Bank we have that, but in terms of the more fundamental issues about corporate regulation in the global economy they simply do not exist, and I think it is perhaps inevitable, sooner or later, that they will be needed. There has been, under the aegis of some of the UN organisations, like UNCTAD, a discussion of increasing co-ordination and-information-sharing between competition authorities, but this has not happened in any meaningful way, in which increasingly concentrated sectors could be brought to book, in a way which would have any implementing powers to break up sectors, or ensure that there was proper competition and proper markets operating. I have to say, I do find it deeply, deeply ironic that, for a profession whose job is keeping the market economy going, they have effectively escaped any meaningful competition and meaningful markets themselves.

  231. And no doubt have an impact on trade, and, given that you are interested in Jubilee 2000, has huge implications, I am sure, for the work that we have to do in alleviating world poverty. You have mentioned a number of organisations, IMF, World Bank, UN, no doubt the Commissioners, who, or where do you think, the responsibility lies for building what effectively you are describing as a new structure?
  (Mr Simms) I think there are a number of models that one could use. And, I have to confess, I might be slightly busking, in answer to your question, here, but I think that, in terms of legitimacy, if bodies are to have legitimacy in the global system at the moment, whether you are talking about something that is directly administered by, or whether it is something where a debate is begun by one of the specialised UN agencies but then free-floated off to be an independent institution, it is the role of UNCTAD, in communication and reference to the other major financial institutions, to start that debate. And indeed they have started that debate, but because of the way that UNCTAD, as an institution, effectively has been emasculated, over the last decade or so, it certainly does not have the clout to push anything like that through, but I think it is probably an appropriate place to begin a debate. But it would necessarily involve bringing together representatives of the existing competition authorities, both national and regional, in the sense of Europe.

  232. But, presumably, there would be huge resistance from some quarters; so, we are at the early stages of the debate, how long do you perceive the process taking?
  (Mr Simms) I think it is a cyclical debate, because, in one sense, we have been here before. There were many attempts, in the late eighties and the early nineties, to establish an international code of conduct for transnational corporations; that was, shall we say, to put it politely, effectively stymied, but got quite close to doing something interesting. And it is a debate which has begun again. And maybe I could bring in my colleague, Deborah Doane, here, because there is a range of things which are looking not specifically at the accountancy profession but at developing global models for corporate regulation, things like the Global Reporting Initiative. Do you want to comment on that a bit?
  (Ms Doane) It seems to me there are a number of issues here. I will start with your point, then I will take a step back. You are looking at somewhat down the road, I suppose a vision, if you are to be optimistic, but the question is, what can we do at a national level and then a regional level and then an international level; these things snowball, do they not? So when we are looking at things like social and environmental regulation, which I am passionately interested in, it happens with different national governments, so France is regulating this area, The Netherlands is, Denmark, gradually you have these things building across the European level, then there becomes an impetus to look at them on a global level. It would be a monumental challenge, and I do not admire that challenge that you have to face, we push from the outside, for you to say, "We need an international competition authority and to get that rolling," you do need things to snowball an agreement amongst a cluster of states before these things can take place. The OECD has been doing some interesting things, and if we look at the regulation of multinationals under the OECD Guidelines for Multinational Enterprise, there was a very good consensus about how you could establish guidelines. Each OECD country signed up to it; where the failure was, with the individual states to implement those guidelines. But I will congratulate states, in that at least there was an effort to come up with a consensus on what a standard set of guidelines should be, about corporate behaviour in international regimes.
  (Mr Simms) And then, hopefully, from the point of view of maybe beginning with initial guidelines, there is the hope that they mature into proper regulation.


  233. You said there is a lack of competition in the Big Five; do you yourself think that that is a case for referral to the Competition Commission in the UK?
  (Mr Simms) I would have to agree with you, yes, I would.

  234. That was a question I asked, it was not a statement?
  (Ms Doane) Can I just make a response to that. One of the problems with the new competition regulation in the UK is that it fails to look at wider issues beyond basic consumer issues, so it does not look at public interest any more, is what my understanding of the new competition regime is, it does not look at wider issues on how these groups would impact on—

  Chairman: Okay; that was just a simple question. So we will move on.

Mr Plaskitt

  235. At the end of your very interesting document, you make a list of recommendations, changes you think you would like to see in the accounting industry. As we have heard this morning, it is fundamentally self-regulating. To what extent do you think we can rely on that self-regulating structure to deliver any of the changes you would like to see; do you think it is capable of delivering any of them?
  (Mr Simms) If I am honest, no, I do not, and there have been a couple of historical references, and, to take us back to perhaps one of the more dramatic instances, I would say, in J K Galbraith's appraisal of the circumstances that led to the great crash in 1929, he observed that, the nature of regulation of the financial community at the time there, that the problem with regulators is that they tend to be vigorous in youth, rapidly moving to a complacent middle-age, and then either becoming senile or arms of the industry that they are supposed to be regulating. I think what we heard earlier was a situation in which some regulation already was literally an arm of the industry that it was supposed to be regulating. I do not believe that there is adequate independence there, I believe they have become fundamentally out of touch with public expectations of corporate behaviour. I do not believe that the audit process that they are overseeing is in touch with the real world. I think, because it leaves off-sheet all the things which most people consider to be important, which are social impacts and environmental impacts, it views the business community as a limb separate from the body of the public that it is a part of, and I think what the regulatory process has to do is to reattach that particular arm of business to the body of the general public.

  236. So does it require, in your view, statutory intervention?
  (Mr Simms) Yes, I think it does.

  237. Is that the only means of bringing about the changes that you want?
  (Mr Simms) I think there is a whole host of ways in which the industry can begin to get its act in order, and we list off a number of initial and tentative suggestions. I think there is a way in which the culture can be changed by bringing in wider stakeholders. But I believe that, ultimately, parameters do need to be set, and new parameters do need to be set, and there are one or two initiatives, that we are a part of at the moment, that are attempting to do that, which my colleague, Deborah, can talk about. We are proposing a new Bill for corporate responsibility.
  (Ms Doane) Statutory regulation that we are looking at, you have probably seen the Early Day Motion 11/30, for the corporate responsibility Bill, looking at, in effect, stakeholder governance of companies and their wider social and environmental responsibilities. The question is, right now, how are companies made accountable and who are they made accountable to. You were saying do we need statutory; how do you define "statutory". What we are calling for is, in effect, statutory obligations for companies to consult with stakeholders, and the Company Law Review, the OFR , misses that point. It is not a mandatory requirement to consult with your wider stakeholders, nor is it a requirement, mandatorily, in the OFR, to report on social and environmental impacts. The problem now is that companies, through non-exec. directors, non-exec. directors get their information from inside a company. So it is the same problem repeating itself over and over. What we are seeing stakeholder accountability would do, it is not bureaucratic regulation, it is not through external governments, regulators, stepping in, in every instance, but it is having, at the first instance, wider stakeholder accountability, which would hold companies to account. And, in fact, the nature of that information is more transparent, and so the market, in effect, works. It is adding information to the market. At that point, there should be, there does need to be an independent body that is made up, not of just the auditors and the accountants, but of wider stakeholder interest, that reviews the performance of companies.

  238. Capital is pretty footloose around the globe; if we were to introduce statutes of the sort you are proposing here in the United Kingdom, what would the economic impact be?
  (Ms Doane) In terms of what, can you say?

  239. As I hinted at the outset, capital is pretty footloose. Suppose we enacted a law, along the lines that you are saying, what would the economic consequences be?
  (Ms Doane) I would hope to see that companies, Andrew referred to the intangible asset base, would be required, in effect, to internalise their externalities, if you will, so the true cost of their business; so actually I think it would ensure that things, reporting of profits is more meaningful, and ultimately, I think, probably better distributed, on the whole.

6   Not reproduced. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 2 September 2002