Strong stuff at the Lords

Strong words from Sharon Bowles at the Lords yesterday, about whether the Secretary of State should delegate responsibility to the UK Endorsement Board.

With the proposed new insurance standard, IFRS 17, the issues go further than unrealised profits, and credit is given to reduce liabilities, not merely for unrealised gains, but for anticipated future income, giving the appearance of capital.1 This cannot be proper accounting. These unrealised gains, and anticipated income can neither be used to service debt, pay down debt or invest in other assets, nor have any value as collateral. No way is it true and fair, and anyone endorsing it would surely have to be nobbled, which seems to aptly describe the UK endorsement board.

Three have been members of the former Accounting Standards Board, which has approved defective accounting standards in the past. Several were partners in accounting firms at the time banks were collapsing. Mr Ashley, former ASB member, was also a career KPMG partner, which the UK Endorsement Board website fails to note, and of course KPMG were the auditors of Carillion and HBOS.

In the case of former ASB member Mrs Wallace, at least the website references her connection to PwC, the auditors of Northern Rock, but it is silent about her time at Arthur Andersen. The Board includes another recent PwC partner, and a partner from Grant Thornton, which is currently defending itself, given the problems in auditing collapsed Patisserie Valerie. There is no mention that Board member Kathryn Cearns has worked for the ASB, and then for the law firm Herbert Smith Freehills, which as well as providing defence advice to PwC and KPMG, also instructed the ICAEW’s counsel to give the dubious ‘true and fair’ legal opinions for the FRC, from which the Government eventually distanced itself, as I discovered in FOIs.

Liz Murrell, an employee of the Investment Association, and Paul Lee, a consultant to the Investment Forum, are also on the Endorsement Board, and both those organisations are dominated by insurance companies whose accounts will benefit from using IFRS 17.

Who is there to represent the public interest, and act on the known lie that Brydon, and indeed the Government’s consultation acknowledge, that accounting standards alone cannot be true and fair. Who is there to represent the policyholders of insurance companies who, barring more Government bailouts will be the victims [when] accounting standards cause them loss. One could hardly wish for worse in terms of an unbiased view.

And no wonder they need protection from liability. Today is a bad SI. This is a bad SI, and we don’t need this Endorsement Board.

It is difficult to improve on that. (I stepped down from the Technical Advisory Group in February for reasons I made clear in a letter to Pauline Wallace, chair of the Board). This one will not go away.

[EDIT] The full transcript, including some equally fruity stuff from Lord Sikka, is here.

 

When accounting standards become dangerous

Excellent post from my colleague Mohammed Amin on the danger of IFRS 17 ‘accounting’.

I do not agree with him that the accounting method is ‘theoretically correct’, given that the standard states the insurance company’s shareholders funds at a figure that is significantly higher than it would be under ‘more conservative accounting’.

But we at UKSA are a broad church.

No place at the table

Appointments to the UK IFRS Endorsement Board were announced on Friday. As the UK Shareholders’ Assocation Tweet (above) says, indvidual shareholders will not be represented. Nor are policyholders, and while are there two academic appointments, neither of these is an economist.

More than a slap on the wrist

Sanctions against Deloitte and two audit partners in relation to Autonomy Corporation Plc

The Financial Reporting Council (FRC) today announces sanctions against Deloitte and former partners, Richard Knights and Nigel Mercer, following an investigation in relation to the audit of the published financial reporting of Autonomy Corporation Plc (Autonomy) for periods between January 2009 and June 2011 (the Autonomy Audits). An independent Disciplinary Tribunal made findings of Misconduct following a seven-week hearing during October and November 2019 and sanctions were determined following a hearing in July 2020.

Sanctions

  • Deloitte has been fined £15 million, severely reprimanded and has agreed to provide a Root Cause Analysis of the reasons for the Misconduct, why the firm’s processes and controls did not prevent the Misconduct and whether the firm’s current processes would lead to a different outcome.
  • Richard Knights has been excluded from membership of the Institute of Chartered Accountants for England and Wales for five years and has been fined £500,000.
  • Nigel Mercer has been fined £250,000 and received a severe reprimand.

 

Stretching the bonds

 

Another great piece on insurance accounting from the Eye this week. As we always say, support great investigative journalism and buy a copy, but the crux of the article is our longstanding claim that the potential costs of no-negative-equity guarantees have been drastically understated.

Apparently there have been complaints about this since October 2018 to the Financial Reporting Council (FRC), the accounting regulator. After nearly two years, ‘the dozy regulator’ has finally addressed the point, concluding that “the guarantees should be valued at what they would sell for in the market, and since most equity release providers who might buy them (they wouldn’t, in reality) all value them in the same way, there’s no problem!”.

The FRC did not ask shareholders or policyholders what value they might place on these products, of course.

“If and when the final reckoning comes for the life insurance companies, as it did for Equitable Life 20 years ago, it might well be the bean-counting that does for them.”

We shall see.

Wirecard illiquidity


Wirecard ticks all the Eumaeus boxes for things that went wrong for entirely predictable reasons. More on that later.

Meanwhile, the chart above shows the yield of the bond that Wirecard issued last September. Notice how it explodes a bit at the end. The Sam Woods theory is that such explosions are the effect of illiquidity.

Note the smaller blip upwards in the middle of October 2019 which happened to coincide with the FT’s revelation of internal documents from Wirecard pointing to “a concerted effort to fraudulently inflate sales and profits”.

Why would such a revelation affect the liquidity of the bond? And why would the later revelation this month that nearly €2bn had gone missing affect the liquidity so much that the bond is now only worth 20c?

Still, if Sam is right it looks a great buy. Repays in 2024 with a 99.5% probability of full repayment. Any offers?