Category Archives: Accounting profession

Professional accounting theory and practice

Accounting profession, Banking, Economics

The FTSE100 and the UK Economy

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Every day, the BBC – in fact the whole media circus – faithfully report the progress of the FTSE100 share index, as though it were a portent of our economic future. Every day so called “experts” explain in detail the reasons for FTSE100 movements seemingly on the assumption that it still relates to the UK economy. But recently some mystification has been expressed over how, when the UK economy is doing so badly – resolutely refusing to respond to the inspirational George Osborne, even losing its triple A rating – yet the FTSE100 is doing so well, already up 8% this year following 5.8% rise last year, threatening to follow the Dow to hit an all-time high. There is a definite disconnect between FTSE100 share values and the real economy. Bank of England governor Sir Mervyn King’s enthusiasm for quantitative easing only further emphasises that disconnect, boosting share values but having no effect at all on the real economy and jobs.

The FTSE index no longer reflects expectations about the UK economy. So what does it reflect? There must presumably be some connection between share prices and expectations of future gains. But those future profits no longer relate to what’s going on in the UK. The FTSE has become a global index, comprising companies like the dreaded Glencore, Anglo American, Serco, Xstrata, and like global companies. Oil and gas and pharmaceuticals account for nearly 30% of the FTSE’s value. Basic resources (mining), banks and financial services make up another 30+%. And an increasing number of foreign companies find a London quotation beneficial, such as the recent Russian additions, steelmaker Evraz and gold and silver producer Polymetal International. Around two thirds of FTSE100 companies have limited relevance to the real UK economy.
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Accounting profession, Company Law, Competition, Corporate Governance, Corporate Ownership, Corruption, Economics

Centrica and the Existential Lie

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The media expressed shock and horror that Centrica should jack its prices up to its customers and pass £1.3bn of its surplus profits back to its shareholders. But why? That’s what Centrica’s directors think they are there for. And the media and most everyone else appears to share that misunderstanding that it’s the legal duty of company directors to maximise shareholder wealth. But it’s simply not true. It’s based on a lie. The capitalist system was much more soundly based than that, but is currently being destroyed by such dishonest, even criminal corruptions of the truth.

In real competitive markets, exploitation of customers, employees and the rest, for the sole benefit of shareholders, is constrained by competition. So everyone benefits. But where a market is carved up between a small number of monopolistic giants, exploitation is inevitable. Some markets are like that. Gas is one. So are most privatised markets because government attempts to create pseudo competitive conditions invariably fail, succeeding only in establishing an additional layer or two of bureaucracy to handle the unavoidable extra regulation.
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Accounting profession, Banking, Corporate Governance, Merger & Acquisition

UK PLC For Sale

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Sir Nigel Rudd is in the news again for selling off some more of UK Plc to foreign competitors. This time he has disposed of the hi-tech railway signalling and control equipment business of Invensys for £1.7bn to German competitor Siemens, recipient of the government’s £1.4bn Thameslink rail contract, in preference to Derby based Bombardier.

Rudd has himself been mentioned a couple of times on this site. He was Chairman of Boots the Chemist and oversaw its disposal to a private equity operation, got it saddled with most of the debt raised for its acquisition, and moved its registration to the tax avoiding Swiss canton of Zug (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). The other mention was as a member of David Cameron’s special advisory committee of ten on economic strategy (see http://www.gordonpearson.co.uk/21/limits-of-economic-advice-to-the-coalition/). He was one of the asset stripping accountants on the committee. Asset stripping is in his blood, his speciality since he started out in 1982 at Williams Holdings. It is curious how our politicos reward such activity with knighthoods and ask such people for their advice.
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Accounting profession, Audit profession, Competition, Globalisation, Political Decision, Regulation, Shareholder Value, Taxation

The Real Costs of Globalisation

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Globalisation reduces the cost of goods and services as their production migrates to the lowest cost parts of the world. The lower prices are a benefit for everyone and the low cost parts of the world, which are only now beginning to industrialise, gain tremendously in terms of economic growth and employment. So globalisation is a good thing, But there are some downsides. Jobs disappear in the advanced economies as production moves to the developing world. Up to now, the advanced economies have grown, bar a few booms and busts, more or less continuously, for the past 250 years in UK’s case. But the migration of jobs now seems likely in the advanced economies to be permanent and to be bringing the growth phase of their economic development to an end.

Permanent changes like this are difficult to forecast, and even appear difficult to recognise when they have happened. The initial response is to identify the change as a blip. Commentators today are identifying this quarter’s UK GDP data as indicating the end to the ‘double dip recession’. If miniscule GDP growth is recorded two quarters on the trot, commentators will surely be referring to ‘green shoots’. But it is equally likely that the slightly encouraging data this quarter is a blip and from now on, the lack of economic growth will be the steady state in advanced economies, which might more aptly be described as post-industrial.
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Accounting profession, Economics, Political Decision, Regulation

Labour’s Balls on Taxation and Spending

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Ed Balls is talking about Labour’s ‘big strategy’ decisions on taxation and spending. He wants to be seen as ‘ruthless and disciplined’ about ‘every penny’ of public spending. Hence his ‘zero-based budgeting review’, which is really a bit of motherhood flim-flam, totally devoid of specifics, dreamed up for the benefit of credulous voters.

The real problem with the economy is lack of demand. The mass of people don’t have the money, or the confidence, to spend unless they have to. So sales are slow and businesses are similarly reluctant to invest till better times return. But the politicians, including Balls, are locked into their simplistic undergraduate understanding of the economy. That was the situation when FDR made his inaugural call that ‘the only thing we have to fear is fear itself’. It’s that fear that prevents Balls suggesting anything remotely like a new New Deal. In his fear, he’d rather be seen to be ‘ruthless and disciplined’ considering chopping ‘every penny’ of public spending, rather than proposing selective increases to the public spend to create jobs, financed by some higher rates of tax.
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Accounting profession, Banking, Competition, Corporate Governance, Corruption, Economics, Political Decision, Ratings Agencies, Shareholder Value

The Glencores, Xstratas and Blairs

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Almost 18 months ago Glencore first featured on this blog – Glencore and others are screwing the world – a posting which highlighted the predatory nature of financial monsters like Glencore. The Financial Times had reported Glencore’s ability and willingness to fix commodity prices for their own profit and everyone else’s loss and how they were expected to increase their monopolistic stranglehold in key markets. Glencore was in the news at that time because of its imminent initial public offering of shares to the London Stock Exchange which was expected to value the company at between £60 billion and £73 billion and facilitate its further expansion through mergers and acquisitions. The FT also reported how the world’s largest commodity trader had paid “almost no corporate taxes on its trading business for years in spite of bumper profits.”

The FT’s report described how Glencore had exercised their monopolistic power to raise prices in the Russian wheat market for a quick profit, at the expense of those millions already struggling on the breadline. That was revealing of the sort of business Glencore is, and the sort of business practices it was prepared to embrace in order to make its money.
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Accounting profession, Audit profession, Banking, Company Law, Competition, Economics, Management Practice, Political Decision, Ratings Agencies

Our Madmen in Authority: the Bullingdon intellectuals

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When J M Keynes used the term ‘madmen in authority’ he was referring to his contemporary equivalents of David Cameron and George Osborne. At the end of last year, though he talked about it incessantly, it was clear that Cameron had limited understanding of the need to rebalance the economy – see http://www.gordonpearson.co.uk/09/mr-cameron-doesn%e2%80%99t-understand/. The real business of making and distributing things for people to use and consume creates real jobs. But Cameron didn’t seem to understand the difference between that real economy and the speculative, bonus driven financial sector. He said he understood, but then always succoured up to his friends in the City.
His lack of understanding, or his duplicity, seems only surpassed by fellow Bullingdon intellectual and purveyor of the greatest budget shambles in living memory, Chancellor George Osborne.

The financial columns have recently suggested full state ownership of RBS was being discussed by senior ministers and treasury officials. It would cost around £5bn. But Osborne was against it. A rational objection was that it would mean taxpayers taking on full responsibility for the bank’s toxic debts, as opposed to the 82% responsibility they already have. But Osborne’s real reason was his dogmatic focus on cleaning RBS ready for sale back to the private sector, even though that won’t happen any time soon. Only Vince Cable has come out publicly in favour of nationalisation so as to boost lending to industry, especially innovative SMEs, in order to get the real economy moving again.
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Accounting profession, Audit profession, Company Law, Competition, Corporate Governance, Economics, Merger & Acquisition, Regulation

The Criminal Company

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The threat to the world’s liberty today comes from the monopolistic power of unregulated corporates. That is exercised mainly through banks such as Goldman Sachs and financial intermediaries and traders such as Glencore. A year ago the Financial Times ran a series of articles showing how Glencore fix commodity prices for their own profit and everyone else’s loss. The Russian wheat and corn harvest being threatened by drought, the FT reported how Glencore made speculative long term proprietary trades in wheat and corn. When wheat prices failed to rise sufficiently for a profit to be made over the period of Glencore’s trade, their man in Moscow ‘encouraged’ the Russians to ban wheat exports. That had the desired effect forcing prices up sufficiently to enable Glencore to close its earlier bets at a decent return. The obvious side effect of the price rise was that the struggling millions had to struggle that bit more. That’s the Glencore way of doing business. (See http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/)

Glencore is currently in the throes of taking over of its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata is already big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and is highly influential in thermal and coking coal. Using the Glencore business method, they will together be able to create and exploit prices of all these commodities and more. And with Viterra also acquired, they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival.
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Accounting profession, Banking, Co-operation, Competition, Corporate Governance, Economics, Political Decision, Regulation

The Road to Co-operation: Escaping the Bottom Line

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This book (http://www.gowerpublishing.com/isbn/9781409448303) is about a new direction for market capitalism, based on co-operation rather than the neoclassical idea of maximising self- interest. It is not argued from a moral or ethical standpoint, but has a hard-nosed foundation in economic theory. The Road leads from the predatory capitalism we suffer today to a co-operative and far more productive capitalism we could enjoy tomorrow.

Predatory capitalism is the inevitable result of encouraging almost anyone to trade in almost anything, not just sub-prime, but actually worthless, even imaginary, financial “products”. The aim is to create a fever of anticipation which sucks money out of the real economy (manufacture, distribution etc) into bubbles of speculation in derivative or imaginary “products” or in mergers and acquisitions.
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Accounting profession, Audit profession, Banking, Company Law, Competition, Corporate Governance, Regulation

Monopolistic Complacency and the Big Four

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A couple of “industries”, audit and management consultancy, which have deliberately entwined themselves round each other and called themselves ‘professional services’, have developed strongly monopolistic tendencies. The degree of industry concentration is truly remarkable: the four leading firms employ around 650,000 people, earn revenues of over US$100 billion, and take around 80% of the global market for large and medium businesses, plus a huge involvement in public sector consulting.

The big four ceased to be truly competitive decades ago. They now exist for the benefit of their own people, rather than their customers. It’s a carve up comparable to the various cartels and closed shops which existed in the City of London prior to the ‘big bang’. It seems unlikely to last much longer.
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