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Room for improvement at the Big 4…

Oh dear. It certainly wasn’t a great performance by the Big 4 when it came to their annual inspections by the Financial Reporting Council (FRC) in the UK.

The quality of the audits performed had decreased and for KPMG in particular, according to the FRC “there has been an unacceptable deterioration in quality”.

The FRC is an independent body who check the quality of the audits undertaken by the 8 largest firms in the UK. Think of it as “auditing the auditors”.

They rate the quality of the audits undertaken using the following scale:

• Good (category 1)
• Limited improvements required (category 2A)
• Improvements required (category 2B)
• Significant improvements required (category 3)

Overall results from the most recent FRC inspections during 2017/18 show that 72% of audits required no more than limited improvements (compared to 78% in 2016/17). Or to put it another way, 28% of the audits reviewed required improvements (category 2B) or significant improvements (category 3).

For KPMG though things were particularly bad. When the FRC looked at their audits within the FTSE 350 (the largest 350 companies on the London stock exchange), they found that 50% required MORE than just limited improvements (compared to 35% in the previous year).

If you take a step back then this really isn’t very good is it. If you went to a restaurant where 50% of the meals served required more than limited improvements you’d be unlikely to go back to that restaurant again and I’m sure that restaurant wouldn’t be in business for much longer.

KPMG are going to face increased scrutiny by the FRC in the next round of inspections. 25% more KPMG audits will be examined over the 2018/19 cycle of work and the implementation of their Audit Quality Plan will be closely monitored.

So what went wrong?

The FRC noted that there were a number of factors. These included a failure to challenge management and show appropriate scepticism across their audits.

Stephen Haddrill, CEO of the FRC, said “At a time when public trust in business and in audit is in the spotlight, the Big 4 must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances. Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders.”

Whilst the level of quality found within the Big 4 audits fell, the performance of the mid tier companies improved. The FRC inspections on BDO, GT, Mazars and Moore Stephens showed general improvements in the quality of inspected audits.

The FRC’s Audit Quality Review is explained in more detail here and if you’re interested in reading the reports on the individual firms they can be found on the following links:

BDO LLP Public Report 2017/18 (PDF)

Deloitte LLP Public Report 2017/18 (PDF)

Ernst & Young LLP Public Report 2017/18 (PDF)

Grant Thornton LLP Public Report 2017/18 (PDF)

KPMG LLP Public Report 2017/18 (PDF)

Mazars LLP Public Report 2017/18 (PDF)

Moore Stephens LLP Public Report 2017/18 (PDF)

PwC LLP Public Reporting 2017/18 (PDF)

Don’t put your foot in it…

If you look at the finance side of running a bar then things should (in theory) be quite simple. Revenue is what your customers pay for the drinks they buy and the main expenses are the amount you pay to the brewery for the beer, staff wages and property costs.

Over in Belgium though some bars are facing a unique problem which is causing unwanted expenses but it looks though that they are coming up with some ingenious solutions.

Belgium is famous for its beers. Monks from local Abbeys started brewing different types of beer in the 12th century and nowadays some of the bars in tourist areas in Brussels and Bruges stock several hundred different types of beers.

Each of these beers has their own particular glass which it is served in. These glasses come in all shapes and sizes and are nice looking objects.

Unfortunately for the bar owners they are also very collectable in the eyes of certain tourists. As a result, lots of these glasses go missing as tourists take them for a souvenir.

This can involve a significant number of glasses. Tens of thousands of glasses a year are stolen in Belgium and replacing these glasses represents a significant cost.

Some of the bars are coming up with innovative ideas to stop the thefts.

The Bruges Beerwall café had 4,000 glasses taken in one year and has now introduced security alarms which are attached to each glass. If a glass is taken past the scanner at the door an alarm sounds.

A slightly less hi-tech solution to the problem (but arguably as effective) can be found at the Dulle Griet bar in the Belgium town of Ghent.

The bar stocks over 500 different types of beers and has some very attractive glasses in which these are served. If you want to have a drink though you have to hand over some security to make sure you don’t steal the glass.

The security is a shoe.

And not just any shoe but one of the shoes you are wearing. You hand it over and it is put in a basket which is then pulled up to the ceiling so that you can have a drink knowing that your “security shoe” is safe in the basket.

A great idea by the bar to keep the thefts of their glasses to a minimum and it has proved so successful that it has now become a bit of a tourist attraction with people popping in to look at the basket and have a drink.

One thought does spring to mind though and with 500 tasty beers on the menu I wonder how many customers have had one too many drinks and woke up in the morning with different shoes on each foot….

Grab your goat and let’s go…

Creativity and innovation in any organisation should always be welcome and whilst technology is often at the forefront of innovation it is sometimes the really simple ideas that can create benefits.

Unfortunately, in this particular situation it didn’t quite go according to plan.

The initial idea was good. Officials in charge of the 1,200 acre Minto-Brown Island Park in Oregon in America were concerned that several invasive plants were taking over the park and killing off a number of the native flora including maple and hazelnut trees.

The solution put forward was to create a crack team of 75 goats who would eat the invasive plants such as the Armenian blackberry and the English Ivy which would then mean that the native flora would thrive.

75 goats were duly obtained from a company called Yoder Goat Rentals (as an interesting aside I wonder how many of you were aware that you could rent a team of goats. I certainly wasn’t.)

The goats got down to work but 6 weeks later the project was cancelled.

There were a number of issues.

Firstly, the goats were fairly relaxed about what they ate. In terms of the invasive Armenian blackberry for example they decided to eat the tasty blackberry leaves but left the prickly bramble. This resulted in the plant carrying on growing.

Secondly, they didn’t show any distinction between the (tasty) maple and hazelnut trees which they were supposed to be helping and the invasive plants.

Thirdly, the total cost of the 6-week pilot programme was $20,719 which was nearly 5 times the $4,245 cost for a normal parks maintenance man supported by a prison inmate work crew.

Finally, according to a report to the city council the goats “had a barnyard aroma”.

In summary, a nice try but it didn’t quite work. Still, as any successful business person will surely agree, you don’t progress unless you try. Better luck next time and at least the goats had a nice 6-week holiday in a lovely park…

Are you better looking than your boss?

So who’s better looking – you or your boss?

Well, if you are male and your boss is also male there could be some disappointing career news for you if you think you are better looking than your boss.

A study has suggested that male bosses are less likely to promote good-looking men who work for them.

The study by University College London’s School of Management concluded that good-looking men were considered competent by their male bosses but as a result were also seen as a threat to them and their own personal career aspirations.

This raises an interesting point. Organisations no doubt want to employ the most competent people but if a male boss is reluctant to recruit or promote good-looking men because they take the view they are a threat to them personally then it means that good-looking men could be discriminated against whether or not they are competent.

Dr Sun Young Lee, the lead researcher on the study was quoted as saying “organisations want to hire competent candidates but individuals have their own agenda. When employing someone, they do not want the newcomer to do better than them and show them up”.

“What about good-looking females” I hear you say?

The study concluded that the same prejudice did not apply to women. Being a good looking lady was not associated with competence according to the study.

The study was published in the Organisational Behaviour and Human Decision Processes journal and Dr Lee felt her results suggested that organisations should consider appointing external recruitment consultants to avoid personal preferences impacting on recruitment decisions.

One additional point though is that if you yourself are male and have recently been overlooked for a promotion by your male boss then surely the only reason you didn’t get the promotion was because you are better looking than him…

Would a good liar make a good accountant?

Do you have children? Have they ever told you a lie? Even a small teeny weeny lie?

Well, if they have then although you may not be particularly pleased with them, it may actually mean that they have good memories and excellent thinking skills.

Psychologists at the University of Sheffield tested 135 children and found that those children that lied performed much better than the honest children in the group.

The children in the study were aged between 6 and 7 years old and during the study they were given a trivia game. The answers to the trivia game were on the back of the card which they had been given. Initially, each child was in a room accompanied by one of the researchers but the researcher then left the child alone with the card with the answer on the back.

Before leaving the room the researcher told the children not to look at the answer but what the children didn’t know was that when they were alone in the room there were hidden cameras which were monitoring whether they would look at the answers on the back.

25% of the group subsequently cheated and looked at the answers on the back of their cards but claimed that they hadn’t cheated when the researcher returned to the room.

At a later stage, all of the children had to perform a separate memory test and the research found that the children who had lied performed significantly better than those children who didn’t lie.

Dr Tracy Alloway, project lead from the University of North Florida was also involved in the research and said that “this research shows that thought processes, specifically verbal working memory, are important to complex social interactions like lying because the children needed to juggle multiple pieces of information while keeping the researcher’s perspective in mind”.

This has got me thinking as a lot of the readers of this blog are accountants or studying to be accountants.

“Thought processes”, “verbal working memory”, “juggling multiple pieces of information” and “keeping other people’s perspective in mind” are all skills which many accountants need.

Does this mean that you would make a good accountant if you were a good liar when you were a child?

Whatever your answer is, I’m not sure I would believe you…

The Captain was sober, the First Mate was drunk. Was that true? Was that fair?

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I’ve been a qualified accountant for a fair few years now.

I had the pleasure of bumping into my first auditing lecturer last week. It was at a business mixer event and even though it was a long time since we last saw each other he really hadn’t changed that much.

We got talking and I reminded him of something that he told me that I’ve remembered ever since and to me is a great way of explaining what is meant by “True and Fair”. Those of you that have studied financial reporting papers will be aware of the importance of “True and Fair” in connection with financial statements.

In summary, financial statements should provide what is generally understood as a true and fair view of the reporting entity’s financial position, performance and changes in financial position.

I always remember my lecturer telling me the story of the ship’s captain that was having a problem with his first mate who was always drunk. In the end the captain wrote an official entry in the captains log saying “Today, the first mate was drunk.”

The first mate was upset about this and the next time he took charge of the ship when the captain was asleep, he wrote in the log that “Today, the captain was sober”. This of course implied that on other days the captain wasn’t sober as he was drunk.

Now, the statement “today, the captain was sober” was clearly true but I’ll leave it up to you to decide whether or not it was fair!

EY confirm the women were real

Some of you may have heard of the website Ashley Madison.

For those of you who haven’t heard of Ashley Madison, it’s a website where married people can register to meet other married people without their respective husband or wife knowing and then have an affair.

In fact, some of you may be registered members of the site (this does raise the question that if you are a registered member of Ashley Madison and are reading this business blog then at the moment you are finding business stories more interesting than having an affair so well done on that).

Ignoring the rights or wrongs of a website facilitating affairs, Ashley Madison has had an up and down ride over recent years.

Back in 2015, they were hacked. As a result the personal details of their users were leaked and there were a lot of users. When I say “a lot”, there were 32 million users.

The situation got worse for Ashley Madison though.

As well as their systems being hacked and details of who had signed up being leaked, it turned out that the vast majority of users were men and of the women who had signed up a significant proportion were Bots (i.e. a piece of software) or prostitutes.

All in all, not great selling points when trying to encourage new members.

In an attempt to build up trust (if trust is a relevant word for people looking for affairs that is…), Ashley Madison commissioned Ernst & Young to cast an eye over the membership data and see if it stood up to scrutiny.

There were some interesting results including the fact that 15,542 new members signed up each day in 2017 (that’s nearly half a million new users per month).

There were also more active women on the site than men. Globally, the ratio of active males to active females was 1 to 1.13 but there were variations on a regional basis ranging from Australia where the male to female ratio was 1 to 0.78 and Columbia where the ratio was 1 to 2.39.

Ernst & Young also reported that “The Client had used Bot programs to generate message activity with paying customers in prior years. The Bot programs were decommissioned in 2015 and our procedures related to calendar 2017 found no evidence that the use of Bot programs previously operated had been reinstated.”

So, in theory the registrations are human and there’s no danger of falling in love with a bot.

The full Ernst & Young report can be found at www.ashleymadison.com/2017report but I would be careful as if you’re viewing this on a computer at home and your husband or wife finds you’ve been visiting ashleymadison.com then there could be some difficult questions to answer.

Then again, if you start typing in the website and your web browser recognises it from a previous visit to that site then maybe…

Nicely said Mr Musk

We’ve all been there haven’t we? Long boring meetings that don’t seem to be going anywhere.

Maybe you’ve tried to give the impression of being interested in what was being said but in reality the meeting wasn’t relevant for you and your mind was wandering to other more interesting things.

Well, if you’re not a great lover of excessive meetings then you are not alone. In fact, you share the thoughts of an incredibly successful and admired business person. Namely, Elon Musk.

Mr Musk’s current business interests include Tesla and SpaceX.

In the past he founded x.com which later became PayPal. Paypal was subsequently bought by eBay for $1.5 billion.

He currently has a net worth in excess of $20 billion.

But what does he think about meetings?

In an email to his staff that was leaked to the electrek website there were a few productivity recommendations:

In the words of Mr Musk, these include:

– Excessive meetings are the blight of big companies and almost always get worse over time. Please get of all large meetings, unless you’re certain they are providing value to the whole audience, in which case keep them very short.

– Also get rid of frequent meetings, unless you are dealing with an extremely urgent matter. Meeting frequency should drop rapidly once the urgent matter is resolved.

– Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.

– Don’t use acronyms or nonsense words for objects, software or processes at Tesla. In general, anything that requires an explanation inhibits communication. We don’t want people to have to memorize a glossary just to function at Tesla.

– Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.

– A major source of issues is poor communication between depts. The way to solve this is allow free flow of information between all levels. If, in order to get something done between depts, an individual contributor has to talk to their manager, who talks to a director, who talks to a VP, who talks to another VP, who talks to a director, who talks to a manager, who talks to someone doing the actual work, then super dumb things will happen. It must be ok for people to talk directly and just make the right thing happen.

– In general, always pick common sense as your guide. If following a “company rule” is obviously ridiculous in a particular situation, such that it would make for a great Dilbert cartoon, then the rule should change.

Nicely said Mr Musk.

She did what for a living?

Businesses can pay significant amounts of money for celebrities to endorse their products.

For example, the American singer and actress Selena Gomez is reportedly paid USD 550,000 per post that she promotes to her 133 million Instagram followers. Cristiano Ronaldo, the Portuguese footballer on the other hand “only” receives USD 400,000 per promoted post to his 120 million followers.

But not everyone is happy for famous people to be associated with a product.

Charles de Cazanove is a Champagne house that was founded by Charles de Bigault de Cazanove way back in 1811.

The Cazanove brand is now owned by the GH Martel Group and they have launched their latest Champagne vintage in a promotion with Clara Morgane. The champagne is imaginatively called “Le Champagne by Clara Morgane” and sells for €50 a bottle.

So, do you know who Clara Morgan is?

If you don’t and you’re a lady then ask your husband or boyfriend if he knows who Clara Morgan is.

If he does know who she is then there is probably another question you should ask him as Ms Morgan is famous as an adult movie actress.

Although Ms Morgan now performs with her clothes on (she’s a singer), it’s not good enough for a descendant of the founder of the Cazanove brand.

Count Loic Chiroussot de Bigault de Cazanove, who apart from needing a very long business card, isn’t happy that his family’s name is being associated with an adult movie star.

He reportedly said that “I am truly shocked. It’s simply scandalous. How could anyone associate the name of my illustrious family to that of Clara Morgane? It’s inconceivable.”

Although the family sold the brand back in 1958, the Count has been reportedly getting lawyers to try to remove his family’s name from the Clara Morgane vintage.

Either way, with all this publicity I’m sure the GH Martel Group are drinking to the success…

How much do Big 4 partners get paid?

KPMG UK released their results last month for their most recent accounting period and they showed a fall of 10% in pay for the KPMG partners when compared to the previous year.

Although the firm’s revenue rose by 5% to £2.2 billion, it’s profit fell to £301 million.

The firm wrote off a number of technology investments.

KPMG, like the rest of the Big 4, have invested heavily in technology companies in an attempt to stay at the forefront of technology.

Unfortunately for KPMG, not all of their investments were successful. Bill Michael, the Chairman of KPMG, highlighted one investment that hadn’t done so well – KPMG had committed £3 million to Flexeye, a tech company that analyses large amounts of data and it hadn’t proved to be the wisest investment.

Whilst profits fell, it hasn’t all been bad news for KPMG as their audit practice grew by 10%.

Back to the average pay of the KPMG partners though and although their average pay fell by 10% I’m sure that the partners will still be able to afford to buy a sandwich for lunch.

The average pay for the KPMG partners was £519,000 each.

That’s not too bad is it?

But how does it compare with the average pay from the partners of the remaining Big 4.

The most recent reported results show the following average pay per partner:

Deloitte – £865,000

EY – £677,000

pwc – £652,000

It looks like Deloitte partners will be having the more expensive sandwiches for lunch.