24 December 2015
Week in Brief: BUSINESS AND THE CITY
ADDING UP, TAKING AWAY: It’s been a bad year for accountants, at least for the major UK firms. Increasingly they find themselves in the firing lines from disaffected clients and shareholders, mostly in relation to audit work, but also for problems with their advisory roles. KPMG is the one in the public eye at the moment, where much of the discontent is internal, as partners criticise the firm’s management for falling revenues (down 2.6%) and profitability (down 7%). This has occurred in spite of £200m being injected into the business to support technology and systems, and the creation of ever increasing numbers of partners –which should lead to revenue going up. Instead, partnership earnings have gone down 13%. Adding to the firm’s discontent, their great rival E&Y (formerly Ernst and Young) has pulled ahead of them on almost every measure of success. In the Belfast office four senior partners, including the firm’s local chairman, have been arrested on a range of charges relating to tax evasion.
But the biggest cloud over the firm is the still growing one of its role in the collapse of the HBOS banking group. KPMG was the auditor of the bank prior to its collapse in 2008 and a Parliamentary enquiry has recently heavily criticised the accountants for not spotting the degree of risk the bank was running and in particular, for its approval of the bank’s loan loss provisions, which proved to be totally inadequate. KPMG has an unfortunate record on bank audits – the local regulator is probing its audit role at Bank of New York Mellon which has been confusing its own money with that of its clients, and in the UK for its role as auditor of the Co-operative bank which turned out to be £1.5bn light on assets after an attempt to buy a portfolio of Lloyds branches fell apart two years ago, amid many lurid allegations about the banks management and their abilities.
KPMG is not the only firm with problems – PWc – formerly Price Waterhouse Coopers–had to settle a major claim earlier in the year in relation to its audits of Cattles, a secondary lender; and Grant Thornton has continuing battles over its role on behalf of the Department of Trade and Industry in its investigation into and the collapse of the Tchenguiz family property empire, and now over its role as auditor of the Globo mobile phone business, which collapsed in October this year. Not a great time to have unlimited liability in an accountancy firm…
YET MORE OIL: We cannot avoid this continuing story; the oil price continues in more or less free fall, now trading at just under US$36 per barrel. Perhaps needless to say, this is a recent record low and there is still no sign of the pumps being switched off – though the lack of space to store much more of the black stuff may force this onto producers soon. Cheap energy is of course overall a “good thing” for economic growth generally, but the dislocation caused to individual producers and oil dependent states by such sudden movements is very damaging to financial and currency stability, and also politically in some countries, at least in the short term. Whatever the original reason for the upswing in output and endless drop in prices – and most observers now blame the Saudi government for a failed attempt to force high cost shale producers out of the market – the fall has become almost self-perpetuating as the oil states try to stabilise falling state revenues by producing ever more of the stuff.
STACK IT HIGH: Ken Morrison is one of Britain’s great business successes, building his father’s Bradford egg and butter stalls into one of Britain’s big four supermarket chains. Ken had his own way of doing things and continued to run Morrison’s long past standard retirement age. His last great coup was the takeover of struggling rival Safeway, for which he was much criticised when the merged vehicle proved slow to integrate; but in the end proved successful, enabling Sir Ken to finally retire on a high note. Since then Morrison’s has struggled again, not least because it was too slow to grasp internet technology and a linked doorstep delivery model. The Morrison family disposed of a large chunk of its shareholding – realising some £400m in cash. Now it has come to light that Sir Ken has been investing some of that in great rival J Sainbury. “Why not?” said the grand old man when asked by journalists as to why he had done this – pointing out he had spent only about 1% of his fortune on his Sainsbury stake, and held very much more in his continuing stake in Morrison’s. Maybe he should have put more into Sainsbury – over the last twelve months its share price is up 9% whilst the business he founded has fallen 15%.
CRATCHIT GETS THE MEMO: In a seasonal message, the CBI has warned that the government’s intention to raise the minimum wage and its continuing loading of costs onto employers will cause a growth in costs that will affect profitability, hinder new investment, and slow growth. This, it said, will lead to higher unemployment. A survey of its members has shown that 43% of them intend to increase headcount and are expecting a good 2016. This survey represents employers with total employees of around a million, compared with the UK labour force which is thought to be about 13 million, but is probably a reasonable cross-section of views and intentions. The survey also shows caution on wage rises – only 16% planned to give rises above inflation (with inflation hovering around nil, that is not hugely demanding!) and most expected inflation linked or nil rises (and presumably further cuts in the coal allowance for the office fire.). But it is the respondents comments on longer term prospects that caused the CBI to give its further warning regarding rising costs and reversals of employment growth. Most respondents with large number of low wage employees expressed great concerns over the above inflation growth in minimum wage costs and other social costs such as funding the government’s (generally regarded as successful) apprenticeships scheme. This, several critics of the CBI position have observed, is in business’s long term interests to meet the improved skills base that the CBI has often called for; nor does the CBI call for restraint to boardroom pay to further keep costs down. Mr Scrooge had no comment.
A Merry Christmas to all our readers
KEY MARKET INDICES: (at 15th December 2015; comments refer to change on week; $ is US$)
UK£ Base rate:0.5%, unchanged: 3 month 0.57%(steady);5 year 1.34%(rising).
Euro€: 1 mth -0.12% (steady); 3 mth-0.11% (falling); 5 year 0.15% (steady)
US$: 1 mth 0.87% (falling); 3 mth0.73% (rising); 5 year 1.64% (rising)
£/Euro: 1.37,£ steady
£/$: 1.49, £steady
Euro/$: 1.0, €steady
Aluminium, tonne: £1,010rising
Copper, tonne: £3,148 rising
Oil, Brent Crude barrel: $35.90,further fall
Wheat, tonne: £112, steady
LondonStock Exchange: FTSE 100: 6,035 (rising). FTSE Allshare: 3,340 (rising)
Briefly: After the dramas of the previous week this was a return to stability, with most commodities and markets reversing previous losses. The exception was of course oil, now hovering ever lower at around US$36 per barrel. The markets will now be in slow motion until the resumption of business life on 4th January 2016 – when we hope to see you again.