Accounting: Vulture culture - today's FDs in a climate of uncertainty

These days, wherever two or three finance directors are gathered together, there is an all-pervading sense of gloom. As the 2009 reporting season gets into full swing, the downbeat note will only sound louder. The concerns shared by FDs, regulators and auditors, which a few weeks ago seemed manageable, are now threatening to spin out of control. If they can be classified under one heading then the word, according to one senior regulator, would be ‘uncertainty’. FDs find themselves hemmed in on all sides by bankers, auditors, clients and the general economy.

Let’s take the bankers first (after all, this whole thing started with them). Bankers appear to be developing split personalities depending on what day of the week it is. An FD may approach one and find a positive reception for their ideas, only to be told later that the proposition is now a non-starter. Why? Many banks are shifting the way they are assessing credit risks, often deciding to retreat from whole sectors. The result is that the average FD has no clue whether their banks will be there for them and for how much. Banks like to talk of relationships surviving the business cycle; the FD community now needs that to be more than fine words.

If the banks are unreliable, then so is the customer base. Last autumn, the chief executive of a major drinks manufacturer could have envisaged, with some equanimity, the prospect that sales may fall to 2006 levels ­ a year which, at the time, was seen as delivering perfectly acceptable results. A few percentage points off sales would be unpleasant, but they would expect to survive. But now, for instance, in the automotive sector, some companies are facing the prospect of revenues collapsing by up to 40%. It is going to take a lot to survive that.

This, of course, feeds through to the annual reports and especially the words that need to be penned about future prospects, financing and going concern, the latter of which this column looked at in December.

Frankly, what was said then may no longer hold true, for which I apologise to editor and readers alike. Back then, I said the Financial Reporting Council’s guidelines on going concern would hold back a torrent of going concern qualifications. Now the FRC’s template ­ and my analysis ­ are in danger of being swept aside, with auditors increasingly nervous about their going concern responsibilities. Why? Because if the economic climate leads to large-scale corporate collapse, the audit profession doesn’t want to be buried beneath a landslide of legal action. Given the choice between looking to the greater good and not increasing uncertainty, or accepting the role of sacrificial lamb in the aftermath of the collapse of 2009, auditors have no doubt what their course of action will be. The lesson from the collapse of Andersens predicated on a ruined reputation still haunts auditors and they will act accordingly.

The auditor view on going concern brings us to the accounts themselves. This is another cause of gathering gloom for corporates and investors alike. A couple of items stand out and are presently top of the worry list: goodwill and pensions. The old joke based on the advert for the Victoria & Albert Museum (nice café with a great museum attached) that Acme plc company was a pension fund with a small business attached doesn’t raise much of a laugh these days: a deluge of data proves that UK plc is in a terrible mess over its pension provision. The bottom line, printed in big, red letters, is that the pension promises made in the past are, for a whole host of reasons, far beyond unaffordable and those promises have to be broken. (The same is true of public sector pensions, but let’s leave that.)

Aon Consulting says the accounting deficit of the UK’s 200 largest privately sponsored pension schemes currently stands at £29bn, while a PricewaterhouseCoopers survey out in March says 90% of organisations are concerned about the risks their pension scheme poses to their business. The pension scheme is the largest creditor for many UK businesses, and its potential impact on a business’s robustness cannot be ignored. Accounting issues add a further layer of complexity; PwC says it sees a divergence of up to £300bn in the total liabilities of UK pension schemes calculated on a scheme-funding basis, compared with the lower liabilities arrived at under accounting rules.

If pension accounting is a headache, so is goodwill for those companies which have been on a debt-fuelled acquisition spree. Companies on both sides of the Atlantic (did anyone mention RBS?) will be completing impairment testing of goodwill and other long-lived assets and will have concluded that a significant charge is in order. You could argue that, as it is a non-cash item and unlikely to compact debt covenants or liquidity, no one should care. But the billions written off will be another blow to an already battered balance sheet and profit and loss account ­ and underlines how inept much of the corporate strategy and activity of the past few years now looks.