The timing was entirely coincidental. We were already collating our database of interesting facts culled from FTSE-100 company annual reports and accounts when, out of the blue, Coopers & Lybrand and Price Waterhouse announced their engagement. We were still hitting the keyboard, thrashing data into our spreadsheets when – ta dah! – KPMG and Ernst & Young decided that they had better get their skates on before the competition authorities played The Last Waltz and sent everybody else home.
So we soldiered on, making our lists, checking them twice, trawling through more than 7,000 pages of annual reports and inputting more than 4,000 separate pieces of data, then processing several thousand more calculations, computations and permutations. Putting together a benchmark of auditing financial reporting and corporate governance.
To us, the things that we discovered along the way were almost as interesting as the results we eventually got.
Yes, we learned that Coopers & Lybrand and Price Waterhouse have 45% of the FTSE-100 audit revenue, while the Peat Marwick Mitchell, Thomson McLintock, Ernst & Whinney and Arthur Young McLelland Moores mob also have 45% of the revenue. Not much in it, and even these figures are a tad out of date given, for example, that Clark Whitehill is losing the Smiths Industries account to Price Waterhouse.
(But there is one interesting side-effect of looking at the cash values rather than just the number of FTSE-100 clients: when one sees just how much of the audit market is now set to be dominated by the Big Four, it makes one wonder whether there ever was a Big Six in the first place.)
In the value for money stakes, we also had a look at the audit fees relative to turnover (audit fee per million pounds of company turnover). This is an exceptionally crude measure, of course. The number of zeros on the pieces of paper that are being checked and in the sales ledger has little to do with the complexity or global span of a business, but it does, we think, offer some kind of benchmark to relate the fees to the scale of the business.
(On this point, our definition of turnover – for the financial services groups in particular – may be a little unconventional. For the banks, for example, we included interest and dividend income, dealing profits and gross fees. The aim was simply to get a measure that gives some idea of the scale of the operation.)
We have also ranked companies by the value of the board, listing directors fees relative to turnover again.
Even though corporate governance matters are moving away from the checklist mentality that was spawned (but not intended) by Cadbury, we thought it useful to have a look at the balance of power in the boardroom between non-executive and executive directors. Of course, even this ratio means little. If a board is heavily dominated by non-executives, then it is easy to suspect that most of the real work gets done well away from the boardroom. Indeed, one wonders how a board meeting actually works when there are more than a dozen non-executives around the table.
One thing that struck us as curious was that we could see no correlation between the speed with which any company’s audit was completed and anything else. This is a somewhat simplistic measure if used to gauge auditor effectiveness or the success of the relationship between client and auditor. But with the modern urgency to announce preliminary results to the stockmarket as soon as possible, we had expected that the huge multinationals – the truly global businesses that like to keep their double-AA credit ratings in the capital markets – would have the fastest audit sign-off time.
But while BP’s numbers were cleared by E&Y in just 42 days, it took them a full 72 days to earn their #9.8m fee from Royal Dutch/Shell. (The auditors ticked and bashed their way through some #1.1bn-worth of revenue per audit day at each company, however.) Woolwich, the former building society, got the seal of approval for its accounts in just 48 days. In fact, they were signed off on the very same day as those of the globally dominant – and almost six times larger – Barclays plc (which also completed the accounts in just six days) was not much of a surprise that the longest gap between year-end and audit certificate was at Great Universal Stores, a company which has taken a decade to find a new FD for themselves. At 116 days, they took even longer than for the reporting accountants to complete their due diligence on Billiton or Centrica. GUS also shares the wooden spoon with Next for having the slimmest annual report, at just 40 pages.
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Barclays and NatWest have the bulkiest annual reports, at more than 150 pages each. No doubt part of the reason is that the document also serves as the banks’ Form-20F filing to satisfy the US Securities and Exchange Commission. As we discussed in Financial Director in September, the SEC information disclosure rules require a lot more information to be disclosed.
One other fact that we decided to track was whether or not the accounts are signed by the finance director. Company accounts have to be signed by at least one director – but on behalf of the whole board – and in about 70 of the FTSE-100 the FD was one of the co-signatories. Although there is no particular reason that we can think of that the FD ought to sign the accounts, it strikes us as curious that, in some 30 cases, the director responsible for preparing the accounts doesn’t get to whip out his Mont Blanc and put the final flourish to them. (Then again, this magazine is still getting to grips with the idea that there are still a few companies out there that don’t have designated financial directors.)
We have had numerous conversations with FDs and others about the structure of company accounts and the burdensome information requirements, and so it came as little surprise to us to find that many companies were preparing a proper set of audited accounts in one document, and an annual review, summary statements, corporate governance and directors salaries data in a separate document. While we admit that there is a certain logic to this structure, we can assure readers that, having looked at the accounts of a dozen companies that split their annual report and accounts and those of another 90-odd that don’t, we find the split set is invariably a damn nuisance to use. Perhaps a refinement of the package – or more experience at using it – is called for. We’ll think again about this next year.
Talking about salaries, we have put together some basic information about boardroom pay, not forgetting the financial director himself (and, in all but two cases, it is still “himself”). This being our first stab at the exercise, we have ignored the complexities of LTips (long-term incentive plans), share options and share ownership, preferring to concentrate on the amount of company cash handed over to board members. We will leave the more exotic – but no less lucrative – components of executive remuneration to a future date.
We found it instructive to examine how the FD stacks up against the rest of the board – and the highest paid director in particular – and this is a measure that we look forward to tracking in future years. It is likely to be an enlightening barometer as to just how the role of the FD is expected to change over the next two, five and ten years.
It also serves as an indicator as to how flat the management structure is, or whether there are some high-profile leading lights – or US-based CEOs – who skew the pay scales the way #3.8m-a-year James Fifield does at EMI.
For spotting real high-flyers, we thought it would be fun to compare salary and age, and this we did by dividing one into the other. Hats off to all those FDs who earn more than #10,000 for every year of their age.
Hats off, too, to those FTSE-100 FDs who had yet to reach their 40th birthday the day their accounts were signed off (there are five of them). Only four FDs are aged 60 or older, though the number of former FTSE-100 FDs on the non-executive circuit or who are now chief executives suggests, perhaps, that greying FDs are much in demand in roles beyond their financial directorship.
But being a FTSE-100 FD is no guarantee of job security as Gerald Corbett at Grand Metropolitan and David Newlands at GEC learned this year. Corbett couldn’t be found a seat at the upcoming Guinness-Grand Met group, while George Simpson, Lord Weinstock’s successor at GEC, wanted a different kind of FD.
For web-watchers, we kept an eye out to see which companies mention their https://www addresses in their annual reports. One caveat: these sites do not necessarily have the annual reports on them, and other companies may have web sites but just didn’t mention it in their annual report.
It is instructive, however, to see how companies are using the web to communicate information to investors.
We feel sure that the paper annual report has plenty of life left in it, though – so we look forward to going through the whole exercise again next year …