We are, of course, still in touch-and-go territory. The
total corporate carnage many predicted has not come about yet. But,
increasingly, it is looking likely that the firestorm which would have left the
corporate landscape a swathe of burned-out ruins was more a doom-laden vision of
Jeremiahs than a practical assessment of the likely outcome of stricken credit
markets. Fair enough, disasters have been anything but scarce. But often they
have, like the demise of Woolworths and any number of leisure-related
businesses, been business models which were moving toward their sell-by dates
before the credit crunch provided the final push.
The corporate governance models seem to have held up remarkably well. And it
is the explanation of why this has come about which is illuminating now. How
have corporates escaped audit disaster? Was it down to smart and timely work by
the regulators? Was it down to fancy footwork by the finance functions? Was it
down to wary and careful auditors? And when is the wave of litigation going to
The answer to all but the last of those questions seems to be ‘probably’. The
answer to the last may well be that the careful planting of good UK corporate
governance over the past two decades and the emphasis on a very different model
from the one which prevails in the US, may well have made all the difference.
In mid-April, those brave folk at PricewaterhouseCoopers released the
findings of their own research on what had been happening among their biggest
clients. They found that nearly all of them had managed clean audit opinions,
nearly all of them had found the going concern issue the most challenging and
they had nearly all done much more work on that challenge and disclosed much
more information on the risks they face. These were the maturity of bank
facilities and their renegotiation and covenant triggers.
All of this is rather disconcerting. After all, newspapers prefer the idea
that businesses in the midst of a credit crunch behave like headless chickens.
The word from inside the corporate village suggests people have tended to
breathe deeply, draw up plans early and, mostly, act in a very practical way. We
wait to see if this continues.
Certainly, regulators in the financial reporting world have helped. The early
handing down of guidance on the issue of going concern by the Financial
Reporting Council and its efforts to bang heads together at both audit firms and
corporates very early in the reporting cycle, seems to have helped enormously.
“The lack of litigation is a feather in the cap of the FRC,” suggests Martyn
Jones, national audit technical partner at Deloitte. “The work of the Financial
Reporting Review Panel has paid off,” he says. “So far.”
The experts at PwC concur. “People started on this earlier,” says Andrew
Ratcliffe, the audit partner in command of the research. “Managements realised
they needed to. Some needed prompting by their non-executive directors and some
by us, but they were in a minority.”
So people kept their heads and they are now working on sensible solutions to
the different problems at this stage in the cycle of the credit crunch. They
know that the issue of going concern is a rolling one. They may have got one set
of figures away. But what happens when they reach the next hurdle, at the
interim reporting stage, for example?
“The intelligent companies have had rights issues and have been talking to their
banks over the past year,” says Ratcliffe. “There has been a lot of sensible
treasury management. They have been looking ahead and trying to head off any
other trouble which may be coming down the line.”
But the threat of litigation remains. The lack of litigation so far has been
one of the many surprising aspects of recent months. Of course, people will try,
suggests Ratcliffe, but it may be slightly different this time around. The
greater emphasis that people have been placing on the issue of going concern,
which was previously taken as a given in most large companies, may pay off. The
greater thought and documentation of the decisions made this time around and
what went into the best judgement at the time may leave a more solid defence
Also, litigation is seen as a US fashion. There, an entire industry built
around class actions promotes it. The fostering of a corporate governance
culture in the UK, which puts a premium on investors giving directors a hard
time over financial reporting, rather than the US emphasis on investors trading
shares and demanding compensation, may have made a difference. Financial
directors will certainly be hoping so.