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In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

A Moat too Far

Bridging the gap between MP's expenses and good financial accountability

If you work in the City it’s been a good few weeks because after months of enduring ritual humiliation, the threat of redundancy and the disdain of the public at large, City workers have been able to enjoy the schadenfreude of MPs wriggling in the spotlight for their financial recklessness.

You’ll be hard pushed to find anyone who supports Fred Goodwin’s £700,000 per year pension pot. But Harriet Harman, the Deputy Leader of the Labour Party, seemed to be on shaky ground when she said that, whilst the government (as majority shareholder in RBS), couldn’t legally retrieve the excess over his contractual entitlement, the ‘court of public opinion’ would require it to be paid.

Well, Fred has disappeared off with his full pot and meanwhile the court of public opinion has issued a resounding verdict on MPs claiming for extravagant furniture, avoiding capital gains tax on the sale of second homes and, most extraordinarily of all, for the upkeep of their country estates and cleaning of their moats.

If, like me, you aren’t able to claim for the cleaning of your moat from your employer then once the delight of this episode has subsided then you’ll be pleased to know that MPs will no longer be able to make such claims either.

But what does this tell us about the financial controls in the House of Commons?

Financial Scandal Characteristics

Well from my perspective it has a number of characteristics in common with other financial scandals whether in the public or private sector which illustrate poor financial management and control.

1. An unclear policy

Many MPs have tried to mitigate their behaviour by claiming that the expenses policy and regime was unclear. Certainly by what has been reported in the press, the fees office seemed to have a high degree of discretion in how much of the cost of a £2,300 plasma TV would be reimbursed. They also had policies which weren't communicated eg. that they would normally pay no more than £750 for a TV. But if that was the case why didn't they write it in and communicate it? Why did the John Lewis list only eke out into the public domain by chance last year? This can only have increased confusion and inconsistency in the application of the policy, such as it was.

If you have investments

in companies that don’t have

a Finance Director on the

board you may want to find

out why not, who is

responsible for

finance and what their qualifications are.

2. A weak finance function

Most MPs are a pretty forthright lot. Perhaps they wouldn’t all whack you on the chin like John Prescott but I suspect many of them can be fairly intimidating to administrative staff in the fees office. It does seem that the sarcastic and patronising correspondence from MPs to fees office staff, which has come to light, may have placed pressure on the fees office to pay claims which they might not otherwise have done.

Perhaps they wouldn’t

all whack you on the

chin like John Prescott

3. Management override

A powerful management team or CEO in any organisation can often get their own way (eg. Fred Goodwin). In this case the fees office seems not to have been supported by anyone in the House of Commons. Indeed two of the three main political parties consistently voted against greater disclosure and even for their own exemption from the Freedom of Information Act 2000! When you have a “management team” with this power and no person or independent committee to check that power it’s not surprising that the management team gets its way.

4. Unclear reporting lines

On top of all this the reporting lines for the fees office were unclear and incestuous. If there's no one at the "board" level with accountability then those at the board level have greater leeway to abuse the system. In the Commons, the most important person is the Speaker and under the House rules it is his responsibility to safeguard the reputation of the House. His failure to do so and his mocking of those seeking it would be a dismissible offence in most organisations.

 5. A misunderstanding of the ethos

Most people would understand clearly that expense claims are for costs incurred so that you aren't out of pocket in performing duties for your employer. Was it really beyond MPs to understand this? Or was it even stated anywhere? Or was it as a concept overridden by daily sloppy practice in the organisation? Who was the guardian of financial prudence in the House?

When you get one of these issues arising it's a cause for concern, but when you get all five it's a disaster waiting to happen.

Finance Director Role

However, let’s not be too smug about this. Whilst there is a common perception that something like this could only happen in the public sector, at Orchard Growth Partners we often see these issues in companies (although not usually all five in one organisation).

 The best way that they are avoided is by having a competent person responsible for finance issues who is overseen by a proper governance structure. In the House of Commons the Speaker is responsible for the expenses system and the people who should be ensuring it’s integrity are the MPs who are themselves the beneficiaries of it’s hitherto largesse. Far from perfect! 

Similarly in a company you should expect to see a named, competent person responsible for the finance function. It still baffles me that many AIM-quoted companies don’t have a Finance Director who is a qualified accountant and has the requisite experience. That might have been acceptable over the last few years of the boom when running a business was easy, but in these difficult times I would want any company I invest in to have a strong Finance Director who can be held to account to the shareholders.

That person should be ensuring that the working capital and cash are well managed, that appropriate controls are in place and that management is getting the information it needs to manage the business (and that it understands and properly interprets that information). The Finance Director should also be acting as the conscience and devil’s advocate on the board, and should be robust enough to take an alternative point of view where necessary. Finally the Finance Director is an important part of the overall good governance of an organisation, along with strong non-executive directors, and can act as a vital interface between the other executives and the non executive directors.

The most important aspect though of a named Finance Director on the board of a company though is that they ought to be qualified and registered with an institute which sets professional standards and can take action upon breach of those standards, including removing them from the register.

If you have investments in companies that don’t have a Finance Director on the board you may want to find out why not, who is responsible for finance and what their qualifications are. Many companies will cite cost as a factor but when companies can access an appropriately qualified Finance Director on a part-time basis, cost should no longer be an issue if it provides shareholders with some comfort in these challenging times.

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

 © Ash Mehta

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