Tuesday, 25 May 2010

The joint account

A few years ago Mark married Eva. They celebrated their wedding in fine style and settled down to make a beautiful home for themselves. Mark, trusting and adoring set up a joint bank account and gold credit card in their new married name. Even at the wedding reception some of their closest friends, however, had serious doubts about the marriage and whether they were really compatible. They all agreed with the happy couple, though, that they could never, ever get a divorce.

Mark is a mature man, very sensible, even a little bit boring. He has a good business that generates enough income to pay the school fees and health insurance. He can even save some money for their retirement. Mark has never spent beyond his means so he doesn't have to borrow money. His business, although very steady and professionally organised, needs a good deal of working capital so he has negotiated an overdraft with the bank manager, Ms Wong, who he sees regularly. She regards him as her ideal customer and has made it clear that she would be delighted to lend more.

Eva is much younger and very beautiful. She is the cherished daughter of an aristocratic Mediterranean family. Mark was her only lover but she naturally inspires complete devotion. Eva is a self-employed travel agent, or "vacation consultant" as she describes herself. Her career has never been truly profitable and recently it has been increasingly difficult to find work. She isn't at all interested in keeping proper accounts so she scarcely realises that she spends far more than she earns. A couple of years ago Eva became obsessed with the housing boom and gambled unsuccessfully in property.

During the first decade of their marriage Mark has tried very gently to steer Eva towards a way of life more like his own with careful budgeting and such like. She has listened patiently and has tried hard not to upset him. Rather than ask him to arrange an overdraft on their bank account she has been financing her lifestyle on the gold card. The credit card company automatically takes the minimum payment each month from their bank account so that doesn't look too bad.

Not long ago Eva reached the credit limit on the gold card. You couldn't really blame her because the credit card company had actually lowered the limit following a shift in their commercial policy.  She promptly arranged a handful of storecards. Mark had warned her several times about storecards and the astronomical interest rates that they charge but it was either that or she would have had to give up all the expensive activities that she treasured.

When Mark found out he was utterly exasperated. Now he had to make a very delicate decision: should he pay off Eva's storecards so that she wouldn't be liable for any more of their punitive interest or should he step back and leave her to her own financial mess? Reluctantly he decided to take action.

Although it wasn't the time for their regular meeting, Mark made an appointment to see Ms Wong. She was charming and sympathetic, as ever, but couldn't altogether hide her surprise at the amount Mark was asking to borrow for "personal" reasons. She agreed the loan but at a significantly higher rate than she had been offering up until now. After he had left her office, still evidently unhappy at finding himself in this situation, Ms Wong placed a warning note on the bank's personal file for Mark and Eva.

To be continued.....

Thursday, 20 May 2010

Money for nothing

Asked what happened to the money he had earned, George Best famously said, "I spent a lot of money on booze, birds and fast cars. The rest I just squandered."

Michael Carroll, a man of fewer talents than George Best, is in the news today because he wants his job as a dustbin man back. He won a £9.7M fortune in 2002 on the National Lottery and now all the money has gone and there are strong similarities in the way that it was spent. There is the sense with both the footballer and the "lotto lout" that they have lost track of where all their cash went. Mr Carroll at least has enough insight to be able to identify part of the problem in saying that, as a nineteen year-old, he didn't have the temperament to be able to look after millions of pounds. He also admits to spending a spectacular amount on drugs. George Best died from all the drink.

The moral lesson is clear: money doesn't buy happiness. The practical lesson is even more tedious: it pays to know how you are spending your money. It is not surprising to find that the chaotic personal life of someone like Michael Carroll does not for careful checking of day-to-day expenditure. It is more disappointing to realise that there are businesses that cannot keep track of payments. Their owners have as much chance of success as Mr Carroll has of getting his old job back.

Don't be a loser. Make sure somebody in your business has the basic bookkeeping skills to look after the money. An accounting course from the Accounting and Bookkeeping College could save you a fortune.

Tuesday, 18 May 2010

Equitable Accounting

The new UK government, unkindly called the Lib-Con coalition, has started work already. Amongst its first measures, aside from reducing the salaries of ministers by 5%, has been the announcement that the members of Equitable Life are to receive compensation as recommended by the Parliamentary Ombudsman. Equitable Life, before its takeover by Halifax Building Society (subsequently HBOS and then the Lloyds Banking Group) had its headquarters in Aylesbury as does the Accounting and Bookkeeping College.

The members of Equitable Life were certainly misled. Each year the directors declared dividends for the with-profits members that were outstanding by the standards of the pensions industry. Very few alarm bells rang until Equitable Life lost a court case brought by a group of investors who believed they were entitled to guaranteed annuity payments. When Equitable Life had sold these annuity contracts its actuaries had seriously miscalculated how expensive the obligations would be. Suddenly it was clear that there wasn't unlimited cash in the pot and the members would have to go short. So little cash, in fact, that Equitable Life was effectively bust.

Throughout this story there was precious little evidence of supervision by the financial authorities. Initially some aggrieved members were looking to the auditors, Ernst & Young, for not sounding the alarm. Auditors had taken the blame for previous corporate fiascos like Enron and seemed like a promising source of funds for the aggrieved. Ernst & Young, however, had a cast iron defence: the convention in the financial services industry, which they were bound to follow, was that the auditors should only examine the assets of the business because auditors are not actuaries and they would not be able to form a worthwhile opinion on the liabilities which, in this case, would be the amount due to be paid out in pensions. Ernst & Young had duly tested Equitable Life's assets and found the figures in the accounts to be true and fair. The directors' error had been in understating the liabilities.

As ever, this one-sided form of accounting could not tell the whole truth or, in this case, anything like the truth. An absence of regulation can only be the responsibility of the regulatory authorities, if any, so the members of Equitable Life resorted to parliament and the Financial Services Authority. The Parliamentary Ombudsman has correctly ruled in their favour. The country will carry the cost, or at least some of it, of this failure.

Wednesday, 12 May 2010

Too big to pay tax

Leona Helmsley, the 'Queen of Mean', said, "Only the little people pay taxes." She was thinking about individuals, herself particularly, but her philosophy clearly now applies to unaccountable international organisations.

Take FIFA, for example. FIFA sets eight conditions that all countries must accept who wish to bid for the World Cup. FIFA then hides behind a confidentiality clause to prevent these stipulations from becoming public knowledge. Fortunately the Dutch government has effectively exposed FIFA's position in the form of a draft letter to Fifa President Sepp Blatter. The letter refers to 'Guarantee no. 3' which grants FIFA a tax exemption that "shall encompass all revenues, profits, income, expenses, costs, investments and any and all kind of payments" and, in case that doesn't cover everyone as well as everything, apparently "FIFA will notify on an ongoing basis the Tax authorities ..... about the individuals and legal entities which shall be entitled to the exemptions under this Guarantee."

It seems that South Africa this summer will be able to charge a sales tax, which would be VAT in the EU, on ticket sales but ticket revenue is tiny by comparison with the vast sums that will accrue to FIFA from broadcasting rights and sponsorship. Governments around the world are so anxious to bring the great event to their country that they will submit to this kind of extortion.

At the Accounting and Bookkeeping College we enjoy World Cup football but we are committed to promoting open and honest accounting. So for us the final insult to be added to the various injuries from Guarantee no.3 is that any "declaration or reporting obligation of [FIFA] shall also be waived (in particular, but not limited to the filing of Tax returns, audited accounts, etc.)".

Saturday, 8 May 2010

Accountancy in a new Government

After yesterday's election in the UK very little is settled but it is clear that we will have a new government because the Labour Party no longer has a majority in the House of Commons. The result that we at the Accounting and Bookkeeping College are delighted with is that very many more people turned out to vote reversing the trend of previous elections.

Apparently all parties agree, to a greater or lesser extent, that the priority for the new administration will be to ensure financial stability through careful and prudent management of the economy. Margaret Thatcher famously likened herself running the British economy to a housewife managing a family's purse. Mrs Thatcher was over-simplifying the case in order to appeal to the electorate, housewives presumably, but it would be fair to make the comparison with a business. Like countries, many businesses borrow money to finance their activities and rely on the continuing availability of loans to avoid going bust. Banks will continue to provide facilities as long as there is a profitable return on their balance of risk and reward. Apart from looking at the borrower's track record of repaying loans in the past, the lender's best source of information about a customer is their accounts and cashflow projections.

The United Kingdom doesn't produce financial statements in quite the same form as a business but in both cases it should be possible to tell whether funds are being generated to meet liabilities. Our next Prime Minister and Chancellor of the Exchequer will need to be adept at producing persuasive figures for the bond markets that finance our national debt. Similarly, every business with an overdraft needs to maintain accurate accounts to show the bank manager. If the new government fails to convince its creditors we could face a crisis of Greek proportions. If your business is equally unconvincing then it will join the record numbers that are facing insolvency.

Thursday, 6 May 2010

Accountancy for Democracy

It almost goes without saying that we should be delighted to have the opportunity to vote in the UK today. That is even true in the Buckingham constituency where the Accounting and Bookkeeping College is based which has neither Labour Party nor Liberal Democrat candidates at this election because of the British parliamentary convention that other parties do not stand against the Speaker of the House of Commons.

There are too many good reasons for voting to list them in this blog and, in an authentic democracy, I can think of no good reasons for not voting. Some people, though, are choosing not to vote because they don't approve of any of the parties. That sort of disapproval has greatly increased since we found out last year what MPs were claiming in expenses. Disappointing though it was to learn about moats, duck houses and mortgage claims on non-existent second homes, we should reflect that we get the politicians that we deserve and we will never deserve any better if we don't vote. Other potential voters sometimes despair and conclude that the same scoundrels and crooks will always be elected because their vote is only one amongst thousands in their constituency and millions across the country.

There is a kind of analogy, though, with double-entry bookkeeping. When we choose to use credits and debits for our accounts, and many totalitarian regimes would probably prefer that we didn't, we are making a commitment to record for every transaction where the movement of value is coming from and where it is going. At first sight voting seems much more one-sided because every effort is made to ensure that nobody knows who cast each vote leaving only an anonymous record to be counted which seems to reinforce the sense that a single vote is a drop lost in an enormous ocean.  That may be the bigger picture, and it may be the reason behind the difference between opinion polls and election results, but it isn't true of the individual voter. Each one of us can have the satisfaction when we vote that we not only had a preference about who should represent us but that we took part and actively registered that choice: the vote went to the candidate of our choice but the mandate came from us.

Unless we vote we don't have a democracy and, in the end, Winston Churchill was right, "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."

Tuesday, 4 May 2010

Do first time buyers need an accountancy course?

You would expect the Accounting and Bookkeeping College to be in favour of financial training and we were indeed excited to hear about the suggestion from Malcolm Hurlston of the Consumer Credit Counselling Service that first-time home buyers should only have access to a mortgage "after study and an exam". A mortgage is a huge financial burden that can eventually overwhelm an ill-advised borrower.

Nobody is pleased to see individuals fall into bankruptcy so it is tempting to adopt any policy that might prevent this. It is not surprising that the people most likely to suffer from debt problems are those who take on 110% or 120% mortgages and a good course might teach people that these financial products are not as desirable as they seem. On the other hand Sue Anderson, of the Council of Mortgage Lenders, points out that people find themselves in mortgage arrears generally after an unexpected life event such as redundancy. Perhaps she has missed the point of training which would, we hope, teach students to anticipate life's ups and downs?

Even so it is not tempting to endorse Malcolm Hurlston's proposition because there are at least two other flaws in our economy that we ought to address before we start to hand out 'home ownership certificates'. Firstly, for every borrower that takes a mortgage which is larger than they can manage there is also a lender. Banks and building societies lose money when their customer defaults and, if it happens too often as in the case of Northern Rock, will eventually go bust themselves. We all agree that some sort of supervision of financial institutions is necessary and it could be that, instead of looking at more complex forms of analysis of banks, our FSA ought simply to outlaw nonsensical products like 100% mortgages.

Secondly, we need to be much more sensible in our view of the value of houses. It is time that politicians and others stopped using expressions like 'property ladder' with its implication that, once you own a home, your net worth will continue increasing automatically until your children inherit. The results of this delusion can be seen in Ireland where developers built thousands of useless homes or the USA where mortgages sold to the illiterate and unemployed could be packaged as AAA assets because they were backed by a home as security.

When society finally learns its own financial lessons it will be time to start trying to teach consumers.