Jeremy Warner's Outlook: Questions multiply as FSA attempts to get to grips with the accounting scandal of iSoft

The fact that three of the founders chose the hype around these contracts to offload £81m of shares should have set alarm bells ringing
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Accounting scandals rarely start out as open-and-shut cases of fraud. It is only in their later stages, once the deception has been pushed beyond the point of no return, that the thin line that separates creative accounting from outright falsehood in the reporting of a company's affairs becomes clearly visible. Furthermore, most of them are more about leveraging the share price, so as to boost the value of bonuses and share options, than straight fingers in the till.

There may be more to the iSoft debacle than meets the eye, but at this stage of the affair, it seems largely to fit the pattern just described. I'm told that it was an open secret among the City cognocenti that iSoft was front-end loading its revenues and profits.

Yet fuelled by some apparently fabulous contracts in the healthcare sector, particularly those to help equip the NHS with an IT system "fit for the 21st century", the shares soared. Investors wanted to believe that here was a software specialist which had managed to buck the trend of the bust. The fact that three of the founders chose the hype surrounding these contracts to offload £81m worth of shares should have set alarm bells ringing, but shareholders ignored it.

Veteran analysts of the black arts of company accounting would have spotted the mischief a mile off. When profits are rising strongly, but cash remains strangely flat or is declining, it usually means that revenue recognition is running ahead of what's actually being banked. One of the best examples of this was the aero-engines group Rolls-Royce before it went bust and had to be nationalised in the 1970s.

What Rolls-Royce was doing was capitalising virtually all its development expenditure with the result that the profit and loss account looked just great even as the assets were inflating on the balance sheet. Then, hey presto, it was discovered that a great deal more money was going out than was coming in and the company was declared essentially insolvent.

It is now known that a variation of this wheeze has been much in use at iSoft. What the company seems to have been doing is recognising all licence income for the entire duration of the contract the moment the work was completed, even though payments might stretch years into the future. Whether this is legal, or within accounting rules, is one question. You might think the answer clear cut, but if the Inland Revenue can demand payment of tax on money not yet received but pending, there is a reasonable case for arguing that it is greyer than it seems. Legal or not, any company that indulges in the practice better be very surethe money will eventually get paid, for if there is any problem with the contract, the accounts will be impossible to reconcile.

With iSoft, the contracts have been going wrong all over the place. The company is roundly blamed by Accenture for delays and problems in the £6.2bn NHS system. To begin with at least, the involvement of the Financial Services Authority will be confined to whether the accounting shenanigans amount to a case of market abuse, or one in which directors knowingly or deliberately attempted to mislead the market. Of the three directors who benefited from the share sales, one is dead, another suspended, and the third, the former chief executive, Tim Whiston, has been ousted.

But plainly, there are wider issues to address here. Where were the auditors, Robson Rhodes, or indeed the audit committee, when all this was going on? And what of the non-executives, supposed watchdogs on behalf of the shareholders? Unfortunately for him, the most senior of these during the relevant period was Sir Digby Jones, the former director-general of the CBI.

I don't want to be unkind on Sir Digby, a great British patriot who has worked tirelessly and exuberantly for the cause of business in this county. There but for the grace of god, many of his peers will be saying. Yet in this regard at least, Sir Digby has conformed to the caricature of the non-executive director once memorably depicted by the former Lonhro boss, Tiny Rowland, as "just decorations on a Christmas tree". By this he meant that they were only there to make the company look pretty to investors and regulators. Quite so.

Reclaiming Jaguar for the nation

Fresh from his triumph in setting a new land speed record for diesel cars, Sir Anthony Banford, chairman of the JCB construction equipment group, says he'd be interested in buying Jaguar, which may be up for sale on account of the travails of its parent company, Ford. Is this hubris from a man whose outstanding success with JCB may have gone to his head, or is Sir Anthony the salvation Jaguar has been looking for, the entrepreneurial genius capable of making this perennially loss-making relic of the British car industry fire on all cylinders again? It would be nice to think it is the latter, and certainly Sir Anthony's achievement in making JCB into that rare thing, a world-class British engineering success story, gives every reason to believe he's got the determination, know-how and muscle to do it.

Just because Ford, despite billions of fresh investment, has been unable to make Jaguar a success, doesn't mean nobody else can. Yet it is not entirely clear the business is, in fact, for sale, and in any case it would be extraordinarily difficult to disentangle from Land Rover and other parts of Ford's European operation even if it was. Ford is reviewing options for the whole of its Premier Automotive Group - which also includes Land Rover, Volvo and Aston Martin - not just Jaguar. There's no doubting the JCB success story, but is it big enough for the massive investment in new models that Jaguar must eventually engage in and will it ever be feasible in what may prove a prolonged period of dollar weakness to sell British cars to the Americans in the quantities necessary to keep Jaguar afloat?

Sir Anthony's interest is a wonderfully romantic idea - to reclaim this icon of the British motor industry for the nation. But he may have had one glass of champagne too many from the salt flats of Bonneville when he let slip this flight of fancy.

Hutchison: still struggling with 3G

The capital eaten up by Hutchison Whampoa's 3G telecoms business, marketed in Britain under the brand name 3, since the company first started investing in it six years back, long ago got too big to keep reliable tabs on. First-half figures from the Hong Kong-based conglomerate yesterday bring news only of more losses and a further delay in the anticipated break-even date. Like a constantly receding horizon, the point at which Hutchison's Li Ka-shing can declare his multi-billion pound bet on next-generation mobile telephony, a success gets pushed further out into the future.

At least this time around, the losses are revealed to be on a declining curve, even if they remain at a truly heroic level. To fund this black hole at the centre of the company's affairs, the 78-year-old entrepreneur has been steadily selling off a lifetime's collection of corporate assets. The half-year results were only in the black at all because of the sale of the container port interest.

What possessed Mr Li, one of the world's most canny financiers, to stick with 3G all these years, remains a largely unanswered question. Even if the business eventually reaches the break-even milestone, he'll never get his money back. The European market for mobile telephony has become both viciously competitive and relatively low growth.

Mr Li bet the ranch, and this time he got it wrong. The only credible explanation is that, flushed with the success of Orange, which he sold to France Telecom for a fortune, Mr Li thought he could repeat the trick all over again with 3. Even after it became apparent he could not, he was too proud to admit the mistake. Ah, the price of vanity.