Jeremy Warner's Outlook: Now KPMG is accused of obstructing justice but this is no repeat of Arthur Andersen

Watch out for duds as IPO fever takes off; Green makes small comeback
Click to follow
The Independent Online

"Arthur Andersen: the sequel", this is not. None the less, it is quite bad enough if The Wall Street Journal is to be believed. The paper quotes unnamed sources in the US Justice Department as saying that Federal prosecutors are preparing a case against KPMG, one of the big four global accounting practices, for obstruction of justice and the sale of abusive tax shelters between 1995 and 2002.

"Arthur Andersen: the sequel", this is not. None the less, it is quite bad enough if The Wall Street Journal is to be believed. The paper quotes unnamed sources in the US Justice Department as saying that Federal prosecutors are preparing a case against KPMG, one of the big four global accounting practices, for obstruction of justice and the sale of abusive tax shelters between 1995 and 2002.

The only reason they haven't already gone public with the charges is fear of triggering another Arthur Andersen, where the reputational damage inflicted by the firm's conviction for obstructing the course of justice in relation to the Enron fraud was so severe that it triggered a complete meltdown, culminating in the loss of 28,000 jobs worldwide and a reduction in the number of global accounting practices from five to four.

It would be in no one's interests for history to repeat itself with KPMG. Criminal infringement cannot be weighed or measured in silver and gold, but it is also plainly the case that KPMG's alleged misdemeanours are of a considerably lesser order of magnitude than Arthur Andersen's. Furthermore, KPMG has already admitted wrongdoing, it has sacked the partners involved and undertaken significant changes in its business practices.

The firm may have been more aggressive in marketing the particular forms of tax avoidance complained of, but everyone was at it to some degree, and to move to outright prosecution would seem disproportionate.

In KPMG's view, even a deferred prosecution agreement, where the firm avoids a criminal trial in return for agreeing sweeping changes in business practices and a fine, would be damaging enough, but this may be what it has to settle for eventually.

In the Andersen case, the conviction was overturned after the appeal court ruled that the presiding judge had misdirected the jury. Unfortunately, this was too late to save the firm. It is not clear the public interest was best served by Andersen's demise, crooked though certain parts of it might have been.

Already limited competition among practices capable of undertaking a global audit or due diligence was further reduced when the big five became the big four. Any new shrinkage and the wheels of global commerce would grind to a halt. It would be virtually impossible to find a practice which wasn't already conflicted out if there were just three.

Accountancy as a profession remains the butt of numerous jokes, yet the fact is that the concept of audited accounts is one of the cornerstones of the capitalist system, without which fraud and financial confusion would reign supreme. The integrity of the independent audit therefore has to be maintained at all costs.

This was severely challenged by Enron, where the impartiality of Andersen's audit had been compromised by the lucrative tax advice and other consultancy services the firm was selling to the Enron board.

Some of the same issues, though in lesser form, are raised by the KPMG case. What trust can be put in the audited accounts when at the drop of a hat the responsible firm is off selling possibly illegal tax avoidance schemes to whoever will take them?

There is no suggestion that KPMG was selling these schemes to its audit clients, but integrity is still compromised none the less.

Both in the US and Britain, lawmakers and regulators drew back from some of the more extreme reforms to the accounting profession suggested in the wake of the Enron collapse.

In Britain, accounting firms are still allowed to sell other services including reporting systems and tax advice to their audit clients. Yet throughout the world, tax collectors are less willing to accept that it is the duty of company directors and their advisers to minimise tax payments through elaborate avoidance schemes.

The big four ignore these trends at their peril. They were lucky to escape a harsher regulatory crackdown after the last great Enron-inspired crisis of trust. It's in nobody's interests for the authorities to be provoked further.

Watch out for duds as IPO fever takes off

I'm still a bull of the London stock market, but my faith is being sorely tested by the deluge of dross being poured on to the new issues market right now. This is generally indicative of the froth at the top of the market. Most of this activity is on the Alternative Investment Market and therefore harmless enough. The amounts involved are relatively small.

But there are some biggies on the main market too, not least PartyGaming, which is one of the biggest ever London IPOs. Despite a universally poor press, which has dwelt on the possibly illegal nature of the company's business - online poker - in its main, US market, the sponsors remain confident of getting the offer away.

Now along comes a much more staid, but equally unappetising business to shove down the mouths of hungry investors, the British foods company RHM. The Hovis bread to Mr Kipling cakes group has been through more owners than your average Ford Mondeo, and is almost certainly just as suspect.

The current owners, Doughty Hanson, bought it five years ago from Tomkins for £1.1bn. If you reckon the hoped for flotation value of up to £1.3bn doesn't offer much of a return, you've figured without the debt leverage of private equity. In fact, the amount of equity used to buy RHM was just £300m, with the rest provided in the form of debt, making the return look much more satisfactory.

That's assuming Doughty Hanson can achieve the valuation it is looking for. The flotation has already been pulled once, and though markets are now more benign and the expected yield of 5.5 per cent relatively generous, it's hard to see why anyone would want to buy. The model is Premier Foods, whose shares have stormed ahead since they were floated a year ago, yet RHM is not as heavily into branded foods as Premier - half its sales are own label - and there is also the downside of a whacking great pensions deficit to deal with.

Approximately £125m of the sales proceeds is to be applied to reducing this deficit, but even so, it's not much of a sales pitch, is it, when you know the main purpose of the float is to solve the company's pensions crisis and provide its private equity owners with an exit.

Growth prospects look limited, and though the company claims there is still considerable scope for efficiency gains, that's not usually the case in private equity-run concerns, where established practice is to strip the business down to the last light bulb. Doughty Hanson might do better just to sell the business to Premier and be done with it, but then Premier's chief executive, Robert Schofield, would be a good sight meaner with his valuation.

Green makes small comeback

I'll be back, yelled Michael Green, Arnie-like, when he was drummed out of the City clutching a £15m payoff from ITV. OK, so yesterday's reverse takeover of the AIM-listed Documedia Solutions by Mr Green's Tangent Communications hardly even takes him back into the foothills of stock market endeavour. Nor will he be on the board. That's being left to his two nephews, Nicholas and Timothy.

But it does take Green senior back into his original business, printing, and he will own more than 50 per cent of the action. And in a mark of how it is often the man, and not the business that maketh the stock price, Documedia shares nearly doubled in value yesterday on news of his interest.

So does Mr Green intend to do it all again? Well, this is no Knutsford, and he's no intention of using it to bid for ITV, or not that he's telling me anyway. Not for Mr Green the hard graft of doing it all again, but it seems he does intend to have a hand in whatever the next generation of Greens might achieve.

j.warner@independent.co.uk

Comments