Queens Moat inspectors urge crackdown on banks

Directors of failed hotels group disqualified after 10-year inquiry

Two inspectors appointed by the Department of Trade and Industry to investigate the hotels group Queens Moat Houses yesterday called for wide-ranging changes in company law. Their proposed measures include "significant sanction" on investment banks which fail to ensure companies provide reliable information, and a weakening of the legal status of secured lenders if they have not been cautious enough.

Two inspectors appointed by the Department of Trade and Industry to investigate the hotels group Queens Moat Houses yesterday called for wide-ranging changes in company law. Their proposed measures include "significant sanction" on investment banks which fail to ensure companies provide reliable information, and a weakening of the legal status of secured lenders if they have not been cautious enough.

The recommendations were made by the accountant Adrian Burn and Patrick Phillips QC, who have spent the past decade finding out why the Essex-based group suspended its share listing in March 1993.

The DTI announced that the former QMH managing director, Martin Marcus, had given an undertaking not to act as a director for 10 years. Two others, the former finance director, David Hersey and his deputy, Allan Porter, have been disqualified for eight and seven years respectively. Judgment is pending against the group's founder and chairman, John Bairstow, who contests the findings.

A DTI spokesman said the Department would look at all the recommendations in the report and, if appropriate, discuss them with regulators. The Financial Services Authority is responsible for the Listing Agreement governing all companies whose shares are quoted on the London Stock Exchange.

Other recommendations in the report are: consideration should be given to the mandatory rotation of partners in charge of property valuations for listed clients; companies' audit committees should regularly review the competence, independence and suitability of valuers.

Apart from ensuring the reliability of published information, financial advisers should "consider whether or not a board of directors includes non-executive directors of sufficient independent and experience".

As with auditors and valuers, directors and partners in investment banks should regularly rotate.

The Listing Rules should insist that all interim statements by listed companies be reviewed by the auditors, and quarterly instead of half-yearly reporting should become compulsory.

QMH was born of a decision in 1967 by Mr Bairstow to convert into a hotel his own house, the Moat House in Brentwood, Essex. He expanded it rapidly, first through a merger with Queens Modern in 1972 and then a series of hotel company takeovers.

The inspectors say: "Mr Bairstow created the culture in QMH which led to dependence upon unacceptable accounting and, to a certain degree, neglect of real operations. He is a man of forceful personality. Not brash or domineering, indeed he has considerable charm, but nonetheless capable of dominating those about him and somewhat cavalier in attitude."

Three years ago Mr Bairstow said: "I believe it is time to end the DTI's role as investigator of company cases unless it appoints inspectors of experience and ability, not theorists lacking knowledge of the commercial world. The current system is time-consuming, unwieldy, a huge drain on taxpayers' money and - in a worryingly large number of cases - ineffective."

FATAL FLAWS AT HEART OF INCENTIVE SCHEME

John Bairstow, the founder of Queens Moat Houses, was responsible for the way the management accounted for its Management Incentive Scheme (MIS), which lay at the heart of Queens Moat Houses' inflated profits.

The core of the MIS was that the hotel manager entered into an agreement with QMH to run his hotel for 12 months for his own profit or loss. In return he agreed to pay QMH an incentive fee for the year. He did not pay this in cash, but gave QMH a promissory note due for payment in 13 four-weekly instalments over the following 12 months. The manager could then keep for himself whatever profits the hotel earned above the level of the fee. If the profits were less than the fee, then the manager was still expected to pay the fee and would himself make a loss.

The DTI inspectors say: "The MIS had three major and insurmountable flaws. First, it leaked too much by way of profits to managers. Secondly, managers were unlikely to be in a position to pay the fee when profits were low. Thirdly, unlike bonuses which management can impose, incentive fees had to be agreed with managers who were unlikely to agree to levels of fees that they found unattractive."

The inspectors add that the accounting policy for incentive fee income gave the QMH directors "a tool with which they could increase reported profits unacceptably at will by writing as many new Incentive Agreements as they chose and having them incept at dates which magnified the unacceptable effect of the policy".