29 January 2019
Yet more management denial and false accounting
Despite reports suggesting a complex fraud including collusion with suppliers, it is implausible that senior management should not have seen some warning signs that things weren’t right at Patisserie Valerie. EBIT margins of over 15% compared to competitors making half that and against a backdrop of stress on the high street should have raised red flags. For an alert management team not to question those kinds of numbers defies common sense. Once again shareholders and stakeholders have had the wool pulled over their eyes by accounting sleight of hand, and auditors have been too easily misled. As we have seen in other global headline cases such as Enron, Parmalat, La Seda de Barcelona and Carillion it appears too tempting for management to resort to dubious bookkeeping and stretched financial standards rather than address the more demanding underlying operational issues which are the cause of the financial woes. The skills to address these issues are too often lacking in management or the advisory and consultancy professionals from whom they seek counsel, for whom textbook theory and financial wizardry tend to be the fall-back solutions. Eventually the cash runs out and what had been a resolvable problem becomes a car crash, ending in insolvency, unnecessary job and stakeholder losses, forensic examinations for fraud, and lawsuits.
In my book, Turnaround Management; Unlocking and Preserving Value in Distressed Situations published by Globe Law and Business and available in February 2019, www.globelawandbusiness.com , I have commented on the tendency for less experienced managers to hide behind their accounting comfort zone with misleading and sometimes fanciful numbers rather than resolve fundamental operating problems. Sometimes they are aided by weak auditing standards in the large accounting firms where it would seem there is a growing vacuum of competence in audit teams, not to mention a conflict of interest between robust application of auditing standards and lucrative fees from other areas of advisory work. The book highlights the processes of operational turnaround by engaging qualified turnaround managers with the range of financial, operational and negotiating skills to get to grips with business stress. Turnaround managers have situation specific skillsets in much the same way as IT and tax specialists have in their areas of competence. Special situations require special measures and turnaround management is no exception.
In the UK politicians are dancing around the issues, but are totally distracted, indulging in other self-induced problems. It is time for action in government to address the weaknesses in the UK auditing profession and for the accounting and consultancy profession to stop pushing issues into the long grass for self-preservation of a fee generating cabal, but to act in the best interests of the future health of their clients and “UK Plc”, even if that means facing up to their own shortcomings. It is also time for shareholders and other interested groups to grasp the importance of professional turnaround and performance improvement management as a special skillset and to delve more deeply into the underlying business issues to drive long term solutions instead of believing what they want to believe and being hoodwinked by temporary accounting sophistry.
Alan Tilley is Chairman at Bryan Mansell & Tilley LLP and author of our new title Turnaround Management; Unlocking and Preserving Value in Distressed Situations.
The views and opinions expressed in this blog are those of the author, and do not necessarily reflect those of the publisher.