We have audited the balance sheet and here is our report:

The cash is overstated, the cashier being short . . .

According to our figures, the enterprise is wrecked . . .

But subject to these comments, the balance sheet’s correct.

The Accountant’s Report, circa 1930

Donald Brydon reproduces this poem on page 135 of his review of auditing, to show that criticism of the accountants who carry it out has been much the same for 80 years. It was only corporate collapses in the past two — notably Carillion and Patisserie Valerie — that led the government to ask him to pen his own, longer work. And his bottom line is that auditors must also write a lot more: extending their subject matter beyond financial statements; telling shareholders whether dividends are affordable; opining on business resilience; and carrying out investigative reporting where fraud is suspected. However, while these recommendations will add many more pages to company accounts, it is not certain they will make better reading for shareholders.

Extending audits beyond financial statements should give investors more confidence in all company information. Even the Institute of Directors welcomes widening the scope to “issues such as governance, environmental risks and social impact”, or “ESG”. Still, it is hard to see how audited emissions statements would protect against the misstated debt and assets behind so many corporate failures.

Telling shareholders whether dividends are affordable, by checking they are covered by a company’s distributable reserves, might prevent reckless payouts putting businesses at risk. Again, the IoD is receptive to reading “justification” of these payouts. But Sir Donald says distributable reserves need only be audited when dividends are of a “similar” size, and admits company mergers can make such calculations incomprehensible.

Opining on a business’s resilience might provide some soothing words for investors. And Sir Donald’s proposed resilience statements go beyond a short-term “going concern” verdict to assess a company’s medium and long-term prospects. But only the short-term statement would be audited — shareholders would still have to take the directors’ word on future risks.

Carrying out investigative reporting where fraud is suspected is a new requirement. It is also a complete reworking of Grant Thornton’s view that “audit is not designed to look for fraud”. Even so, it is style of reporting and writing that does not come naturally to many in the profession.

So the Accountant’s Report, 2020, may now read:

We’ve audited the new accounts and here’s what we discern:

ESG is fine; can’t tell if divis cause concern.

Should be OK for one more year, no obvious sign of fraud.

But we’re largely still reliant on what we’re told by the board.

NMC: Stuck in the Mud

All it takes to pull a company into the swamp is a cartoonish name and a megaphone, writes Kate Burgess.

This week, shares in NMC, the acquisitive UAE-based healthcare group, fell more than 40 per cent on the back of allegations from short seller Muddy Waters that its numbers are, well, muddy.

NMC denies the claims but its share price shows the potency of selling a company’s shares short and giving vent to free speech — very free at times. In fact, Muddy Waters was so free with the fraud word (rejected by NMC) that Lombard is hampered from debating the allegations in detail.

The activist’s self-interest is manifest but it is putting its money where its mouth is. That gives its words a power other sceptics lack. Broker Jefferies has serially expressed doubts over the health group’s numbers. In May, it fretted over NMC’s cash flows, working capital and related-party management fees. In July, it examined NMC’s balance sheet, highlighting debt as well as large amounts of goodwill and negative tangible equity value. In August, it pored over NMC’s working capital and questioned its use of supply chain finance. Yet, by mid-September, NMC’s shares were at a peak of 2,937p.

Now Muddy Waters is trumpeting similar misgivings in more populist language. Terms such as reverse factoring — where companies in effect borrow to pay suppliers — have become popular flashpoints since Carillion’s demise.

NMC is predictably cross. It says: “The assertions, insinuations and accusations made in the report . . . appear principally unfounded, baseless and misleading, containing many errors of fact”. The mudslinging will last into the new year.

Carson Block, the man behind the Muddy Waters mask, points out that a cartoonish pseudonym does not mean his thesis is not serious and if short selling activists get their facts wrong, corporate targets “don’t stay in the dirt”. True. However, once mired in mud, it is never easy to get up.


NMC: kate.burgess@ft.com

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