The Investigative Journalist's Guide to Company Accounts

174 Pages·2018·8.442 MB·English

by  Raj Bairoliya

D
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The Investic.:
Journalist’s
(I
—_,
Company
Accounts
byRaj Bairoliya
PublishedbytheCentreforInvestigative
Journalismwiththesupportofthe
LoranaSullivanFoundation
e
r
f
The
Investigative
Journalist’s Guide to
‘Company
Accounts
byRaj Bairoliya
PublishedbytheCentreforInvestigativeJournalism
Firsteditionpublished2014
©2018RajBairoliya
Themoralrightsoftheauthorhavebeenasserted.
Thisguideisaimedatinvestigativejournalistswhodonotworkday-to-day
withfinancialmatters.Bynecessitymanycomplexpointshavebeensimplified
toillustrateaccountingtopicsofpotentialjournalisticinterest.
Throughoutthisguideexampleshavebeendrawnfrompublishedaccounts
andotherpubliclyavailableinformationandcommentedonbytheauthor.
Fortheavoidanceofdoubt,theinclusionofaperson,companyorentityasan
exampleorillustrationdoesnotimplyanyallegationofwrongdoing.
Thisguidemustnotbecopiedinpartorinwholewithouttheexpress
writtenpermissionoftheauthor.Theauthordoesnotacceptanyliability
whatsoeverforanyusethatismadeoftheinformationprovidedherein.
From 2015 a major new Financial Reporting Standard consolidated
thousandsofpagesofdisparaterules,guidanceandstandardsdevelopedina
piecemealfashionovertheyearsintoasingle335-pagedocument.
Manyfamiliarterms,suchasProfit&LossAccount,BalanceSheet,and
Stock,gavewaytomoremodernterms.AccountingStandardsarealsobeing
morecloselyalignedtotheInternational FinancialReportingStandards
(“IFRS”).Thisguidemostlyusesthefamiliartermsand,wherenecessary,
thenewterms.AppendixOneliststhemainchanges.
Contents
Acknowledgements 4
Introduction 5
GlossaryofAccountingTerms 8
HowtoGettheBestfromthisGuide
ChapterOne:TheWorldofBusiness 20
ChapterTwo:WhatisaProfitandLossAccount? 38
ChapterThree:UnderstandingaBalanceSheet 46
ChapterFour:HowtoReadtheCashFlowStatement 63
ChapterFive:NotestotheAccounts 68
ChapterSix:AuditorsandtheAuditReport 107
ChapterSeven:WhyDirectorsCooktheBooks 122
ChapterEight:WhatHappensWhenCompaniesFail 134
ChapterNine:FindingCluesinAbridgedorAbbreviatedAccounts 141
ChapterTen:Recap 150
AppendixOne:FinancialReportingStandard102Terms 160
AppendixTwo:SampleP&L,BalanceSheetandCashFlowStatement 161
AppendixThree:WhatCompanyDataCanBeFoundWhere 164
AppendixFour:AnOffshoreGuide 169
Acknowledgements
Theinitialencouragementforthisguidecamefromaninvestigativejournalist
KhadijaSharife, aformercommissioningeditorattheForumforAfrican
InvestigativeReporters(FAIR),whoattendedatrainingseminarononillicit
financeandassetrecoveryinLondon.Thattrainingcoursewasorganisedby
theTaxJusticeNetworkandtheCentreforInvestigativeJcJournalism(CIJ)in
2013andwaspartofa seriesoftrainingseminarsbeingorganisedonfinancial
secrecyandcorruption,aimedatpractisingjournalistswhohaveaninterest
ininvestigatingbusinessesandtheflowofmoney.
MythankstoJeffreyKatzandcorporateinvestigationscompanyBishop
InternationalLimited(www.bishop-group.com)forprovidingtheoffshore
registrationdatainAppendixFour.
Introduction
carn
Thankyouforbuyingthisguide.
Alittlehistoryisinorder.Somefifteenyearsago,Iwascomplainingtomy
friendMichaelGillardaboutthestandardoffinancialinvestigativejournalism
intheUK—itwasamatterofseriousconcerntomeasImademylivingfrom
investigatingwrongdoing.Ifjournalistsaren’texposingwrongdoing,Ican’t
beinvestigatingit.Michaelsuggestedthatratherthancomplaining,Ishould
dosomething.Thisdevelopedintoacoursespeciallydesignedforjournalists
andresearchersprovidedbytheCentreforInvestigativeJournalism(CIJ).
Wehavebeenpresentingthatcoursesince2003.Iwasoftenaskedifthere
wasasuitablebookaimedatinvestigativejournalists—Iwasnotawareof
one.So,thisistheresult.
Thisguideisdefinitelynotforanyonewhoknowsanythingaboutaccount-
ingandtheworldoffinance.Itisaimedatcompletebeginners.Ifyouarean
experiencedfinancialjournalist,,0orworsestill,anaccountant,youareunlikely
toderiveanybenefit.BynecessityIshallpresentmanycomplexideasin
asimpleandnon-technicalmanner.Likeanyprofession,accountancyhas
itsfairshareofjargonandunnecessarilycomplexterminology.However,
unlikemedicine,itusesmanycommonsoundingwordsthatoftenhavea
verytechnicalmeaning.
Sowhoisthisguidefor?Itisprimarilyforinvestigativejournalists,but
alsothosewhoneedtomakesenseofasetofcompanyaccountsortoobtain
anoverviewofabusinessinordertoask“on-the-money”questions.Todo
thisatanexpertlevelisdifficult,ifnotimpossible,withoutyearsofspecialist
TIneInvestiigatiiy-¢Journalists:$GuiidetoCompanyifAccroounts
tsqwrtuaoreaWionsilgtihniihsoagtntbfoaseanrirtwndoegaeartpxdshupkoletslaeorebideooqnoubucvtteeea.asrintHyicooooenwumnsre?opveuaeyIgnterhy,sdIabeownypfdaetanhniwetdtsstoaoarnokcpsnciwenorewgusrunhsat.ysdh,eyaooynuodwuatetroheaAtlttkoeniotokwiksinnwrogehwlaeatntwivhetthhalyeet
caoccmopuanntsyoatnhderittshaanccfoournatvs.erNyogboooddy,renaostone.veIsnthaecccooumnptaanntys,inpitchkeunpeawass?eItsoitf
apIsnotliihmteicpacolormctaopnnatnnleoycctamiolaenkmsi?npgAlorcyeleatrihm?eHsreathsqaiuttewrsaotiinsoenasqbuibgeecsinotignontrrsaaicastse?dtDoaoibttsohuectrdeiitdrseibcaticloittirvysi?thiAeavsree?
thereanumberofrelatedcompaniesformingpartofacomplexweb?Despite
beingwildlysuccessful,doesitpaylittleornotax?
Inallofthesecasesthequestionsincludewhetherthecompanyismaking
aprofitorloss,hasmoreassetsthanliabilitiesandisgeneratingcash.What
isrevealedbythesmallprintintheaccounts,whatishidingbehindthe
numbers,andwhoisincharge?
Thisguidewillseektodemystifycompanyaccountssothatyoushouldbe
abletoanswerallofthesequestionsandfindoutwheretherealstoryisin
asetofcompanyaccounts,eveniftheyrunintohundredsofpages,without
drowninginthedetail.Swimminginit,buthopefullynotdrowning!
IwilldealessentiallywithcompanyaccountsasproducedbyUKregistered
companiesorthosequotedontheLondonStockExchange(LSE)—companies
thatplaybytherulessetdownbytheCompaniesAct2006,theLSElisting
requirementsandUKaccountancyregulator'sUKGAAP(GenerallyAccepted
AccountingPrinciples).Companyaccountsaroundtheworldareproducedin
asimilarfashion,soonceyouunderstandasetofUKcompanyaccountsyou
canapplythatunderstandingtoforeigncompanyaccounts.Manyaccounting
conceptsandpresentationsareuniversal.Onlytheamountofdisclosuremay
differ.
Iwillalsoconcentrateontradingcompaniesratherthanbanks,insurance
orinvestmentcompaniesandminingoroilcompanies.Theaccountsofthese
typesofcompaniesareinmanywayssimilartothoseoftradingcompanies
thatmakeorsellgoodsorservices.Buttherearecertainessentialdifferences
andcomplexitiesforwhichajournalistwouldneedtoseekspecialistadvice
fromthoseknowledgeableaboutthatparticularindustry,suchasinvestment
Introduction
analystsorcommentators.
Sowhatskillsdoyouneed?
Youwillneedsomeappreciationforcommerce—howsimplebusinesses
suchasacornershoporamarkettraderwork.
Youcertainlydon’tneedtobeamathematicianorstatistician.Asyou
willseelater,accountingismainlyaboutwordsandoftenaalittlesleight
ofhand-somethingmostjournalistsaregoodat!Butyouwillneedtobe
comfortablewithnumbersandnotglazeoverwhentheyappear.Numbers
arelikeaforeignlanguage.Itisdifficulttostartbutthemoreconversantyou
become,theeasiertheybecome.
Thisisnot“companyaccountsfordummies”.Journalistsshouldbebetter
thanthat.Itisnotsimple.Thereisnoeasyway.However,itcanbedone.
Ihopethisguideisindeedhelpfulindemystifyingcompanyaccounts.If
youhaveanycommentsorsuggestionsyouarewelcometoemailmeatthe
addressbelow.
Anumberofpeoplehavecontributedextensivelytothisguidebecoming
arealityratherthanjustremaininganunansweredrequestfromjournalists
attendingmycourses.IamparticularlyindebtedtoMichaelGillardforhelp-
ingtomakeithappen.ManythankstoJulietFergusonandMinalDaGama
Roseforensuringthateverythingwasontrackandreadyintimeforthe2018
CIJSummerConference.Finally,thankstootofriendsandfamilywhohave
readdraftsandofferedcorrectionsandsuggestions.
Wasitfoolishforamanofnumberstoofferwordsofwisdomtomasters
ofwords?Timewilltell.
RajBairoliya
[email protected]
June2018
GlossaryofAccountingTerms
8 TwhsihteahdyawcchoileueneltoiFanoigtkaitnegrmastparsoevtidoefdcboemlopwanayreacthcoeutnetrsmosryoFuinanneecdialtoSbtaetefmameinlitasr,
Thinkofitasthebasicvocabulary.Youprobablyknowmanyofthemalready,
butifyouarenotsurewhataspecifictermmeans,pleasereviewtheterms
belowbeforedivingintotherestoftheguide.Pleasebearinmindthatthese
are“journalistfriendly”definitionsratherthantechnicaldefinitionsandare
designedtocutthroughtheaccountingjargon.
Abridged(formerlyAbbreviated),Accounts“Micro”and“Small”UK
companiesdonothavetofileaProfit&LossAccount(P&L),theycanfilea
lessdetailedBalanceSheetandfewerNotes(seeChapter9).
AccountingPoliclesThefirstNoteintheAccounts.Rulesofthegame.
Thebasisforhowthenumbershavebeencalculated.Thisiswheretospot
“aggressive”accountingthatworksthesystemtomakenumberslook
better.Shouldanswerwhen“asaleisasale”andhighlightjudgement
issues,
AccrualsAmountsaddedtothecreditorsattheyear-endinrespectof
goods/servicesreceivedbutnotyetinvoiced.Frequentlyabused.Alsosee
Prepayments.
AccruedIncomeThisisincomethatthecompanythinksithasearned
inaccordancewithitsaccountingpolicybutnotyetinvoiced.Canbe
manipulatedeasily.Iftherevenuefigureiscooked,partsofitarelikelyto
beAsmitatpinétgherare.O|pporsiteolaftDioenferSrpedreIandcionmgeth.ecostofanassetovera
nhuavmebaersiognfyifeicaarsn,tRimespualtcstoinnapnroafnitnsu.alchargeagainstrevenue.Theratecan
GlossarofAccountingTerms
AnnualAccountsCompanicsproduceannuallyauditedaccounts
showingtheirtradingresultsandfinancialhealth.ConsistsofDirectors’
Report,AuditReport,P&L,BalanceSheet,CashFlow,Notes.UK
CompanieshavetofilethematCompaniesHouse.
AnnualReport Providedbydirectorstoshareholderstogowiththe
AnnualAccounts.Containsstatutoryinformationsuchasdirectors’
sharcholdings,politicaldonationsandothergoodstuff,Butwithlisted
companiesthereisoftenmoreheatthanlight,showingwhatdirectors
wantsharcholderstofocuson.AnnualAccountsareintheunexciting
secondpart.
AssetsWhatthecompanyownsandisowed.
AssoclateCompanyCompanyBBisanAssociateofCompanyAAifA
holdsmorethan20%butlessthan50%ofShareCapitalofBorexerts
“significantinfluence”onCompanyB.
AuditOpinionStatementlegallyrequiredwitheverysetofaudited
accountsstatingthatthenumbersaddupandgivethelegendary“true&
fairview”thatallnecessaryinformationhasbeenprovidedbythedirectors
andcomplywiththeCompaniesAct2006.
AuditorsAccountantstechnicallyappointedbyshareholderstoopine
whethertheAccountsproducedbythemanagementfairlyrepresentreality.
Inpractice,theyareappointedbymanagementandrubber-stampedbythe
shareholders.
AuditReportNon“Small”companiesmusthaveanannualAuditwhere
theauditorcertifiesthat“Accountsshowaatrue&fairviewandcomplywith
theCompaniesAct”.99.9%ofAuditReportsareofthistype.Othersare
“Qualified”—awarningsignthatallisnotwell.
BalanceSheetorStatementofFinancialPositionSnapshotof
everythingacompanyownsminuseverythingitowesononeday(the
financialyear-enddate)—notthedaybeforeorthedayafter.Often
“windowdressed”(seebelow).
BorrowingsLoansoroverdraftsfrombanks,otherfinancialinstitutions
orindividualsincludingdirectors,plusbondsissuedtoinvestors.
CalledUpShareCapitalorEquityAmountinvestedbytheownersof
thecompanyinshares.Sameasissuedcapital.Shareshavea“par”orface
value,whichisusually1pto£1.Sharescanbe(andusuallyare)issuedat