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Former Financial Services Authority chief executive John Tiner this week became the latest brave soul to enter the debate on who audits the auditors - in this case with a report into the governance of the National Audit Office.
This follows on from some unpleasant publicity last year over the expenses of Sir John Bourn, who has been Comptroller and Auditor General these last 20 years. No one has questioned the quality, integrity or impartiality of the National Audit Office work under Bourn, and neither does this report. That side of things is fine, but the governance of the body itself has got a bit left behind. Tiner's proposals briskly set about bringing it up to date.
His key suggestion is that the NAO should henceforth have a board under an impartial chairman appointed by the Queen, and the chairman should in turn select powerful non-executives.
But though the Comptroller will answer to this board, it is important that he is not thought of as a chief executive whose job is to do what the board decides. Instead, it is vital for the independence of the office that he continues to decide what the NAO will investigate, and how its resources will be deployed. There are few enough watchdogs over Government spending to risk weakening this one.
Tiner suggests three other things, all of which make eminent good sense. First, the NAO and the Audit Commission, which deals with local authorities, should work more closely together and exchange a board member to assist in this. Second, the Comptroller's pay should no longer be linked to that of a High Court judge, but set to attract the right calibre of candidate. Finally, the Comptroller's term of office should be limited to eight years, and be nonrenewable.
It is hard to object to any of this, and let's hope our politicians don't. The NAO is too important to be left with a vacuum where its own governance should be.
BRITISH TELECOM has long been characterised as a pension fund with a telephone network attached, and with good reason. The liabilities on its pension fund were £36.9 billion last September. The company's market capitalisation was just £21 billion.
The accounting and pensions world has been seething this week after publication by the Accounting Standards Board of a discussion paper proposing even more stringent pension-fund accounting. First, the board says, pension fund liabilities would be increased, because it suggests these should be discounted using a risk-free rate of return rather than double A-rated bonds. Second, the gains and losses from pension-fund investments and the rises and falls in liabilities should be clearly shown on the profit-and-loss account of the sponsoring company.
Independent pension consultant John Ralfe, in a note for RBC Capital Markets, works out what it could mean for BT, as at the same time longevity assumptions are tweaked to bring them into line with those used by the Pension Protection Fund. These adjustments do not change the economic reality behind the reporting, but they do increase the volatility of reported earnings, and throw into stark relief the risks companies take when running defined benefit schemes.
The key point is that a bad time in the markets could easily push BT into a loss. Ralfe calculates that the company had a net £7 billion loss on investments in 2003, which would have swamped the £2 billion profit from operations, putting it £5 billion in the red. In later years, as markets recovered, profits would have been significantly higher.
In 2006, the £2.1 billion would more than double to £4.3 billion and in 2007 it would have risen from £2.5 billion to £3.9 billion. As for the current figures, Ralfe says it is quite conceivable profits would have been all but wiped out again.
The new accounting proposals are bound to be contentious. Accountants argue with justification that their job is to show what is happening, not to make life comfortable for the board and the shareholders. Ralfe points out that if firms don't like the volatility, they can avoid it by investing heavily in bonds - but that, of course, ismore expensive.
That is perhaps the central point. Such accounting does show the costs of running defined benefit schemes in an extremely harsh light - so harsh that it would be likely to prompt even more companies to give up on them.
IT was a shock to learn from a Department for Transport statement this week that the Government had guaranteed raised by Metronet, the nowcollapsed consortium that was supposed to have been upgrading most of the Tube network.
Naïvely, I thought the point of Private Finance Initiative (PFI) contracts was that they transferred the risk to the private sector, which then had an incentive to do the job efficiently. Not in this case, it would appear.
Given that Metronet was owned by a clutch of private-sector companies, most with share listings in the UK, it is strange a Government guarantee should have been necessary. It is odder still the Government did not take more interest in the way Metronet was run subsequent to giving that guarantee.
If it had, it might have noticed that almost all the Metronet contracts were going to its shareholders, in contrast to policy at the still-solvent alternative consortium Tube Lines, where contracts were put out to competitive tender.
The net result of this is that the Government - or rather the taxpayer - has to honour the guarantee, which means it is to pay out £1.7 billion to the holders of the debt, as well as finding £33 billion in grants to finance the continuation of the work.
What a disaster this PFI project has turned out to be. And how interesting that the people who arguably have got off lightest of all are the companies in the consortium to which all the risk was supposedly transferred.
