When large suppliers announce their annual results,
their customers, shareholders and analysts assume the figures are
correct - but that is a big assumption.
The accountancy profession has told Computer Weekly that
write-offs by suppliers, because of contracts which have been
over-valued, expose a deep wound in book-keeping practices.
This fissure allows companies to legitimately base their annual
accounts on assumptions.
The flaw in accounting regulations, rarely discussed in the
open, means that the annual accounts of large technology companies
can be based, at least in part, on assumptions which may prove
incorrect. Costs on long-term contracts can turn out to be more
than directors first thought, or they may not receive the payments
they anticipated.
BT write-off
The difficulty facing suppliers was illustrated when BT
wrote off £336m on contracts in its Global Services division.
BT Global Services manages large IT outsourcing contracts,
including the supplier's £1bn contract with the Department of
Health.
Yesterday,
BT's share
price fell to a new low of 97p - it has dropped by more than
half in a year, from 237p - after it revealed disappointing
results.
A statement from BT announcing its
third quarter results referred to "assumptions" it had made and
disclosed that the company has been reviewing its major
contracts.
There is no evidence that any rules, whether moral, regulatory
or legislative, were broken.
A BT spokesman confirmed to Computer Weekly that its assumptions
made at the outset or during the life of contracts turned out to
have been optimistic.
"It is a question of using a certain set of assumptions when
working out costs, and cost savings, and the way the contract is
going to work, and then finding out years later that those
assumptions have proved not to beas prudent as they perhaps should
have been," he said.
Lax accounting
regulations
It is important for customers of big IT outsourcing companies
that their suppliers are financially sound. When issuing tenders
for long-term contracts, buyers will ask for the annual accounts of
potential suppliers. They will want the chosen supplier to be
around for a long time, and have the cash to invest adequately in
systems and services - particularly talented people.
Even if the accounts of many major IT suppliers prove incorrect
this would, arguably, not be the fault of their directors but of
lax accounting regulations which allow boards to speculate about
profits in their financial results.
It is not practical for suppliers to wait until the end of a
10-year outsourcing contract before declaring, with the benefit of
hindsight, the concrete profits on the deal. But there is no
compulsion in law or codes of conduct of the accountancy profession
for directors to be prudent in their estimates of annual
profits.
The government has learnt the hard way from the banking crisis
the dangers of a lax regulatory regime, but accounting policies are
more lax.
Ongoing
arguments
One partner at a large accountancy firm said, "You have raised a
very big and deep question. There have been arguments for decades
about how you can get accounts in the best possible shape, and I do
not think the arguments and discussions are finished yet."
There will undoubtedly be pressure for accounts to be tightened
up and suppliers need to cautious in their assessments, he said.
"Accounting is not an exact science. It involves assumptions,
valuations and views."
It is possible the credit crunch will expose the weaknesses in
the accounting regulations which encourage customers, shareholders
and others to accept as fact company accounts which are
speculative.
Even now, there may be IT services companies which are, on the
face of it, comfortably profitable, but which are, in fact, in some
difficulty.
| Satyam accounting
fraud |
|---|
| An admission by Satyam's founder, Ramalinga Raju, that he
deliberately
over-stated his company's revenues and profits for several
years will do little to boost confidence in the annual accounts of
large technology companies.
Satyam was India's fourth largest software exporter. It is
now being sold and its accounts for several years re-stated,
which the company says will take some time. Indian authorities, policy makers, regulators, accountancy
specialists and academics are to meet to stop a similar fraud
happening again. |
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