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.
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.
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.
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.
Related BT stories:
- BT - good news on the NHS's National Programme for IT
- BT shares slide 30% as global IT services arm falters