Talking of profit and loss

YOU are, let us suppose, an auditor. No, there is no need to take it personally. I am not trying to upset or offend you. For the sake of argument, just suppose you really are an auditor (probably trying to disguise yourself, in the interests of respectability, as an estate agent, car salesman or scrap metal dealer).

Comes the day to settle a company's annual accounts and you face the firm's finance director. You helpfully suggest that there are 365 ways in which the profit-and-loss account might be presented and tactfully inquire what he has in mind.

Well, says the finance director, we in this company are dedicated to the pursuit of shareholder value. You applaud his stand, naturally. And, the FD goes on, shareholders very properly want a high share price. This is more easily achieved if method number 74(a) is followed. Thus sales made, but not yet delivered, and certainly not paid for, can be recognised as achieved revenue.

The fact that the customer might not survive to pay, or that one of the company's partners might go out of business and leave a tiresome bill behind is, well, on the whole unlikely. So these, if mentioned under contingent liabilities, can be deemed immaterial, can't they? You say you get the message.

All in all, says the FD, he hopes you appreciate that the accounts can thus present an encouraging picture of rising sales and profits. You agree. And, you helpfully add, this should boost the FD's and the chief executive's share options, to say nothing of their annual bonuses.

Good Heavens, says the FD, that had slipped his memory. Your observation is correct. Nevertheless, he adds, he will not be deterred by a prospect of personal gain. After all, incentivisation is all the rage and who can argue with the wisdom of that? No-one, you reply, pencilling in an increase in audit fees for next year.

Telecoms trend
ANYONE for telecoms? Problems surfacing at Energis and Colt underline the difficulties arising from excessive investment. Similar problems have hit the US. Over the last 20 years, there has been a collapse in telephone line capacity utilisation there.

When it was at 80% - 90%, firms prospered. Today's level of below 55% means the disappearance of any pricing power. Whatever else is recovering in the US (supposedly), it is not telecoms.

Pension lesson
HAVE companies closing down final salary pension schemes learned from the Equitable Life affair? The courts initially upheld the mutual's attempt to differentiate between members' bonuses, depending on whether they opted for guaranteed annuity rates or plain vanilla pensions. The economics were obvious since Equitable, as a mutual, had no reserves.

The senior chancery judge, Sir Richard Scott found for Equitable's now much-maligned board, saying the mutual's articles of association gave it ample discretion, which seemed indisputable given the articles' wording. Going to appeal would be a waste of time, he warned.

Yet both the Appeal Court and the House of Lords found that Equitable had breached an 'implied' condition of members' rights. The decision astonished many in the legal profession.

The trustee deeds of various company schemes could well stumble over the same problem. They will normally say that companies can terminate schemes if they wish. Literally interpreted that should put companies in the clear. But after the two court rulings and the introduction of the 'implied' duty, expect actions against companies with who knows what effect.