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Freeport's accounts still don't add up

freeport2 Freeport's accountants, RSM Tenon Audit Limited (subsequently referred to as Baker Tilly, as they have been taken over) have refused to give an explanation for their errors in  preparing Freeport's last published accounts (year ended 30 June 2012).

Baker Tilly are members of the esteemed Institute of Chartered Accountants of England & Wales, so I emailed them to complain about the errors I discovered in the the accounts. The Institute then advised me that it would be writing to Baker Tilly and would  reply to me once they had received an answer. I also emailed the head of Baker Tilly, John Abbot (no relation to the current prime minister of Australia,  at least not as far as I am aware) to inform him of the situation.  Unfortunately, John was too busy earning and spending his £300,000 (plus) a year salary to even bother replying.

Well, his firm only made an error of approximately £168,000 – nothing to worry about, then!

Even worse, the accounts were prepared to make Freeport look financially viable – which it isn't. It's only surviving by the “grace” of its ultimate parent company, the Washington-based private equity firm Carlyle. Should Carlyle decide that Freeport is no longer viable...

There are also serious issues about the £22 million debtors shown on the balance sheet.

Any accountancy student, if asked to prepare a set of accounts from a trial balance of Freeport's  accounts, would no doubt have put the £22 million debtors figure (due from  related companies) into an inter-company account (to be netted off, reduced in  other words) with the loans due to other related parties. Baker Tilly, possibly no doubt in collusion with Freeport's directors, put this balance £22,711,499) in current assets, just above the £39k in the bank. That certainly makes things look much better: “Current” assets, £22.03 million!

Unfortunately, if you look at note 3 in the accounts, it states that the £22.7 million debtors (of the total debtors figure of £22.98 million) are “due after more than one year”. How can they be CURRENT DEBTORS then? The real “current debtors” figure is just over £270,000 – possibly rent due (though as Freeport has only published abbreviated accounts, even this is not certain).

Any capable accountancy student would thus prepare the balance sheet on this basis:

Investments £125,007
Current Debtors £271,001
Cash at Bank £ 39,461
Net Current Assets £435,469

But here is the problem: the short term creditors figure is £9.5 million. These are amounts which are actually due within the first year. As Freeport currently has several outstanding mortgages we should assume that these are repayments that must be due within the short term. Any competent accountant (except John Bennett, the audit senior who prepared and signed off Freeport's accounts) or accountancy student would immediately exclaim, “Oops, you've got a short-term liquidity problem there!”  Less than £450k worth of assets with short-term liabilities of approximately £9 million. (I am using approximate figures because I am ignoring the amounts due to other Freeport companies.)

Without looking at both the profit and loss statement and the bank statements it is impossible to see how Freeport is financing these mortgage repayments. Further, what are these mortgages for, as Freeport only has some rather vague “fixed” assets of just over £125k?  Interestingly, nobody would know about these mortgages unless they checked on the Companies House webpage – or they had access to Freeport's proper figures!

Are Freeport's accountants simply playing for time so that they can rework the figures to make them look more presentable? They are going to struggle. As already mentioned in a previous article, the debtors figure includes an amount of approximately £14.9 million from CEREP UK Investment D GP Ltd (Freeport's only shareholder in the last accounts). This company has no material assets.

None of this is answering the question of why there was a £167,951 difference in the accumulated amounts of debtors. In the notes to the accounts (note 4) we are told that Freeport has debts owing from related companies of £4,000,000, £4,280,400 and £14,870,051. These three amounts add up to £23,150,051 - £167,951 more than the figure in the balance sheet. The difference could actually be greater if we take the figure in note 3 (£22,711,499) as being the figure of the long-term debtors that three individual figures should add up to. In other words, the difference could almost be £440,000. 

Let's hope that Robert Hodges, the director who signed off the accounts (in other words, he couldn't have checked  them), and who has now resigned, isn't sitting at a table at the Casino in Estoril. Let's hope it was all really just a “genuine error”, either by John Bennett, Robert Hodges, or perhaps both of them.

And this isn't making wild accusations. After all, Silvio Berlusconi, the former prime minister of Italy, has been accused of not completely dissimilar actions. And we all now know what the current mayor of Toronto (Rob Ford) has been  getting up to. I could also throw in the actions of the former chairman of the Co-op Bank (now under police investigation), but that would make this article longer than the Treaty of Lisbon.

The point is, why shouldn't “lesser” players, like former directors of a company like Freeport, not have similar things thought about them? If only either Hodges or Bennett had actually checked that the figures agreed then nobody would be screaming, “'Ere, Hodges!  What's this £168,000 difference? You're not doing your fiduciary duty, dear chap. Remember section 174 of the Companies Act 2006.”

As Robert Hodges seems to have forgotten this piece of legislation, then perhaps I might take this opportunity to remind him. Section 174 of this act requires that company directors have a duty “to exercise reasonable care, skill and diligence”. It's clear that Hodges failed in this capacity.

Sub-section 2 of 174 explains what taking reasonable care and being diligent means – as Hodges seems either to have forgotten it or  has no idea, here it is: “This means the care, skill and diligence that would be exercised by a reasonably diligent person with – (a) the general knowledge,  skill and experience that may reasonably be expected of a person carrying out  the functions carried out by the director in relation to the company, and (b)  the general knowledge, skill and experience that the director has.”

If Hodges couldn't be bothered to check that the three amounts that made up the accumulated debtors figure on the  balance sheet actually agreed, he could have at least employed a competent and  diligent person that could add up to do it for him. Perhaps he thought that a set of accounts prepared by a firm of accountants which is a member of the esteemed ICAE&W should at least be numerically flawless.

More seriously, though, given his “general knowledge, skill and experience” as a company director, he could have sat back in his chair and thought: These accounts are almost borderline fraudulent! But then, who prepared the accounts in the first place? (Baker Tilly.)

Worryingly, it seems that neither  Freeport, John Abbot, the head of Baker Tilly (as far as I am aware) or Helen Howard, the person who is supposed to be dealing with this problem at the  Institute of the Chartered Accountants of England and Wales (ICAE&E), seem  to really be concerned about any of this. I wonder if Miss (or Mrs) Howard would be so relaxed about if it was her money, or she suddenly weren't paid at the end of the month. Anyone who is concerned about these things can contact Helen on.

Helen.Howard@icaew.com It might give  her a push.

Mind you, she shouldn't really need  a push. In his inauguration speech in June this year, current president of the ICAE&W, Martyn Jones, gave a strong enough suggestion that the Institute was  really going to pull its socks up and give the public a better service. No only  did he insist that there was no longer any room for assisting people (their  clients) in aggressive tax avoidance, he also stated, “We recognise the  importance of individuals and companies paying the right amount of tax. Our view is that there is no room in our profession [accountancy] for aggressive tax avoidance and we have told our members that their ethical framework does not allow them to take part in artificial schemes.”

Very noble, but very pointless. Like all these speeches it's mostly worthless waffle. That is why it's taken over three weeks for Helen Howard to reply, we all know that the Institute will do very little (if anything) with regards to Freeport's accountants, despite their obvious incompetence.

But it might already be too late. Maybe Hodges has already given the money to “charity”; like a casino in Lisbon. But of course, even if the missing money is just a “mistake”, it still raises the question of why Freeport's directors and it accountants Baker Tilly (then RSM) prepared the accounts to make the company seem financially viable. Maybe they thought nobody would check…

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