The Eighth Year and the Myth of Audit

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Source: https://sites.google.com/site/spritetump/odobrosonha

25 Then Joseph said to Pharaoh, “The dreams of Pharaoh are one; God has revealed to Pharaoh what he is about to do. 26 The seven good cows are seven years, and the seven good ears are seven years; the dreams are one. 27 The seven lean and ugly cows that came up after them are seven years, and the seven empty ears blighted by the east wind are also seven years of famine. [Genesis]

 

Businesses are about people. People who do, people who lead, and people who count stuff. This is about the counters. The bean counters. The dour professionals with their ledgers and their double entries. With their standards and their prudence. The accountants.

There are two distinct classes of accountant. The first win their spurs in the rarefied atmosphere of a professional services firm. They’re not the cream of their graduating class. Those guys and girls got snapped up by the boutique consultancies. They’re not the most ambitious, that group goes on to endure sixteen-hour days and bigotry in an investment bank. No, the ones who file through the doors of the big four accountancy firms to join the training treadmill are good but not great, maybe (whisper it) just a bit boring. Or shout: Pasty faced shoegazers.

The really wild ones, the ones that wear brown shoes, go into tax.

A notch further down this hierarchy go to the second-tier firms, let’s not worry about them.

And then you have the waifs and strays of the finance profession. The urchins, urchin’ around on corporate graduate schemes to become what no parent wishes for – a management accountant. I was one of those, out of university without a clue and onto the only graduate scheme that was still hiring. I became an accountant by mistake, and it took me sixteen years to stop.

There is a whiff around accountants these days. It is not as bad as the miasma surrounding bankers, who are the unwholesome spawn of Baal, but a sulphurous odour nonetheless. The failure of Carillion is a recent but not isolated lodestone for public ire.

Carillion, and all such failures, are first and foremost the failure of their own management team, but attention inevitably turns to their auditors. Where were the standards and the prudence while the company flushed its way down the toilet?

My answer lies with the Prophet Joseph and God.

Text books are filled with all the worthy roles a finance function performs to keep its host business alive and healthy. I doubt any of them mention that it plays the role of Joseph.

Being employed is as much about the certainty of employment next year as it is about this week’s wages (unless you are one of the sociopaths known as an entrepreneur). That gives the internal accountant or the commercial finance person or management accountant, call them what you will, two key but rarely mentioned tasks: dealing with lies and making life boring.

People will lie for an easy life. Whether it is the operational manager whose team could not possibly deliver cost savings next year, or the salesperson bemoaning market conditions for lower revenue target, the life of the management accountant is beset by liars. Learning the business, filtering out the bullshit and being credible in this environment is a core skill which means you can put together a coherent, challenging and achievable business plan.

Making life boring is just as important. Steady, predictable growth and modest improvements year on year keep everyone employed. Bonuses don’t fluctuate, hard questions are avoided.

Life and business aren’t like that. Myriad exogenous factors can lead to a good year or a bad year. In this the management accountant is Joseph, and her/his granaries are the balance sheet.

Putting a little bit aside in a good year is just prudence. A provision against what may befall in the future. Provisions are essentially subjective: I think I may owe someone money in the future, I’ve assessed the risk, I’ve taken a little bit out of this year’s profits against that possibility.

Often this is for a good, uncontroversial reason. Sometimes it is just because this year’s numbers are looking a bit too good, and next year might be tough. Smoothing out volatility makes everyone more comfortable, and in the medium term all profits will be declared, all taxes paid, and no harm done. A victimless crime. In fact, in the exercise of judgement and prudence, not a crime at all.

Everyone sleeps well at night.

Where is the auditor in all of this? In practical terms – utterly powerless. As a financial controller I expected my junior finance managers (around their first full year post qualification) to be able to run rings around any auditor. They could justify a provision one day, and when the corporate numbers looked a bit better the next day, argue the opposite. Sometimes they did this just to alleviate the grind of the year-end close.

Learning to deal with liars makes you quick on your feet and fills your armoury with credible half-truths and myths about the business. I’ve made up this example to protect ex-colleagues, but they’ll recognise the tone “we get more refund claims against us on a Tuesday, and next year there are more Tuesdays than this year, so some of the revenue earned this year is at risk…”

You can’t really blame the auditors. Most have never stepped outside their glass and steel edifice. As their careers progress the cream keep getting skimmed off to do business advisory work or are enticed away by corporate riches. Quality diminishes with seniority.

In which case what is the point of the tax every business has to pay in audit fees?

And so we come to God. People behave better when they think there is someone watching. A warning sign about speed cameras makes you slow down, even if you are pretty sure there is no actual camera.

Most accounting is carried out by software, most decisions, even marginal ones, are benign. The presence of the auditor is just to remind the CFO not to do something really bad. The probability that Tina or Tim nice-but-dim from DeToiletWaterhouse will actually catch you is low, but the consequences are high, so don’t do it.

That’s fine when good years are followed by bad years and more good years. But think about Joseph. What happens in the eighth year of famine? At that point the Prophet would rely not on prudence in filling the granaries, but on a miracle.

Accountants can perform miracles too. Balance sheet sleight of hand and some fast talking can draw forward future performance and prop up the eighth year. Sometimes they get away with it, the ninth year is fine, the borrowed future repaid, and everyone sleeps soundly again. Employees keep getting paid, audit fees are earned and disaster avoided. Another victimless crime?

Maybe.

No one knows with certainty what will happen in the ninth year. And at what point does Pharoah (the CEO) who has put years into a business, or a deposit on a yacht, have the incentive to say “actually, we’re toast.”

Aha, but God (aka the auditor) is watching.

True. But remember all those little white lies, the marginal provisions? We all know there is no camera.

Besides, the auditor is also invested in the business. Years of boozy lunches and advisory add-ons have been earned. Believing in the ninth year means they may be earned again. The auditor that calls foul in the eighth year is a heretic. Any business can have a run of bad luck, who wants an auditor that does not believe?

The myth is that oversight works. Thousands of years of religion have proved this to be untrue. Paradise is a long way off; the pleasures of sinning are present and immediate. God may be watching, but most of the time (floods and plagues of locusts aside) does nothing. And auditors are far from omniscient.

Just like everyone else they also want to be employed next year. Except on the very brink of disaster, there is no incentive for them to call out a business that is sinking.

The entire system needs a rethink. It is grounded in a history of manual ledgers and petty cash. The risky parts of the economy are now wholly electronically controlled. Money is digital, transactions are coded. It is possible to be omniscient about transactions. The risks are all in the making of decisions. Why force every business to pay the audit fee tax, the modern day tithe to the church, for oversight that is over-engineered and yet impotent?

Better in my view is a system which focusses where the risks are. A smaller, better experienced, commercially aware and technically well-resourced group that can spot check businesses at will. An arm of government that is protected from mixed incentives, with tools and powers to keep businesses on their toes.

If we need someone to play God, better the government than the self-interested.

END

The views expressed are strictly my own and not those of any employer past or present.

Find out more about my writing here.

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Immigrant Car Wash

Image result for American Hand car wash london

They are Albanian and they never stop working. The queue usually stretches outside the gate, and covers the range of cars from executive cruisers to family run arounds. Their slick processes deal with each equally.

There are no six sigma consultants here, no industrial engineers, but to my eye the method is perfect. Young men swarm over the cars that are being washed, careless of the spray from pressure washers, and practised enough to know they won’t take a direct hit. The roles are well defined: hose, sponges, chamois, windows, vacuum and interiors, but like a Dutch football team from the 70s they can switch, seemingly on instinct, based on the level of demand. When a new car rolls through the gate someone will break off and begin by squirting industrial cleaning fluid onto the brake dust that coats the wheels. The supervisor is the libero, spotting gaps and filling in around his workmates, adding weight to any part of the machine that is slowing things down.

The pricing board has any number of options, but I think everyone buys the standard “inside and out”. The young men don’t skimp, they don’t cut corners and they take pride in their work. I’m not sure anyone would notice or care too much if the guy with the paintbrush didn’t flick over all the edges of the interior trim to get dust out, but he does anyway.

A couple of them speak enough English to understand any special instructions, the rest is done in the universal language of nods and gestures.

My late uncle had a theory that people drive better after they clean their cars. He said it instils a sense of pride that leads to greater care. I don’t see anyone boiling out of the gate and driving like a lunatic, so I have no evidence to suggest his theory is wrong. It has a charm to it, and I want it to be true.

Before the Albanians came the lot had been vacant for years. It was a goods yard once, a relic in this residential suburb, too close to the rail tracks for the property developers to take an interest, and bypassed by modern logistics. For fifteen years it has been a bustling corner of the cash in hand car wash trade. Cars come in one gate dirty, the owners leave the engines running, and the cars leave the other gate gleaming, with the sickly chemical smell of spray wax and cheap air fresheners.

The pricing is rudimentary, always just off a full note. It once was £8, and only a churlish hand took the offered change. It is now £12 and I would guess most, like me, offer £20, take the proffered £5 note, and leave the shrapnel. At the end of every day I bet someone sifts the chrome drum of the vacuum cleaner for coins.

It’s not a unique model of business, and you can find an “American Hand Car Wash” anywhere that a busy road passes a gap between businesses.

I don’t tell my mother I use the car wash. Her first reaction would be: “Save your money, I’ll do it.” That is despite the effects of age and arthritis and, that at barely five feet tall, she would need a ladder to reach the roof of my aging Renault. It is for the same reason we only warily take her to restaurants, and when we do we don’t show her the menu. After fifty years in this country she has not lost that working class, immigrant sensibility of saving every penny, of doing things yourself rather than paying others.

She was born in a mahal, which translates to palace, but is probably better understood as a chateau or stately home, and was the darling child of a proud and ancient lineage. She had a milk nurse. This was in part superstition – none of her preceding siblings had survived infancy – and in part because ladies of a certain stature, like my grandmother, did not nurse their own children.

All of that ended with partition. She left India with half her family to the newly created Pakistan and then she married my father and moved to London. She worked in a factory, a dry cleaner’s, and finally a greengrocer’s stall until my father died. Then she bought a sewing machine and ploughed through her grief, rocking me with one foot and working the machine with the other. Her desk job in a bank, which she retained until my brother and I bullied her into retirement, came when I was about three.

Thrift and hard work are the principles that have stayed with her in that arc from faded aristocracy, near destitution, emigration and now comfortable middle class. There is little in that arc that is unusual or noteworthy; in my corner of London I see it everywhere. The ethnic stores that pepper the high street open early and close late, if they close at all. It doesn’t matter if it is the Polish delicatessen or the Turkish convenience store. Old Gujarati ladies once lined the tills in the supermarket, blue branded jackets over their sarees; now paler faces are mixed in, with broad Slavic features and extra Js and Ks in their name badges. They pull the long shifts and late shifts and just keep going.

All of this cultural melting pot is inside the north London eruv, the hub of British Judaism. No one makes trouble because trouble won’t pay the rent and leave enough to send home at the end of every week. And that home is presently only an abstract concept. There is no going back; there is no option but to succeed. A return, in the rare instances that happens, leaves deep roots and ties here. Despite race, religion or any other distinguishing feature, here becomes home.

This is my home. My daughter was house captain in the local church primary school, my niece sang the hodie in the carol service in our local church (not as well as this though).

More broadly, making this country a home for immigrants matters. Immigrants work, immigration works. It provides weary economies with a supply of labour that is relentless and driven. It provides aging populations with youth and vigour.

Once the immigrants move beyond self-sufficiency, which they must to succeed, they become the source of wealth from which our top-heavy populations will pay for pensions and healthcare. Our task as mature post-industrial economies, hungry for sources of growth, is to harness that energy and determination, to take the skills and talents of new arrivals and use them. Weaving these disparate, different threads into the fabric of our society is a symbiotic act, necessary for our survival and theirs. It should not matter if it is a South Asian junior doctor or an Albanian youth with a burning desire to work all the hours he can, they are resources that want to be made productive.

In the same way disseminating the wealth of knowledge in our universities is to seed the world with its most dynamic workforce influenced by our culture and values. Closing bogus colleges is a valid, if costly policy choice. Restricting student numbers is blinkered short-termism.

That is not to ignore the structurally unemployed amongst our own populace. The decline of heavy industry and the growth in the service sector has left some regions in a spiral of decline. The solution there is different, and independent of creating a welcoming environment for migrants. Structural problems need structural solutions, and that means investment. The country needs an infrastructure that allows employers to disperse from dense metro areas, which they will if connectivity and access make the economics of moving viable. Education and retraining is needed for those whose jobs have disappeared, and those who have known nothing but a generation of unemployment. In the short term that investment will be re-distributive, but the point of an investment is that it pays back.

Today, our beloved NHS would fail without the contribution of migrant workers. But there is a genuine question to be asked: What restricts the educational attainment in certain parts of the country that means our own citizens cannot fill the gap in skills. The question is a supply side one, your Ghanaian nurse is a demand side response. The myth of migrants taking local jobs can only be true if the unemployed of Leicester or Middlesbrough are given the opportunity to gain competing skills.

In contrast, the investment for immigrants is not financial; it is in opening our hearts and minds to the contribution others can make, if we only stop thinking of them as “other” and instead as like ourselves: people trying to build a life for themselves and their families.

The young men at the carwash have changed in fifteen years, just as the faces lining the supermarket tills have changed. The car wash has changed around them. They all wear logoed sweatshirts now, and will change your tyres as well as wash your car. It would be naïve to think all the income goes through the books, but some of it does, where before the whole thing had no paper trail.

The lot, which served no purpose before they took it on, is always busy. They are always busy. I don’t envy them the cold water and back-breaking labour. I’m one generation on, living off the effort my parent’s generation put in. That means I know why they do it. One day their kids will bully them into retiring and grudgingly they will agree.

 

END

If you are interested in my writing check out my author site

Other essays you might be interested in:

Remember, The White Folks Won

The Gates to Common Ground

J’accuse… the Muslims

 

 

Faith and Continuity

Suleimani Aqeeq Ring

Suleimani Aqeeq Ring

In Islam we differentiate between Muslims (those who submit to the will of Allah) and Momins (those who believe). Believers have attained a higher state of faith than those who submit. One of the five signs of a believer is that they wear a ring on their right hand, typically a carnelian, and this is mine.

My maternal grandmother bought this in Iraq as a gift for my father, her son-in-law. My brother inherited our father’s utterly gorgeous Omega watch, and I got the ring. That’s pretty much all he had, and as all my grandparents were poor as church mice the gift is probably as much as my grandmother could afford.

I also inherited my father’s mannerisms, but alas not his elegant fingers; the ring has been widened twice since I have owned it.

This is my symbol, of the things I believe, who I am and where I came from.

End

More symbols here