Examination of Witnesses (Questions 100 - 119)
MONDAY 2 MARCH 1998
MR ROBIN
MOUNTFIELD, CB and MR
MICHAEL HERRON
100. Can I ask the Treasury about their
recommendations on profit and clawback on re-sale.
(Mr Mortimer) Our main concern is to have clawback
arrangements in respect of property, in particular where there
is development potential. Then we very strongly recommend that
departments consider clawback. The problem with having clawback
arrangements in general is that if you introduce these arrangements
then they are likely to depress the sale price, so you need to
make a judgement as to whether you want a lower sale price with
a clawback arrangement or a higher sale price without a clawback
arrangement. We do not positively rule out clawback arrangements
in non-property cases but it is a question of expert judgement
and the people selling the businesses would need to discuss this
with their expert financial advisers.
Mr Wardle
101. Mr Mountfield, if the little essay
in self- congratulation which you offered Mr Leslie just a moment
ago is to be believed, why do you suppose it is that the NAO have
produced a report as quickly as this?
(Mr Mountfield) Well, I am not sure that I accept
that the NAO Report is critical really.
102. If that is your answer, then let us
leave it there because we clearly disagree. I think, if not in
scale, certainly in calibre and quality, this is a major disaster.
If you couple with it the fiasco of Uzbekistan, this is a major
disaster which I think ranks with the all-time great major disasters
going back to the groundnut scheme and Delorean. You said in your
evidence earlier that in 1994 if the business were to survive
as a viable operation, then the restructuring programme was needed.
After that, you not only had the advice of Binder Hamlyn, but
in 1995 you had Ernst & Young telling you that there were
no management controls and yet you also told the Committee that
early in 1996 you could be convinced that there was just a downward
blip in trade and that a £41 million trading loss in 1995
was something that could be overcome. How on earth could you make
any such assertion since your management accounts were all at
sea, since they differed from one little unit of the 14 to the
next one? How on earth could you make such an assertion?
(Mr Mountfield) First of all, if I may comment
on the Ernst & Young Report which was a report commissioned
by the National Audit Office following their audit of the 1994
accounts, that report was not given to the OPS either by the NAO
or by HMSO. It came to our attention as part of Binder Hamlyn's
work on the Long Form Report, I think I am right in saying, in
February 1996 or maybe January 1996.
103. So you are saying that Ernst &
Young came into this agency which was under your umbrella, and
I understand the distinction between agency status and the rest,
so you are saying that they came in and they worked there and
you did not have the merest feedback that they were saying that
there was absolute chaos and dislocation in the financial reporting
system? Are you saying that none of that filtered through agency
management to the officials in the OPS?
(Mr Mountfield) Yes.
104. Well, I think that in itself says a
great deal. Now, Mr Mountfield, you have sprayed your evidence
with reference to ministers, but you told the Chairman that you
are reluctant to disclose to the Committee what your own evidence
was. You referred to the Chancellor of the Duchy's specialist
adviser. Could you tell us who it was?
(Mr Mountfield) Yes, Mr Clay Brendish.
105. And what was his commercial experience?
(Mr Mountfield) He is Chairman of a listed company,
Admiral PLC.
106. When you say he attended five or six
meetings, did he, in your opinion, play a material part in the
decision to go for a trade sale as opposed to proceeding with
the three to five-year restructuring?
(Mr Mountfield) I think he was part of the advice
process on which ministers took their decision.
107. How specific was his advice and what
is on record?
(Mr Mountfield) I am afraid I am not able to say.
108. Then why did you allude to ministers'
specialist advisers with commercial experience? Was this to take
our minds away from the fact that there is precious little amongst
the officials who were involved in this fiasco?
(Mr Mountfield) No, because the proposition was,
which I have some sympathy with, that we should have insisted
on non-executive directors being appointed to the Board of HMSO
and I mention Mr Brendish's existence in that connection, not
in relation to the advice he may or may not have offered to ministers
on the sale.
109. I have heard your regrets about non-executive
directors and if there is time we will come back to that, but
are you saying that it is credible that officials would wash their
hands of the agency and leave it to ministers because that certainly
is what I inferred and I think you implied earlier? Since the
line of reporting was from the agency chief executive to the Chancellor
or whichever minister he chose on his team, are you saying, therefore,
that officials simply were not involved in these decisions?
(Mr Mountfield) No, I am not saying that at all.
What I am saying is that I am not accountable as accounting officer
for the decision to sell.
110. So you have told us that you were not
aware of what Ernst & Young had had to say about the abysmal
state of financial reporting. You are saying that you were not
aware until the accounts were produced for 1995 that you were
sitting, or the agency was sitting-let us preserve the distinction
for your sake-on a £41 million trading loss. Are you saying
that on that basis you were prepared to go along with the ministerial
decision to go for a trade sale?
(Mr Mountfield) First of all --
111. Did you not wonder why there was a
sudden rush to go for a trade sale rather than continue with the
programme on which you had all embarked?
(Mr Mountfield) First of all, if I may, the loss
of £41 million was not a trading loss. That was after allowing
for two specific adjustments: one for £25 million which was
an exceptional item for the early redundancy payments in 1995/96
which were taken into the 1995 accounts; and, secondly, for a
series of specifically identified one- off events as the management
[5]
--
112. So, in other words, it was not just
in 1996, but it was a lot earlier that you were contemplating
the trade sale, or ministers were contemplating the trade sale
and provisions were being made in the 1995 year end figures?
(Mr Mountfield) No, the year end figures were
of course not drawn up until after the end of the year, in other
words, after the end of 1995, whereas the decision to proceed
with the trade sale was taken --
113. So this was a decision taken after
the year end to make these provisions? So you could say that netting
all of those figures out, the trading downturn in 1995, smaller
than £41 million, as you have just explained, was a mere
blip?
(Mr Mountfield) No. Of the £41 million that
you refer to, there was £15 million or thereabouts of specific
trading items which were specifically identified in the end of
1995 accounts[6].
114. You then went on in your evidence this
afternoon to talk about a profitable first quarter, or the agency
chief executive's view that there had been a profitable first
quarter, I think, in 1996 because we are now moving into mid-
1996.
(Mr Mountfield) Yes.
115. How on earth could he have come to
that conclusion if his accounting and control systems were in
such disarray?
(Mr Mountfield) I think the proposition that they
were in that degree of disarray is an exaggeration of the real
position. There were unreconciled imbalances which were in effect
the risk of double accounting, plus or minus transactions between
--
116. As between any subsidiaries underneath
a holding company.
(Mr Mountfield) But that does not mean that the
aggregate situation was as adrift as that.
117. It may do or it may not. I do not think
you know and I allow that I do not know, but let me ask you this:
if there had been a genuine serious decision to go for a three
to five-year restructuring programme, let us see what we can make
of that. You said to Ms Eagle a little earlier that it might seem
perfectly logical to you to take the four divisions and sub-divide
them into 14. Is it just as logical if your ultimate goal was
to have a flotation to have them all go their own way on their
accounting systems?
(Mr Mountfield) No. First of all, if I may split
that point into two, the question of whether it was right to split
the business into 14 business units was clearly a judgment which
was taken on consultancy advice in 1994 and was endorsed by ministers
at that time. The question of whether the accounting arrangements
were properly done, I think I agree with you entirely that it
was unsatisfactory and there were clearly unresolved problems
at the point when we were trying to make the sale.
118. Let us just pursue that for a moment
because that is very helpful. Here you are with this flight-path
to flotation, or so we are told, and yet you leave in charge of
an agency, or ministers leave in charge of an agency a chief executive
who is due for retirement in a year's time and presumably with
at least some sense that there are financial and reporting gaps
in every direction and everyone is allowed to go their own way
and you then choose an in-house replacement. Does that make sense?
(Mr Mountfield) First of all, the decision to
proceed in 1994 was on the track record which, to all appearances,
was a steady-state business declining in real terms, but continuing
to be profitable. From 1980 through to 1994 it was still breaking
even or better.
119. But you are saying that until you received
audited accounts for 1995 or until you began to look at the draft
accounts, should we say, after the financial year end, you really
had no sense from the financial management information which the
chief executive must have been receiving, you had no sense of
the state of chaos that existed within the agency?
(Mr Mountfield) Yes. I believe that the position
was that the accounting arrangements were perfectly adequate before
the restructuring.
5 Note: See Evidence, Appendix 1, page 25 (PAC 227). Back
6
Note: See Evidence, Appendix 1, page 25 (PAC 227). Back
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