Examination of Witnesses (Questions 640
- 657)
TUESDAY 23 JANUARY 2001
MR ROGER
DAVIS, MR
RICK HELSBY
AND MR
IAN TRUMPER
640. I am talking about your accountancy work
now?
(Mr Davis) The phrase, Ms Clwyd, "blind eye",
I hope never occurs in my vocabulary. I am an auditor, and my
whole training is to turn a blind eye to absolutely nothing. What
we are doing is, on any multinational client, and we are in most
of these countries not because they are attractive places for
business, although we want to build local practices as far as
we can, we are in many of these countries simply because our clients
are investing in those countries and they need our expertise in
those countries. Now, any of those multinational clients, of course,
we report to those clients in accordance with international accounting
standards, there is no regulator that can stop a partner in one
of those countries saying—
641. Except you said that international accounting
standards are still evolving, that there is not an international
accounting standard?
(Mr Davis) Let me simplify this. If it is a UK-based,
multinational company, they will want their accounts drawn up
in accordance with UK accounting principles, which are very, very
close to international accounting standards. I do not think the
detail need concern the Committee. And so we will ensure that
the audit in that country is done to international accounting
standards. The problem we have is that it is a domestic company,
in that country, where we may not be permitted to put our name
on a set of accounts in that country in accordance with international
accounting standards.
Mr Worthington
642. But you put your name on it?
(Mr Davis) We put our name on it, we put a warning
on it, saying, I cannot remember the precise words, but the warning
is sufficient for at least the sophisticated investor, like the
World Bank, and so on, to know that those accounts are not drawn
up with international accounting standards. It is a very difficult
call, Mr Worthington. We can withdraw from that country, or withdraw
all domestic work from that country, or we can stay in there and
try to fight from inside; we stay in there and try to fight from
inside, with, I think, quite a lot of success. It is a very difficult
call for this firm though to put its name onto something which
we do not think—
643. But the more we get into this the more
we realise how difficult it is, and the role that you are playing
there is obviously a valuable role. I am puzzled by the contrast
between yourself and the lawyers, and I think you were sitting
in.
(Mr Davis) Yes, we were.
644. Where the lawyers were very, very critical
of the environment in London and elsewhere. We know there are
corrupt environments, where there are countries where all the
people on the ground say, "It is not possible to operate
unless you play the local game;" and that is corruption.
In countries where politicians, unaccountably, become very, very
rich, and the only possible source of their money has been from
private companies that have won contracts; and you would agree
with that?
(Mr Davis) I would agree there is a lot of corruption,
yes, in some of these countries; we are not talking now about
UK-based, multinational clients. But I go back to my question,
it is a difficult call for my firm, it is a very difficult call
for my firm, but I think one of the concerns of the Committee
is that, because of corruption, people, foreign investors, are
not putting money into the economic development. "I would
say this wouldn't I?" We are staying there, we are putting
money in; it is not so much money, we are putting a lot of training
in, we are putting expatriates in, that transfer the technology
to the locals. I am not asking to be thought of as being altruistic,
but we are actually doing that, and so, in the call we have to
make, are we in that country or are we not, we do take those things
into account.
645. I think what I am asking you to say is
whether you would agree that this is a massive problem in the
developing and other parts of the world, where we are not looking
for the bad apple but where the accountants are saying, "You're
on the right track; we cannot operate properly unless international
standards rise." Are you saying that?
(Mr Davis) We can operate, we can serve our multinational
clients, including British-based multinational clients, quite
satisfactorily, if need be, or put in expatriates, or whatever
we have to do; they just do not tolerate second-rate service,
they want the same service around the world, and I think you have
heard evidence to that effect. As far as the local practice is
concerned, our judgement is to stay in there and help raise the
local standards, we believe that is in the long-term interest
of the country and the long-term interest of the firm, it is as
simple as that.
Mr Colman
646. And you always qualify the accounts, under
those circumstances, making it clear that international standards
are not being met?
(Mr Davis) We say, effectively, I cannot remember
the precise words, it is changing; we say, effectively, these
accounts are not drawn up in accordance with international accounting
standards. But we are not going to accept that something that
is fraudulent but there are—the typical difference, just
so the Committee understands this rather technical point, between
one of these countries' standards and international accounting
standards is that the local standard does not show the true financial
position. And the reason it does not show the true financial position
is usually to understate profits, because there are tax consequences
in understating profits, but also what some people might call
good reasons, they have a concept of hidden reserves, which come
out on the rainy day, and that is not tolerable in terms of Anglo-American
transparency, you do not have hidden reserves, you tell it as
it is. It is not so much deliberate fraud, just put in a deliberately
incorrect stock figure, or something of that kind, it is not corrupt
accounting, it is just accounting which is designed for a system
whereby probably the tax is much more based on the accounts than
it is in other areas of the world, and where family-owned businesses
simply do not want the world to know too much about them.
647. But, using your words, you would not take
a moral judgement in those cases, of corrupt practices by those
domestic companies within the countries we have been talking about?
(Mr Davis) If they set out deliberately to deceive
investors, the accounts were fraudulent, we would certainly take
a moral judgement, if the accounts were fraudulent, we would not
sign them. If they were in accordance with local practice, even
if local practice is not what I would agree with and what international
accounting standards would agree with, we would sign them but
qualify them to the extent they were in accordance with local
practice. I do not know whether that distinction is clear. If
we knew they were deliberately fraudulent, of course, we would
not.
Mr Colman: Just to pursue this, one last
time, but the category of corruption, in terms of corrupt payments
being made, I am talking about fraudulent accounts, if you know
that it actually contained large sums of money which had been
handed over from a private company to, let us say, the political
rulers of a country, and it is there in the accounts but it is
not clearly identified, it is hidden, would you, in fact, wish
to make a judgement on that, or are you turning your blind eye
in this situation?
Chairman: He does not have a blind eye.
Mr Colman
648. Would you be making your moral distinction
then, Chairman?
(Mr Davis) I would be extremely concerned, and we
have systems of international quality inspection, and so on, if
there were large payments that were shielded in the accounts,
which were clearly material to an understanding of that company's
position. We would say, "Out of that client."
(Mr Trumper) An example of that, if I may just add
to that point, is that the sort of corruption you are talking
about, trying to differentiate between the facilitation payments
and the grand corruption, in some of these countries where you
are talking about grand corruption, of course, if you did come
across that sort of payment you would take legal advice as to
whether it was an illegal payment or not. And I think Roger has
already outlined the action that the audit practice would take,
if, indeed, they had the advice it was an illegal payment.
649. But the advice would be from local lawyers,
under local practice, or international law?
(Mr Trumper) You would have to take account of both,
but, primarily, I would say that you would take local advice as
to whether or not that payment was illegal in that country. Can
I just go on and say that, in terms of the grand corruption that
we tend to get involved with in investigation work, clearly, a
lot of those issues are in respect of the greater part of transactions.
And I am sure that I have seen examples where the audit practice
tried to get to the bottom of that, tried to understand, get the
proper representations from management; and if they are not satisfied,
they will qualify their report, and specify in the report their
concerns.
Mr Worthington
650. Can I ask a little bit more about your
company's experience of investigating fraud related to corruption;
have you carried out any work on behalf of donor organisations?
(Mr Helsby) Yes, we have.
651. Can you give us some examples of that?
(Mr Helsby) I do not want to name names, because some
of the cases I am dealing with actually at the moment are in the
hands of prosecution authorities, or may get into the hands of
prosecution authorities. So far as a donor organisation goes,
we are working at the moment in Bosnia, on behalf of a donor organisation,
not in this country, who has lost a lot of public monies through
corruption within Bosnia, and we usually act for victims of fraud,
and NGOs, like any others, are victims of fraud. So, in that regard,
there is a victim of fraud and they have asked us to investigate
the whole situation, so that they can state transparently to stakeholders
what happened. So there is a report in the process of being produced
which will, I expect, become public at some time, so that they
can seek to recover the monies which the NGO has lost, so that
they can learn from the mistakes which they made, so they can
put matters into the hands, if possible, of local prosecution
authorities to prosecute the individuals involved. I have also
worked for World Bank-funded cases, and I am happy to say that
I worked in Albania, on the collapse of the pyramid schemes there,
over a period of two years, where, you may recall, the entire
business and financial and political community collapsed, with
the loss to the Albanian people of round about a billion dollars.
And that was a case in which, in the interests of transparency,
the World Bank agreed to fund the Albanian Government to have
a full forensic investigation to find out exactly what happened,
again what lessons could be learned, was there any prospect of
recovering monies, and what were the prospects of prosecuting
the individuals involved. So, yes, we do have quite extensive
experience of acting for NGOs, and indeed government.
652. Is this a growing side of your business?
(Mr Helsby) In developing economies, yes. I guess
the area of our business which is growing is probably in Central
and Eastern Europe, I would say, in the forensic investigations
practice. And I think that is down to the fact that where inward
investment goes so we as forensic investigators tend to follow;
in other words, the vast majority of our fraud cases, and I talk
about fraud in the wider sense and not about corruption specifically,
it would be where a company from country A, a western European
country, or UK, invests in a developing economy and finds that
the investment it has got is a pup, for a variety of reasons,
mainly because local management may be defrauding it, in some
form or fashion. These are people whose corporate governance ethics
are high, they call us in specifically because they want to address
potential stakeholder and shareholder concerns, they want to uncover
the full extent of the fraud, they want to put matters into the
hands of the local prosecution authorities. And that is where
many of our difficulties, as forensic investigators, actually
arise, and where it is frustrating for the corporate, in those
circumstances, because you will find that the local police are
not willing or able to do it, you will find that there is an overwhelmingly
bureaucratic process in those places, that there is a lack of
mutual assistance provisions, in terms of other countries, which
obviously affects how you can do things, and obviously a very
ill-developed sense of corporate ethic within the territory concerned.
Chairman
653. Can I just ask you one question which I
did not really put to you earlier. Accountants are said to be
a major source of money laundered in this country through client
accounts. Do you keep clients' accounts, and do you ask for it
to be banked and then to be invested? What we are a bit mystified
about, of course, like the solicitors, is that there is a relatively
low level of reporting of this sort of crime by the accountants
as a whole?
(Mr Davis) For my own firm, Chairman, I cannot say
we keep no clients' accounts, but it is not our business, our
business is basically middle and large company auditors and advisers,
and they do not need somebody else to keep their accounts for
them, we would be quite suspicious if somebody said, "Would
you keep an account for us?". Though I cannot claim we keep
none, but there would be little reason, in a very large firm.
Secondly, we have reported cases of money laundering, over the
last year or so, indeed, but I go back to our client selection
policies, that before we will allow a client to use our name we
will go through a very rigorous procedure, what that company is
in business for, make quite sure we understand that business is
above board, and so forth. So I think, from a large firm like
mine, something has gone wrong in my firm in our client selection
if we have to report a lot of money laundering cases, although
we have had to do it.
654. The figures are, perhaps you are aware
of them, from NCIS, 0.7 per cent of the 14,129 suspicious reports
made to NCIS in 1998 having accounted for only 0.3 per cent of
the 14,148 reports made the previous year, which is a surprisingly
low figure to come from the accountants' profession?
(Mr Trumper) I think Monty Raphael referred to us,
and questioned what is underlying those sorts of figures. I think
that people will accept that the work of NCIS is targeted largely
towards drugs money and terrorist-type activity. We just do not
operate in that area, our practice generally is large multinationals,
we do not tend to get into the black market economy, and a lot
of those reports, I think, are reflective of the black market
economy.
655. Based on your experience overseas and in
this country, relating to auditing and accounting, and, of course,
your concern about corporate transfer, what should the Department
for International Development be funding in this area, do you
think, overseas?
(Mr Helsby) I believe what some of the core issues
around overseas are, actually, the whole issue of, effectively,
corporate governance and ethics within territories and governments,
to be perfectly frank with you, that is, to my mind, the big area.
If you get things right at the top, and you can look at this in
terms of corporates, in getting things right at the top, and a
lot of the things flow therefrom. The same with countries; if
you get things right at the top and actually try to get corporate,
ethics, stakeholder interest as being paramount, in the wider
sense, then I think a lot of the technical things which flow from
that will emerge, including, for example, mutual assistance treaties,
they are not going to work if, up here, nothing is happening.
656. Yes; and you are talking here, in these
countries, about governments, are you not, not necessarily big
companies?
(Mr Helsby) Yes; absolutely right.
(Mr Davis) We are probably close to the end, Chairman,
I think we will end on a slightly bright note. As you know, I
have had a lot of experience for corporate governance of the Turnbull
thing, and previously with the Hampel thing. I have had a great
number of requests, do not ask me how many, but there are more
than a couple of handfuls, from various countries, including some
quite developed ones but particularly from the less developed
countries, from all sorts of sources, for the corporate governance
code, "How could it work in this country?". A lot of
those have actually come out of senior partners in my own firm
who want actually to do something, or they have come from an emerging
regulator, who has said, "Give me something I can work with."
That is quite good news; people are starting to say that, "If
we are going to continue to attract international money, World
Bank money, and so forth, we've got to do something." We
just hope it will not be lip-service, but there is a lot of interest
in corporate governance now.
657. Has the Foreign Office asked you to do
this in relation to the overseas territories, perhaps; perhaps
we should set a good example?
(Mr Davis) No.
Chairman: No, I did not think they had.
Anyway, thank you, all three of you, very much indeed for coming
this morning and helping us understand and perhaps grope for solutions.
Thank you very much indeed.
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