Select Committee on International Development Minutes of Evidence

Examination of Witnesses (Questions 640 - 657)



  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.


  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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