Accounting for Renewable Energy Costs

The announcement by the Department of Energy and Climate Change (DECC) that the Feed-In Tariff (FIT) for solar photo-voltaic will be slashed with effect from 12 December, although hurried, will come as no surprise, of course. It was clear to the Accounting and Bookkeeping College in February that the government was backing a horse at very expensive odds. Some of the language used by the minister, Greg Barker, still seems a little ironic, however, “My priority is to put the solar industry on a firm footing so that it can remain a successful and prosperous part of the green economy, and so that it doesn’t fall victim to boom and bust.” Having created the boom the government only needed to make a drastic cut in rates to ensure that the industry would fall victim to its policies.

So the department has had to acknowledge that some of its calculations, even those made quite recently, have been wrong. But what if the whole plan is wrong? This is what we asked to consider by analysts working at accountants KPMG who believe that the current grand plan known as ‘Green Transition’ is based on assumptions that are now hopelessly out of date. Their report, called ‘Rethinking the Unaffordable’, considers whether the planned investment of £199 billion, financed through our energy bills, represents value for money. There are examples of how the project is not going according plan with the operators of the National Grid having to pay for wind farms to be turned off because the network cannot absorb the extra capacity, for instance, and the report picks apart the figures for the introduction of smart energy meters to show that they would cost £256/ton of CO2 when the official rate is only £12. It goes on to list the assumptions from the Green Transition plan beginning with “The UK economy enjoys a rapid recovery” and continuing through, “New nuclear and Carbon Capture and Storage (CCS) demonstration projects are operational by 2020″.

Ultimately, if a number of the assumptions behind the current energy policy are obviously wrong then the case for a ‘dash for renewables’ collapses. It will be difficult for a government which believes itself to be the greenest ever to put aside its commitment to renewables but it may be that the lesson of the PV debacle is that the case for pressing ahead needs to be absolutely watertight or else the country, and the climate, may well be better off if we stick to what we know in the form of nuclear and gas.

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Writing on Accounting Wall for RIM

It has been a very bad week, of course, for Research in Motion Limited (RIM). The outage afflicting its Blackberry service has left users fuming. The company’s management has given the impression that it was trying to say as little as possible during the crisis leaving a void that has been filled with media speculation and public anger across the social networks. Apparently the failure of a “core switch”, possibly in nearby Slough, along with its failover caused the problem initially with subsequent backlogs creating ongoing difficulties. When a disaster is so catastrophic and so unexpected it is impossible for anyone involved to be certain how long it will take to fix but RIM seems to have been unable to keep users informed at all leaving the impression that it didn’t care.

A look at RIM’s accounts, however, is more revealing than its PR department has proved to be in the latest crisis. RIM’s latest quarterly results show a business that has turnover in billions of dollars and profits in hundreds of millions. The report begins with highlights which feature the fact that “The BlackBerry subscriber base grew 40% year over year to surpass 70 million” and goes on to say that “RIM shipped approximately 10.6 million BlackBerry smartphones and approximately 200,000 BlackBerry PlayBook tablets”. Pretty impressive! A comparison with the previous quarter, though, begins to tell a different story. At the end of the first quarter RIM had $2.9 billion in cash or equivalents. In the space of three months half of that money has gone. Since the company made a profit the cash hasn’t been burnt by losses: it must have gone elsewhere. Again the text offers a helpful explanation, “Uses of cash included strategic purchases of intellectual property assets associated with RIM’s participation in a consortium of companies that successfully bid to acquire Nortel Networks Corporation’s patent portfolio, of which RIM’s cost is approximately $780 million, capital expenditures of approximately $285 million, and working capital requirements.” No doubt the investors are happy that RIM is making valuable acquisitions like the Nortel patents to boost its business but simple arithmetic would suggest that the ‘working capital requirements’ must be a number on a similar scale. The figures themselves reveal that the main drain on working capital was a huge increase in inventory of $754 million. It looks as though RIM has an awful lot of unsold BlackBerrys and Playbooks.

Both the first quarter and second quarter narratives provide a clue as to what is happening behind the scenes at RIM describing a new focus for the business such “that it would be reducing its global workforce across all functions by approximately 2,000 employees, representing approximately 10% of the total global workforce”. So, with competitors like Apple getting ahead in the technology race and cash resources drying up, management took the decision to decimate the workforce, especially the divisions that aren’t dedicated to producing sexy new products. Maybe they’re regretting that now?


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Pub game over

The news that Karen Murphy’s appeal has been upheld by the European Court of Justice (ECJ) has been welcomed in newspapers and pubs throughout the land. Of course they are all right to celebrate the fact that her criminal conviction has been overturned. It was always a nonsense that using a satellite decoder purchased quite legally in one EU country could be a criminal offence in another. If, however, the public mood of celebration comes from a belief that pubs can now subscribe to Greek or even Bulgarian satellite services broadcasting Premiership (FAPL) to screen matches not broadcast on Sky or ESPN or, more likely, to obtain the same content at a much reduced price, then we should prepare to be disappointed.

The decision of the ECJ is quite unequivocal when it comes to the sale of satellite decoder equipment, “national legislation which prohibits the import, sale or use of foreign decoder cards is contrary to the freedom to provide services and cannot be justified”. This should surprise nobody and is entirely in accordance with the ECJ Advocate General Kokott’s opinion earlier this year in the same matter. The court even considers the position of the unfortunate broadcaster caught between FAPL and the customer which, until now, has had to agree to limit its service to a certain country even though, apparently, the customer can take their subscription and use it anywhere in the EU so, “a system of exclusive licences is also contrary to European Union competition law if the licence agreements prohibit the supply of decoder cards to television viewers who wish to watch the broadcasts outside the Member State for which the licence is granted.”

These, though, weren’t the only matters for consideration by the court which was asked to answer nine related questions. Several of these questions relate to the extent of the copyright that exists over television broadcasts of football matches. The match itself, it seems, cannot be subject to copyright, “as those sporting events cannot be considered to be an author’s own intellectual creation”. However, virtually everything else that is added to the broadcast including “the opening video sequence, the Premier League anthem, prerecorded films showing highlights of recent Premier League matches and various graphics can be regarded as ‘works’ and are therefore protected by copyright”. It is impossible to imagine football matches going out on TV without this copyright content.

The final conclusion, then, is that anyone who wishes to broadcast (as opposed to view) copyright material, and that includes pub landlords, must obtain the permission of the copyright owner: “the Court decides that transmission in a pub of the broadcasts containing those protected works, such as the opening video sequence or the Premier League anthem, constitutes a ‘communication to the public’ within the meaning of the copyright directive, for which the authorisation of the author of the works is necessary”.

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Scandal of Accounting for Parliamentary Expenses

When the scandal of parliamentary expenses erupted in 2009 it was clear, of course, that a new system for paying MPs’ expenses was needed immediately. Before the end of the year parliament had passed legislation to bring the new Independent Parliamentary Standards Authority (IPSA) into existence. Equally urgently the new IPSA assembled everything, including staff, premises and software to begin operations after the election in May 2010.

Now the National Audit Office (NAO) has had time to review the success of the new authority and the value for money that it delivers. Credit is due for the exceptional speed, described as “a major achievement”, with which the new authority began work and the NAO is sympathetic towards some of the difficulties faced, even dismissing excess spending on temporary staff as “the right thing to do in the circumstances”. Inevitably, though, there are suggestions for how IPSA can do its job better and cheaper as the authority reaches maturity including moving to more suitable and cheaper premises once the current exorbitant lease expires after five years.

It is doubtful whether the MPs themselves would have given such a positive report on the new scheme. Certainly the House of Commons Public Accounts Committee in its report on IPSA has stronger reservations based, probably, on the mood of MPs as a whole. The NAO provides statistics that demonstrate this dissatisfaction. Apparently, “89 per cent told us they were dissatisfied with at least one aspect of the a new Scheme”. In detail, 61% of MPs were either very or fairly dissatisfied with the system for claiming subsistence and accommodation expenses and “an adversarial relationship appears to have developed between IPSA and many MPs”: not surprising when “most MPs believe they routinely subsidise their work and do not claim what they are entitled to”. Considering that virtually all MPs thought that the old system needed replacing this does not amount to a vote of confidence in IPSA.

In describing the process, at least as far as MPs and their staff are concerned, for claiming these expenses the NAO may well have identified the fundamental problem. Figure 10 in the report presents in the form of a flow chart the incredibly repetitive sequence that has to be followed in order to make a claim. Looking at the diagram there is good reason to believe the MPs when they estimate that they are spending four hours each month and their staff a further 12 hours toiling over their claims. It beggars belief, for instance, that the computerised system which IPSA has implemented, ‘expenses@work’, requires a whole new claim form to be initiated for each of the six different categories of expenditure that an MP might have incurred. The computer should do the analysis for the users, not the other way round! The NAO has attempted to place a cost on this incredibly laborious process and has arrived at a total expenditure in terms of staff time of £2.4million. The figure would have been very much higher if the amounts used for cost per hour had been those for a combination of senior and junior staff at IPSA rather than their more lowly paid claimants from the House of Commons.

So MPs are saddled with a frustrating expenses system that leaves almost all of them out of pocket. Maybe, after the expenses scandal, that is the system they deserve? The public has an costly and hideously inefficient mechanism for enabling MPs to do their job but perhaps, after all our righteous indignation, that is also our just reward?

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Skeleton Accounting

One of the reasons, of course, that is cited as a cause of the credit crunch of 2007 is the fact that banks did not know how much toxic debt in the form of collateralised debt obligations (CDOs), or shares in sub-prime mortgages in other words, other banks were holding. As a result all the banks stopped lending to each other and the ones that didn’t have ready capital of their own became insolvent. Four years later there is no such mystery over where the sub-prime poison and other bad debts ended up but, fortunately for those who run the banks if not for their shareholders, governments stepped in to prevent all except Lehman Bros. from going to the wall.

Two institutions that were especially badly damaged by becoming party to sub-prime lending were Fannie Mae and Freddie Mac. They were hurriedly and expensively rescued by the US government in the form of the Federal Housing Finance Agency (FHFA). The FHFA not unreasonably has taken a long hard look at the CDOs that Fannie Mae and Freddie Mac bought in the years running up to the credit crunch to see who was responsible for the appalling losses that they sustained. The answer, it seems, is that these bundles of mortgage were deliberately or wilfully mis-sold and the FHFA is suing the banks that sold them in order to get its money back.

Taking the suit against Barclays as an example it looks on the face of it as though FHFA has a very good case. The complaint alleges that when its ‘securitizations’ were issued, Barclays either did know or should have known that the registrations and prospectus supplements were substantially untrue. It looks at statistics which would have been available at the time to see if the figures that were quoted for levels of owner-occupancy and loan-to-value ratios were accurate. Not surprisingly, given subsequent events, it finds that they weren’t: they were miles out. More damningly the FHFA repeats in its complaint evidence that was produced in government investigations and court cases that have taken place since the crisis. So, for instance, the Supreme Judicial Court of Massachusetts found that Fremont, a  mortgage originator for Barclays, “made no effort to determine whether borrowers could ‘make the scheduled payments under the terms of the loan,’” and that “Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow.” Given the amount of testimony that the court had seen of appalling malpractice at the mortgage originators these conclusions seem inevitable.

This skeleton has been out of the closet for some time now and it is highly likely that FHFA will arrive at some sort of very expensive settlement with the banks. Why shouldn’t any other wounded party that bought CDOs follow the FHFA example and suing for its money back and, if they did, where would that all end?

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Whose bank account is it anyway?

The decision by the Payments Council, the body that exists to ensure the operational efficiency, effectiveness and integrity of payment services in the UK, to set a target date for the end of cheque clearing was widely reported in December 2009. The newspaper reporting, of course, left most people believing that cheques were definitely going to be abolished, probably in 2018.

Apparently, though, that wasn’t quite what was meant by the initial announcement. The Payments Council told the House of Commons Treasury Committee in 2010 that “closure in 2018 is by no means a foregone conclusion” and that they “have not made the decision to abolish cheques”. The Treasury Committee now feels that the public has been wilfully misled, possibly with the intention of making the abolition of cheques a self-fulfilling prophecy. In its latest report the committee points out that the banks have, on occasion, been telling their customers that “cheques are going to become a thing of the past” and that other trusted authorities are now taking up the same refrain with, for instance, a local council issuing a guide to council tax which stated, ”The Bank of England has announced cheques are to be phased out by 2018″. It seems that it didn’t help that the Cheque Guarantee Scheme (CGS) has closed quite soon after the announcement of the target date for the end of cheques themselves. So the Treasury Committee is now showing its disappointment with the Payments Council by recommending that the board “be altered in order significantly to strengthen the voice of consumers”. The banks themselves haven’t got away with it: the committee says that “each bank should be required to write to its customers stating that cheques will continue to be in use for the foreseeable future”.

Aside from shaking its stick at the Payments Council and the banks the Treasury Committee also wanted to consider what was to become of cheques and any progress that had been made with devising a replacement. Age UK had kindly proposed a list of priorities for such a payment method which should be;

  • Easy to use
  • Accessible, without the need for special equipment
  • Operable from home
  • Accepted by retailers, including small traders, clubs and societies
  • Allows payments to individuals
  • Controllable (so that people can budget)
  • Secure, and perceived to be secure
  • Protected
  • Difficult to abuse
  • Easily available
  • Suitable for people on low incomes.

According to the Payments Council a new “paper-based solution will probably look very similar to a cheque [...] but it won’t act like a cheque [...] the trick is that for users, they feel it is as like a cheque as possible such that they will feel comforted”. So it will walk like a duck and quack like a duck. This is the very least that the banks’ customers can expect because, regardless of any decisions by the Payments Council, banking law establishes that an account holder can give an instruction in writing to the bank to make a payment, or write a cheque in other words.

Thankfully the Treasury Committee can see through this nonsense. Even the Payments Council recognises this and has finally annouced that “any improvements to be made will concentrate on the ‘behind the scenes’ processing”.

It only remains for the message that cheques will not be abolished to reach bank customers but it would be foolish to expect to see very many newspaper headlines to that effect.

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The cost of lending books

Public libraries as we know them really began in the middle of the 19th century with a series of Acts of Parliament combined with cash provided by some noteworthy and wealthy philanthropists. There was good reason to believe that the new public libraries would be popular, of course, because so-called ‘subscription’ libraries were widespread across the country even though they were only available to those who could afford the fees. There was some opposition to the new public libraries as they would require additional taxation which would mainly fall on rate payers who were probably already paying members of subscription libraries if they liked books at all. In the end, though, Victorian Britain took the view that it was worth spending public money on books for the benefit of everyone.

Now it seems that we would like to spend rather less money on public libraries. One way to achieve this would be to close them all down but the outcome of the various Libraries Acts is that local authorities now have a statutory duty to provide a library service. So both politicians and executives in local government are looking for ways to cut the library budget whilst still seeming to carry out their legal obligations. The collective wisdom of those who are furthest ahead in this process has been published by the Local Government Group  for the benefit of all in ‘Future Libraries: Change, options and how to get there’. Prudently, this document does not claim to be a step-by-step guide to a cheaper and better library service. One reason for this is that it is now very difficult to be sure what the libraries are for. The Victorian emphasis on books has gone and, instead, ‘Future Libraries’ offers us a list of “outcome areas” including;

“• reading levels, access to job seeking support and information, promoting independence for older people

• providing service access points in neighbourhoods and rural communities

• providing a focus for community engagement activity through meeting space, volunteering, community activities, particularly in areas of deprivation or with low car ownership, limited public transport and low computer ownership

• empowering communities, including asset transfer and community management”.

It is not surprising, then, to find that amongst some generalisations about consulting with stakeholders etc and a few tips regarding sharing the cost library of library resources there is very little substantial advice in ‘Future Libraries’. It is more distressing to find that, probably as a result of the same vagueness, local authorities “often lacked good cost data”.

So ‘Future Libraries’ fails to confront some of the real questions about how libraries might work in future such as;

• how much of what is now in the form of hardback or paperback books will be delivered electronically?

• does each local authority need to run its own library service independently of all the others?

• can local government hand library services over to the private sector to run?

Maybe the reason why it doesn’t begin to answer these questions is that it doesn’t know what the library service is or how much it costs?

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IMF’s Limited Financial Wisdom

Once a year or so the International Monetary Fund (IMF) kindly carries out a review of the UK economy. The Irish would advise, of course, that the IMF does not always demonstrate an unusually high level of financial foresight but even so the published IMF review is always worth studying.

As with the previous OECD report, the IMF is generally supportive of the Coalition government’s fiscal policy. The headlines on this occasion, though, emerge from the additional comments contained in the review to the effect that the government should, to quote Oliver Cromwell, “think that ye may be mistaken”. The IMF considers that there is a possibility that the UK economy might stagnate indefinitely: not because fiscal and monetary policies are wrong, apparently they “remain appropriate” but rather as a result of risks arising “from uncertainties surrounding commodity prices, euro-area sovereign turmoil, the housing market, and the size of the output gap and fiscal multipliers”. There ought to be no question that government policy has to be capable of responding to dramatic external factors but the last two items in this list are not external at all: they are the assumptions that the government is making about the current state of the economy. So, the IMF says that the government is only making the right moves for our economy if it is not wrong about where we are now.

Astutely qualified support for economic policy, then, but there is more direct criticism of the way in which the UK is managing its globally significant banking industry. The “crisis revealed serious weaknesses in supervision” and, although the review awards credit for some of the measures adopted since the credit crunch, such as the creation of the Financial Policy Committee (FPC), plans “to further step up supervisory efforts are necessary and welcome”. Regrettably the IMF seems to see these steps almost entirely from the perspective of outside authorities, such as the Financial Services Authority (FSA), looking in. Arguably the collapse of Lehman Brothers and the massive bail-outs of Lloyds Banking Group and others had the greatest impact on their shareholders but the IMF review does not discuss the possibility that the best protection and early-warning of failure for these businesses might come from within.

The best way to guard against banking failure would be to ensure that the audit process actually addressed this possibility. At the moment, after months of painstaking audit work the eventual audit report remains inevitable in all cases, even when the bank itself is only weeks away from extinction. With a small change in the audit requirements for banks the audit could serve the same purpose as the occasional ‘stress tests’ carried out by the supervisory authorities and much more. The insight that the auditors have from their inspection of the books and records of the bank combined with the thorough review of the viability of the bank’s business that is required to satisfy the going-concern test for each audit report would provide far greater accountability for of these giants that are ‘too big to fail’ if only a way could be found for auditors to report explicitly on their work. Surely that would be better than asking the civil servants at the FSA to try to do the same thing with less access and fewer resources?

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Government IT projects: an institution of failure

The Coalition government says that it is determined to reform the use of IT to deliver better services and reduce costs. Of course, if we were in the USA it would also be in favour of motherhood and apple pie. The National Audit Office (NAO) put this aspiration in context with its ‘landscape review’ that identified 30 ”major cross-government policies, reviews and strategies for ICT” from 2000 to 2010. Now the House of Commons Public Administration Committee has taken a hard look at this succession of disappointing IT initiatives and even more depressingly repetitive enquiries that have followed. The committee heroically optimistic of bucking the trend has published its findings and recommendations online.

After listing some of the more notorious failures amongst government IT projects and some of the common failings that these embarrassments share the committee goes on to address what it believes are the underlying causes. Some of these causes stem from a flawed approach that has been pervasive. The committee thinks that projects are typically over-specified and unresponsive. It compares what it calls the traditional ’waterfall approach’ where “the design goes through a series of sequential phases with each phase being completed before moving onto the next” with a more ‘agile approach’ that “is based on an iterative and incremental process, where requirements and solutions continuously evolve” and rightly supposes that many businesses find their systems developing this way. It also tackles, rather inconclusively, the issue of whether government projects always over emphasise security and then allow the most appalling security breaches through everyday human error.

With help from contributors like HP its report also explores weaknesses in the way that the civil service is staffed that lead to a greater likelihood of IT fiascos. Apparently civil service departments need to have Chief Information Officers who can bring sufficient technical and professional competence to the team at board level. The committee makes the even more radical suggestion that “departmental boards and senior officials can best benefit from professional training and support in technology policy”. At least a change in practice so that ‘Senior Responsible Owners’ (SROs) stay in place long enough to see through the IT projects that they are commissioning might be worthwhile.

The most scandalous revelation exposed by the committee is that the data “needed to assess the current state of government IT proved hard to come by…. because the data we requested did not exist”. As a result simple benchmarks like ‘how much is it costing to supply a civil servant with a computer’ are not available. The report demands full transparency demanding that the government publishes not only details of the cost of IT projects but also “information about system architecture and design, about the hardware and software it uses, and the rate paid for commodities and services”.

So, after all the failures and all the subsequent enquiries it is not surprising that there is much to criticise even in the way that the government and civil service handles the basics of IT implemetation and the Public Administration Committee can point to departments that have neither the right staff nor the basic information to allow them to manage this function successfully. Perhaps, though, this is all the inevitable consequence of a government that consists of career politicians and career civil servants.

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Macmillan accounts for its misdeeds

The business of educational publishing is not one that is normally associated with bribery and corruption, of course, unlike the murky trough of arms trading where BAe, for instance, has so famously failed to remain whiter than white. Even so, there are deals to be done and Macmillan Publishers Ltd has been caught red handed in an attempt “made by an agent to pay a sum of money with the view in mind of persuading the award of a World Bank funded tender to supply educational materials in Southern Sudan”, according to the press release from the Serious Fraud Office (SFO).

Left with no room to deny its dishonest behaviour, the management at Macmillan Publishers has tried to co-operate with investigators at every stage, something of a contrast with the attitude of the principal staff at News International. Apparently the ”first stage of this process involved MPL, instructing external lawyers to conduct a review of the books and records of the company with a view to identifying areas of corruption risk”. It is disappointing to discover that this accounting task was presented to lawyers rather than a firm of accountants. Doubtless the lawyers instructed accounting staff to carry out much of the work but it is revealing to note that the exercise was to identify risk rather than to discover actual instances of corruption. This time there is a more direct comparison with News International where, at the moment, it seems to be impossible to imagine following a bookkeeping trail back to the actual payments identifying who made, who received and who authorised the expenditure.

The investigation selected three jurisdictions, Rwanda, Uganda and Zambia, where Macmillan Publishers were bidding for similar tenders. Although the “investigations were thorough and completed to the satisfaction of the SFO” the conclusion seems rather hesitant in that it ”was impossible to be sure that the awards of tenders to the Company in the three jurisdictions were not accompanied by a corrupt relationship”.

Humbled and chastened, Macmillan Publishers has received a £11m fine. The SFO press release lists eight ways in which the miscreant had set out to amend its ways with the implication that the punishment might otherwise have been very much more severe. Although “ the company has been debarred from participating in World Bank Funded tender business for a minimum period of three years” Macmillan Publishers “has taken the decision to cease all live and prospective public tenders in its Education Division business, in East and West Africa regardless of the source of funds”. This seems rather more contrite than News Corp’s decision to close down the News of the World whilst keeping the option to open the ‘Sun on Sunday’.

The management at Macmillan probably assumed that bribery was accepted practice when bidding for contracts in Africa, rather like journalists offering Metropolitan Police offices money for information, without appreciating that, even so, it wasn’t acceptable. At least there seems to be no question of anyone going to jail. The Murdochs and their employees may find that their less revealing approach produces a very different outcome.

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