Lies, damn lies, and accounting: UK water sector

[IvanV]

Well, I'm just flabbergasted that Severn Trent think they can pull a trick like this (BBC news article). And despite the obviousness of it, they say, nothing to see here, all normal and tickety-boo. And, what's worse, that accountants will sign it off. Accountants are supposed to act as something of a control on smoke and mirrors in accounts. As the retired auditor who looked at this says, you just aren't allowed to just move money around to no real effect and claim it makes a difference. And it takes advantage of the old trick of the related party transaction with a price that would never be achieved in the open market. Sadly companies get away with so often, mainly to evade tax. Perhaps because it is often hard to detect, people have fallen into the thinking that you can do just what you want, even when it is a completely transparent sham.

Kudos to the BBC for explaining it so clearly, and how ridiculous it is. And also why it is so bad in this case. Specifically it drives a coach and horses through the water company regulatory rules on capital adequacy. So it lets more money be drained from the group to be paid out to shareholders, potentially leaving the customer/tax-payer to clean up and subsequent mess, as is now happening with Thames Water.

As someone who spent a year working as a water sector regulator, at just the time when water companies first tried this sort of thing on, and we jumped on it instantly bringing in the first basic-but-ultimately-inadequate capital adequacy rules, I confess also to feeling somewhat ashamed that we have failed to stay alert to such obvious trickery. And ashamed also for the accountants and companies that try this stuff on.

[Sciolus]

Yeah, this is blatant thievery, paying yourself non-existent money knowing that the public will pick up the tab one way or another. And yet another example of auditors wilfully or incompetently conniving at corruption.

[IvanV]

Yeah, this is blatant thievery, paying yourself non-existent money...

They haven't gone that far. They have paid out money they actually had. But they would have been impeded from paying out that much without the trick.

The point is that they are supposed to keep the ring-fenced water company with decent amount of actual money in it, not running it close to empty. That is so that they have some financial resilience, to cope with unexpected costs, including in particular the consequences of their own inefficiencies and incompetence that might cost them money. And Thames Water shows what happens if you get too close to the line and then find your liabilities are larger than you forecast.

I had thought that the government was preparing to take Thames Water into special administration any minute. But apparently it is still trying to avoid doing so, which gives the wrong message. It says, you can take your jam today and we'll still make sure nothing too bad happens. When they ought to be saying, be greedy and it will be very bad for you.

[Woodchopper]

Well, I'm just flabbergasted that Severn Trent think they can pull a trick like this (BBC news article).

Wow, if a normal person did that kind of thing and used the arrangement to make money then it would seem to be a blatant case of fraud.

[TopBadger]

Well, I'm just flabbergasted that Severn Trent think they can pull a trick like this (BBC news article).

Wow, if a normal person did that kind of thing and used the arrangement to make money then it would seem to be a blatant case of fraud.

I'll confidently predict right now that no directors will go to jail for this...

[Sciolus]

Yeah, this is blatant thievery, paying yourself non-existent money...

They haven't gone that far. They have paid out money they actually had. But they would have been impeded from paying out that much without the trick.

The point is that they are supposed to keep the ring-fenced water company with decent amount of actual money in it, not running it close to empty. That is so that they have some financial resilience, to cope with unexpected costs, including in particular the consequences of their own inefficiencies and incompetence that might cost them money. And Thames Water shows what happens if you get too close to the line and then find your liabilities are larger than you forecast.

I had thought that the government was preparing to take Thames Water into special administration any minute. But apparently it is still trying to avoid doing so, which gives the wrong message. It says, you can take your jam today and we'll still make sure nothing too bad happens. When they ought to be saying, be greedy and it will be very bad for you.

Thanks for the nuance, although to be fair the BBC also describe it as "made-up money". But there is definitely non-existent value; IIUC they have taken real money out of the company which is ultimately gold-standard value, being backed by taxpayers/billpayers, under the false pretence that there is plenty of real money there.

[IvanV]

Thanks for the nuance, although to be fair the BBC also describe it as "made-up money". But there is definitely non-existent value; IIUC they have taken real money out of the company which is ultimately gold-standard value, being backed by taxpayers/billpayers, under the false pretence that there is plenty of real money there.

I agree it is made up money, and the rest of what you say is spot on too.

[JQH]

A new variation on kiting cheques. How can this be legal?