AIDB judicial microscope poses questions across the board

When Ian Shelton took the witness chair this week, he made history as the first accountant to be forcibly disciplined under the glare of the public eye.

The complaint against him saw the 42-year-old former financial controller of Transbus, accused of ‘dishonesty’.

The case’s public airing has not only been the first public outing for the AIDB, but it has also revealed some interesting questions about many of the parties involved.

Patrick Lawrence QC, the Accountancy Investigation and Discipline Board’s counsel in the case put to the five-member panel adjudicating, that Shelton had not just been dishonest, but worn a ‘badge of dishonesty’ for failing to follow basic paper trails or to question obvious fraudulent practices at Mayflower, his cash-strapped company.

Transbus, a subsidiary of listed Mayflower Plc, effectively abused a revolving debt facility it had with HSBC, the charges say.

And when Shelton discovered the inappropriate practices, he chose to keep quiet, in the hope that those above him would report the misleading practices to the auditors or shareholders.

The charges are the first in a series relating to Mayflower. Not only is Shelton under the judicial microscope, so are auditors from PricewaterhouseCoopers.

The complaints against PwC relates to their audit of the 2002 accounts, particularly amounts held on behalf of HSBC under the invoice discounting scheme, as well as disclosure relating to the company’s ability to continue as a going concern. The case before the firm will be heard from 25 September.

Mayflower’s group FD, David Donnelly, is also set to take the stand.

Mayflower went into administration in March 2004, with debts of £250m. The 2002 accounts over which PwC are accused, are thought to have masked a £20m black hole. The case is the first test of new public hearings, and also indeed the first of Cameron Scott’s new regime at the AIDB. Until now, most major disciplinary matters had been held by the Joint Disciplinary Scheme under the eyes of Chris Dickson, Scott’s counterpart and the JDS’s executive counsel.

The public hearings and Scott’s investigations have already revealed some interesting flaws in audit procedure that might not otherwise have come to light.

HSBC, for example, could perhaps have been more critical in its analysis of the accounts at Transbus, court evidence suggested, as part one of the case against Mayflower accountants unravelled.

The bank periodically visited the Guildford premises, to inspect the invoice facility in question.

However an employee junior to Shelton prepared spreadsheets for HSBC’s inspectors – which saw customer payment dates being manipulated to withhold money from the bank.

Instead of interrogating the procedures, the panel heard how the HSBC inspectors were ‘walked’ through the spreadsheets by an employee junior to Shelton.

The bank itself may have some cause to think over its approach to those sorts of cases.

In addition, the bank also failed to have proper processes which would require documentary proof that Transbus did in fact manufacture and deliver the goods for which it requested payment, through its invoice discounting.

The atmosphere at Mayflower in the difficult circumstances it faced also raised eyebrows.

Shelton recalled, and it seems an integral part of his defence, how an executive told him to either do as he was told or face losing his job.

Under cross-examination, Shelton repeatedly explained away his frank and telling admissions - of how the bank had no clue that the spreadsheets showing customer payment dates had been manipulated - made to Scott, as ‘looking at things with the benefit of hindsight’.

Contrary to his better judgment, and the code of ethics he subscribed to as a member of ICAEW, Shelton carried out and maintained fraudulent practices, under the threat of losing his job, the tribunal heard.

Shelton this week accepted that what he did was dishonest. But he maintained that he was not.

Whatever the outcome of the case and its related actions, its public airing has given us an at times slightly tragic insight into the circumstances of a failing company, and what its executives will apparently do to try and stave off collapse.

The AIDB can impose sanctions, an unlimited fine, exclusion from membership of a professional body, and withdraw practising licences if the tribunal upholds the complaints. The panel will present written findings at a later stage.

A PUBLIC MATTER

●‘In December 2003,you knew the bank was being ripped off.
The company was struggling to survive and you were asked to sign a form which would amount to another rip off…’
Patrick Lawrence QC to Ian Shelton during proceedings this week.

●’At any point there would be a balance of funds which had been received from customers in respect of invoices which had already been financed through Midfes but which had not yet been paid over to HSBC. At the half-year (June 30) and yearend (December 31) these funds, the so called “double-dip” would be included in the
Transbus cash balance in the half-year and year-end accounts.’
Frank Daly, former FD of Body Group Division of Transbus International Limited.

●‘Transbus would hold onto payments received from its customers for a longer period of time in order to improve its cash flow… accordingly two set of accounts were being maintained,'
Grant Thornton insolvency practitioner who helped review the Midfes facility at Transbus in March 2004.
Grant Thornton's investigation revealed a £25.8m hole which appeared to have originated in early 2000.

●‘[Executives] would often ask us to withhold additional payments to HSBC thus ensuring the group hit target. This would make [those executives] look very good,'
Ian Shelton in his witness statement to the AIDB.

●'David Berry resigned as Finance Director in October 2003.He left Transbus in the first week of November 2003 with a £100k compromise payment for his sterling work…was very, very nervous about not being paid due to the cash-flow situation within the group and regularly checked with his bank,'
Ian Shelton in his witness statement to the AIDB.