Accountancy regulation “toothless”, say Citi analysts

by Richard Crump

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27 Nov 2012

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CITI ANALYSTS have criticised the way financial reporting is policed by the accounting watchdog, in response to allegations of disclosure failures at Autonomy, the former FTSE 100 technology business acquired by Hewlett-Packard (HP).

Last week, HP took an $8.8bn (£5.5bn) impairment charge on its $11bn acquisition of Autonomy in 2011 and accused the company of using "serious accounting improprieties, misrepresentation and disclosure failures" to misrepresent the business.

It is claimed that more than $5bn or the writedown is linked to accounting misrepresentations discovered during a forensic review of Autonomy's accounting practices carried out by PwC.

The review was part of an investigation that HP said was sparked by a whistleblower from within Autonomy, described as a "senior member of Autonomy's leadership team", who said there were "questionable accounting practices" at the UK business prior to its acquisition.

Analysts at Citi, an advisor to Autonomy on the HP takeover, have laid some of the blame on the way annual reports and accounts are policed by the Financial Reporting Review Panel (FRRP), an arm of UK reporting watchdog the Financial Reporting Council (FRC).

In a research note cited by the Financial Times, analysts at Citi's investment bank claimed accountancy regulation was "toothless".

"We believe that accounting enforcement in the UK should be more transparent . . . and better resourced, with more extensive powers," the authors of the note said.

"The FRRP only occasionally issues a press release about a specific company's accounting, and these have been decreasing over time," the analysts added.

The FRC denied any suggestion that its regulation of corporate financial reporting was toothless or under-resourced, the FT reported.

Richard Fleck, FRRP chairman, said the panel did not publicise the letters it sent to listed companies querying annual reports because it usually turned out that there was a "perfectly proper" and rapid explanation for the issue raised.

Mike Lynch, Autonomy's former chief executive, has denied the business was wilfully misrepresented.

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