Farepak: a public’s right to know?

Without wishing to prejudge the outcome of current investigations, the
Farepak saga offers an opportunity for accountants and auditors to consider what
information we provide, and also how we provide it.

There are serious issues involved in relation to signing off accounts,
contingent liabilities, inter-company loans, dividends and distributable
reserves.

The most recently filed accounts for Farepak were signed off in February
2006. The holding company, EHR, had not only some time earlier filed its annual
accounts for the same period, but also its subsequent six-month report.

Was Farepak so insignificant to the group that its accounts were immaterial?
Was the late signing of Farepak accounts a mere technicality? In such cases,
should we as auditors advise readers of consolidated figures the real state of
play regarding all subsidiaries’ accounts, not in any judgmental way but as a
flag? Should inter-company loans be treated differently to other debtors or
creditors? Should company loans be reported or treated differently?

In some countries, banks are not allowed to permit hardcore overdrafts which
must be converted into some form of loan facility.

Should hardcore inter-company loans be converted automatically into some form
of share capital to demonstrate that this is not necessarily liquid funds, but
long-term financing? What impact might that have on corporate capital
structures?

We carefully disclose contingent liabilities as a note to the accounts, where
possible quantified, but do we have a duty to explain the likelihood of the
contingency happening and explaining what the implications for the company might
be?

In Farepak’s case, the contingency liability was the cross-guarantee given
for the group’s banking facilities. The consequence of it materialising we know
was insolvency.

Equally, a contingent liability reported in some other company might be no
more than a trifling inconvenience if it materialised.

These are not the only questions that will be asked, but they are those that
immediately stand out on looking at publicly filed information. As qualified
accountants and auditors, we are used to looking at such information, but I
question whether a lay person would necessarily see such points.

Do we have a duty to present meaningful information, or can we continue to
hide behind ‘true and fair’?

Jonathan Russell is president of UK200 Group and partner at
ReesRussell