Taking hits

By paying a total of £285m to settle allegations of corruption, BAE Systems
may hope for a quieter life – but that may not be the case.

A statement from the Serious Fraud Office said that the company will plead
guilty to an offence, under the Companies Act 2006, of failing to keep
reasonably accurate accounting records and pay a £30m fine. Falling foul of this
legislation could have implications for directors and auditors.

Section 387 of the Companies Act 2006 states that if a company fails to keep
adequate accounting records, an offence is committed by every officer of the
company who is in default. The penalties could be a two year imprisonment and/or
a fine. So which of BAE’s highly paid directors will be queuing up to accept

The failure to keep adequate accounting records may also cast doubts on the
directors’ duty of preparing true and fair accounts (sections 393 and 394 of the
Act). Once again there are questions for the BAE board to answer.

Attention should also focus on BAE’s audit committee and non-executive
directors. How did they fail to spot the company’s non-compliance with the
Companies Act?

The spotlight could also fall on KPMG, BAE’s auditors who in the last two
years collected over £13.8m for audit and £9.4m in consultancy fees from the
company. Under section 498 of the Companies Act, auditors are specifically
required to carry out such investigations as will enable them to form an opinion
as to whether adequate accounting records have been kept by the company.

Since BAE continued to receive unqualified audit reports, auditors presumably
must have been satisfied. A guilty plea in such circumstances could persuade
regulators to examine how the auditors came to their conclusions.

Newspaper reports have drawn attention to a network of companies used to
enable BAE to make secret payments. However, the company’s accounts are very
economical with information. Its most recent accounts only list the main
subsidiaries and the company claims that “it is not practical to include all of

In the absence of information it is difficult to call directors to account.
The cost of providing the information would be a tiny fraction of BAE’s
advertising and public relations budget.

The whole episode may persuade some investors to take action against the
company, its directors and auditors, especially as the company is taking a hit
of £285m, resulting in lower returns.
The biggest casualty from the debacle is trust. BAE’s glossy social
responsibility report claims to promote high ethical standards, but the events
have cast doubts on such claims.

Talk is always cheap and easy. The real challenge is to align corporate
culture with high sounding statements and BAE’s failures are all too visible.

Prem Sikka is professor of accounting at Essex Business School

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