Smoke and mirrors

ANGER OVER the pay and bonus accounting policies of a major UK bank has cast lingering suspicions on the accounting methods of big players in the financial services sector. Pensions & Investment Research Consultants (PIRC), which provides research and consultancy on corporate governance to institutional investors, says that Barclays’ 2010 reports and accounts fail to show the full extent of bonuses promised, distorting investors’ views of the bank’s profits and liabilities.

PIRC, which calls itself the voice of responsible share owners, previously flagged concern about the complexity and opacity of remuneration policy at Barclays, but has now added a fresh complaint to the charge sheet saying that the bank’s “accounting for declared bonuses is deficient”.

Because of the bonus tax regime, PIRC says it is possible to work out the extent to which bonuses that were taxed for the period have yet to be charged to Barclays’ accounts.

PIRC claimed that a bonus tax of £437m had been paid from bonuses of approximately £4.8bn, but that another £116m of tax had not yet been charged to the bottom line at the end of 2010. It concluded that Barclays had neglected to put the tax on £1.4bn of bonuses through the profit and loss account.

In 2010, Barclays’ profit after tax was £4.5bn and that figure was £3.5bn in 2009, so the amount not included in the accounts on PIRC’s calculation comes to 31%-40% of a year’s profits. The upshot of PIRC’s analysis is that, working on the rule of thumb that the profit is split 50/50 between employees and shareholders in investment banking, leaving out such a material sum obscures the correct balance of reward between the shareholders – who bear the risk – and the employees.

Finally, PIRC raises questions over Barclays’ compliance with section 411 of the Companies Act, which requires staff costs to be stated on the basis of “wages and salaries paid or payable in respect of that year”.

When asked to comment on this, a Barclays spokesman dismissed PIRC’s intervention, saying there was nothing new in its complaint.

Barclays has also said that its accounting treatment is in accordance with IAS 19 [Employment Benefits] and is consistent with that adopted by other banks. In fact, Barclays is arguing that it has improved the disclosure surrounding remuneration. At its AGM at the end of April, Sir Richard Broadbent, deputy chairman and chairman of the board remuneration committee, said: “One new feature in 2010 is the increased level of disclosure of the compensation of senior management.” This came about as a result of the Project Merlin deal between banks and the government on lending and bonuses.

The body in charge of corporate governance in the UK, the Financial Reporting Council (FRC), failed to respond to any requests for comment. But given the sensitivity over banks, it is hard to believe that the FRC’s subsidiary, the Financial Reporting Review Panel, will not be asked to take a look.

Broadbent had more to say at the AGM, however. “Among many important features of this agreement, we undertook to ensure that bonuses in the UK would be less than last year, which they were, and that we would disclose more information on senior management remuneration, which we have,” he said.

“Having now definitely agreed what is appropriate to disclose, bearing in mind the commercially sensitive nature of some of the information, we will publish more detailed information every year.”

That has not satisfied PIRC, but it remains to be seen whether Barclays is forced to do more through either shareholder or regulatory pressure. However, this row is bound to raise more questions over whether bank corporate reporting is still fit for purpose in the post-financial crisis era. ?

Although in its reports and accounts it says: “The total bank payroll tax paid was £437m, of which £225m was recognised in 2009 in respect of 2009 cash awards and certain prior year deferrals distributed during the taxable period. For 2010 a charge of £96m has been recognised in relation to prior year deferral, with the remaining £116m recognised over the period 2011 to 2013.”