18 May 2018


18 May 2018

Good morning,

Carillion may have gained the lion’s share of attention this week as the UK’s final parliamentary report into its demise was published. But it was one of the report’s key conclusions, and what that means for auditors, which I think deserve another look.
Among the conclusions of the 100-page dossier was the recommendation that the Big Four accountancy firms – KPMG, EY, PwC and Deloitte – should be referred to the competition authority, calling them out, in no uncertain terms, as a “cosy club incapable of providing the degree of independent challenge needed.” (£)
A whitewash it was not. Instead, the report’s recommendations amount to a root-and-branch overhaul of the UK’s system of corporate accountability, throwing the once-thought taboos of much tighter regulation and break-ups into the mix.
The report’s conclusions should come as little shock. The Big Four’s nearest competitor, Grant Thornton, made headlines in March over its decision to stop bidding for audit contracts among the FTSE 350, having concluded that it is too difficult to compete. (£) The Big Four’s share of FTSE 350 auditing contracts has increased from 95% to 98% in the past five years alone, which begs the question: if the likes of Grant Thornton can’t compete, who can?
Refreshingly, the industry seems alive to the challenge. Bill Michael, chairman of KPMG’s UK business, said that his firm had considered break-up scenarios “for some time”, adding that they have to “demonstrate why they are manageable and why the public and all stakeholders should trust us.”
His comments get to the heart of how sustainable capitalism must behave in advanced economies. Yes, it must inspire trust that each business gets a fair crack at the whip. But as the debacle over Carillion has shown, it must also have the public’s trust that contracts dealt with on their behalf are handled as transparently as possible to ensure that, ultimately, the private sector will act in their interests.
Next steps for the Big Four look to involve either forcing each large firm to split into two smaller multidisciplinary firms, or spinning off each of their consultancy practices to create audit-only businesses. Given news today that their leaders will be excluded from an advisory panel appointed by Sir John Kingman to consider the future of the accounting regulator in Britain, it seems that the change can’t come quick enough.


The UK government has agreed a Brexit customs “back-stop”that would see the UK match EU tariffs after 2020 if there is no deal on their preferred customs arrangements. The measure would avoid a hard border in Ireland after Brexit, and reportedly satisfy the Irish government’s plea for a guarantee that the border would not be hardened at the end of the transition period. 
The European Union has unanimously agreed to continue its adherence to the Iran nuclear dealdespite President Trump’s withdrawal. At a meeting of the European Council in Sofia, leaders of the EU28 also directed Brussels to consider measures to diminish the impact of US sanctions in order to keep the deal live. Iran has warned that it will leave the agreement should US sanctions damage its economic interests. (£)
The Times reports that Britain is considering sending up to 400 additional troops to Afghanistanunder pressure from President Trump to bolster its military presence in the war zone. The envoy would form part of a NATO-led training mission, which also involves an extra 3,500 troops already committed by the US. A final British plan has yet to be signed off, but Theresa May is expected to make an announcement at a NATO summit on July 11-12. (£)


Ministers have called on the Competitions and Markets Authority to investigate whether Sainsbury’s £12 billion takeover of Asda is likely to harm supermarket suppliersand the food industry. Business secretary Greg Clark has written to Andrea Coscelli, the chief executive of the CMA, regarding the “potential concern” about the move among supermarket suppliers, adding that the takeover must consider the supply chain. (£) 
PayPal has bought Swedish payments start-up iZettle for $2.2 billion.The sum is double the estimate for iZettle’s previously intended IPO flotation, which was due to take place at the end of May and would have made it largest fintech company in Europe to list. The move signals a significant expansion into Europe and Latin America by US-based PayPal, which analysts expect will fuel anxiety about further takeovers in the European fintech scene. (£)
Legal & General Investment Management have launched the first UK fund to invest in companies entirely based on their gender diversity performance. Led by Dame Helena Morrissey, who has invested £50 million into the so-called “Girl fund”, it will work by scoring and ranking companies according to four different diversity measures, including women on the board. According to LGIM, companies must reach a minimum of 30% representation of women in these four measures in order to be considered for investment. 


What happened yesterday?
Surging shares in online grocery retailer Ocado led the FTSE 100 to finish on a record high yesterday, mirrored by strong gains for the pound. By close of trading, the FTSE stood 0.7% higher at 7,779.49 points – beating a previous closing high of 7,778.64 from January 12.
Far and away the day’s greatest riser was Ocado, whose shares rocketed more than 40% as it won a contract with US grocery giant Kroger to exclusively provide its online expertise across multiple distribution warehouses across America. Elsewhere, stocks in gambling companies rallied from an announcement yesterday that the government will introduce legislation reduce the maximum stake on fixed-odds betting terminals to £2. Paddy Power Betfair (up 1.9%), William Hill (up 4.2%) and GVC Holdings (up 5.0%) all regained yesterday’s lost ground.
Royal Mail (down 7.2%) was a rare exception to the day’s successes, despite new chief executive Moya Greene delivering better-than-expected final results. The mail service warned that incoming GDPR legislation may lead to a steeper decline in letter deliveries this year, hampering profits.
Oil prices were also in focus as Brent crude hit $80 a barrel for the first time since 2014 after France’s Total threatened to withdraw from its large Iran gas field deal, following the US decision to exit the Iran nuclear deal. The continuing fallout of Venezuela’s economic collapse last week has also compounded fears of a significant tightening in global oil supplies in coming months, leading oil price rises to top more than 50% during the past year.
Investors in the pound seemed to take the media at their word that the UK was planning on remaining in the European customs union , despite later being dismissed by Theresa May. At the end of the trading day, the pound was up by 0.26% against both the dollar at $1.35 and the euro at €1.15.

Trading Announcements

Nex Group
Int. Economic Announcements
(07.00) Producer Price Index (GER)
(07.00) Wholesale Price Index (GER)
(09.00) Current Account (EU)
(10.00) Balance of Trade (EU)

Baillie Gifford Shin Nipon
Clarke (T.)
Derwent London
Hikma Pharmaceuticals
Hunters Property
Independent News & Media
Menzies (John)
National Express Group
Petrofac Ltd.
Paddy Power Betfair
Rockhopper Exploration



Ed Conway suggests in The Times that the government could solve the housing crisis by abolishing stamp duty altogether. Pointing out that the scheme could be paid for by its replacement with CGT, Conway concludes that the only thing holding it back may be politicians’ need to disagree with one another. (£)
Fraser Nelson warns in The Telegraph that Tory leavers may be preparing to re-table their plans for a no-deal Brexit. If the group consensus is to avoid economic catastrophe, Nelson suggests Michel Barnier needs to counter whatever deal the British government tables with an offer that will also satisfy the ambitions of the rightwing of the Conservatives if Theresa May is to avoid further internal party squabbles, and possibly, secure the future of her government. (£)


A man named Tsutomu Yamaguchi was in Hiroshima when the first atom bomb was dropped. He then travelled home to Nagasaki the day before the second atom bomb was dropped. He survived both and lived to be 93.


House of Commons
No business scheduled
House of Lords
No business scheduled

Scottish Parliament
No business scheduled