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Financial Failures and Scandals From Enron to Carillion 1st Edition
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Disruption in the Audit Market The Future of the Big Four Krish Bhaskar
Enron and Carillion are household names, not because of what they were, but because of the way they failed. The extent to which the auditors can be blamed for these and many other corporate failures is an important public policy issue. This interesting and well-researched book highlights the role of accounting and auditors in some of the highest profile failures of recent years. It is a useful contribution to the current debate on what needs to change in accounting and auditing practice
—Geoff Wilkinson held a range of senior economic and financial positions with the British Steel Corporation before moving into investment banking. He was finance director and subsequently managing director of Laird plc, an FTSE 250 company, and chair of the Audit Committee for the Eden Project.
This book is a first in that it examines a number of recent financial scandals and corporate failures in the UK and further afield. Placing earlier pivotal cases in perspective, it then concentrates on current cases, culminating in a forensic financial dissection of the Carillion collapse, using a variety of analytical techniques including financial modelling. By critically analyzing the Carillion collapse, and other recent cases, it sets out a detailed analysis of what went wrong, and who was to blame. An accompanying online resource also updates recent cases such as Patisserie Valerie.
—Vaiz
Karamatullah, former CFO of Arab conglomerates in various Middle Eastern countries; presently trustee of the Graham Layton Trust, a UK charity supporting free eye care overseas.
Financial Failures and Scandals
This concise volume evaluates the cause and significance of recent corporate failures and financial scandals, and how they reflect on the fitness for purpose of the external auditors, financial reports, financial watchdogs, boards, directors and senior management. Failures like the disastrous collapse of Carillion, examined at length, have ultimately led to a crisis of confidence not only in the audit process but in the entire process of financial reporting.
Revealing the shortcomings in audit quality, independence, choice and the growing expectation gap, Financial Failures and Scandals questions if the profession, its regulators or government watchdogs are adequately prepared for the challenges of increasing regulation, public outcry and political scrutiny in the face of inevitable future financial failures. The fundamental structures of financial reporting, annual reports, boards of directors and senior management are often found to have failed. Tighter regulation and new requirements for reporting will inevitably result.
Drawing on extensive research and interviews with insiders, users and experts, this unique book provides a compelling account of the profoundly disruptive impact of financial failures on corporate and financial accountability.Topical and readable, this book will be of great interest to students, researchers and professionals in accounting and auditing, as well as to policy makers and regulators.
Krish Bhaskar was founding Professor of Accounting at the University of East Anglia, UK and previously held positions at the London School of Economics and the University of Bristol. He is the author of over 50 books and has also worked extensively in the IT, consulting, investment banking, automotive and forecasting sectors.
John Flower, now retired, was formerly Professor of Accounting at the University of Bristol, UK and Director of the Centre for Research in European Accounting, Brussels.
Rod Sellers, OBE, FCA, has spent almost 50 years in senior financial and corporate roles in industry.
Disruptions in Financial Reporting and Auditing
Edited by Krish Bhaskar
Following the global financial crisis and the growing number of major corporate collapses and financial scandals, confidence in the corporate sector, and more importantly, the professionals who audit them, is at an all-time low. Based on the authors’ extensive experience and unique research (including interviews with hundreds of professionals, regulators and whistleblowers) this topical series provides a uniquely accessible insight into the criticisms and challenges currently facing the financial reporting and auditing industry, and examines possible solutions.
At a time of unprecedented scrutiny and technological change, the four complementary volumes (Disruption in the Audit Market, Financial Failures and Scandals, Disruption in Financial Reporting and Disruption in Auditing) critically examine the key debates, drawing on expert opinions from top industry professionals. Together the four volumes combine into an unparalleled contemporary overview and evaluate the future challenges facing this vital part of our economy and society.
Disruption in the Audit Market
The Future of the Big Four
Krish Bhaskar and John Flower
Financial Failures and Scandals
From Enron to Carillion
Krish Bhaskar and John Flower
For more information about this series, please visit: www.routledge.com/ Disruptions-in-Financial-Reporting-and-Auditing/book-series/DFRA Or
See the online companion volume with current updates: http://www. fin-rep.org/
Financial Failures and Scandals
From Enron to Carillion
Krish Bhaskar and John Flower with
contributions from Rod
Sellers
First published 2019 by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017
The right of Krish Bhaskar and John Flower to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data
Title: Financial failures and scandals : from Enron to Carillion / Krish Bhaskar and John Flower ; with contributions from Rod Sellers.
Description: Abingdon, Oxon ; New York, NY : Routledge, 2019. | Series: Disruptions in financial reporting and auditing | Includes bibliographical references and index.
Identifiers: LCCN 2019004492 (print) | LCCN 2019006565 (ebook) | ISBN 9780429270611 (E-Book) | ISBN 9780367220730 (hardback : alk. paper)
Subjects: LCSH: Business failures—Case studies. | Corporations— Finance—Case studies. | Corporations—Corrupt practices— Case studies.
LC record available at https://lccn.loc.gov/2019004492
ISBN: 978-0-367-22073-0 (hbk)
ISBN: 978-0-429-27063-5 (ebk)
Typeset in Bembo by Apex CoVantage, LLC
1 About this book
Background and focus of the failures in this book
This book is about financial scandals and failures. Financial or accounting scandals are usually business scandals arising from intentional manipulation of the financial statements. In this book we concentrate on misdeeds by companies and their management.
The Competition and Markets Authority (CAM) and Kingman report were published post-publication. Reactions to the CMA on the audit market and the Kingman report on the replacement of the FRC can be found in the online companion volume www.fin-rep.org. The CMA only considered what we regard as ineffective solutions. The Kingman Review was, in our opinion, far more effective, scrapping the Financial Reporting Council (FRC) in favour of the Audit, Reporting and Governance Authority (ARGA) with statutory powers making it a stronger regulator with harsher penalties and the ability to investigate all company directors. ARGA will also be able to make changes to accounts, have a wider set of sanctions and can publish reports into a company’s conduct and management. The Government has said it would implement the Review.1
The cases we deal with concentrate on more recent ones and involve one of two main symptoms:
1 Misappropriation of assets (possibly theft) and then hiding the results in the financial reports;
2 Intentional manipulation of accounts by management to improve financial reports and the annual reports.
Who is involved in preparing financial reports?
The external auditors (referred to as auditors here) are the main external check and balance for all companies over a certain size including both private and non-listed organizations. The Big Four accounting firms (PwC,
EY, Deloitte and KPMG) dominate the auditing of Public Interest Entities (PIEs) and have a stranglehold over the FTSE 350.2 We estimate that by 2025 or shortly after, they will have close to 100% share of this audit market. In simple terms, the auditors usually have a pass or fail type of sign off. A negative audit repor t is indicated by ‘qualified’ or by no audit opinion. The Audit Committee (AC) is also significant in the accounts preparation with often continuous interaction with the auditors. The AC comprises some non-executive directors (NEDs) and the Audit Committee Chairperson (ACC). The AC usually provides a report in the annual report.The Audit Engagement Partner (AEP) is the senior auditor, usually a senior partner of one of the Big Four, and it is he or she that signs the audit report in the annual report. This is separate from the Audit Committee report which is part of the Annual Report.
Typical interactions in the reporting process
The AEP has interactions with the AC and also, depending on culture, with the Company Financial Officer (CFO) and/or the ACC. The ACC often takes a lead role in solving disputes between the CFO and the AEP. Box 1.1 shows an example of a typical interaction for a specific issue.
Box 1.1 Interactions between AEP, ACC and AC3
Issue: identification of intangibles on acquisition
Arising from: IFRS implementation
• Following acquisition, AEP stated position clearly despite doubts from CFO;
• CFO engaged an external valuer for the work;
• Valuation considered by AEP, then technical department and AC;
• AEP questioned valuation, so AC ag reed to revise downwards.
Issue: presentation of cash flow statement
Arising from: IFRS implementation
• AEP proposed presentation based on guidelines included in relevant standard for first year of IFRS;
• Company accepted in first year but did not like the format – so adopted alternative for subsequent year;
• AEP warned CFO of risk of regulatory action and discussed with ACC;
• CFO and AC adopted revised for mat – subsequently discovered other companies had also used this for mat.
Issue: accounting for a complex transaction
Arising from: solutions for unusual transactions
• Passed up by more junior staff for discussion by CFO and AEP but no initial agreement;
• ACC aware of problem at pre-AC meeting;
• CFO acquired more evidence to support his view based on similar cases elsewhere;
• AEP checked with technical department and accepted the proposal;
• Following agreement between AEP and CFO, then CFO met with ACC to ensure he supported it;
• CFO and AEP jointly presented solution to AC, who asked questions before accepting.
There is some merit for these interactions to be reported on and summarized. Unresolved disputes can be clearly identified. Exactly how much should be revealed needs further discussion, but nevertheless, we are in favour of the disclosure of such interactions between these important players in the reporting process.
The role of the regulators
The FRC introduced the requirement for the strategic report which is a description of the business model, as well as a narrative section in the ‘front half’ of UK annual and corporate reports. Note the Kingman Review has recommended that the FRC be replaced with an independent statutory regulator called ARGA. We agree with the ICAEW4 assessment that the quality of narrative and non-financial disclosures in the ‘front half’ of the annual report has improved significantly in the UK in recent years. Of particular note are improvements in relation to the business model, strategy, non-financial key performance indicators (KPIs) and alternative performance measures (financial) and drivers of long-term value creation. There is also a strong sense that the ‘front half’ has continued to evolve in response to the introduction of the strategic report and changing market expectations. (That is not to say that there aren’t major problems with many of the top front halves of typical annual reports.)
The FRC (although not without its own critics [now replaced]) has reported a fall in audit quality. We maintain that this fall is due to the convergence of a number of disruptive factors:
• Continuing government auster ity policies eroding government expenditure (and those firms depending on public spending);
• Brexit changing the focus for firms, and creating a fall in the value of sterling;
• Low interest rates causing higher leverage and trapping highly geared firms into a false sense of security whilst interest rates are low;
• Disruptive industries and sector s causing the growth in some and the fall-off in demand for brick-and-mortar retail outlets and restaurants;
• Other disruptive effects, e.g. new technologies, the internet and IT.
Carillion – a pivotal event
A financial failure (and arguably scandal) which is pivotal to the future of the audit market is the failure of Carillion, which took place in early 2018. Carillion takes a significant portion of our attention in this book. Not since Enron has there been a case which has attracted such severe criticism. More significantly, it argues for a major change to financial reporting, watchdogs and auditing.
Its failure left a mountain of debt, job losses in the thousands, a giant pension deficit and hundreds of millions of pounds of unfinished public contracts with vast ongoing costs to the UK taxpayer. How could a company that was signed off by KPMG as a going concern in Spring 2017 crash into liquidation only a few months later with a reported £5+ billion of liabilities and just £29 million left in cash? Moreover, all of the Big Four were involved in Carillion in some way: one was the external auditor; one was the internal auditor; two were tasked with reviews or specialist help; and one became the administrator.
Stephen Haddrill, ex-chief executive of the FRC, said the CMA should investigate the case for ‘audit-only’ firms in an effort to bolster competition and stamp out conflicts of interest in the sector. This radical idea would force the Big Four firms – Deloitte, EY, KPMG and PwC – to spin off their UK audit ar ms into separate businesses (explored in depth in Disruption in the Audit Market). Mr Haddrill’s intervention follows a string of corporate accounting scandals, ranging from Carillion to Steinhoff in South Africa and Petrobras in Brazil. “There is a loss of confidence in audit and I think that the industry needs to address that urgently”, he said. “In some circles, there is a crisis of confidence.”5
Three of the four now say they will ban non-audit work for their largest audit clients. This is entirely different from splitting the firms into separate audit-only and consulting firms.
Even this brief overview shows that much is left to be desired from current audit practice, despite attempts to improve quality. We posited in Volume 1 that the way that the current audit sector is configured makes it unable to cope with current economic and disruptive conditions. This volume explores in detail how, why and when auditing fails, sometimes to catastrophic effect. Al so see Appendix 2.02.01
Recent financial failures and scandals – an overview
Table 1.1 sets out a selection of the largest recent global scandals. We have concentrated on companies based in the UK, US, Canada and those with a UK connection. Note, some famous UK cases are excluded as they are discussed in detail in later chapters. Table 1.2 summarizes all the current cases being investigated by the FRC (as of May 2018).
Table 1.1 Selection of the largest recent global scandals CompanyCountryPeriodAuditorIssue
Lehman Brothers US2010EYSee Chapter 4.
MF GlobalUS2010PwC Poor trading decisions and fines. Kept bonds off its balance sheet. PwC paid out of court settlement of $3 billion.
Colonial Bank US2009, 2018 court case PwC Ghost mortgages. PwC found negligent. Possible claim of $5.5 billion (Now settled for $335m).
ConnaughtUK 2009/10PwCPwC fined £1.5 million over misconduct in their audit.
Miller Energy Resources US 2011KPMGAssets overvalued by more than 100 times. Fine of $6 million.
Wells Fargo Bank US2011 to 2018 KPMGAgg ressive cross-selling without permission.
Alberta Motor Association Canada2016N/AFraudulent invoices.
OdebrechtBrazil2016PwCGovernment bribes.
PetrobasBrazil2014 to 2017 KPMG after PwC Money laundering and corruption.
CaterpillarUS2017PwCTax and accounting fraud accusations (with government).
GEUS2017/18KPMGAccounting fraud.
BTItaly2015 to 2017 PwCOverstated profits.
KPMGUS2017KPMGReceived advance notice of PCAOB inspections.
SteinhoffGlobal2018DeloitteSee Chapter 8.
CarillionUK2018 KPMGSee Chapters 6 and 7.
1 A Tobashi scheme is a fraud where a client’s losses are hidden by an investment firm by shifting them between the portfolios of other clients. Any real client with portfolio losses can therefore have their accounts flattered by this process. This cycling cannot continue indefinitely and so the investment firm itself ends up picking up the cost. As it is ultimately expensive, there must be a strong incentive for the investment firm to pursue this activity on behalf of their clients.
Table 1.2 Current FRC cases under accountancy and audit schemes (as of July 2018)
RSM Tenon and the audit by PricewaterhouseCoopers LLP Accountancy Scheme 16-Aug-17 14-Dec-16 13-Aug-12
Tanfield Group and the audit by Baker Tilly UK Audit LLP Accountancy Scheme 11-Jun-14
SIG plc and Deloitte Audit Enforcement Procedure28-Jun-18
Sanctions against RSM TenonAccountancy Scheme 21-Jun-18
Conviviality plc and KPMGAudit Enforcement Procedure03-Jul-18
The team behind this series
Professor Krish Bhaskar6 is the principal author of this book. He has published more than 50 books and many refereed articles. He has also worked in the IT, consulting, investment banking, automotive and forecasting sectors. He has experience of running companies, preparing reports and auditing7 – though mainly computer auditing, as it used to be called. Krish has been aided and abetted by Professor John Flower, whose major role is as an auditor and researcher into multinational financial reporting. John would probably classify himself as left of centre and leaning towards anti-capitalism and environmentalism. He has published scholarly critiques of the profession, including Global Financial Reporting, with Dr Gabi Ebbers, Palg rave, 2002, and two more radical books, Accounting and Distributive Justice (2010) and The Social Function of Accounts: Reforming Accountancy to Serve Mankind (2017). He has undertaken substantial research on financial reporting and standard setting. He also introduced modern auditing methods for the Common Agricultural Policy8 and undertook a number of innovative techniques in auditing what was and is massive-scale mega audits.9
Rod Sellers, OBE,10 FCA,11 has spent almost 50 years in senior financial and corporate roles in industry. Rod has given his time, written material, and given his views relentlessly, unstintingly and without complaint. But he does not want to be regarded as an author – just a contributor. He is deemed part of the auditing establishment (as he sat on the advisory board of one of the Big Four accounting/auditing/consulting firms) and was financial director and then chief executive of an FTSE 25012 company. For the last 20 years, he has been a por tfolio NED/chairman with a dozen companies – from private family businesses to PIE entities. His role has often included serving on audit committees and working closely with the financial departments. He defends the accounting and auditing profession and, although he realizes the impact of disruption, he does not believe that very much has gone wrong or usually requires anything more than evolutionary change. However, in terms of solutions and scenarios to correct problems facing the audit market, he appreciates that something more radical might be appropriate. He also believes that, in most cases, management is honest and trustworthy. His motivation to be involved in this series of books is to make sure his viewpoint and that of the profession is taken into account. Rod came to many of the interviews and collected considerable amounts of written evidence (emails, etc.).
All three of us have extensive and varied experience in the accounting profession. Two of us are broadly pro-Big Four in some shape or form and one of us is against. All three of us have experience both from the
reporting viewpoint and audit experience. One of us has had a lifetime career in industry with preparer experience including audit committees and shareholders. But we all agree that the current disputes between the FRC, the users of reports, the government and the Big Four has to lead to re-evaluated audit experience, not least because of the gap between what the public expects and what the auditors actually currently deliver. This expectations gap is currently widening and unstable, especially after the plethora of failures in 2018. In addition, the rate of increase of financial failures from 2017 onwards seems to be accelerating. Recent improvements to financial reporting and auditing seem not to be working.
However, although we share a common view of what the problem is, we do not all share the same opinion of what has caused the problem, or the best way to address it.
• John Flower, despite his extensive audit experience, is negative towards the role of auditors, financial reporting and current accounting rules. John is disillusioned with the public interest notion of auditing and wants radical change.
• Rod Sellers believes that in general the preparers of financial reports do so honestly and fairly. He believes that the available published evidence tends to concentrate on the frauds and scandals, thereby negating much of the good work which is undertaken between a company’s financial team and its auditors out of the public eye. But he recognizes that change is coming and may be necessary.
• Krish Bhaskar takes the middle ground and keeps a balanced view. However, he is aware that in a situation like Tesco, for example, there is high motivation for senior management to manipulate financial reports, however slightly, to their advantage, for financial gain (salary, bonuses and share options, etc.) or face-saving reasons.
There are also many other contributors to this book: managers, board members and practitioners with the Big Four who prefer to remain anonymous but who have provided significant input. In the main they support the profession, but some see issues and problems within it. Some are ardent critics of the growing UK approach to audits via checklists rather than intuition and a profound in-depth knowledge about the entity being audited. Their input amounts to hundreds of hours of partner time, hundreds of pages of input and thousands of emails.
We also draw on the views of a variety of groups, companies and institutions. These views range from support for the current status quo to being critical of it or in some cases highly critical of the status quo and ardently wishing for change. Boards and management of the FTSE and
larger AIM companies feel that they are under much pressure from an ever-changing set of rules and regulations.This demonstrates our key aim: to ensure that this book is relevant, fair and transparent.You know whose view it is you are reading.
Included as our own text are sections written by a variety of interviewees including partners from the Big Four, senior auditors, accountants, analysts, investment bankers, other professional investors, shareholders and senior and lower level managers of the FTSE 350. Many have required anonymity so there are only a handful of attributions given. We have not always identified quotes separately, especially if they came from several sources, even though we may have used the actual words from a single source. Credit should be given to those people who have given much time and effort in providing input to this volume. We do indeed thank them very much. Of course, as these written sources have requested anonymity, we are not at liberty to release their names. However, many of the ideas incorporated here include input and sometimes their actual words. Where we have incorporated ideas into our own thinking, then we adhere to the normal observation to the effect that the views expressed here are our own, notwithstanding the comments of others.
Where possible we have also referenced press reports. Usually these articles are published contemporaneously with the business failure or event. Most importantly, where possible, we always try to provide a balanced view.
Many of the comments we received have been added for balance to reflect the many comments received from reviewers and practitioners, some of which have been involved in the various cases we consider. Often their response is to disagree with our conclusions in the strongest possible terms. However, our conclusions are based on evidence and are often reinforced by others; those references have been given.
Other books and volumes in this series
The volumes which make up the Disruptions in Financial Reporting and Auditing series are:
1 Disruption in the Audit Market: The Future of the Big Four; 2 Financial Failures and Scandals: From Enron to Car illion; 3 Disruption in Financial Reporting;
4 Disruption in Auditing.
References to these companion volumes are made throughout this book.
Websites and online material
There is a complementary companion set of material to this volume online available at www.fin-rep.org. Some material may be updated over time. The glossary is listed first on the website and material is then by book title (Which Book?). There is a short glossary of the most relevant terms at the end of this book. Online, there is also the (full) glossary, which takes longer to look through but has more than 400 terms. As there are so many abbreviations, you may find it useful to keep the glossary open whilst reading this book. On mobile devices, just enlarge by zooming. This companion site can be accessed via www.fin-rep.org.
The reader can access the two glossaries on the home page and will be provided with options as to where to go for which book. Instructions are on the site. This site is available as a free-of-charge companion site to this book. There are details of how to obtain passwords (if implemented). Each book has its own space. Updates and new analyses may be provided. A blog may be added at a later date. Each book in this series has its own space on the site. Access to each book’s area is restricted to purchasers of that book. Multiple access by several users for one book is not permitted unless licensed. The rule is one book = one right to access. This is enforced through software. The Big Four and PIEs can purchase multiple access licenses. Instructions are again on the site. Use by research students using university library copies may be allowed. However, it is expected that the library will purchase multiple copies of each volume.
Many of the references in the text are also available online on www.finrep.org.The references are given as links to a specific URL. Press Control and left click simultaneously on your mouse or equivalent on the link and you will be taken directly to the reference if it still exists. Note that some links and URLs require fees or provide limited access (e.g. The Times and the FT). There is also an adjacent site at www.fin-rep.com, which has additional relevant information, updates and new research results. Feedback from researchers, regulators, the government, the Big Four, other audit firms, professional investors and the preparers of reports will be posted here. Multiple user licenses can be arranged.
Although the title of the book mentions Enron to Carillion. The book and its online appendices deals with later cases such as Conviviality, SIG, Patisserie Valerie and so on.
Notes
1 Marriage, M., 2019, UK accounting watchdog to be replaced by stronger regulator, Financial Times, 11 March 2019. Available at: https://www.ft.com/content/ d6580162-4416-11e9-b168-96a37d002cd3 Accessed March 2019.
2 FTSE 350. The top 350 companies listed on the FTSE, the Financial Times Stock Exchange 350 index – that is the top 350 companies by market capitalisation. Most of these are classified by as Public Interest Entities which means they have the highest level of reporting and external audit requirements. The FTSE 100 is the top 100 listed companies. The FTSE 250 is the 101st to the 350th top listed company.
3 Beattie, V., Fearnley, S., and Hines, A., 2011, Reaching Key Financial Reporting Decisions – How Directors and Auditors Interact, John Wiley & Sons. Available at: www.wiley.com/en-us/Reaching+Key+Financial+Reporting+Decisions%3A+How+ Directors+and+Auditors+Interact-p-9780470748749 Accessed July 2018, or available at: www.amazon.co.uk/Reaching-Key-Financial-Reporting-Decisionsebook/dp/B005HF3OBK/ref=sr_1_1?ie=UTF8&qid=1528106773&sr=81&keywords=Key+Financial+Reporting+decisions Accessed July 2018.
4 Institute of Chartered Accountants for England and Wales (ICAEW), considered the most prestigious of the accounting bodies, and the organization that usually entitles an accountant to audit (in England and Wales). There are Scottish and Irish equivalents.
5 Marriage, M., 2018, ‘Probe Urged into Break-Up of Big Four Accountants: UK Financial Reporting Council Wants Inquiry into Case for Creating Audit-Only Firms’, Financial Times, 16 March. Available at: www.ft.com/content/911e8184283d-11e8-b27e-cc62a39d57a0 Accessed July 2018.
6 Brother of philosopher Roy Bhaskar, now deceased and previously leader of the realist movement (the Realist Theory of Science, amongst others).
7 Although he has no formal accounting qualification, he has been an examiner, wr itten books for the ICAEW and CIMA and undertaken and supervised audits for those with ICAEW and ACCA qualifications, and undertaken national and country audits; in addition he has helped one of the Big Five with certain aspects of FTSE 100 audits, and undertaken numerous assurance reviews for investment banks. He also taught auditing and computer auditing as part of continual professional development programmes for qualified ACAs and others, nationally and internationally. He has a close association with US and French universities and runs two boutique consulting companies.
8 From 1981 to 1991. In the early days of the Common Market, agricultural spending absorbed 80% of the budget. It is now a significantly lower share, as the EU has developed other budget lines, but still accounts for 38% of the EU budget of 155 billion euros as of 2016.
9 Ibid.
10 UK Royal Honour: Officer of the Most Excellent Order of the British Empire.
11 Fellow of the ICAEW, rather than just ACA, of which he is a chartered accountant.
12 The Financial Times Stock Exchange 250 Index, also called the FTSE 250 Index. FTSE 250 is a capitalization-weighted index consisting of the 101st to the 350th largest companies listed on the London Stock Exchange. Rod describes it as a share index of mid-sized companies (after the top 100) listed on the London Stock Exchange by market capitalization.
2 Regulation, regulators and reporting
Accounting, reporting and auditing – not an exact science
Accounting and its rules are not an exact science. These two quotations epitomize the issue:1
• “How do you explain to an intelligent public that it is possible for two companies in the same industry to follow entirely different accounting principles and both get a true and fair audit report?”
• “Every company in the country is fiddling its profits.”
This conundrum is referred to as the expectation gap. Identified by Porter in 19932 (and others), it refers to the gap between expectation and actual performance. This can be divided into deficient performance, deficient standards (together making a performance gap) and unreasonable expectations. Expectations, reasonable or otherwise, continually change. They only grow, not diminish. Auditors and standard setters consistently lag behind.
We know that accounting and the preparation of financial reports is like portraying dynamic n-dimensions into static two-dimensions – many interpretations and tr icks are possible. Originally the financial reports consisted of:
1 The balance sheet, a snapshot of the business at a specific date;
2 An income statement or profit and loss account measured over a per iod of time and the cash flow statement;3
3 Various notes to these statements and accounting policies.
Not so now. It has been expanded with various additional reports and narrative reporting (sometimes referred to as the strategic report and
director’s report) and various non-financial information (NFI) and reports.
Flexibility and judgement – leads to misstatements?
There is flexibility and judgement. Rules can be written but to distil real-life transactions and events into a set of figures can never be exact –especially when some events are estimated such as how much of the money owed can actually be collected. There is the concept of what is material. Two companies with exactly the same performance and underlying reality might report very different results using the same set of basic accounting principles and standards.4 Differing estimates about the probabilities and events requiring exercise of ‘judgement’ will always cause this. What is still surprising to many observers is that the auditors will say that the two different sets of accounts can provide a true and fair view of the company.5 Note it is “[a] true and fair view”(as several commentators said to us):
There is no such thing as “the” true and fair view. There is always a range of views.
Materiality
You will find that the concept of materiality comes up in our case studies. According to Wikipedia,
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.6
Basically, if the amount being questioned is less than this numerical material amount, then the auditors can ignore that issue.
In the US, the Securities and Exchange Commission (SEC) defines what is material by using a numerical value. This is currently 5% of pretax profits, though this cannot be a hard and fast rule. If pre-tax profits are, say, £20 billion in one year, then f all back to £1 million the next year, and then return to £20 billion the year after, defining what is mater ial as 5% of the £1 million figure is clearly misleading. So, the value of what may be material has to be assessed with regards to the overall nature of the company and its business, and also taking a longer-term view. Often the definition of a material value is included in the annual report under a section usually called ‘Materiality’.
Forward-looking statements
There is an increasing focus on NFI and a growing requirement to provide forward-looking information, including a forecast view of the business and the answers to additional ‘what if’ questions. ‘Going concern’ examines the survivability of the company over the next 12 months. ‘Viability’ looks forward several years. However, there is now interest in not just an opinion about the future but also numerical forecast numbers.
A recent survey by KPMG, the 2016 Survey of Business Reporting, reported that 25% of the companies included (270 companies across 16 countries) provide short-term forecasts in their annual reports.7
Not just an annual report
Reporting today has an annual report, various documents for the state and for tax computations, half-yearly reports and often quarterly reports (compulsory in the US). Added to that are the various presentations and information given to analysts and shareholders. These are usually found or mentioned on the company’s website under investor relations sections. As well as giving an overview of the company, such websites will have key company announcements, news articles, press briefings and so on. There may be predictions by analysts or an average of the investment analysts forecasts or buy/sell recommendations (usually only if positive, though). Also, if necessary, any profit warnings are given. See Box 2.1.
Box 2.1 Additional information found typically under ‘investor relations’
For example, on BT’s website at www.btplc.com/ Sharesandperformance/Presentations/index.htm, you will find the following headings and information:
Results Watch webcasts and download press releases, slides, KPIs and transcripts. Latest consensus is also available.
Key company announcements
Key company announcements such as BT Pension Scheme agreements, the EE acquisition and BT sport rights auctions.
Regular ‘teach-in’ events In depth teach-in events on topics such as cost transformation, pension, regulation, network and technology.
Presentations from the lines of businesses
Analyst presentations from around BT, with updates on products and strategy.
SRI eventsPresentations for socially responsible investors, including the purposeful business programme.
Capital market days
Slides and videos from capital markets days.
Notes: Socially responsible investing (SRI), or social investment, also known as sustainable, socially conscious, ‘green’ or ethical investing, is any investment strategy which seeks to consider both financial return and social good to bring about a social change.
Purposeful business is less well known as a concept but according to BT it means “putting customers first; connecting people; working for the environment; supporting good causes; we’ve got big ambitions to be a more sustainable business”.
True and fair concept versus fair, balanced and understandable
We know that there may be many true and fair views of the financial statements from the identical underlying physical operations and transactions. The requirement to present a true and fair view in financial statements is enshrined in EU, UK and US law. The concept of true and fair is where directors must consider whether the financial statements that they approve are appropriate. The external auditors are legally obliged, under the Companies Act 2006, to state, when giving their opinion on a company’s financial statements, whether the accounts, in their opinion, give a true and fair view.
Since 2014, there is a requirement for an extended front half of the annual report with a greater narrative section. The new test is fair, balanced and understandable (FBU). Only the financial statements part of the annual report is independently assured by external auditors. Directors are obliged, under the UK Corporate Governance Code, to ensure that the entire report is FBU, but there is no obligation to obtain assurance over this – auditors do not have to carry out any additional work in this regard but must merely consider whether the non-financial part of the annual report is consistent with the knowledge they have gained in the course of the audit. Our evidence suggests that narrative sections often suffer from widespread lack of balance and tone, and sometimes misdirection.
The increasing importance of the UK’s Financial Reporting Council (FRC)
The FRC has a role both as a standard setter and enforcer. Some think that this creates an inherent conflict of interest in that it is ‘marking its own work’. The FRC has introduced a number of changes, including the strategic report having a description of the business model, and a narrative section in the front half of UK reports.The FRC only has to prove breach of a rule on the part of the external auditors. However, the FRC’s regulatory powers do not extend to company executives who are not accountants. So, it has a somewhat asymmetric role in sanctions over misconduct or inappropriate behaviour as shown in Box 2.2.
Box 2.2 FRC’s Asymmetric Sanctions
FRC sanctions on external auditor
Persons Firm, engagement partner normally but could extend to other auditors or accountants on the audit (with recognized qualifications).
Test Breach of FRC or regulatory rules.
Sanctions for firm£10 million fine plus other actions. Sanctions for individual Fines and possible ban from working as an accountant.
FRC sanctions on company or organization
Persons with recognized qualification
We will call this type of person a preparer accountant.
A person without a recognized accounting qualification, if on the board, we will call a director-preparer. If not on the board, it is unlikely for any action to be taken other than for fraud by the Serious Fraud Office (SFO).
Test Misconduct, which is a stricter test than breach of rule.
Sanctions for firmNo sanction against firm. Passed to FCA or, for criminal fraud, the SFO.
Sanctions for individual Fines and bans from working as auditor or accountant.
So, in the case of a preparer accountant (a qualified accountant in the firm preparing the reports, usually a financial director or CFO), the FRC has to prove behaviour amounting to misconduct rather than breach of a rule. However, the FRC has no right to sanctions over other members of the board, e.g. director-preparers who are not qualified accountants. This is asymmetric as the FRC has much greater control over the auditors than the preparers.
Recent and possible initiatives from the FRC include:
Recent:
• Strong encouragement of ‘clear and concise’ reporting;
• A new governance and stewardship code8 and usually periodic updates or guidance notes;
• Expansion of this code to private companies;9
• New routine reports on materiality and auditing; often under the headings of guidance, policy or thematic review;10
• New fines and penalties (now up to £10 million, though this may be raised again);
• Involvement in the senior appointments of the Big Six.
Possible (from reviews into the FRC):
• Possible break-up of the Big Four into split of separate audit-only and consultancy firms;
• Stronger penalties and sanctions over management and the preparers of reports;
• New audit rules. Now partly the responsibility of the Brydon Report. The new ARGA which replaces the FRC and should have stronger powers and teeth. But not all the powers we wanted. The Kingman Review did water down some of ours and others more stringent requests.18
However, it has not all been plain sailing for the FRC. In 2017 it came under criticism for closing the investigation into Tesco and its auditor, PwC.The FRC said there was “not a realistic prospect”11 a tribunal would find PwC guilty of misconduct at Tesco. This is their standard language for saying they could not publicly fault PwC.
FRC: post-HBOS and Carillion
In September 2017, the FRC cleared KPMG, the auditor of HBOS (Halifax and Bank of Scotland), of misconduct in relation to its work with the lender in 2007 and 2008. The FRC said the audit of HBOS’s 2007 results “did not fall significantly short of the standards reasonably to be expected” and that its assessment of the bank’s health in 2008 “was not unreasonable at the time”.17 The FRC’s decision prompted concern over accountability for the downfall of the bank (and in general all banks), which was forced into a rescue by Lloyds Banking Group in 2008.
Nicky Morgan, chair of the Parliament’s treasury Select Committee (SC), sent a letter arguing that accountants should be subject to tougher rules, more like those imposed on auditors “to protect the public interest”.18 FRC ex-chief executive Stephen Haddrill responded by saying that the ability of the FRC to investigate audits and bring auditors to book had been hampered by the prevailing UK law, which had set the bar of the misconduct test unattainably high. But with the EU Audit Regulation and Directive (ARD) implemented in 2016 and enshrined in UK law, the threshold had been lowered and the regulator would be able to make relevant enforcement. This also meant that more potentially deficient audits would be investigated, prosecuted and ultimately sanctioned. In so doing, fines were increased to in excess of £5 million and now to £10 million.
A £10 million fine was levied on PwC but reduced to £6.5 million on settlement, with a 15-year ban for one partner plus a fine of £325,000 for that individual. In 2017 there were two further large fines. PwC was fined £6 million, reduced to £5.1 million on settlement following an investigation into the 2011 accounts of RSM Tenon, which collapsed in 2013. One of PwC’s partners was fined £114,750 and PwC had to pay £500,000 in costs in 2017. This fine came after PwC was fined £5 million earlier in 2017 over its audit of Connaught in the period running up to the social housing group’s collapse in 2010. Bottom line, dismiss the numbers, but none of these sanctions were large enough to have much real effect and reports of them were confined to the specialist financial press or financial pages of the national press in the main.The ones that still stand out include the collapse of HBOS and the more recent 2018 cases; although, in our interviews, the impact seems to be much greater in terms of peer group pressures and status (i.e. promotions) within the audit firm.
The FRC has often been criticized for being too close to the Big Four. Of the 30 board and senior FRC positions identified in Accountancy in December 2017 (page 13), 15, or 50%, are from the Big Four (including one from Arthur Andersen, one of the Big Five firms before the Enron scandal), and two were from mid-level firms.
20 Regulation, regulators and repor ting
It has also been criticized for being too slow and ineffective. The FRC admitted that it should have been faster to investigate why KPMG gave HBOS’s accounts the green light just seven months before the bank had to be rescued by Lloyds during the GFC. Instead, the FRC closed its investigation into the audit, saying it had found that KPMG’s work for HBOS “did not fall significantly short of the standards reasonably to be expected”, notwithstanding that criticisms have been made elsewhere that this was a biased board and the suspicion is that this may have been a biased decision. The FRC then admitted:
We should have adopted a more proactive approach to our early enquiry in relation to HBOS rather than a heavy reliance on other regulators.13
The FRC came under heavy criticism by the joint Select Committee (SC)12 and MPs for being slow and “far too passive” in its scrutiny of the financial practices of collapsed outsourcer Carillion. MPs on two highprofile parliamentary committees concluded in their report that they had “little faith in the ability of the FRC to complete important investigations in a timely manner”.14
The roles of the regulators
Box 2.3 lists the main regulatory bodies in the UK.
Box 2.3 Relevant watchdogs
FRC – Financial Reporting Council. Probably the best known of the watchdogs for annual reports, reporting and auditing. It regulates auditors, accountants and actuaries, not directors (unless they are qualified accountants). Concerned with the listings of companies on the stock exchanges or equivalent and false market values and areas that might affect market capitalization and share value, corporate governance and reporting, including monitoring and reviewing the actions of the auditors.
FCA – Financial Conduct Authority. Regulates listed companies and markets; more concerned with the conduct and actions of the board of directors.
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which is procured only by these motives. But if thou love thy wife or husband, because God enjoins it, then thy love will be constant and perpetual.
3. This property of love, that it is spiritual, built on the rock of God’s commandment, answers all the objections which many would make against it in their own cases. “Who, says a man, can love such a wife?” “And what wife, says a woman, can love such an husband?” I answer, a man whose affection is spiritual, can love even such a wife. And the woman who has attained to spiritual love finds it possible to love even such an husband.
4. But as the ground of their love must be spiritual, so must also the working thereof. It must seek the spiritual good of the person beloved, by every possible means. For that love which seeks only their temporal welfare, deserves no better name than carnal love. But surely those who love each other, because God bids them, will love each other as God bids them. They will be careful of each others souls, as well as of their bodies and estates. But alas! How exceedingly does the love of most married people fail herein? Thou art kind to thy wife or husband, and it goes to thy heart, to think any thing should be wanting for their good. It is well; but so may a Turk as well as thou, if by good, thou meanest only that which is temporal. But dost thou seek to help thy yoke-fellow to heavenly, as well as earthly benefits? This is spiritual love: this becomes a Christian husband, and a Christian wife. Be not then carnal in your love, walking as men, but spiritual as the children of God.
5. *But remember farther, that your love must be matrimonial, as well as spiritual. It must be matrimonial, with regard, 1. To the degree, and 2. To the effect of it. For the first, A man should love his wife, a woman her husband, above all the creatures in the world. Next to the living God, the wife is to have the highest place in the husband’s heart, and he in her’s. No neighbour, no friend, no parent, no child, should be so near and dear to either as the other They are joined in the closest of all unions; therefore their mutual affection should be most abundant. They must do more and suffer more for
each other, than for any other in all the world. They must bear with more faults in each other than any besides, and be ready to take more pains for each other.
6. Secondly, As to the effect of this love, it should knit them together, that they may receive full satisfaction in each other. Love should cause a man to account his wife the only woman in the world: and so the wife to account her husband the only man in the world. The persons of each should be to the other the most precious of all persons. Do any object, this cannot be, unless every man and every woman, could find in their own yoke-fellow as amiable qualities as are to be found in others: I answer, not the good qualities of either, but the good pleasure of God is the ground of their mutual dearness. Good qualities make this duty more easy: but it is still a duty, tho’ good qualities be away. A man may lawfully think another woman a better woman than his own wife. But he may not love another woman, tho’ more virtuous, above his own, tho’ less virtuous. This is the effect of matrimonial love, to settle the heart of each upon the other, above all in the world besides. It admits of none equal in affection, but places the yoke-fellow next to our own soul Nor will it bear the desire of change, but so links their hearts together, that in this respect they are only dear to each other.
7. The means to get and confirm this love, is to have one house, one table, one bed. But besides this natural means of procuring love, there are two spiritual means. The one is, to take special notice, of God’s gracious providence in their match. They must often consider, that God joined them together, for their mutual benefit, as being on the whole fitter for each other, than any person besides could be. We know, that a mean gift is often respected, for the giver’s sake. And he that loveth God, cannot but love all his blessings for his sake. Wherefore remember, that God in great goodness (for crosses also come to God’s children from his goodness) hath bestowed this yokefellow, and thou shalt dearly love thy wife or husband, tho’ perhaps not so well-tempered. For the dearness of the giver will countervail the defects of the gift. And then thy yoke-fellow’s distempers will grieve thee indeed, but not alienate thy affection.
8. Another means of uniting your souls is, constantly to join in exercises of piety. Pray together: sing together: confer together, concerning your heavenly country. And this will be found an excellent means of confirming your mutual love. These will nourish the Spirit of holiness in you: and that inkindles love wherever it comes. By these you will soon perceive yourselves to have been spiritually profitable to each other: and to receive a spiritual benefit cannot but beget and nourish spiritual affection. Naturally you would grow weary of each other: but if you season your natural communion, with this communion in spiritual things, it will prevent all satiety Jars and contentions are the great hindrances of love; but the joining together in these exercises, will cause you to jar far more seldom: nor will any sudden jar fester or rankle, so as to breed hard thoughts of one another, which are the bane of love. Prayer will prevent most contentions and compose all: for when you shall appear before God in prayer, instead of blaming each other, you will each blame yourself, and then all contention will cease.
9. But some may say, “What shall I do, who have such an husband or wife, as neither can nor will join with me, in the service of God?” I answer, pray for that yoke-fellow, who will not pray with thee. The less able or willing they are to intreat for themselves, the more frequently and earnestly intreat God for them. It may be, God will give thee thy desire, and turn their hearts to thee. At least, thy own soul will gain an increase of heavenly love to them. And this is sure, that to love your yoke-fellow spiritually and fervently, tho’ you are not loved again, is far better, than to be loved of them, without so loving.
CHAP. III.
Of the Effects of Love.
1.
T
HE effects of nuptial love are three, Pleasingness, Faithfulness, Helpfulness. The first, which must mix itself with all the rest, is an earnest desire to please each other, so far as it is possible to be done, without sinning against God. Wherefore the husband must do or leave undone, any thing he can, that he may please his wife: and the wife must in any thing cross her own desires that she may satisfy his. In diet, attire, choice of company, and all things else, each must fulfill the other’s desire, as absolutely as can be done, without transgressing the law of God. As difficult as this may seem at first, practice will make it easy. Resolutely begin, and the proceeding will be pleasanter than the beginning. Especially if both labour together, each seeking to oblige the other. For it cannot be difficult to satisfy one, who desires to take as well as to give satisfaction.
2. But some will say, “This suits not me, nothing will satisfy my froward yoke-fellow.” I answer, It may be so: it is not in ones power, to make a froward person take a thing well. But it is in your power, to do your best, to satisfy such an one; and to strive the more, the more averse to peace your companion is. “But it is hard, to be still striving against the stream.” It is; but duties must not be omitted because they are hard. The scholar, who has an hard lesson, must take the more pains to learn it. So the husband or wife, that has a perverse companion, must take the more pains to please them. Let the difficulty therefore make thee more diligent: and encourage thyself in this tedious labour, by thinking, “If after all I cannot please my yokefellow, I shall not fail to please God. Yea, and the harder the work is, the better he will take it at my hands. Therefore I will so behave, that
they may receive content in all things, if any thing but sin will content them.” This caution indeed we must observe; for we may not, to please anyone, sin against God. If any thing but sin will satisfy, thou must do it, be it ever so contrary to thy own will. But if thou canst not fulfill the desires of a creature, without breaking the law of God, then thou must not fulfill them: better offend a mortal man, than the immortal God.
3. In the next place, husband and wife are to be faithful and helpful to each other. These two must always be united: therefore we speak of them together This was the principal thing which God designed in the creation of the woman. It is not good, saith he, for man to be alone: I will make him an help meet for him. And undoubtedly man was intended to give, as well as to receive help. This helpful fidelity consists in their mutual care to abstain from and prevent whatever might grieve or hurt either: and to do themselves, and incite others to do, whatever might comfort or benefit either. And this must extend to the soul, the body, the name, and the estate.
4. First, to the souls, by provoking each other on all occasions, to inward and outward holiness. The husband must further the wife in all goodness, and the wife the husband: for she has also liberty to stir up her husband, by intreaty and fair means. And as they have special opportunity, so they should be always ready, with special diligence, to provoke one another to love and to good works. O how sweet is the society when they thus watch all occasions to further each other in godliness! Again; being continually together, they may discover in each other divers corruptions and imperfections. They must not turn these into matter of contempt, but of compassion and care for each others reformation. They should observe each others temper, ’till they perceive what infirmities each is chiefly inclined to, and then diligently abstain from what may provoke that evil, and apply all means that may heal it. If all their labour does not avail, they must not fear to seek the help of some common friend, who possibly may effect that cure, which themselves had endeavoured in vain. And if even this does not succeed, still they must wait and pray,
referring the matter to God, the only physician of the soul, who is able in due time to redress all.
5. The same faithful helpfulness they owe, to the bodies of each other. They must shun all things that might cause sickness or pain to each other, and readily undergo any pains or cost, according to their power, to procure whatever is necessary either to keep or recover their health. They must comfort each other, in the days of sorrow, that worldly sorrow work not death. The wife must be health to her husband in his sickness: she must support his weakness, and he her’s. Sickness and weakness are things which of themselves are hard enough to be borne. There needs not the addition of unkindness to make the burden heavier. Let every husband and wife avoid or mend this fault, and be particularly careful of their behaviour, at that time above all, when either is visited with grief, or weakness, or sickness. When your wife is sick or pain’d, then comfort her with loving words, and chear her by a tender countenance. Then see that she want no looking too, no help which thou canst procure. When thy husband is sick or weak, then stay him with comfortable speech, revive him with diligent attendance. Do all thou canst, to ease his pain, and to recover his strength. Let thy love and care be his best physic, and thyself his best physician. This is to be faithful to thy husband’s body, and to “cherish him in sickness as in health.”
6. In the third place, man and wife must be faithfully helpful to each others names, and that in a double respect: in maintaining them both between themselves and also among others. First, they must hold fast a good opinion of each other, so far as it may possibly stand with truth. Yea, it is no blame for them to have somewhat too good an opinion of each other: for a man to think his wife not only more handsome, but more wise and good than she is; (making her virtues carry a greater show to the eye, by looking at them thro’ the glass of love:) and for her to think him not only more proper, but more kind and good than he really is, by taking things with that largeness of good interpretation, which much love naturally puts upon them. Certainly then they should be peremptory to give no
place to ungrounded, unwarranted surmises. They must on no account suffer their hearts to grow mistrustful of each other. All rash, ill-built, hasty surmises, must be far from them. Otherwise love will go out at the same door, at which suspicion came in. He or she that has a suspicious head, has not a truly loving heart. Such may be lustful or fond; but an holy, virtuous, spiritual affection they cannot have. So long as they give way to evil surmisings, there is no place for this. *And therefore of all domestic makebates, of all that breeds quarrel between married people, nothing in the world is more pestilently effectual to this bad end than jealousy Having leavened the heart, it makes the speech tart and sharp, the countenance sour, the whole behaviour distasteful. No good words, no good actions, or ♦gestures, or looks can proceed from a jealous heart. Jealousy will make one suck mischievous things out of his own fingers ends. Suffer not therefore this evil weed to grow up in the garden of matrimony. For no good herb will prosper by it; no praise-worthy thing will flourish. Let all then that are married, detest any thought of this kind that may arise. Let their hearts disdain to give the least credit, unless the proofs be more than manifest. Away then with this makebate jealousy, this quarreler suspicion, this breeder of brawls, this mother and nurse of contention, this underminer of love and of good husbandry, of all that should be profitable to an houshold. Away with it, I say, out of thy heart: chase it far from thy breast, from thy house. It is better to receive ten wrongs without suspecting, than to suspect one that is not received. Wherefore as thou wouldst stand for the good name of thy companion, against the tongue of a slanderer, so stand for it against the dreams of thy own heart, against thy own slanderous imagination. And if any person will suffer his lips to be so ill employed, as to become Satan’s bellows, by blowing these coals betwixt you, by telling thee this or that, rebuke such a person, reject his words with detestation, flee his company, nor defile thy ears and heart, by giving gentle audience to a whisperer and talebearer In a word, wouldst thou love or be loved? Wouldst thou live otherwise in marriage, than as in a prison or dungeon? Then strengthen thy heart against all suspicion, and rather be any thing than jealous.
♦ ‘guestures’ replaced with ‘gestures’
7. Ye must be tender also of each other’s reputation abroad. This requireth two things: First, that each labour to conceal the weaknesses of the other, so far as is possible, from all men. The husband must endeavour, that none may know of his wife’s faults, but himself: and the wife must do her best to keep her husband’s faults from the knowledge of every creature. On the contrary, to publish each others sins, is a monstrous treachery. To backbite an enemy is a sin: how much more to backbite ones yoke-fellow? Whose faults can a man cover if not his wife’s, that is in effect, his own? Or who can be free from reproach, if one so near as his wife, deface his good name? ’Tis impossible but man and wife must sooner or later discover their weaknesses to one another. And for them to be playing the tell-tale against each other, what soul does not loath to think of it? If thou hast been so sinfully talkative before, now for shame lay thy hand upon thy mouth, that thou mayst no more incur the name of fool, by making thy tongue to spread abroad folly.
8. But besides this, you must faithfully keep each others secrets. A man may have occasion to acquaint his wife, with things which he would not reveal to others; so may a woman to acquaint her husband. Now if in such cases a wife find, that her husband has revealed what she intrusted with him alone; or he find, that she has revealed what he spoke to her in the confidence of love, this will breed such a distrust of the offending party, as will not easily be removed. Wherefore let husbands and wives always mind this: If he lay up any thing in her breast, let him find it safe there, as in a chest, which cannot be opened by any pick-lock. If she commit a thing to his safe keeping, let it be imprisoned in his bosom. Otherwise no man can chuse but be strange to one, whom experience has convinced of blabbing. And it is an infallible truth, that there is no comfortable living with one whom you cannot trust.
9. The last part of faithful helpfulness to each other, is that which concerns their estates. And to this end it is requisite, first, that all things be common between them, goods as well as persons: For if they make not a division in the greater, it is absurd to make it in the less. They should have one house and one purse: for they are one, and their estates should be one also. And having thus united their fortunes, let them, secondly, practise good husbandry therein. This implies three things, diligence in getting, prudence in saving, providence in foreseeing. These three, industry, frugality, and forecast, make up good husbandry And if any of these are wanting, so much is wanting to the perfection of it; and so much also will be wanting, for their comfort and prosperity.
CHAP IV.
Of the duties of the married to their family.
Man and his wife, who before were members of other families, join together that they may become the roots of a new family: Wherein by training up their servants and children, they provide plants for God’s vineyard, the church. In this family the husband is the head; the wife is the next, as subordinate to him. They are both to maintain and govern their family. First, they must join in providing it with all necessaries, imitating herein the father of this great family, the world, who fills every creature with good things fit for it. But they must govern as well as maintain their houshold; the man as God’s immediate officer, the woman as an officer deputed by him, not equal, but subordinate: he, by the authority derived immediately from God, she by authority derived from her husband.
2. The first point, in order to the due government of their family, is to educate their children well; more especially in their tender years. I cannot lay down a better method for this, than is laid down in a letter printed some years since; part of which is here subjoined.
*“According to your desire, I have collected the principal rules I observed in educating my family. The children (she had ten who came to man’s estate, eight of whom were frequently at home together) were put into a regular method of living, in such things as they were capable of, from their birth, as in dressing, undressing, changing their linen, &c. The first quarter commonly passes in sleep. After that, they were, if possible, laid into their cradles awake, and rocked asleep, and so they were kept rocking till it was time for them to awake. This was done to bring them to a regular course of sleeping, which at first was three hours in the morning, and three in the afternoon: afterwards two hours till they needed none at all.
*“When they were turned a year old, they were taught to fear the rod, and cry softly. By this means they escaped abundance of correction which otherwise they must have had, and that odious noise of the crying of children was rarely heard in the house.
*“As soon as they were grown pretty strong, they were confined to three meals a day. They were never suffered to chuse their meat, but always ate such things as were provided for the family. Whatever they had, they were never permitted to eat of more than one thing. Drinking or eating between meals was never allowed, but in case of sickness, which rarely happened.
*“At six they had their supper. At seven their maid washed them, and got them all to bed by eight. Then she left them in their several rooms awake: for we allowed no such thing, as sitting by a child till it fell asleep.
“They were so constantly used to eat and drink what was given them, that when any of them was ill, there was no difficulty in making them take the most unpleasant medicine. This I mention, to shew a person may be taught to take any thing, be it ever so disagreeable.
*“In order to form the minds of children, the first thing to be done, is, to conquer their will. To inform their understanding is a work of time, and must proceed by slow degrees: but the subjecting the will is a thing which must be done at once; and the sooner the better. For by our neglecting timely correction, they contract a stubbornness, which is hardly ever to be conquered, and never without using that severity, which would be as painful to us as to the children. Therefore I call those cruel parents, who pass for kind and indulgent: who permit their children to contract habits, which they know must be afterwards broken.
“Whenever a child is corrected, it must be conquered. And when his will is totally subdued, then a great many childish follies and inadvertencies may be past by. Some should be overlooked and taken no notice of, and others mildly reproved. But no wilful transgression should ever be forgiven, without chastisement, less or more.
“I insist upon conquering the wills of children betimes, because this is the only foundation of a religious education, without which both precept and example will be ineffectual. But when this is throughly done, then a child is capable of being governed by the reason of its parent, till its own understanding comes to maturity, and the principles of religion have taken root.
*“I cannot yet dismiss this subject. As self-will is the root of all sin and misery, so whatever cherishes this in children, ensures their after wretchedness and irreligion; and whatever checks and mortifies it, promotes their future happiness and piety. This is still more evident, if we consider, that religion is nothing else but the doing the will of God, not our own: and that self-will being the grand impediment to our temporal and eternal happiness, no indulgence of it can be trivial, no denial of it unprofitable. Heaven or hell depends on this alone. So that the parent who studies to subdue it in his children, works together with God in the saving a soul; the parent who indulges it, does the devil’s work, makes religion impracticable,
salvation unattainable, and does all that in him lies, to damn his child, soul and body for ever.”
3. This advice, first, to conquer the wills of children, is exactly agreeable to the apostle’s direction to parents, Eph. vi. 4. Train them up, (I do not say, in the nurture and admonition of the Lord; for I know not what that odd expression means, but) ἐν παιδεία καὶ
νουθεσία Κυρίου, in the discipline and instruction of the Lord. Ἐν
♦ παιδεία, in the discipline first; then ἐν νουθεσία, in Christian knowledge; because they may be inured to discipline, before they are capable of instruction. *This therefore I cannot but earnestly repeat, break their wills betimes: begin this great work before they can run alone, before they can speak plain, perhaps before they can speak at all. Whatever pains it costs, conquer their stubbornness: break the will, if you would not damn the child. I conjure you, not to neglect, not to delay this. Therefore, 1. Let a child, from a year old, be taught to fear the rod, and to cry softly. It cannot be exprest, how much pains this will save both to the parent and the child. In order to this, 2. Let him have nothing he cries for; absolutely nothing, great or small. Let this be an unvariable rule; else you undo all your own work. 3. At all events, from that age, make him do as he is bid, if you whip him ten times running to effect it. Let none persuade you it is cruelty to do this: it is real cruelty, not to do it. If you spare the rod, you spoil the child; if you do not conquer, you ruin him. Break his will now, and his soul shall live, and he will probably bless you to all eternity.
4. *But we are by nature not only full of self-will, but likewise of pride, atheism, anger, falshood and idolatry. Now the end of education is to counteract and remove all the corruption of nature; of Christian education in particular, termed by St. Paul, the discipline and instruction of the Lord. Set yourselves, therefore, ye Christian parents, to the work. Indeed it is not a little one. In order to
accomplish it, you will need both the wisdom and the power of God: in order to root up, instead of strengthening, as most do, all these roots of bitterness. Self-will has been spoken of already. The next evil you are to oppose in children is pride. In order to guard against this, 1. Never commend them to their face, either for their goodness, sense or beauty. It is deadly poison. It is the direct way to plunge their souls in everlasting perdition. 2. Suffer no other to do it, if you can possibly prevent it: and if any should commend them, in their hearing, regard not ♦complaisance, or good-breeding so called, but check them immediately 3. Lovingly shew them their faults, especially their wrong tempers, as soon as ever their understanding dawns. 4. In particular, labour to convince them of atheism: shew them, that they are without God in the world: that they do not know God; that they do not love, delight in, or enjoy him, any more than do the beasts that perish. 5. Do not teach them revenge: never say, “Who hurts my child? Give me a blow for him.” Do not encourage them in anger, by laughing at, or seeming pleased with their little froward tricks. Rather check them for the least appearance of it, much more for an angry word or action. 6. Let property be inviolably maintained among your little ones. Let none of them dare to take the very least thing, not an apple or a pin, without, much less, against the consent of the owner. 7. Do not teach them lying. Never say, “It was not my child that did so.” On the contrary, inure them to confess their faults, and to tell the truth at all hazards. 8. Begin early to guard them against idolatry, against the love of the world in all its branches. Do nothing to feed in them the desire of the flesh; that is, of the pleasures of sense. Keep them (on this account, as well as on account of health) to the plainest, simplest diet. If they do not want it as physic, let them taste no liquid till ten or twelve years old, but water or milk. Above all, let no tea come within their lips, no strong drink of any kind. If they never have it, they will never desire it. It is wholly your fault if they do. Do nothing to feed in them the desire of the eye Let their dress also be plain and simple. Let them always (so far as your circumstances will allow) be clean, but never fine. Let them never wear any thing that is ♠showy, any thing that is gay or glittering. Put nothing upon them that attracts the eye, either their own, or that of others. Give them nothing, nor suffer others to give
them any thing that is purely ornamental. Dress your children just as you dress yourself, that when they are grown up, they may have nothing to unlearn. More full directions on these heads, and many others, you have in the “Instructions for Children,” which I advise every parent to read again and again, and to put it in practice with all his power.
♦ ‘complisance’ replaced with ‘complaisance’
♠ ‘showey’ replaced with ‘showy’
5. The government of your family in general respects matters of God, and matters of the world. Your first care must be, that the living God be duly worshipped by all in your house. To this end, you must read the scriptures, call upon the name of God among them, and catechise them in the principles of religion, that none under your roof may be ignorant of the great truths of the gospel. To this end also you must see, that they sanctify the sabbath: you must carefully and constantly bring them to the public assemblies, and examine them afterwards, how they profit thereby If this care be wanting, you will want the blessing of God on all your other cares. Wherefore, let man and wife be principally helpful to each other in this business. When the husband is present, let him read and pray with the family, and teach them the fear of the Lord. In his absence, let his wife do these duties, or at least take care to see them done. And let both of them provide and allow convenient time and leisure for the same: and let each quicken the slackness of the other, if either begin to grow weary. If he is worse than an infidel, who provideth not food and cloathing for his family, what is he that lets their souls go naked, for want of that which is both food and cloathing to them; I mean, instruction in the things that pertain to life and godliness? Herein, then, let all husbands and wives be of one mind in the Lord, using all good means to plant and water piety in the hearts of all that are under their care.
6. As to matters of the world, first, They must appoint their inferiors such works and services, as they are severally fit for, and then follow and look after them, that they may perform those services. Had not the Lord seen, that inferiors would need this, he would not have made this difference in the family. But God saw, that the best servants need this help, and therefore ordained governors; generally two, that the absence of the one might be supplied by the presence of the other. Secondly, You must mark the carriage of your inferiors, and see what disorders do, or are ready to break in, whether openly or secretly, that they may be either prevented or resisted speedily. Idleness, tatling, discord, and many more evils, are apt to steal even on good servants and children, which the Lord well knowing, made rulers in the house, to keep all in good order: and if this care be some trouble, yet the mischiefs which arise from the want of it are much more troublesome: whereas, if the eyes of the master and mistress be always open, much peace will follow in the house. Thirdly, You must join in admonishing, encouraging, reproving, and, if need be, correcting your inferiors. Both must discountenance what is evil, and encourage what is good. And in so doing you must take care to maintain each other’s authority to the full. If one encourage, the other must not oppose; if one reprove, the other must not defend. If he see cause to correct the children, she must not grow angry or hinder: neither, when she would correct, must he save them out of her hands. Nay, suppose either should exceed, correcting either without cause, or above measure, the other must not find fault, in hearing of the inferiors; but they must debate the matter between themselves, and keep their disagreements from appearing in the family. So therefore join hands, that your dissention may not blast the fruit of all your endeavours. So shall you preserve your authority, ♦ increase your love to each other, and procure amendment in your inferiors.
♦ ‘encrease’ replaced with ‘increase’
CHAP. V.
Of a Man’s keeping his Authority.
1.I
T is the duty of an husband, to govern his wife, and to maintain her. The former implies, that he keep his authority, and that he use it. And, first, every man is bound to keep himself in that place wherein his Maker hath set him, and to hold fast that precedency which God hath assigned him. The Lord hath intitled him your head, and he may not take a lower place. The contempt redounds upon God, which a man takes upon himself, by making his wife his master. But perhaps some will say, “All this is reasonable, if it were practicable. But there are some wives so proud, headstrong, and stubborn, that their husbands cannot govern them.” I answer, most men blame their wives, when the real fault is in themselves. Man cannot hinder a violent woman from assaulting his authority, but he may from winning it: not indeed by violence, but by skill; not by main force, but by a ♦ steady and wise proceeding. And, first, let him endeavour to exceed his wife in goodness as he does in place. Let him walk uprightly and religiously in his family, and give a good example to all in the house. Then any reasonable woman will give him the better place, whom she sees to be the better person. Take pains then to make thyself good, and that is the most compendious way to make thyself reverenced.
♦ ‘steddy’ replaced with ‘steady’
2. This in general. But in particular, shun those evils, that make a man seem vile in the eyes of those that are round about him. The first of these is bitterness: sharp, tart carriage, reviling, passionate, provoking language, are fitly so called; being as offensive to the mind, as gall and worm-wood to the palate. This bitterness shews folly, and works hatred, and therefore must needs be a great underminer of authority. For wherever want of wisdom is, there will ensue want of reverence. He that would retain his pre-eminence,
must, secondly, avoid unthriftiness, another great enemy to reverence. Drunkenness, gaming, and ill company, are the three parts of unthriftiness. And whoever gives way to any of these, must expect to be despised. Thirdly, lightness must be avoided by husbands, all foolish, childish behaviour, that wears no stamp of gravity or discretion, but savours of a kind of boyishness. If the husband puts a fool’s coat upon his back, can he blame his wife for laughing at him? Cast therefore all those base evils from you, and strive for holiness and gravity of conversation, that your superiority, supported by such pillars, may stand upright and unshaken.
3. But how is a man to use this authority, so that it may answer the end for which it is given? The end of it is, That he may present her to God, holy and without blemish; that he may so govern her, as to weaken every corruption, and strengthen every grace in her soul. In order to do this, he must temper the exercise of his authority, by justice, wisdom and mildness. Justice is the life and soul of government, without which it is no better than a dead carcase: wisdom is the eye of government, without which it is like a strong man stark blind. Mildness is the health and good constitution of government: and when these are all joined together, then the husband is, as it were, God in the family, a resemblance of his sovereignty and goodness.
4. Justice is to be practised in directing and recompensing. For the first, a man must not so abuse his authority, as to enjoin any thing sinful: what God commands, he must not forbid; what God forbids, he must not command. Let no husband forget, that the Lord in heaven, and the magistrate on earth, are above him. He and his wife are equally subject to these. Therefore let him never set his private authority against theirs, nor make his wife undutiful to either of these, by a false claim of duty to himself. For instance: let no husband command his wife to lie for his advantage, to break the sabbath for his gain; to partake of his fraud, or sin of any kind. Neither let any man forbid his wife to pray unto God, to attend his word and sacraments; to use any of the means which God hath made the ordinary channels of his grace. See then, all ye husbands
that your directions to your wives agree with the laws of God. Otherwise to disobey you is the better obedience, and to reject your evil directions, is not to deny subjection to your persons but to your sins, yea to the devil himself, who rules in you.
5. But this rule of justice must extend a little farther. The husband must not urge his authority, not only in things unlawful, but even in those that seem unlawful to his wife’s mistaken confidence. He ought not to force her to what she thinks a sin. Conscience is God’s immediate officer, and tho’ it is mistaken, must be obeyed, ’till it be better informed. Wherefore, when a woman thro’ weakness fancies a thing indifferent to be sinful, a man must not compel her to act against her conscience, but with pity and gentleness try to remove that mistake. “But what if she pretend conscience, when it is but willfulness?” Then he must wait awhile, and if persuasions avail not, at length use his authority, and enjoin her to change her obstinacy into subjection. “But how shall I know, whether she be scrupulous or stubborn?” I answer, scruple of conscience is grounded on the word of God, on some text which carries an appearance at least of condemning the thing in question. But obstinacy is backed with no part of God’s word. Therefore, if a woman produce some scripture, tho’ perhaps misinterpreted, for her scruple, she must be tenderly dealt with. But if she plead conscience, without God’s word, it is probably a mere pretence. Again, it may be a mistaken conscience, when things indifferent are deemed either necessary or sinful. But if conscience be pleaded against doing what God hath plainly commanded, this is willfulness in error, not weakness of conscience.
♦6. Justice is likewise to be exercised in requiring either the bad or good carriage of the wife. Bad behaviour may be requited with reproof or correction. But be sure, not to reprove without a fault. Find not a fault where no fault is, for fear of making one where there was none. And observe; a fault reformed is to be accounted no fault. Therefore it must never be mentioned more. And when a real fault requires punishment, still the husband must come exceeding slowly to it, and be very seldom in it, never until he is compelled, because all other means are ineffectual. For a man to look and behave cooly
towards his wife, to withdraw the testimonies of his love, to cease to trust and to speak familiarly and chearfully to her, these things I call punishments. And all things of this kind must be more or less sharp, as the fault is greater or less, being suited, not to the passion, or loss, or hurt of the reprover, but to the offence of the reproved. On the other hand, rewards and commendations should be proportioned to the nature and degree of her good behaviour: the husband being careful to feed her virtues, nourish her obedience, and confirm all her amiable qualities.
♦ ‘9’ replaced with ‘6’
7. The next virtue of the husband is wisdom, which gives rules for the right ordering his authority. It is a main part of this wisdom, to conform the use of his authority to the disposition of his wife. There is a great difference in tempers: some are more stiff, some more pliant; some are easy to be ruled, some the contrary. Some require more sharpness; others will be better wrought upon by gentleness; and wisdom teaches to frame all commands, reproofs, rewards, according to the condition of the person. A soft, tender woman must be dealt with tenderly; a rough, high-spirited one, with more sternness and severity. And herein an husband must not follow his own inclinations, but bow himself to the temper of his wife. As she is more apt to grieve or rage, to be dejected or careless, so ought a man to shape his words and behaviour, that he may most heal and least provoke those passions to which she is most liable. St. Peter points all men to this part of discretion, when he terms women, the weaker vessel; meaning, subject to more natural infirmities than the man. So much the more should the husband shew himself a man of knowledge toward her Our Saviour’s government may be our example. He well considers the particular nature of all his members, sees the tempers and infirmities of each, and deals with them accordingly. And his wisdom appears in mixing a fit cup of consolation or affliction for every soul. Every husband must carefully imitate this: for if some women were reproved so frequently and so sharply as others; they would be quite disheartened: and if some
were to receive so great kindness and such commendations as others need, they would be utterly destroyed by pride. Now the art of government must moderate all these things, according to the nature of the governed. And this art the giver of wisdom will not deny, to them that earnestly crave it at his hands.
8. Another part of wisdom is, to chuse a fit time and place for every act of authority. Two rules may be observed with regard to time, particularly in reproving, that being a thing wherein most caution should be used, because it is most apt to be taken ill, and because if it speed well, it does much good, if not, it does much hurt. But in all other parts of government, the same rules are so needful, that much mischief will grow by not observing them. Now, as in this case there are two persons concerned, so a time of reproving or commanding must be chosen, suitable to both. It must be then used, when he is fit to use it well, and she to take it well. First then, when a man himself is quiet, in tune, and free from perturbation, then probably he will reprove or command well. But when anger boils within, let him forbear exercising any part of his authority, till he recover his due temper Authority cannot be well managed, but by the hand of wisdom. Therefore undertake not to exercise it, at a time when wisdom is banished. Go not about such a work, but when thou art thyself, when thy mind is settled, thy judgment clear. Then shew thy wife her duty, then tell her of her faults; else she will never mend her faults or see her duty. Chuse, secondly, the time wherein she is most capable of receiving information or reproof: when she is chearfully quiet, well-pleased, free from excessive grief, anger, pain, sickness, which often untunes the soul, then is a good time to advise or tell her of a fault. Else her passions will make her as unable to take any thing well, as his will make him unable to do it well.
9. As to place, commendations or easy commands may be given before others. But for reproofs, the most secret place is generally the most convenient. Or if you would have her do or forbear any thing, which you think will be displeasing to her to hear, tell your mind in private, and then persuade where you may freely speak all that is fit to be spoken. “But what if women offend in public, before servants
