Whether it’s financial restructuring or lobbying government and helping formulate policy, the accountancy profession can help the economy grow again. But it might be time for a refresher course in inflation accounting, says Jon Moulton.

As I am writing this at home in Guernsey, we have been plunged back into lockdown. A year ago, this term meant less to us than the latest lease accounting standards. Now we are quite well adapted to working from home, not paying over VAT or PAYE, and writing lengthy and intricate going concern opinions, which have generated less and less impact because they’ve become the norm. All of this was inconceivable a year ago too.

ICAEW reacted swiftly, and pretty well, as the crisis took hold. Lots of useful material was produced and quality guidance provided. The Corporate Finance Faculty was, and continues to be, very active in lobbying and in helping to formulate government policy as regards sources of emergency finance. There have been legislation changes in insolvency – but not all good. The helpful idea of a creditor moratorium was emasculated by overly restricted drafting, as a result of which the procedure can hardly ever be used.

And now we have the National Security and Investment Bill, which has erected potentially serious hurdles to perhaps one-third of prospective acquisitions, in a spectacularly excessive belief that the UK has large numbers of companies of super-strategic importance. Things would certainly have been worse without the amending efforts of the Corporate Finance Faculty team, who extracted some useful mitigations.

We can help

What should come next from the accounting profession? There seem to be two overriding objectives. The first is to help viable businesses survive and prosper. There is a lot that can be done to that end. We need relaxed audit timetables, no self-fulfilling going concern opinions, extensions for accounts filing and the like. Advisers need to be creatively involved in financial restructuring. Perhaps we should push once again for the purpose of administration to be to save a business and preserve some jobs, not to create a corporate shell. Advisers can also help raise equity and debt in order to replenish balance sheets, and help in negotiating time to pay from creditors, especially the government.

The second objective is to drive growth in the economy. This will be about encouraging enterprise by sensible taxation and grasping the opportunities of Brexit to attract and develop new companies. Business models may need adjustment to prosper post-Brexit. The faculty can help ensure sensible levels of regulation. Even better, we should find ways to eliminate the sillier regulation. There are plenty of targets.

There are some certainties. Offices and retail stores have clearly lost importance and value. Masses of government support for business will need repaying, with no one believing this will be easy. If the UK government tries to get PAYE and VAT arrears paid too quickly, insolvencies will rocket. But many companies will not be able to manage their cash flow to survive even a gentle repayment timetable. Insolvencies and reconstructions are going to rise.

Then the big one. The explosion of government debt and money printing will one day lead to levels of inflation not seen for more than 30 years. This is inevitable, with only the timing in doubt. Essentially, the main way to deal with such enormous borrowing is to devalue long-term debt. Economic growth might play a lesser role, but inflation will be the main route. 

I learned a lot about inflation accounting as a trainee accountant in the early 1970s (RPI went up 24% in 1975). I tried looking up the revered Sandilands Report of 1975 on inflation accounting. Alas, it has never been digitised – it should have been. Inflation meant the replacement cost of inventories caused some businesses to continuously consume cash, and historic cost accounts overstated real current profitability. 

Perhaps some helpful soul could scan a hard copy of Sandilands onto the web? It would save us having to reinvent it.

About the author

Jon Moulton is a CF and a Fellow of the Institute for Turnaround Professionals. Jon has long experience of turnarounds, having invested in them for 30 years and with considerable success. Jon is currently Chairman of FinnCap, the major AIM broker, The International Stock Exchange and Anti-Microbial Research Limited. He also chairs the Better Capital funds and Greensphere, an alternative energy infrastructure fund. He regularly writes, broadcasts and speaks on corporate finance and financial matters. Jon is also a Director of the think tank The Centre for Policy Studies and an Honorary Fellow of University College London.

About the article

This is extracted from the Corporate Financier March 2021 edition - exclusively for Corporate Finance Faculty & Faculties Online members - who can access our highly regarded magazine in its originally designed form, as well as our extensive archive brought to you by the ICAEW Corporate Finance Faculty.