“Creative Accounting”

In his book “Maxwell: The rise and fall of Robert Maxwell and his empire” {Carol Publishing Group – 1992}, the author Roy Greenslade confirms that Maxwell was a student of a book by Ian Griffith titled “Creative Accounting”.

Chapter 4 of “Creative Accounting” is titled “How to pilfer the pension fund”!

Roy Greenslade relates on page 40 how Maxwell applied the techniques of “Creating Accounting” long before £454 million was “misappropriated” from the pension funds of the employees of the Mirror Newspaper Group.

“His pension manoeuvre occurred when he bough a book company Wheatons, for £6 million and found it had a £8 million pension fund surplus. He closed down the fund, set up a new one into which the existing members were transferred and switched the surplus to his own coffers.”

A similar tactic was attempted when Elders IXL Ltd acquired the Courage Brewing Group in 1986, however the Trustees of three pension funds were able to obtain the protection of the High Court of England and Wales to prevent the fund surplus being “asset stripped” from the funds.

 

Creative Accounting

 

After Robert Maxwell acquired the Mirror Newspaper Group for £90 million in 1984 he soon discovered that the employees’ pension fund had a large actuarial surplus. The member contribution rate was 6% of wages and the company had been contributing another 14.5% as the employer’s contribution.

Maxwell quickly stopped making employer contributions and then enjoyed a “contribution holiday”. Maxwell also reduced the annual increase in pension payments to the statutory minimum of 3% per annum

Even with the employer’s contribution holiday, the value of the fund surplus rose to £85 million by 1988 and then increased further to £149 million by 1990, since the members were still making contributions at a rate of 6% and the investment returns of the fund had been strong.

Off Balance Sheet Financing

RG Walker, Professor of Accounting, University of New South Wales in a paper “Off-Balance Sheet Financing” {UNSW Law Journal- Vol 15(1) provides examples of how Elders IXL Limited used dubious accounting practices.

In the absence of any local accounting standards, Elders IXL failed to consolidate its financial subsidiary:

“The 1987 annual report of Elders-IXL included consolidated statements which did not encompass finance subsidiary Elders Finance Group Limited. Instead, the consolidated balance sheet showed the investment in the subsidiary at net assets of $403 million. Had Elders Finance been consolidated, the consolidated balance sheet would have included additional assets of $3,907 million and additional liabilities $3,504 million (less any inter-company loans)”

Another strategy used by Elders IXL to avoid consolidation would involve restrictions of shareholdings to less than a majority interests -coupled with options to acquire additional shareholdings.

“When Elders-IXL sought to takeover Scottish & Newcastle Breweries plc, the target company commissioned a report from Arthur Young & Co on Elders’ financial position. Arthur Young noted that Elders held a 50% interest in the Courage Pub Holdings Ltd and its subsidiaries (“Pubco”), while a subsidiary of Elders held approximately one third of Hudson. Moreover, Elders had an option to acquire an extra share from Hudson which would give it an outright controlling shareholding.

Elders-IXL had reported debt-equity ratio of 32 per cent. Arthir Young considered that if Elders had consolidate its finance subsidary Elders Finance, consolidated Pubco, and treated subordinate convertible notes as debt (rather than equity), then the debt-equity ration would have been 210 per cent.”


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This tab updated on 7 June 2015