The Sunday Times - UK (2022-02-13

The Sunday Times February 13, 2022 3

6 Deloitte is being probed by

the FRC over its audits of

Lookers. The watchdog looked

into the car dealership’s 2017

and 2018 accounts last year,

after Lookers said it had

discovered potentially

fraudulent transactions at one of its units while preparing its 2019

accounts. After an investigation, Lookers said it had found that pre-tax

profits had been overstated by £25.5 million. The FRC has not released

any details. Deloitte resigned as auditor of the company in 2020 after 14

years overseeing its accounts.

Deloitte is also under investigation over its auditing of Essar Oil UK

and was previously fined a record £15 million for serious misconduct in

its audit of software group Autonomy. It has also faced investigations

over audits of UK outsourcer Mitie and building materials company SIG.

Deloitte declined to comment.

6 EY is grappling with the fallout from

the collapse of German payments firm

Wirecard, which it audited for a decade.

It has become the country’s biggest

post-war accounting scandal. Former

chief executive Markus Braun was

arrested on suspicion of

accounting fraud before the

company fell into

insolvency. He has denied

wrongdoing. Several EY

Germany partners are under

investigation by prosecutors

and the country’s audit

watchdog, and the firm is

expected to face claims of

€1 billion from

investors. EY chief executive Carmine Di

Sibio said in September it would invest

$2 billion (£1.5 billion) in the next three

years to improve the quality of its audits

EY has faced scrutiny over its audits

of failed FTSE 100 hospital operator

NMC Health, and was fined £2.2 million

by the FRC last year for its audit of

Stagecoach. It is also, along with

PwC, being probed over its audit

of London Capital & Finance, the

collapsed minibond company.

EY said it was co-operating

with the FRC’s Inquiries and it

would be inappropriate to

comment.

EY

6 Outsourcer Carillion — which was

audited by KPMG — was working on

about 450 public sector projects

when it went bust in 2018 under

£7 billion of debt. KPMG’s UK chief

executive, Jon Holt, last month

admitted that its auditors had

“misled” regulators during

inspections of audits of

Carillion and fellow outsourcer

Regenersis. The FRC has

accused KPMG and six of its

former employees who audited

the two outsourcers of forging

documents and misleading its

inspectors; there is an industry

tribunal into the allegations, and

an investigation into KPMG’s audits of

Carillion. This month, Carillion’s

liquidators made a £1.3 billion legal

claim against KPMG, saying it missed

“red flags” in its audits of the company.

KPMG, chaired by Bina Mehta, left, has

said it believes the lawsuit is without

merit and will defend it robustly.

KPMG was fined £13.5 million last

year after one of its partners helped

push bed maker Silentnight

towards insolvency so HIG, a

private equity group, could

acquire it without its pension

liabilities.

Holt said: “We will deal with ... and

learn from these legacy issues.”

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an order themselves. That’s not to forget

the time and travel savings for

consumers who could purchase goods

and have them delivered without leaving

their armchairs.

So what the heck were we going to do?

1: Suppliers wouldn’t like the fact that

online dealers didn’t want to commit

until they had an order. We vowed to go

the other way — what we called “narrow

and deep”. We would specialise in

committing to ordering big quantities of

a small number of lines, but we wanted

better prices in return so we could

compete and survive.

2: Retailers traditionally had higher

costs, the biggest being their properties.

Thankfully, I had always gone for sites in

much cheaper secondary locations that

we could, over time, afford to buy

outright (and to this day we own the

freeholds on more than 90 per cent of

our sites, so don’t have to pay rent). We

figured that our products are a

I

had a problem. It was the late 1990s

and things weren’t looking good.

Retail was under attack with the

arrival of the internet and you could

read the writing on the wall. I

remember walking with my wife on

the beautiful beach at Filey in North

Yorkshire, discussing the serious

possibility that shopkeepers selling

commodity products could go the way of

the brontosaurus if we weren’t careful.

When the first search engines started,

you could type in the model you wanted

— be it a camera, telly or anything else

with a number — and they would churn

out the cheapest price for you. This

included goods from non-authorised

retailers that couldn’t provide back-up,

cowboys selling fake products, items

being advertised that didn’t exist and

people trading from their front rooms —

none of which the great British public

realised. It was the Wild West and it was

already causing us problems.

One advantage of the web was that

sellers could show infinite ranges

(whereas us shopkeepers had to pay for

the stock, ship it, display it nicely in

expensive stores, pay sales staff to

provide service etc). But, these new-

fangled sellers were at great risk because

if a competitor dropped their price by a

penny, they would no longer be top of

the search engine’s recommendations

and would be stuffed. They couldn’t sell

their wares unless they dropped their

price, too. Quickly, the profit in the

product would be eroded and it would

be a zero-sum game with no winners

among the sellers. So we had to figure

out a way to survive in this environment.

The web’s other advantages were that

it offered immediate pricing visibility for

shoppers and competitive downwards

pressure on prices that should benefit

consumers if it could get its act together.

Sellers could advertise online, then buy

from their supplier only when they got

4: Service online would be limited to

text, photos and, ultimately, film

footage; more expensive and complex

items would still benefit from live

interaction with knowledgeable people.

So we decided to move into more

specialist products such as projectors,

higher-end hi-fi and more sophisticated

TVs. We thought customers would

appreciate the great service that we tried

to give. Suppliers loved this, too; they

made no money from a £99 telly.

5: If we could develop niche products or

our own exclusive lines that weren’t sold

on the web, we wouldn’t have to

compete with the whole world. We could

focus on value (which I define as “quality

per pound”) by cutting out the

distributor in the middle to reduce

prices — and benefit from the product

reviews this would generate.

6: We needed to convince

manufacturers that if they didn’t regard

retail as a distribution channel worth

“considered” purchase, unlike an apple

or a newspaper, so customers would be

prepared to travel to us. In other words,

we were a destination.

3: Costs were key when competing with

the web, and we were very careful about

opening more stores that we might not

need as the web began to have an impact

on retail — a point not heeded by some

other retailers, which suffered

accordingly.

I dodged the online retail asteroid – and you can, too

I had thought that

shops selling

commodities

faced extinction

Julian Richer Sound Advice

GERARDO JACONELLI

saving, we would all go out of business,

as indeed many did — Comet, Best Buy,

Maplin and lots of independent

electronics retailers. But it took me ten

years to do this. I had to have several

conversations with suppliers along the

lines of, “Can you please come and

collect your products before it rains, as

your stock is outside on the pavement?”

When they asked what I meant, I’d reply:

“I mean that unless I can compete with

the web and make a margin to cover my

costs, I don’t want your product!” They

got the message in the end.

These measures saved us, and I am

here to tell the tale.

The moral of this story is that

businesses evolve all the time and if you

don’t go forwards, you go backwards. As

this example shows, asteroids can

sometimes be avoided if you spot them

early enough.

Julian Richer is founder and managing

director of Richer Sounds

Noel Edmonds hosted the

first-ever National Lottery

show on BBC1 in November

1994, with seven people

sharing a jackpot of

£5.8 million. Its operator,

Camelot, had beaten seven

other bidders to take on the

lucrative contract and has

since created 6,300

millionaires and handed out

£56 billion in prize money.

Today, a competition to

select an operator to run the

lottery for its fourth licence

term has erupted into a fierce

fight for control — one that

has been mired in claims of

incompetence, leaks and an

unfair scoring system.

The contest burst into the

open last week with reports

that Camelot, the incumbent,

had scored highest in an early

assessment of four bidders.

The Gambling Commission

insisted it had yet to make a

decision, but the leak has led

to criticism of the regulator,

which is responsible for

choosing a winner.

Julian Knight, chairman of

the Commons DCMS select

committee, which is leading

an inquiry into the

competition, said the leak

was “unfortunate and

incompetent”. It was also met

with dismay that Camelot

looked poised to secure the

contract for a fourth term.

Camelot, which is owned

by the Ontario Teachers’

Pension Plan, has been

criticised for growing sales

from games other than the

traditional weekly draws,

such as scratch cards.

A lower proportion of

scratch card sales is given to

good causes compared

with draws.

“There have been

concerns ... raised

to the committee

that Camelot have

gamed the system, by

effectively using the

parameters of the

licence to grow their own

revenue streams. But at the

same time, that’s not

benefiting good causes as

you’d like,” said Knight.

Camelot gave 28 per cent

of its revenues to good causes

in 2010, but that proportion

fell to less than 23 per cent in

its most recent accounts.

The company said it has

increased the total figure, due

to a rise in revenues from

£5.5 billion to £8.4 billion a

year.

Carolyn Harris,

chairwoman of the all-party

parliamentary group on

gambling-related harm, said

she had “grave concerns”

Rows erupt as Camelot

closes in on Lottery jackpot

transparently” identify the

best application. “The

commission is proud that its

process has attracted a range

of applicants and a vigorous

competitive process,” it said.

However, even after being

scored on the extensive list of

factors, a quirk in the process

means that bidders can then

be marked down if they are

deemed to be ‘higher risk’. A

so-called solution risk factor,

which critics say is vague and

subjective, can wipe up to

15 per cent from the score

related to the bidders’

business plan. A 15 per cent

penalty could easily result in

failing the competition.

While the potential scores

have not yet been made

public, industry sources

claim that Camelot, as the

incumbent, has an unfair

advantage from this process.

A new operator without

Camelot’s track record in the

UK would inevitably be seen

as more risky, they said.

The commission said the

evaluation process was

“highly confidential”. “The

outcome report has yet to be

finalised,” it said. “Our job is

to run the best competition

we possibly can — one that is

fair and open and results in

the best outcome for players

and good causes.”

The fight for the National

Lottery involves some of the

UK’s leading names in politics

and business. Allwyn, owned

by the Czech oligarch Karel

Komarek, has enlisted former

Sainsbury’s chief executive

Justin King to spearhead its

bid. Sisal, an Italian lottery

operator, has hired Baroness

(Karren) Brady and Lord

(Ed) Vaizey, former

culture minister, to

advise.

Richard Desmond’s

Northern & Shell,

which already owns the

Health Lottery, has not

gone public with its

advisers. Camelot is

chaired by Sir Hugh

Robertson, former minister

for sport and the Olympics in

London 2012.

A victor could be declared

as early as this month, but the

Gambling Commission’s

ruling could be met with a

legal fight. The fairness of the

contest expected to be at the

centre of any challenge.

Camelot has lined up

leading QC Lord (David)

Pannick, a crossbench peer in

the House of Lords, who

represented the company in

2000 when it successfully

challenged a decision by the

Gambling Commission to

negotiate only with Sir

Richard Branson.

Sabah Meddings about Camelot’s commitment

to good causes, and

questioned whether it

deserved to win the licence

again. “I’m very disappointed

and I’m very concerned that

whoever has awarded this has

not looked at the bigger

picture and the problems

with Camelot’s activities,” she

said.

It was a story in the Daily

Telegraph that said Camelot’s

bid had secured the highest

score. That mark was

reportedly passed to culture

secretary Nadine Dorries. A

final decision will be taken by

the board of the Gambling

Commission, which is

chaired by Marcus Boyle, an

ex-partner at the professional

services firm Deloitte.

Despite the public interest

in the competition, the

commission refuses even to

confirm which bidders have

entered. The terms on which

they will be judged have also

been kept secret.

However, The Sunday

Times can disclose that

bidders are scored on areas

such as how much money

they plan to return to good

causes and charities; what

their transition plan is,

including building the

infrastructure for running the

lottery; and their financial

strength. They are also

marked on factors such as

plans to protect players from

gambling addiction.

The scores are awarded by

the Gambling Commission,

which said it had “carefully

designed the framework to

fairly and

still eke out profits from older wells.

Mitch Flegg, Serica’s chief executive,

said UK gas had lower emissions than

imports, such as the liquefied natural gas

that comes from the likes of Qatar. But he

warned: “A windfall tax may make it

more difficult for companies such as ours

to continue making the level of invest-

ment we’re planning in the next few

years. That may lead to further shortages

and price volatility.”

Looney argued that BP’s profits would

be reinvested in green energy such as off-

shore wind and hydrogen — exactly the

type of investment, and jobs, that the UK

needs. Moreover, energy companies

were racking up huge losses as recently

as 2020, when oil prices briefly turned

negative. BP and Shell recorded com-

bined losses of $42 billion that year. As

another industry executive put it: “You

take the risk, but you do expect a reward.

What you don’t expect, after years of

hardly any money coming in, is to get that

money taken off you.”

The economic theory holds that a

windfall tax should not change the

behaviour of the market because it is a

unique event. Not everyone buys that.

“Nobody would believe it was a one-off,”

said one chief executive. “And the history

of these things is that even when govern-

ments promise to remove it when prices

go down, they are slow to take it away.”

OGUK points to figures that show

exploration for new fields cooled rapidly

after the tax hike in 2011. But Professor

Michael Jacobs, specialist in political

economy at the University of Sheffield,

said: “It cannot be the case that this is

going to hit investments, because these

companies have got much more money

than they were expecting.” The former

adviser to Brown, who described

Labour’s proposed tax increase as

“modest”, said: “You would expect

them to invest more, not less.”

Labour’s proposed tax would only hit

the profits made by oil companies in the

North Sea, rather than their global earn-

ings. Some have questioned how this

would work in practice as some big firms

do not break out UK profits. Moreover,

not all energy companies make money at

the market, or “spot” price, of gas; many

sell forward their product at fixed prices.

Those that have hedged sales in this way

will not be banking as much profit. Nor

would a windfall tax apply to Norweigian

producers, who supply a large propor-

tion of UK gas.

Dibb of the IPPR argued that the physi-

cal location of oil and gas resources low-

ered the likelihood of firms quitting the

North Sea. “It’s not like a tech firm mov-

ing from New York to Dublin,” he said.

“It’s highly unlikely they’ll go elsewhere.”

There is another argument that a

windfall tax may simply miss the point.

While it can act as a sticking plaster to

help households facing the dire choice

between heating and eating, it would

do little long term to address energy

supply, security and prices — let alone

the transition to net zero. “With a wind-

fall tax, you’re not discouraging people

from consuming energy, which is what

the UK should do if it wants to achieve cli-

mate neutrality,” said Alice Pirlot of the

Centre for Business Taxation at Oxford

University. Such a move would most

probably require a “rethink of the entire

UK tax system”, she said. Professor

Jacobs suggested a more creative

approach: “We need to insulate homes

better so people don’t need to use as

much energy. That’s the way to keep bills

down.”

time, millions were struggling through

recession and high unemployment.

Thatcher recalled: “Naturally, the banks

strongly opposed this. But the fact

remained that they had made their large

profits as a result of our policy of high

interest rates, rather than because of

increased efficiency or better service.”

Labour also imposed a windfall tax in

1997 on a string of privatised companies

such as British Airways and British Gas —

sell-offs that were deemed to have been

priced too cheaply and to have left the

businesses too loosely regulated, allow-

ing them to bank huge profits. Labour

raised £5.2 billion from the measure.

Sanger of EY, who worked on the tax for

then-chancellor Gordon Brown, noted

that the measure had been in Labour’s

election manifesto, giving companies

plenty of notice. “By including it in the

manifesto, it was clear that there would

be no other windfall tax,” he said.

In 2009, after the advent of the financial

crisis, Labour levied a one-off 50 per cent

tax on bankers’ bonuses, which brought

in £2 billion — far more than the £550

million that had been expected. It dif-

fered from the previous windfall taxes

in being prospective, rather than retro-

spective. It was supposed to discourage

bank largesse, but instead, it encouraged

companies to hand out even more to make

up for the shortfall in take-home pay.

Banks continued to feel the pain under

the subsequent coalition and Conserva-

tive governments, with the introduction

of the banking levy and bank surcharge,

the latter of which exists to this day —

though neither was strictly a windfall tax

in the sense they were not one-offs.

Likewise, North Sea oil has been a reg-

ular target of tax hits. As early as 1980,

Howe imposed an extra levy on the oil

and gas industry, only to abolish it two

years later. In 2002, Brown introduced a

supplementary charge of 10 per cent on

energy company profits, and doubled it

in 2005 after the likes of BP and Shell

reported bumper profits from higher pri-

ces. The déjà vu does not end there:

Brown committed the funds raised

towards the “Warm Front” scheme — to

help poorer households with energy

bills and home insulation. The indus-

try warned that the measure would

“severely undermine business confi-

dence”, but this did not stop the coali-

tion from raising the charge in 2011.

DEEP FREEZE

Dire warnings that fresh taxes could send

oil and gas investment into a deep freeze

have returned to the fore. The industry

argument goes that gas will be needed for

decades to come as a “transition fuel”

while countries target net-zero emissions

by 2050. In particular, gas will have to

plug a shortfall as coal-fired power sta-

tions close and ageing nuclear plants are

retired. As recent price spikes have

shown, demand for gas could remain

higher than usual for years to come.

“If anything, the UK needs more gas,

not less right now,” Looney said last

week. “That’s going to require more

investment ... A windfall tax prob-

ably isn’t going to incentivise

[that].”

BP and Shell have both been

reducing operations in the North

Sea to focus on easier, and more

profitable, basins. In their place

have come smaller operators, such as

Serica Energy, which reckons it can

NOVEMBER 1980

Magaret Thatcher’s

chancellor, Geoffrey

Howe, raises tax on oil

and gas producers

MARCH 1981

Howe’s budget

introduces a

windfall 2.5 per

cent tax on

bank deposits

JULY 1997

New Labour implements a

manifesto commitment to

bring in a windfall tax on

privatised companies

such as BT, British Gas

and the airports

authority BAA

APRIL 2002

Gordon Brown

introduces

supplementary tax

on oil and gas profits. It

is raised again three years

later

DECEMBER 2009

Alistair Darling, the

chancellor at the time,

imposes

one-off levy of 50 per

cent on any banking

bonus above

£25,000

JANUARY 2011

Coalition

government

introduces banking

levy; the rate is adjusted

over time. The same year,

George Osborne raises

the surcharge on the

North Sea to 32 per

cent, before

reducing it again.

JULY 2015

Conservative

government

announces the bank

surcharge – an extra 8 per

cent on profits in addition to

corporation tax, while

reducing the bank levy

DECEMBER 2019

Labour proposes

windfall levy on oil

and gas companies

in election

manifesto

MARCH 2021

Rishi Sunak raises

corporation tax from

2023 but reduces the bank

surcharge; overall tax for

banks will go up slightly to

28 per cent

JANUARY 2022

Labour and the Liberal

Democrats call for windfall

tax on oil and gas producers

Dina Asher-Smith

is among British

athletes to have

benefited from

lottery income

HISTORY OF

ONE-OFF HITS