The Butler Report

Lord Butler’s report has, much like the earlier Hutton report, exonerated the government and individual members of the government from blame; in relation to taking the UK to war on the false premise of Iraq possessing weapons of mass destruction (WMD).

Butler has achieved this neat side-step by working on two mistaken assumptions:

• He has assumed, that with respect to the evidence on WMD; all parties and processes connected with the collation, processing and dissemination of the evidence functioned unsatisfactorily. Therefore, if all were to blame, no one individual could be held personally responsible or singled out for blame. He assumes that the UK government still operates under the principle of collective Cabinet responsibility.

Unfortunately, the pretence of collective responsibility has long since been abandoned by Prime Minister Blair; who has little interest in the seeking the approval or counsel of Parliament, or his colleagues in the Cabinet.


• Butler also noted that if Prime Minister Blair had not really believed that there were WMD, then he would never have used that as an excuse for war. Butler holds to the belief that once the lie had come out, after the war, the Prime Minister’s position would have become untenable; ie it would have been irrational for the Prime Minister to lie.

However, Butler ignores one very salient point, that is exactly what has happened. There were no WMD, and the Prime Minister is having to explain how this “error of judgement” occurred.

Butler’s reasoning is honourably based, for he believes that public servants and politicians should act with honour and integrity.

Unfortunately they don’t.

Protecting individuals from specific blame is the act of an honourable man. Unfortunately, the politicians that he protects are not honourable; and have readily in the past sought scape goats to protect their own positions, when errors of judgement and incompetence threaten their privileged positions.

The argument that it would be irrational for Blair not to tell the truth, shows how little Butler understands Blair. Blair did not care whether there were WMD or not, the possibility of there being WMD was enough to use in his argument to take the UK to war.

Blair, as a lawyer, knew that whatever the outcome of the search for WMD he would always be given the benefit of the doubt; ie that he acted in the best interests of the country. It could never be proven that he had deliberately lied, it is after all still an essential part of the law that you are innocent until proven guilty.

I am afraid that Lord Butler, being a man of honour and integrity, inhabits a world that has long since ceased to exist; which is exactly why he was chosen to prepare the report.

An honourable man cannot be accused of deliberately colluding with the government in a cover up.

Confidence in the Financial System

Sir Richard Sykes, a "big player" in UK business circles and a leading government adviser, has published a report entitled "Restoring Trust; Investment in the 21st Century".

Sir Richard, worried about the small amount of money that people are putting away for their retirement, is trying to persuade investors to return to the UK stock market.

With the melt down in share prices in the first few years of the 21st century, the £40BN shortfall on endowment policies and the Enron and WorldCom scandals to name but a few; investor confidence has taken a battering over the past few years.

Sir Richard ought, in some respects, to be able to count on the help of the Financial Services Authority (FSA). Their primary function is to maintain confidence in the financial system in the UK.

One significant piece of the jigsaw that forms the financial system is the trading of shares on the stock market. Confidence in the working and price mechanisms of the market will minimise investors’ fears about investing in that market.

I have been watching the activities surrounding one particular share, with a degree of fascination over the past few months.

The share, which shall remain nameless, is highly volatile. Its trading range, in pence, has moved from below 10p to the high 70’s then back to the mid 30’s. All of this, in spite of the fact that the company has yet to earn single penny in revenue from its activities.

The main driving force behind the price swings have been:

• Optimistic news releases via RNS and AFX notes.



• Speculation by gullible fools.



• Ramping and de-ramping (talking it up and talking it down), on the bulletin boards of financial websites.



• Optimistic conversations, and emails, between the CEO and shareholders. The subjects of these "private exchanges" are then published, by the same shareholders, on the bulletin boards.

To some extent this will always happen in a free market. However, the degree to which this has happened with this share has given me much cause for concern.

Matters came to a head recently when a false AFX note, containing information that would have caused the share to leap, was posted on a bulletin board. On discovery that it was a fake, the poster claimed to have posted it as a joke.

Following on from that, the CEO in an email to a shareholder (the contents of which were naturally posted on a bulletin board), noted that he was fed up with the volatility of the share price; and that news flow would be staunched in order to stabilise the price, and remove the speculators from the share.

There are two possible scenarios, but only one conclusion, wrt this email.

• The posting of this email, if false, means that the poster was trying to manipulate the market.



• However, should the email be genuine; then it means that the CEO was trying to manipulate the market, via news management.

Either way, this is a very clear example of market manipulation; something which the FSA has an interest in stamping out, in order to maintain confidence in the financial system.

I applaud Sir Richard’s intentions. However, before trying to persuade investors to return to the market, he needs to ensure that shenanigans such as this are stamped out. In other words he needs to ensure that the FSA are proactively investigating occurrences such as the one I have just described, and taking action where deemed appropriate.

The Price of Petrol

The recent rise in the price of oil, to around $40 a barrel, has once again brought the price of petrol in the UK into focus.

There have been threats by various action groups to blockade the roads; in a repeat of the chaos that ensued a few years ago, when petrol prices hit new highs.

It seems that the hard pressed British driver, so we are told, will not tolerate petrol at 80p or more a litre. The argument is also made that, since over 50% of the price is tax, it is up to the government to keep the price down by reducing the tax.

Some politicians have jumped on the “petrol price bandwagon”, and expressed their support for the British motorist.

However, in my view, far too much time and effort is expended by politicians and the press in trying to placate the motorist.

Let us take a look at a few facts:

• In real terms the price of petrol has remained, more or less, constant over the past 30 years. In other words, the motorist is no worse off now than 30 years ago.



• Britain is a small overcrowded island of 58 million people. It seems that, despite the congestion of the roads and cities, everyone feels that it is their God given right to own and operate a car. Newsflash, it isn’t!



• Oil is a dwindling resource, the more we use the less there is; by definition there will have to be some from of rationing. The most effective form of rationing is via the price.



• Taxation on petrol is required to support the ever increasing demands of the electorate for better schools, hospitals and, dare I say it, more roads. It is time for the motorist to wake up, and realise that these thing have to be paid for. Therefore it is not unreasonable for the government to tax motorists, given the fact that they (the motorists) insist that every inch of the country be covered in motorways.



• Cars are a blight on the environment, high petrol prices are a good way to make people think twice about using them.



• The use of cars in the UK at the moment can be said, in many cases, to be unnecessary. The “school run”, in the mornings and afternoons, sees a multitude of unnecessary car journeys; as “little Johnny” is driven the few yards to school by his overprotective and doting mother. We are breeding a generation of fat, lazy and spoilt children. It seems to me that they, and the environment, would benefit immensely from them walking to school each day; rather than being chauffeured.

I am therefore very happy to see petrol prices rise in line with the price of oil.

The Current Situation in Saudi Arabia

The recent attack on the foreign workers in Saudi augurs ill for the future. Saudi Arabia, despite earning a good income from oil production, has a number of significant social/political problems that it needs to address.

These include the following:

• Demographics, over 40% of the population are under 25 years old



• Reliance on a single revenue source, oil is the sole revenue source for the Kingdom. Saudi has failed to develop any other form of revenue earning economic activity



• High unemployment, Saudi relies on 6 million foreign workers to run its key industry. The result being that its own citizens are unemployed



• Security, Saudi’s security services and armed forces are not “top rank”. This was very clearly demonstrated by the events over the weekend. Saudi relies on the USA to protect its borders



• Democracy, this is in fact non-existent. Saudi has been ruled a by the House of Saud since the state was founded in the early 20th century



• Human rights, Saudi has a very poor human rights record; eg women are not allowed to drive cars and people are still beheaded



• Education, Saudi education is religious based and highly anti Western

The social and political problems within Saudi have provided a fertile recruiting ground for Bin Laden and his acolytes.

In my view, time is running out for Saudi Arabia. The Saudi government needs to address the above issues, with urgency, in order to avoid the significant and irreversible breakdown of law and order that is inevitable.

Failure to address these issues will ensure that the House of Saud is replaced by an extreme Islamic theocracy. This will not be good for either the Saudi people, or the oil-based economies.

The European Elections for the Invisible Parliament

The citizens of Europe are facing the joys of a European election in the next fortnight, when we have the opportunity to vote for our Members of the European Parliament (MEP’s). This provides an apposite opportunity to pose a few questions, I am happy to publish any replies:

• What exactly do our MEP’s do?



• Can you name one piece of legislation, passed by an MEP, that has had a positive effect on the way of life of the citizens of Europe?



• Does anyone know the name, or party, of their MEP?

Despite the fact that the EU elections are only a fortnight away, I have not received a single solicitation or piece of information from any of the candidates standing; telling me about themselves, or their policies.

We pay these people a more than generous salary and expense allowance, and they have a far better standard of living than the majority of the citizens whom they represent. Yet they choose to remain invisible.

The staging of the elections for the “invisible parliament” costs the European taxpayer a very large sum of money. Yet we see no return on our “investment”.

I, for one, intend to register my protest at this insult to democracy; I do not intend to vote.

I recommend that every like-minded citizen of Europe follow suit.

Iraq, What Needs to be Done

The situation in Iraq is, to put not too fine a point on it, a real mess.

Despite President Bush proclaiming, “mission accomplished” in 2003, the ongoing bombings and attacks on coalition personnel prove otherwise.

The situation has not been helped by the disclosure of USA troops abusing prisoners. Quite how the military and politicians thought that this was a good way to extract information is beyond me.

It is fair to say that as a result of this, the American brand image is at an all time low.

The USA and coalition are now faced with some tough decisions. The easiest option would be to cut and run. In the short term, this would save coalition lives. However, in the long run it would be disastrous:

• Iraq would descend into even more chaos, and many thousands more Iraqi civilians would die; as various factions fight it out for control.



• The temptation for other countries in the region to interfere would be great. Before long, the Middle East would dissolve into chaos and war.



• The oil supply to the rest of the world, would be threatened; and the world economy would sink into recession.



• The terrorists would be emboldened by the withdrawal, and step up their attacks elsewhere.

In short, withdrawal is not an option.

Here’s what needs to be done; it is neither palatable, nor easy:

• Stop abusing prisoners.



• Punish those responsible for the abuse, and those who gave the orders.



• Get the power back on in Iraq.



• Remove the military control of the procurement and funding allocation process in Iraq.



• Install a civilian administration as soon as possible in Iraq.



• Leave as soon as all the above have been done.



• Reduce the West’s reliance on oil.

It’s going to be a long summer!

The Photos of Torture in Iraq

The pictures coming out of Iraq, alleging the torture and abuse of Iraqi prisoners by British and US servicemen are a matter of great concern and shame; if they are proven to be true.

The US and British governments are currently investigating the accusations; and have let it be known that should the accusations be proven, the perpetrators will be punished.

The question is how far up the chain of command will the recriminations go?

No doubt the men and women on the field, who are in these photos, will be punished. However, it is extremely unlikely that they were acting without the direct encouragement of more senior personnel and other agencies.

Will these people and agencies be investigated and punished?

There is also a more troubling question; the young men and women in the US and UK armed forces were sent into Iraq on the pretext of stopping the spread of WMD, and reducing the risk of terrorism spreading.

The senior politicians in the US and UK, specifically President Bush and Prime Minister Blair, made it very clear that the mission was one of “Good vs. Evil”. Those sent into Iraq were, in my view, “pump primed” by Bush and Blair to believe that in effect they were fighting for the very existence of the West’s way of life.

Under those circumstances it is quite possible that, many miles from home in an inhospitable country, the young men and women of the armed forces may act with an almost zealous fervour to achieve their mission.

In other words, they were acting out the roles scripted for them by the politicians.

Bush and Blair need to keep this in mind when they next make moralistic pronouncements about events and countries.

Additionally there are a number of uncomfortable questions arising from this disgrace:

• If the scenes of abuse have come as a total surprise to President Bush and Prime Minister Blair, then the chain of command and control has suffered a catastrophic failure. The responsibility for this failure rests with those at the top of the chain.



• If the scenes of abuse have not come as a surprise; then it means that either these acts were being perpetrated on the express/implied orders of Bush and Blair, or that they were informed of it some weeks/months ago before the newspapers published the story. In which case Bush and Blair are guilty of suppressing a scandal that should have been placed in the public domain, as soon as it had been discovered.

Either way Bush and Blair need to consider their positions. The credibility of the coalition forces, and the last shred of justification for the invasion of Iraq, have been blown away by this scandal.

Meanwhile the people of Iraq must be wondering if they are, in fact, any better off.

The Penny Has Finally Dropped

I see that there was a “dust up” this weekend, at the G7 talks, between the President of the European Central Bank (ECB) and the finance ministers of France and Germany.

The leaks from this meeting suggest that the finance ministers are more than a tad “peeved” at the ECB’s refusal to cut rates.

The finance ministers know that they are unable to kick start their sluggish recession bound economies, as long as Europe’s interest rates remain at the current levels.

Jean-Claude Trichet (President of the ECB) knows that as long as it is the ECB’s mission to take a European wide view with regard to inflation, he cannot reduce interest rates at the behest of France and Germany.

Gordon Brown (the UK’s Chancellor of the Exchequer) can look on with a smile of smug self-satisfaction. The UK remains outside of the Euro, and therefore outside of the remit of the ECB.

I have noted before that the European Union cannot succeed in micro managing the economies of its member states (see The Impact of The Euro); as long as there is a single currency managed by a central bank. In my view the EU, in its present form, is destined to fail.

It seems that the finance ministers of France and Germany have only just realised this. The “penny has finally dropped”.

Preventing Cheque Fraud, It’s Not Rocket Science!

This week in the UK, Joyce De-Laurey was found guilty of stealing £4.4M from Goldman Sachs.

It transpires that the former secretary accumulated her “nest egg”, over a period of 14 months, by forging the signatures of two senior members of Sachs on cheques and wire transfers.

The money was used to finance a lavish lifestyle enabling her to purchase, amongst others, a villa in Cyprus for £750K, £56K of Cartier “goodies” and £20K of items from Harrods.

I have had many years international experience running internal audit departments, and investigating frauds (see resume); and am constantly surprised as to how lax some companies’ cheque authorisation procedures are.

It seems an opportune moment to remind those in business of some of the basic controls that should be in place, in order to minimise the risk of fraudulent payments (note this list is not exhaustive):

• There should be a hierarchy of cheque signatories. The larger the amount, the more senior the level required to sign.



• Cheques over a certain predetermined limit should have at least two signatures.



• Cheques should never be drawn without a cheque requisition being signed by a responsible official, who does not sign the cheque.



• Cheque requisitions should be supported by documentary evidence, eg invoice/purchase order.



• Transaction summaries of cheque payments should be routinely reviewed by internal audit.



• Transactions over and above a predefined norm should be checked by internal audit.



• An up to date cheque signatory list should be maintained, showing limit/authorities etc.



• The bank should be encouraged to proactively query suspicious transactions.



• Bank reconciliations should be performed regularly, and be up to date.



• All directors’/senior managers’ personal accounts should be thoroughly reviewed by internal audit on a regular basis.



• Finally, and this really ought to have rung alarm bells at Goldman Sachs, where an employee starts to display ostentatious signs of new found wealth; identify the source of this wealth.

As you can see, the above points are not rocket science. However, I would bet good money that many companies, not just the hapless Goldman Sachs, may not have all of these procedures in place.

What Use Are the Olympics?

The Olympics are soon to be foisted upon us again. I confess that I have little interest in sport, and find the “over the top” enthusiasm and saturation coverage by the media of this four yearly event to be tedious in the extreme.

This time it is the turn of the “lucky” Greeks to host this sporting extravaganza.

The modern Olympics, a far cry from the games envisaged by the ancient Greeks, are in my view a complete waste of time and money:

• The hapless cities that host them are turned into a traffic congested hell on earth.



• A media circus descends on the city and occupies every hotel, bar and restaurant; displacing the local citizens.



• Despite the hype and media splurge, those that host the event rarely see a profit.



• The security risks these days far outweigh the benefits; viz the pipe bombing in Atlanta in 1996, and the terrorist atrocity in Munich in 1972. Goodness only knows what is being planned by the fanatics and scum for the 2004 games.



• The athletes themselves, instead of being fine examples of the human body in its natural form, are in fact pumped up products of illegal steroids and substances. So much for promoting health, fitness and vitality!



• Some athletes so grotesquely abuse substances and their bodies, in order to make their mark on the Olympics; that even their gender is called into question.



• The games, originally designed to promote friendly competition between rival nations, are used as a massive propaganda tool by the host countries to promote their own vision of society. Witness the Munich Olympics of 1936, or the tit for tat boycotting of the Olympics by the USA and USSR in the 1980’s.

I for one will be doing everything possible to avoid reading about them, or watching them, when they start later this year.

They are, in my opinion, of little value or purpose.

You Get What You Ask For

I note that my previous article, "The Merging of the Customs and Inland Revenue", seems to have been rather prophetic; with regard to the inability of politicians to manage IT projects.

An article in Wednesday's Times notes that owing to the slipshod vetting of tenders; the UK tax payer has been landed with a cost over run of £150M, relating to a contract with an IT agency that vets people working with children and the vulnerable.

It seems that the number of people using this service was massively underestimated. A classic mistake often made when defining the usage requirements of new IT systems.

The politicians thought that they were being clever in contracting with the company that offered the lowest bid.

However, that bid was based on low usage figures which were in fact wrong. The actual figures, which were much higher, have resulted in a significantly higher variable running cost.

Be careful when vetting tenders, you get what you ask for!

The Merging of the Customs and Inland Revenue

Gordon Brown, in his recent UK budget, announced that the offices of Customs and Excise and the Inland Revenue would be merged. The timescale for this is estimated, by KPMG tax chief Laughlin Hickey, to be around five years.

The disruption and chaos to the UK tax and VAT systems, that it will undoubtedly cause, is beyond measure. Needless to say, the overburdened tax payers will bear the brunt of the chaos.

One area that will undoubtedly cause the most difficulty will be the merging of the departments’ computer systems. As anyone who has managed an IT changeover knows, the process of upgrading or changing an IT system needs to be carefully planned controlled and monitored.

Many private sector firms find IT system changes to be unexpectedly costly, both in terms of time overruns and money expended trying to fix “bugs” etc; which were not expected at the planning stage. The history of public sector IT changes is littered with even more expensive failures, the IT upgrade of the air traffic control system is one such example of poor planning and control.

This seems an apposite time to remind IT managers (and the Treasury) of the basics of planning, and managing, a successful IT change.

Here is a very generic checklist, which can be used when reviewing the merits/demerits of a new IT system. Note, it is very basic, and is not intended to be comprehensive.

General

System/user specification - compared with standard Internal Control Objectives. Is the package in conformity with company recommendations?

• Is the system being taken "as delivered" or is it being customised?


• if so, additional development costs and timescale


• if so, implications for system size and response time


• use of PC packages to replace or supplement larger systems


• are features being lost which will have to be replaced e.g. inputs to planning at head office level.

Cost rentability/payback savings:

• what are the alternatives?


• have all costs been identified and included e.g. incremental licence fees?


• has the in house IT department been permitted to bid for service and have cost-comparisons been prepared on a rational basis?


• downsizing risks.


• cost implication for remaining users.

Interfaces to other systems

Organisational issues:

• user profiles set up to reflect organisation.


• discipline in manufacturing environment.


• is integration within the package matched by an integrated approach to the implementation?


• is system ownership/module ownership clearly defined?


• is the role of Data Administrator defined?


• is there sufficient local expertise for a stand-alone IT dept. especially if there is a change to unfamiliar hardware and operating system?

Controls

• Security and disaster recovery.


• what is covered by a Service Contract with the in house IT department, and what is a local responsibility e.g. order desk terminals?


• Maintenance/support:


• costs of third party support

Internal Control Checklist

This checklist covers the key issues which will arise from the initial review of the application.

Access controls:

Validation checks:

• both within the system and by responsible officials e.g. credit referral


• All points of data entry identified/controlled


• Clearance of rejected data/dump accounts:


• clearly defined who should receive the data


• timescale for reacting to that data


• escalation procedure if a serious problem manifests itself


• log for registering error reports and their disposal

Processing/proving checks (closed loop):

• goods movement:


• consider all aspects of logistics chain e.g. is material removed by Quality Control?


• identify exit and entrance points.


• Are transactions registered in correct chronological sequence e.g. if work in progress is back flushed before stores issues are booked, there will be an apparent negative consumption.


• Does opening balance plus each class of transaction produce an amount equal to sum of closing balances on stock file?


• Does opening balance of debtors plus each class of transaction produce an amount equal to sum of balances on sub-ledger?


• Does same logic apply to accounts payable sub-ledger?


• Batch thinking can be usefully carried over to modern packages when considering completeness of processing.

Exception reports:

• responsibility for acting on them


• Authorisation of sensitive transactions e.g. special discounts, credit notes, write offs/ons, adjustments. VAT implications.


• All physical points of despatch identified and controlled, including direct deliveries. Proof of despatch to and receipt of goods at remote sites e.g. telecommunication infrastructure project.

Exceptional transactions outside normal system parameters:

• one-offs, manual dockets, specials, projects, tooling charges.


• Cancellation/reversal of transactions. Authority and method of booking e.g. tends to be basic data capture as distinct from system-generated transactions. Effective communication of effect on net net turnover.

Master data file maintenance:

• customer, product, price files, vendor record, classification of accounts.
  

Bill of Materials:

• completeness and accuracy.


• Processing/job dependency sequences control. Quality of user manual - are dependencies explained?


• Interface/reconciliation of operational system with financial accounts - nominal ledger:


• order processing, goods movement, accounts payable, accounts receivable, cash


• Month end/year end procedures. Closing off and archiving procedures.


• Ability to restore. Initialisation of new accounting period.


• Initial transfer/loading of files from previous system including manual systems. Are front-end validations/checks being used or by-passed? If latter, will copied over data be regarded as corrupt by new package?
  Watch for reversible entries when transferring over a trial balance.
  

Goods Received Note/Receiving Report clearance:

• age listing and price difference analysis.


• Audit trail/history records:


• days/months available on screen?

Back-up/contingency planning:

• risks prioritised


• disaster recovery plan


• Control of change management. Implications for software and organisation. Will home-grown changes make it impossible to take new releases of third party software?


• Is there an ability to fix problems locally or is all technical expertise in, say, the USA of Germany? If overseas, what is response time?

EDI links with suppliers and customers:

• cost benefit of reducing goods movement pipeline but need to minimise exposure to hacking.

System reporting

• Do people get the reports they need and does the IT department know the distribution list?



• Does the package provide an addressing facility; do not take it for granted that it will.



• Are the reports acted on and/or do staff know what to do with them?



• Training of operators and users. Are features understood and are they being used cost-effectively? Are staff working around the system e.g. is it in danger of migrating to PC spreadsheets?



• Control of charges from software houses for maintenance and development. Proper contracts in writing and proper system for screening orders for change requests.