Sir Bryan Carsberg’s proposals for valuation industry reform are timely, says Alex Catalano
Over the past couple of weeks, I’ve been gripped by Enron’s boom-to-bust drama. It’s also provided plenty of material for moralising. For starters, there’s always the danger that the professionals who are supposed to provide an independent view on a company’s business can go bush and present a less-than-objective assessment, or be tainted by conflicts of interest.
Enron’s collapse has put the searchlight on auditors, and Arthur Andersen’s role in sanctioning accounts that obscured the company’s real financial position. So Sir Bryan Carsberg’s recommendations for tightening up the valuation process come at a good time.
Anyone who has been around the property industry knows how all-important valuations are, underpinning the value of quoted property companies and vast amounts of lending in both the commercial and residential markets. And we’ve all heard the rumours of pressure from clients to make the figures look better, or valuers who are more likely to look on the bright side when coming up with a figure.
The 18 recommendations which Sir Bryan makes are all eminently sensible – tightening definitions, providing clearer guidance, recording meetings and discussions between valuers and clients etc.
But there are two proposals which are particularly inspired. One is that valuers who are carrying out the exercise for third-party use should have to state their firm’s total fee-earning relationship with the client who instructed them, and the length of time they have been valuing for the client, in their valuation report.
At Enron, Andersen is thought to have compromised its objectivity as an auditor because the firm was earning a larger whack – tens of millions – from providing Enron with other services.
Separate businesses
In the US, valuers and agents are separate businesses, avoiding conflicts of interest. Property advisers here argue that it is their activity as agents in the market that gives them the knowledge and up-to-the minute information that underpins their valuations.
Sir Bryan hasn’t gone for the US solution. But having valuers publish the exact extent of the firm’s financial dependency on its client will help to allay suspicions that its work is being influenced. And his suggestion that there be independent monitoring of the relationship between valuations and prices achieved is also a good one.
The second point from the Enron saga is how partnerships and creative accounting can be used to veil what is really making money – or not.
Enron started in a real business – oil and gas pipelines – and moved away from hard assets. Scores of off-the-book partnerships inflated earnings and hid debt.
In the UK property sector, there’s a bit of a fad for property companies to hive off their assets into partnerships and joint ventures. The argument, a good one, is that this restructuring lets the management concentrate on what it’s good at – being entrepreneurial at wringing money out of property rather than just holding assets.
Rebel shareholders
This is fine in theory. But in practice, for shareholders it depends on whether the team is as red-hot at it thinks it is, and the terms on which the partnerships, or funds, or joint ventures are set up.
The latter point has come up at Capital & Regional, where some rebel shareholders, including Dawnay Day, are questioning the board’s plan to hive off large parts of its portfolio into joint ventures with Morley. Now, these restive shareholders could have their own agenda vis … vis the company. But the general point is a valid one.
Unless shareholders can see what is being proposed in detail, how do they know they are getting a good deal? And once assets are hived off, will the performance of the joint ventures be reported and transparent to shareholders? Here, UK accounting rules are better than US ones – it is harder to hide things off-balance sheet.
And so to the final Enron lesson: if you don’t understand something, it doesn’t mean you’re dumb. It means either that it hasn’t been properly explained or that it doesn’t make sense.
In September 2000 I heard one of Enron’s men in Europe speak to a high-powered group of property people about his company’s visionary plan to power ahead in broadband, setting up fibre-optic networks and trading internet capacity.
There were charts showing the explosive growth to come, and Mr Enron Broadband delivered his message in a completely incomprehensible mixture of geek-talk and US business bull (I’m allowed to say this – I’m a passport-carrying US citizen).
So I was particularly interested to read in Forbes magazine its account of how the broadband business helped to sink Enron.
