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Practices of UK Companies in Relation to Inappropriate Financial Reporting

Taking advantage of loopholes in financial regulations by UK companies

A certain degree of flexibility and management judgment on business leaders is allowed by Generally Accepted Accounting Principle (Gee 2006). This is to enable the companies to have some leeway or choose their own methods of accounting, financial estimates and disclosures (Benston, Bromwich & Wagenhofer, 2006, pp. 166-167). The flexibility offers a constructive effect on economic development. Industry players argue that flexibility in accounting methods is needed as industries are diverse and have varied accounting needs and changes that occur regularly making it hard for the FASB to take action within a short period of time (Porter & Norton, 2013, p. 25).

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When flexibility as well as options is given to organisations’ management to manage their business returns, particularly those related to methods of depreciation of assets and valuation of inventory, they are allowed to choose the accounting method that will mostly help them to achieve the desired level of returns. Since this is usually guided by regulations, it is purely an aspect of law, but not of ethics (Maynard, 2013, p. 59). Therefore, in as much as it may seem illegal, it is not. This paper discusses how companies in the United Kingdom have exploited loopholes in financial regulations to gain advantage or present financial figures in a misleadingly favourable light. In this case, the paper will draw on the example of wage disclosure. The paper will also explore why companies explore the loopholes in financial regulations to avoid compliance. In terms of compliance, the paper will specifically use the aspect of tax compliance. In light of this, the research will explore reasons why and how this happens and implications arising from it.


The United Kingdom has been progressively adopting new accounting standards called financial reporting standards to replace GAAP, and this is mainly to affect the companies that are quoted and, more specifically, multinationals (Anson, 2000, p. 15). The accounting standards include FRS100, FRS 101 and FRS 102. FRS 100 provides guidance on whether companies want to apply the FRSSE or prefer to choose one of the newly developed financial reporting standards (Gee 2006). FRS 101 gives some leeway for companies in terms of reduced disclosures. In other words, UK organisations that adopt International Financial Reporting Standards will benefit from reduced disclosures (Maynard 2013). The IFRS in this case appeal to subsidiaries as it benefits parent companies who do not want to go through tiring disclosure requirements. FRS 102 is a mix of both UK GAAD and IFRS (Anson, 2000, p. 15).

Presenting misleading financial figures

Wage differentials

Most UK companies have been taking advantage of the option and flexibility to reduce disclosures (Putten 2008). In the context of wages paid to directors and other employees, most companies use the phrase “average number of workers as well as the total salaries and wages bill” in their published financial statements (Putten 2008). In this case, the average number of workers includes directors of those companies working under a contract of service and their huge packs are included in the total wage bill. The outcome of this is to overstate the average wage bill included in published accounts.

The minimum wage allowed under law in the UK is about £3.00 per hour and about £7,500 annually for workers on full-time basis. To evade this, UK companies are relocating their operations to developing countries to take advantage of lower wages and cheap labour (Anson 2000). In some instances, these companies are employing workers that are not UK citizens. In this case, they adopt IFRS as it gives them leeway to pay less and give reduced disclosures. The salary of company director ranges from £200,000 to about £700,000 excluding other packs yet their employees are paid as low as £2.00 per day meaning that an employee receives about £510 per year (Putten 2008, p. 188). If employees are about 1,000 in one subsidiary, then their total earnings per year will be somewhere slightly above the total earnings of a single director. Therefore, including the salary of directors in employee wage bill instead of apportioning it differently, it aims to overstate the wage bill and increase the returns (Putten 2008). Wage bill is an expense, which reduces amount of profits earned, and since taxes are based on profits, it goes without saying that concealing profits reduces taxes and increases company returns.

Reasons why this happens


There exist a lot of studies on motives for earnings in relations to contracts. The most common drives for manipulating financial figures are results of terms of loans and compensation contracts (Gee 2006). This may entail abiding by the terms of solvency and liquidity in loan agreements or even optimizing bonuses.

Capital or stock markets

By presenting misleading financial figures, these companies want not only to influence the prices of share, but also to profit from the exercise (Maynard 2013). This exercise in relation to the capital markets, a management buy out may necessitate the company to underestimate its returns (Anson 2000). When the company is floating its shares on capital markets for the first time, it may be forced to overestimate the profits to attract more investors.

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Business managers at times make certain deliberations in their financial accounts in order to give investors some information regarding the firm and their investment in general (Porter & Norton 2013). Managers present their financial statements in a better way in order to attract and give confidence to share holders about the performance of their investments. Due to this, managers attempt to signal their confidence particularly in the profits of the organisation to the shareholders as well as other parties who are interested in those financial statements (Anson 2000).


In this case, companies are motivated by the fact that existing regulations could hinder them from positing the profits they need (Gee 2006). Therefore, they conceal financial figures in order to evade certain industry regulations, to achieve tax advantages, or avoid being probed by regulatory agencies.

Exploiting Loopholes in financial laws to avoid Compliance and reasons behind the practice


Under the new financial regulations standards amortisation of goodwill is allowed, and UK organisations have the flexibility and option of not separating goodwill from intangible assets (Gee, 2006, p. 234). Under International Financial Reporting Standards, intangible assets are supposed to be segregated from goodwill. At the moment, amortisation of goodwill cannot be undertaken. However, organisations are supposed to undertake impairment tests every financial year to rationalise the value of goodwill (Anson, 2000, p. 17). In 2004, the returns of British American Tobacco had grown by about £0.4 billion due to amortisation of goodwill.

Location of company assets

Assets are important things for a company to function. In heavy industries, such as drilling and even construction, it will be prudent to have the heavy equipments in the country of operation as opposed to country of residence for logistical purposes (Porter & Norton 2013). This would be beneficial to companies as some oversees countries offer tax incentives to businesses investing in heavy industries (Fulford, 2000, p. 54). Tax benefits are much better compared to the accounting charges that would have been made in their published financial reports (Fulford 2000). In the end, taxes charged to companies are significantly reduced, and even dates of payments made are likely to be extended. Organisations can take advantage of these rules to benefit themselves.

Through tax arbitrage, UK companies may choose to seek for part of operations so that they maximally get tax benefit by simply trading off the financial regulations of their country of residence and the country of operations (Benston, Bromwich & Wagenhofer 2006). For instance, they might rent assets from countries which offer big reliefs not just on capital expenditure, but also on the revenue generated by the renting organisation. The result of this deal is that the renting organisation generates substantial up-front tax losses, and that the renter organisation gets the allowance and relief on the cost of acquiring capital assets (Porter & Norton 2013). This infers that company acquiring the equipments also gets substantial up-front tax relief as compared to cash costs used. In term of tax, this results in ‘double dipping’. This is the case where one expense has yielded two tax reliefs, which will take decades to reverse.

Realisation of costs

There is always an inducement to transfer costs to areas that impose high taxes in order to benefit maximally from tax relief offered. UK organisations may decide to shift costs into areas that charge reasonably high taxes (Maynard 2013). This is called cost loading. In this case, companies might benefit by simply inflating the production cost mainly in heavy industries in order to benefit from reducing tax as well as reducing the level of production through agreements with the host nation, resulting in a double benefit particularly to the companies involved in the process (Benston, Bromwich & Wagenhofer 2006).

Incorporation of subsidiaries

A number of tax legislations as well as other related laws make it easier for organisations to have subsidiaries in places where they operate (Gee 2006). However, companies will always decide if they really need other subsidiaries in places or areas that are tax-based. Some countries offer low rates of tax on returns generated within their territories (Porter & Norton 2013). As such, they seek to enhance their tax incomes by attracting returns or profits in their territories which may have not been earned generated there but which are transferred to those countries using the loopholes in accounting regulations. UK companies have been taking advantage of the existing loopholes in the financial regulations to relocate their profits from the UK to other places where they are declared (Fulford 2000). The explanation behind this is that they are more likely to get chance of being taxed modestly in the places they are declared.

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Most international companies usually argue they have a responsibility to their shareholders to use all the means possible to reduce the tax paid by their companies (Benston, Bromwich & Wagenhofer 2006). In law, there are no provisions to direct managers on how to deal with their business affairs particularly how they can minimise taxes (Anson 2000). Therefore, the aspect of duty is only used by companies to justify or conceals certain corporate behaviours.

The location of intellectual properties

UK multinationals take advantage of the loopholes in their financial regulations to locate their intellectual properties in different countries worldwide (Anson 2000). Such undertakings also help them maximise their international or cross border transactions. Due to that, these companies increase the chances for relocating their returns to areas that impose less tax on profits (Gee 2006). The UK Company Act allows local companies to locate ownership of their intellectual properties to low tax in the countries with little and a time no tax charges arising from their relocation.


In the United Kingdom, there is no specific requirement that makes companies abide by set accounting standards and regulations. However, corporate laws in the United Kingdom recognise certain accounting regulations and require well-established businesses or multinationals to state whether they have prepared their financial statements and accounts in line with the available or recognised accounting standards. In general, all the financial undertakings of these companies are controlled or regulated by rules, and as a result, issues arising from them are treated as matters of regulation. It is usually seen that all the data and information relating to financial statements are manipulated by exploiting the available loopholes in financial regulations and legislations to give results that reflect the aims of the company management.

These undertaking by UK companies do not violate any legislation or laws as well as do not contravene any of the financial regulations or accounting standards adopted in the UK. An organisation which returns are less in any financial year may “lawfully” adopt some dishonourable accounting methods to increase its returns falsely. The United Kingdom has been home to some of these incidences where financial experts have adopted different creative accounting approaches to manage their organisational earnings. Generally, these approaches are used to trick or mislead people who use such financial statements, and in the end, these practices may benefit only some people and occasionally bring losses to many other people such as investors.

In the United Kingdom, there are accounting practices as well as financial regulations that are adopted by accounting standards boards. These regulations also recognise international accounting standards as all of them are used by UK multinational when making their financial statements. These financial and accounting practices, such as GAAP as well as reporting standards, such as IFRS, are mainly adopted to help organisations produce financial statements that are right and show a true position of the company as and when they are declared.

As it has already been seen, even with many rules and regulations in place, UK organisations especially multinationals still find some ways or loopholes in accounting practices to manipulate some aspects in their financial statements. Some of these aspects that are mostly used include stock valuation and accruals in order to make figures look as if they are favourable and these are usually directed or focused on some group of people, such as shareholders, as they are only interested in the state of their investments.

Reference List

Anson, MJP 2000, Accounting and tax rules for derivatives, Fabozzi Associates, Philadelphia.

Benston, G., Bromwich, M & Wagenhofer, A 2006, Principles- Versus Rules-Based Accounting Standards: The FASB’s Standard Setting Strategy, ABACUS, vol. 4. no. 2, pp. 165-189.

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Fulford, J 2000, The accountant’s guide to advanced Excel, Oak Tree Press, Dublin.

Gee, P 2006, UK GAAP for Business and Practice, Elsevier Library, Burlington.

Maynard, J 2013, Financial accounting, reporting, and analysis, Oxford University Press, Oxford.

Porter, G & Norton, C 2013, Using financial accounting information: the alternative to debits and credits, South-Western/Centgage Learning, Mason.

Putten, K 2008, Myths and Realities of Executive Pay, Cambridge University Press, Cambridge.

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