Ah, those were the days. Here’s the chief executive of Mitie two years ago. We are “well positioned for growth.” And last year: The “business model is flexible, resilient, low risk”. It turns out that none of this was true. Risks were higher and profits much lower, and now the numbers need restating “to correct material errors“.

The CEO has taken her growth and resilience elsewhere, and the man from British Gas has come in, scrapping the final dividend to fix the leak in the p&l. Mitie is one of these frightfully modern businesses which grew fat on the back of government outsourcing, “managing and maintaining some of the nation’s most recognised landmarks” (and detention centres).

Winning the contract is one thing: trying to work out when, or whether, it is really profitable is something else. The accountants are having another stab at setting the rules here (IFRS15, if you want to show off) to discourage undue optimism from CEOs. With contracts that last several years, the temptation to take a rosy view so as not to disappoint investors can be irresistible.

No big outsourcer has resisted. Their published figures are deeply suspect, and the analysts are struggling to interpret them. Shares in rival Capita jumped 17 per cent last week (but are still half their peak) on relief that things are no worse than expected. Besides, as Morgan Stanley points out: “IFRS15 enables the writing off of accrued income (i.e. revenue recognised but not billed) from the balance sheet through reserves (so no prior year adjustment to the p&l). This revenue can then be recognised effectively under IFRS15 again.”

Neat, huh? Take the hit to reserves, and book future profits (assuming there are some) through the p&l. This should help Capita in its long search for a CEO, although he or she may still be unable to kick the outsourcers’ habit of booking profits before they are earned.

No Green legacy

Owen Green, who has died aged 92, was one of the two takeover kings who dominated the stock market in the 1980s. Less flamboyant than James Hanson, he was just as deadly, as he built BTR into an industrial giant, at its height the fourth most valuable company in the FTSE100. Victories included Thomas Tilling (then the biggest-ever UK takeover) and an ailing Dunlop, although glass-maker Pilkington managed to escape.

Running it with a small staff from a dreary 1960s block in Westminster, Sir Owen eschewed non-executive directors and corporate codes. His appetite for buying diverse businesses made it hard for outsiders to describe exactly what BTR did, and the sprawl of hundreds of individual companies reporting back compounded the pressure on his executive colleagues.

His fans saw him as a badly-needed champion of British manufacturing industry, while his detractors suspected BTR was an accounting confection, sustained by under-investment and rules which allowed takeover provisions to be recycled into profits. The group did not long survive his retirement, after 37 years, in 1993. More recently, he savaged the culture of corporate greed that had infected big companies while wages were being squeezed. There’s no sign of that changing.

Forward guidance: raise interest rates

At last, the folly of the Bank of England’s panicky halving of Bank Rate to 0.25 per cent following the referendum may be starting to sink in. The governor, Mark “forward guidance” Carney, may still be complacent, but three of the eight members of his Monetary Policy Committee voted for a rise last week. Perhaps they spotted that the Retail Prices Index, that measure the authorities would like us to forget, signals that inflation was up to 3.7 per cent in May.

Meanwhile the housing market is buoyed up on the toxic combination of the help-to-buy subsidy and the unsustainably low mortgage rates that flowed from last year’s cut. The longer this goes on, the greater the risk of a crisis for borrowers who lack the resilience to deal with an increase in mortgage costs. A return to “normal” conditions may still be a long way off, but one small step in the right direction by the MPC would be a good start.

This is my my FT column from Saturday

 

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