YOU COULD practically hear the bored irritation in the first minister’s voice when she answered the STV journalist’s question on 3 June of this year. No, she explained, she was “not concerned about the party’s finances”. The ‘ring fenced’ independence referendum fund had not gone missing at all you see – the Scottish National Party’s accounts are “independently and fully audited”.
Alas, how was Nicola Sturgeon to know that only a few months later those independent auditors would feel the need to identify the area of “greatest potential for fraud” in SNP accounts. Something the independent auditors of Johnson Carmichael LLP had hitherto never felt the need to include in SNP financial reviews.
On 26 June, 2020, Johnson Carmichael LLP concluded that the SNP’s statement of cash flows represented a “true and fair view of the state of affairs of the Scottish National Party”. Yet fast forward to 26 June 2021 and the self-same auditors now write “we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in in the following area: revenue and recognition”.
Revenue and recognition is an accounting term for when revenue is to be recognised.
Revenue recognition means – and not to simplify too much – a company should only record income when it has been earned, not when the related cash is collected. For example, if a gardener asks for £15 for mowing a lawn, the gardener can “recognise” that £15 in his accounts even if he has not collected the £15 immediately after doing the mowing.
And this is the area the SNP’s independent auditors think is of “greatest potential for fraud”. A view that they either never held previously or as far as I can see never felt a need to publicly disclose in the 2019/2020 SNP financial review.
The thought has occurred to me that perhaps the auditors are simply being over-cautious since the SNP is under formal investigation by Police Scotland’s fraud squad. Maybe Johnson Carmichael LLP is simply protecting its reputation?
That might have been the conclusion to be reached were it not for the Sunday Herald’s reporting the contents of leaked SNP internal governance documents. Those documents reveal the SNP is fully aware of the inadequacy of its internal procedures; admitting “some processes that have developed in an ad hoc way”.
Or put simply, the SNP is admitting privately to itself that internal procedures have been made up on the spot in recent years. This rather reinforces the seriousness of the auditors’ warnings about greatest potential for fraud being how revenue is recognised in the accounts.
‘Ad hoc’ is no way to manage financial procedures. Especially when prosecutors have confirmed warrants will be issued, enabling the Police to demand access to the accounts – and any other materials – held by the SNP’s independent auditors Johnson Carmichael LLP.
Interestingly the Scottish Mail on Sunday reports from a source close to the Police inquiry that the coppers are frustrated by slowness of the Crown Office. “Police have waited almost four weeks for the Crown Office to approve this warrant, so there has been a frustrating wait”.
And if all of this is not enough to raise eyebrows, we need to return to Nicola Sturgeon’s 3 June answer to STV. Back then she also said, “our accounts are managed on a cash flow basis”. The only logical interpretation to be drawn is the first minister was claiming the SNP use cash rather than accrual accounting. Unfortunately for the first minister, this does not appear to be accurate.
And this distinction is not pedantic. You see, accrual accounting is for when revenue is earned, and is typically recorded before any money changes hands. Whereas cash basis accounting is reported on the income statement only when cash is received. Accrual accounting in no way tracks cash flow, and as a result might not account for a company with a major cash shortage in the short term.
So given the SNP’s accounts are accrual and not cash basis accounting, Nicola Sturgeon has absolutely no basis telling the public – or SNP members – the books are managed on a cash flow basis. This matters even more given ‘ring fenced’ referendum funds of more than £600,000 apparently disappeared from the party accounts in 2019.
The SNP’s ‘cash at hand and in the bank’ plunged from £411,042 in 2018 to just £96,854 by 2019. At the same time the donations the SNP received collapsed from £1,423,667 in 2017 to just 416,186 by 2020. Indeed Quarter 4 of the 2020 accounts reveals the SNP received a mere £2,080 in ‘donations accepted, excluding public funds’.
Be under no illusions, this is a party heavily reliant today on money raised from its membership and from its MPs via the ‘parliamentary levy’. Gone are the days when big money donors such as Brian Souter and the Weirs were handing out loans and donations. Indeed between 2017 and 2019 the SNP went from a net surplus of £701,988 in its accounts to a deficit of £319,161.
By the close of 2019 it is completely fair to conclude the SNP was a party under some financial pressure. Two general elections fought, running a substantial deficit by the end – donor money drying up – and suddenly the ‘ring fenced’ referendum fund is hard to find in the accounts.
It is a pity then for the SNP that “some processes that have developed in an ad hoc way” might buttress auditors’ warnings about the “greatest potential” for fraud being how income is recorded. Or that the Police are obtaining warrants to seize auditors accounts. Nicola Sturgeon must feel regretful that she could not – it seems – understand how the SNP has managed its cash flow.
But then again, apparently, she and her husband (SNP chief executive Peter Murrell) never ever discuss their respective jobs at home. So, I suppose First Minister you want us just to accept “these things happen”?
Photo by Pixel-Shot from Adobe Stock