Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Barclays’ cost of dealing with fiascos is close to half of pre-settlement income over last 5 years

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Image courtesy of DollarPhotoClub.com

Image courtesy of DollarPhotoClub.com

Previously discussed Barclays drawing a £72M (US$109M) fine for breaking British anti-money laundering laws and calculating the fine is equal to about six workdays worth of net income before costs of settlements.

While calculating magnitude of costs from this settlement, I noticed the income statement shows there have been huge reserves set up for settlements.

Fines and legal fees in last 4 years

The fines and legal fees over the last four years for all of the fiascos the bank has engaged in are a large portion of net income.

You can find the 2014 financial statements for Barclays at this link. The financials are here. Income statement is on page 224.

Check out the costs disclosed on the face of the income statement. To save space I will use ‘interest rate’ for the amounts disclosed as ‘Provisions for PPI and interest rate hedging redress’ and ‘foreign exchange’ for the line disclosed as ‘Provision for ongoing investigations and litigation relating to Foreign Exchange’. I assume money laundering is included somewhere.

Check out these provisions, with amounts in millions of pounds:

2014 2013 2012 2011
interest rate 1,110 2,000 2,450 1,000
foreign exchange 1,250
subtotal provisions 2,360 2,000 2,450 1,000

 

Now look at the severe cumulative hit to net income. I will add the subtotal of provisions for those two scandal areas back to statutory profit to see what net income could have been. Then will calculate the percent of possible net income that was wasted by sundry illegal activities.

I will assume for this calculation that all of the settlement costs were after tax. Fine print in settlements negotiated in the US indicate the offending party won’t take a tax deduction for the fines.

2014 2013 2012 2011 2010 5 yr tot.
subtotal provisions 2,360 2,000 2,450 1,000 7,810
statutory profit 845 1,297 181 3,868 4,499 10,690
income w/o prov. 3,205 3,297 2,631 4,868 4,499 18,500
% wasted 74% 61% 93% 21% 0% 42%

 

A very rough trendline would show net income dropped from about £4.5B in ’10 to under £1B for the last few years. Let’s round that off to about an 80% drop in net income.

My calculation shows that 42% of income after tax but before the settlements in the last five years was used to deal with the investigations, legal costs, and settlements for sundry fiascos. That would be the cost of dealing with various schemes created by a variety of staff to generate more income for the bank and more bonuses for themselves.

So, if you as a stockholder are disappointed with the severe drop in net income over the last four years and wondering where £7.8B of equity went, yes about eight billion pounds of your net worth, you can thank management and sundry traders who wasted your money.

Written by Jim Ulvog

December 15, 2015, 7:08 am at 7:08 am

Posted in Other stuff

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