Financial Reporting Review Panel Complaint

I would like to make a formal complaint on behalf of the Seymour Pierce Action Group about Seymour Pierce Group’s failure to disclose a loan of £150,000 to Radio First in the year ended 30 September 2002.

When the loan was made Keith Harris was Chairman of both Seymour Pierce Group and Radio First. Seymour Pierce Group was the broker and nominated advisor of Radio First.

Keith Harris remained Chairman of Radio First until 24 April 2003, when the company was placed into liquidation.

During the year ended 30 September 2003 Seymour Pierce loaned another £350,000 and then wrote off the full £500,000 loan. The loan and write off was disclosed in the accounts for the year ended 30 September 2003.

There are two questions to ask. Firstly, was this loan a related party transaction? FRS8 Related Party Disclosures defines a related party as when “the parties are subject to common control from the same source”.

FRS8 defines control as “the ability to direct the financial and operating policies of an entity with a view to gaining economic benefits from its activities”. Chairmen do both. They exercise control and get economic benefit for doing so. Therefore, Seymour Pierce Group and Radio First were related parties.

The second question is was the £150,000 loan material? FRS8 defines material transactions as “when their disclosure or omission might reasonably be expected to influence decisions made by the users of general purpose financial statements”.

Related party disclosures do influence the decisions account users. If Directors are transferring assets to other companies they have an interest in, shareholders want to know about it. Related party disclosures are the best available proxy for assessing the business ethics of Directors.

FRS8 also states that materiality should “be judged, not only in terms of their significance to the reporting entity, but also in relation to the other related party”.

From Radio First’s perspective the £150,000 was material. The company was loss making and running out of money. Keith Harris was quoted in the Guardian on 2 July 2002 saying “We’re optimistic additional funding will be raised. We have enough cash to run for some time anyway”. He added that if Radio First ran out of money all creditors would be paid in full.

Radio First ran out of money nine months later but Seymour Pierce Group was not repaid the £500,000 loan as Keith Harris pledged.

Further damning evidence that the failure to disclose the £150,000 loan to Radio First for the year ended 30 September 2002 contravened FRS8 is the inclusion of the following related party disclosure;

“J.S. Mackay and P.D.W. Ingram both acted as non-executive Directors of Codicology Limited during the year. On 20 November 2002 it was agreed that the group’s shareholding be sold for £50,000 to the majority shareholder in the company, conditional on the transfer to Seymour Pierce Group of the lease of the premises occupied by Codicology Limited.

Critically, this proves that Seymour Pierce Group considered a £50,000 related party transaction to be material. It also shows that Seymour Pierce Group were aware that having common Directors established a related party relationship requiring FRS8 disclosure.

Conversely, Seymour Pierce Group cannot argue that a related party relationship did not exist with Radio First because they disclosed the £500,000 loan written off in the year ended 30 September 2003.

The significance of this FRS8 disclosure omission has been magnified by a string of related party transactions entered into by Seymour Pierce Group since. Every Seymour Pierce Group Executive Director, with the exception of Patrick Ingram, has benefited from related party asset sales, arguably at the expense of shareholders.

The Seymour Pierce Action Group was set up in October 2003 to investigate whether Seymour Pierce Group has any claims against current or former Directors and advisors.

We feel that the failure to disclose the £150,000 loan made by Seymour Pierce Group to Radio First in the year ended 30 September 2002 deprived shareholders of vital information for assessing the effectiveness of corporate governance.

The Seymour Pierce Action Group sought an explanation for the disclosure omission at the Seymour Pierce Group AGM on 19 December 2003. No satisfactory explanation was provided.

Please can you adjudicate on whether or not the £150,000 loan to Radio First should have been disclosed in the Seymour Pierce Group 2002 accounts.

(Copies sent to Carol Page - Financial Reporting Review Panel Assistant Secretary, John P Connolly - Deloitte & Touche UK Senior Partner & Chief Executive, Martin Eadon - Deloitte & Touche Assurance Chief Operating Officer and Managing Partner, Gerry Paisley - Deloitte & Touche Practice Protection, Charles Hardy - Deloitte & Touche, Patrick Ingram - Seymour Pierce Group, Keith Harris, Seymour Pierce Group)