Severn Trent Faces Scrutiny Over £1.68bn Accounting Practices

LONDON, December 10, 2024 – ​Severn Trent ​Water, one of England’s most popular water companies, was set on fire for using an accounting manoeuvre that artificially inflated its balance ​to £1.68 billion. According to a BBC Panorama survey, this practice raises serious questions about the integrity of ​the company’s ​financial statements and their commitment ​to public responsibility.

At the centre of the dispute is ​a shellfish company, Severn ​Trent Trimpley, established in March 2017. This entity is part of ​a complex website within the Severn Trent ​plc group. By taking advantage of a £3 billion loan note, the company created a paper value that now appears to be ​a significant asset in Severn Trent Water’s books. If Severn Trent denies any error, claiming that the accounts are accurate, experts and activists question the legitimacy and implications of this agreement.

Account mechanics

The financial agreement began ​with the creation of Severn Trent Tripley, ​a company without assets. Another group ​entity, Severn Trent Draycote, ​initially purchased Trimpley ​for £2. ​Draycote then issued additional shares to Trimpley in exchange for a loan note of ​£3 ​billion, indeed an IOU. Although ​there is no money to change hands, Trimpley was awarded a paper value of £3 ​billion ​because of this IOU.

Severn Trent Water acquired a 49% stake in Trimpley, which ​was valued at £1.4 ​billion in its accounts. The retired auditor Stanley Root, who reviewed the agreement, described it as “as close as possible to an unreal transaction.” Root ​pointed out that the ​transaction misleads Severn Trent Water’s financial health, making it more robust than it really is.

Effect on financial statements

Tripley’s paper value has increased over the years, ​reflecting interest on £3 billion. As a result, ​the ​investment is now valued at £1.68 billion ​in Severn Trent Water’s 2023/24 accounts. ​Although this value is offset in ​the general accounts of the IOU ​Group, it remains an inflated asset in the balance sheet of ​Severn Trent ​Water, asking questions ​about transparency.

Severn Trent Water administrators argue ​that the assessment is fair and consistent with accounting standards. However, Root and others argue that such practices distort the real financial position of the company, which may mislead investors, regulators and the public. Critics point out that these inflated figures carry large dividends paid to shareholders, thus draining the water management entity more effectively.

Dividends and public costs

Since ​the ​introduction of the Trimpley Arrangement, Severn Trent ​Water has ​paid 1,615 billion pounds in ​dividends, exceeding ​1,246 ​billion ​pounds in the ​same period. This £369 million deficit suggests that funds are extracted ​from the company’s reserves, reinforced by the recovery assets of £1.68 billion, to finance payments to shareholders. Critics argue that this practice undermines the ​company’s ability to ​invest in infrastructure improvement and environmental protection.

Activists like the Shrewsbury Group Upstream of Sewage Creek, expressed frustration, calling for more of Severn Trent’s revenues to be allocated to address pollution in local rivers. “They ​didn’t update the infrastructure. They used our money to enrich themselves and ​their ​shareholders,” ​said an activist.

Regulatory oversight and response

Severn Trent Water operates under the control of Offat, the water service regulator in England and Wales. Despite ​its questionable accounting ​practices, the company has always received improved environmental performance assessments from the Environment Agency, ​which has earned it a rating ​of four stars for five consecutive years. However, the Panorama’s revelations could lead to a reassessment of regulatory oversight.

Severn Trent defended his ​actions, stating that the Trimpley structure was intended ​to ​account for future revenues. However, the company has not yet used it for this purpose. Criticism, including Root, suggests that the ​agreement primarily serves to justify ​large dividend payments by inflating the company’s retained income. This raises questions about the alignment of Severn Trent’s financial strategies with its public service obligations.

Broader implications for the water ​industry

The ​controversy surrounding Severn ​Trent highlights ​broader concerns about private water sector financial practices in the UK. Root’s analysis ​of the largest UK water and sanitation companies suggests that creative accounting cannot ​be ​isolated from Severn ​Trent. Such ​practices could undermine public ​confidence and challenge the adequacy of existing regulatory ​frameworks.

Financial activists and experts demand greater transparency and accountability in the sector. They argue that resources must be a priority ​for infrastructure improvement and environmental sustainability, rather than shareholder performance. Disclosures could intensify calls for reform in the management and regulation ​of water companies.

As the debate continues, it remains focused on whether Severn Trent’s accounting practices are consistent with ​its public utility obligations. With increasing scrutiny, ​the company faces ​pressures to ​address ​concerns and demonstrate its commitment to transparency and responsible financial ​management.