Accounting & Business – news June 2010

Posted on September 21, 2010 · Posted in Accounting & Business

UK news

Ernst & Young fined £1/2m over Equitable failings

Ernst & Young has been fined £500,000 and ordered to pay £2.4m in costs by an Appeal Tribunal considering the firm’s audit of Equitable Life.  But the original fine of £4.2m and costs of £5.75m imposed by the Joint Disciplinary Tribunal were cut substantially by the Tribunal.  Both E&Y and a former partner, Kevin Paul McNamara FCA, have been reprimanded by the Tribunal – a reduction on the original verdict by the JDT of a severe reprimand.  The original JDT finding – which had been suppressed until now – that E&Y had acted with a lack of objectivity and independence was rejected.  The decision of the Appeal Tribunal was welcomed by E&Y, which said: “The allegations that we lacked objectivity and independence were acknowledged by all parties as ‘by far the most serious’ that we faced – the rejection of these findings by the Appeal Tribunal led to their decision to significantly reduce our fine (by more than 90%).”

FAST FACTS

£4.8bn – Equitable Life policyholders’ losses

£2bn – value of policies sold by Equitable Life in 2000, prior to its collapse

£1.5bn – cost to Equitable Life of judgement in Hyman, which caused collapse

Haddrill calls for stronger FRC powers [longer lead, photo of Haddrill]

Accountants could find their influence with the Financial Reporting Council reduced, suggests Stephen Haddrill, recently appointed FRC chief executive and former director general of the Association of British Insurers.  “There has been a concern within the ABI that the voice of the professions within the FRC is too strong,” he told the Mail on Sunday.  “That is a view with which I have some sympathy, which is why I have set-up the [FRC’s] investors’ group.”  Haddrill also indicated that the FRC should have increased powers to use and share information about the accountancy profession.  “Legal restrictions stop us sharing information, not only with outside bodies but even within the FRC,” he said.  “For example, one part of the FRC may be looking at a company’s accounts, while another part may be looking at its audit, but they cannot confer.”  He added that he wants the FRC to have a broader range of disciplinary options for accountancy and actuarial professions who misbehave.

HMRC plays hardball with soccer clubs

HMRC has launched a legal action to challenge the football creditor rule (FCR), which requires clubs that become insolvent to prioritise payments to other clubs and those closely connected to the sport.  A spokesman for HMRC said: “There is no legal basis for the football creditor rule. Non football creditors are being seriously short changed and enough is enough.”  It is asking the High Court to declare that the FCR is unlawful, against public policy and to prevent its use and states that it is acting in the interests of all non-football creditors. A Premier League spokesman confirmed that the League would “robustly defend its position”. 

NAO gains full access to BBC

The Government has pledged to give the National Audit Office “full access to the BBC’s accounts to ensure transparency”.  In April, Edward Leigh MP, the then chairman of the House of Commons Public Accounts Committee, complained: “The BBC is currently immune from being properly held to account for its spending of billions of pounds of public money. It is a publicly owned and funded organization, receiving an annual grant from Parliament. But, unlike other such organizations, it is not accountable to Parliament for the public money it spends through audit by the Comptroller and Auditor General.”

 

HMRC guilty of new data leak

As many as 50,000 letters containing private income and tax information have been sent inadvertently by HMRC to the wrong taxpayers.  A spokesman for HMRC said: “Unfortunately an error has occurred in one of the tax credits print runs causing some customer information to be wrongly formatted. Investigations are underway to identify the cause of the problem and we will be contacting affected customers in writing, apologising and providing a corrected award notice. An initial analysis shows that ID theft could not result from this printing error.” 

High Court rejects Littlewood case on VAT refund

HMRC has won a High Court case brought by Littlewoods, which sought the recovery of £1bn in lost compound interest on overpaid VAT.  The High Court ruled that neither UK nor EU law provided taxpayers with the right to receive compound interest.  The ruling is provisional and subject to reference to the European Court of Justice on questions of detail that have yet to be decided. 

 

FRC corporate governance committee to be chaired by former CBI man

Sir John Sunderland is the Financial Reporting Council’s new chairman of its Corporate Governance Committee.  He replaces Baroness Hogg, who served in the role from the beginning of 2008 and has now taken on the role as chair of the FRC.  Sir John was CBI President from 2004 to 2006 and served as a task force member on Accounting for People.  On his appointment, Sir John said that he believed that a lesson of the financial crisis is that companies must increase their accountability to shareholders.

Professional Oversight Board reports on transparency

The Professional Oversight Board has reported on the first set of completed transparency reports since they became a requirement for auditors of public interest entities.   The requirement applies to auditors of UK companies with securities traded on a UK regulated market.  Dame Barbara Mills, chair of the Oversight Board, said the quality of transparency reports had improved since they became obligatory, but that firms should enhance the quality of disclosures related to independence policies, financial information and international network arrangements. 

Madoff victims in Europe to recover losses

Most UK victims of the Madoff Ponzi fraud will be fully compensated, according to lawyers representing 720,000 investors.  The $15.5bn payment will be funded by banks and other intermediaries that put investors in contact with Madoff.  Investors will recover the value of the original investments, rather than the amount they believed those investments had grown to at the time of the Madoff collapse.  The settlement covers European clients, not those based in the United States who mostly invested directly in Madoff’s funds.

PwC and E&Y get peeping tom option

PwC has installed blinds to prevent staff in Ernst & Young seeing confidential information through their office windows.  PwC’s new office is a mere 10 metres from Ernst & Young’s headquarters in More London Place, near Tower Bridge.  PwC’s window blinds automatically activate when presentations take place.  A spokeswoman for PwC said the actions were consistent with its practices in other buildings where frosted glass was used: the difference at More London was that technology was being applied to improve privacy.

IFAC reports on work planning

IFAC has published an exposure draft outlining the direction and priorities of its services relevant to professional accountants in business. The proposed strategic direction focuses on enhancing the profile, influence and relevance of professional accountants in business and identifies two key objectives: to increase awareness of the important roles professional accountants play in creating, enabling, preserving and reporting value for organizations and their stakeholders; and supporting professional accountants in business within IFAC member bodies by facilitating the communication and sharing of good practices and ideas.

E&Y warns on fraud

Corporations are failing to take sufficient basic steps to protect themselves from the increasing risk of fraud, or to comply with stricter legal controls against corruption, according to the latest Ernst & Young Global Fraud Survey.  The survey of over 1,400 senior decision-makers in major companies in 36 countries found that 18% of UK companies have not performed a fraud risk assessment over the last 12 months; 8% have never completed one; 34% rarely or never perform fraud or corruption related pre-acquisition due diligence; and 47% rarely or never perform post-acquisition reviews. 

EU emissions trading system is ‘cost to taxpayers’

The European Union’s Emissions Trading System is unfairly rewarding industrial operators at the expense of taxpayers, according to analysis from the London School of Economics’ Centre for Economic Performance.  Industry is successfully exploiting concerns about competitiveness to obtain free emission permits using criteria that are too lax, says the report, ‘Still Time to Reclaim the European Union Emissions Trading System for the European Taxpayer’.  European governments should improve the design of the ETS by removing exemptions, which would raise additional income of €7bn annually, it argues.

 

‘Re-engineering’ accountants in high demand

Accountants with process re-engineering experience are in demand across a number of sectors to improve and streamline systems, concludes the latest Badenoch & Clark professional talent spotlight.  It adds that technical accounting skills are in demand for consolidation projects, with the restructuring of group functions, reporting lines and year end creating new opportunities for technically strong ‘Big Four’ accountants with consolidation experience.  However, employers are having to accept that recruitment is taking longer and proving more difficult as organisations become less able to compromise on their need for essential skills and relevant experience.

 

OFR to be reinstated

The Operating and Financial Review is to be reinstated as a requirement in company reporting, the new Programme for Government has announced.  The OFR will ensure that directors’ social and environmental duties are covered in company reporting.  The incoming Government has also pledged to “investigate further ways of improving corporate accountability and transparency”.   The OFR was previously introduced in 2005 and abolished the following year, replaced by the Business Review.

 

Institutes told to keep closer eye on members

Accountancy bodies have been told by the FRC’s Professional Oversight Board to increase their monitoring of members.  The review of the accountancy institutes recommended that “the bodies should not only discuss all matters identified during their review with the member, but should require the member to respond to all points and take appropriate action”.  This should include members being required to confirm that matters raised have been resolved, with the bodies making further checks to ensure this has happened. 

 

IFAC calls for transparent government accounting

The Greek sovereign debt crisis illustrates the need for greater transparency in government accounting practices around the world, says IFAC.  “Greece is a financial reporting crisis… and that is a serious problem,” said Ian Ball, IFAC’s chief executive.  “There is an urgent need for an increased level of transparency in the governments, in respect to how they use their finances; and what we are advocating is high quality financial reporting among governments.”  The ripple effects of financial problems means there is no longer such a thing as an only ‘local’ crisis, he added.

IASB and FASB respond to criticisms

The IASB and FASB have agreed to clearer prioritization of projects and a slowing down in the rate of production of exposure drafts in response to concerns expressed by stakeholders.  They will now limit the number of exposure drafts to four per quarter.   The two boards will also issue a separate consultation document seeking stakeholder input about effective dates and transition methods for convergence between IFRS and US GAAP.  The modified strategy retains the target completion date of June 2011 for many projects, but for some the target date has been extended into the second half of 2011.  

 

 

RoW news

South Africa fraud warning [longer, with fast facts]

Fans attending the World Cup finals have been warned of common ATM fraud scams operating in South Africa.  Visitors are warned to use ATMs only in well lit and heavily populated areas, to shield PIN numbers, not to count cash in the open, ensure they get the right card back after a transaction and to be cautious about offers of help with using an ATM – including from people who appear to represent a bank, who may even be wearing bank uniforms.  ATMs themselves may be tampered with by criminals, either to retain credit cards or fitted with micro cameras to record PINs.  People using internet cafes are warned to be careful about their use of passwords when accessing bank accounts online, particularly to ensure no one witnesses their use.  Identity Fraud Communications Awareness Group spokesman Neil Munroe said: “Football fans will stand out from the crowd, making them an easy target for criminals.”

FAST FACTS

300,000 – the number of visitors expected to South Africa for the World Cup

65,000 – the number of people reporting fraud to the South African Fraud Prevention Service between 2004 and 2008.

R1.3 billion – the cost of fraud reported to SAFPS in 2008

Ireland’s Auditor General investigates Dublin Dockland scheme [longer]

A €426m property acquisition by the Dublin Docklands Development Authority, a public agency, is to be investigated by Ireland’s Comptroller and Auditor General.  An initial enquiry conducted for the Department of Environment concluded that the DDDA’s then chief executive, Paul Maloney, failed to keep his board aware of the escalating cost of the project.  Maloney disputes the findings. DDDA bought the former Irish Glass Bottle site in a joint venture with two property developers using a special purpose vehicle called Becbay Ltd.  The site value is now shown on the Authority’s as worthless.  Acquisition costs were financed by loans from the now nationalised Anglo Irish Bank and have since been transferred to the National Assets Management Agency (NAMA) – the state vehicle for non-performing assets financed by Irish banks and building societies.  DDDA is now in deficit by about €250m and is paying around €5m a year in interest payments to Anglo Irish.

IASB and FASB respond to criticisms

The IASB and FASB have agreed to clearer prioritization of projects and a slowing down in the rate of production of exposure drafts in response to concerns expressed by stakeholders.  They will now limit the number of exposure drafts to four per quarter.   The two boards will also issue a separate consultation document seeking stakeholder input about effective dates and transition methods for convergence between IFRS and US GAAP.  The modified strategy retains the target completion date of June 2011 for many projects, but for some the target date has been extended into the second half of 2011.  

 

EU emissions trading system is ‘cost to taxpayers’

The European Union’s Emissions Trading System is unfairly rewarding industrial operators at the expense of taxpayers, according to analysis from the London School of Economics’ Centre for Economic Performance.  Industry is successfully exploiting concerns about competitiveness to obtain free emission permits using criteria that are too lax, says the report, ‘Still Time to Reclaim the European Union Emissions Trading System for the European Taxpayer’.  European governments should improve the design of the ETS by removing exemptions, which would raise additional income of €7bn annually, it argues.

 

IASB and FASB propose accounts report income in two ways

The IASB and FASB have published joint proposals to improve the consistency of presentation of other comprehensive income.  This would see profit, loss and other comprehensive income presented in separate sections of a continuous statement.  Items in other comprehensive income would be grouped according to whether they will be ‘recycled’ into the profit or loss section of the income statement. 

IFAC calls for transparent government accounting

The Greek sovereign debt crisis illustrates the need for greater transparency in government accounting practices around the world, says IFAC.  “Greece is a financial reporting crisis… and that is a serious problem,” said Ian Ball, IFAC’s chief executive.  “There is an urgent need for an increased level of transparency in the governments, in respect to how they use their finances; and what we are advocating is high quality financial reporting among governments.”  The ripple effects of financial problems means there is no longer such a thing as an only ‘local’ crisis, he added.

Madoff’s European victims recover losses

Most European victims of the Madoff Ponzi fraud will be fully compensated, according to lawyers representing 720,000 investors.  The $15.5bn payment will be funded by banks and other intermediaries that put investors in contact with Madoff.  Investors will recover the value of the original investments, rather than the amount they believed those investments had grown to at the time of the Madoff collapse.  The settlement covers European clients, not those based in the United States – who mostly invested directly in Madoff’s funds. 

Iran and Syria to establish joint bank

Iran and Syria are to form a joint bank to strengthen the two countries’ economic co-operation.  The bank is to be based in Syria, but 60% owned by the Iranian state and  will have a total capitalisation of about $30m.  Part of the objective of the bank is to provide services to the one million Islamic pilgrims who travel each year from Iran to Syria.  The two countries have signed a series of economic co-operation agreements, which also cover mutual investment in technology, industry and trade. 

E&Y warns global fraud rise

Fraud, bribery and corruption have become increasing concerns for most boards across the world, according to the latest Ernst & Young Global Fraud Survey.  Some 76% of respondents said these had become higher priorities and were worried about their personal liability.  Incidence of fraud seems to be rising in many regions, with the number of companies in Western Europe experiencing a significant instance of fraud rising in the last two years from 10% to 21%.  Fraud levels remain high in Latin America, at 21%, and in the Middle East and Africa, at 18%.

Bank of Italy suspends mark-to-market

The Bank of Italy suspended mark-to-market valuations of European government bonds in the wake of downgrades of Greece, Spain and Portugal and lowered market valuations.  Italian lenders do not have to use market values in their available-for-sale portfolios for the time being, thereby protecting national banks from erosion of their capital ratios. 

Fraud precedes bankruptcy, finds US study

Frauds against corporations often precede bankruptcy, a study by the Committee of Sponsoring Organizations of the Treadway Commission in the United States has concluded.  It also found that disclosure of frauds typically led to a substantial decline in share price – on average they fell by 16.7% in the two days following an announcement.  Stock exchange delisting and asset sales were other common results to major frauds and in 90% of cases a chief executive or CFO was named by the Securities and Exchange Commission for alleged involvement.  Some 350 instances of alleged fraud over 10 years were examined.

PwC faces Glitnir lawsuit

PwC is being sued over its audits of failed Icelandic bank Glitnir.  A claim lodged with the Supreme Court of the State of New York by agents winding-up the bank cites PwC jointly with large shareholders over Glitnir’s collapse.  The claim alleges that businessmen who gained control of the bank placed nominees into controlling positions in the bank for the benefit of themselves and their businesses.  “The individual defendants could not have succeeded in their conspiracy to loot Glitnir without the complicity of Glitnir’s outside auditors at PricewaterhouseCoopers hf,” says the lodged claim.  A spokeswoman for PwC responded: “PricewaterhouseCoopers hf. would like to iterate that the opinion [on Glitnir] was based on information and data the accountants had access to at that time. PricewaterhouseCoopers hf holds by its opinion on the banks financial statements and other assurance work for the bank.”

Tax collectors in Greek front line

Greece has sacked 20 senior officials responsible for collecting taxes, as the government grapples with the need to clamp down on tax evasion.  Tax officials now represent a front line of conflict between government and society in reducing the national fiscal deficit.  Four tax inspectors have been given prison sentences of between seven and 15 years for issuing false VAT rebates, worth €60m.  Earlier this year tax collectors went on strike, claiming they were being unfairly penalized by public sector salary cuts.

SEC proposes equity audit trail

Stock exchanges and the US Financial Industry Regulatory Authority will have to establish consolidated audit trail systems, the Securities and Exchange Commission has announced.  This will mean the SEC can audit all trading orders received and executed across the securities markets and should enable it to tackle ‘dark pools’ of hidden trades.  The move is intended to provide the SEC with the expertise to understand the causes of events such as the recent collapse in the Dow Jones Index, where it fell by 700 points in minutes.

Corruption scandals erupt in Italy

A corruption scandal that threatens to ruin some of the country’s most prominent entrepreneurs is rocking Italy.  One government minister has resigned and senior business people have been arrested. Investigations are centring on contracts awarded by the Civil Protection Agency, which has responsibility for infrastructure for major national events.  As many as 400 senior business figures and public officials are rumoured to be under investigation regarding the alleged payment of bribes for contracts.  Industry minister Claudio Scajola has resigned, but denies suggestions that he took €900,000 from a Rome builder.

Germany seeks to control sovereign debt market

Germany has banned ‘naked short selling’ – the sale of assets that the seller does not own – and speculation through credit default swaps relating to sovereign debts.  The move has been strongly criticized by many traders. The EDHEC-Risk Institute argues the move is impractical and counter-productive, because neither regulators nor intermediaries are in positions to know whether traders own underlying assets.  It also argues that countries will find it more difficult to manage the interest rate exposure on their national debts, as counterparties will not be able to hedge the country risk of interest rate swaps they enter into.

 

Politics

FRC to review audit choice review

The Financial Reporting Council is to conduct a full review of previously agreed measures to extend choice in the audit market.  In its fifth progress report on the recommendations of the Market Participants Group, the FRC said that progress so far has included the release by the Audit Firm Governance Working Party of its best practice code on the governance of audit firms and improved transparency reporting by audit firms.  International developments include the European Commission’s forthcoming green paper on auditing and the expected passage of the Restoring American Financial Stability Bill, easing co-operation between US and European regulators.  Stephen Haddrill, chief executive of the FRC, said that risks from audit market concentration persist.  “Over the next six months the FRC will assess the effectiveness of the [MPG] recommendations as a whole and make clear proposals on what further action is required,” he said.

New government, new start

ACCA has published a new report – ‘A Blueprint for Sustainable Recovery’ – suggesting 33 measures to boost the economy.  “Not only are we emerging from the financial crisis with an unprecedented deficit, but we have an onerous regulatory burden, an increasingly complex and uncompetitive tax system, a pensions system in need of reform, and a small and medium-sized enterprise sector calling out for support,” said ACCA chief executive Helen Brand.   Proposals include changes to the tax system to make it more consistent, transparent and subject to pre-legislation scrutiny; devising a medium-term strategy to support SME development, with regulation better tailored to the capacity of small firms to cope; and taking steps to break-up institutions that are ‘too big to fail’.

FRC proposes stronger governance rules

Annual elections for directors of FTSE 350 companies are included in changes to the UK Corporate Governance Code, proposed by the Financial Reporting Council.   Other proposals include performance related pay becoming more closely aligned to the long-term interests of the company; clearer principles explaining the leadership role of chairmen and the constructive challenge role of non-executive directors; and a greater emphasis on the importance of getting the right balance of skills and experience on a board.  Companies’ focus on risk management should be strengthened, with business models explained and board taking responsibility for determining the nature and extent of the significant risks a company engages in.  Baroness Hogg, who has just taken over as FRC chair, said: “The changes we have made are designed to reinforce board quality, focus on risk and accountability to shareholders.”  The CBI supported the proposals with the exception of annual elections, to which it expressed concern.

Accountants take government positions

Qualified accountants have taken key ministerial positions in the new Government.  Liberal Democrat Michael Moore becomes Secretary of State for Scotland: he worked in the corporate finance practice in the Edinburgh office of the former Coopers & Lybrand firm before entering politics.  Mark Hoban, a Conservative MP, becomes financial secretary: he has worked for PwC.  Another Conservative MP and accountant, Justine Greening, has been made economic secretary: she worked for the former Price Waterhouse firm.  Conservative MP Nick Gibb, a former KPMG accountant, is an education minister.  But former accountant, Mark Harper MP, who before the election was shadow minister for disabilities, has not entered government.

Dual reporting of income

The IASB and FASB have published joint proposals to improve the consistency of presentation of other comprehensive income.  This would see profit, loss and other comprehensive income presented in separate sections of a continuous statement.  Items in other comprehensive income would be grouped according to whether they will be ‘recycled’ into the profit or loss section of the income statement. 

Public sector

Councils told to stop work on CAA

The new Government has abolished Comprehensive Area Assessments for local public services.  CAAs brought together the work of the Audit Commission, Ofsted, the Care Quality Commission and three other inspectorates of local public bodies.  All work on updating the area assessment and organisational assessment will cease with immediate effect,” the Audit Commission told its audited bodies.  “We will work with the government and our partner inspectorates to ensure we can continue to increase accountability for local public services through more transparency, richer data and less inspection.”  It has written to all local bodies to advise them how it intends to bring work on CAA to a conclusion.   In a separate move, Eric Pickles, the new communities secretary, has rejected a request from the Audit Commission to authorise a salary of £218,000, plus pension contribution of £21,800, for the currently advertised post of chief executive.  Former chief executive Steve Bundred’s salary was £208,000.

 

‘Public sector finance function challenged’

The finance function in the public sector must operate more effectively and with more influence if it is to cope with government demands for lower public expenditure, says a report from PwC, ‘A place at the top table? Raising Finance’s game in the Public Sector’.  A PwC survey of 60 finance professionals from across the public sector found that only a fifth of respondents consider their role as being that of a ‘business partner’, suggesting that the finance function is mostly marginalized in decision-taking.  The research also showed that their time is heavily skewed to compliance and control activities, rather than providing high level insight and guidance.

Practice

Time to pay rejections double

Small firms are finding it tougher to reach ‘time to pay’ agreements with HMRC.  A Freedom of Information Act request from IT consultants Syscap revealed a doubling in rejected applications in the last year.  The figure for rejected claims rose from 5.3% in the first quarter of 2009 to 11% in the same period this year.  Baker Tilly said: “We have heard of businesses that have approached HMRC to agree time to pay their tax, only to be grilled at length about all the available sources of credit including the company credit card, overdraft etc. as well as the ‘pecking order’ in which the business is paying its other creditors.”

Free tax toolkits

HMRC has made free ‘toolkits’ available for tax agents to download in an attempt to reduce common errors in the filing of clients’ tax returns.  The toolkits cover Capital Gains Tax for land and buildings; Marginal Small Companies’ relief; Income Tax Self Assessment; Trust and Estates; Capital Gains Tax  for trust and estates and Capital Allowances for plant and machinery.  Brian Redford, head of HMRC’s Business Engagement Team, said: “Agents do not have to use them but because they are designed with the help of the agent community they are packed with helpful information including checklists, links to online guidance and examples of frequent errors and how to avoid them.  The toolkits provide evidence of good working practice and reasonable care and will help agents ensure that tax returns are completed correctly from the beginning – therefore minimising potential error and possible investigation.”  The toolkits are at www.hmrc.gov.uk/agents/prereturn-support-agents.htm.

Corporate

Institute of Internal Auditors provides guidance on pay

A new practice guide on key executive compensation risks has been published by the Institute of Internal Auditors.  The IIA says these risks should be understood before assessing whether controls and governance over executive compensation and benefits programmes are effective.   It warns that excessive, illegal or unethical executive compensation and benefits could be misclassified, or otherwise hidden within the financial statements; and operating or financial data could be manipulated to trigger incentive-compensation payments or artificially inflate the value of stock options.  The IIA adds that failure to properly construct, communicate and, where appropriate, defend, executive compensation and benefits structures can lead to reputational damage for corporations.  The same applies if remuneration systems are seen to reward failure, or are socially irresponsible – for example, where they disregard environmental damage.  But the IIA recognize that reward systems must be competitive to ensure they attract people of the right caliber, who are capable of leadership and meeting performance expectations of investors and other stakeholders.

E&Y partner becomes FD for Yorkshire Water

Yorkshire Water has appointed Ernst & Young partner Liz Barber as its new director for finance and regulation.  Barber has been with E&Y for 23 years, including as an audit partner, but for the last four years as a specialist on the water industry.  She takes up her role at Yorkshire Water later this year.  The previous finance director, Allison Bainbridge, stepped down earlier this year as part of a wider restructuring of the board, which also saw chief operating officer Richard Flint becoming chief executive.

Enterprise

BCC warns of red tape

Government bureaucracy is costing small firms £88.3bn a year, a report from the British Chambers of Commerce concludes.  It calculates that the burden grew by £11bn in 2009 after the UK adopted 40 new European regulations: the BCC’s Burdens Barometer shows that almost a third of new regulatory requirements stem from European Union directives.   Francis Chittenden, ACCA Professor of Small Business Finance at the Manchester Business School, which helped compile the report, said that regulation was “like taxation”.  “It raises business costs and so reduces the amount of business activity conducted in the UK,” he argued.  BCC is seeking the scrapping, postponing and reviewing of various proposed regulations, including cancellation of the dual discrimination regulation, right to request time off to train regulation and the gender pay reporting regulation.  The incoming coalition Government has pledged that it will remove one existing regulation for each new regulation, while ending the practice of ‘gold plating’ EU directions when implementing them. 

IR35 to be scrapped

IR35 looks likely to be scrapped as part of a wide-ranging review of taxation of small businesses.  The new coalition’s Programme for Government said it would “seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility”.  Other measures from the incoming government include a commitment to speed-up the time it takes to start a new business by reducing the number of forms needed to register a new business.

 

Financial services

Small firms ‘lack crime controls’

Small financial services firms lack adequate systems and controls to combat fraud and other financial crimes, the FSA has warned.  The conclusions follow a review of 159 small firms’ anti-crime systems and controls, particularly related to their defences against money laundering, financial sanctions, data security breaches and fraud.  Few firms were found to have appropriate due diligence systems in place, or to recognize or deal with customers and circumstances presenting the highest risks.  The FSA visited 42 IFAs, of which only 17 had monitoring systems in place that could identify suspicious activity and a mere nine had effective procedures in place to deal with these situations.  While half of IFAs use consultants to produce policies and procedures for them to protect them and their clients against financial crime, most of these systems were not tailored to the specific needs of the firms.

Companies complying with disclosure rules treble

The number of companies providing all information required by the FSA’s Disclosure and Transparency Rules (DTR) on companies’ annual announcements has trebled in a year, says Deloitte.  It found 33% of companies reporting on 2009 year ends included all required DTR information, compared with just 11% in 2008. The survey reviewed130 companies’ year end results, including 30 investment trusts.  It found that 86% of corporates produced the now voluntary preliminary announcement, a 7% reduction from the 93% in 2008.  Discussions on going concern have risen, with nearly half of companies referring to this in their first announcement.

RoW sectors

Practice

PCAOB ‘blocked from auditor inspections’

PCAOB – the Public Company Accounting Oversight Board – has warned that over 400 non-US companies whose securities trade on US markets are audited by firms that PCAOB cannot inspect “because of assorted non-U.S. legal obstacles”.  Auditors on the list include the Big Four in the UK, firms located in another 17 EU countries, plus China, Hong Kong and Switzerland.  Companies affected include Vodafone, HSBC, BT, Barclays and Rio Tinto.  The Sarbanes-Oxley Act of 2002 requires auditors to be registered with, and regularly inspected by, the PCAOB if they audit the financial statements that issuers file with the Securities and Exchange Commission (SEC).  PCAOB warns that investors in US markets may rely on audits without realizing those firms are not inspected by PCAOB. It has conducted more than 1,300 inspections of registered firms in the United States and 33 non-U.S. jurisdictions.  It points out that its inspections “regularly identify deficiencies in firms’ audits and in their quality control procedures”.

IFAC reports on work planning

IFAC has published an exposure draft outlining the direction and priorities of its services relevant to professional accountants in business. The proposed strategic direction focuses on enhancing the profile, influence and relevance of professional accountants in business and identifies two key objectives: to increase awareness of the important roles professional accountants play in creating, enabling, preserving and reporting value for organizations and their stakeholders; and supporting professional accountants in business within IFAC member bodies by facilitating the communication and sharing of good practices and ideas.

Corporate

Fraud warning

Organizations lose 5% of their revenues annually to fraud – a global loss of over $2.9trn – according to a study by the Association of Certified Fraud Examiners.  Average losses are around $160,000 in the workplace frauds examined by the study – which was backed by interviews with chief finance officers.  In a quarter of cases, losses were valued at $1m or more.  The 1,843 frauds studied took an average of 18 months to be detected.  The most damaging frauds were committed by senior executives, with frauds carried out by executives or owners found to be three times more damaging than those committed by managers and more than nine times more damaging than employee fraud.  Workplace fraud is most likely to be detected as the result of whistle blowing by colleagues.  Small businesses are especially vulnerable to fraud as they do not have sophisticated fraud prevention and detection systems in place.

Institute of Internal Auditors provides guidance on pay

A new practice guide on key executive compensation risks has been published by the Institute of Internal Auditors.  The IIA says these risks should be understood before assessing whether controls and governance over executive compensation and benefits programs are effective.   It warns that excessive, illegal or unethical executive compensation and benefits could be misclassified, or otherwise hidden within the financial statements; and operating or financial data could be manipulated to trigger incentive-compensation payments or artificially inflate the value of stock options.  The IIA adds that failure to properly construct, communicate and, where appropriate, defend, executive compensation and benefits structures can lead to reputational damage for corporations. 

Financial services.

EU and US agree principles of banking reform

US Treasury Secretary Timothy Geithner and European finance Commissioner Michel Barnier have agreed common principles for banking reform, including a continued commitment to accounting standards convergence.  In a statement issued after a meeting in Washington, they said that the two jurisdictions should focus pragmatically on achieving broadly equivalent outcomes, while recognising different historical and legal traditions.  They agreed to work towards a common implementation date of 2011 for the Basel trading book rules and on the importance of reducing systemic risk and the challenge of ‘too big to fail’ financial institutions by raising prudential standards through the implementation of G20 Leaders’ commitments including  stronger capital and liquidity requirements; a leverage ratio; a global framework for comprehensive regulation of over the counter (OTC) derivatives markets; and stronger crisis management and resolution tools to allow regulators to manage the failure of a major firm without exposing taxpayers to losses. 

FINRA fines Piper Jaffray for not keeping email copies

The US Financial Industry Regulatory Authority (FINRA) has fined investment bank Piper Jaffray for failing to retain 4.3 million emails between 2002 and 2008.  Email management system providers Mimecast argued the fine demonstrates that email retention is a priority compliance issue.  In the event of litigation or other regulatory inquiry, companies may need to provide a secure and audited copy of every internal and external email within 24 hours of request, said Mimecast.  CEO Peter Bauer added: “Simply archiving all email communications isn’t sufficient since, without a storage architecture that allows for rapid search and the retrieval of securely archived email data, businesses won’t be able to provide the information requested in time.”