UK News
Liechtenstein in UK tax deal
UK and Liechtenstein tax officials have begun talks on implementing a tax transparency agreement. Liechtenstein has asked HMRC to provide names to assist the identification of UK residents with bank accounts and interests in trusts in Liechtenstein that are used to evade UK tax. The two countries agreed that this would lead to a formal tax information agreement being signed in the “near future”. HMRC permanent secretary Dave Hartnett described the talks as “unprecedented”. Fast progress is also being made in improving information flows from other tax havens. All four jurisdictions – Costa Rica, Malaysia, Philippines and Uruguay – named at the G20 summit as non-compliant and put on a ‘black list’ have since told the OECD they will co-operate with measures to eliminate tax abuse. The OECD intends to now negotiate tax information exchange agreements with all jurisdictions that have not previously entered into agreements.
IASB responds to G20
The IASB has agreed to take action by the end of the year on all recommendations on accounting standards made by the G20 leaders. The moves are intended to assist with formulating an internationally consistent approach to the financial crisis. A meeting between the IASB, the FASB and the Accounting Standards Board of Japan reaffirmed their commitment to convergence of accounting standards, despite increased pressure on the boards from US and European political leaders. The IASB says that attempts to provide consistent approaches to impairment of assets are a particular challenge, with IFRSs and US GAPP having “multiple and different impairment models that relate to different financial asset types in different ways”. The IASB and FASB will now prioritise the development of a new standard on fair valuation and impairment, rather than making further piecemeal amendments to existing standards. This will implement the call from the G20 “to reduce the complexity of accounting standards for financial instruments”.
FASB moves on fair value
The FASB has responded to intense pressure from the US Senate by amending accounting standards on the use of fair value in inactive markets. Judgement will be exercised by companies to decide when a formally active market has become inactive and in determining fair values when markets become inactive. Financial instruments that do not appear on balance sheets at fair value were previously only disclosed at fair value annually: these will now have been disclosed at fair value on a quarterly basis. The IASB responded that press reports overstated the level of divergence on fair valuations between its approach and that of the FASB.
Focus on risk
An ACCA survey of 750 CFOs, partners and senior accountants in Europe, Africa and Asia reveals that accountants will need to cope with more complex demands in the next five years as businesses find it harder to raise finance. Most business leaders are so concerned about the financial stability of customers that they will become more cautious in giving trade credit. Accountants will be expected to have skills in enterprise risk management, strategic scenario planning and improved use of data. There will be more demand from emerging economies for basic accounting skills, such as financial audit, financial narrative reports and budget planning.
Parallel accounting
Paul Boyle, chief executive of the Financial Reporting Council, has called for a debate on whether companies should produce several sets of financial statements, rather than accounting standards being used to achieve multiple outcomes through a single set of statements. “Not all of the needs of all users can be provided by a single set of financial statements,” he argued. Instead, he suggested, consideration should be given to the production of alternative interpretations of a company’s health, based on different data, including parallel accounts that include fair valuations using mark-to-market and mark-to-model values.
Business failures jump
Business failures in the first quarter of 2009 jumped by a third over the same period last year, says credit reference agency Equifax. The rise on the previous quarter was a mere 3.3%, leading Equifax to suggest the economic crisis may be levelling-off. But Ernst & Young reports 117 profit warnings by UK PLCs in the first quarter of this year, implying that the worst of the downturn is yet to come. Sectors with the most profit warnings were support services, media, industrial engineering and software and computer services.
FSA tackles insider trading
A solicitor and his father-in-law have been found guilty of insider dealing, after an FSA investigation. Solicitor Christopher McQuoid had obtained inside information as legal counsel for a company, which he passed to James Melbourne to use for trading in the company’s shares. Profits of £48,919 were split between the two men, who were each sentenced to eight months’ imprisonment. Other FSA insider trading investigations are continuing, with arrests made. The University of Sunderland says its new Cassandra software, using artificial intelligence, can provide near instantaneous warnings of insider dealing.
Michael Page’s profits fall
Gross profits at financial sector recruitment specialists Michael Page fell by a third in the first quarter this year, to £95m, compared to the same period in 2008. The biggest fall was recorded in the Asia-Pacific region, where gross profits fell by 42.3%. Half of the business’s profits are recorded in the Europe, Middle East and Africa region, where profits fell by 26.8%. The group cut 809 jobs, 16% of the total, in the first quarter.
Businesses ‘must keep talent’
Businesses should avoid cutting staff and instead invest in training and professional development, according to an ACCA report, Perspectives on Talent Management in Challenging Times. Companies that invest in staff during the recession will be best equipped to take advantage of the recovery in 2010 or 2011, it argues. Businesses in difficulty paying salaries should consider alternatives to compulsory redundancy, including reducing the working week and capping staff pay.
Tough times for Ireland
Income taxes have increased and spending cut under an Irish emergency budget. A recently imposed income levy has doubled to a maximum of 6%. Excise duty on cigarettes is up by a quarter. Welfare payments are down by as much as half. A campaign against welfare fraud has been launched. Tax relief on mortgage interest is restricted to seven years. A National Asset Management Agency has been set-up as a ‘bad bank’ to take dodgy loans on commercial properties off the books of the Irish banks.
IASB tackles off-balance sheet risks
The IASB has published proposals to improve the transparency and strengthen the derecognition requirements of financial instruments. The proposals are part of the IASB’s review of off-balance sheet activities, consolidated accounts and the identification of which companies a group controls. It is intended that the proposals will become joint ones with the FASB.
PwC partners charged over Satyam
Two partners in Price Waterhouse India are being prosecuted over their audit of the failed Satyam IT company. The firm said it was “surprised and disappointed that the Central Bureau of Investigation has pressed charges” and that details of the charges were awaited. “We too have not come across any evidence of criminal wrongdoing on the part of either partner and both partners continue to vigorously deny any wrongdoing,” said PwC. Both partners were suspended by PwC at the end of January and one, Gopalakrishnan, has since retired, while the other, Talluri, remains suspended.
PCOAB goes travelling
The US Public Company Accounting Oversight Board has announced the overseas jurisdictions in which it will inspect US-registered accountancy firms opertions during this year. Countries include the UK, Switzerland, Russia, Ireland, France, Germany, Canada, Australia, Hong Kong, Indonesia, Philippines and South Korea. PCAOB has also published reports on previous international inspections.
Accountants worry about jobs
Over half of accountants in the UK are worried they will lose their job, according to a survey conducted for CareersinAudit.com. Some 22% of those surveyed say they are “constantly worried” at the risk to their employment, while 69% feel that colleagues are competing with them to keep their jobs. Nearly half of accountants are putting in extra hours, even when there is no additional work to do. Almost 40% would take a pay cut to avoid redundancy.
Supply chains at breaking point
Companies within supply chains are unable to cope with any further stretching of payment terms, according to research conducted for working capital advisors Demica. Many buyers would like to extend credit arrangements, but many suppliers cannot finance this, concludes the survey of over a thousand firms in the UK and Germany. Demica says that 88% of UK companies and 55% of those in Germany have identified key suppliers that cannot sustain any further lengthening of payment periods. Increasingly banks and companies are looking to supply chain financing arrangements in place of overdrafts and loans.
Rest of the world news
More tax havens fall into line
Costa Rica, Malaysia, Philippines and Uruguay have all responded to their ‘black listing’ by the leaders of the G20 nations by agreeing to co-operate with the provision of more information to combat tax abuse. All say they will incorporate an internationally agreed tax standard in their laws and treaties. Consequently they have moved from the ‘black list’ to the ‘grey list’ of partially-co-operative jurisdictions. All jurisdictions surveyed by the OECD have now agreed to adopt the standard, aimed at providing information on individuals and corporations using tax havens as a means of not paying due tax. But market analysts Datamonitor warned that some countries on the grey list are likely to avoid full co-operation. It suggests that countries suffering a loss of revenues to tax havens should consider copying Brazil, which levies higher rates of taxation on companies domiciled in jurisdictions it regards as tax havens – including the US state of Delaware.
FASB agrees fair value change, under Senate pressure
The FASB has responded to pressure from the US Senate by amending accounting standards on the use of fair value in inactive markets. The move will provide consistency in accounting for impairment losses on securities, said the FASB. It added that the revisions will require greater disclosure in support of asset impairments. Judgement will be exercised by companies to decide when a formally active market has become inactive and in determining fair values when markets become inactive. Financial instruments that do not appear on balance sheets at fair value were previously only disclosed at fair value annually: these will now be disclosed at fair value on a quarterly basis. FASB Chairman Robert Herz said the changes would increase transparency in banks’ reporting. The IASB said that press reports overstated the level of divergence on fair valuations between its approach and that of the FASB.
IASB reacts to G20
The IASB will act by the end of the year on all recommendations on accounting standards made by the leaders at the G20 summit. A meeting between the IASB, the FASB and the Accounting Standards Board of Japan reaffirmed their commitment to accounting standards convergence. The IASB says that providing a consistent approach to impairment of assets is a particular challenge, with IFRSs and US GAPP having “multiple and different impairment models that relate to different financial asset types in different ways”. The IASB and FASB will prioritise the development of a new standard on fair valuation and impairment, rather than making further piecemeal amendments to existing standards.
Focus on risk
An ACCA survey of 750 CFOs, partners and senior accountants in Europe, Africa and Asia reveals that accountants will need to cope with more complex demands in the next five years as businesses find it harder to raise finance. Most business leaders are so concerned about the financial stability of customers that they will become more cautious in giving trade credit. Accountants will be expected to have skills in enterprise risk management, strategic scenario planning and improved use of data. There will be more demand from emerging economies for basic accounting skills, such as financial audit, financial narrative reports and budget planning.
Tough times for Ireland
Income taxes have increased and spending cut under an Irish emergency budget. A recently imposed income levy has doubled to a maximum of 6%. Excise duty on cigarettes is up by a quarter. Welfare payments are down by as much as half. A campaign against welfare fraud has been launched. Tax relief on mortgage interest is restricted to seven years. A National Asset Management Agency has been set-up as a ‘bad bank’ to take dodgy loans on commercial properties off the books of the Irish banks.
Businesses ‘must keep talent’
Businesses should avoid cutting staff and instead invest in training and professional development, according to an ACCA report, Perspectives on Talent Management in Challenging Times. Companies that invest in staff during the recession will be best equipped to take advantage of the recovery in 2010 or 2011, it argues. Businesses in difficulty paying salaries should consider alternatives to compulsory redundancy, including reducing the working week and capping staff pay.
KPMG sued for $1bn
Liquidators for the failed US mortgage lender New Century are suing the company’s auditors, KPMG, for $1bn over its alleged approval of poor accounting practices at New Century that understated provision for bad debts. KPMG said: “Any claim that we acquiesced to client demands is unsupportable. As the bankruptcy examiner’s report that was seeking to identify entities to sue said: ‘KPMG would have significant defenses to any such suit.’. KPMG acted in accordance with professional standards in New Century and we will vigorously defend our audit work. Any implication that the collapse of New Century was related to accounting issues ignores the reality of the global credit crisis. This was a business failure not an accounting issue.”
PwC partners charged over Satyam
Two partners in Price Waterhouse India are being prosecuted over their audit of the failed Satyam IT company. The firm said it was “surprised and disappointed that the Central Bureau of Investigation has pressed charges” and that details of the charges were awaited. “We too have not come across any evidence of criminal wrongdoing on the part of either partner and both partners continue to vigorously deny any wrongdoing,” said PwC. Both partners were suspended by PwC at the end of January and one, Gopalakrishnan, has since retired, while the other, Talluri, remains suspended.
IASB tackles off-balance sheet risks
The IASB has published proposals to improve the transparency and strengthen the derecognition requirements of financial instruments. The proposals are part of the IASB’s review of off-balance sheet activities, consolidated accounts and the identification of which companies a group controls. It is intended that the proposals will become joint ones with the FASB.
SEC recruits auditors to detect fraud
The US Securities and Exchange Commission is to bring in auditors from outside to strengthen its fraud-detection operations in the wake of the Madoff scandal. The SEC is engaged in a comprehensive investigation to understand why the Madoff fraud went unnoticed for so long, despite signals and warnings that should have led to detection. One likely option is to engage firms to conduct compliance reviews for the SEC. The Commission’s enforcement operations are also likely to be enhanced, possibly by hiring retired FBI officers.
PCOAB goes travelling
The US Public Company Accounting Oversight Board has announced the overseas jurisdictions in which it will inspect US-registered accountancy firms opertions during this year. Countries include the UK, Switzerland, Russia, Ireland, France, Germany, Canada, Australia, Hong Kong, Indonesia, Philippines and South Korea. PCAOB has also published reports on previous international inspections.
BDO Seidman partner charged
BDO Seidman partner Stephen A. Favato has been charged with tax evasion; aiding and assisting the preparation of a false tax return; and corruptly endeavouring to obstruct and impede the administation of tax laws. All charges related to work for a client at the Woodbridge, New Jersey office, where Favato was based. The firm said: “Immediately upon being informed of this potential indictment, the firm placed Mr. Favato on leave of absence. BDO Seidman has co-operated fully with the investigation which focuses on the alleged improper deduction of personal expenses as business expenses.”
EU governments spend €3,000bn on banks
European Union governments have allocated €3,000bn ($3,900bn) to rescue their banks, according to figures collated by the EU. The liability is equivalent to a quarter of member government’s total GDP. Most of the commitments – €2,300bn – comprise state guarantees on banks’ loans and deposits. Another €400bn is committed to the rescuing and restructuring of financial institutions and $300bn is to recapitalise the banks. Member states have also agreed £67bn extra for the European Investment Bank, enabling more public infrastructure schemes to proceed.
GASB consults on pensions
The US Governmental Accounting Standards Board has invited comments on pension accounting standards. Key issues include recognition of liabilities and expenses; measurement of unfunded pension obligations; the use of actuarial methods; and the reporting by government employers in cost-sharing mutliple-employer pension plans.
Suspended for slow results
The Kuwaiti Stock Exchange suspended 36 companies for failing to publish their 2008 results on time. Many of them have since had their listings resumed. More companies could be suspended if they do not hold their annual meetings by their due date, or if dividends are paid late, the stock exchange warned. Of the 36 firms, 25 were investment businesses, some of which said they were having difficulty valuing assets in current market conditions.
Politics
Myners proposes ‘devil’s advocates’
Non-executive directors might need to become ‘devil’s advocates’, more willing to challenge the proposals and information put forward by executives, says treasury minister Lord Myners. Improved corporate governance could involve strengthening the role of non-executives, giving them their own secretariats, enabling them to commission their own research, requiring them to work more hours and paying them more in return, Myners told the House of Lords Economic Affairs Select Committee. Audit committees might benefit from appointing a technical specialist to provide guidance, giving them alternative perspectives from those of the executives and the external auditors, he suggested.
Convergence with US is ‘critical’
Convergence of US and EU accounting standards is “critical” if European banks are not to be at a competitive disadvantage, say EU finance ministers. Speaking after a meeting in Prague of European finance ministers and central bankers, they said they feared “competitive distortions” following the decision of the FASB to allow banks more discretion in fair valuation of assets. Italy’s Finance Minister Giulio Tremonti was quoted as saying: “If it was up to me to decide, I would just download the US text with Google and adopt it with a European blessing.” Christine Lagarde, France’s finance minister added: “We need to stress to the IASB the urgency to examine accounting principles, in particular those concerning the valuation of illiquid assets”. Germany’s Peer Steinbrueck said he wanted the FASB changes to be copied in Europe.
Politicians told: stay out of accountancy
Paul Boyle, the departing chief executive of the Financial Reporting Council, has urged politicians not to meddle in the setting of accounting standards. “We at the FRC believe that the most appropriate standards are likely to be developed if standard setters are able to exercise independent judgement, relying on their skills and experience,” he said. “The standard setters must be independent of all vested interests. Whilst we recognise that politicians have a responsibility to nesure that there is an effective system for setting accounting standards, we believe that the choices as to the most appropriate accounting methods should not be made on political grounds.” Boyle warned that accounting standards should not be manipulated for political ends. “If there is a wish to use accounting to achieve policy aims for which it is not designed then this will have implications for the current uses of accounting.”
‘Accountancy dominated by middle classes’
Accountancy and other professions remain dominated by people from wealthy backgrounds, a report produced for the Cabinet Office has concluded. “Professionals typically grew up in families with incomes well above the average family’s income,” said the Panel on Fair Access to the Professions. This was more true for people born in 1970 than it was for people born in 1970, the authors added. The report proposes helping young people to understand accountancy and other professions and promoting a more positive approach, in particular, to accountancy. There should be support for young people for pathways into the professions. It called on professional firms to ensure that recruitment and selection procedures provide everyone with an equal chance.
Public sector
Iceland-investing councils ‘negligent’
Seven local authorities negligently deposited money after credit ratings for Icelandic banks were downgraded below acceptable levels, according to an Audit Commission report. Those seven authorities put £32.8m onto deposit with Icelandic banks in October 2008, after the banks’ credit ratings had been seriously downgraded. The councils angrily denied being negligent. The Audit Commission added that most councils had acted prudently. More than half had never invested in Icelandic banks, or had not done so after October 2007, when the first warning signs were visible. Between November 2007 and 6 October 2008, 18% of authorities removed all deposits in Icelandic banks as they matured. During 2008, the total value of councils’ investments in Icelandic banks more than halved. The Audit Commission itself invested £10m in Icelandic banks in April and July 2008. It remains unclear whether public bodies will be able to recover any of their investments in the Icelandic banks.
Council pension funds in crisis
Local government pension funds are running a deficit of about £100bn, according to leading pensions consultant John Ralfe. He calculates liabilities are currently around £220bn, against assets of £120bn or so. This compares with an official deficit of just £23bn as at March last year – or £43bn, using Ralfe’s calculations based on FRS17 – before the collapse in asset values. PwC has made a similar analysis, concluding that at December last year, local government pension schemes could meet only 66% of their liabilities Ralfe and PwC say this will lead to increases in council tax, but this is denied by local government minister John Healey.
Financial services
New insurance solvency rules
The EU’s Solvency II Directive is expected to be approved this month, radically changing the regulatory requirements on insurers and establishing new minimum solvency levels based on insurers’ risk profiles. It also introduces new supervision arrangements and deepens market integration, with the aim of assisting European insurers to compete more effectively on a global basis. Agreement on Solvency II has been reached by representatives of member states – enabling the measure to be approved by Parliament and the Economic and Financial Affairs Council (ECOFIN) – following compromises on group support and equity risk. Insurers must demonstrate risk awareness through their governance structures. Mark Batten, a partner at PwC, said: “Whilst there are significant implementation challenges, Solvency II provides an opportunity for a more informed and forward-looking basis for decision making and could lead to significant changes in the shape of the market in the EU.”
UK fraud investigation launched into Allied Irish Bank
A fraud investigation has been launched into the UK operations of the Allied Irish Banks, by the Serious Fraud Office and the City of London Police. The investigation centres on loans provided by AIB for the purchase of investment properties in the UK. The loans were taken out by a company controlled by a person who is the main suspect in the case, but who operated with assistance from others. The investigation follows concerns raised by an internal AIB investigation over the quality of security provided for the loans, with some guarantees being issued fraudulently. Subsequently the properties were sold at a loss of £56m to AIB.
Practice
Non-doms guidance is ‘too confusing’
PKF has strongly criticised HMRC for producing guidance for non-UK domiciled individuals just six days before the new guidance comes into effect. The guidance is also too long, at over 400 pages, says the firm. “As far as individual taxpayers are concerned this guidance is too much and too late – as well as being potentially misleading, or incorrect in some circumstances,” says Matt Coward, PKF’s director of personal tax services. “The guidance confirms that many individuals, who had not previously had to worry about their tax status because they only have modest funds overseas, will now have to consider their position very carefully. Many may take one look at the guidance and feel obliged to submit a tax return unnecessarily, seek professional tax advice over these complex rules or, regrettably, decide to ignore the issue completely.”
Transfer pricing clampdown
HMRC is increasing its examination of corporations’ transfer pricing practices. “With the creation of the transfer pricing group on 1 April 2008, HMRC now has more transfer pricing specialist resource to assist with the risk assessment process,” said a spokeswoman. Since last year, it has begun more than 75 transfer pricing investigations. “The objective of the new transfer pricing governance process and creation of the transfer pricing group is to ensure improved consistency for customers and the prioritisation of compliance resource to issues of greatest risk,” said the spokeswoman.
Corporate
JJB rescue ‘could be template’
The crisis-hit JJB Sports retail group has been rescued by the use of a CVA, which could have as big an impact on the restructuring of commercial debts as IVAs have had on personal insolvencies. CVAs – company voluntary arrangements – use procedures established by the Insolvency Act 1986. They enable a company to agree with its unsecured creditors an arrangement on how to pay-off debts, when and in what proportion. JJB sold-off its chain of fitness clubs prior to finalising the terms of the CVA. Landlords of about 250 existing stores will have the terms of their leases temporarily varied, enabling JJB to make monthly rental payments, instead of quarterly settlement. Landlords of about 140 closed outlets will have to accept only partial payment of sums due, to be claimed from a pot of £10m set aside for that purpose. Assuming landlords accept its terms, JJB will be the first listed company to use a CVA.
Rake and Nelson on way up
Top auditors are in demand for some of the City’s top directorships, as the global crisis shows the need for stronger corporate governance. Former head of KPMG International Sir Mike Rake has added the deputy chairmanship of EasyJet to his other roles as chairman of BT, head of Barclays’ audit committee and a director of McGraw Hill. KPMG’s current UK vice chairman and its global chairman for financial services, Brendan Nelson, is reportedly in discussion with the Royal Bank of Scotland about joining its board and heading its audit committee. Neither RBS nor KPMG would comment.
Enterprise
SMEs pushed away by public sector
SMEs are having difficulty winning valuable public contracts despite Government promises to help, concludes a report from the House of Commons All Party Parliamentary Small Business Group. The report – supported by ACCA – recommends that further barriers need to be removed to help SMEs win public sector contracts. These contracts are still seen as difficult and expensive to win. Professor Robin Jarvis, head of ACCA’s small business unit, says: “The procedures and practices used in many tenders disadvantage SMEs over larger companies. Many small businesses and contractors believe that days spent preparing tenders with a low probability of success are better spent earning, and therefore do not bid for public work at all.” The report makes a series of recommendations, including that public bodies should set targets for contracts awarded to SMEs and, in particular, micro-entititiesr; that bureaucracy should be minimised; and that the procurement process should be made more transparent, with contracts awarded according to value for money.
HMRC accused of slowing down repayments
HMRC has been accused by PKF and Baker Tilly of slowing down tax refunds. PKF blames a two stage approval process, with 10% of tax refund claims being security checked and those failing the test being referred for further investigation to a specialist unit. Peter Harrup, tax partner at PKF says, ”Struggling taxpayers are having to wait months for their refunds. Clearly, HMRC have to check that claims are genuine, but officers should keep taxpayers informed of what is going on and keep delays for small businesses to an absolute minimum.” Baker Tilly said: “These delays shine another sidelight on HMRC’s continuing struggle to maintain the quality of the service it provides while reducing staff numbers.”