AB – news – April 2011
UK News
FRC consults on getting more women into boardroom [lead, with photo and fast facts]
Listed companies should adopt policies on boardroom diversity, with the objective of increasing the proportion of women directors, suggests Lord Davies’ report, ‘Women on Boards’. The move would involve a change to the FRC’s Corporate Governance Code, following revisions last year promoting greater diversity, including the recruitment of more women directors. FRC Chairman Baroness Hogg said: “The FRC believes that diversity at the board table can help to make boards more effective, for example by reducing the risk of ‘group think’. She said that the FRC’s code change had already encouraged companies to increase their recruitment of women directors. ACCA welcomed the call to improve diversity, but argued this could be best be achieved through transparent reporting, not the quota targets suggested by Lord Davies. Chief executive Helen Brand said: “ACCA supports greater diversity in terms of gender, but also in terms of background and experience. Transparency is the key to overcoming gender inequalities in companies – not quotas.”
FAST FACTS
9.4% – FTSE 100 women directors as at 2004
12.5% – FTSE 100 women directors as at 2010
25% – Lord Davies’ target by 2015
Mark-to-market gains Midas touch [photo]
Italian banks have become persuaded of the benefits of mark-to-market valuations. Faced by a crisis of weak capital ratios, Italian banks are now seeking to plug the gap by having the Bank of Italy’s gold reserves valued at market prices. The Bank’s book value of €156,000 (about £132,000) would then escalate to about $30bn. As the country’s retail and savings banks are shareholders in the Bank of Italy, the country’s central bank, the revaluation would provide an accounting solution to their weak capital positions. Neatly, the increase in book valuation of the gold is close to the extra capital required by Italy’s banks under Basel III. The Italian government and the Bank of Italy are thought to be opposed to the revaluation. The government has adopted a different approach to boost the capital ratios: it is allowing banks to treat credit loss deferred tax assets as capital.
KPMG partner killed in Cork plane crash
Pat Cullinan, a partner at KPMG’s Belfast office, was killed in a plane crash at Cork airport. He was one of six people who died when a Manx 2 scheduled plane crashed when it attempted to land on a journey from Belfast. Cullinan had worked for KPMG since 1989, qualified in 1993, then worked in both the London and Dublin offices and became a partner in 2005, operating from Belfast. KPMG managing partner, Terence O’Rourke, said: “Pat was an extremely talented professional and a real gentleman.”
Plumbers’ tax amnesty
Self-employed traders have been advised to consider whether they can and should enter into the ‘Plumbers’ Tax Safe Plan’ – a scheme launched by HMRC to improve collection rates for plumbers and traders in related occupations. Traders in the plumbing, heating and gas installation industry have until the end of May to notify their intention to take advantage of a tax amnesty that is part of the plan, with all additional liabilities to be disclosed and paid by the end of August. Participants in the plan can correct past tax under-declarations in return for a penalty addition of 10% of the value of the tax underpaid over the last five years.
iXBRL causes problems
HMRC has published a long list of software providers, whose products are recognised as compatible with the iXBRL reporting requirements that came into effect at the beginning of April. Chas Roy-Chowdhury, head of tax at ACCA, expressed concern that HMRC is insisting on implementation on the scheduled date despite a call by it and other accountancy bodies for a delay. He said: “It is a real pity that our letter was rebuffed. We wanted a smooth implementation. It looks as if the software is not there yet properly and other providers will find hardware issues. We are very positive about iXBRL, but there are issues that should have been resolved before it was introduced.”
SMEs get guidance on IFRS
Guidance for SMEs in their adoption of IFRS has been published as a first draft by the SME Implementation Group, which advises the IASB. It is published for comment in question and answer format. The aim is to answer the most likely questions that will be posed by SMEs. This includes dealing with situations where a group parent is not required to report using IFRS, but where part of the group is required to do so.
RSM Tenon grows revenues
Turnover at RSM Tenon was up 65% in the second half of last year compared to 2009. Second half turnover in 2010 was £121.1m, against £73.5m in the same period the year before. Underlying operating profit grew from £8.8m in the 2009 half year, to £13.5m in the same period in 2010. The company reported that integration of acquisitions is now almost complete, with annual cost savings of £10m expected to be delivered from 2011/12. The business reported organic growth in the audit, tax and advisory practice of 7% and of 3.5% in the recovery practice.
KPMG buys EquaTerra
KPMG has acquired one of the world’s largest outsourcing advisory practices, EquaTerra. The move addresses developing expectations from clients in the type of support they need when outsourcing operations, says KPMG. “EquaTerra’s tools and capabilities speak directly to clients’ desire to move beyond one-off outsourcing activities and develop comprehensive sourcing strategies that deliver real value across their organizations,” said John Veihmeyer, KPMG’s US chairman and chief executive. “This is part of our strategy of building large-scale transformation capabilities to help organizations as they address the realities of a new global marketplace.”
Guidance issued on bank positions
The Auditing Practices Board has issued new guidance to auditors on confirming clients’ bank positions. The revised practice notes reflect changes to International Standards on Auditing introduced from October 2009. Changes mostly relate to confirmation procedures with clients’ banks, but do not involve any amendment in procedures agreed with the British Bankers’ Association.
Pensions trustees warned
Trustees have been warned by the Pensions Regulator on their responsibility to maintain accurate data on pension savers. Trustees have been told not to assume that schemes’ statutory audits will inform them of the quality and accuracy of their member data. They have also been given clearer guidance on what they should expect of scheme auditors and administrators. The regulator said 20% of small schemes’ trustees had never met their administrators to review records, while 40% were unaware of guidance on record keeping.
E&Y appoint non-execs
Sir Richard Lambert – the retiring director-general of the CBI and a former editor of the Financial Times – has been appointed by Ernst & Young as a global non-executive director of the firm. Another two non-executives have been appointed: Mark W. Olson, former chairman of the US Public Company Accounting Oversight Board, and Klaus Mangold, a former CEO of Daimler-Chrysler Services AG in Germany and Vice Chairman of Rothschild Europe. The appointments follow E&Y’s s adoption of the UK Audit Firm Governance Code. The ‘integrated’ nature of E&Y’s worldwide business determined the global reach of the appointments.
IFRS Foundation consults
The IFRS Foundation Monitoring Board has issued its report on governance for public consultation. A series of stakeholder meetings in Europe, Asia and America will consider the document. The review considers whether the current governance structure effectively promotes the IASB’s primary mission of setting high quality, globally accepted standards and whether it is both independent and accountable. The review considers institutional aspects relating to governance, in particular the composition and the respective responsibilities and roles of the Monitoring Board, Trustees and IASB.
UK Government launches ‘contracts finder’
A more open system to assist SMEs win contracts from government departments has been launched by the Government. ‘Contract finder’ enables businesses and charities to search for details of every tender opportunity available from central government. They can also request an email alert for all new relevant tender opportunities. The Government wants 25% of public contracts to go to SMEs. To support this the prequalification process for low value orders is being eliminated and surgeries will be held to encourage small firms to put forward ideas for innovative improvements that fall outside standard procurement procedures.
Execs told to be tech savvy
Directors must become more ‘tech-savvy’, says Deloitte’s Centre for Corporate Governance. The Centre concludes that many directors have the wish to understand IT better, but do not understand how to improve their skills and knowledge. Deloitte argues that key issues such as client data security, the safeguarding of intellectual property and legal and regulatory compliance make IT competence central to boards’ capacity to be effective. The report concludes that IT must be used to support the work of boards and that IT strategies must be aligned to business strategies. Boards should take more steps to understand their exposure to IT-related risk.
Directors guidance issued
Directors of listed companies have been told to consider how they can lead their companies more effectively. The FRC’s ‘Guidance on Board Effectiveness’ is one of a series of guidance notes issued to assist companies apply the principles of the UK Corporate Governance Code and reflects changes made to the code last year. These provide greater emphasis on the role of the chairman and the importance of getting the right balance on the board. FRC Chairman Baroness Hogg said: “While it is not prescriptive, this guidance can, I hope, help boards to carry out their role effectively.”
EC vetos tax avoidance rules
HMRC has been warned by the European Commission to amend anti-avoidance measures that are “disproportionate” and “go beyond what is reasonably necessary in order to prevent abuse of tax avoidance”. Two measures are affected, relating to the transfer of assets abroad and the attribution of gains to members of non-UK resident companies. If the Government fails to provide a satisfactory response, the matter will be referred to the European Court of Justice. KPMG said the two provisions are “a key part of anti-avoidance legislation” and that forced changes could have a profound impact on UK tax rules.
RoW News
Further revolutions warning
Middle East revolution might spread beyond Libya, Tunisia and Egypt across the rest of the region, including in states previously untouched by uprisings, Standard & Poor’s has warned. It said that wealth generation from oil revenues and other natural resources was not sufficient to diffuse popular discontent, said S&P. Tensions in several Arab states have caused a series of warnings by ratings agencies: Fitch has downgraded Tunisia to BBB and Libya to BB. Several countries in the region are under review by Fitch and S&P for further downgrades. S&P added: “Saudi Arabia shares many of the risk factors” that had led to uprisings elsewhere. Senior PwC partner in Egypt Tarek Mansour said that the political tension had led to delays in signing-off accounts and conducting business, but that improved economic conditions would follow from deep-seated reform, including more transparent financial reporting practices.
FAST FACTS
$89bn – Libya’s GDP
$100bn – Tunisia’s GDP
$255bn – Algeria’s GDP
$501bn – Egypt’s GDP
$623bn – Saudi Arabia’s GDP
Figures for 2010, using purchasing power parity. Source: CIA, ‘The World Factbook’
Mark-to-market gains Midas touch [photo]
Italian banks have become persuaded of the benefits of mark-to-market valuations. Faced by a crisis of weak capital ratios, Italian banks are now seeking to plug the gap by having the Bank of Italy’s gold reserves valued at market prices. The Bank’s book value of €156,000 (about £132,000) would then escalate to about $30bn. As the country’s retail and savings banks are shareholders in the Bank of Italy, the country’s central bank, the revaluation would provide an accounting solution to their weak capital positions. Neatly, the increase in book valuation of the gold is close to the extra capital required by Italy’s banks under Basel III. The Italian government and the Bank of Italy are thought to be opposed to the revaluation. The government has adopted a different approach to boost the capital ratios: it is allowing banks to treat credit loss deferred tax assets as capital.
KPMG partner killed in Cork plane crash
Pat Cullinan, a partner at KPMG’s Belfast office, was killed in a plane crash at Cork airport. He was one of six people who died when a Manx 2 scheduled plane crashed when it attempted to land on a journey from Belfast. Cullinan had worked for KPMG since 1989, qualified in 1993, then worked in both the London and Dublin offices and became a partner in 2005, operating from Belfast. KPMG managing partner, Terence O’Rourke, said: “Pat was an extremely talented professional and a real gentleman.”
SMEs get guidance on IFRS
Guidance for SMEs in their adoption of IFRS has been published as a first draft by the SME Implementation Group, which advises the IASB. It is published for comment in question and answer format. The aim is to answer the most likely questions that will be posed by SMEs. This includes dealing with situations where a group parent is not required to report using IFRS, but where part of the group is required to do so.
India delays IFRS
The Indian government has delayed implementation of IFRS: it was to have become mandatory for large companies from the beginning of April. A senior official in the Ministry of Corporate Affairs explained: “We have put in place 35 accounting standards to be followed by large companies in the first phase. Implementation by companies will depend on how and when some issues like the ones related to taxation are resolved or not. But the implementation date is not April 1, 2011.” Indian business organizations had led calls for a deferral of IFRS adoption.
KPMG buys EquaTerra
KPMG has acquired one of the world’s largest outsourcing advisory practices, EquaTerra. The move addresses developing expectations from clients in the type of support they need when outsourcing operations, says KPMG. “EquaTerra’s tools and capabilities speak directly to clients’ desire to move beyond one-off outsourcing activities and develop comprehensive sourcing strategies that deliver real value across their organizations,” said John Veihmeyer, KPMG’s US chairman and chief executive. “This is part of our strategy of building large-scale transformation capabilities to help organizations as they address the realities of a new global marketplace.” The terms of the deal were not disclosed.
E&Y appoint non-execs
Sir Richard Lambert – the retiring director-general of the CBI and a former editor of the Financial Times – has been appointed by Ernst & Young as a global non-executive director of the firm. Another two non-executives have been appointed: Mark W. Olson, former chairman of the US Public Company Accounting Oversight Board, and Klaus Mangold, a former CEO of Daimler-Chrysler Services AG in Germany and Vice Chairman of Rothschild Europe. The appointments follow E&Y’s s adoption of the UK Audit Firm Governance Code. The ‘integrated’ nature of E7Y’s worldwide business determined the global reach of the appointments.
Accelerated growth predicted for Russia
Russia is poised to accelerate its economic growth, as oil prices drive higher government spending and companies boost investments, according to investment analysts Aurora. Moscow investment bank Renaissance Capital predicts annualised GDP growth of 6% in the second quarter: the highest rate since 2008 and significantly higher than last year’s growth of 4%. Announcements are expected of major private equity investments in the country, while the Russian government is establishing a special fund to attract international investment.
IFRS Foundation takes on Tokyo
The IFRS Foundation is opening a Tokyo office to improve its relationships in the Asia-Oceania region, helping to build closer connections with stakeholders in the region. The Foundation says it, and the IASB, will provide resources to the Tokyo office to support countries moving towards the adoption of IFRS. Tsuguoki Fujinuma, vice-chair of the Trustees, said: “Adoption of IFRSs is widespread in Asia-Oceania. Here in Japan, companies are now permitted to use IFRSs, and the Japanese FSA is expected to make a decision on mandating adoption of IFRSs in 2012.”
IFRS Foundation consults
The IFRS Foundation Monitoring Board has issued its report on governance for public consultation. A series of stakeholder meetings in Europe, Asia and America will consider the document. The review considers whether the current governance structure effectively promotes the IASB’s primary mission of setting high quality, globally accepted standards and whether it is both independent and accountable. The review considers institutional aspects relating to governance, in particular the composition and the respective responsibilities and roles of the Monitoring Board, Trustees and IASB.
Execs warned to become more tech savvy
Directors must become more ‘tech-savvy’, says Deloitte’s Center for Corporate Governance. The Centre concludes that many directors have the wish to understand IT better, but do not understand how to improve their skills and knowledge. Deloitte argues that key issues such as client data security, the safeguarding of intellectual property and legal and regulatory compliance make IT competence central to boards’ capacity to be effective. The report concludes that IT must be used to support the work of boards and that IT strategies must be aligned to business strategies. Boards should take more steps to understand their exposure to IT-related risk.
States told to improve pensions accounting
States and local government in the US must improve accounting practices to enable accurate credit ratings to be awarded, says Fitch Ratings. To assist this, Fitch has created standardized assumptions of 7% investment returns and an adequate funded ratio of 70% or above. The funded ratio will be calculated on the basis of a rolling five year average of assets’ market value. Fitch says that existing reporting systems are inadequate and fail to allow comparability between schemes. The Governmental Accounting Standards Board is formulating changes to pension disclosure requirements to improve transparency and reliability.
Non-profits worry over tax exemption status
Three quarters of US non-profit organisations are worried that some tax exemptions will be revoked over the next two years. A survey by Sage North America also found that non-profits are concerned at potential reductions in funding from local government, but 90% expect fund raising this year to be at least as successful as 2010. There has been frequent speculation in recent years about the future of non-profits‘ tax exemptions.
EU tightens screw on Big Four
European Commissioner Michel Barnier has warned the Big Four that the audit market must be reformed. “The status quo is not an option for the auditing world,” he said. “How can we encourage the emergence of new actors capable of being competitive? Some possibilities: putting in place ceilings to the total market share of the larger audit firms for listed companies; the idea of joint auditing where the audit could be done by two different audit firms, one of which at least is not part of the Big Four; and there is also the option of a ‘European passport’.” Proposals on competition reform are due for publication in November.
US ‘faces audit reform’
The audit market in the US faces fundamental reform, warned James Doty, the new chairman of the Public Company Accounting Oversight Board (PCAOB). Examination of existing practice will focus on the conduct of auditors, the role of audit committees, corporate governance, the way in which identified financial problems are disclosed and the extent of “hyper concentration” in the audit market. Doty said: “There will be analogues to what Mr Barnier is saying in Europe.” He added: “The big question is what are the practices that are diluting audit quality.”
IASB ‘must reform’, says Hoogervorst
The IASB needs to become more open and better able to represent the interests of all its country members, says incoming IASB chairman, Hans Hoogervorst. “It’s very important that we develop a governance structure that is more inclusive”, said the former Dutch finance minister. “At all costs we should avoid the perception that IFRS is dominated by a small group of nations.” He added that the IFRS Foundation should be accountable to users of accounting standards. But Hoogervorst defended the use of fair values, saying financial services firms that used fair value emerged from crisis sooner as they had been able to “get rid of poisonous assets at a much earlier stage”.
Incentives to be disclosed
Financial institutions will have to increase their disclosure of incentive-based compensation arrangements under proposals published by the US Securities and Exchange Commission. New regulations will also ban financial institutions from operating compensation arrangements that encourage inappropriate risks. The SEC’s proposals are the result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC and other agencies to tighten up on incentive-based remuneration. Companies affected include broker-dealers and investment advisers with $1 billion or more in assets.
Politics
EU tightens screw on Big Four
European Commissioner Michel Barnier has warned the Big Four that the audit market must be reformed. “The status quo is not an option for the auditing world,” he said. “It’s not about changing for the sake of change, but to reply to very real needs which we can no longer ignore….. The auditing market is hyper-concentrated. How can we encourage the emergence of new actors capable of being competitive? Some possibilities: putting in place ceilings to the total market share of the larger audit firms for listed companies; the idea of joint auditing where the audit could be done by two different audit firms, one of which at least is not part of the Big Four; and there is also the option of a ‘European passport’.” He intends to produce proposals on competition reform in the market in November.
US ‘faces audit reform’
The audit market in the US faces fundamental reform, warned James Doty, the new chairman of the Public Company Accounting Oversight Board (PCAOB). Examination of existing practice will focus on the conduct of auditors, the role of audit committees, corporate governance, the way in which identified financial problems are disclosed and the extent of “hyper concentration” in the audit market. Doty said: “There will be analogues to what Mr Barnier is saying in Europe.” He added: “The big question is, what are the practices that are diluting audit quality?”
‘Audit must fit investors’ needs’
Auditors must do more to meet the expectations of investors, warned Stephen Haddrill, chief executive of the Financial Reporting Council. Investors should be given more information about the prospects of the company and a better picture of the future of the business and of the judgements made in the course of the preparation of the financial statements, he said. “In short, we want investors to learn about the business and its future from the directors; we want the directors to say more about the things that really keep them awake at night; and we want to empower auditors to challenge management by requiring them to say whether the Board have really given a balanced and fair view on these matters as well as on the accounts.” Mr Haddrill called on the European Commission to “forge a better balanced triangle between companies, auditors and investors” to “create a partnership in which each plays their full role”. But, in a warning to the Commission he added: “we must not do anything in the name of competition that puts quality at risk”.
IASB ‘must reform’, says Hoogervorst
The IASB needs to become more open and better able to represent the interests of all its country members, says incoming IASB chairman, Hans Hoogervorst. “It’s very important that we develop a governance structure that is more inclusive”, said the former Dutch finance minister. “At all costs we should avoid the perception that IFRS is dominated by a small group of nations.” He added that the IFRS Foundation should be accountable to users of accounting standards. But Hoogervorst defended the use of fair values, saying financial services firms that used fair value emerged from crisis sooner as they had been able to “get rid of poisonous assets at a much earlier stage”.
Public sector
Abolition of Audit Commission faces delay
The timetable for the abolition of the Audit Commission has slipped from next year to 2014. Chief executive Eugene Sullivan told staff that the wind-down of the organisation was likely to last at least until the end of 2013. The Commission said that progress on closure rested on decisions by ministers and passing of necessary legislation. Several hundred Commission staff have either left or are working out their notice. The Commission’s chair Michael O’Higgins said: “There’s no point in having a living death so we’re anxious to wrap things up as soon as possible.” No final decision has yet been taken either on the audit regime for local government and local health bodies after the Commission’s abolition, nor on how the Commission itself may be disposed of. One option being considered is a trade sale, possibly to one of the mid tier firms, while many staff want to convert the operation into an employee-owned mutual.
Public bodies ‘may breach covenants’
Proposed changes to accounting rules for the public and voluntary sectors could force many public bodies and charities to breach their banking covenants, PwC has warned. Under proposals expected to be published soon by the ASB, not-for-profit organisations would have to hold assets at cost, rather than booking them at current market value. This would have the effect of reducing the asset valuations shown by many ‘public benefit entities’ (PBEs), causing them to breach loan agreements with banks, argues PwC. Housing associations and universities could be particularly affected, it suggests. PwC director Matthew Hodge warned: “It is vital PBEs take advice, because there are accounting options that may help avoid the need to renegotiate contracts with banks.”
Financial Services
Deutsche subsidiary fined
Deutsche Bank subsidiary DB Mortgages has been fined £840,000 by the FSA for irresponsible lending practices and unfair treatment of customers in arrears. DB has also had to pay £1.5m in redress to customers adversely affected. DB failed to carry out adequate checks about customers’ ability to repay mortgages where the repayment term continued into the customer’s retirement; failed to consider whether cheaper mortgages were available for self-certified customers; and failed to ensure that customers had thought about where they would live at the end of the term if they needed to sell their house to pay off an interest-only mortgage. Where customers went into arrears, DB did not consider customers’ individual circumstances or advise them of options available to them and applied unfair charges. Margaret Cole, the FSA’s managing director of enforcement and financial crime, said: “Firms need to understand that we will not tolerate lax lending practices and unfair treatment of customers in arrears.”
Auditors and regulators become partners
A new draft code of practice for relationships between auditors and regulators has been published by the Bank of England and the FSA. It has been welcomed by the FRC. The code of practice proposes a framework for auditors and supervisors to work together in an ‘open and collaborative way’, including how, and how often, they should communicate. The guidance is intended to enhance the ability of the FSA to scrutinise accounting practices and related judgments, understand fully their implications and highlight emerging problems. Auditors are intended to benefit from the closer working relationships, by gaining valuable insights to support audit opinions.
Corporate
CFO development ‘strengthens corporate performance’
Companies that take steps to nurture talent in their finance departments and have a considered succession planning policy benefit from stronger corporate performance, according a report published by Ernst & Young. Yet few companies adopt this approach. The role of CFO will adapt in the next three years, as CFOs become increasingly engaged in the strategic direction of their business – especially in the UK, as businesses look for strategic acquisition opportunities to achieve growth. CFOs capable of taking greater responsibility for managing different operations will be highly value by their companies. They must also take a leading role in communicating with investors and customers. There is a widespread view – shared by 69% of UK respondents – that staff in their companies’ finance functions do not have the skill set to step up to the role of CFO. Some 63% of UK respondents report that they do not have the time to support talent development.
Farepak FD faces disqualification
Former Farepak finance director Stevan Fowler and eight other former directors of the failed company face disqualifications, if action launched by the Insolvency Service is successful. The application was made in the public interest on the grounds that the conduct of each director makes him unfit to be concerned in the management of a company. Farepak was a subsidiary of the European Home Retail Group and operated a Christmas savings club. It entered administration in October 2006 and was later placed in creditors’ voluntary liquidation. The administration was the result of a £33m loan made by Farepak to EHR that was never repaid, leaving 116,000 savers in distress.
Practice
Consultation on insolvency profession
The Insolvency Service has responded to last year’s report from the Office of Fair Trading on the future of the insolvency profession by launching a consultation process. The OFT had expressed concern that the interests of the banks too often took priority over smaller creditors in administration procedures. It recommended an industry-funded independent complaints handling body be established, with broad powers to review IP fees and actions, impose fines, and return overcharged fees to creditors. It also proposed reform of the regulatory system for insolvency practitioners. The Government is broadly supportive of the OFT recommendations, which business minister Ed Davey described as “helpful. The consultation lasts until 6 May.
Lunn wins Judicial Review
Well known media accountancy firm Christopher Lunn & Co has been successful in Judicial Review proceedings against HMRC, which was found to have acted unreasonably in refusing to allow Christopher Lunn & Co to act as a tax agent for its clients. The firm was represented by McGrigors law firm, led by partner James Bullock. Bullock said that HMRC had been wrong to cease dealing with Lunn without giving them an opportunity to make representations first. “In the light of an ongoing investigation, in respect of which Christopher Lunn and Company has sought to co-operate, it was most surprising that HMRC should act in this way,” he said. “Only once before has HMRC unilaterally withdrawn agent status – and that was in a situation where the agent had actually been convicted of tax fraud. The High Court has quite rightly ruled HMRC’s actions unlawful”.
RoW sections
Corporate
CFO development ‘strengthens corporate performance’
Companies that take steps to nurture talent in their finance departments and have a considered succession planning policy benefit from stronger corporate performance, according a report published by Ernst & Young. Yet only a minority of companies adopt this approach, it warns. The report also suggests that the role of CFO will adapt in the next three years, as CFOs become increasingly engaged in the strategic direction of their business. CFOs capable of taking greater responsibility for managing different operations will be highly value by their companies, says the report. They will also have to take on a more leading role in communicating with investors and customers. There is a widespread view – shared by 73% of EMEIA respondents – that staff in their companies’ finance functions do not have the skill set to step up to the role of CFO. Some 46% of EMEIA respondents report that they do not have the time to support talent development.
Lease accounting impact
The vast majority of US companies are unprepared to changes in lease accounting, as brought forward by the Financial Accounting Standards Board and the International Accounting Standards Board. A Deloitte survey found that a mere 7% of US executives regard their companies as extremely or very prepared to comply with the new lease accounting standards. Compliance will require fundamental changes in the way leasing transactions for property and equipment are accounted and require more extensive financial reporting than previously. All operating leases will need to be capitalised on the balance sheet, while lessees will no longer report rent payments, but instead report interest and amortization expenses. Most survey respondents expect the standards changes to impact on their debt to equity ratios.
Practice
BDO moves into Albania
BDO has admitted a new member firm in Albania into its international network. BDO Albania was incorporated at the end of last year and has now obtained its audit licence. The firm’s initial development will be led by BDO Croatia and is being established in partnership with local firm, PBM Ltd. Operations will include private and public sector audits, tax advice, internal audit services, consultation and advice for foreign investors. Limos Malaj, managing partner of BDO Albania, said: “The new law on auditing, which came into force in 2009, has significantly remodelled the organisation of the accounting and auditing profession in our country. Among other changes, there is now a public oversight board overseeing the profession’s activities, and clearer requirements on matters such as continuing professional education, a code of ethics and transparency reports.”
PwC faces Satyam challenge
PwC is facing the threat of legal action regarding its audit of the collapsed Indian IT company Satyam. A class action suit related to the company’s failure has just concluded with a payout of $125m to investors by the company, now called Mahindra Satyam. “The company has agreed to pay to the class members as consideration, $125 million, subject to approval of the Reserve Bank of India and the determination of the Authority for Advance Ruling,” the company said in a statement. It indicated it might now seek to recover some of the costs of the settlement from the former senior management – who have been declared bankrupt – and PwC. Company founder Ramalinga Raju has admitted he conducted a £1bn accounting fraud. PwC declined to comment.
Public sector
Irish ministers blamed for crisis
Civil servants in the Irish government gave ministers repeated and strong warnings that fiscal policies were unsustainable, according to the Wright Report into the Irish fiscal crisis. Finance ministers – Brian Cowen, who went on to become Taoiseach (prime minister) and Charlie McCreevy, who subsequently became European Commissioner responsible for the accountancy and other professions – were told that they were failing to recognise the cyclical nature of high tax income. Consequently, government spending and tax policies were consistently less conservative than advised by Department of Finance officials. Internal advice given by civil servants was found to be more critical of government policy than that of outside agencies and most economists. The report was written by Rob Wright, a former senior Canadian civil servant, and commissioned by Ireland’s outgoing Fianna Fail-led government. Its conclusions were accepted by its finance minister, Brian Lenihan. Wright called for a substantial public sector reform programme to modernise services and the greater use of highly trained finance specialists, including economists.
GASB proposes hedge accounting changes
The US Governmental Accounting Standards Board has published an Exposure Draft on the use of hedge accounting for derivatives. Public bodies would be required to report fair value changes of a hedging derivative as either deferred inflows or deferred outflows of resources, rather than recognizing those changes in investment income. Hedge accounting would cease, and all accumulated deferred amounts reported in investment income, when a hedging derivative is terminated. Hedge accounting would not need to change simply because a swap counterparty is replaced through an assignment and the government’s economic position remains unchanged.