Accountancy news February: Accounting & Business

AB February 2009

UK news

Brand briefs MPs on audits

ACCA chief executive Helen Brand was due to give evidence to the House of Commons Treasury Select Committee on the role of audit in the banking crisis as AB went to press. Reviewing the role of auditors in the banking crisis headed the committee’s list of matters it is considering in its investigation into the banking crisis.

Others due to give evidence to the committee on the role of auditors were Paul Boyle, chief executive of the Financial Reporting Council; Robert Hodgkinson, Institute of Chartered Accountants in England & Wales; Professor Michael Power of the London School of Economics; Professor Prem Sikka of the University of Essex; John Hitchins of PwC; Brendan Nelson of KPMG; and Jonathan Hayward of Independent Audit. The committee is also interviewing representatives of the Bank of England, the FSA, the Financial Services Compensation Scheme, the British Bankers Association and the Association of British Insurers.

Boyle leaves FRC

Paul Boyle is stepping down as chief executive of the Financial Reporting Council, having overseen the expansion of its role and the increase in its functions. He has been in post since early 2004. Boyle said: “The scope of the FRC’s responsibilities is unusually wide amongst its international peers but I believe that we have been able to demonstrate the merits of bringing together the regulatory responsibilities for corporate governance, accounting, auditing and actuarial practice. The FRC is now well-established with a clear strategy and strong team and I expect that it will continue to play a leading role in promoting confidence in corporate reporting and governance in the UK.” The FRC has begun looking for a replacement. Boyle is expected to leave in the summer.

The lay-offs begin

KPMG is seeking volunteers to go onto four-day weeks and is offering sabbaticals to staff at 30% of normal pay. Grant Thornton has made 130 staff compulsorily redundandant, agreed 40 voluntary redundancies and redeployed 50 staff. BDO Stoy Hayward intends to make about 250 employees redundant, 8% of its staff. PKF is losing about 70 staff. Deloitte has agreed 300 voluntary redundancies.

McClure Watters fined

The Belfast accountancy firm McClure Watters has been fined £6,000 and ordered to pay £60,000 costs after the Accountancy and Actuarial Disciplinary Board found against it in an investigation of its audit of the Emerging Business Trust and EBT Venture Fund. The firm’s partner, Rollo McClure, was also fined £6,000 and reprimanded. A report by the House of Commons Public Accounts Committee criticised the firm for failing to identify conflicts of interest involving directors of their client company, related to the spending of public money.

SEC to get tough

Mary Schapiro, chief executive of the Financial Industry Regulatory Authority, is to become chairman of the US Securities and Exchange Commission. Schapiro says she intends to oversee a tougher regulatory regime, with more international co-operation between regulators and a merger of domestic regulators. Hedge funds, credit ratings agencies, insurance companies and financial instruments will be more closely scrutinised. She suggests that the timetable for implementation of IFRS in the US may be too tight.

Aon fined £5m

Risk management consultants Aon have been fined £5.25m by the FSA for systems breaches that could have permitted corrupt payments. Aon “failed to properly assess the risks involved in its dealings with overseas firms and individuals who helped it win business”, said the FSA. Aon made suspicious payments of $7m. The fine is the largest financial crime-related penalty imposed by the FSA. It follows Siemens’ $1.4bn settlement with US and German regulators over charges that it made bribes to win overseas government contracts.

PwC acquires Sustainable Finance

PwC has expanded its sustainability and climate change team through the acquisition of market specialists Sustainable Finance Ltd. The company will operate as a wholly-owned subsidiary of PwC. SFL was founded in 2003 by Leo Johnson and Matt Arnold , who both become PwC partners. The company helped develop the Equator Principles, the industry standard for managing environmental and social risks in project finance.

Poor coaching

Coaching and mentoring of finance professionals is weak, according to an ACCA survey of members in 170 countries. Most employers support coaching and mentoring in principle, but fail to understand good practice – leading to poor returns on training investment. Few organisations have embedded a coaching culture across their businesses. Coaching practices are mostly restricted to senior management. ACCA’s report – Coaching and mentoring revolution – is it working? – suggests that organisations would benefit from extending coaching and mentoring across all levels of management.

Taxonomy published

The International Accounting Standards Committee Foundation has released the IFRS Taxonomy 2009 for public comment. The Taxonomy translates all IFRSs into XBRL – the eXtensible Business Reporting Language used to communicate information between businesses and with regulators. The Taxonomy is designed to ease the filing, access and comparison of financial data. The Federal Accounting Standards Board (FASB) has specified that improvements in the use of XBRL are a pre-requisite for US adoption of IFRS.

SFO investigates Madoff

The Serious Fraud Office has launched an investigation into the UK business operations of Bernard Madoff, who is accused in the US of conducting a $50bn investment fraud. The focus of the SFO investigation will be on UK victims and any criminal offences committed in the UK. A report by Grant Thornton, provisional liquidators of Madoff’s UK businesses, led to the SFO investigation.

ICFR launched

A UK government-sponsored think-tank devoted to considering the future of financial markets regulation has been launched. The International Centre for Financial Regulation was initiated before the economic crisis and will now concentrate on how the recession affects regulation of banks. It will also provide training on risk management to regulators and banks. Its initial chief executive is Barbara Ridpath, who joins from Standard & Poor’s. It is recruiting an advisory board.

Disclosure rules strengthened

The IASB has published proposals to clarify how to define which entities a company controls. The proposals are part of the IASB’s review of off-balance sheet activities, responding to urgings from leaders of the G20 countries. The move is in line with recommendatioins from the Financial Stability Forum. Further proposals relating to the disclosure of off-balance sheet assets and liabilities are due by April.

‘SPVs to become transparent’

Many more special purpose vehicles (SPVs) will be brought onto US company accounts, as a result of the convergence of US GAAP with IFRS, Fitch Ratings has said. It says that outside the US, segment reporting under IFRS will need to be properly explained by companies if analysts are to understand their financial performance. Fitch added that it expects disclosures on credit derivatives, fair value and off-balance-sheet entities to improve, particularly in the US.

Quay Accounting bought

Quay Accounting has been bought by employment services provider Parasol. Quay specialises in providing accountancy services to freelancers. Parasol said the acquisition will be one of a series, enabling it to grow into the one of the biggest contract service providers in Europe and to offer a one-stop-shop to contractors. Quay Accounting employs 50 staff in Poole, Manchester and Aberdeen and has a turnover of £1.5m.

KPMG’s profits up

KPMG Europe made a profit of €691m last year. This was a slight increase over the previous year, when its profits were €661m. Last year was the first in which the integrated KPMG Europe reported. Operating income increased dramatically – up from €2.3bn to €3.4bn. But personnel costs rose sharply – from €1bn to €1.9bn.

Grant Thornton grows 25%

Grant Thornton’s merger with Robson Rhodes enabled it to grow its earnings by 25% to £394m in the year ended June 2008. Costs associated with the merger contributed to a fall in profits to £72m. The firm said that following the merger its London operation has nearly doubled in size, while its audit and advisory practice grew by 44%. It claims to be the third largest auditor for the top 2,500 private companies.

REST OF THE WORLD NEWS

SEC to get tough

Fair Value must stay

Fair value should stay but be improved, concludes a study conducted by the US Securities and Exchange Commission for Congress. Improvements should include reconsidering accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets.

Taxonomy published

Financial Crisis Group

Membership of the Financial Crisis Advisory Board has been announced by the IASB and FASB. The Group will consider financial reporting issues arising from the global economic downturn. Members include Fermin del Valle, a former IFAC president, and other leading accountants, economists, bankers and regulators from across the world. The SEC, Japan’s Financial Services Agency and some other regulators have observer status. Recommendations from the group will be jointly considered by the IASB and FASB.

Disclosure rules strengthened

‘SPVs to become transparent’

Lloyds TSB admits ‘stripping’ data

The UK’s Lloyds TSB bank has admitting falsifying records on behalf of Iranian and Sudanese clients, enabling them to access the US banking system in violation of sanctions. In an agreement with the Manhattan District Attorney, Lloyds TSB agreed to pay fines of $350m and admitted ‘stripping’ data in wire transfers to hide the identity of clients. Clients were able to conduct $300m of business in violation of US trade sanctions. Lloyds TSB ended its Iranian business in 2004 and its Sudanese business in 2007.

Poor coaching

Eurozone warnings

Ireland, Spain and Greece have been warned by Standard & Poor’s that they could lose their triple A credit ratings, because of the severity of the economic crisis in their countries and the impact on public finances. All three governments risk severe fiscal deficits, said S&P. The warning is likely to increase the cost of borrowing for the three governments. Italy, Portugal and the UK all face future warnings if their public finances continue to deteriorate. [confirmation awaited from S&P]

SEC investigates itself

The US Securities and Exchange Commission is conducting an investigation into its own operations, alongside the investigation of the alleged $50bn Madoff fraud. Outgoing SEC Chairman Christopher Cox said that it wanted to know how Madoff’s scheme had been undetected for so long, despite “credible and specific allegations” being brought to the SEC’s attention in 1999 and possibly before.

Accounting fraud ‘to rise’

Nearly two-thirds of US executives expect accounting fraud to increase over the next two years, according to a survey conducted by Deloitte. Sectors regarded as most vulnerable include IT, retail and service industries, such as telecoms and healthcare. Frauds may include manipulation of revenue recognition, reserves, inventory and cost of goods sold. Deloitte also warns of errors in disclosures in financial statements and violations of the Foreign Corrupt Practices Act.

IFRS to increase tax bills

Large US corporations face a big hike in corporation tax bills when the US moves to IFRS, according to a study by the Georgia Tech Financial Analysis Lab. Under IFRS, companies will have to use first in-first out (FIFO) stock costings, whereas many companies currently use either last in-first out (LIFO) or average cost methods. Use of FIFO would cost an extra $15bn in tax over a four year period in the 30 companies examined in the study, which heavily use LIFO costings. Moving to FIFO would cost companies on average an extra 12% of pre-tax income.

Swiss promise tax co-operation

The Swiss Private Bankers’ Association has indicated it is willing to co-operate with the EU, to prevent EU citizens using Swiss banks to avoid tax in their home states. But, said the head of the SPBA Michel Derobert, they would not accept being blamed for clients’ misuse of their banking system. He indicated he was particularly upset by suggestions by German Finance Minister Peer Steinbrueck that Switzerland should be placed on the OECD ‘blacklist’ of countries for non-co-operation on tax evasion.

Kuwait pledges investment

Kuwait’s sovereign wealth fund has pledged that it will not pull out of its overseas investments to finance investments in its domestic economy. The fund has launched a $5bn fund to support local stock markets, but most domestic development projects planned by the Gulf Co-operation Council have been postponed. Kuwait’s foreign minister Sheikh Mohamed al-Sabah estimates that its wealth fund and other Arab investors have lost $2,500bn in four months as the economic crisis intensified at the end of last year.

Iceland wants euro

Most Icelanders want to join the European Union and abandon their krona currency for the euro, according to an opinion poll. More than 65% of the population surveyed want to start talks on EU membership, against just 17% who oppose talks. The current coalition government is expected to fall, unless progress is made of seeking membership, while the value of the krona has collapsed. The country’s economy received a $20bn bail-out from the International Monetary Fund.

Transfer pricing rules eased

New rules on cost sharing between national divisions of multinational companies have been announced by the US Internal Revenue Service, which will provide more flexibility on transfer pricing arrangements. The new rules apply to costs on the development of intellectual property, including patents and software. The changes respond to criticisms from multinationals that the previous rules, issued in 2005, were too draconian.

Anglo Irish Bank nationalised

Ireland has nationalised the Anglo Irish Bank, to prevent it collapsing. Anglo Irish has been embroiled in scandal because of secret loans to its chairman of €129m, partly concealed through end of year transactions with the Irish Nationwide Building Society. Ireland’s Financial Regulator, Patrick Neary, resigned over the affair.

SEC’s new chief accountant

James Kroeker has been appointed the US Securities and Exchange Commission’s acting chief accountant, following the retirement of Conrad Hewitt. Kroeker has been deputy chief accountant since early 2007. He has helped lead SEC efforts to improve financial reporting and reduce the complexity of financial disclosures. Kroeker served as staff director of the SEC’s Congressionally-mandated study of fair value accounting standards and led the SEC’s efforts to improving off-balance sheet accounting guidelines.

Aid loses out

Promises of aid to African countries have not been fulfilled, claims South African finance minister Trevor Manuel. The G8 nations are now $240bn behind on their promises of aid. Manuel also claims that rich nations are applying protectionist trade measures that penalize developing nations. South Africa has its own economic crisis, with banks lending excessively to stockbrokers, who financed clients’ investments that have now turned bad.

Russia feels pain

Russia could suffer a $100bn outflow of capital because of the global crisis, Alexei Ulyukaev, the deputy chairman of Russia’s Central Bank, warns. He adds that the country’s gold and currency reserves have fallen by $141bn, Russian companies have foreign payment obligations of $160bn in 2009 and the Government’s budget deficit may reach 6% of GDP this year – the first time in nearly a decade that it has been in deficit.

UBS closes accounts

UBS is closing US clients’ offshore accounts that have allegedly been used to evade tax. About 19,000 accounts will close or will be transferred to other banks in a move instigated by the Internal Revenue Service. Clients could lose assets that have not been declared to IRS unless they open new accounts to receive the funds, notify IRS of doing so and risk criminal penalties. UBS is accused of having allowed US citizens to evade tax of about $300m a year, hiding assets of $18bn.

Iran issues Israel warning

Companies doing business with Israel are likely to suffer sanctions from Iran. The Iranian government has proposed to its parliament a bill that would impose sanctions on foreign firms with trade links with Israel, or that are deemed to provide financial support to Israeli interests.

US banks retain offshore subsidiaries

Some 83 of the 100 largest US banks had subsidiaries in offshore tax havens in 2007, the Government Accountability Office has said. US government rescued banks Bank of America, Citigroup and Morgan Stanley had between them over 100 divisions in offshore territories, while the rescued AIG insurer had 18 offshore subsidiaries. The US Congress estimates that the IRS loses about $100bn annually through the use of tax havens and offshore accounts.

London money recovered in Africa

Hundreds of thousands of pounds stolen in London have been recovered in South Africa, en route for Zimbabwe, claim local police officers. They report that the money had been stolen in a cash-in-transit raid. The cash was found hidden in a car in Durban that was heading for the Zimbabwean border, said the police – who made the interception at the request of counterparts in London.

Politics

Small firms face tax hike

The Government will claim an extra £2.4bn in tax from small firms, figures uncovered by the Conservative Party reveal. The tax increase is the result of 250,000 companies with profits of under £10,000 becoming liable to pay corporation tax after Gordon Brown, as Chancellor, abolished the 0% rate of corporation tax – putting them into the 21% tax rate. Another quarter of a million small firms – with profits between £10,000 and £50,000 – will pay more tax because of the axing of the Marginal Starting Rate Relief. Further tax increases on small firms will come into effect as the small companies tax rate rises from 19% to 22%. Shadow economic secretary Justine Greening, said that with one in 10 businesses reportedly on the brink of failure “it is as if [Gordon Brown] has tried to tax our smallest companies out of existence.”

Data lessons

HMRC has promised that it will make its “best endeavours” to fully implement by 2011 the recommendations from Kieran Poynter’s independent review. Poynter, the chairman and senior partner at PwC, made a series of proposals to prevent future data leakage, including that HMRC cease making data transfers using physical resources and that it encrypt its computers and portable media. HMRC says that “good progress” is being made and that it has removed the ability of civil servants to save data onto CDs and memory sticks. But in a separate move worrying data protection campaigners, the Government is proposing in its Coroners and Justice Bill that it be allowed to share widely personal data between government department, local authorities and other public bodies. At present, data may only be used in connection with the purpose for which it was given.

Financial Crisis Group

Accountants ‘to help tax credits’

Accountants will increasingly have to assist clients obtaining tax credits, according to a report from independent think-tank Civitas. According to Individualists Who Co-operate, the extension of the welfare state through tax credits has created an administrative merry-go-round in which people on middle incomes often pay the same amount in tax as they obtain in benefits – but are forced to pay tax and claim tax credits to recover the tax paid. The report argues that where families have broadly similar tax and benefits outcomes, the Government should cease taxing them and enable them to make their own decisions on how their money is spent.

Health commissioning ‘too weak’ say MPs

The NHS Next Stage Review reforms are fundamentally sound, but are likely to be poorly implemented, according to the House of Commons Health Select Committee. Primary Care Trusts have the main responsibility for changing health service delivery, but the committee doubts that most PCTs can do this. PCT commissioning remains poor, say the MPs, lacking analytical and planning skills, and with management of variable quality. Weaknesses are reinforced by the NHS failing to give sufficient status to PCT commissioning.

UK risks EU waste fines

The UK may have to pay hundreds of millions of pounds in European Union fines because of central and local government delays in agreeing waste management contracts, says the National Audit Office. EU member states face financial penalties unless they achieve staged reductions in waste going to landfill. By 2020 waste going to landfill must reduce to 35% of 1995 levels. Private Finance Initiative contracts will account for 80% of waste management arrangements. But central government has delayed authorising projects and spending, while local government has held-up contract finalisation and planning permission.

Practice

Executors face investigations

Executors of estates could be chased by HMRC for large tax payments, law firm Lewis Hymanson Small has warned. Changes to the application of inheritance tax rules mean that HMRC no longer has a time restriction for challenging the administration of an estate: previously there was a limit of 60 days for questions to be raised with executors. Families may have to pay higher probate costs to ensure that in-depth tax investigations are not made, say the firm. Executors may have to personally meet any additional tax bills, because it may be impractical to recover the money from estate beneficiaries several years after settlement.

Chantrey Vellacott grows

Chantrey Vellacott has enlarged by merging with the 50 year old Colchester accountancy firm Butt Cozens. Butt Cozens’ three partners – Dawn Lay-Flurrie, Peter Gardiner and Melinda Simpson – become partners of Chantrey Vellacott. Butt Cozens had a relationship with Chantrey Vellacott for 20 years, latterly through membership of DFK, which supplies resources to 13 independent accounting firms.

Corporate

FSA clarifies security rules

The FSA has clarified rules for directors who use their shares as security for loans. This follows the controversy over the allegedly undeclared use of Carphone Warehouse shares as security by the company’s deputy chairman David Ross. The FSA has now issued a statement that it “can see no basis on which a director could legitimately avoid seeking clearance where his or her shares are to be used as collateral for a financing transaction”. However, the FSA accepts that there was confusion over rules that derive from the EU Market Abuse Directive and which are differently applied in different European markets. No action will be taken against David Ross or other directors who have previously failed to declare their use of shares as loan security, providing all outstanding disclosures were made by 23 January.

Northern Rock needs new FD

Ann Godbehere has stepped down as chief financial officer of Northern Rock and will leave the company at the end of February. She was appointed as an interim CFO when the Government nationalised the failed bank last year. The bank has begun looking for a replacement. Godbehere’s appointment had been controversial as the Canadian commuted to her work from Zurich and was believed to be paid £75,000 a month.

Enterprise

Loans ‘must flow to SMEs’

ACCA has welcomed the Government’s setting-up of a loan guarantee scheme, in line with proposals initially put forward by ACCA’s SME Committee in November. ACCA stresses the need for support to be channeled in ways that strengthen supply chains and recognises the risks they pose to customers and suppliers. The SME Committee warns that the system of guarantees will only be effective if it encourages new lending as well as the refinancing of existing loans. Guarantees also need to have a positive impact on trade credit and default rates.

‘Accountants should do more’

Accountants should increase the range of services they provide to support small firm clients to survive the recession, according to a survey published by AccountsIQ, a brand of accounts software. A survey of a hundred small businesses found that 82 wanted better support and advice. Some 80% wanted improved analysis and interpretation of financial data and 69% sought greater assistance with cash flow management. And 63% called for more transparency in reports of their changes in financial position. AccountsIQ is a software product produced by Visor, an Irish company established by Dublin accountant Tony Connolly.

Public services

Council taxes up

Council tax rises will be below last year’s inflation rate, but above that for 2009, a survey by the LGA suggests. Councils in England indicated their council taxes will increase by 3.5% for the 2009/10 financial year, the lowest rise in a decade. The survey also found that council revenue is expected to fall by £2.5bn next year, as authorities’ income declines from planning fees, car parking charges, investment income and capital receipts from land sales. Demand from service users has increased, with both businesses and individuals seeking help in difficult economic times. An earlier LGA survey found that 73% of councils have had to revise their budgets in response to falling income and increasing service demands.

Council jobs down

One in seven councils has cut jobs in recent months, while many more are about to do so, according to a survey conducted by the Local Government Association (LGA), the Improvement and Development Agency and the Society of Local Authority Chief Executives. The survey found that 13% of councils responding had cut jobs as a result of the slowdown and 22% had introduced a recruitment freeze. Councils employ 2.2 million staff across the UK and many have already announced hundreds of job losses.

Financial services

Failed banks ‘used aggressive accounting’

Over 80% of banks supported by the US Treasury through the initial tranche of money from the Troubled Asset Relief Program (TARP) had used “very aggressive” or “aggressive” accounting practices that downplayed their true exposure to likely losses, risk exposure, possible regulatory action and projected profits, concludes a study conducted by Audit Integrity. There was a strong correlation between those banks that used the most “aggressive” accounting practices and those that needed the greatest financial report, found the study. Across 7,000 public companies measured by Audit Integrity, only 35% used “aggressive” or “very aggressive” accounting practices.

EU derivatives hopes dashed

The European Commission has abandoned attempts to create a single European exchange to trade all credit derivatives. Trading firms and regulators failed to support the proposals. The EU had hoped that the central clearing of over-the-counter (OTC) contracts would reduce market risk for investors. The Commission believed that it had reached agreement in December with market participants to introduce an exchange within six months. But it is understood that US banks that trade in Europe refused to accept the EU stipulation that would have to clear their European trades within the EU, rather than in the US. The US is moving forward with its own proposals for centralized OTC contract clearing.

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