Accountancy news March 2009: Accounting & Business

AB March 2009

Main stories – UK edition

Businesses fail

Company liquidations in England and Wales jumped by half in the last quarter of 2008, rising from 3,000 to 4,600 in a year. This was also an 11.9% rise on the previous quarter. In addition, there were a further 2,428 corporate involvencies in the final quarter of last year, a wapping 220% increase on the same period a year before. Personal insolvencies also rose sharply, increasing in England and Wales by 18.5% in a year to 29,444. Of these, 19,100 were bankruptcies, which rose by 22.2% from 2007. Individual voluntary arrangements grew less severely, increasing by 12.2% over the year to 10,344. PwC warned that the trend of higher company and personal insolvencies would increase, with more self-employed traders and company directors with personal guarantees seeking bankruptcy to gain relief from their debts.

No confidence vote

Finance professionals in the UK have less confidence in their national economy than those in other countries, according to a survey conducted by Robert Half recruitment advisors. Only those in Ireland, of those countries surveyed, were less confident. Job insecurity, economic doubts and reduced optimism about their own companies topped finance professionals’ concerns. Half of respondents said they were less confident about retaining their jobs than a year ago. Most said they felt other people consider their occupations to be boring, but more than half regard their own roles as professional and trustworthy. The survey suggests a lot of finance professionals want to move abroad for work. Some 56% said they are interested in working in the United States, 54% in Australia and 42% in Canada. Finance professionals in New Zealand (63%), Australia (55%) and Singapore (50%) are most interested in moving to the UK to work.

Tax charter

HMRC has published a draft of its first ever tax charter. The charter is a short principles-based document, which would be backed by legal rights for taxpayers. It pledges that HMRC should be honest, claim only tax that is due, respect its clients, provide accurate information, protect private information and pursue those who break tax rules. In return, taxpayers should make payments and statements accurately and on time, respect staff and advise changes of circumstances. Consultation on the charter is open until 12 May.

Fraud jumps

Fraud has reached near-record levels, according to the latest KPMG Fraud Barometer. Over £1.1bn of fraud cases came to court in 2008, the second highest amount ever measured in the survey’s 21 years. KPMG warns that fraud will rise further. Fraud by professional gangs was high, but government losses from VAT ‘carousel’ fraud fell significantly. There was a ten-fold increase in financial services fraud, with £806m of frauds committed by professional gangs in 111 cases – but much of it was accounted for by one case, the attempt to hack into Sumitomo Matsui. There was also a big increase in mortgage fraud.

HMRC lose VAT case

HMRC will find it harder to refuse claims for VAT refunds after a High Court judgement. Livewire Telecom sought £2.4m from HMRC for VAT on cross-border trades, which HMRC refused because the company had unwittingly traded with fraudsters. The High Court decided that HMRC could not withhold refunds from companies that had been innocent victims of a fraud, even if HMRC believes they should have acted with greater care. Accountancy firm Vantis represented Livewire and said the judgement would force HMRC into the real world and should end the “discriminatory manner” in which it handled missing trader cases.

‘Pre-packs protect jobs’

Pre-pack administrations can protect jobs and value in a failed business, the head of the Insolvency Service has told MPs. Chief executive Stephen Speed defended administrators’ use of pre-packs, while admitting his agency was still learning about the effects of them. In evidence to the House of Commons Business and Enterprise Select Committee, Speed said “ the evidence suggests that pre-packs do preserve jobs, economic value and goodwill in a business that has become insolvent or got into difficulty”. He said unsecured creditors lose from a liquidation anyway.

EU attacks tax fraud

EU member states will no longer be permitted to refuse to co-operate on investigations into cross-border tax fraud on the grounds of bank secrecy under proposals published by the European Commission. The measures would apply to all taxes and social security contributions. The Commission is also proposing common rules of procedures, common forms, formats and channels to exchange information between member states. Tax administration officials from one member state would be permitted to conduct tax investigations on the territory of another, with the same powers of inspection.

Directors’ jail sentences

Directors are now more likely to be imprisoned over dangerous working practices. Higher financial penalties have been made available to the courts, along with imprisonment for a wider range of offences, following the application of the Health and Safety (Offences) Act. The Act applies across Britain, but does not impose new obligations. Directors can be prosecuted if they have not taken reasonable care for the health and safety of their workforce and others who may be affected by their actions or failings.

More to leave UK

Companies are still considering relocating their tax base away from the UK despite government concessions, the latest KPMG tax competitiveness survey has found. The proportion of companies actively considering leaving the UK has more than doubled to 16% since 2007. Companies said the dividend exemption unveiled in the pre-budget report was insufficient to change their minds if they were thinking of leaving the UK. They also feared the debt cap will cause problems. Further reform of the taxation of foreign profits – especially the ‘Controlled Foreign Companies’ regime – and more transparency in the system are required to stem the flow, says KPMG.

HBOS loss

The former head of group regulatory risk at HBOS has claimed he was sacked for suggesting the bank had exposed itself to excessive risk from its lending practices and high growth rate. Paul Moore also lodged his concerns with the FSA. The FSA said that it and HBOS’s auditor KPMG had thoroughly investigated the claim, which led to changes at the bank. KPMG said its investigation was conducted by individuals that were unconnected to its audit team, who reported to the FSA and HBOS’s audit committee. HBOS reported a loss of nearly £11bn for its last trading year.

KPMG audit head

KPMG has appointed Oliver Tant as UK Head of Audit. Tant succeeds Richard Bennison, who recently became chief operating officer of KPMG Europe. Tant joined Thomson McLintock’s audit practice in 1982. For the past three years, he has been global head of private equity and a lead partner in the UK practice. Tant joins KPMG’s European Audit Leadership team, the Global Audit Steering Group and the UK Operating Team.

Mazars expands

Mazars achieved a 16% increase in global fee income in 2007/8, rising to $745m across the international partnership. Turnover in Asia and Africa more than doubled, with UK turnover increasing by over 20%, to £104m. The firm added national operations in another three countries, bringing the operations of the international firm to 50 countries. Mazars presented its annual report in accordance with IFRS, claiming it is the only global audit firm to observe the same standards as its listed clients.

More ACCA students

A record number of students sat ACCA’s examinations in December, with 182,449 students taking 365,528 papers. Over 6,400 students successfully completed their exams to become ACCA affiliates. An improved pass rate at professional level led to an overall 4.4% increase in affiliates.

Ineffective boards

Directors of one in three unlisted and AIM-listed companies regard their boards as only partially effective, the latest annual survey from Hanson Green and MM&K reports. Directors of nearly 80% of listed companies regard their boards as fully effective. Chairmen regard their boards as more effective than do their other non-executives. While more than half of directors regard the recruitment of more women on their boards as important, directors do not regard other issues of diversity as important. Many directors of listed companies do not regard their remuneration as adequate.

Pensions ‘at risk’

Proposals from the IASB requiring companies to show pension scheme losses in their profit and loss accounts could kill-off final salary pension schemes, claims advisors Aon Consulting. The proposals were contained in an IFRS Update. Calculations by Aon sugest that if the change had been applied in 2008 then 200 large PLCs would have disclosed a ten-fold increase in pensions charges on their P&L accounts, from £10bn to £95bn. The IASB dismissed the claims, saying the the proposals would merely increase transparency.

RBS’s class action

RBS and its former directors are being sued by an investor who alleges that the bank failed to disclose the true state of its finances when it sold American depository shares in June 2007. The action, in the name of Natalie Gordon, names RBS, its chairman Sir Tom McKillop, former chief executive Sir Fred Goodwin, other directors and banks that underwrote the share offer, including Banc of America Securities. The suit requests class action status.

Main stories – RoW edition

No confidence vote

Finance professionals are increasingly pessimistic about their job security, their companies’ prospects and the state of the economy. Those working in Ireland were the most worried, closely followed by those based in the UK and France. Finance workers in Japan were the least optimistic about company performance, with just 20% being bullish on their company’s future. Those in Dubai and Brazil were the most positive in the 14 countries surveyed. Employers were thought most likely to be recruiting in Dubai, New Zealand, Hong Kong, Brazil and Singapore. Of those surveyed, Dubai has the most workers from abroad in its finance and accounting workforce, with 85% of workers there stating that Dubai was not their home country. Brazil had the least, with only 2% of workers coming from outside. Accounting and finance workers most commonly described their role as ‘professional’ (66%) and ‘trustworthy’ (53%), but fewer (29%) calling it ‘commercially aware’.

Delayed knowledge

Anglo Irish’s internal auditor only became aware in November last year that his bank had made a multi-million pound loan to its chairman, he told a committee of the Irish parliament, the Dail. Chairman Sean FitzPatrick borrowed up to €122m from the bank, hidden from the annual accounts through a ‘bed and breakfast’ transaction with the Irish Nationwide Building Society. A separate short-term arrangement with Irish Life & Permanent deposited €7bn with the bank to bolster its year-end deposits. ILP initially defended its actions, saying it had “provided exceptional support” to the bank that was properly accounted for and reported to the regulator. ILP’s chief executive subsequently resigned. Anglo Irish’s auditors, Ernst and Young says that its audits complied with auditing standards, it received statements from directors of year-end loan balances, but that it was unaware until late 2008 of refinancing transactions that concealed the extent of the chairman’s loans. Anglo Irish was nationalised in January.

EU attacks tax fraud

EU member states will no longer be permitted to refuse to co-operate on investigations into cross-border tax fraud on the grounds of bank secrecy under proposals published by the European Commission. The measures would apply to all taxes and social security contributions. The Commission is also proposing common rules of procedures, common forms, formats and channels to exchange information between member states. Tax administration officials from one member state would be permitted to conduct tax investigations on the territory of another, with the same powers of inspection.

SEC to act tough

The US Securities and Exchange Commission will be tougher and faster in its investigations of alleged wrongdoing, its new chairman Mary Schapiro has pledged. “A strong and reinvigorated SEC will be on the beat like never before to catch wrongdoers,” she said. “But there needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don’t occur in the first place.” Measures promised by Schapiro include improving the quality of audit for non-public broker-dealers; promoting and regulating a central clearing house for credit default swaps; and improving the quality of credit ratings.

EU demands standards

There must be “more work on accounting standards” as lessons are learnt from the global crisis, says EU internal markets commissioner, Charlie McCreevy. He said that mark-to-market valuations had

“exacerbated the markets’ recent problems” by reinforcing the downward spiral in asset values. McCreevy also proposes caps on leveraging banks’ balance sheets, larger capitalisations for banks’ trading books, greater due diligence on securitisations and ending incentive schemes that promote turnover without worrying about risk exposure.

KPMG’s new US CEO

John Veihmeyer has been appointed as the new CEO of KPMG’s US firm. He replaces Timothy Flynn, who now leads KPMG International’s newly formed global executive team, while remaining chairman of KPMG International. Veihmeyer has been deputy chairman of KPMG in the US since 2005 and chairman of the Americas region for KPMG International since 2007. He joined the Washington DC office of KPMG in 1977 and became a partner in 1987.

Gulf warning

Companies in the Gulf States are in a stronger position than their peers elsewhere because the recession reached the region later, reports Moody’s Investors Service. But Moody’s predicts that 2009 will be a tough year for corporations in the Gulf and the Middle East. It says that Gulf-based corporate issuers, most of which are government-owned, will suffer further declines in credit quality this year. It warns that ratings could be affected either by corporate performance or its assessment of government support mechanisms.

Firms’ Madoff claims

Audit firms BDO, Ernst & Young, KPMG and PwC are being sued by investors in hedge funds that lost money from the collapse of Bernard Madoff’s business empire. Legal claims have been filed in the US and Luxembourg. A spokesman for BDO Seodman said: “It is unfortunate that these investors would bring legal action before all of the facts are known and seek to blame others for their own investment decisions.” It adds it was not an auditor of Madoff Securities, while its audits of the Ascot Partners and Gabriel Capital funds “conformed to all professional standards”. It “will vigorously defend ourselves against these unfounded allegations”. A spokesman for KPMG said: “We’re confident that KPMG’s audit work for Rye Investment Funds conformed to all professional standards. KPMG doesn’t comment on pending litigation.” Ernst & Young declined to comment. No one was available at PwC.

Santander pays out

Santander is offering to make payments of €1.4bn to private banking clients to settle claims arising from losses in Madoff funds. The offer would exchange clients’ Madoff investments with securities to be issued by Santander. The bank says that the offer is made to maintain business relationships with affected clients. The proposal is expected to prevent law suits against the bank, but does not apply to institutional investors.

KBR pays $579m

KBR, its Kellogg Brown and Root subsidiary and former parent Halliburton will pay $579m to settle bribery charges. The companies were alleged to have made corrupt payments over a 10 year period to Nigerian government officials to win construction contracts worth $6bn. KBR and Halliburton were also charged with breaches of financial records and internal control requirements to hide the payments. KBR and Halliburton will pay $177m to settle charges from the SEC, while Kellogg Brown & Root will pay a $402m fine to settle criminal charges brought by the US Department of Justice. The companies will make the payments without admitting or denying the charges.

Mazars expands

Mazars achieved a 16% increase in global fee income in 2007/8, rising to $745m across the international partnership. Turnover in Asia and Africa more than doubled, with UK turnover increasing by over 20%, to £104m. The firm added national operations in another three countries, bringing the operations of the international firm to 50 countries. Mazars presented its annual report in accordance with IFRS, claiming it is the only global audit firm to observe the same standards as its listed clients.

‘World copying Zimbabwe’

Zimbabwe’s central banker, Gideo Gono, claims that governments around the world are following his country’s economic practices of printing money to get out of trouble. “The whole world is now practising what they have been saying I should not,” he told Newsweek. “I had decided that God had been on my side and had come to vindicate me.”

More ACCA students

A record number of students sat ACCA’s examinations in December, with 182,449 students taking 365,528 papers. Over 6,400 students successfully completed their exams to become ACCA affiliates. An improved pass rate at professional level led to an overall 4.4% increase in affiliates.

South Africa praised

South Africa has been praised as having one of the few governments that saved in the good times to create a budget deficit and is spending taxes on improving public infrastructure rather than bailing-out banks. The report from Control Risks suggests that fears of a likely Jacob Zuma presidency may be overstated. It adds that while investors may fear the replacement of the respected finance minister Trevor Manuel, he may be replaced by an economist with strong practical experience. The major risks facing the country, says the report, are related to the prosecution of Zuma and the replacement of Manuel.

Moody’s downgrades Europe

Moody’s downgraded more European companies in 2008 than in any previous year since 1990. Some 249 European companies were downgraded.

RBS’s class action

RBS and its former directors are being sued by an investor who alleges that the bank failed to disclose the true state of its finances when it sold American depository shares in June 2007. The action, in the name of Natalie Gordon, names RBS, its chairman Sir Tom McKillop, former chief executive Sir Fred Goodwin, other directors and banks that underwrote the share offer, including Banc of America Securities. The suit requests class action status.

Politics stories

New fiscal rules

MPs have told the Treasury to draw-up new rules to assess acceptable levels of public sector net debt. The Treasury Select Committee says that the coming period in which normal rules are suspended and a Temporary Operating Rule applied “provides an ideal opportunity to re-evaluate the fiscal framework for the future”. Even without the nationalisation and part-nationalisation of the banks and other emergency spending measures, the Government was on course to breach its own Sustainable Investment Rule. The committee says that moves towards a new framework should involve “a full public consultation”. The Institute for Fiscal Studies issued its own warning about the prospects for public finances, predicting that tax increases or spending cuts of £20bn a year will be needed by the end of the next Parliament if the public finances are to be repaired as planned in November’s Pre-Budget Report. Even then, public sector debt may not return to pre-crisis levels for more than 20 years.

Scotland abandons LIT

The Scottish Government has conceded that it cannot introduce its proposed Local Income Tax in place of the council tax in the current Parliamentary session. The proposal from the ruling Scottish Nationalist-led minority government was rejected by other political parties in a vote on the Scottish Budget. Devolved finance minister John Swinney said that an additional £70m would be allocated to local authorities that maintain their freeze on council tax charges for a second year, with a guarantee that further funds would be given to councils for the rest of the Parliamentary term to continue the tax freeze.

ACCA defends IFRS

The financial crisis is not a cause to abandon IFRS, says ACCA. In a briefing paper aimed at European policy-makers, How should the EU respond to the financial crisis?, ACCA is calling for a continued commitment to IFRS. The paper makes seven recommendations calling for a more measured response from the EU in tackling the crisis, ensuring that existing legislation and regulations are implemented and enforced across the EU, rather than rushing in with new legislation. “It asserts the need for the EU to take a lead in shaping the new global governance around progressive values,” says ACCA’s director of public affairs and media relations, Clive Booth.

Poor value consultants

The Scottish government fails to get value for money for the £114m a year it spends on consultants, says Audit Scotland. Most spending on consultants is on IT and business management services, spread across more than 1,200 consultancy firms, the auditors found. But there is no clear strategy for the use of consultants, nor links to government priorities or financial and workforce plans. Better planning, management and purchasing of consultancy services could save about £13m a year, its report concludes.

Foreign Office’s £1.4m mess-up

The Foreign Office made a loss of £1.4m on a property transaction in Dublin, because it failed to undertake an adequate survey of a property before buying it. It sold the British Ambassador’s residence in Dublin, Glencairn for £24m and bought Marlay Grange to replace. But only after the purchase did it realise Marlay Grange needed to be stripped of asbestos and completely refurbished before it could be occupied. It was resold at a loss of £1.4m. The Foreign Office is now seeking to repurchase Glencairn.

Practice stories

Beware social networks

HMRC is accessing social networking sites and personal blogs for evidence of undeclared income, the Tax Advice Network claims. The move represents an extension of existing practices to check local newspaper classified advertisements and Ebay auctions. Mark Lee, chairman of the Tax Advice Network, warns that people who boast of and exaggerate their business activities online may provoke an HMRC investigation. “The most blatant ‘traders’ will be the first to be attacked,” says Lee. “But HMRC will also use online search facilities to check out whether what you tell them stacks up with the online evidence of your activities.” Lee says that people trading and not advising HMRC within the required three months are “playing a dangerous game”. He suggests that anyone generating money through their online activities ensures that they keep good records of their income and of all related expenses. This will make it easier to complete tax returns and pay tax only on net profit, not on all income received.

HMRC to charge costs

HMRC is seeking powers to charge taxpayers for legal fees incurred in pursuing taxpayers who do not pay their tax bills, claims Wilkins Kennedy. It warns that up to £1,870 could be claimed – on top of existing late payment penalties – by HMRC from taxpayers who do not have the cash to pay on time. This, it says, is in breach of the Government’s promise to treat tax late payment more leniantly during the economic crisis. Those with small arrears of less than £500 could face a 20% surcharge. The firm says that HMRC is acting more aggressively than are other creditors.

Enterprise stories

Support shake-up

Small business support from the Government is to get a shake-up under plans put forward by an independent review, commissioned by the Department for Business, Enterprise and Regulatory Reform. A one-stop-shop will be set-up that provides guidance on health and safety and employment legislation, backed by a telephone advisory service to provide bespoke advice to SMEs. The service would be free to SMEs in their first year of trading. All government guidance could be accessed from a single contact point. Government would remove disclaimers over the effects of businesses following its advice and would encourage discretion over the prosecution of ‘reasonable’ businesses. The advice aims to save time and money for SMEs, improve legal compliance and boost business confidence in small firms’ support services. Sarah Anderson, who conducted the review, said that SMEs could save £1.4bn a year with a better government advisory service.

Debt drove profits

Only 20% of buy-out profits come from operational improvements in the portfolio companies owned by private equity, the first annual report from the British Private Equity and Venture Capital Association reveals. Taking on large quantities of highly leveraged debt and achieving scale through acquisitions were more significant factors in generating profit, the report, compiled by Ernst & Young, found. Portfolio companies out-performed the average of public companies, with a 7.5% improvement in productivity and a 1% growth in employment. Assessments were made on 14 companies over their period of acquisition where there was an exit in the period 2005 to 2007.

Corporate stories

Wolfson fined £140k

Wolfson Microelectronics has been fined £140,000 by the FSA for failing to promptly reveal price sensitive information to the market. The delay led to a false market in Wolfson shares for 16 days after a major customer told the company it would not purchase parts for future editions of two products, potentially losing Wolfson $20m, 8% of its 2008 revenue. Although Wolfson expected its forecast revenue for the year would be unchanged, the FSA concluded that it should have been disclosed. Wolfson’s investor relations advisor wrongly said there was no need to make a disclosure and the company failed to consult its legal advisor. When the company was told by its legal and corporate broking advisors to make the disclosures, its shares fell by 18% in a day. Wolfson’s co-operation with the FSA mitigated the size of the fine, which received a 20% discount for early payment.

Tesco’s new CFO

Tesco has appointed Laurie McIlwee as group finance director. He was previously Tesco’s distribution director and, before that, UK finance director. Outgoing finance director Andrew Higginson has become chief executive of Tesco’s retailing services, responsible for developing Tesco Personal Finance following Tesco’s acquisition of RBS’s 50% stake. Before joining Tesco, McIlwee spent nine years at PepsiCo where his roles included chief financial officer at Walkers Snack Foods and finance director of PepsiCo Eastern Europe. Higginson is a former finance director of the Burton Group and group finance director at Laura Ashley.

Financial service stories

Pacific banning

The former chief executive and finance director of stockbroking firm Pacific Continental Securities have been banned by the FSA for serious failures that led to customers buying high risk shares without suitable advice. Steven Griggs, the former chief executive, was also fined £80,000 and Charles Weston, the finance director, was fined £95,000. Pacific Continental was declared in default by the Financial Services Compensation Scheme in January, enabling the FSCS to pay compensation where customers were mis-sold shares. The company is now in liquidation. Weston was found to have been aware that staff used high pressure sales tactics to sell shares and that advisors were selling shares to the benefit of Pacific Continental, not the clients. Griggs failed to prevent this happening. The two directors misled the FSA about their relationship with an individual linked to a boiler room fraud.

FSA meets firms

The FSA has held a series of four meetings with the auditors of UK banks to discuss going concern judgements and the application of accounting standards. While discussions on this type are normal, they have been more intensive than in previous years because of the global crisis and questions over banks’ solvency and liquidity. The FSA has also warned that banks’ adjustment of their business models to operate profitably in changed financial markets and economic environment presents a key risk for the coming year. It adds that despite these pressures, financial institutions must still treat customers fairly, including those hitting financial difficulties.

Public sector stories

Paying for IFRS

The Audit Commissioned is providing £3.3m to its audited bodies to assist them moving to IFRS, which will be adopted by local public bodies from 2010. The funds are intended to cover the transitional costs and is funded from reductions in the cost of the Commission’s operations. NHS trusts will receive the funds in a one-off rebate in December this year, with councils receiving theirs in December next year. Audit Commission chairman Michael O’Higgins said: “ The introduction of the new standard does impose an extra cost on them and we wanted to help. We listen carefully to the bodies we audit and appreciate their financial position. We have decided that the 3% rebate, which covers the transition costs, is appropriate and timely and thanks to the savings we have made, we are in a position to fund it.”

PwC partner leads PPPs

PwC corporate finance partner Charles Lloyd has been seconded to the Treasury for 18 months as head of public private partnerships. Lloyd has 15 years experience advising government on PPPs and the Private Finance Initiative, complex procurement, business restructuring and corporate disposals, leading the firm’s PPP team from 2000 to 2004. The appointment coincided with a warning from the PPP Forum – the main industry body – that the Government needs to make direct investments and support to PFI schemes of at least £4bn over the next 18 months to prevent public infrastructure spending plans from collapsing.