AB news – May 2011
UK News
FRRP ends RTZ enquiry [lead with photo]
Rio Tinto has increased its sustainable development disclosures in its reports and accounts, concluding a review conducted by the Financial Reporting Review Panel. The review was initiated after a complaint was submitted to the Panel regarding Rio Tinto’s 2008 accounts. Under the Companies Act 2006, a directors’ report’s business review must contain a balanced and comprehensive analysis of the development and performance of the company’s business. The review considered whether Rio Tinto should have included additional information about some of its operations to comply with these provisions. The Panel welcomed the additional information provided in the just published 2010 report and accounts. A spokesman for Rio Tinto said: “This additional material has been previously available – e.g. on our website – and there is nothing materially new being disclosed. However, Rio Tinto is committed to taking this opportunity to provide shareholders with further informative and meaningful disclosures regarding its business operations and the delivery of its strategy.”
London still major finance centre [lead with photo and fast facts]
London remains the world’s pre-eminent financial centre, according to the latest rankings in the Global Financial Centres Index. New York is second, followed by Hong Kong and Singapore, with Shanghai and Tokyo joint fifth. Frankfurt is the second most important financial centre in the European Union, but is a mere 14th in the global rankings. The results showed that Shanghai is becoming more competitive, while Singapore has become less so. There was no significant difference in the ratings of London, New York and Hong Kong: implying, concludes the survey, that the three centres must work in partnership. In his foreword to the report, Sir Michael Snyder, chairman of the UK Government’s Professional and Business Services Group, said: “Whilst GFCI 9 shows London remaining at the top of the index, the research clearly indicates that uncertainty over tax and regulation is a major concern to financial institutions based in London or indeed those contemplating being here.”
FAST FACTS
70 – the percentage of equity trading conducted in London, New York and Hong Kong
43 – the percentage of finance professionals considering leaving London
11 – the percentage intending to leave London
Lords attack auditors
Auditors made the financial crisis worse by failing to warn regulators of the severity of problems at banking clients, concludes the House of Lords Economic Affairs Committee’s inquiry into the audit profession. The failure by auditors and regulators to work together amounted to a “dereliction of duty”, claimed the peers. The committee also concluded that audit standards are slipping, because of the introduction of IFRS. Lack of competition in the audit of major banks should be considered by the Office of Fair Trading, the report suggests. ACCA welcomed many of the committee’s findings, but rejected the criticism of IFRS. “It is very pleasing to see that the Lords have recommended that the audit should expand in scope to provide broader, more up-to-date assurance on matters such as risk management, the business model, and the business review,” said ACCA chief executive Helen Brand.
Audits referred
Several auditors have been referred by the Financial Services Authority to their professional bodies for investigation for alleged failings in the quality of their client asset reports. Richard Sutcliffe, leader of the FSA’s client assets unit, said: “We have seen serious failings in relation to auditors’ client assets reports. As a result we have referred a number of auditors to their relevant auditing bodies over the past year and are currently considering referring several other cases.” New rules have been published by the FSA to clarify what is expected from external auditors in producing client asset reports.
Inquiry into going concern assessments
The FRC has launched an inquiry into going concern assessments and liquidity risks. The inquiry will consider the experience of auditors and companies who have addressed these issues during the recession. Recommendations will suggest measures to improve the reporting regime and related guidance to auditors and companies. The panel of inquiry will be led by former KPMG chairman Lord Sharman. FRC Chairman Baroness Hogg said: “In launching this inquiry, our aim is to ensure the lessons of the recent past are captured, our guidance developed as necessary and best practice in dealing with a range of related issues shared widely.”
Pre pack administrations
Tighter rules on business owners restarting their old companies under new names using pre-pack administration procedures have been announced by business minister Ed Davey. “We intend to require administrators to give notice to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party, in circumstances where there has been no open marketing of the assets,” said the minister. Creditors may then have the right to apply to court to prevent the sale.
Cooking oil to heat up PwC
PwC has contracted to use recycled chip fat oil from fast food takeaways, bars and restaurants to heat its new Southbank headquarters. Two 6,000 litre tankers will be filled with used oil each week from businesses across the city and the contents refined for reuse by PwC. The scheme is the largest of its kind in the UK and will meet a quarter of the energy requirements at PwC’s More London building.
IFAC publishes sustainability framework
IFAC’s Professional Accountants in Business Committee has updated its Sustainability Framework, to ensure that there is an integrated approach to business reporting and highlighting the central role played by accountants in supporting their organisations to operate sustainably. The framework draws on best practice from across the world. Roger Tabor, chair of the PAIB Committee, said: “Accountants… need to be prepared to take on new and expanded roles, activities, and skills as they support their organizations in charting a more sustainable path.”
HMRC ‘lost £16bn from struck-off companies’
Half a million companies ‘disappeared’ in the year ending March 2010, failing to pay £16bn in tax due, claims a report by Tax Research UK. Green Party MP Caroline Lucas published the Tax and Financial Transparency Bill that would strengthen legal measures against fraudulent trading by companies that are formally dissolved. “This Bill would ensure that banks have to provide details on all accounts they maintain for companies operating in the UK so that H M Revenue & Customs and Companies House can chase those companies who do not file the returns they’re obliged to make for the missing information – and the tax they owe,” said Lucas.
Public sector standards published
The Accounting Standards Board has published proposals for standards for public sector and not-for-profit organisations. The standards in Financial Reporting Exposure Draft (FRED) 45 would operate alongside the proposed Financial Reporting Standard for Medium-size Entities (FRSME). The FRSPBE has been developed because IFRS-based standards for the ‘for-profit’ sector do not consider transactions specific to the ‘public benefit entity’ sector. Issues addressed in FRED 45 include concessionary loans; property held for the provision of social benefits; entity combinations; impairment of assets; funding commitments; and income from non-exchange transactions, such as donations.
Degree ‘not necessary for accountants’
Accountancy has routes into the profession that do not require entrants to go through a degree course, points out an ACCA report, Climbing the ladder. Andrew Leck, head of ACCA UK, says: “It is clear that the UK must focus on ‘upskilling’ the population if it is to achieve its ambition of being in the top eight countries in the world for skills, jobs and productivity by 2020 and if it is to break down barriers to social mobility.”
Bribery Act guidance published
The Bribery Act is to come into force on July 1. Guidance to businesses on compliance with the law has now been published. The Ministry of Justice has also published case studies on facilitation payments, entertaining and joint ventures. ‘Quick start’ guidance for small firms is published on the MoJ’s website, www.justice.gov.uk/guidance/bribery.htm.
OFT to investigate audit restrictions
The Office of Fair Trading has been asked by the Government to investigate whether clauses in banks’ lending agreements have the effect of unfairly restricting audit market competition. The OECD has suggested that some bank loans are contingent on borrowers’ audits being undertaken by one of the Big Four. The Government announced in its ‘Plan for Growth’, published with the Budget, that it wants the OFT to investigate whether the removal of restrictive clauses would assist mid-market firms to compete more effectively for audits.
ACCA calls for more relevance in reports
Corporate reporting should be more heavily geared to effective communication, according to an ACCA submission to the Financial Reporting Council. The ‘gold standard of corporate reporting’ relies on brevity, relevance and flexibility, argued ACCA. John Davies, head of technical at ACCA, said: “ACCA wants to see the annual report re-defined as a regulatory document which contains the various reports and disclosures required by company law, the Listing Rules and other official guidance, but without the additional material.”
Audit responses published
The Financial Services Authority and the Financial Reporting Council have published responses to their consultation paper on arrangements for auditors and regulators of financial services businesses to work together. The discussion paper considered greater exchange of information, adoption of a more professional sceptical approach by auditors, the nature of disclosures and the scope of auditor reporting. The FSA and the FRC said they had received a wide range of constructive responses from accountancy firms, accountancy bodies, financial institutions and other stakeholders.
RoW News
Rules for single EU CT filings proposed
The European Commission has published proposals for rules for a common consolidated corporate tax base across the EU. The single tax base would not affect the right of member states to set their own tax rates, but would harmonise the way in which corporation tax was assessed. Companies would have the option of filing a single tax return for all their earnings within the EU. The rules would establish for companies that operate cross-border within the EU the distribution of profits to be assigned to different member states, each of which would apply their own corporation tax rates. Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-Fraud and Audit said: “The CCCTB will make it easier, cheaper and more convenient to do business in the EU. It will also open doors for SMEs looking to grow beyond their domestic market. [This] proposal is good for business and good for the EU’s global competitiveness.”
FAST FACTS
€2bn – potential savings for businesses from common rules
€1bn – additional income is simpler tax rules encouraged 5% of EU small firms to operate cross-border
Tweedie intervenes in US IFRS row [photo]
Outgoing IASB chair Sir David Tweedie has intervened in the row in the United States over the adoption of IFRS, urging its adoption in full. “It is the unambiguous commitment to IFRSs in 2011 that is essential,” he said. “The SEC has already indicated that the earliest implementation date when IFRSs would be required for the largest US public corporations will not come until 2015 or 2016 at the earliest. Implementation for smaller companies could come later.” He also said: “Delaying the adoption of IFRSs imposes unnecessary costs and risks on US companies…… Their foreign competitors could use IFRSs for all purposes, even for filing with the SEC, now that the reconciliation requirement has been removed. Even if you accept the need for a global standard, you may disagree with my assessment that the SEC must make a decision this year to allow the use of IFRSs. The window of opportunity will close if a decision is delayed.”
Major financial centres ‘must be partners’
London remains the world’s pre-eminent financial centre, according to the latest rankings in the Global Financial Centres Index. New York is second, followed by Hong Kong and Singapore, with Shanghai and Tokyo joint fifth. Frankfurt is the second most important financial centre in the European Union, but a mere 14th in the global rankings. The results showed that Shanghai is becoming more competitive, while Singapore has become less so. There was no significant difference in the ratings of London, New York and Hong Kong: implying, concludes the survey, that the three centres must work in partnership.
IFAC publishes sustainability framework
IFAC’s Professional Accountants in Business Committee has updated its Sustainability Framework, to ensure that there is an integrated approach to business reporting and highlighting the central role played by accountants in supporting their organisations to operate sustainably. The framework draws on best practice from across the world. Roger Tabor, chair of the PAIB Committee, said: “Accountants… need to be prepared to take on new and expanded roles, activities, and skills as they support their organizations in charting a more sustainable path.”
UN publishes business and human rights principles
The United Nations has published the report of John Ruggie, its special representative on business and human rights, proposing ‘guiding principles’. The principles highlight steps states should take to foster business respect for human rights; provide a blueprint for companies to know and show that they respect human rights; and reduce the risk of causing or contributing to human rights harm. These constitute a set of benchmarks for stakeholders to assess business respect for human rights. The UN Human Rights Council will consider formal endorsement of the text at its June 2011 session. Ruggie’s project has been backed by ACCA.
Moscow aims to become major financial centre
Russian president Dmitry Medvedev has convened an advisory committee of top bankers to assist Moscow become a major international financial centre. Committee members include Goldman Sachs’ chief executive Lloyd Blankfein; JPMorgan Chase’s chief executive and chairman Jamie Dimon; Bank of America’s chief executive and president Brian Moynihan; and Blackstone’s founder Steve Schwarzman. In the latest Global Financial Centres Index, Moscow was listed at number 68 and St Petersburg at 69 – below Manila, Jakarta and Bangkok.
Portugal crisis puts new strain on euro
Standard & Poor’s has warned that the failure of the Portuguese government to win support for a tightening of its austerity programme makes it more likely that the government and the country’s banks and insurers will seek debt restructuring and write-offs by lenders. Portugal’s sovereign debts were downgraded by S&P from A- to BBB, as were four of the country’s banks and two subsidiary operations. There are also growing fears about Greece’s sovereign and banking debt: Greece’s long term sovereign credit rating was downgraded by S&P from BB+ to BB-.
Russia establishes $10bn private equity fund
A $10bn Russian Private Equity Fund has been established by the Russian government, in co-operation with global private equity firms. The aim is to attract greater levels of foreign capital to Russia. Goldman Sachs leads the project.
Banker charged with $100m attempted fraud in Sydney
Australian police claim to have foiled an attempted $AUS 110m fraud, allegedly undertaken by a former employee of Westpac bank and two associates. The fraud investigation followed the discovery of $AUS 1.1m missing from the account of one elderly customer of the bank. Three associates are alleged to have laundered the proceeds of the fraud through a series of accounts in other banks, with the assistance of employees in those banks.
APB issues guidance on audit of government in Ireland
The UK and Ireland’s Auditing Practices Board, part of the Financial Reporting Council, has issued a consultation paper, proposing changes to the practices in auditing central government financial statements in the Irish Republic. The consultation draft updates the current guidance to reflect the issuance of the new auditing standards. These apply to audits of financial statements for periods ending on or after 15 December 2010. Richard Fleck, APB Chairman, said: “The APB is updating its Practice Notes to assist understanding of the new auditing standards.”
European Parliament urges progress on ‘Tobin Tax’
The European Parliament has voted its support for the ‘Tobin Tax’ – a surcharge on every financial transaction at a rate of 0.05%. This could raise up to €200bn a year. When proposed by economist James Tobin, the idea was to provide a means of addressing global inequality and supporting infrastructure improvements and health and social care in developing nations. The vote is not binding on the European Commission and the tax is opposed by the International Monetary Fund and several EU governments.
Kabul Bank to be wound down
The Afghan government has agreed to wind-down the Kabul Bank, under pressure from the International Monetary Fund and Western ally governments. A recent investigation by the New York Times claimed the Kabul Bank had lost $900m through fraud, mismanagement and bad property investments in Dubai. The bank is used to process many foreign aid payments and for the Afghan security forces.
NSW accuses outgoing government
Newly elected New South Wales state premier Barry O’Farrell has accused his predecessor Labour government of “cooking the books”, by hiding a $AUS 4.5bn hole in the financial budgets. Former NSW treasurer Michael Lambert has been commissioned to audit the state’s accounts. The secretary of the Treasury, Michael Schur, has meanwhile been placed on leave. Ministers in the previous government denied the accusation.
ECB and Bank of Russia agree partnership
The European Central Bank and the Bank of Russia have agreed a co-operation programme on banking regulation. The programme aims to improve the capacity of the Bank of Russia to supervise domestic banks, strengthen the stability of the Russian banking system, support the banks towards transition to Basel II principles and strengthen the Bank of Russia’s own internal audit functions. About 400 Bank of Russia internal auditors have participated in training sessions with the ECB to promote risk-based auditing, IT auditing and the auditing of foreign reserve management.
Audit report criticises Indian army
India’s army allows a private company to run profit-generating golf courses on government land free of charge, according to a highly critical report from the country’s Comptroller and Auditor General. The operator, Army Zone Golf, has rent-free access to at least 32 square kilometers of valuable real estate owned by the defence ministry, forming part of its portfolio of 97 luxury golf courses. Income from membership of the clubs goes to a private regimental fund – the accounts of which the auditor was prevented from seeing.
FitzPatrick inquiry postponed
The accountancy tribunal inquiry into Sean FitzPatrick, former chairman of collapsed Anglo Irish Bank, has been put on hold, after Ireland’s Director of Public Prosecutions, James Hamilton, expressed concerns that it could prejudice potential criminal action. Investigations into the circumstances of the failure of the now nationalised Anglo Irish are being conducted by Ireland’s Gardai (police) and the Office of the Director of Corporate Enforcement. The tribunal hearing was to have begun last month.
Politics
Audit requirements could lesson
Fewer SMEs will be required to undertake audits under proposals contained in the Government’s ‘Plan for Growth’, published as part of the Budget. “The UK has more onerous accounting standards for unlisted companies than many competitors, both in the EU, and elsewhere in the world,” claimed the report. The Government will apply to use more of the small company audit exemptions in the EU’s Company Law Directives. This would allow SMEs to use any two out of three criteria – turnover, balance sheet size and employee numbers – for exemption. New legislation will be introduced to adopt the changed criteria next year. The Government will also ask the European Commission to remove the audit requirement for most medium sized companies and simplify the narrative reporting requirements for listed companies.
Rules for single EU CT filings proposed
The European Commission has published proposals for rules for a common consolidated corporate tax base across the EU. Member states would still set their own tax rates, but harmonise corporate tax assessment. Companies could opt to file a single tax return for all EU earnings. The rules would determine the distribution of profits to be assigned to different member states, each applying their own corporation tax rates. Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-Fraud and Audit said: “The CCCTB will make it easier, cheaper and more convenient to do business in the EU. It will also open doors for SMEs looking to grow beyond their domestic market.”
UN publishes business and human rights principles
The United Nations has published the report of John Ruggie, its special representative on business and human rights, proposing ‘guiding principles’. The principles highlight steps states should take to foster business respect for human rights; provide a blueprint for companies to know and show that they respect human rights; and reduce the risk of causing or contributing to human rights harm. These constitute a set of benchmarks for stakeholders to assess business respect for human rights. The UN Human Rights Council will consider formal endorsement of the text at its June 2011 session. Ruggie’s project has been backed by ACCA.
Tax professionals ‘should be consulted on legislation’
Tax professionals should be consulted about the impact of proposed new legislation before it is implemented, the House of Commons Treasury Select Committee suggests. The Government has introduced an impact analysis of tax measures to ensure compliance burdens and collection costs are properly considered. Publication of these analyses would assist tax professionals to assess the quality of measures and advise government of any weaknesses, said the committee. The MPs concluded that all tax legislation should comply with four principles: fairness; support of growth and promotion of competition; certainty; and stability.
Basel III ‘not enough’, says Turner
Basel III is not sufficient to make the world’s financial system stable, the FSA’s chairman, Lord Turner, has claimed. Supervisors must recognise that constant evolution and financial innovation create new risks, requiring regulators to adapt to respond. “The pre-crisis delusion was that the financial system, subject to the then defined set of rules, had an inherent tendency towards efficient and stable risk dispersion,” said Lord Turner. “The temptation post-crisis is to imagine that if only we can discover and correct specific imperfections – such as bad incentives or industry structure – that a permanently more stable financial system can be achieved.”
Public sector
Options proposed for local audit
Local public bodies should be free to appoint their own auditors after the Audit Commission is abolished, the Government has proposed. Smaller bodies should be subject to a lighter touch, more proportionate, audit, while larger organisations should use their market strength to reduce audit costs. The future focus of local public audit should include greater transparency in financial reporting, enabling voters to hold local authorities and other public bodies more closely to account. Ministers also want reduced audit fees and higher auditing standards. Local government minister Grant Shapps explained: “The Audit Commission has lost its way, becoming too focused on reporting to Whitehall and supporting the previous era of target driven Government.” Consultation on new audit framework arrangements lasts until 30 June and offers two options for auditor oversight: either local public bodies will be free to appoint external auditors, subject to independence safeguards; or the National Audit Office and accountancy bodies will oversee a statutory framework.
NAO warns of ‘cuts, not savings’
The short-term focus of spending reductions means that cost reduction is likely to be achieved by cuts rather than efficiency savings, the National Audit Office has warned in a report on the Government’s Efficiency and Reform Group. “Because of the short time scale, there is a risk that much of the cost reduction achieved by departments in 2010-11 will result from policy decisions to withdraw funding and reduce budgets or other short-term measures, rather than structured and sustainable cost reduction,” concluded the report. The NAO said that it was unclear from most departments’ current business plans what proportion of spending reductions will be achieved by genuine efficiencies, rather than by service reductions.
Practice
Accountant jailed for client warning
An accountant has been jailed for 18 months, and banned from being a company director for six years, for tipping-off a client that he was being investigated in a money laundering probe. Kishor Doshi traded as Accountancy & Taxation Services, registered under the company name Otax, in Sunderland. Doshi is the first person imprisoned for warning a client in this way under new requirements introduced in the Proceeds of Crime Act. Northumbria Police’s economic crime unit had obtained a court order for the release of the client’s funds and sent a Production Order to Doshi. Under the terms of this, Doshi was not permitted to notify the client. He claimed that he was unaware of the law. Doshi pleaded guilty to a further offence of breaching money laundering regulations by failing to register with HMRC.
Chantrey Vellacott expands
Chantrey Vellacott has taken over Southampton-based business rescue and insolvency practice Roger Evans, which has 11 offices in the South and Midlands. Mike Tovey, managing partner at Chantrey Vellacott, said: “We have been looking to establish an insolvency presence ourselves in the Hampshire area and to push further west and have been talking to Rogers Evans for several months….. We have an office in Reading covering the Thames Valley area, and a strong insolvency and business recovery operation based in Hove, so this is a logical move for us. We believe that Rogers Evans’ place in the market will be boosted by being a part of Chantrey Vellacott DFK and this is the first step in a planned expansion out towards the south west.”
Financial Services
AIU reviews building societies
All building societies are to fall within the scope of the Audit Inspection Unit in the 2011/12 year, the Professional Oversight Board has announced. Previously only larger building societies were under the remit of the AIU. All incorporated UK banks were brought within the responsibility of the AIU from 2010/11. The AIU has been instructed by the POB to have particular regard in 2011/12 to fair value accounting estimates and disclosures, impairment of assets, revenue recognition, related parties and going concern, including whether appropriate professional scepticism has been applied in these areas. It will also place emphasis on the quality of reporting to audit committees and assess how the revised auditing standards that became effective from December 2010 financial year-ends are being applied by firms and individual audit teams in practice. Dame Barbara Mills, Chair of the Board, said that work of the AIU will reflect the heightened audit risks of the current environment and focus on the business sectors most affected.
Sector recovers
The UK financial services sector has recovered to the point where business is only slightly below normal, according to the latest CBI/PwC survey. Activity has grown strongly for three quarters in a row and is the best since the onset of the financial crisis in September 2007. However, total operating costs are also rising at their fastest pace since then, with costs per transaction rising slightly. Ian McCafferty, the CBI’s chief economic adviser, said: “While business with private individuals has again shown the fastest growth, business with companies also shows some signs of improvement. Firms’ profitability has improved due to higher incomes and another big drop in the value of non-performing loans.”
Corporate
Deloitte warns of refinancing crisis
There will be high levels of competition for capital to refinance over £7 trillion of debt falling due in the next five years, claims a report by Deloitte, A Tale of Two Capital Markets. The study examined the debt of over 9,000 large companies in the G20 and concluded there is a two-tier economy, with a major variation between large, cash-rich, companies, and growing challenges for SMEs. Margaret Ewing, Deloitte partner and vice chairman, said: “CFOs of highly indebted companies need to address their refinancing requirements sooner rather than later to improve their financial flexibility and boost their liquidity position.” Deloitte warned that with £500bn of UK banks’ wholesale term debt due to mature by the end of next year, UK banks will themselves be vulnerable to volatility in the wholesale funding markets. Increased regulatory controls will also constrain banks’ lending capacity.
Healthcare Locums CFO steps down
Healthcare Locums finance director Diane Jarvis has resigned. She was suspended earlier this year, along with founder and executive vice-chairman Kate Bleasdale. Ms Bleasdale has since been dismissed. In a statement the company said: “Ms Jarvis’s resignation follows an investigation by the company into financial irregularities that occurred during her tenure as chief financial officer and for which she has accepted responsibility.” Shares in the company were suspended in January, after the discovery of accounting irregularities. Zolfo Cooper has been appointed to restructure the company and two new board members have been appointed.
RoW
Practice
KPMG grabs Brazilian firm from BDO
BDO’s member firm in Brazil has been acquired by KPMG. BDO has responded by taking over the Crowe Horwath network member in the country, RCS Auditores Independentes. It is reported that BDO is considering lodging a complaint against the actions of KPMG. BDO CEO Jeremy Newman was quoted as saying: “BDO is not the first firm to have suffered as a result of our larger competitors using their dominant financial position to buy market share and we have expressed our concerns about this in BDO’s recent submission to the European Commission’s Green Paper on the role of the audit profession. These tactics are not driven by client needs but by one firm’s wish to buy market share and presumably achieve further economies of scale. We are concerned that when one firm looks to dominate it reduces choice for clients and leaves the market worryingly dependent on just a few players. BDO will be lodging an objection to this deal with the Brazilian competition authorities.” KPMG, BDO and Crowe Horwath all failed to respond to requests for comments.
SMPs key in supporting SMEs
Small and Medium Practices – SMPs – have a key role in supporting SMEs, delegates at IFAC’s SMP conference in Istanbul have been told. IFAC President Göran Tidström said: “SMPs can help SMEs thrive by providing them with a broad range of services, including strategic and business advisory services, IT and financial reporting systems support, risk management and fraud prevention services, and financial, tax, and HR advisory services. The IFAC SMP Committee supports SMPs in developing and maintaining their competencies to provide these services, in addition to traditional compliance services.”
Financial services
Deutsche Bank to pay massive compensation
Deutsche Bank has been instructed by Germany’s highest civil court to pay compensation of over half a million euro to clients who invested in exotic products that lost most of their value in the financial crisis. Deutsche was told by the court that it should have warned clients of the real nature of the risk they were entering into. While the compensation bill is not substantial in itself, it is expected to lead to a potentially large number of copycat cases. Deutsche’s lawyer said it could spark “a second financial crisis”. The product that investors put money into was a ‘spread ladder swap’ – a complex derivative that bet on future interest rate movement. The court ruled that Deutsche had been subject to a conflict of interest, because it acted as a counter-party in the transaction, while advising clients to make investments. The court told Deutsche that it had a duty to ensure clients had the same level of knowledge as itself.
Electronic fraud ‘costs $1trn’
Companies globally are losing $1trn a year from electronic fraud – but are keeping the cost quiet to avoid public disquiet, according to a report by Market Watch using data sourced from McAfee. As well as market damage, financial services firms fear costly investigations by regulators, says Market Watch. High levels of publicity could lead to banks and other firms losing market value at a rate exceeding the actual losses incurred. McAfee found that even the largest finance companies are not completely protected from fraud and data theft, and that 70% of firms fail to report on all hacking incursions, data leaks and consequent losses.
Corporate
Deloitte warns of refinancing crisis
There will be high levels of competition for capital to refinance over £7 trillion of debt falling due in the next five years, claims a report by Deloitte, A Tale of Two Capital Markets. The study examined the debt of over 9,000 large companies in the G20 and concluded there is a two-tier economy, with a major variation between large, cash-rich, companies, and growing challenges for SMEs. Margaret Ewing, Deloitte partner and vice chairman, said: “CFOs of highly indebted companies need to address their refinancing requirements sooner rather than later to improve their financial flexibility and boost their liquidity position.” The survey found that most of the maturing debt is located in the Americas – responsible for half the total. Asia has the lowest magnitude of debt, but the highest proportion (69%) of it maturing in the next five years. These factors suggest intensifying global competition for capital, argued Deloitte.
Audit heads support Sarbanes-Oxley
The vast majority of US chief audit executives support the retention of the Sarbanes-Oxley Act, according to a survey conducted by Grant Thornton. Some 88% believe the Act should not be repealed, though nearly half say that regulatory change poses the biggest threat to their companies. Warren Stippich of Grant Thornton said: “Based on discussions with various CAEs during the survey process, many believe that SOX brings a continued focus by management on financial and governance-related controls. However, CAEs believe that compliance audit processes are now well-defined and are currently exploring ways to contribute value creation to the organization well beyond compliance monitoring and reporting.”