UK News
SFO investigates Kaupthing
The Serious Fraud Office is to investigate activities of the Icelandic bank Kaupthing in the UK prior to its collapse in October 2008. The focus of the investigation will be on the marketing of what was described as a “high yield” deposit account called Kaupthing Edge. Consideration will be given to whether this involved any fraudulent activity in the UK, and whether there were any misrepresentations or false representations in the promotion of the product to UK investors. Another focus for the SFO investigation will be the bank’s decision-making processes: substantial value was extracted from the bank prior to its collapse. The SFO estimate that over 30,000 UK individuals, companies and organisations invested into the Kaupthing Edge deposit account. Ernst & Young is acting as administrator of the parent bank Kaupthing Singer & Friedlander. ING is now operating the Edge accounts, which were transferred to it from Kaupthing. [148]
FAST FACTS
30,000 – UK investors in the Kaupthing Edge deposit account
160,000 – UK investors in various Kaupthing products
£2.5bn – value of the UK deposits in Kaupthing
KPMG revenues fall
KPMG’s European revenues fell by 0.4% to €3.5bn in the year ending September. Revenues fell particularly heavily in the UK, where they dropped by €1.9bn (1.6%), and in Germany, where they fell by €1.2bn (1.7%). Additional €1bn revenues will now be added to the European division with the absorption of Netherlands, CIS, Turkey and Luxembourg. The strongest performance came in the audit practice, where European revenues were up by 3.1%: revenues fell by 5.4% in tax services and were static in the advisory practice. Joint chairmen of KPMG Europe LLP, John Griffith-Jones and Rolf Nonnenmacher, described the firm’s performance during the recession as “creditable”, given that it was “the worst financial crisis in almost 80 years”. They added: “Our scale has allowed us to play a full and constructive part in tackling the financial crisis, working closely with governments, regulators and companies to battle a storm that might have overwhelmed the banking system.” [152]
AADB investigates on Equitable Life
An Institute of Chartered Accountants of Scotland member is being investigated by the Accountancy and Actuarial Discipline Board regarding Equitable Life’s 1999 financial statements. A Joint Disciplinary Tribunal report on Ernst & Young’s audit of Equitable Life is expected “soon”, according to the Joint Discliplinary Scheme, following a two week hearing in October. Ernst & Young withdrew its legal action in June last year prevent the JDS from forwarding its report on E&Y to the FSA, but the FSA says it will not take action based on the report. [89]
APB’s new executive director
Marek Grabowski becomes executive director of the Auditing Practices Board from March. He retired last year from PwC where he had been an audit client service partner and a technical support partner dealing with auditing and accounting issues internationally. He replaces Jon Grant, who has held the position since 1996. Grant will work for the FRC on a part-time basis and continues to be a member of the International Auditing and Assurance Standards Board. [76]
Tenon and Bentley Jennison merge
Tenon and RSM Bentley Jennison have merged. The new firm, RSM Tenon, becomes the seventh largest in the UK, with nearly 3,000 staff and combined fee income of over £250m, and is now the UK member of the international RSM network. Andy Raynor, chief executive of Tenon Group PLC, heads the enlarged firm. Tony Stockdale, national managing partner of RSM Bentley Jennison, joins the board of the PLC, as do Richard Smith, national head of risk management for RSM Bentley Jennison, and Mark Lucas, head of corporate finance at Tenon. [91]
FRC consults on work plan
The Financial Reporting Council is consulting on its work plan and priorities for 2010/11. Outlined priorities include helping boards, preparers, audit committees, auditors, actuaries and investors address current financial conditions and to monitor responses to those challenges. It may issue updated guidance to audit committees and directors and will review a selection of annual and interim accounts and directors’ reports. The FRC plans to identify longer-term lessons of the financial crisis, including by changing the corporate governance code, supporting the introduction of a stewardship code for institutional investors and promoting more transparent corporate reporting. [94]
Bank of England accuses bonuses
Banks’ responsibility for the financial crisis includes paying-out too much of their profits in staff bonuses and shareholder dividends, the Bank of England argues in its latest Financial Stability Report. “A simple analysis suggests that reducing staff costs by around one tenth and dividend payout rates by around a third would allow UK banks to increase retained reserves to close to £70bn over the next five years,” suggests the report. [70]
CFOs gain confidence
CFOs have become much more optimistic about the financial prospects, according to the tenth quarterly Deloitte CFO Survey. Concerns about shortages of liquidity and credit have eased, indicating that conditions have improved. Some 78% of CFOs now think the UK banking system is strong enough to sustain the recovery, but fears of a ‘double dip’ recession are widespread. Top priorities for CFOs this year are reducing costs and increasing cash flow. Equity and bonds are regarded as more attractive options for finance than bank borrowing. [85]
APB’s going concern guidance
The Auditing Practices Board has published new guidance to auditors on exercising going concern judgements. The guidance also covers how they review Corporate Governance Statements required by the FSA under its Disclosure and Transparency Rules. The APB’s going concern guidance clarifies for auditors their responsibilities in reviewing whether directors’ statements on going concern in annual reports are consistent with the FRC guidance for directors published last year. [69]
BDO adopts global name
All BDO member firms have adopted the single global trading name of ‘BDO’. The change was effective from the beginning of the year. BDO is the world’s fifth largest accountancy network and this move affects 1,138 offices in 110 countries. The network also created a new brand image. BDO chief executive Jeremy Newman said: “Our transition to the single global trading name is the culmination of many years of strategic and operational investment and engagement.” [74]
AIU’s non-audit concern
The Audit Inspection Unit has expressed concern about the widespread selling of non-audit services to audit clients. Firms’ appraisal documents have, on occasion, referred to staff’s achievement in cross-selling non-audit services to audit clients. Auditors’ ethical standards bar firms taking into account audit staff’s success in selling non-audit services in the arrangements for appraisal, promotion and remuneration. The AIU also found that audit personnel sought recognition and reward for assisting in obtaining non-audit work from audit clients. [77]
FEE supports XBRL
FEE – the Federation of European Accountants – has published a policy statement to explain to accountants and auditors the impact of the use of XBRL and XBRL-enabled documents. Regulators, reporting entities and users of financial statements are keen to reduce costs, increase efficiencies and improve the quality of information in financial reports through the use of XBRL. FEE argues that XBRL has the potential to reduce the cost of capital by increasing transparency and ease of use of financial information. [82]
Rogue email ‘no joke’
A Deloitte graduate trainee has resigned after a joke email was sent around the world. The email requested nominations for “Xmas awards [that] probably massively violates the HE equal opportunities policy”. Categories included “fittest boy – looks” and “boy most likely to sleep his way to the top”. The first year analyst resigned when she realised the emailed had become widely circulated inside and outside the firm. A spokesman for Deloitte said: “While intended as a joke, this is a stark reminder of the need to exercise careful judgement when using email.” [91]
Boyle made OBE
Paul Boyle – the former chief executive of the Financial Reporting Council – was made an OBE in a new year’s honours for services to the financial services industry. Other awards included CBEs for Ian Hardie, the HMRC’s deputy director of corporation tax and VAT, and Ian Luder, the recent Lord Mayor of London and a former Grant Thornton partner. Gillian Thompson, the recent chief executive of the Accountant in Bankruptcy service of the Scottish Executive, was made an OBE. [78]
M&A accounting ‘not useful’
Mergers and acquisitions accounting is costly, difficult and not useful for investors, according to a Financial Reporting Council study. One explanation, says the FRC, is that IFRS 3, on business combinations, has not been properly applied by companies because of unfamiliarity with its requirements and the complexity of valuing intangible assets such as brands and customer relationships. Amendments to IFRS 3 should mean more intangibles are recognised for accounting purposes and achieve greater consistency between disclosures about acquisitions in accounts and what companies state in their business reviews. [87]
Standards convergence ‘not a priority’
Less emphasis should be placed on converging accounting standards and more on making accounts more relevant for investors, according to a survey conducted by the CFA Institute. Three quarters of the 16,000 investment professionals surveyed believe that making information in accounts more relevant to investors is more important than either achieving convergence or reducing complexity. [55]
Deloitte expands consulting
Deloitte has acquired UK performance and information management consultancy ReportSource, the UK’s leading business performance and information management consultancy, taking on an extra 66 consulting staff. Ian Harrison, managing director of ReportSource, joins Deloitte as a partner. Deloitte says the acquisition will help it support clients to maximise the benefits of existing IT investments. [54]
E&Y quits White Tower
Ernst & Young has resigned as auditor of White Tower, the property vehicle of troubled entrepreneur Simon Halabi. In its letter to the company, the firm said: “In accordance with section 519(2) of that Act, we confirm that there are no circumstances connected with our resignation which we consider should be brought to the attention of the members or creditors of the company. We draw your attention to the fact we issued a qualified audit opinion.” [76]
RoW News
The first Arab economic unity conference has taken place in Kuwait. The event was described as “the only truly cross-sector and cross-cultural gathering in the Arab world” and its theme was the integration of Arab economies. Topics included the prospects for monetary and economic union, developing the region’s economic strength beyond the use of oil; food security; trade liberalization; and whether Islamic finance offers a broad model for doing business. The conference also hosted the 2009 Arab Creativity Awards, celebrating achievement in Arab science, technology, economics, society, literature, culture and the media. The programme of events was organized by the Arab Thought Foundation – Fikr – which aims to promote improved relations between the Arab and western worlds. It was sponsored by the state of Kuwait. “The Arab region possesses all potentials of integration and can restore its historical well-deserved honorable status among the other nations of the world,” said Prince Khaled Al-Faisal, the chairman of the Arab Thought Foundation. [159]
FAST FACTS
$352bn – GDP of the largest Arab economy, Saudi Arabia
$31,397 – GDP per capita of the richest Arab state, Qatar
$751 – GDP per capita of the poorest Arab state, Yemen
France proposes EU carbon tax
French president Nicholas Sarkozy has proposed a single European Union-wide carbon tax and border tariff, following the rejection for his proposals of a national French carbon tax in the courts. Sarkozy said that it would not be acceptable for European businesses to be disadvantaged in international trade because they adopted more environmentally-sound business practices. “In future we will levy a ‘climate tax’ at Europe’s borders,” he said. The president had proposed a carbon tax in France of €17 per ton of carbon dioxide, but the national Constitutional Council embarrassed Sarkozy by ruling it breached national laws because it contained too many exemptions. While it would have covered industrial production, it would not have affected many energy producers, including oil refineries. French Economy Minister Christine Lagarde said that the government is now working-up plans to apply the carbon tax more widely, including on the major energy companies. [144]
FEE supports XBRL
FEE – the Federation of European Accountants – has published a policy statement to explain to accountants and auditors the impact of the use of XBRL and XBRL-enabled documents. Regulators, reporting entities and users of financial statements are keen to reduce costs, increase efficiencies and improve the quality of information in financial reports through the use of XBRL. FEE argues that XBRL has the potential to reduce the cost of capital by increasing transparency and ease of use of financial information. [82]
Lloyds fined $217m
Lloyds Banking Group will pay $217m to US authorities to settle allegations of violations of breaches of sanctions controls against Iran, Libya and Sudan. It must also submit to two annual reviews of transactions carried out in US dollars. The complaints arose from activities conducted in 2006 by Lloyds on behalf of clients in the three countries. The Treasury Department accused Lloyds of “intentional manipulation and deletion of information about US sanctioned parties in wire transfer instructions routed through third party banks located in the US”. [86]
Bernanke blames lax oversight
The global crisis was caused by regulatory failure, not low interest rates, US Federal Reserve chairman Ben Bernanke has claimed. “Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble, than a general increase in interest rates,” he said. [57]
Standards convergence ‘not a priority’
Less emphasis should be placed on converging accounting standards and more on making accounts more relevant for investors, according to a survey conducted by the CFA Institute. Three quarters of the 16,000 investment professionals surveyed believe that making information in accounts more relevant to investors is more important than either achieving convergence or reducing complexity. [55]
Japan wavers on fair value
The adoption of IFRS would be put at risk by the adoption of ‘full fair value’ under the US rules, the Tokyo Stock Exchange president and chief executive has said. Atsushi Saito argued that Japanese companies are worried about differences between the systems used by the FASB and IASB for fair value measurement. Following changes to the IASB’s standards, forced on it by the European Union, further modifications to IFRS 9 to bring it closer to the US methodology would jeopardise Japanese implementation of IFRS, said Saito. [84]
US audit firms warned of law suits
Auditors in the United States have been warned to expect a big increase in litigation this year. Richard A. Roth of the New York Roth Law Firm told an accountancy conference that recent large losses and frauds will persuade investors to lodge legal claims against audit firms. Accountancy firms should review their client relationship practices in the light of recent court decisions, he suggested. “Investors will go after whoever still has money that could satisfy a legal judgment,” said Roth. “This creates tremendous risk for accountants.” [86]
KPMG revenues fall
KPMG’s European revenues fell by 0.4% to €3.5bn in the year ending September. Revenues fell particularly heavily in the UK, where they were €1.9bn (1.6%) down, and in Germany, which fell by €1.2bn (1.7%). An additional €1bn in annual revenues will now be added to the European division through the integration of the Netherlands, CIS, Turkey and Luxembourg into KPMG Europe ELLP. The strongest performance came in the audit practice, where European revenues were up by 3.1%: revenues fell by 5.4% in tax services and were static in the advisory practice. [91]
Sikich expands
The Illinois accountancy firm Sikich is expanding through two mergers. The Rockford accountancy firm of Frederick M. Marcus & Co is to become part of Sikich, as will a marketing and design firm, Icon Digital Design & Illustration, which is based in Illinois. Jim Sikich, chief executive of the firm, said that the move reflected the need for clients to access professional marketing services. [64]
CFOs gain confidence
CFOs have become much more optimistic about the financial prospects, according to the tenth quarterly Deloitte CFO Survey. Concerns about shortages of liquidity and credit have eased, indicating that conditions have improved. Some 78% of CFOs now think the UK banking system is strong enough to sustain the recovery, but fears of a ‘double dip’ recession are widespread. Top priorities for CFOs this year are reducing costs and increasing cash flow. Equity and bonds are regarded as more attractive options for finance than bank borrowing. [85]
Overstock sacks Grant Thornton
US online retailer Overstock has dismissed Grant Thornton after the firm revised its position on how the company should report a $785,000 asset in 2008. As a result, Grant Thornton was unable to complete its review of the company’s Q3 2009 financial statements unless the company amended its previous 2009 quarterly filings and restated its 2008 financial results. KPMG has now been appointed. Jonathan Johnson, president of Overstock, said: “It is nice to be back with a Big Four accounting firm.” A Grant Thornton spokesperson responded: “As a matter of professional standards and firm policy, we do not comment on the work provided to clients beyond information required by the SEC, and believe our services complied with professional standards.”
BDO adopts global name
All BDO member firms have adopted the single global trading name of ‘BDO’. The change was effective from the beginning of this year. BDO is the world’s fifth largest accountancy network and the move affects 1,138 offices in 110 countries. The network has also created a new brand image. The CEO for BDO in the US, Jack Weisbaum, said: “The adoption of the single ‘BDO’ brand name reinforces our commitment to the BDO international network, even as we celebrate our firm’s centennial here in the United States.” [85]
E&Y pays $8.5m
Ernst & Young is to pay the US Securities and Exchange Commission $8.5m, following charges laid against it and six of its current and former partners. The charges relate to an accounting fraud at Bally Total Fitness Holding Corporation. An SEC investigation found that E&Y knew or should have known about Bally’s fraudulent financial accounting and disclosures. The SEC concluded that E&Y issued “false and misleading” audit opinions on Bally’s financial statements from 2001 to 2003 by not qualifying them and saying they were prepared in accordance with US GAAP. [90]
Dubai banks downgraded
Dubai banks have been downgraded by ratings agencies, following reviews of their exposure to Dubai World and other property investments in the region. Moody’s downgraded Emirates NBD, Mashreqbank and Dubai Islamic Bank. Standard & Poor’s downgraded National Bank of Dubai, Dubai Islamic Bank, Mashreqbank and Emirates Bank International. Fitch Ratings has put four Dubai and Middle East banks on ratings watch, including HSBC Middle East. [65]
Calls for Irish banking inquiry
A call for an inquiry into the collapse of Ireland’s banks has been backed by environment minister John Gormley, the leader of the Green Party and a member of the ruling coalition. Members of the governing Fianna Fail party and the opposition Fine Gael party have joined the demand for an independent inquiry, which is led by Central Bank governor Patrick Honchan. Ireland’s Taoiseach Brian Cowen has not ruled out an inquiry, but says that the crisis must first be resolved. [85]
ACCA calls for improved dialogue
ACCA is calling for improved dialogue between regulators and businesses, following the publication of a policy paper, The Future of Financial Regulation – An Update. The paper calls for changes in the regulatory environment, with better ethics training for all directors including non-executives, the implementation of a US-style Consumer Financial Protection Agency in Europe and for company boards to urgently upgrade their risk functions. “Buy-in from both sides is the key to achieving successful regulation,” says Ian Welch, ACCA’s head of policy and co-author of the report. [87]
Politics
ACCA calls for improved dialogue
ACCA is calling for improved dialogue between regulators and businesses, following the publication of a policy paper, The Future of Financial Regulation – An Update. The paper calls for changes in the regulatory environment, with better ethics training for all directors, including non-executives; the implementation of a US-style Consumer Financial Protection Agency in Europe; and for company boards to urgently upgrade their risk functions. “We need to see specific proposals to turn the G20’s stated pledge to see integrity in financial institutions turn into reality,” said Ian Welch, ACCA’s head of policy and co-author of the report. “Buy-in from both sides is the key to achieving successful regulation. The risk is that if this is not achieved, governments could lose patience and impose a framework of strict and detailed regulations rather aiming for than a balanced and common sense business environment.” [141]
SNP accuses firms
Insolvency practitioners are making unacceptable and excess profits out of the recession, according to the Scottish Nationalist Party’s regulatory spokesman, Mike Weir MP. “The UK Government must take a serious look at the workings of the insolvency industry that appears to be raking in a fortune at the expense of creditors,” he said. “There is something seriously wrong when liquidations can take a generation to finalise and people are actually dying before the insolvency gravy train comes to a halt.” Weir claimed that “the industry is largely self-regulated”, with “practitioners…. regulated by accountancy and law professional bodies, which have no independence from the firms they regulate”. He added: “What’s more, there is no independent complaints investigation procedure or ombudsman to adjudicate on malpractices – there are no questions over fees or delays.” [131]
Accountants have ‘negative impact’
Tax accountants ‘destroy value’ and have a negative financial impact on society, argues a study published by the New Economics Foundation. “Determining the right amount of tax payable is a specialist skill and often requires professional support,” explains the report, ‘A Bit Rich?’. “However, some highly paid tax accountants’ sole purpose is to help rich individuals and companies to pay less tax……. For a salary of between £75,000 and £200,000, tax accountants destroy £47 of value for every pound in value they generate.” The negative impact of tax accountants was much greater than that of City bankers, concluded the study, which “destroy £7 of social value for every pound in value they generate”. By contrast, waste recycling workers generate £12 of value for every pound they earn. [128]
Carbon tax fraud ‘cost billions’
About €5bn in tax revenues have been lost to European Union governments because of carbon trading carousel fraud, according to analysis carried out by Europol. In some EU member states, up to 90% of the volume of trades within the Emission Trading System were fraudulent. The first signs of the fraud were seen in late 2008, when there was a large upsurge in trading activities. The UK, France, the Netherlands and Spain have all introduced controls to avoid the frauds, which involve circular (‘carousel’) trades of non-existent emissions permits, with a government being fraudulently billed for a repayment of the VAT. Europol says that with the involvement of these governments, and those in Belgium and Denmark, it has established a project to monitor activities “to identify and disrupt the organised criminal structures behind these fraud schemes”. It predicts that the fraudsters will now migrate towards conducting similar activities in the trading of gas and electricity. [155]
Public sector
Public sector converges with IFRS
Convergence has been achieved between international public sector accounting standards and IFRS, the International Public Sector Accounting Standards Board (IPSASB) has declared. The declaration of convergence follows the agreement of three final revised public sector standards on the presentation, recognition and measurement and disclosures of public sector accounts. A fourth standard agreed at the IPSASB meeting in December covered intangible assets, while an improvements standard made minor changes to existing IPSASs. They are primarily drawn from IFRSs, with limited changes dealing with public sector-specific issues. The board also approved an exposure draft covering service concessions. “In the current global economic environment, when governments are increasingly raising debt through the capital markets as a result of their financial interventions in the private sector, the need for certainty in the application of well-developed financial instruments standards has particular urgency,” explained Mike Hathorn, chair of the IPSASB. “Achieving convergence is also crucial to enhancing transparency at this time of large scale government interventions.” [161]
IFRS drives recruitment
The move to IFRS in the public sector has led to higher demand for qualified accountants, according to the World of Work annual report from recruitment consultants Badenoch & Clark. There was also a high demand for project accountants in the NHS and for business critical positions in the NHS and other public bodies. The firm said that the apparent job security of the public sector had encouraged workers to move there from the private sector. [75]
Practice
‘Time to pay’ under fire
HMRC is rejecting an increasing number of applications to join the Time to Pay Scheme, according to IT finance provider Syscap. More companies are now seeking finance from Syscap because they are unable to defer tax payments. “HMRC….. have progressively raised the approval bar, started asking tougher questions, requested more details and are turning more applications down,” says Syscap. “Those that do manage to secure an agreement with HMRC are now faced with inflexible conditions and much tighter repayment schedules.” Baker Tilly also criticized the working of the scheme, saying that larger companies face higher costs because of a new requirement that any business with outstanding tax liabilities of £1m or more must commission an independent business review, at their own expense, before HMRC will consider allowing extra time to pay. This will cost about £50,000 extra for the 300 to 400 business affected, says Baker Tilly. [147]
Tax refund delays
Refunds for overpaid tax are taking longer to process because of an increase in fraudulent claims, says the Chartered Institute of Taxation. John Whiting, the CIT’s tax policy director, says: “This has been a theme of 2009, that practitioners regularly grumble that it is difficult to get early tax repayments. We have had a regular flow of complaints about this. We have taken this up with the Revenue and they have said there is no campaign to stop the repayments. What it is, is that there are some concerted attacks on them from people seeking false refunds. It means the innocent are caught up with the guilty.” [105]
Clampdown on construction expenses
The construction industry has been warned that HMRC is unilaterally cutting the entitlement period for the recovery of travel expenses from six years to four years. Tax claims advisors Rift says the move will save HMRC millions of pounds annually. “There are literally thousands of construction workers who, because they are paid on PAYE and use their own transport to travel from site to site, are
entitled to refunds on their travel expenses but have never made a claim,” says Jan Post of Rift. They should quickly submit old claims, she advises. The claimback period was cut from six to five years in January and will be reduced further to four years in April. [114]
Enterprise
Demeca research shows SMEs turning to new sources of finance
A shortage of bank lending is driving firms towards other forms of trade finance, according to a report from working capital consultants Demeca. The report was backed by a survey of 1,500 UK, French and German firms that employ over 1,500 staff. Many firms reported having no alternative options for obtaining finance with the closing of traditional bank lending lines. Some 43% of French companies, 34% of those in Germany and 31% in the UK said they had begun using trade receivables as security for borrowing: those in the UK and Germany, in particular, expect to increase their use of trade receivables. Some 61% of companies reported securitisations had become more difficult to use. Demica CEO Phillip Kerle said: “If European firms are to raise finance successfully in the future, the focus will have to be taken off liquid assets. Trade receivables are leading the way as invoice debt is seen to be a high quality security and therefore has the ability to improve access to credit significantly.” [167]
Recession ‘a boon to new starts’
The recession has driven a big increase in new start businesses, figures from the British Bankers Association suggest. Over 47,000 businesses a month began trading in the first three quarters of last year – an increase over 2008. The BBA has also published a revised Statement of Principles setting out how banks will support entrepreneurs through the remainder of the recession. It emphasises the importance of openness and early collaboration, with firms expected to provide realistic business plans that deal honestly with the likely impact of the enduring negative trading conditions. [90]
SME confidence returns
Confidence is returning to the SME sector, according to the latest Bowmark Entrepreneurs’ Index. Some 59% of respondents – directors of UK SMEs – expect to see a sustained recovery in the UK economy this year, most of them predicting it later in 2010. Some 78% believe that an incoming Conservative government would be more supportive to SMEs than is the current administration. Directors of business services SMEs are the least optimistic of an early recovery, while those in the health sector are the most positive – with nearly three quarters of people in the sector expecting to see more outsourcing of health services to the private sector. [105]
Corporate
Vodafone loses £2.2bn tax appeal
Vodafone has lost its legal appeal against a £2.2bn tax bill relating to its acquisition of Germany’s Mannesman. Vodafone had channeled the transaction through a Luxembourg subsidiary, which had generated a substantial profit that the parent company argued was not subject to UK corporation tax. It said that paying UK tax on subsidiary companies in other countries in the European Union as controlled foreign companies was incompatible with EU law. The High Court accepted Vodafone’s case, but it was rejected by the Court of Appeal. Now the Supreme Court – which last year replaced the House of Lords as the highest appellate court in the UK – has ruled that there is not a “point of law of general public importance which ought to be considered by the Supreme Court at this time”. [131]
United Utilities FD quits
United Utilities’ CFO Tim Weller is to leave the company in May after four years in the job. He is to take up the role of CFO with Cable &Wireless Worldwide. Philip Green, chief executive of United Utilities, said: “Tim has been an integral part of all the work we have done in recent years to reshape the United Utilities Group and to improve our operational performance; he also played a key role in relation to the recent water price review.” Weller joined United Utilities from RWE Thames Water, where he had been group finance director. Before that he had been group finance director at Innogy Holdings, an energy company. Weller began his career at KPMG, where he was a partner in the infrastructure audit and accounting group. He has also been a director of financial control at Granada. [139]
Financial services
FSA to strengthen stress testing
The Financial Services Authority is requiring firms to increase their use of stress testing to reduce the risk of market failures. Financial services firms are expected to develop, implement and action robust and effective stress testing programmes to assess their ability to meet capital and liquidity requirements in difficult conditions. The FSA will also run its own stress tests on a periodic basis for firms that have a “high impact” on the wider market and on other firms where the FSA believes it is necessary. Paul Sharma, FSA director of prudential policy, said: “Stress and scenario testing should be an important element in firms’ planning and risk management processes. These changes send a clear signal to firms’ senior management that they need to engage in building a robust stress testing infrastructure as an important part of effective risk management, and use that to assess capital needs in a stress. ….. It is essential that firms identify what could cause their business to fail and use this information to ensure that the relevant risks are sufficiently well-understood and appropriately managed to secure consumer protection and market confidence.” [186]
Skandia loses its FD
Skandia UK’s finance director Simon Lloyd is leaving the company, as part of a radical round of cost cutting. Chief operating officer John Tomlins is also departing, as are platforms delivery director Tim Mann, head of investment research Tom Berger and head of open architecture Steve Kowai. Jamie Macleod, the chief executive of the Skandia Investment Group, and Dave Chessell, sales director of Skania UK, left late last year. [69]
Plus RoW
Enterprise
Demeca research shows SMEs turning to new sources of finance
A shortage of bank lending is driving firms towards other forms of trade finance, according to a report from working capital consultants Demeca. The report was backed by a survey of 1,500 UK, French and German firms that employ over 1,500 staff. Many firms reported having no alternative options for obtaining finance with the closing of traditional bank lending lines. Some 43% of French companies, 34% of those in Germany and 31% in the UK said they had begun using trade receivables as security for borrowing: those in the UK and Germany, in particular, expect to increase their use of trade receivables. Some 61% of companies reported securitisations had become more difficult to use. Demica CEO Phillip Kerle said: “If European firms are to raise finance successfully in the future, the focus will have to be taken off liquid assets. Trade receivables are leading the way as invoice debt is seen to be a high quality security and therefore has the ability to improve access to credit significantly.” [167]
SMEs emerging from recession
Jobs are being created in the small firms sectors in the US and the UK, suggesting that SMEs may emerge from recession quicker than large corporates. US job figures show that small service companies gained 11,000 jobs in December. This compares with total private sector employment figures falling by 84,000. There were major differences between sectors, with construction, financial services and manufacturing SMEs all shedding jobs. In the UK, there has been an increase in new start businesses, with over 47,000 businesses a month starting to trade in the first three quarters of 2009. [93]
Corporate
Vodafone loses £2.2bn tax appeal
Vodafone has lost its legal appeal against a £2.2bn tax bill relating to its acquisition of Germany’s Mannesman. Vodafone had channeled the transaction through a Luxembourg subsidiary, which had generated a substantial profit that the parent company argued was not subject to UK corporation tax. It said that paying UK tax on subsidiary companies in other countries in the European Union as controlled foreign companies was incompatible with EU law. The High Court accepted Vodafone’s case, but it was rejected by the Court of Appeal. Now the Supreme Court – which last year replaced the House of Lords as the highest appellate court in the UK – has ruled that there is not a “point of law of general public importance which ought to be considered by the Supreme Court at this time”.
Financial executives ‘face challenging 2010’
Difficulties in approaches by the IASB and FASB as they move towards accounting standards convergence rank highly in the challenges facing financial executives this year, according to Financial Executives International. FEI points out that CFOs are still awaiting details of the final roadmap for the US Securities and Exchange Commission’s adoption of IFRS, while the IASB has been forced by the EU to adopt a three phased approach to the production of new accounting standards for financial instruments. Meanwhile, the joint IASB/FASB project reviewing the structure and presentation of basic financial statements will produce significant changes for CFOs. Creating a common standard for the US and the rest of the world on revenue recognition will also have far reaching effects. [121]