UK NEWS
IASB proposes pension accounting revolution (long lead) [158]
IASB proposals to reform pensions accounting will substantially increase company liabilities and cause extreme balance sheet volatility, claim critics. Under the exposure draft to amend IAS 19 Employee Benefits, entities would have to account immediately for all estimated changes in the cost of providing future pension and healthcare benefits, clearly distinguishing between different components of the cost of these benefits and disclose clear information about the risks arising from defined benefit plans. IASB chairman Sir David Tweedie said: “The proposals, if adopted, will significantly improve the transparency and comparability of pension obligations.” PwC said the impact in the UK alone would be a fall of £10bn a year in annual corporate profits, but that it supported the improved transparency. Pensions consultants Aon said the reform would “cause mayhem”, adding that as companies could no longer ‘smooth’ the costs of contributions there would be a big increase in balance sheet volatility, made worse by the reforms being adopted retrospectively.
FAST FACTS
£10bn – loss in annual corporate profits caused by IAS19 change, according to PwC
5% – additional cost of defined benefits schemes, according to Mercer
90% – the percentage of final salary pension schemes now closed to new members, according to the Association of Consulting Actuaries
HMRC earns £40bn in tax clampdown (long lead) [152]
HMRC investigations raised £39.5bn in uncollected tax in the five years since the new department was formed – a rise of 64% in unpaid tax collection. The largest slice of the additional tax, £12.6bn, was from corporation tax paid by large businesses: another £10.4bn was paid in uncollected VAT. Non-compliance investigations into small firms and the self-employed earned £359m last year, but this was a fall on previous years. Roy Maugham, tax partner at UHY Hacker Young, which collated the figures, suggested HMRC should focus less on small firms. “Considering the relatively modest amounts of money that HMRC collects through self-assessment enquiries into SMEs you have to ask whether smaller businesses really deserve all the scrutiny they receive,” he said. “HMRC is also using increasingly controversial methods to tackle tax evasion. Purchasing offshore bank account details that have been stolen by criminals, for example, now seems a perfectly legitimate tactic to HMRC.”
ASB challenges IASB [85]
IASB proposals for changes in accounting standards relating to the derecognition of assets and liabilities could lead to an increase in off-balance sheet accounting, the ASB has warned in a letter to the IASB. The proposed changes focus on legal form, rather than considering the risks and rewards involved and making the system more robust and less susceptible to manipulation, argues the ASB. It adds that exceptions proposed to deal with repo transactions are only necessary because the underlying principles of the proposed changes are wrong.
E&Y defends Lehman suit [122]
Ernst & Young will strongly defend itself from any legal actions related to its audit of Lehman Brothers, it has insisted. “Lehman’s bankruptcy was caused by a collapse in its liquidity, which in turn was caused by declining asset values and loss of market confidence in Lehman,” said the firm. “It was not caused by accounting or disclosure issues. When it comes to the role of the auditor and the way we applied the rules that were in effect when we audited Lehman Brothers, the conclusions reached about Ernst & Young in the bankruptcy examiner’s report are wrong…. It properly notes that ‘E&Y may have valid defenses’. We agree, and we are confident we will prevail if any potential claims are pursued.”
MacIntyre Hudson joins Morison International [69]
MacIntyre Hudson has become the UK member of the Morison International network. It replaces Tenon, which joined the RSM network when it merged with Bentley Jennison. Howard Lewis, the firm’s principal, is appointed as the international liaison partner with Morison International, representing the firm on the MI European and North American board of directors. Rakesh Shaunak, principal and member of MacIntyre Hudson’s management board, joins the Morison international board.
E&Y partner profits fall [90]
Partner profits at Ernst & Young fell last year, according to analysis conducted by The Times. Deloitte’s partners earned £883,000 each last year; PwC’s £777,000; Ernst & Young’s £678,000; and KPMG’s £671,000. Ernst & Young says the profit fall reflects investments for growth. “We invested at the bottom of the downturn in graduates, new partners, staff, new services and other resources in order to ensure that we were fit for the upturn,” said a spokesman. “We felt that this was the right thing to do and our partners supported that.”
Tenon goes for LSE listing [74]
RSM Tenon has applied to list on the London Stock Exchange and delist from the Alternative Investment Market, with effect from 27 May. Confirmation of the change of listing was not available at time of going to press and is subject to approval from the UK Listing Authority. Assuming the approval is given, RSM Tenon becomes the first accountancy firm to be listed on the LSE. A prospectus is being published by the company.
PwC avoids £35m penalty in PFI judgement [85]
A claim against PwC for damages of £35m has been rejected by the High Court. It instead ordered PwC to pay £427,000 to four former directors of Ryhurst. The £35m was the difference between the amount the directors were paid when the company was sold to Barclays Bank in May 2005 and the price obtained by Barclays when it resold the company 11 months later. The plaintiffs had taken advice from PwC on the market value of the company, which bid for healthcare PFI projects.
IASB appointment [80]
Paul Pacter, the IASB’s director of small and medium-sized entities, has been appointed to the IASB’s board. He will continue to chair the IASB’s SME Implementation Group. Pacter has previously worked for the US Financial Accounting Standards Board, where he was deputy director of research and executive director of its parent foundation. Since 2000, Pacter has been a part-time director in Deloitte’s Global IFRS leadership team, managing its IAS Plus financial reporting website. He is resigning from his Deloitte role.
IASB attacked by ‘Publish What You Pay’ [80]
The IASB has been attacked by the Publish What You Pay campaign for weakening accounting standards reforms under pressure from the extractive industries. The lobby group is demanding country-by-country reporting and improved reporting and disclosures by oil, gas and mining companies. While the IASB proposes that key company financial information is published on a country-by-country basis, PWYP claims the level of disclosures is inadequate for investors and the public to assess companies’ risk exposure, or to press for improved governance.
ASB issues extract on financial liabilities [67]
The ASB has published a draft Urgent Issues Task Force Abstract, ‘Extinguishing Financial Liabilities with Equity Instruments’. A consensus has been reached, says the ASB, behind issued equity instruments being measured at the fair value of the equity, unless that fair value cannot be measured. The abstract implements IFRIC Interpretation 19 in the UK and Ireland and applies to entities applying UK accounting standards and applying FRS 26.
Sustainability memorandum signed [83]
IFAC has signed a memorandum of understanding on sustainability with the Prince’s Accounting for Sustainability Project (A4S), supporting the global accountancy profession’s role in developing sustainable organizations. The memorandum specifies that sustainable reporting practices must be embedded. Measures to be adopted include the development of a community website for professional accountancy organizations to collaborate on sustainable practices; establishing an international integrated reporting committee to develop an improved reporting model; and incorporating accounting for sustainability within professional training and education. ACCA backs the project.
HMRC’s bonus season [70]
HMRC is obtaining £4bn from taxation on this year’s City bonuses – more than the staff themselves. Analysis by the Centre for Economics and Business Research concludes that bonus payouts by the City for 2010/11will rise to £6.8bn, up from £6bn in 2009/10. With the 50% rate on income over £150,000 now in place, plus National Insurance payments, HMRC will get a larger share of the bonuses than will the staff.
Convergence report published [79]
The IASB and FASB have published a progress report on convergence of IFRS and US GAAP. The target remains convergence by June 2011 and the two boards have accelerated and intensified their co-operation to meet the target, involving a programme of more joint meetings. The IASB has also reviewed with the Accounting Standards Board of Japan preparations for convergence and Japan’s adoption of IFRS, progress towards which has also been accelerated to meet the target date of June 2011.
EU discusses double taxation [82]
The European Commission has launched a consultation on problems of double taxation within the EU. The Commission believes that many individuals and companies moving between EU member states may become liable to tax in more than one member state, including people who live in one country but work in another. It says that while there are mechanisms in place to prevent or relieve double taxation, it is unclear how effective these are and is inviting suggestions on how to improve the system.
IASB seeks greater investor involvement [71]
The IASB’s Standards Advisory Council has been reconstituted to increase investor involvement. It now includes representatives from eight leading investor organisations, with a new subgroup of these members. Three analysts sitting on the IASB – Patrick Finnegan, Patricia McConnell and Stephen Cooper – will publish updates on financial reporting for investors, called Investor Perspectives. The IASB promises to improve consultation with investors and dedicate a section of its website to investors.
EU to punish states violating fiscal rules [76]
The EU is set to penalise member states breaching the Stability and Growth Pact, which is supposed to constrain borrowing. EU commissioner for economic and monetary affairs Olli Rehn complained that most member states ignore the rules. In 2007, before the financial crisis, half of member states breached the limits on permitted national debt. “We need to sharpen our teeth,” said Rehn. The Commission intends to closely monitor member states’ spending and deficits in future.
CIFAS reports surge in identity fraud [62]
Successful identity fraud has grown by 45% in the last year, while attempted identity fraud has risen by 20%, according to the latest quarterly report by CIFAS, the UK’s Fraud Prevention Service. CIFAS says that fraud prevention has become more difficult because of the sharp rise in criminals using accurate current addresses when stealing identities. The overall level of fraud remained static.
Taxing bill for volcanic ash [82]
High net worth non-residents stuck in the UK because of flight cancellations caused by the volcanic ash clouds risk substantial increases in tax bills, law firm Wedlake Bell has warned. HMRC will not take into account the effect of the disruption when calculating whether a non-resident has spent more than 182 days in the UK in one year and will only waive its 90 day rule – the limit on the average time spent over four years – if a person cancels future trips.
Begbies Traynor says business debts threaten recovery [81]
High levels of business debts are threatening the economic recovery, according to Begbies Traynor. It reports that over 160,000 companies are experiencing ‘significant’ or ‘critical’ financial distress, between them owing over £55bn to other firms. There has been a 14% rise in companies suffering significant or critical financial problems in the first quarter of this year, with a 42% rise in the property services sector and a 30% rise in construction. Over 160,000 companies are reported to be in financial distress.
Vantis sued for wrongful dismissal [106]
Legal action is being taken against Vantis for alleged wrongful dismissal and non-payment of salaries by two former tax advisors who were charged relating to a tax shelter scheme for celebrity clients. Robert Faichney and David Perrin claim that Vantis failed to go through proper procedures when dismissing them, owe them damages for wrongful dismissal and over £1m in unpaid salary. Peter Coyle, solicitor for Faichney and Perrin, says that legal advice has been given to Vantis that his clients did not engage in illegal practices. A spokesman for Vantis said: “Vantis have filed a robust defence and counter-claim which exceed the claim currently against Vantis.”
RoW NEWS
Greece crisis highlights tax avoidance issue (longer lead) [161]
Tax evasion of €31bn a year is the root cause of Greece’s fiscal crisis, its Prime Minister George Papandreou claims. Greece’s tax revenues are 4.7% of GDP, compared to an EU average of 8%, with the difference reflecting a culture of tax refusal that is endemic. It worsened in recent years, while the country became more wealthy. In the period of economic growth from 2000 to 2007, GDP rose by 29%, yet tax receipts fell by 2.5%. Some 95% of residents claim to earn less than €30,000 a year. A programme of tax increases approved by the Greek parliament and designed to help plug the national fiscal deficit has been disregarded by EU officials as unlikely to be collected. Inspired by the Greek debt crisis, the EU intends to penalise member states breaching the Stability and Growth Pact, which is supposed to constrain borrowing. In 2007, before the financial crisis, half of member states breached the limits on permitted national debt.
FAST FACTS
€111bn – support package for Greece
€295bn – value of Greek government bonds in circulation
€600bn – value of EU government bonds due for issue in 2010
€750bn – support package for EU as a whole to protect euro
Australia cuts CT rate (longer lead) [147]
Australia will cut its corporate tax rate on a phased basis to 28%, down from its current 30%. Small firms will pay the lower rate from 2013. Larger companies will be taxed at 29% in 2014 and then at 28% from 2013. The tax reduction is below that recommended by an independent review, headed by Treasury secretary Ken Henry, which suggested cutting the CT rate by 5%. Small firms will also benefit from a reduction in tax-related paperwork. The reduction in CT is to be financed by a new 40% resource super-profits tax to be levied from 2012 on mining and other extraction companies, which is predicted to raise AUS $12billion a year. The government said it may further reduce the CT rate to 25% if the mining tax generates more revenue than projected. Extraction companies expressed anger at the new tax: their share prices fell markedly.
IASB seeks greater investor involvement [71]
The IASB’s Standards Advisory Council has been reconstituted to increase investor involvement. It now includes representatives from eight leading investor organisations, with a new subgroup of these members. Three analysts sitting on the IASB – Patrick Finnegan, Patricia McConnell and Stephen Cooper – will publish updates on financial reporting for investors, called Investor Perspectives. The IASB promises to improve consultation with investors and dedicate a section of its website to investors.
IASB appointments [80]
Paul Pacter, the IASB’s director of small and medium-sized entities, has been appointed to the IASB’s board. He will continue to chair the IASB’s SME Implementation Group. Pacter has previously worked for the US Financial Accounting Standards Board, where he was deputy director of research and executive director of its parent foundation. Since 2000, Pacter has been a part-time director in Deloitte’s Global IFRS leadership team, managing its IAS Plus financial reporting website. He is resigning from his Deloitte role.
Sustainability memorandum signed [83]
IFAC has signed a memorandum of understanding on sustainability with the Prince’s Accounting for Sustainability Project (A4S), supporting the global accountancy profession’s role in developing sustainable organizations. The memorandum specifies that sustainable reporting practices must be embedded. Measures to be adopted include the development of a community website for professional accountancy organizations to collaborate on sustainable practices; establishing an international integrated reporting committee to develop an improved reporting model; and incorporating accounting for sustainability within professional training and education. ACCA backs the project.
IASB attacked by ‘Publish What You Pay’ [80]
The IASB has been attacked by the Publish What You Pay campaign for weakening accounting standards reforms under pressure from the extractive industries. The lobby group is demanding country-by-country reporting and improved reporting and disclosures by oil, gas and mining companies. While the IASB proposes that key company financial information is published on a country-by-country basis, PWYP claims the level of disclosures is inadequate for investors and the public to assess companies’ risk exposure, or to press for improved governance.
Deloitte buys Swiss consultancy firm [56]
Deloitte has continued its programme of strategic expansion with the acquisition of Swiss management consultancy firm Exsigno. The firm specialises in public sector and healthcare consultancy, employing over 150 staff. It will be integrated into Deloitte’s existing Swiss consulting practices, which will double in size and are now expected to generate annual revenues of CHF85m (£52m).
Ireland fails to implement accounting directive [83]
The European Court of Justice has declared that Ireland failed to comply with the Accounting Directive of 2006 by not fully implementing it within domestic legislation. The Directive required member states to harmonise high-level statutory audit requirements. It also established the basis for mutual recognition of statutory auditors, a means of international co-operation for the regulation of auditors, fixed rules on professional ethics and independence, defined auditing standards, provided a basis for quality assurance and of systems for investigations, penalties and public supervision.
Sustainability memorandum signed [91]
IFAC has signed a memorandum of understanding on sustainability with the Prince’s Accounting for Sustainability Project (A4S), supporting the global accountancy profession’s role in developing sustainable organizations. The memorandum specifies mutual agreement that sustainable reporting practices must be embedded. Measures to be adopted include the development of a community website for professional accountancy organizations and others to raise awareness and collaborate on sustainable practices; establish an international integrated reporting committee to develop an improved reporting model; and incorporating accounting for sustainability within professional training and education. ACCA is backing the project.
E&Y opens Africa Centre [94]
Ernst & Young has launched an Africa Business Centre, following publication of research by the firm that found 40% of companies were considering diversifying geographically and 18 % were considering buying up weak competitors and expanding market share in new geographies. But, says E&Y, many global companies underestimate the challenge of Africa’s size, infrastructure underdevelopment, shortage of skilled resources and unreliable telephony and technology systems on their business models. The centre aims to assist making business in Africa more cost-effective and provide a single point of contact for the firm for the whole continent.
Irish Nationwide hires E&Y for inquiry [90]
Ernst & Young has been hired by Irish Nationwide to investigate events prior to the building society’s collapse. The society has been effectively nationalised as part of the Irish government’s rescue of the country’s financial system. A spokeswoman for Irish Nationwide said: “We can confirm that Ernst & Young are conducting some work for the Irish Nationwide Building Society, including undertaking specific investigations as and when required” A spokeswoman for Ireland’s Financial Regulator said that it was aware of the appointment of E&Y, but “was not involved in their engagement”.
Islamic banks not providing wealth management support [85]
Islamic banks should do more to support richer clients with wealth management and estate planning advice, according to a report from Bank Sarasin. Too often advice is given to wealthy clients that mimics conventional approaches, rather than being geared to Islamic principles, warns the report. Islamic banks should also concentrate on ensuring the interests of clients and advisors are brought together. Too often, claims the report, banks generate income from transaction fees, without worrying whether they are serving clients’ interests in strengthening their financial position.
Sub-Saharan recovery strengthening [70]
The World Bank expects Sub-Saharan Africa to expand by 4.2% this year, following growth of 1.7% in 2009. This is an upgrade of earlier predictions. Further accelerated growth is possible believes the World Bank if governments reform key areas of economic activity, including agriculture, energy, transport and financial services and further deregulate economies. The World Bank intends to invest $1bn in Sub-Saharan Africa this year, down from $1.5bn last year.
Riots and deaths in Sudan after collapse of Ponzi scheme [71]
Four people died and many more were injured in riots in Sudan after the collapse of a Ponzi investment scheme. About a thousand demonstrators are reported to have protested on the streets of El Fasher, in the North Darfur region. The deaths and injuries were reportedly caused by police firing on the protestors. Operators of the Ponzi scheme apparently tricked thousands of people into investing, promising returns of 50% per month.
Convergence report published [79]
The IASB and FASB have published a progress report on convergence of IFRS and US GAAP. The target remains convergence by June 2011 and the two boards have accelerated and intensified their co-operation to meet the target, involving a programme of more joint meetings. The IASB has also reviewed with the Accounting Standards Board of Japan preparations for convergence and Japan’s adoption of IFRS, progress towards which has also been accelerated to meet the target date of June 2011.
EU discusses double taxation [82]
The European Commission has launched a consultation on problems of double taxation within the EU. The Commission believes that many individuals and companies moving between EU member states may become liable to tax in more than one member state, including people who live in one country but work in another. It says that while there are mechanisms in place to prevent or relieve double taxation, it is unclear how effective these are and is inviting suggestions on how to improve the system.
IASB seeks greater investor involvement [71]
The IASB’s Standards Advisory Council has been reconstituted to increase investor involvement. It now includes representatives from eight leading investor organisations, with a new subgroup of these members. Three analysts sitting on the IASB – Patrick Finnegan, Patricia McConnell and Stephen Cooper – will publish updates on financial reporting for investors, called Investor Perspectives. The IASB promises to improve consultation with investors and dedicate a section of its website to investors.
US firms profit from bankruptcy [90]
Firms handling bankruptcy wind-ups in the US are earning unprecedentedly large profits Four of the five largest bankruptcies occurred since late 2008, when Lehman Brothers went into bankruptcy – the largest ever corporate collapse. The second biggest was Washington Mutual, a few days after Lehman. The third largest, WorldCom, dated from 2002, but the next two largest date from last year- General Motors and CIT. Accountants and advisors handling Lehman Brothers’ bankruptcy earned over $730m in fees, according to the New York Times. Some firms, it reports, charge $1,000 an hour.
Politics
EU considers audit regulation [221]
The EU could take over the regulation of auditors under proposals being considered by the European Commission in advance of the publication of a green paper set for publication in the autumn. The green paper will also review the market domination by the Big Four and consider whether additional steps are needed to enable mid-tier firms to expand to challenge the larger firms’ market leadership. Commissioner Michel Barnier says that he wants to initiate a debate. The green paper will also examine the impact on financial stability of audit concentration and accounting standards and the auditing of SMEs. “While the role of the main economic and financial actors – banks, hedge funds, credit rating agencies, etc – were immediately called into question following the financial crisis, the role of the auditors has not really been questioned until now,” said Commissioner Barnier. “Now we are entering a less reactive phase and I am convinced that it is the right time to launch a real debate at European level on the subject of audit. This conviction is reinforced by the questions recently raised in the context of the audit of the accounts of the American bank Lehman Brothers.” Part of the fresh debate should consider whether regulation should remain national, or whether it needs to be done at a European level, said Barnier.
FRC considers wider audit role [101]
The role of audit should be reviewed with the objective of enhancing its value, Stephen Haddrill, chief executive of the Financial Reporting Council, has argued in the annual ICAS Aileen Beattie Memorial lecture. “Just when audit is needed more, the impression is growing that it is delivering less,” said Haddrill. The reasons include accounting standards that allowed management more discretion in the valuation of hard to value assets and the confinement in the role of the auditor, including restraint on auditors speaking to regulators. The FRC will publish its thinking on how to improve the value of audit later this year.
Stewardship code is about good governance, says ACCA [111]
The Financial Reporting Council’s proposed Stewardship Code for Institutional Investors could enhance the quality of corporate governance and provide additional safeguards for the capital markets and investors, says ACCA. It is giving its backing to the FRC in saying that major investors should be encouraged to use their influence more constructively. “We would like to see more stress placed on the fiduciary responsibilities of institutional shareholders to those who entrust their money to them, and a greater focus on why exactly those investors might see more active engagement as being in their interests and the interests of their beneficiaries,” says Paul Moxey, head of corporate governance and risk management at ACCA.
IMF plans bank tax [124]
The IMF has proposed tough new taxes on banks and insurers and stronger regulation of the sectors to prevent a future financial crisis. A ‘Fat Tax’ – financial activities tax – would be levied as a proportion of profits and remuneration, in addition to a flat-rate levy on liabilities to fund an insurance scheme. One continuing problem, warns the IMF, is that banks remain too strong and have become even more powerful than before the banking crisis. Dominique Strauss-Kahn, the IMF’s managing director, is demanding faster progress on financial sector reform, including agreement on rules on financial sector liquidity and capital; a toolkit for addressing systemic risks; and a framework for cross-border resolution of problems. He says that continuing risks include asset bubbles in emerging economies.
Public sector
£38bn lost in fraud [150]
Fraud in the public sector is costing £38bn a year, a report from MacIntyre Hudson has claimed. This is twice the level previously calculated. Some £22bn of this is lost through misappropriation of public spending, with £16bn lost from non-collection of national and local taxes. The firm argues that focusing on this fraud would be a painless way of addressing the fiscal crisis and suggests it is realistic to stem the losses by 30% by 2013/14 – reducing government spending by £11bn PA. MacIntyre Hudson argues that public bodies have dramatically underestimated the true cost of public sector fraud. Jim Gee, director of counter fraud services at the firm, said: “We need to learn from countries like the US, where public sector organisations have a legal duty to accurately measure the nature and extent of their losses each year and to publish this information together with their plans for reducing them.”
MEPs agree sanctions for late payment[101]
MEPs have agreed tough sanctions on public bodies that pay their bills late. However, the measure will only take effect if approved by the Council of Ministers. The European Parliament’s Internal Market Committee agreed that deadlines for paying bills should be established legally for the public and private sectors. All invoices should be paid within 30 days, unless by mutual agreement and specified in the contract it is extended to 60 days. The MEPs rejected a proposal from the Commission to impose a standard 5% penalty on late paid bills, instead favouring a charge of 9% over base rate per day, plus €40.
Enterprise
FSB finds SMEs wary of banks [156]
Small firms remain wary of banks, with only 18% seeking new credit, according to the results of a survey from the Federation of Small Businesses. Half of those applying for credit have been successful, 12% await a decision and 36% had applications rejected. There are also signs that the cost of borrowing is rising, with 16% of small firms with credit facilities finding these have become more expensive in the last two months. For 12% of small firms, interest rates rose by 10% to 14%. A mere 1% of firms have found borrowing costs falling. John Walker, national chairman of the Federation of Small Businesses said: “Small businesses continue to bear the brunt of the financial crisis and are being penalised with extortionately high interest rates. At any time, not least when the economy is on such a fragile path out of recession, a 10 to 14% increase in costs is highly unreasonable.”
Baker Tilly survey shows tax threat is biggest challenge to SMEs [100]
SMEs are confident about the strength of the economic recovery in the UK, but are fearful of the effects of likely increases in taxation, according to a Baker Tilly survey. The latest Baker Tilly Owner-Managed Business Survey shows that reducing the cost and complexity of taxation, including corporation tax, national insurance contributions and VAT, has been identified as their main priority for the new government. Owner managers are much more optimistic now than last year: 62% expect sales to rise, compared to just 19% last year. But tax rises are regarded as a potential threat to the recovery.
Practice
HMRC revises IR35 guidance [140]
HMRC has updated its Employment Status Manual regard IR35 interpretation to include case law from recent decisions in the Dragonfly Consultancy and Larkstar Data cases. The guidance provides greater clarity on how HMRC will approach IR35 investigations. In the Dragonfly case, a director of a firm was held to owe £99,000 in taxes because for three years his work was ‘integrated’ into that of his client and even though he worked away from the facilities of his client, paid to access the client’s database and funded his own training, he was regarded by HMRC’s special commissioner as being effectively an employee. In the Larkstar Data case there was a series of hearings in front of HMRC’s general commissioners, the High Court and the HMRC’s special commissioners. Directors of the firm eventually succeeded in arguing they operated independently of their clients.
Future of UK GAAP [110]
Responses to the ASB’s consultation on the replacement of UK GAAP indicate strong support for the proposal that publicly accountable entities should have to apply EU-adopted IFRS. Non-publicly accountable SMEs should use IFRS, while small companies continue to apply FRSSE for the time being, according to the majority of responses. Respondents generally agreed with the ASB that financial reporting should be based on an entity’s characteristics, rather than its size, with a significant majority agreeing that large companies not publicly accountable should be able to use the IFRS for SMEs. There was wide support for a special accounting standard for public benefit entities, such as charities, housing associations, colleges and universities.
Financial Services
Banks targeted for audit inspections [159]
The Financial Reporting Council’s Professional Oversight Board is to increase its focus on banks in its audit inspections in 2010/2011. The board has made banks incorporated in the UK a separate category for the work of its independent Audit Inspection Unit. Dame Barbara Mills, chair of the Oversight Board, said: “The board continues to have regard to the level of public interest involved and has determined that the level of current public interest in banks means that these should be included as a separate category.” Other AIU priorities include segmental reporting, revenue recognition and fraud, going concern, fair value accounting estimates, asset impairments and compliance with ethical standards. The board has chosen to simplify the definition of UK unquoted companies, limited liability partnerships and industrial and provident societies to include all such entities having either a Group turnover greater than £500m or having a group turnover in excess of £100million and external long term debt in excess of £250million.
Commerzbank fined for inaccurate reporting [107]
Commerzbank has been fined £595,000 by the FSA for inaccurate transaction reporting. Firms must submit accurate data for reportable transactions by close of business the day after a trade is executed, with the information used by the FSA to detect and investigate suspected market abuse. For two years Commerzbank failed to report, or reported inaccurately, almost all of its reportable transactions. Commerzbank was sent repeated reminders by the FSA of its obligations to provide transaction reporting. Commerzbank co-operated with the FSA in the course of the investigation and settled at an early stage, qualifying it for a 30% discount on what would have been a £850,000 fine.
Corporate [for uk and row versions]
New standard for prospectuses [135]
A new assurance standard for the process of compiling financial information for prospectuses has been proposed by the International Auditing and Assurance Standards Board (IAASB). The standard – ISAE 3420 – has been designed in response to the increasingly integrated nature of global capital markets and the importance of pro forma financial information in investment decisions. The IAASB says the standard would enhance public confidence in how such financial information is produced. The standard would specify the information necessary in many forms of domestic and cross-border securities offerings, illustrating the impact of an event or transaction on an issuer`s financial information. It also deals with the practitioner’s responsibilities to report on the process applied by an issuer’s management to compile pro forma financial information for inclusion in the issuer’s prospectus.
Currency risk exposure studied [123]
There are significant differences in the way large globally diversified corporations report their disclosures to currency fluctuations, an ACCA report has found. The study – Derivatives Reporting Practices by Multinationals – is believed to be the first to establish a systematic link between disclosure practices and the degree of legal enforcement of accounting rules in the countries concerned. The findings could influence development of accounting standards related to multinationals’ disclosures, risk exposures and use of derivatives. The authors argue that the issue is very important for policy-makers given the size and concentration of resources in large corporations, the increasing trend towards globalization in capital markets and in the provision of services and goods and also about concern regarding the opacity of reporting by multinationals.
RoW sectors
Practice
EU considers taking over audit regulation [156]
The EU could take over the regulation of auditors under proposals being considered by the European Commission in advance of the publication of a green paper set for publication in the autumn. The green paper will also review the market domination by the Big Four and consider whether additional steps are needed to enable mid-tier firms to expand to challenge the larger firms’ market leadership. The green paper will also examine the impact on financial stability of audit concentration and accounting standards and the auditing of SMEs. “While the role of the main economic and financial actors – banks, hedge funds, credit rating agencies, etc – were immediately called into question following the financial crisis, the role of the auditors has not really been questioned until now,” said Commissioner Michel Barnier. Part of the fresh debate should consider whether regulation should remain national, or whether it needs to be done at a European level, said Barnier.
Managers fool auditors [119]
Auditors can be diverted from detecting fraud by wily managers exercising diversion techniques, according to new research. The study examined how experienced auditors responded to managers who encouraged them to closely examine parts of the business where there was no fraud by warning them of the risk of errors in those areas. This technique –likely to be deployed by dishonest managers – was found to be effective in 93% of cases. The research won the Best Paper Award at the 2010 annual meeting of the Auditing Section of the American Accounting Association. The study’s findings were based on an experiment involving 76 auditors with an average of four years’ professional experience, two-thirds of them employed by Big Four accounting firms.