Accounting & Business – October news
UK News
Fiscal deficit starts recovery
UK tax receipts rose unexpectedly in the beginning of the new financial year, boosted by a big increase in corporation tax payments – which were £8.5bn in July this year, compared to £6bn in the same month of 2009. Receipts from income tax, capital gains tax and national insurance were 5.4% up in the first four months of the year compared to 2009 and VAT receipts were 22.8% higher. This helped cut net borrowing by £2.6bn in the first four months. Income tax receipts were boosted by 700 high net earners taking advantage of the amnesty for holders of accounts in Liechtenstein to pay tax on previously undisclosed wealth. Gemma Tetlow of the Institute for Fiscal Studies said: “Growth in tax receipts over the year so far remains ahead of the Office for Budget Responsibility’s forecast for growth over the year as a whole, while central government spending has also been growing slightly more quickly than forecast for the year as a whole.”
FAST FACTS
8.5% – the increase in the central government receipts in the first four months of 2010 compared to 2009
6.0% – the increase in central government current spending in the first four months of 2010 compared to 2009
5.8% – the reduction in public sector net investment in the first four months of 2010 compared to 2009
Source: Institute for Fiscal Studies
Bob Hertz goes
Robert Hertz is stepping down from his role as chairman of the Financial Accounting Standards Board. Hertz led the board for eight years and existing FASB member Leslie Seidman becomes acting chairman. The retirement of Hertz means that both the top standards setting positions are changing: Sir David Tweedie is to leave the IASB in June next year. SEC Chairman Mary L. Schapiro said: “During his tenure, Chairman Herz has served as an effective investor advocate to improve the quality of financial reporting standards around the world.” Coinciding with the announcement of the change of leadership of the FASB, it was also decided that board membership would grow from five back to its original seven members. Trustees of the Financial Accounting Foundation decided this would assist with the convergence programme with the IASB. The new board members are expected to be in place by early next year.
Deloitte revenues fall
Deloitte’s UK turnover in the year ending May fell by £16m to £1,953m and its distributable profit dropped from £601m to £590m. Corporate finance revenues grew by 10.6%, but dropped by 2.9% in audit, 2.3% in tax and 4% in consultancy. John Connolly, Deloitte senior partner and CEO, predicted a return to turnover growth in all parts of the firm in the current financial year. Deloitte aims to overtake PwC to become the largest accountancy firm in the UK and globally.
PwC turnover up
PwC increased its UK turnover in the year ending June from £2,331m, from £2,248 last year. Advisory turnover grew by 9%, to £804m, with a 15% rise in the contribution from the consulting business. There was a 4% growth in turnover in the assurance business, but a 2% fall in the tax practice. The firm has increased its investment in future growth, leading to a 2% fall in distributed profits. PwC says it intends to create an extra 800 jobs across its operations in the next year. PwC also announced the closure of its final salary pension scheme to existing staff: it was already closed to joiners.
Towry reports good first half
Wealth advisory firm Towry has reported record income, profit and growth in the first half of this year. The firm was previously known as Towry Law and took over the financial advisory division of Baker Tilly in 2007. Revenues grew by 60%, from £25m in the first half of 2009 to £40m this year, while EBITDA rose by 50%. Assets under management increased by £600m to £3.5bn during the first half of the year.
Michael Page optimistic
Professional recruitment company Michael Page has increased profits and turnover in the first half of 2010, reflecting improved economic conditions and a move away from reliance on traditional markets. Revenues in the half year grew by 8% to £394m and profit rose by 42% to £61m. Over half of profits were generated from outside its traditional finance and accountancy core operations and 71% was earned outside the UK. The group reported £29m as non recurring income, including £17m from refunded VAT.
Lease accounting reforms ‘will restrict lending’
Reforms to lease accounting proposed by the IASB and FASB risk drying-up debt finance for UK businesses and threaten economic recovery, claims the Finance & Leasing Association. Under the proposed new IASB standards, companies would have to report the estimated fair value and cost of leases on their balance sheets. The FLA argues this would increase the administrative burden on lenders and lead to greater accounting uncertainty. It warns of further problems that the suggested standards changes do not dovetail with new requirements for minimum capitalisation.
Negligence claims jump
Negligence claims against professional services firms have risen to an 11 year high, pushing the cost of professional indemnity insurance to rates that many firms cannot afford. Professional negligence claims launched against professional services firms in the High Court jumped 125% to 332 last year, up from 147 in 2008, according to a report from finance providers Syscap. Premiums rose when insurers became nervous about calls on policies after law firm Halliwells became insolvent this year, while the collapse of Quinn Insurance reduced competition between providers.
More companies may move
Some 18% of large corporations have considered moving abroad because of the UK’s tax system, an HMRC survey has revealed. Half are unhappy with tax rates: others complain the system is too complex and lacks certainty. The survey found 86% of large corporations believe HMRC provides a good service. Complaints included a shortage of information and advice, the absence of a joined-up approach across HMRC and a lack of transparency. Meanwhile, Ireland’s Revenue Commissioners report more corporations are moving to the country to reduce their tax bills.
Accounting policies improve
Descriptions of significant accounting policies by management have shown clear improvement, according to the Financial Reporting Review Panel in its annual report. The FRRP stresses that there is particular need for management to explain why it uses one accounting option rather than another – and the impact of doing so – during the current financial crisis. The Panel review 308 sets of accounts in the year ending March 2010; requested additional information or explanation from 146 companies; and three companies agreed to restate amounts reported in prior periods. FRRP expressed concern at the quality of some AIM companies’ reports.
Warning about DAC costs
Life insurers could be badly hit by IASB and FASB proposals to change the accounting for deferred acquisition costs, says credit ratings agency Moody’s. DACs account for the costs incurred by insurers to acquire or renew insurance contracts. At present, insurers can use DACs for costs that “vary with and are primarily related to” the acquisition of insurance contracts. But under IASB and FASB proposals, DACs could only be used in narrower circumstances involved in the acquisition and renewal of policies, relating to direct costs incurred because of the contract and for related underwriting, issuing and processing costs.
Accounting changes for leaseholds abandoned
Leaseholders have complained to housing minister Grant Shapps over the Government’s decision not to implement new obligations on managing agents to account for the spending of management charges. New accounting regulations for managing agents under the Commonhold and Leasehold Reform Act 2002 stipulated that lessees would receive a full set of annual service charge accounts along with an accountant’s report, but this requirement has now been dropped. Leaseholder information service Flat Living has urged the Government to implement the measure, which had been the subject of a long campaign by leaseholder representative bodies.
IASB improves process
The IFRS Foundation, the new name for the oversight body of the IASB, has published proposals for the IASB’s annual improvements process. This is the mechanism for non-urgent but necessary amendments to IFRSs to be grouped together and issued in one package to clarify guidance and wording, or make relatively minor amendments to the standards that address unintended consequences, conflicts or oversights. The proposals are open until November for public comment.
HMRC impersonation
Taxpayers have been warned by HMRC of criminals making phone calls impersonating tax officials and offering tax refunds. The aim is to obtain taxpayers’ bank account details in order to commit frauds and to sell personal information to other criminal gangs. HMRC says the new approach by criminals follows its success in shutting down over 180 websites that were sending out fake tax rebate emails. HMRC stresses that it will only ever contact customers due a tax refund by post. It requests that all scam emails impersonating HMRC are forwarded to it at phishing@hmrc.gsi.gov.uk.
Most companies breach disclosure rules
A mere 28% of companies met the Disclosure and Transparency Rules in their second half interim management statements, according to analysis by Deloitte. But this is a significant improvement on the previous half year, when only 15% met their DTR obligations. Deloitte surveyed 100 listed corporates drawn from the largest, middle sized and smallest categories of market capitalisation, plus 30 investment trusts. The trusts were more compliant than the listed companies, with 77% meeting content requirements.
Taxpayers warned: it’s not good to talk
Law firm McGrigors has warned taxpayers about informal conversations with tax officials. HMRC has sent letters to 600 offshore account holders registered with the Offshore Disclosure Facility amnesty asking for details of how banks marketed accounts to high net worth customers. Phil Berwick, director of tax investigations at McGrigors, said: “Any information disclosed by taxpayers during the course of a telephone conversation with HMRC could come back to bite them. If HMRC uncovers evidence of non-compliance, it’s naïve to think that it would just brush that information under the carpet.”
HMRC works with lenders
HMRC and the Council of Mortgage Lenders are developing a scheme for income verification for mortgage applications, to tackle fraudulent proposals for home loans. A spokesman for HMRC said: “We are in advance negotiations.” The Council of Mortgage Lenders explained that it is currently engaged in a pilot scheme working with HMRC to verify income and prevent fraud and this would be extended. But, she said, this would not be used on a routine basis and will be additional to other income checks.
Investment companies warned on conflicts
Investment companies must strengthen the independence of their boards of directors and ensure that directors recognise their responsibilities for overall administration, according to a report from Frostrow Capital. Boards should prove their independence by being firmer with under-performing investment managers, improving administrative efficiency and controlling costs and fees. “If investment boards employ these measures we believe there is a significant
opportunity for growth in the sector,” says the report, ‘Securing the future of investment companies’.
Pensions tax relief ‘unclear’
Pensions advisors Mercer has called for urgent clarification of restrictions on pensions tax relief for high earners. It says that next year’s deadline for the implementation of changes is unrealistic and that it will actually need two to three years for schemes to be redesigned for employee tax payments to be minimised. Mercer is concerned that without these redesigns, schemes will have to pay tax on behalf of members, which it regards as inappropriate.
HMRC to collect tax underpayments
About 1.4 million taxpayers will have tax underpayments collected from their pay packets, after HMRC admitted that PAYE coding errors had caused widespread errors in tax collection. Refunds of an average of £1,500 each will be collected in monthly instalments. Another 4.3 million taxpayers have overpaid under PAYE and will receive refunds averaging over £400 each. UHY Hacker Young has claimed that IT systems problems at HMRC have caused widespread mistakes in PAYE coding allocations.
HMRC staff sacked for racism
Seven HMRC staff in Northern Ireland have been sacked for racially motivated gross misconduct. The employees deliberately underpaid tax credits to ethnic minority claimants. HMRC permanent secretary for tax Dave Hartnett said: “The vast majority of our people are entirely professional and one of the ways we support that professionalism is by taking decisive action against the tiny minority who let us all down by falling far short of those standards.”
RoW News
Stanford accountants sue Lloyds
Accountants working for Allen Stanford are suing Lloyds of London for refusing to meet the costs of their legal defence under their directors and officers insurance policies. Lloyds declined to pay out on the grounds that nearly $2bn of unsecured loans to Stanford were not disclosed and it also alleges fraudulent accounting practices in the Antigua offices of the now collapsed Stanford empire. Accountants Mark Kuhrt and Gilbert Lopez are taking the legal action, along with Stanford himself: colleague Laura Holt, the chief investment officer, reached agreement with the insurer after the commencement of the hearing. The plaintiffs allege that James Davis – the CFO of the Stanford bank – was responsible for the criminal acts: he has pleaded guilty to theft charges. The case against Lloyds of London is being heard in the US District Court in Texas.
FAST FACTS
$7bn – deposits taken in Ponzi scheme
$1.5bn – potentially recoverable by investors
30,000 – number of investors
Bob Hertz goes
Robert Hertz is stepping down from his role as chairman of the Financial Accounting Standards Board. Hertz led the board for eight years and existing FASB member Leslie Seidman becomes acting chairman. The retirement of Hertz means that both the top standards setting positions are changing: Sir David Tweedie is to leave the IASB in June next year. SEC Chairman Mary L. Schapiro said: “During his tenure, Chairman Herz has served as an effective investor advocate to improve the quality of financial reporting standards around the world.” Coinciding with the announcement of the change of leadership of the FASB, it was also decided that board membership would grow from five back to its original seven members. Trustees of the Financial Accounting Foundation decided this would assist with the convergence programme with the IASB. The new board members are expected to be in place by early next year.
PwC buys Diamond
PwC has expanded its US consultancy arm through the $378m acquisition of Diamond Management & Technology Consultants. Diamond is a listed company and the payment of $12.50 per share represents a 31% premium on the share price. Adam Gutstein, president and CEO of Diamond, said: “This is an attractive all cash opportunity for our stockholders, creates exciting prospects for our people, and will provide us new and enhanced capabilities to bring to our clients as we help to address their most critical challenges and important opportunities.” Diamond employs over 500 consultants, with offices in Chicago, Hartford, New York, Washington D.C., London and Mumbai.
Michael Page optimistic
Professional recruitment company Michael Page has increased profits and turnover in the first half of 2010, reflecting improved economic conditions and a move away from reliance on traditional markets. Revenues in the half year grew by 8% to £394m and profit rose by 42% to £61m. Over half of profits were generated from outside its traditional finance and accountancy core operations and 71% was earned outside the UK: the company operates across Europe and in Asia Pacific and the Americas. The group reported £29m as non recurring income, including £17m from refunded VAT.
IASB improves process
The IFRS Foundation, the new name for the oversight body of the IASB, has published proposals for the IASB’s annual improvements process. This is the mechanism for non-urgent but necessary amendments to IFRSs to be grouped together and issued in one package to clarify guidance and wording, or make relatively minor amendments to the standards that address unintended consequences, conflicts or oversights. The proposals are open until November for public comment.
Lease accounting reforms ‘too complex’
Reforms to lease accounting proposed by the FASB and IASB are too complex and burdensom, claims the US Equipment Leasing and Finance Association. Under the proposed new FASB and IASB standards, companies would have to report the estimated fair value and cost of leases on their balance sheets. The ELFA argues the approach proposed is “unduly complex and will impose a compliance burden on lessees that will not result in a significant improvement in the quality or reliability of financial information.”
Dubai World plans asset sale
Dubai World is expected to launch a massive sale of assets in order to improve its ability to repay creditors. It may sell as much as $20bn of assets, to fund repayments of nearly $15bn and improve its cash flow. Assets that could be sold include Dubai’s Atlantis Hotel, DP World, the Jebel Ali Free Zone, Dubai Maritime City and Dry Docks World, plus overseas holdings MGM Resorts and US retailer Barney’s.
Iran feels sanctions
Iran has withdrawn government funds from banks in the European Union, to avoid the impact of international economic sanctions over its nuclear programme. Mahmoud Bahmani, the head of Iran’s central bank, said it was anticipating sanctions by the EU. Iran bought €11.9bn of goods and services from EU member states in 2009. Bahmani said that Iran would seek to limit foreign imports as a response to the sanctions impact, increasing its economic self-sufficiency.
State of New Jersey accused
The US State of New Jersey has been charged by the Securities and Exchange Commission with securities fraud. It is alleged to have misrepresented its financial position and failed
to disclose to investors in $26bn of municipal bonds that the state’s two largest pension plans were underfunded. “All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks,” said Robert Khuzami, director of the SEC’s Division of Enforcement. The SEC alleges that New Jersey gave the impression that its pension schemes were adequately funded, whereas it was unable to contribute to them without raising taxes or cutting state overheads.
Ratings agencies warned
Credit ratings agencies have been warned by the US Securities and Exchange Commission about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures and methodologies the firms use to determine credit ratings. The report flows from an inquiry into Moody’s, which examined whether the agency violated the registration or anti-fraud provisions of federal securities laws. The SEC decided not to pursue fraud enforcement action because of legal and jurisdictional uncertainties – which have now been clarified by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Rich Irish 4,000 Irish avoid tax
Amidst a severe economic and fiscal crisis, 3,800 Irish top earners avoided paying any income tax last year, the country’s Revenue Commissioners have declared. Most of the individuals were company directors, who earned over €100,000, but used tax breaks and tax relief on trading losses to avoid tax liabilities. The government said that action against tax shelters was reducing the number of people avoiding tax.
€500k price for citizenship
Individuals willing to invest €500,000 in Montenegro will be awarded national citizenship, its government has announced. The country achieved notoriety earlier this year when it gave citizenship to deposed Thai Prime Minister Thaksin Shinawatra, who has been accused of fraud and terrorism in his home country. Shinawatra promised to make investments in hotels and coastal resorts in the Balkan country. Montenegro seceded from Serbia in 2006.
Taxpayer’s car frenzy
Angry taxpayer Ernest Milton Barnett has been imprisoned for four years for driving his car into an Internal Revenue Service building in Birmingham. He pleaded guilty to using his Jeep Cherokee car as a deadly weapon and for assault on an IRS employee. He spun his vehicle round in front of the offices, then repeatedly drove into an office window. The 50 year old committed the offence two years ago after losing his temper during a phone conversation with IRS staff. Another angry taxpayer flew a small airplane into an IRS building in Austin, Texas, earlier this year – killing himself and an IRS employee.
Ireland downgraded
Standard & Poor’s has downgraded Ireland’s long-term sovereign debt from AA to AA-. The downgrade reflects fears that the eventual cost of the government’s bail-out of the country’s banks, particular Anglo Irish, will escalate. It also fears continuing economic weakness in Ireland, damaging tax income. Standard & Poor’s says that the cost of the banking rescue has already increased above its initial expectations. Ireland’s short-term rating remains A-1+. The AA- rating applies to government issued securities and National Asset Management Agency debt.
E&Y sued
Ernst & Young is being sued over its audit of the collapsed Parkcentral Global hedge fund, based in Texas. Investors taking the action claim to have lost over $17m: the fund closed after losing $2.6bn. The suit accuses Ernst & Young of fraud, negligent misrepresentation, securities fraud and conspiracy. E&Y declined to comment.
Russia allows electronic tax returns
Russia’s Ministry of Finance is moving the filing of tax forms onto electronic systems. Tax statements, claims and notifications may now be filed electronically, backed by electronic signatures. It is intended to eventually require all tax form filing to be conducted electronically. The new system was adopted in September. The Ministry also announced that fines for breaches of tax regulations are increasing substantially.
Norwegian pensions exit settlements
Norway’s state pension fund has disinvested from Africa Israel Investments and Danya Cebus – part of Africa Israel – in protest against the building of Israeli settlements in occupied Palestine. Aslak Sckanke, senior adviser to the Norwegian wealth fund’s Council on Ethics, said: “In no way is there a boycott of Israeli firms. We look at what companies do, not where they are from.” Africa Israel says it is no longer engaged in the building of Israeli settlements.
DAC costs warning
Life insurers could be badly hit by IASB and FASB proposals to change the accounting for deferred acquisition costs, says credit ratings agency Moody’s. DACs account for the costs incurred by insurers to acquire or renew insurance contracts. At present, insurers can use DACs for costs that “vary with and are primarily related to” the acquisition of insurance contracts. But under IASB and FASB proposals, DACs could only be used in narrower circumstances involved in the acquisition and renewal of policies, relating to direct costs incurred because of the contract and for related underwriting, issuing and processing costs.
Canada moves closer to IFRS
IFRS will be used in Canada for regulatory reporting, under proposals published by the Investment Industry Regulatory Organization of Canada. IIROC’s proposals relate to investor protection, dealer member service provider costs, the value of using one standard for both statutory and regulatory reporting purposes and the incremental regulatory value provided by adopting IFRS. IIROC indicated that the move to IFRS is likely to be limited to applications where the benefits outweigh the costs.
Politics
Audit Commission to be axed
The Audit Commission is being scrapped by the Government. The Commission is responsible for the auditing of local public bodies, including councils and NHS trusts. All local government spending over £500 will now be reported online. Communities secretary Eric Pickles called for ‘armchair auditors’ to monitor local authorities. “Greater openness in spending is the best way to root out waste, spot duplication and increase value for money,” he said. ACCA warned that ‘armchair auditing’ was an inadequate replacement for public auditing and that it could lead to inconsistency and uncertainty, though it accepted there was a need for a review of the Audit Commission. ACCA’s head of public sector Gillian Fawcett said: “The public sector needs a coherent approach when it comes to audit and authorities need to be clear on the processes and expectations involved in it.” Audit Commission chairman Michael O’Higgins pointed-out that his agency had been created by a Conservative minister, Michael Heseltine, and its achievements had included the banning from office for misconduct of Labour councillors in Lambeth and Liverpool and uncovering the ‘homes for vote’ scandal at Conservative-controlled Westminster City Council. The Big Four firms are likely to win substantial additional audit work from the closure of the commission.
Treasury to cut a quarter of jobs
The Treasury is expected to lose a quarter of its jobs, as its role in overseeing other departments and the wider economy is cut back. Some 350 Treasury posts could go, cutting the department to a core 1,000 employees. Most government departments will need to agree cost reductions of between 25% and 40% over the next four years, with administrative savings of a third. A spokeswoman for the Treasury declined to comment on predications of job losses in the Treasury or other departments, saying: “We’re not getting drawn into the details of any departmental negotiations.”
Call for more HMRC resources
Senior civil servants have called for an increase in resources for HMRC to enable it to collect more tax and reduce the fiscal deficit. The Association of Revenue and Customs – which is linked to the First Division Association – argues that it is sensible to invest in tax collection in current circumstances and not, as expected, for HMRC to lose more staff in the forthcoming Comprehensive Spending Review. Graham Black, ARC president, said: “It is madness to reduce HMRC still further, when it has already suffered 30% cuts in recent years. With more staff, we can bring in more of the tax that is legally due and deal with the tax cheats who are putting the burden onto everyone else. The amount of money spent on dealing with the tax gap has almost halved since 2006-07 from £3.6bn to £1.9bn and at the same time the revenues collected by HMRC have fallen by £25bn.”
Farewell PBR
The Treasury has announced that it is to dispense with the annual autumn Pre Budget Report to save money. However, key macroeconomic and fiscal information must still be presented to Parliament in the middle of the financial year, as prescribed by statute. The Treasury played down the significance of the decision to scrap the PBR, an official saying: “An economic forecast and statement will be presented to Parliament in the autumn. Further details will be announced to Parliament in the usual way.”
Practice
Advisors must improve knowledge
Firms providing independent financial advice must understand alternative asset classes if they wish to stay independent, argues financial services analysts Defaqto. In a new guide to alternative investments, Defaqto warns that the Financial Services Authority’s Retail Distribution Review states that any adviser firm that wishes to remain independent will have to “make recommendations based on a comprehensive and fair analysis of the relevant market and to provide unbiased, unrestricted advice”. Fraser Donaldson of Defaqto commented: “Although it is possible for firms to decide that certain products would not be suitable for their clients, this cannot be used as a get-out clause as the [RDR] policy goes on to say that the firm is expected to demonstrate clearly why a particular market or product is not suitable.” Defaqto concludes that this means that all independent financial advisors must have a sound knowledge of all relevant asset classes, including property, private equity, venture capital trusts, commodities, structured products, investment trusts and hedging.
VAT warning
HMRC has reminded companies that since April all VAT-registered traders with a turnover of £100,000 or more and all newly registered traders must submit their returns online and submit VAT payments electronically. These companies may no longer make payments to HMRC by cheque. All payments – including those permitted to be made by cheque – must be received by HMRC in their bank account by the due date for payment. Where payment is not received within the HMRC account by the due date, the trader may be liable for a surcharge for late payment.
Financial Services
SocGen and Zurich fined
Société Générale and Zurich Insurance have received substantial fines for breaches of reporting requirements. The London branch of SocGen was fined £1.575 million for failing to provide accurate transaction reports to the Financial Services Authority. Transaction reports enable the FSA to detect and investigate suspected market abuse including insider trading and market manipulation. SocGen also breached FSA rules by failing to retain and make available all relevant transaction reporting data, which must be maintained for at least five years. Between November 2007 and February 2010, SocGen either failed to report, or inaccurately reported, 18.8 million of its 23.5 million reportable transactions. It received a 30% discount on the fine for co-operating with the FSA investigation. The UK branch of Zurich Insurance was fined £2,275,000 for not having adequate systems and controls in place – causing the loss of 46,000 customers’ personal information. The fine is the highest levied to date on a single firm for data security failings.
Barclays fined
Barclays Bank is to pay $298m to the US Department of Justice, the Manhattan District Attorney’s Office and the US Department Of Treasury’s Office of Foreign Assets Control to settle charges that it breached sanctions in trading with Cuba, Iran, Libya, Sudan and Burma between 1995 and 2006. In a previous action by the Department of Justice and the US Securities and Exchange Commission, Lloyds was required to pay $350m to settle charges that it breached sanctions in conducting trades with Iran and Sudan. Credit Suisse has paid $536m to settle similar charges. The charges filed by US authorities allege that Barclays “knowingly and wilfully facilitated” the transactions in breach of sanctions.
Enterprise
Basel III ‘an excuse’ for not lending
Banks have been accused of using the need to accumulate additional capital under Basel III as an excuse for not lending to SMEs. Lawrence Galitz, chief executive of ACF Consultants, said: “Basel III may not be as strict as many fear and implementation is to be phased over time, for a very good reason. But even though banks have been relieved by the outcome, some are still using Basel as an excuse not to lend. They’re making a scapegoat out of the Accord…… But growth will slowly grind to a halt if banks do not start lending to SMEs. Lending to small or new businesses is obviously a risk, but the SME sector is a major source of economic development and employment.” Basel III rules are scheduled for finalisation later this year and are expected to increase the obligation on banks’ minimum tier one capital ratio, probably raising it from 4% to 8%. The banking sector regards this requirement as too strict, though many banks already meet the minimum requirement.
Self-employed cannot pay debts
Many self-employed traders are unable to repay commercial or personal debts, according to the Consumer Credit Counselling Service, a debt charity. Of the approximately 6,500 traders who contacted the agency’s Self Employed Centre in the first half of this year, only 1,600 were able to enter into a debt management plan to repay their debts. The majority of callers were in severe debt and had negative cash flows, leaving them with no money to being repaying debts. The situation is similar to that of last year.
Corporate
Rok hits trouble
Ashley Martin has been suspended as group finance director for maintenance and building services group Rok, after serious weaknesses were revealed in the financial controls in its plumbing, heating and electrical business. An independent review was conducted by BDO. The division was already adversely affected by underperforming contracts, which have been terminated and the business restructured, but the division’s financial weakness continued – leading to the review. The failings led to the division not contributing to overall group profits in the first half of this year, which were below market expectations. Pre-tax profits halved from £6m in the first six months of 2009 to £3m this year. David Miller, a former CFO for Amey, has been appointed interim CFO. The board has also agreed to streamline the operations of the division.
Private equity doubts
Private equity groups do not necessarily outperform stock market investments, according to research conducted by the HEC School of Management in Paris. Analysis of the returns produced by 701 mature buy-out funds showed average annual returns of 7.6%, compared to 6.8% for market investments of a similar risk profile. But top performing private equity funds do outperform the market – though are balanced out in averages by low performing funds. Funds in the top quartile, showed average annual returns of 13.6%: top quartile returns in market investments generated returns of 8.5%. The pressures on private equity funds in current market conditions was dramatically illustrated by the closure of the Candover fund – which has handled €46bn of buy-outs in the last 20 years – and the proposed return of its cash to investors.
Public sector
Managing staff cost reductions
The National Audit Office has published a guide to public bodies on how to manage staff cost reductions. The Government is committed to saving £6.2bn across six departments in the current financial year, with further savings to be delivered through this autumn’s spending review. Characteristics underpinning the review are for a ‘step change’ in achieving efficiency and value for money and to challenge departments, local authorities and delivery partners to fundamentally change the way that services are provided so that more power lies in the hands of individuals and frontline professionals. The NAO warns that achieving top end savings targets of up to 40% a year requires higher initial implementation costs, as well as a clear strategy, strong project management and effective spending controls. The guide – ‘A framework for managing staff costs in a period of spending reduction’ – also enables senior managers to identify and appraise options for staff cost reductions.
Councils complain of red tape
The Local Government Association has submitted a dossier to government of red tape and outdated laws that it says adds to the cost of running local services and prevents councils from operating efficiently. The report complains that excessive guidance, attempts at Whitehall micromanagement, seldom used legislation and unnecessary or redundant legal obligations are burdens on councils. It quotes long guidance documents on the consideration of planning applications and the administration of benefits that have no legal force. The LGA complains that authorities must provide 2,500 separate pieces of data to other public bodies.
RoW
Corporate
Barclays fined
Barclays Bank is to pay $298m to the US Department of Justice, the Manhattan District Attorney’s Office and the US Department Of Treasury’s Office of Foreign Assets Control to settle charges that it breached sanctions in trading with Cuba, Iran, Libya, Sudan and Burma between 1995 and 2006. In a previous action by the Department of Justice and the US Securities and Exchange Commission, Lloyds was required to pay $350m to settle charges that it breached sanctions in conducting trades with Iran and Sudan. Credit Suisse paid $536m to settle similar charges. The charges filed by US authorities allege that Barclays “knowingly and wilfully facilitated” the transactions in breach of sanctions. Barclays issued a statement outlining the settlement, adding that “Barclays does not anticipate any further regulatory actions relating to these issues”. It said that it had conducted an internal review of its conduct relating to US dollar payments for trades involving other countries subject to US sanctions and has reported the outcome of the review to the US authorities.
Beazer charges
Beazer Homes’ former chief accounting officer is facing 11 criminal charges, including securities fraud, conspiracy and providing false statements to a financial institution. Michael T. Rand has been detained by order of a US District Court, pending a hearing. The charges result from a government investigation into Beaver, a major US home builder. Beazer has previously accepted responsibility for securities fraud and conspiracy and will pay restitution of up to $50m. Prosecutors allege that Rand directed the accounting fraud conspiracy, deceiving auditors and manipulating the reporting of revenue to achieve earnings targets over a seven year period, from 2000 to 2007.
Practice
More whistleblowers go to PCAOB
More accountants are blowing the whistle on dodgy colleagues by reporting them to the US Public Company Accounting Oversight Board. Last year PCAOB received more tip-offs than ever before – 179 – warning them of doubtful practice by audit firms. Most of the warnings came from other staff within the firms: others came from accountants working for audit clients and from outside consultants and investors. Allegations included failure to comply with accounting standards, breaches of independence requirements and over-charging by firms. PCAOB often shares this intelligence with the Securities and Exchange Commission, which is itself in the process of adopting a new reward system for whistleblowers. The increase in tip-offs to PCAOB is credited on its adoption of an online ‘Tip Center’, which invites comments and reports from accountants and the public. PCAOB says these tips can lead to regulatory and legal action, but that it is prevented by law from reporting on this.