Accounting & Business – News analysis
EU takes action on auditor liability
The European Commission has proposed limits on auditors’ liability to protect the Big Four from further reductions in numbers, threatening the viability of a competitive market for company audits. It hopes the move will also strengthen mid-tier audit firms, enabling them to compete better against the Big Four.
No specific limit is proposed on auditor liability – member states would determine their own national limits and their own method for limiting liability. Instead, the Commission recommends key principles that would underpin liability limitation – that any limitation is fair for auditors, audited companies, investors and other stakeholders. The Commission also specified that the limitation of liability should not apply in the case of intentional misconduct on the part of the auditor, or where the limitation would be insufficient if it did not also cover third parties. It also insists that damaged parties must retain the right to be fairly compensated.
Charlie McCreevy, the Internal Market and Services Commissioner, said: “After in-depth research and extensive consultation, we have concluded that unlimited liability combined with insufficient insurance cover is no longer tenable. It is a potentially huge problem for our capital markets and for auditors working on an international scale. The current conditions are not only preventing the entry of new players in the international audit market, but are also threatening existing firms. In a context of high concentration and limited choice of audit firms, this situation could lead to damaging consequences for European capital markets.”
Three possible methods for liability limitation are listed in the Commission’s ‘recommendation’, but it makes clear that any other equivalent method might be used. Member states should choose the method that best suits their needs. The Commission’s preference is for a cap on liability, or a combination of proportionate liability and a cap, with proportionate liability suggested as a less preferred alternative.
The Commission’s recommendation arises from a mandate for investigation and proposals laid down in the 2006 Statutory Audit Directive.
Time limit on tax refunds to be cut
UK taxpayers will only have four years to claim rebates of overpaid tax, instead of the current five years, under legislation going through Parliament as part of this year’s Budget that amends the Taxes Management Act.
But the change will not affect HM Revenue & Customs’ right to recover underpaid taxes over a much longer period. Where there is fraud or negligence on the part of a taxpayer, HMRC can recover underpaid income tax for a period going back as far as 20 years and 10 months.
According to UHY Hacker Young, the change will particularly affect the elderly, with an estimated 200,000 pensioners paying too much tax last year. Many pensioners overpay tax because of incorrect PAYE codes on pension annuities. A system of taxing pensioners’ annuities with an automatic 22% income tax deduction from most annuities at source regardless of tax liability is currently being replaced. Almost half of claims currently submitted will be debarred or partially debarred under the revised time limit, says the firm. Claims over the period currently permitted for claims are worth an average of £1,963.
Rob Durrant-Walker, of UHY Hacker Young in York, said: “The changes are weighted in HMRC’s favour. If taxpayers are careless, HMRC can demand back tax of more than four years, but if HMRC is careless and collects too much tax, taxpayers will only be able to seek redress for four years overpaid tax. It’s one rule for HMRC, one rule for the taxpayer. In the case of pensioners being overtaxed, the fault lies with HMRC.
“Other taxpayers could also be hit as you can bet that when there is extra tax to be collected HMRC will try to use spin and allege neglectful behaviour from the taxpayer in order to get around their own time limit. HMRC does not proactively identify which taxpayers have overpaid and it can take years for overpaid tax to come to taxpayers’ attention.”
German corporate snooping scandal widens
A corporate culture apparently common to many German companies has been revealed, in which private investigators are hired to investigate journalists who write critically about their businesses.
A criminal investigation is currently taking place into the actions of Deutsche Telekom and its use of customer data. In a statement, Deutsche Telekom said: “According to recent findings, there were cases of misuse of call records at Deutsche Telekom in 2005 and, according to latest allegations, also in 2006. The allegations made against the company do not relate to any unlawful use of the content of calls – in other words they do not concern the tapping of calls.”
Deutsche Telekom is alleged to have examined its call records data to see which employees were in phone contact with journalists who wrote negative stories about the company. René Obermann, the chairman of the board of management and chief executive, said: “ We have called in the public prosecutor’s office and will support them in their full investigation of these allegations.” He added: “I am shaken to the core by these allegations.”
The company accepts that it has internal control “weaknesses”, which allowed private investigators to be engaged without authority from the board. Following an internal investigation into tip-offs of malpractice, the company made “far-reaching staffing and organizational changes in the group security department”. Dr. Gerhard Schäfer, a former Presiding Judge at the Federal Court of Justice, will act as an expert in the company’s own investigations of alleged data misuse and proposed strengthening of procedures.
According to press reports, Deutsche Telekom employed global security experts Control Risks to conduct investigations for it and Control Risks sub-contracted some of its operations to private investigators, including former officers of the notorious East German state security organisation, the Stasi.
In a statement, Control Risks said it was “disappointed to be implicated in the current investigation involving Deutsche Telekom”. It added that “the allegations are completely at odds with Control Risks’ working practices, values and codes of conduct” and that they relate to a period in the past.
Further allegations have emerged suggesting that other German companies have also engaged private investigators to examine links between staff and journalists. The claims are particularly damaging for Deutsche Telekom, which is still over 30% state-owned and whose T-Mobile subsidiary has a growing share of the markets in the US and the UK. Former group chairman Klaus Zumwinkel resigned over allegations of tax evasion that are still being investigated and led to an international row between Germany and Liechtenstein, where Zumwinkel held bank accounts.
Pressure grows on IASB and fair value
The International Accounting Standards Board is to reconsider whether ‘fair values’ should always reflect exit values, or whether in some circumstances they should use entry values.
Ken Wild, global leader of international accounting standards at Deloitte, said the project is “very significant”. While exit price valuations might be the most relevant and fair value of a financial instrument, said Wild, this would not be true, for example, with furniture and fittings, where replacement cost was a more significant issue. “With different items you need different measures,” he suggested.
The setting-up of a review on the use of exit and entry values in the use of fair valuations was disclosed by the IASB in its Annual Report. The decision followed receipt of over a hundred submissions challenging the assumption that exit values should always be used, as is required by SFAS 157.
“When completed, the results of the review will help the Board decide whether to retain the term ‘fair value’ or to redefine it or replace it with a more specific term that is appropriate in the particular circumstances,” said the Annual Report. “The Board expects to publish in 2009 an exposure draft of an IFRS on fair value measurement guidance and hopes to issue the ensuing standard in 2011.”
The IASB is also forming a new group to consider the specific problems of valuing illiquid securities, in response to complaints from banks and insurers that fair value has seriously exacerbated the impact of the credit crunch. Accountants, regulators, banks and insurers have been invited to a founding meeting. Action was urged on the IASB by the Financial Stability Forum, with backing from the G7 governments.
Meanwhile, progress is being made on the creation of an IASB oversight board, with the US Securities and Exchange Commission, International Organisation of Securities Commissions (IOSCO), the European Commission and Japan’s Financial Services Agency meeting together to create an International Accounting Standards Committee Foundation Monitoring Group. European Commissioner Charlie McCreevy said the new body would increase the accountability of the IASB. However, it is also likely to be a forum to play out the major tensions that exist between regulators and the IASB.
Christopher Cox, chairman of the SEC, has hinted that the creation of the oversight body is a condition of the early acceptance of IFRS in the US, which the Federal Accounting Standards Board says it wants in place in about five years.
UK to strengthen financial regulation
A new structure of UK financial regulation has been announced by Chancellor of the Exchequer Alistair Darling. In place of the tripartite system of joint regulation between the Financial Services Authority, the Bank of England and the Treasury, a new structure will give clearer responsibilities to each, with more emphasis on regulatory co-ordination.
An internal review by the FSA of the Northern Rock crisis recognised that it did not regulate Northern Rock sufficiently well and had not anticipated the effects of its excessive use of borrowing on inter-bank borrowing. Key staff at the FSA have subsequently been replaced.
Under the new arrangements, the FSA will remain the sole banking supervisor and will be given extra powers to tackle market abuse and ensure investor confidence. The Bank of England will have stronger powers to carry out a new statutory duty to protect financial stability. A financial stability committee of the Bank will be created and Sir John Gieve, the deputy governor responsible for financial stability, is to retire.
The Chancellor made the announcement of the changes in his annual Mansion House speech, where he also revealed that he had appointed Sir James Crosby, former chief executive of HBOS, to review the funding of mortgages. Darling pointed out that where a decade ago almost all funding for mortgages came from deposits, a third was now financed through inter-bank borrowing and that the implications of this change need to be evaluated.
To deal better in future with threats to the global financial system, the International Monetary Fund and the Financial Stability Forum need to play an increasing role, argued the Chancellor. He said that the UK Government had secured support for “the expanded use of international colleges of supervisors” to provide an international oversight of threats to the financial system.
ACCA publishes fair tax research
Hong Kong has a fair and simple tax regime, while the UK’s is unfair and complex, according to research conducted by ACCA that compared the tax systems of six jurisdictions.
Asked whether their tax system was fair, UK respondents showed the highest level of disapproval. Finance professionals in Hong Kong, Singapore, Canada, the US and Australia all rated their systems as fairer than their counterparts in the UK rated theirs. Only Australia’s system was considered more complex. The UK also performed worst on transparency, with Hong Kong and Singapore rated the best.
UK respondents complained there were too many taxes, adding to the system’s complexity. They expressed unhappiness at the increasing role of employers acting as tax collecting agents for government; retrospective changes to the tax system; stealth taxes, such as the failure to index link thresholds and allowances; and the assumption of additional powers by HM Revenue & Customs.
The results also showed an overwhelming belief from all the countries surveyed that it is the volume of directives, laws and regulations that has the greatest burden on tax complexity. Respondents in all the countries agreed that reducing complexity in the tax system would lead to a reduction in the level of tax avoidance and tax evasion. UK respondents said that lack of clarity, increasing complexity and a seemingly aggressive stance by HMRC were breaking an already fragile trust. The report concludes that trust is an essential requirement for any tax system to work effectively and to ensure widespread compliance.
Professor Francis Chittenden, ACCA professor of small business finance at Manchester Business School and co-author of the report Perspectives on Fair Tax, said: “The message from our research is for governments to reduce the volume of laws, directives and regulations that contributes most to complexity. There is a fundamental issue for governments around the world to decide the purpose and structure of tax systems, and importantly to communicate the rationale behind these decisions.”
Chas Roy-Chowdhury, ACCA’s head of taxation, added: “The report’s findings also show that tax systems lag behind the economic cycle, that it simply can’t keep up with the pace of change. Governments should explore the creation of flexibility in the tax structure to allow for a swift response to changing economic conditions.”
France gives up on tax harmonisation
France has abandoned its hopes of pushing progress on either harmonisation of corporate tax rates or a common consolidated approach to calculating corporation tax. France had stated its intention to try to seek agreement from other EU member states during its presidency of the EU, which covers the second half of 2008. The change of position follows the rejection of the Lisbon treaty by the Irish voters.
Heritage asset value disclosures strengthened
Museums and galleries must increase their disclosure of the valuations of heritage assets under a revised Financial Reporting Exposure Draft published by the ASB. While accepting that the valuation of often irreplacable heritage assets is “very difficult and challenging”, the ASB confirmed its belief that there is no better alternative to FRS 15. But it wants this strengthened by requiring public bodies and other organisations owning heritage assets to show the cost or value on their balance sheets. Where this is not practicable, there should still be enhanced disclosure of asset values.
Card fraud protection flaw
The Address Verification System (AVS) designed to prevent online fraud using credit cards is instead being used by criminals to commit fraud, according to a warning issued by fraud protection consultants 3rd Man. AVS is used by credit card companies and banks to verify the identity of a card user, checking their billing address against the address held by the card issuer. But hackers have been able to access retailers’ database to obtain information to circumvent the address controls. 3rd Man suggests the breach of the systems controls could potentially lead to millions of pounds of fraud.
FRC updates Combined Code
The Financial Reporting Council is publishing an updated Combined Code. The revised code no longer restricts an individual from chairing more than one FTSE 100 company and will allow chairmen of listed companies outside the FTSE 350 to also sit on their audit committees, providing they do not chair them and were regarded as independent when initially appointed. Most companies will begin to apply the revised code in 2009, reporting against them for the first time in 2010.
White list of offshore centres published
The Channel Islands and the Isle of Man have been given only qualified status in a European Union approved ‘white list’ of tax havens. The Cayman Islands and other UK Caribbean dependencies have been excluded from the list altogether.
Finance execs dissatisfied with their departments
A mere 10% of finance heads are very satisfied with their departments’ workforces, a survey conducted by Accenture has found. Attracting and retaining good staff was recognised by finance executives as one of their key challenges over the next two years. But they admit that their companies are not good enough at training and development to improve staffs’ skills. Globalisation is named as another challenge, giving rise to demands for new capabilities amongst staff and a need to respond to rapid change and a greater focus on cost control.
Call for more tax staff
The Association of Revenue and Customs has called for the UK Government to increase resources allocated to HM Revenue & Customs, to combat the recruitment of experienced tax inspectors by the private sector. The loss of key staff is causing problems in its work countering tax evasion, says ARC, which represents senior staff. It called for higher pay and more resources to be spent on staff training and development.
ICFR gets backing from Big Four
The new International Centre for Financial Regulation is being backed by donations of £100,000 from a consortium of the Big Four firms. The City of London is putting a million pounds into the initiative, while the Government has promised £2.5m over three years. The ICFR will be a global body based in London, promoting more effective financial regulation. It was proposed last year in a paper written for the Treasury by Lord Currie. The initial chief executive is to be Barbara Ridpath, managing director of Standard & Poor’s in Europe.
IASB and FASB publish revised conceptual framework
The International Accounting Standards Board and the Federal Accounting Standards Board have published an exposure draft, seeking views on the revised conceptual framework. It seeks views on an improved objective of financial reporting, the qualitative characteristics of information provided by financial reporting and constraints on the provision of that information. The draft reflects revisions made to its initial consultation document following previous comments. It proposes that the objective of financial reporting is to provide financial information useful to present and potential equity investors, lenders and other creditors and presents an improved description of ‘faithful representation’.
Woolworths has been fined £350,000 by the FSA for failing to disclose market-sensitive information in a timely manner. The breach occurred when there was a variation in the terms of a supply contract held by its subsidiary Entertainment UK, which cut Woolworths’ profits for 2006/7 by £8m. Failure to disclose the information promptly created a false market in Woolworths’ shares for 29 days, breaching listing and disclosure rules.
New Iraq mis-spending claims
Fresh allegations of misuse of US government money in Iraq have been made. A senior US army official in charge of the Pentagon’s largest contract in post-invasion Iraq claimed that he was pushed out of his job after questioning the legitimacy of recharges imposed by the contractor. Army auditors suggested that more than $1bn of spending by the contractor were not supported by adequate records.
Pension funds pessimistic about deficits
Trustees at a quarter of pension schemes currently in deficit expect their schemes still to be in deficit in 10 years time, according to a survey carried out by fund advisers Aon Consulting. Schemes that do not have clear plans to move out of deficit are in breach of the expectations laid down by the Pensions Regulator, under the Pensions Act, 2004. Aon predicts that these schemes can expect to be put under close scrutiny by the regulator.