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Dispatch (UK/ROW edition)
| by Paul Gosling 01 Sep 2006 Topic: News |
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FSA calls on Big Four to improve governance The Financial Services Authority (FSA) has called on the Big Four to adopt the Combined Code on Corporate Governance, separating the functions of chairman and chief executive. At present in the UK, only KPMG has both a chairman and a chief executive—and none of the firms have a chairman likely to meet the code’s independence criteria. The Big Four should also, said the FSA, have general boards overseeing their businesses comprising majorities of non-executive directors, appoint audit committees with majorities of non-executives to which internal audit directly reports, and undertake annual reviews of the effectiveness of their internal controls. While listed companies can opt out of the combined code on a “comply or explain” basis, the FSA believes the Big Four should not be permitted any non-compliance because of their responsibilities to a wide range of stakeholders. The strongest risks to the Big Four come from possible weaknesses in the audits conducted by firms operating within their networks in other countries, suggested the FSA. The FSA’s call for stronger governance within the big firms came in its response to the Financial Reporting Council’s consultation on the lack of choice in the audit market. There is no reason why it should be assumed listed companies must use a Big Four auditor, says the FSA, which recently replaced Deloitte with RSM Robson Rhodes as its own auditor. The Association of British Insurers endorsed the FSA’s call for greater use of middle-tier firms in the auditing of listed companies and argued for regular tendering of audit contracts. Regulators should closely monitor whether there were any cross-subsidies between audit and consultancy work, suggested the ABI. ACCA, in its response to the FRC, described audit as “a competitive and successful market”. It said that should one of the Big Four cease to trade, causing serious problems in lack of choice, then “one-off measures by the regulator at the time are likely to be the most cost-effective solution”. SEC delays Sarbanes-Oxley for foreign companies The Securities and Exchange Commission (SEC) has agreed to lift the Sarbanes-Oxley Act compliance obligations on some companies listed overseas. About a quarter of foreign companies will be given an additional year to provide an auditor’s attestation report on internal control. These will now not be necessary until they provide annual reports for financial years ending on or after 15 July 2007. For year ends on or after 15 July 2006, they will now only have to comply with the management report requirements of Sarbanes-Oxley. The relaxation does not apply to what the SEC calls “large accelerated filers”—companies defined as “accelerated filers” with publicly issued shares above $700m. “Accelerated filers” are companies that have been a public company for over a year, have filed at least one annual report, are not small business issuers and have publicly issued shares of at least $75m. Smaller US companies are also being granted a year’s delay. New public companies—including overseas companies listing in the US for the first time—are to be given transition relief from the Sarbanes-Oxley Act, which will now only affect their year two annual report. “We have heard that the Section 404 reporting requirements impose a special burden on foreign private issuers, smaller companies and newly public companies,” said John White, director of the SEC’s Division of Corporation Finance. “These companies play an important role in our capital markets, and these releases illustrate the Commission’s commitment to improving the efficiency and effectiveness of Section 404 implementation for them. “We believe our proposed transition relief for newly public companies should enhance the attractiveness and cost-effectiveness of participating in our markets, both for companies contemplating [initial public offerings] and for foreign companies considering listing in the US for the first time, without sacrificing important investor protections.” NHS “should change accounting practices” The UK’s Department of Health has been advised to abandon the application of Resource Accounting and Budgeting (RAB) to NHS trusts. The interaction of RAB with the pre-existing statutory duty of NHS trusts to break-even over a two-year period, creating what has been called a “double deficit”, is a major factor in the financial crisis which has afflicted some NHS trusts and led to thousands of job losses, concluded the Audit Commission in its report, Review of the NHS Financial Management and Accounting Regime. All NHS trusts should be given an alternative financial regime which provides more effective incentives for good financial management and is similar to that used for NHS foundation trusts, it is suggested. Under RAB, if a trust reports a deficit in one year, its income is reduced by that amount the following year. In addition, the deficit is posted to the balance sheet and carried forward to give a cumulative position. That cumulative position is then used to assess whether the NHS trust has achieved its statutory duty to break-even over a two-year period. The impact is that a trust must both live within reduced income in the second year and cover the brought forward deficit. Other recommendations are made in the report. Primary Care Trusts should operate a changed planning and financial system, giving them more power to manage their financial risks. Payment by Results (PbR) tariffs should be developed in a way to provide trusts with greater medium-term certainty over their financial income. A more effective and swifter mechanism for identifying and dealing with financial distress at NHS bodies should be found. A banking arrangement should be established by the Department of Health to provide necessary working capital for NHS bodies. Finance staff within the NHS and trusts’ boards should have their skill levels and capacity improved. An earlier Audit Commission report, Learning the Lessons from Financial Failure in the NHS, concluded that the financial crisis in NHS trusts was in part the result of weaknesses in the leadership of trusts, which failed to predict or react to developing difficulties. Sir Michael Lyons, acting chairman of the Audit Commission, said: “Crucially, our recommendations support the NHS reforms, would enable trusts and PCTs to achieve better value for taxpayers’ money and contribute to consistent, reliably funded services for patients.” A spokesman for the Department of Health said it welcomed the reports and recommendations, which were now being considered. Home Office “worse than a corner shop” for book-keeping One of the UK’s “great departments of state”—the Home Office—has “failed in its obligation to present to Parliament properly audited financial accounts”, said the chairman of the House of Commons Public Accounts Committee (PAC), Edward Leigh. “The manager of even the smallest corner shop knows how crucial it is to reconcile cash records with bank statements,” said Leigh, who released a report showing that the Home Office was unable to do this and appeared not to understand the importance of accounts reconciliation. The PAC had looked at the Home Office’s accounts following the Comptroller and Auditor-General’s refusal to sign-off its accounts. The Home Office had not submitted its accounts in time to meet the statutory timetable. And the late accounts were not full and proper, failing to provide a reasonably accurate reflection of the financial position of the department. The National Audit Office (NAO) had advised members of the PAC that the department’s accounting systems recorded transaction figures were nowhere near accurate. “When the gross transaction value of debits and credits within [the supplied] data was totalled, they each amounted to some £26,527,108,436,994, almost 2,000 times higher than the Home Office’s gross expenditure for 2004-05, and approximately one-and-a-half times higher than the estimated GP of the entire planet,” said the NAO in a memo. In the first round of capacity reviews of government departments, the Home Office was the weakest of four departments assessed—which also included the Department of Work and Pensions. DWP has responsibility for a number of projects that have been regarded as disasters, particularly the Child Support Agency, which is to be abandoned as unreformable. The Home Office received a two-star rating, signifying it needs “urgent development”. Richard Bacon, an MP on the PAC, told the House of Commons that the Home Office was unsure how much it spent, what it was owed, what it owed to others, what assets it owns, or whether its expenditure was fully authorised by Parliament. mobile phone retailers claim fraud “myth” Mobile phone retailers are launching a judicial review of actions by HM Revenue & Customs (HMRC) in combating carousel and missing trader fraud. They claim that investigations and associated delays to VAT repayments by HMRC are pushing many legitimate traders to the brink of insolvency. “What HMRC is doing is saying it will investigate a transaction chain and it will withhold VAT repayments while it is investigating this, no matter how long it takes and no matter how many people go bust in the process,” said Anthony Elliot-Square, chairman of the Federation of Technological Industries (FTI), representing mobile phone retailers. The FTI is not directly involved in the legal action, which is being taken by individual members of the Federation. Elliot-Square added that he did not believe that the widely quoted costs of the fraud were accurate, “if there is a fraud”. He said that if the reported figures valuing the fraud at £5bn to £8bn were correct, “you would have thought, with all their resources, [HMRC] would have done something about it”. Elliot-Square suggested that HMRC officials may be overstating the cost of the fraud to conceal VAT under-collection rates. “They seem to blame everybody else and suggest a big conspiracy—it’s nonsense,” he said. In turn, HMRC said that the FTI’s allegations of exaggeration were “nonsense”. But its spokesman did concede there were innocent victims whose applications for VAT repayments were being delayed. “I can understand people saying they are being penalised,” admitted the spokesman. Ironically, HMRC is itself doubtful about the latest valuation placed on the fraud by the Office for National Statistics, which estimates the activity has generated £10bn of artificial transactions. HMRC does, though, point to a number of recent successful prosecutions, which have led to prison terms of eight, nine and 10 years, and the charging of 17 people alleged to have been involved in one gang carrying out the activity. banks blame insolvencies for “weak” profits Lloyds TSB increased its provisions for bad debts by 20% to £800m in its latest half-yearly report, blaming the rise of personal insolvencies for a hit on its profits. Other lenders reported loan defaults rising by as much as 50%. The UK’s 2004 Enterprise Act and the advice offered by insolvency practitioners has damaged Lloyds TSB’s profits, claims the bank. Chief executive, Eric Daniels, said: “Not too many years ago, in our parents’ generation, a debt was something which was freely contracted and therefore it was something that you naturally would repay. Today, advice is being given to students that the minute you graduate it is a smart thing to default and declare bankruptcy. That is a huge societal change.” The bank’s concerns seemed confirmed by figures released by the Government’s Insolvency Service, reporting a 66% increase in personal insolvencies over the last year and a 153% rise in the number of individual voluntary arrangements (IVAs) over the same period in 2005. But the Insolvency Practitioners Association (IPA) disputes the assertion that this increase is a matter for concern. IPA President, KPMG’s Finbarr O’Connell, said: “I think that it is to be very much welcomed that consumer debtors are increasingly looking to use what has become a well established route to reaching some sort of orderly settlement with their creditors through an IVA, rather than simply throwing in their hand and going bankrupt, or just putting their head in the sand and waiting for their creditors to take action.” O’Connell added that Lloyds TSB was wrong to associate the increased use of IVAs with the Enterprise Act. “IVAs were introduced by the Insolvency Act 1986—that is, some 20 years ago—and remained unaffected by the Enterprise Act,” he explained. “The debtor is expected to bring in the value of any assets he/she has and to make payments from his/her income for, usually, five years… I do not see an IVA as an easy option out of debt.” But PricewaterhouseCoopers pointed out that, at the current exponential rate of increase in the number of IVAs, more than 100,000 people this year will be protected from their debts. “This means that bad debt write-offs could amount to up to £1.5bn for creditors,” said Pat Boyden, partner in the Business Recovery Services practice at PricewaterhouseCoopers. in brief...
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