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Dispatch (UK/ROW edition)
| by Paul Gosling 06 Feb 2007 Topic: News |
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The US Securities and Exchange Commission has agreed to reduce the burden of the Sarbanes-Oxley Act, proposing new interpretive guidance on the evaluation of internal controls over financial reporting. Clarification has also been given on auditors’ reporting requirements. The effect of the recommended amendments is to give directors more flexibility in deciding the level of internal controls required, and could help them cut audit bills by limiting the scale of audits of internal control. ‘We are proposing this interpretative guidance to help management make their evaluation process more efficient and cost-effective,’ said Christopher Cox, chairman of the SEC. ‘In the absence of guidance, management has looked to the PCAOB’s [the Public Company Accounting Oversight Board’s] auditing standard to conduct their evaluations, which is not what was intended. With this guidance, management will be able to scale and tailor their evaluation procedures to fit their facts and circumstances, and investors will benefit from reduced compliance costs. While the guidance is intended to help public companies of all sizes, smaller companies should particularly benefit from its scalability and flexibility.’ The move by the SEC was backed-up by PCAOB’s decision to propose a new internal control auditing standard under Section 404 of the Sarbanes-Oxley Act, replacing Auditing Standard No. 2 – called by Cox ‘unduly expensive and inefficient’. Cox said the move will strengthen investor protection by refocusing audit resources on ‘what truly matters’. The proposed new standards are principles-based. The two principles behind them are that it is for management to design controls to prevent financial mis-statements and that management should gather and analyse evidence regarding the operation of controls, based on risk assessment. Recognising that many foreign companies have found the Sarbanes-Oxley Act so onerous that they want to delist from a US stock exchange, the SEC proposed new rules easing the process for deregistering. The SEC’s moves were welcomed by the Confederation of British Industry (CBI), which lobbied for them. The CBI’s director-general, Richard Lambert, said: ‘This is very good news for non-US companies who are currently trapped in the US system and want to de-register, but could not because of the complex rules and regulations.’ IFRS application ‘subject to national influence’ IFRS application is affected primarily by a company’s country of domicile and its previous national accounting standards, not by its industrial sector, according to a KPMG study of nearly 200 companies in 16 countries. Only with financial institutions is industrial sector the primary influence. Financial statements of a Spanish retailer and pharmaceutical company are therefore more likely to be similar in their accounting choices than are the financial statements of a retailer based in Spain and one based in France, concludes KPMG. But as accounting practice beds down under IFRS, these practices will move towards greater harmonisation, predicts KPMG. In particular, pressure for common accounting practices and presentations will come from analysts, suggests the firm. ‘Perhaps as expected, the first post-2005 generation of IFRS financial statements show their lineage – of previous national standards, training and culture,’ said Mary Tokar, head of the KPMG International Financial Reporting Group. She predicted that the pressure to benchmark against competitors will drive greater convergence in IFRS interpretation. KPMG says that the influence of previous GAAP on transition to IFRS was particularly evident in the UK environment – for example in the way companies account for joint ventures, investment properties and actuarial gains and losses on pensions. But UK companies’ analysis of their expenses in the income statement was more varied than in other countries – suggesting that UK companies were more inclined than those in other countries to ‘pick and mix’ what suited them best. The UK’s Accounting Standards Board (ASB) reports mixed progress in moving to IFRS. Companies completed their accounts on a timely basis and many reported these promptly to their audit committees. But too often, says the ASB, accounts are over-long and too complicated. Many companies use standardised references to accounting policies, irrespective of whether these were actually being used in the preparation of their accounts. The ASB is calling for more thoughtful and relevant preparations. UK ‘guilty of double taxation’ UK taxation of foreign sourced dividends breaches European Union law, the European Court of Justice (ECJ) has ruled. By failing to provide any dispensation cutting UK tax liability to compensate for taxation levied elsewhere, HM Revenue & Customs is guilty of double taxation. But, in a decision that disappointed many tax advisers, the ECJ ruled that it is a matter for the UK to decide whether the means of avoiding double taxation should be through an exemption or imputation. Foreign sourced dividends are subject to imputation systems. The ECJ decision came in the FII GLO case, which also ruled on the treatment of Advance Corporation Tax in operation until 1999. ACT had a disadvantageous effect on companies with foreign shareholdings. A UK resident company had to pay ACT in full where it received dividends from foreign sources and used this to pay dividends to its own shareholders. Yet a resident company in the same situation, except that its received dividends were from UK sources, benefited from a tax credit and had no ACT to pay. Further slow litigation can now be expected from multinationals seeking to recover ACT. ‘This decision is surprising,’ said Bill Dodwell, tax partner at Deloitte. ‘It is clear that the ECJ dislikes the UK’s old ACT system and has broadly given companies the reliefs they sought. However, on the key issue of whether a system of double tax relief is acceptable, confusion reigns. The UK Government is likely to choose to interpret the judgement in a highly restrictive manner, as it has done with the recent changes to the CFC rules and to loss relief. ‘The ECJ considers that the UK needs to change its system for portfolio dividends – those from less than 10% shareholdings – but it may keep its system from 10% or greater shareholdings. Further litigation is likely, as companies seek to claim before the UK courts that certain UK exemptions need to be extended to overseas companies. The ruling conflicts with the Cadbury Schweppes ruling, issued by the ECJ only three months earlier.’ Both Deloitte and KPMG complained that the ECJ judgement increased the complexity of the rules governing UK corporate tax. Nor does the style of the ECJ decision help. ‘The Court needs to adopt a less Delphic tone if it is to help member states and taxpayers understand its rulings,’ said Dodswell. ‘customer services must improve to avoid FSA fines’ Financial services firms must do more if they are to meet the Financial Services Authority’s (FSA) deadline on ‘Treating Customers Fairly’ (TCF), says Ernst & Young. Firms have until March to implement their TCF programmes, but most have further significant steps to take to meet FSA requirements, regarding root cause analysis, management information and understanding the cost implications of poor complaint handling. There has already been big improvements in customer service handling, with 97% of firms saying they can identify and respond to a complaint within 48 hours, and 89% providing their boards with regular summaries and detailed information on complaints handling. But only 39% of firms have fully integrated their complaint handling with the TCF initiative, with a further 56% needing to integrate TCF across the rest of their business. Ernst & Young’s survey also reveals that a fifth of firms do not have clear and well documented relationships between complaint handling and compliance, while a quarter cannot monitor how easily customers can register complaints. Two-thirds of financial services businesses do not use information from complaints as a formal part of product development. A mere 11% of firms analyse the costs to income and retention rates of complaint volumes. Steve Southall, financial services regulatory director for Ernst & Young, said: ‘Given the FSA deadline of March 2007 for firms to implement TCF initiatives across a significant part of the business, senior management need to ensure that complaint handling, as well as other customer management processes, meets both customer and regulator expectations. In addition, the continued focus on complaint handling by the Financial Ombudsman Service, and the ongoing reviews by the Office of Fair Trading of payment protection insurance and credit card and bank charges, means that complaint handling will remain a priority area for senior management in 2007.’ Southall added: ‘Many current complaint handling models were not designed to cope with the volume or complexity of today’s complaints – or the reporting and management oversight which is required to meet FSA standards.’ ‘money laundering rules still confuse’ The European Union’s Second Money Laundering Directive (2MLD) has failed to harmonise interpretations of money laundering requirements across the EU, concludes a study commissioned by the City of London Corporation. According to the study – written by a group of national legal experts led by the British Institute of International and Comparative Law – the Directive has been subject to different national interpretations in the six member states observed. The fault lies with imprecise terminology in the Directive, coupled with differences in existing national legal and regulatory systems. Problems include varying understandings of what constitutes a ‘serious crime’; different professional privilege exemptions; variations in processes for proving identity in non face-to-face transactions; and conflicts between 2MLD’s ban on ‘tipping off’ and the requirements of the EU’s Data Protection Directive. The study also reports a wide range of procedures for defining and reporting suspicious transactions, with some member states requiring the reporting of all transactions above a certain level regardless of suspicions of money laundering. The City of London Corporation argues that the report demonstrates just how difficult it is to produce a consistent interpretation of legislation spanning jurisdictions. The 2MLD extended to accountants and the legal profession the requirement to report suspicious activities and carry out identity checks, and extended coverage to the dispersal of proceeds from all serious crime. Michael Snyder, the City of London’s policy chairman, said: ‘This report makes it clear that implementation of 2MLD fell some way short of producing a uniform anti-money laundering regime across the EU. I trust that the report’s detailed analysis will prove helpful to European policy-makers and regulators as they strive to implement the Third Money Laundering Directive in 2007.’ good news is still bad news for pension funds UK pension fund deficits in the largest Plcs fell by around £20bn last year – but remain at dangerous levels, warn pension fund advisers. Scheme deficits in FTSE350 companies fell by over a third last year – from £86bn to £61bn – according to Mercer. But this merely represents a return to the situation at the end of 2002 and does not overcome the essential problems for employers, it says. ‘Rising funding levels are good news for pension scheme members, but the underlying longevity and investment risks remain significant issues for sponsoring employers,’ said Tim Keogh, worldwide partner at Mercer. ‘There has been little change in relative risk levels over the last four years.’ A more positive view was taken by another leading fund adviser, Watson Wyatt. It recorded a £20.5bn fall in FTSE100 deficits in 2006, with a £14.1bn reduction in December alone. ‘December was a particularly favourable month,’ reported Stephen Yeo, senior consultant at Watson Wyatt. ‘Not only did share markets rise, by about 3%, but so too did yields on AA-rated corporate bonds. Accounting standards require that all the liabilities are valued using such bond yields, so deficits are particularly sensitive to them. ‘Although deficits calculated on the FRS 17 measure do fluctuate from month to month, because equity and bond markets don’t necessarily move in tandem, there are signs that deficits may be experiencing the first part of a sustained fall. We estimate that FTSE100 companies will make deficit contributions of at least £5bn in 2007, in part to reduce the requirement to pay levies to the Pension Protection Fund. Provided that investment markets do not experience adverse shocks, we expect 2007 to see a further reduction in deficits.’ Yet – with an important European Court of Justice decision expected as accounting & business went to press – Yeo added a warning that if the ECJ rules that if the Government’s Pension Protection Fund (PPF) must fully compensate fund members of final salary schemes when their employer becomes insolvent, then the PPF itself could go bust. To prevent this happening, employers may be required to contribute between them an extra £3bn to £4bn annually. Mercer and Deloitte also caution that employers face much higher PPF levies in 2007. ‘The PPF has recognised that higher levels are needed next year, but the new target is still wide of the mark to secure members’ benefits in the longer term,’ says Mercer’s Paul Greenwood. Deloitte warns engineering companies are particularly vulnerable to rises in the PPF levy and some could be driven into bankruptcy. in brief...
Inadequate progress on narrative reporting | |