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Dispatch (UK/ROW edition)
| by Paul Gosling 31 Jan 2007 Topic: News |
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ACCA’s chief executive, Allen Blewitt, has written to the UK Environment Secretary David Miliband, urging him to recognise that the global accountancy profession has a key role to play in saving the world from environmental destruction. Blewitt’s letter to Miliband followed the publication of Sir Nicholas Stern’s report on climate change. Stern, the former senior Treasury mandarin and World Bank chief economist, warned that without tough action on climate change, 200 million people could become homeless refugees, displaced by rising oceans and drought. The economic impact could be a recession slicing 20% from world GDP. Urgent steps, argued Stern, could prevent the worst of this, but this would require reductions in carbon emissions of at least 25% – and 60% for the wealthiest nations. While Stern’s report shows what counts for the global economy, accountants must rise to the challenge of ‘who counts’ the ongoing costs of environmental degradation, argued Blewitt. Blewitt explained: ‘The contribution of the accountancy profession to date has been significant, but more must be done. Despite the Government’s unfortunate rejection of the Operating and Financial Review, a reasonably robust model for the Business Review still exists and can be used for mandatory disclosure of carbon emissions.’ There would be wider market acceptance of the need for an emphasis on the true sustainability of reported profit levels if accountants have a stronger methodology to quantify, internalise and report on the financial consequences of social and environmental impacts, suggested ACCA. While green taxes are important, there must be transparency on where the money goes and this must be integral to the approach of green taxation. People need to be reassured that green taxes are reducing climate change. More effort should be put into greening the public sector’s supply chain. Further, wrote Blewitt, the Government must propose robust models for personal carbon trading markets, avoiding any repeat of the privatisation voucher-type scandals seen after the collapse of the Soviet Union. US hints at challenge to Big Four The Big Four’s dominance of the auditing market ‘may not be healthy’, US Treasury Secretary Hank Paulson has said in a wide-ranging speech indicating the administration’s commitment to the adoption of principles-based accounting standards and the need to move towards full implementation of IFRS. ‘The current situation forces us to ask questions about the industry’s sustainability and effectiveness,’ said Paulson. Those questions, he suggested, were whether there was sufficient competition in the audit market, whether the reformed accounting system would produce high quality audits and talented auditors, and whether it served the accounting profession to have detailed rules that focus on technical compliance rather than use professional guidance ‘that could be second-guessed’ by regulators and litigants. Paulson implied that it was unacceptable that, in 2005, 1,200 companies listed in the US had to restate their financial results and that in the first nine months of 2006 the figure had topped a thousand. ‘Businesses and auditors are searching for something that doesn’t exist in today’s constantly changing world – a rules-based safe haven that still provides investors with an accurate portrayal of a company’s financial performance,’ added the Treasury Secretary. He argued that auditors should increasingly rely on their professional judgement. Regulation of companies should be made less burdensome, added Paulson, who referred to the increasing number of US listed companies going private, to avoid heavy regulation. Paulson said that while he did not propose amending the Sarbanes-Oxley Act, he did believe that it needed to be implemented ‘in a more efficient and cost effective way’, particularly relating to Section 404 regarding companies’ managements’ assessment of internal controls and the auditing of this. Paulson added that the ‘explosive growth’ in number and size of hedge funds meant that their impact had to be continually assessed. firms propose revolution in company reporting A world in which balance sheets become almost irrelevant has been floated in a radical vision-shaping document from the chief executives of the six largest firms, the Big Four, plus Grant Thornton and BDO. Operating together as the Global Public Policy Symposium, the six firms have agreed a futuristic report that argues that today’s financial reporting systems and the expectations placed on auditors are no longer appropriate. Moving towards greater real-time reporting and finding different reporting systems that pay more regard to intangible assets are just part of the potential future direction for the profession. Given that billions of people use the internet to obtain customised products and services, company reporting should similarly reflect that requirement for customisation, says the report, Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks. The firms suggest that XBRL, a software platform that reads information systems from across a range of software languages and database types, provides the technological basis for meeting customisation objectives. Financial reports have a uniform approach that fails to meet the needs of many investors and which is inaccessible to others. If auditors can provide assurance for the process of generating frequently updated data, then information flows can speed up, with some information perhaps updated daily. At present, auditors are subjected to unfair and unrealistic demands, argue the firms. There is an ‘expectation gap’, with, on the one hand, policy-makers, regulators and investors expecting auditors to detect any and every fraud, yet client fees not being adequate to enable auditors to provide that level of assurance, and accounting and auditing standards do not require auditors to operate at this level. One answer might be to offer three types of more intensive investigation and assurance. Regulators and policy-makers might consider all public companies being made subject on a periodic basis – say three or five yearly – to a full forensic audit, in which any fraud might be expected to be uncovered. Alternatively, random selection of public companies for a forensic audit might increase the deterrence and detection of fraud. The third option would be to allow shareholders to determine the level of audit appropriate, which would include the option of a full forensic audit. The firms believe that further significant changes in the regulatory environment are necessary, reflecting the contemporary globalised market. All countries should use principles-based international accounting standards. Work should accelerate on creating and using a single set of international standards for auditing. National regulatory bodies should increase international co-operation, to the point where they harmonise approaches. Restrictions on firms’ network integration should be scrapped, they say. ‘Our networks cannot become truly global in a corporate sense without further liberalisation and harmonisation of national rules,’ the report argues. World Bank warns UK tax rules ‘too complex’ The UK’s volume of tax legislation has nearly doubled in the last decade, a report from the World Bank and PricewaterhouseCoopers has claimed. While the UK has a below-average corporate tax burden, its tax competitiveness is damaged by its complexity. Tax complexity reduces a government’s tax income and makes it difficult for businesses to assess their true tax burden, says the report. Paying Taxes – The Global Picture concludes that high tax rates do not always lead to higher overall revenues, and that, when considering rates, the focus should be on the total business taxes raised, not just the corporate income tax rate. Governments should consider tax simplification as a means of enabling economies to work more efficiently and to increase tax compliance. ‘Straightforward tax administration and a simpler tax collection process are fundamental to an effective tax system,’ said Caralee McLiesh, programme manager and co-founder of the World Bank Group’s Doing Business Project. ‘There are benefits both for governments, by increasing tax revenues, and for business, by making it easier to comply.’ Tax rates are lowest in the Middle East and North Africa and highest in sub-Saharan Africa, where a company on average pays over 60% of its profits as tax. On average in the 175 economies studied, businesses submit 35 pages of tax returns a year. But there is significant variation between countries. In Cameroon, the average annual tax return for businesses is 172 pages, while in Austria it is 17. The findings suggest that, on average, corporate income taxes accounted for only 36% of the total tax rate, 11% of the number of payments made and 25% of the compliance time represented by a company’s total tax rate. There are many other business taxes (such as employment and property taxes) that governments and a company’s stakeholders should consider, along with the associated costs for compliance and administration, to appreciate the extent of a company’s total contribution to public finances. Governments’ varying use of direct, indirect and employment taxes is highlighted in the report. In particular, argue the authors, employment taxes add to the opacity of taxation. government facing ‘loss of billions in tax repayments’ The UK Treasury could be forced to repay £1bn or more in overpaid tax as a result of a House of Lords ruling in favour of Deutsche Morgan Grenfell. In 2001 the European Court of Justice ruled that UK-based subsidiaries of companies based elsewhere in the EU could not lawfully be required to pay Advance Corporation Tax (ACT) just because they were not UK-based. But Deutsche and other companies had been barred by the Inland Revenue from recovering overpaid tax beyond six years under the rule of limitation. But the period of limitation has now been set by the House of Lords as running from the date at which the mistake in law was recognised by the courts. Refunds due to Deutsche go back to the 1970s. Another 60 companies have been waiting to pursue similar claims until a decision was reached on Deutsche’s case. Bill Dodwell, tax partner at Deloitte, said: ‘The long awaited decision of the House of Lords is a success for Deutsche Morgan Grenfell and other members of the ACT Group Litigation Order. It is likely that most of the ACT would have already been offset, but HM Revenue & Customs is likely to have to pay restitution, in effect interest, on the payments of ACT to these companies. ‘The decision clears up some of the confusion on time limits, but it remains to be seen what evidence will be needed for companies to prove that there has been a mistake and also when that mistake could “with reasonable diligence have been discovered”.’ Dodwell added that the cost to the Treasury could run into billions of pounds. reporting opt-out for foreign firms Foreign companies listed in London will not be required to disclose information required under the Transparency and Prospectus Directives until 2009, under an agreement between the UK Treasury and the EU. The concession will affect several hundred companies, mostly headquartered in the US and Japan. ‘This two-year delay on the application of the equivalency tests in the Transparency and Prospectus Directives will enable convergence to proceed at an appropriate pace, avoiding disruption to markets,’ said Ed Balls, Economic Secretary to the Treasury, in a speech at the Tokyo Stock Exchange. ‘This is a good example of our pragmatic pro-European approach,’ he added. ‘It is increasingly important that in completing the European single market in financial services, European regulators explicitly consider the EU’s competitive position in the wider international financial system.’ Balls told his audience that it was essential that there was integration in accounting standards and that countries did not adopt regulatory competition. ‘We are all interested in protection of consumers, protection of the financial markets, the efficiency of those markets and the importance of financial markets for building and sustaining global growth,’ he said. The minister added that the new regulatory framework for the prudential regulation of insurance will achieve convergence in global standards, including the use of IAS. ‘Wherever it is appropriate to do so, Solvency II will also seek to achieve consistency with Basle II, to help ensure that products containing similar risks are regulated in the same way across sectors and to simplify regulation for banking-insurance conglomerates,’ said the Economic Secretary. Balls also called for reform of the US Sarbanes-Oxley Act and for US adoption of IAS. ‘Proposed reforms of the US corporate governance regime should be – and I believe would be – of benefit to Britain and the world,’ Balls argued. In a separate speech, Balls announced a major reform of the auditing of EU expenditure undertaken through the UK Government. Balls said that ‘against the backdrop of a qualification of the European Union’s accounts by the European Court of Auditors for the 12th successive year, with the Court unable to give a positive statement of assurance on two-thirds of EU spending.... Europe – member states and the Commission – must do better to end this annual embarrassment’. Under the UK presidency of the EU, said Balls, it had been agreed to establish simplified, common control principles, make greater use of management declarations and audit assurances, introduce a single audit approach and target agreed areas of greatest risk. In line with established practice in the Netherlands and Denmark, the UK will now publish its own statement of assurance each year on UK use of EU funds, to be audited by the National Audit Office. The UK will now lobby other European governments to adopt the same approach to reduce the main cause of qualified EU accounts – European expenditure that is the responsibility of member states’ governments. in brief...
Reverse charging timetable derailed again
Network integration continues
DWP accounts qualified
Treasury ‘becomes big business friendly’
Internet fraud rises
US reports post-retirement commitments
KPMG trial postponed
US and Israel ‘becoming more corrupt’
FSA announces move to
‘principles-based’ regulation | |