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Dispatch (UK/ROW edition)
| by Paul Gosling 08 Mar 2007 Topic: News |
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protective administration considered if auditor fails A future Andersen-style collapse or near collapse of one of the Big Four firms could lead to it being placed into protective administration, under plans being actively considered by the International Forum of Independent Audit Regulators (IFIAR). This month’s two-day meeting of IFIAR will give detailed consideration to contingency plans in case of a crisis – such as a serious regulatory failure, or major litigation – at one of the Big Four. Paul Boyle, the vice chairman of IFIAR and chief executive of the UK’s Financial Reporting Council (FRC), told accounting & business: ‘IFIAR doesn’t yet have any settled or formal position on this topic. One of the possibilities to be discussed at this meeting will be some form of administrative protection.’ But he conceded: ‘It is the most promising option at this stage.’ Legal and multi-jurisdictional challenges would have to be considered, said Boyle. ‘Is it desirable? Is it legally possible? It may already be legally possible in some jurisdictions and not in others. It may be possible to change the law in some jurisdictions and not in others. But you have to consider this in the context of what would be a major crisis if one of the big firms did get into trouble – so you might have to consider something that is not perfect.’ IFIAR was established in September last year by 19 of the world’s leading audit regulatory bodies, with others, such as those of the US and the European Commission, having observer status. It shares regulatory experiences and knowledge, promotes regulatory collaboration and provides a single global contact for international organisations that have an interest in audit. Australia and the UK are influential in the work of IFIAR – with Jeffrey Lucy, chairman of the Australian Securities and Investments Commission (ASIC), being the first chair of IFIAR and the FRC actively involved in it. The FRC has been keen to develop theoretical responses to any possible collapse or lack of confidence in one of the Big Four. It was recently revealed that one option considered by the FRC has been the enforced sale of the firms’ audit arms. The UK’s Financial Reporting Council (FRC) has been ordered to pay almost £1m in costs to PricewaterhouseCoopers and Mayflower’s former finance director after it failed in its prosecution of the two. An investigation and tribunal hearing followed the collapse of Mayflower, a bus manufacturer. The FRC ‘should not have brought’ the complaint against David Donnelly, Mayflower’s former finance director, said the Disciplinary Tribunal of the Accountancy Investigation and Discipline Board (AIDB). Regarding PwC, the ‘complaint should have been abandoned long before it was’, said the tribunal. Costs were awarded to David Donnelly of £587,500. PwC was awarded £400,000. ‘The FRC is disappointed with the decision,’ it said in a statement. ‘The FRC continues to support the function of the AIDB, as set out in its scheme. Where there is evidence of misconduct, it is important that the complaint should be heard by a disciplinary tribunal sitting in public. The decision in this case gives rise to potentially significant implications for future disciplinary cases. The FRC is giving careful consideration to the implications of the tribunal’s decision.’ A statement from PwC said: ‘We are pleased with the award of costs made by the tribunal and the common sense approach they have taken in making the award. We do not believe that the complaints should have been brought, and significant costs could have been saved by all parties.’ The award of costs is not only embarrassing for the FRC, but also creates serious financial difficulties. The FRC’s total budget for accounting, auditing and corporate governance work in the 2006/07 financial year is £13.2m, and its budget for accountancy disciplinary case costs was just £500,000. UK declares victory in VAT war Missing trader and carousel VAT fraud have ‘fallen sharply’ to ‘minuscule levels’, the UK Paymaster-General, Dawn Primarolo, has told Parliament. The success comes at a time when a number of international police investigations have made headlines. A number of major international anti-fraud police investigations have taken place recently, spanning the Middle East, the Caribbean and Europe. One of these led in February to the arrests of nine UK residents charged with defrauding the public revenue, with three also charged with money laundering offences. All are accused of involvement in international trans-shipments of mobile phones as part of a carousel fraud. European arrest warrants have been issued for further individuals in France and Spain. HM Revenue & Customs disclosed that the arrests followed a five-year investigation, codenamed ‘Operation Euripus’. The same investigation led to raids of 93 premises in Spain and the UK in July 2003, with 42 arrests. Investigating officers say that material, including 391 computer hard drives, seized in those earlier arrests yielded half a million documents that have undergone long and detailed analysis. Meanwhile, John Deuss, who runs Transworld Oil in Bermuda and who was once reported to have supplied petroleum products to South Africa during the period of sanctions against apartheid, is currently in the Netherlands facing charges of involvement in carousel fraud, which he strongly denies. Until his arrest, Deuss was also chairman and chief executive of the First Curaçao International Bank. He also recently stepped down as chairman of the Bermuda Commercial Bank, in respect of which the First Curaçao has 48% ownership and had effective control. Accounts held by Deuss in Dubai have been frozen while investigations continue. First Curaçao continues to trade under new executives. Curaçao is a small island in the Netherlands Antilles – one of the Windward Islands – which has autonomy, but is recognised by the European Union as an associate member. Its legal system operates under that of the Netherlands. The future of the market promoting Individual Voluntary Arrangements (IVAs) is uncertain after major share price falls in the largest companies marketing IVAs and a clampdown by the Office of Fair Trading (OFT) in the way IVAs are advertised. Newspapers have described the IVA sector as in ‘meltdown’, after profit warnings from Accuma and Debt Free Direct, followed by admissions from Debtmatters Group that it faced a ‘challenging’ environment in which to meet profit expectations. The three companies are the largest in the IVA market. Lenders, including Lloyds TSB, HSBC and Northern Rock banks, plus the Nationwide Building Society, have complained at what they regard as the use of IVAs to stoke a repayments crisis. Personal insolvencies, comprising personal bankruptcies and IVAs, increased by 59% in 2006 to 107,288 from 67,584 the year before. Now several banks have adopted a more aggressive approach, partially withdrawing co-operation from IVA companies. Market analysts report that where in the past banks would have accepted that a customer with an IVA need only repay 25% of their debt, that figure has now risen to 45% or 50%. This has probably contributed to the fall in the market price of the IVA companies. Another factor is suggestions that they could face mis-selling claims. Meanwhile, the OFT has concluded that some companies promote IVAs used adverts and websites that ‘potentially mislead customers’. The OFT found that some advertisements had falsely claimed that ‘up to 90% of your debt may be written-off’, when the maximum figure was likely to be 60%–70%. Firms were also criticised for suggesting they might be able to end ‘all interest and charges’ on debts and for not making clear that the firms’ own charges would first be added to the total debt before a resolution was achieved. The British Bankers’ Association has called for stronger regulation or self-regulation of the industry. One organisation – styling itself iva.com – was created last year as a ‘self-regulatory body’. However, the organisation failed to respond to requests from accounting & business to discuss its role and membership. The Insolvency Practitioners Association has also agreed to take on the role of IVA sector regulation and accreditation, being the representative body of the largest operators in the market, including those accountancy firms offering IVA services. It has set up a debt resolution forum to represent the IVA sector. FEE calls for more governments to adopt accruals One in five European governments has not adopted any form of accrual accounting, a report from the Federation of European Accountants (FEE) concludes. All governments should move towards speedy implementation of accruals, it argues. The picture presented by FEE is of significant variation across Europe in the adoption by national and local governments of accruals principles. In general, northern European countries have been more committed to the use of accruals than those in the south. Italy and Hungary continue to use cash accounting at all levels. The UK, Denmark, Estonia, Finland and Latvia have adopted accruals across much of their operations. Several countries are in the process of adopting accruals principles. Austria recognises fixed assets at historic costs and does not charge depreciation on depreciable assets, except with some agencies; stocks are not recognised as assets, but income and expenditure is recognised on an accruals basis. The Czech Republic and Lithuania use accruals for fixed assets and stocks, but not for tax revenues. Perhaps surprisingly, FEE found local government to be quicker than national governments to move to accruals systems, suggesting a bottom-up movement. In Germany, some lander (regional governments) have begun adopting accruals accounting, although the Federal Government has no plans to do so. The research found no instances of a national government using accruals and local government using cash accounting. ‘It would appear to be simpler for smaller organisations to make the transition simply because they are smaller,’ explains the report. FEE argues that it is important for all European governments to adopt accruals, to assist international financial comparisons. It also supports the International Public Sector Accounting Standards Board in drawing up a conceptual framework that reconciles the principles of accruals with the specific needs of the public sector. ‘Accrual accounting facilitates better planning, financial management and decision-making in government, as well as a robust and accepted way of measuring the efficiency and effectiveness of public bodies and their policies,’ said Jacques Potdevin, FEE’s President. The UK Government used a ‘uniquely convenient’ statistical interpretation to claim it still met its ‘golden rule’ and ‘sustainable investment rule’, according to the respected independent economic think-tank, the Institute of Fiscal Studies (IFS) in its ‘green budget’ assessment of the economy. The sustainable investment rule is defined by the Treasury as ensuring that ‘public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level’. The Chancellor has defined this as the public sector net debt (PSND) being no more than 40% of national income. But IFS calculates that if full public sector pension, PFI and Network Rail liabilities were added in, the PSND would increase by £700bn or so, taking the PSND to more than 90% of national income. This would place the UK near the head of the Organisation for Economic Co-operation and Development (OECD) countries’ indebtedness. Network Rail’s liabilities account for £18bn. Although it is ‘similar to conventional government borrowing as the government guarantees to repay its debt... the Office for National Statistics defines it as a private sector company and therefore off the public sector’s balance sheet’, says IFS. Future PFI liabilities are about £100bn. Including just the capital spending element of PFI would push the PSND above the 40% level, calculates the report. The biggest element of the hidden public sector debt lies with public sector pensions. Using the current discount rate of 3.5% per year after inflation, these are valued at a liability of £530bn. This rises to £639bn when the agreed new lower rate of discounting of 2.8% takes effect. Yet, suggests IFS, the discount rate used should actually be that of expected economic growth of about 2.5% – which would significantly raise public sector pensions liabilities further. There are also problems on the golden rule – that ‘over the economic cycle, the Government will borrow only to invest and not to fund current spending’. It is only because the Treasury brought forward by two years its assessment of when the current economic cycle began that the golden rule has not already been broken by £5.5bn, says IFS. Using modelling provided by the report’s sponsor, Morgan Stanley, IFS calculates that the economic cycle may have really started in 2003/04. Using Treasury forecasts, the golden rule would be overshot during this cycle by £57bn, or under IFS forecasts, it would be broken by £66bn. ‘By re-dating the economic cycle at a uniquely convenient moment, and delaying tax increases and spending cuts until just after the election, the Chancellor appears to have eroded the credibility of his fiscal rules as a meaningful constraint on his tax and spending decisions,’ says IFS. in brief... FSA casts doubts on benefits of IFRS
New National Assets Register
More banks to disclose client details
ECJ limits pensioners’ protection
Fraudsters ‘using false UK phone numbers’
Inefficient efficiency
Ex-wife protects maintenance from bankruptcy
FSA’s regulatory reform to cost firms £50m
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