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Dispatch (UK/ROW version)
| by Paul Gosling 20 Nov 2007 Topic: News |
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Market-led action is required to extend audit choice and prevent serious economic damage should one of the Big Four collapse, says the final report of the Market Participants Group (MPG), which is advising the UK's Financial Reporting Council (FRC). In its response, the FRC said it would give further consideration to audit firm ownership rules - which could lead to the investment of outside capital in mid-tier firms to enable them to expand faster. Actions that increase audit choice can already be taken to smooth the operation of the market, concluded the MPG. These include requiring outgoing audit firms to improve the transfer of relevant audit information to incoming auditors. As part of risk evaluation and planning, major public interest entities should consider the risk of their auditor withdrawing from the market. Boards should disclose any contractual obligations, such as those imposed by lenders, that limit audit choice. The FRC itself will take action to promote a wider range of market participants, by promoting understanding of audit quality and the capabilities of individual firms. It should provide independent guidance to audit committees on how to choose their auditor. The promotion of audit choice should be an objective of regulators and legislators in developing policy on auditor liability, subject to the protection of audit quality. The MPG's recommendations are similar to those in its interim report, published earlier this year. Paul Boyle, chief executive of the FRC, said: 'The responses to the MPG's interim report have demonstrated broad support for its recommendations. The FRC will support their implementation in a timely fashion and will report regularly on progress.' Michael Cleary, chief executive of Grant Thornton UK - the largest firm outside the Big Four - welcomed the proposals. 'It is a package of measures that include helping the market to make informed choices in the selection of auditors in part through a better understanding of audit quality and greater transparency of the capabilities of individual firms,' he said. But he warned that any change would only happen over the long term. Most companies never try to quantify the value of their IT assets, according to a survey conducted for software provider Micro Focus. Two-thirds of businesses do not know the total value of their software assets and a third are unaware of the total cost of spending on software. Finance directors and chief information officers of large companies in the US, the UK, Germany, France and Italy were asked about their companies' attitudes to IT valuations. The results showed that not only did the businesses not quantify the cost or asset values of their IT investments, but two-thirds made no attempt to assess the contribution made by IT to their business performance. Micro Focus argued the results showed that businesses pay too little attention to the value of IT compared with cash assets, property and brand and other intellectual property. The survey found big differences across the countries - 60% of CIOs and CFOs in Germany know the size of core software assets compared to 52% in the US, 40% in Italy, 36% in France and 12% in the UK. 'Given that global IT spend last year alone was over US$1 trillion, this research is a wake-up call for all of us in business,' said Stephen Kelly, chief executive of Micro Focus. 'The huge scale of IT spending in companies flags a critical issue for company boards and shareholders alike. If organisations do not know the cost and value of IT assets, then they must be severely challenged to make the right IT investment decisions moving forward.' A KPMG/Micro Focus study earlier this year revealed 90% of leading companies fail to attribute value to IT investments in their annual accounts. off-balance sheet disclosure to be reviewed Accounting rules are to be reviewed by the US Treasury in an attempt to increase disclosure of off-balance sheet liabilities and investments, Hank Paulson, the US Treasury Secretary, has declared. Paulson said that following the global financial crisis created by defaults in the US sub-prime lending market, there needed to be careful evaluation of what went wrong in order to prevent a recurrence. Bank regulators will need to consider the level of capital required for banks exposed to off-balance sheet investment vehicles. The role of credit rating agencies will be examined, Paulson promised, to consider possible conflicts of interest and whether regulation pushes banks and investors to over-rely on agencies' ratings. Similar action is being initiated by the European Commission, with Charlie McCreevy, the EU's Internal Markets Commissioner, indicating it would also consider how to ensure that high risk securities and liabilities are adequately shown on banks' balance sheets. He added: 'The whole episode reinforces the need for greater international co-operation among regulators - EU-US and wider.' McCreevy argued that the new Capital Requirements Directive, which is to be fully implemented next year, 'should improve matters'. As previously demanded by Germany's Chancellor Merkel and France's President Sarkozy, the Commission will, like the US Treasury, examine the role of credit ratings agencies in structured finance markets and consider their governance arrangements. The US Treasury has also been active in bringing together Citigroup, JP Morgan Chase and Bank of America to create a fund to convert distrusted securities into liquid instruments. It is intended that the US$75bn 'Master Liquidity Enhancement Conduit' (M-LEC) will increase confidence in debt markets affected by the sub-prime crisis and reduce the losses that banks and other institutions suffer by holding securities that the market has lost confidence in. In a joint statement, the banks said that M-LEC will operate 'for a set period of time', purchasing from special investment vehicles highly-rated assets to provide liquidity, enabling sellers to meet redemptions and facilitate asset-backed commercial paper rollovers. Confidence in credit markets has partially returned, with share prices in the banking sector rising, as banks begin to declare the extent of losses from distressed sub-prime lending. Citigroup is to write-off US$5.9bn. UBS has written down US$3.4bn in securities. Nomura expects to lose US$622m on its involvement in sub-prime lending. Even MoneyGram International - a money transfer operation - has lost US$200m by investing in complex debt securities. Buy-to-let investors were relieved by the Pre-Budget Report's reduction in Capital Gains Tax (CGT), after weeks of bad news for their sector. The sub-prime financial crisis has made it difficult for buy-to-let investors to obtain mortgages. Northern Rock was a leading lender, as were Paragon Mortgages and Bradford & Bingley - whose share prices have fallen heavily. Julia Harris of Moneyfacts said: 'While the prime residential sector has so far been largely unaffected by the sub-prime crisis, the buy-to-let sector is beginning to show signs reminiscent of the sub-prime market over the last few weeks with tightening credit criteria, the withdrawal of products and rising fees.' Moneyfacts reports that one in five buy-to-let mortgages available at the beginning of July had been withdrawn three months later. Chancellor Alistair Darling has, perhaps inadvertently, stimulated the sector with his Pre-Budget Report, with CGT rates on investments such as buy-to-let to fall from 40% to 18% in April. Some owners may rush to sell as soon as they are able to realise a higher proportion of their capital gain. Others may, as predicted by Standard Life, sell before April, while they can still make use of their indexation and taper reliefs. The buy-to-let industry is busy telling investors the prospects are good. 'A high tenant demand is fuelling rental yields, offering strong capital returns for buy-to-let investors,' suggested David Austin, managing director of Property for Life. He said that the sector would remain buoyant, provided the UK base rate does not rise above 6%. But the Council for Mortgage Lenders predicted a slowdown in buy-to-let purchases in the coming months. With buy-to-let borrowing now accounting for 10% of mortgage balances today, up from just 3% five years ago, a drop in demand would not only bring about a fall in house prices, but is likely to affect confidence and activity in the real economy. The Confederation of British Industry, the British Chambers of Commerce, the Federation of Small Businesses and the Institute of Directors have jointly called on UK Chancellor of the Exchequer, Alistair Darling, to reverse his decision in the Pre-Budget Report to eliminate taper relief and indexation from Capital Gains Tax (CGT). A new single 18% rate of CGT will apply from April next year. Nigel May, tax principal at MacIntyre Hudson, said: 'By abolishing indexation allowance as well as taper relief, taxpayers will lose the benefit of indexation of their base cost between 1982 and 1998, a period during which the RPI [retail prices index] more than doubled. They will not only pay an increased tax rate of 18%, but where the asset was owned before 1998 [they] will pay this on a much larger gain, much of which simply represents inflation. Taper relief itself replaced retirement relief, under which gains of up to £250,000 could be exempted on retirement. These will now face a tax charge of 18%.' He predicted 'a rash of transactions' prior to April next year, as people avoided higher rates of tax. Chas Roy-Chowdhury, ACCA's head of taxation, said the Chancellor was rewarding investors with a short-term perspective, at the expense of those who had invested for the long term. He hoped the Government would 'row back' on its proposals during consultation, recognising the moves penalised the entrepreneurs they had promised to support. The Chancellor further inflamed businesses by effectively reversing the decision in the recent Arctic Systems case. Husband and wife businesses will now be required to profit share in relation to their involvement in the business, not just according to their share of ownership. In a more widely welcomed move, all married couples and civil partnerships will benefit from an increased inheritance tax (IHT) threshold of £600,000 - the level already available to couples who set up trusts to reduce IHT liability. EU rejects share voting reforms The European Commission has withdrawn proposals for 'one share, one vote' shareholder democracy in EU-listed companies. The Internal Markets Commissioner, Charlie McCreevy, said that the most comprehensive study of control-enhancing mechanisms in EU-listed companies, published earlier this year, found no economic evidence of a causal link between deviations from the 'proportionality principle' and companies' economic performance. He said he had therefore decided to take no action to require companies to adopt one share, one vote. However, McCreevy added: 'I have no doubt that enhanced transparency and better dialogue between companies and their shareholders would be useful for the market. Shareholders should use their existing voting rights to push for this. But a further layer of EU action is not the right way to go. Existing EU legislation - the Takeover Bids Directive, the 2006 amendments of the Accounting Directives, the Transparency Directive and the recently adopted Shareholders' Rights Directive - already contain ample provisions on transparency.' The decision was attacked by some institutional investors. Karina Litvack, head of governance and sustainable investment at F&C Investments, said that she was disappointed. 'Although family-controlled businesses have, in practice, often been found to take a long-term view in the interest of shareholders, control-enhancing mechanisms that protect family interests are not the right way to bring about this state of affairs,' she said. 'By stripping minority shareholders of their ability to hold management to account, they are effectively preventing them from challenging management on occasions when these virtuous conditions break down.' Investors have also expressed concern that proposed new legislation in Germany could put an end to activist investment in the country. Under the proposed change in German law, investors that collude in deciding how to vote would be regarded as 'acting in concert' and required to bid for a company if, between them, they own more than 30% of the business. The aim of the German Government is to prevent a repeat of the destabilisation achieved by hedge funds at Deutsche Börse, which led to the resignation of its chief executive and a criticism of the funds as 'locusts' by a leading politician. An alternative approach to tackle the criticism of the funds has been put forward by the Hedge Fund Working Group, which recommends that funds sign up to a code of transparency and a shared commitment to the support of financial stability. in brief...
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