top stories
Dispatch (UK/ROW version)
| by Paul Gosling 05 Nov 2007 Topic: News |
|
accounting transparency demanded A more transparent system of international accounting has been demanded in the wake of the near collapse of the UK's fifth largest mortgage lender, the Northern Rock bank. It was rescued by emergency loans of £3bn from the Bank of England and promises from the Government of guarantees of customers' deposits. The UK's Chancellor of the Exchequer, Alistair Darling, said it was unacceptable that so-called financial engineering meant that investors were unclear how their assets were secured. Speaking to the annual conference of the governing Labour Party, the Chancellor called for more effective regulation of international financial markets. Action needed to be taken, said Darling, to achieve 'far greater openness and to prevent risky investments being hidden off the balance sheet - effective supervision for banks, here and across the world'. The massive run on deposits at Northern Rock also led the Chancellor to accept the need for a more comprehensive system of deposit protection. 'So we need to strengthen protection for ordinary savers, to give them confidence, ensuring their savings in a bank or building society are guaranteed,' said Darling. The UK's existing deposit protection scheme has limits to its pay-outs, putting savings at risk. As more Northern Rock savers became aware of these limitations, so queues outside the bank's branches lengthened as people tried to withdraw cash. Deposit protection is handled through the Financial Services Compensation Scheme. The first £2,000 of savings are fully protected; the next £33,000 are 90% protected; and deposits beyond that are unprotected. One news story reported an anxious couple had saved £1m with Northern Rock and were trying unsuccessfully to move their funds: they stood to recover a mere £31,700 if the bank had collapsed. The Treasury, the Financial Services Authority (FSA) and the Bank of England are now reviewing the protection scheme and are extending its scope. They are considering copying arrangements in the US and Germany, through which savings accounts in a failed bank are transferred to a solvent bank and made fully accessible with 100% protection. An FSA spokeswoman said: 'The authorities will be looking at what measures can be taken to ensure that customers have confidence that their deposits are safe.' E&Y defeats £200m damages claim Ernst & Young avoided paying £200m in damages when the UK's Court of Appeal upheld a High Court judgment that E&Y was not liable for losses that emerged at an audit client after the disposal of a subsidiary. Freightliner LLC, which brought the action, has indicated it intends to appeal to the House of Lords. E&Y admitted errors in aspects of its audit of the ERF truckmaking company in the late 1990s, then owned by Western Star of Canada. ERF was subsequently bought by MAN, a German truckmaker. Western Star was meanwhile purchased by Freightliner, a division of DaimlerChrysler. After protracted legal actions and negotiations, Freightliner paid MAN about £250m to settle losses arising from frauds within ERF that neither party had been aware of when the company was sold. ERF's financial controller, Stephen Ellis, admitted fraudulent manipulation of the company's accounts, falsely showing a profit at the loss-making company. Although Western Star was unaware of the fraud, it was forced to compensate Freightliner on the basis that, as financial controller of ERF, Ellis was acting as Western Star's agent. Freightliner attempted to recover its losses from E&Y. But the action failed because the court held that E&Y was not responsible for the use Freightliner made of ERF's accounts. E&Y said it was delighted but not surprised by the judgment. Lisa Cameron, general counsel of E&Y, added: 'We have stressed consistently since the beginning of this action that the case brought by Freightliner against Ernst & Young was unsustainable because it attempted to extend the recognised boundaries of an auditor's duties and responsibilities. The former financial controller of ERF admitted at the original trial that he had been concealing trading losses and deliberately misleading Ernst & Young, as well as continuing to perpetrate the fraud for more than a year after the company was sold and Ernst & Young had ceased to be its auditor.' credit ratings agencies in firing line The world's largest credit ratings agency, Standard & Poor's (S&P), has lost its president as the global financial markets crisis continued. The departure of Kathleen Corbet was coincidental, claimed S&P, which maintained that she had left 'to pursue other opportunities'. Corbet's departure, however, comes at a time when the major agencies faced unprecedented criticism for allegedly failing to provide adequate warning of the weakness of sub-prime loans. S&P resolutely defended its record. In a statement the company said: 'Standard & Poor's has been actively monitoring trends in the housing market, the mortgage finance market, consumer credit and the overall economy and believes that its models, assumptions and analysis are fully informed... We identified the deterioration in sub-prime credit quality over a year ago and changed our rating assumption in April 2006.' But this was not enough to see off the critics. Charlie McCreevy, the European Union's Internal Markets Commissioner, said the agencies were trapped in a conflict of interest. 'On the one hand they act as advisers to banks on how to structure their offerings to get the best mix of ratings,' said McCreevy. 'On the other, credit ratings agencies provide ratings that are widely relied upon by investors.' This view was echoed by Jean-Claude Trichet, President of the European Central Bank. 'The fact that conflict of interest might appear is something we must reflect on,' he said, 'as is the fact that we have very few credit rating agencies at a global level.' He added that it was 'a problem' that agencies rated bonds without investors knowing what underpinned them, while the agencies who did know felt unable to disclose this by reasons of confidentiality. The theme was endorsed by world leaders, with both the German Chancellor, Angela Merkel, and French President, Nicholas Sarkozy, criticising the ratings agency. The UK's Chancellor of the Exchequer, Alistair Darling, said there must now be international action to prevent a recurrence of the crisis and improve the transparency of the financial system. There is now speculation of possible legal action against some agencies, both from investors' groups and US prosecutors. Major financial institutions have been caught up in the international crisis. As accounting & business went to press, there were doubts whether the largest mortgage lender in the US, Countrywide Financial Corp., and the fifth largest in the UK, Northern Rock, would survive in their current form. Two medium-sized German banks have also had to be rescued and senior executives in banks across the US and Europe have departed. listed companies 'not complying with EU directive on reporting' There is widespread confusion among listed companies about their obligations under the EU Transparency Directive. The first FTSE100 companies have taken widely different interpretations of their requirements to produce Interim Management Statements (IMSs), according to analysis carried out by communications consultancy Radley Yeldar. IMSs provide a requirement for listed companies to provide quarterly updates to the market and have been obligatory since 20 January. Radley Yeldar reviewed the content and style of the first 29 IMSs from FTSE100 companies. Four companies failed to meet even the basic requirement of explaining their financial position. Without clear guidance from the Financial Services Authority (FSA) on the content and presentation of IMSs, it has been left to companies to decide what they need to do. While some have issued detailed reports of full quarterly results, others have made the briefest of comments. Reports varied from 28 words to more than 13,000 words in length. One company said it would read out a two-line statement at its AGM. Nearly half of IMSs follow the format of interim results statements. Others provide information without help in understanding it. Three companies failed to provide any numerical data to support their financial performance figures. There is also confusion on what to call the reports: some IMSs are being called 'first quarter trading statements', others 'Q1 results' and most 'Interim Management Statements'. 'Companies are clearly uncertain about what should be included in the new Interim Management Statements,' said Richard Carpenter, development director at Radley Yeldar. 'The FSA has said that it wants the content and presentation of the statements to be developed by the market, but this will take time. In the meantime, investors are faced with huge variation in the quality and quantity of information provided. And the basics of clear communication seem to have gone out of the window. The FSA needs to clarify its position on the content of IMSs and encourage investors to be more vocal about what they want to see.' mid-tier consolidation accelerates Consolidation of the middle-tier of accountancy firms has accelerated, with Bentley Jennison joining RSM International and with the merger of Nexia and SC International. Bentley Jennison's membership of the RSM International network means that it has, in effect, replaced Robson Rhodes, which recently merged with Grant Thornton to create an expanded fifth largest accountancy firm. Bentley Jennison was not previously part of any international network of firms and is now known as RSM Bentley Jennison. RSM remains the seventh largest firm worldwide. In a statement, RSM said that it had analysed various UK firms and held discussions with several, before choosing Bentley Jennison. The UK firm boasts strength in the public sector advisory market and has doubled in size every four years since its formation in 1984. It had a total fee income of £64m last year, compared with the £1.4bn of the RSM worldwide (including Robson Rhodes). The acceptance of Bentley Jennison into membership of RSM International marks RSM's fifth episode of expansion in recent months. RSM Gassó Auditores in Spain also joined the network, RSM Central and Eastern Europe was formed in March and RSM Top-Audit in Russia is being expanded. RSM International says it expects to make further announcements in the coming months. Meanwhile, Nexia International and SC International have announced their intention to merge. Unlike with RSM - whose network expansion has already taken effect - the Nexia and SC merger will not be in place until December. The expanded Nexia International will become the world's ninth largest accountancy firm, with a combined turnover of US$2.2bn. Gareth Pearce, chairman of Nexia International, said: 'SC International brings with it particular strengths - the US, including JH Cohn, the largest independent accounting firm in New York; Europe, notably Germany, the Netherlands, Switzerland and Russia; South Africa; Mexico; and Canada.' Green taxation has become a major political battleground in the UK, after the opposition Conservative Party published proposals to shift the burden of taxes on to consumption and carbon emissions. The Conservative's Quality of Life Policy Group's vice chair, Zac Goldsmith, said: 'It [the report] is radical but practical, pioneering but realistic, and shows how the next Conservative Government can deliver the change we need.' Tax incentives should be widely used to reduce emissions, with perverse incentives eliminated, argued the report. The group criticised the Government for allowing energy consumption and new home construction to be VAT-free, while property improvements to reduce energy use are subject to VAT. This encourages the demolition of properties, when renovation is usually a lower energy option. New taxes should be imposed on the most environmentally damaging forms of transport. VAT would be applied to domestic UK flights. Air Passenger Duty should be applied per flight instead of per passenger, creating incentives for all seats to be used. Businesses using private planes would face an additional tax on carbon emissions. A purchase tax of zero to 10% would be levied on new cars, according to energy consumption. Zero carbon homes should be permanently exempted from stamp duty, suggests the group, with stamp duty rebated for homes and commercial properties where energy efficiency has been improved. Council tax could be discounted for low carbon emission homes. Tighter regulation is proposed on products and services, including power stations and consumer products - for example, eliminating the stand-by button on televisions. The group proposes a moratorium on the building of new airports, runways and roads. The largest listed companies and pension funds would have to extend their annual financial reporting to state their levels of carbon emissions. The policy group's recommendations are intended to help shape the Conservative's next election manifesto, but not all the proposals are likely to be included. Nigel May, principal at MacIntyre Hudson, said that the policy review showed a misunderstanding by politicians of public attitudes. He added there was little public support for the implementation of green taxes. People only changed behaviour if taxes are set at 'penal levels', with the result that green taxes have little effect on carbon emissions. in brief...
New duties on directors
Investors demand transparency
Income growth slows
'Be upfront on bonuses,' says SEC
Sceptical consumers
Insolvency fears grow
HMRC windfall
Medicare loss
Simplify IP protection, says ACCA
Boats seized after quota scam
'Staff pay too little into pensions' | |