The global body for professional accountants

This month’s stories include an attack on audits of public companies by the IFIAR, the jailing of a former KPMG partner and the downgrading of Russia’s sovereign debt rating

Audit under fire

Audits of public companies suffer from ‘persistent deficiencies’, warns the International Forum of Independent Audit Regulators (IFIAR). ‘The high rate and severity of inspection deficiencies in critical aspects of the audit, and at some of the world’s largest and systemically important financial institutions, is a wake-up call to firms and regulators alike,’ said Lewis H Ferguson, chair of IFIAR. ‘More must be done to improve the reliability of audit work performed globally on behalf of investors.’ IFIAR’s criticisms came as it published its 2013 Inspection Findings Survey of audit reviews submitted by 30 national audit inspection bodies.

Sharing expertise

ACCA is taking part in a new programme that will help transform accounting standards and develop professional institutes in Africa and Asia. The Investment Facility for Utilising Specialist Expertise (IFUSE), run by the UK government’s Department for International Development, will see staff from UK chartered accountancy institutes working in countries including Ethiopia, Zambia, India and Vietnam to improve their financial management and investment climates by sharing British expertise and international best practice. ‘By helping developing countries to manage their own resources better and attract investment, we can create the jobs and growth needed to lift people out of poverty,’ said international development secretary Justine Greening.

ACCA is part of the first deployment, training the Ethiopian Ministry of Education in accountancy practice. ‘ACCA is excited by the opportunity to work in partnership with the Ethiopian Ministry of Education through the IFUSE initiative,’ said ACCA chief executive Helen Brand. ‘We will not only be helping Ethiopian organisations to comply with global financial reporting and auditing standards, which we believe will encourage greater trade and investment opportunities, but will also be working with lecturers to ensure there are future generations of qualified finance professionals.’

KPMG partner jailed

Former KPMG partner Scott London has been jailed for 14 months after admitting assisting insider trading. London leaked confidential information about audit clients in return for cash and jewellery. The tip-offs were made on at least 14 occasions and enabled a friend to make US$1.27m from stock trading. London was in charge of KPMG’s audit practice in the South West of the US. A KPMG spokesman said: ‘It was appropriate that London was held accountable for the consequences of his actions.’

Russia downgraded

Russia’s sovereign debt rating has been cut by S&P to the lowest investment grade. The credit rating agency warned that further downgrades may follow if the Ukraine conflict leads to additional sanctions and Russia’s economic growth continues to slow. Russia was previously put on review for downgrade by Moody’s, while Fitch Ratings has placed Russia on negative outlook. Russian economy minister Alexei Ulyukayev said the latest downgrade would not affect investors.

Sanctions imposed

More financial sanctions have been imposed on members of Russia’s elite regarded as close to President Vladimir Putin. Igor Sechin, chief executive of state-run oil company Rosneft, has been placed on a ‘blacklist’ by the US government and the European Union. Rosneft, the world’s largest traded oil company, is not directly affected.There are now 48 oligarchs, officials and politicians blacklisted by the US or the EU in protest against Russian action in Ukraine.The sanctions restrict travel movement and freeze assets.

PwC warns on audit

Internal audit functions need to improve faster to deal with a growing risk environment, PwC has warned. Stakeholders have higher expectations than do chief audit executives on what internal audit can achieve, concluded PwC’s 2014 State of the Internal Audit Profession study. More than half of senior managers do not believe internal audit adds significant value to their organisation, while nearly 30% of board members believe it adds less than significant value, found PwC.

BEPS plan attacked

Accountancy umbrella body the CCAB has criticised the OECD’s Action Plan on Base Erosion and Profit Shifting, which it says will cause many multinational corporations to fundamentally change their business models. It says that the OECD might have been expected to address controversial tax planning approaches, but the plan goes much further. Responding to an OECD consultation, the CCAB says that under the plan recognition of company profits will move from where value is created to the locations where products are sold or consumed, which the CCAB describes as a ‘fundamental revision’ of existing tax practices. Meanwhile, Oxfam says the plan should be substantially reformed because the world’s poorest countries are not covered by its proposals. ‘Developing countries are being locked out of negotiations, creating a risk that any revisions to the rules will only serve the interests of the wealthiest and most powerful,’ said Oxfam International executive director Winnie Byanyima. A report for Oxfam, Business Among Friends, calculates that some developing nations would more than double their tax revenues if profits were taxed where economic activity occurred.

Duo join SASB

Former New York mayor Michael R Bloomberg and former US Securities and Exchange Commission chairman Mary Schapiro have taken senior positions with the Sustainability Accounting Standards Board (SASB). They will join the SASB board as, respectively, chair and vice chair. Professor Bob Eccles, a Harvard Business School professor and honorary ACCA member, steps down as chairman but will continue on the board.

PCAoB slams quality

Deficiencies in company audits are too common, the US Public Company Accounting Oversight Board (PCAOB) has warned. Board member Steven B Harris said in a speech that, along with comparable bodies elsewhere, it ‘remains concerned about the continued high number of audit deficiencies’. Harris said that deficiencies were commonly found in relation to audits of internal control, fair value measurement and disclosures, and management estimates. He added that the PCAOB was concerned about whether audit firms’ business model undermined auditor independence – both through companies paying for the audit and through the high level of non-audit fees paid to auditors.

Indirect tax favoured

Governments are turning to indirect taxes to raise finance, according to KPMG’s Corporate and Indirect Tax Rate Survey 2014. It says there has been a fundamental change in governments’ approach to tax policy. However, KPMG concludes there is no international consistency, with some governments raising tax rates and others cutting them. But there is more commonality in governments instructing their tax authorities to conduct more investigations to improve tax collection rates and seek penalties and interest on uncollected tax.

Directive approved

A directive requiring the disclosure of greater financial and diversity information on large companies and groups has been approved by the European Parliament. Companies covered by the directive will have to detail their impact on the environment and human rights, their social and employment policies, board diversity and how they tackle bribery and corruption. The directive will apply to about 6,000 European public interest companies with more than 500 employees. 

BoA’s capital mistake

An accounting error led Bank of America reporting it had US$4bn more in capital than it actually had. Disclosure of the mistake led to the bank withdrawing a capital plan it had already submitted to the US Federal Reserve and to put on hold proposals for a dividend issue and share buy-back.The error arose as a result of the treatment of changes in the market value of its bonds, which the bank wrongly reported had led to an improvement in its capital position. 

Dubai raises US$750m

Dubai has returned to the capital markets, raising US$750m through the issuing of sukuk bonds. The issuance means the Dubai market has now raised more than US$20bn in sukuk bonds. The success of the bond issue by the Dubai government is a sign of renewed investor confidence in Dubai, whose economy is expanding. Dubai intends to issue further sukuk bonds to finance state enterprise activity.

Dubai predicts boom 

Dubai is ready for a fresh round of investment – and does not regret the inflated boom that went bad, investors have been told. ‘If Dubai had to do the same again, most likely we would follow the same approach,’ said Mohammed Al Shaibani, chief executive of Investment Corp of Dubai. Major investments in Dubai between 2006 and 2008 created the framework for it being the regional financial and trade centre, he said. ‘Now we are leading the region and have a mission to position Dubai as one of the world’s main global cities. We are on the right track.’

ECB mulls deflation

The European Central Bank (ECB) could adopt quantitative easing to finance asset purchases if deflation takes hold or if inflation rates dip further, says ECB president Mario Draghi. ‘The governing council is committed – unanimously – to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation,’ he said.Inflation in the eurozone has fallen to 0.5% – significantly below the target level of 2%.

report criticised

The European Court of Auditors has complained the European Commission’s Anti-Corruption report contains little analysis and no substantive findings. Instead the commission relied on corruption perception polls, with limited benefit, says the ECA. ‘The findings of the report are primarily based on the perceptions of citizens and companies,’ stated Alex Brenninkmeijer, the ECA member responsible for the analysis. ‘Reality may well be different. And it is unfortunate that the commission excluded EU institutions and bodies from its analysis.’

EY appoints global VC

EY has appointed Michael Solender as its global vice chair. He will integrate the firm’s international legal operations. Mark Weinberger, EY global chairman and CEO, said: ‘In this unprecedented regulatory environment we are calling on Michael to lead EY’s legal resources across the world.’ Solender has been EY’s vice chair and general counsel in the Americas since 2009. 

Compiled by Paul Gosling, journalist

Last updated: 5 Jun 2014