The most recent articles from Accountancy Age

Deloitte could charge £22,000 per hour for Woolworths administration

AA Freelancer — 2008-11-28T14:13:00.000Z

AA Freelancer, Accountancy Age, Friday 28 November 2008 at 14:13:00

Deloitte could be charging as much as £22,000 an hour plus expenses for taking control of Woolworths after it went into administration on Wednesday, industry experts have estimated.

Deloitte could be charging as much as £22,000 an hour plus expenses for taking control of Woolworths after it went into administration on Wednesday, industry experts have estimated.

The Big Four accountancy firm has devoted 100 staff to the project with the firm's five partners leading attempts to find buyers for the wholesale and retail businesses, the Guardian reported.

Partners in the insolvency arms of the big four accountancy firms charge up to £600 an hour, according to industry insiders and fees for senior managers are up to £400 an hour. It is believed that about 70 support staff are likely to be charged out for the Woolworths assignment at around £130 an hour each, the Guardian added.

Deloitte has become the fastest growing of the big four accountancy firms in terms of fees, gaining a reputation for aggressively pricing its work.

Audit committees warned to ask 'key questions' in the crisis

Gavin Hinks — 2008-11-28T08:59:00.000Z

Gavin Hinks, Accountancy Age, Friday 28 November 2008 at 08:59:00

'More rigour' necessary in considering analysis for going concern statements

Audit committees have been offered new guidance warning them to consider 'key questions' when looking at annual financial statements in the financial crisis.

The guidance, which reiterates existing requirements, says that 'particularly relevant in current economic conditions' is monitoring the integrity of the financial statements and formal statements about company performance and reviewing internal controls and risk assessments.

A set of key issues laid out by the FRC including close attention to liquidity risk and going concern considerations.

The paper says: 'Audit committees are likely to examine in more detail the rigour with which the analysis supporting the going concern judgment has been made and the integrity of the disclosures about going concern in the financial statements and other market communications.'

Ian Wright, FRC Director of Corporate Reporting, said the 'initiative is the latest in a series of actions taken by the FRC and its operating bodies during 2007 and 2008 to help mitigate the increased risk of errors and omissions in annual reports which have the potential to adversely affect confidence in corporate reporting. We will continue to monitor developing issues and will be seeking to help the market whenever possible.'

Growing concern over rise in 'going concern' notices

Joanne Christie — 2008-11-27T18:23:00.000Z

Joanne Christie, Accountancy Age, Thursday 27 November 2008 at 18:23:00

BDO Stoy Hayward's recent 'going concern' warning over Sofa Workshop will be just one of many to come

With the economy teetering on the edge of recession and Insolvency Service figures recording a 25% rise in the number of companies filing for bankruptcy, it is likely that BDO Stoy Hayward’s recent ‘going concern’ warning over Sofa Workshop will be just one of many.

A Deloitte report has revealed that going concern warnings that a company may not be able to continue trading appeared in the audit reports of 5% of listed companies for the 2007/08 year. That figure is expected to rise for companies with December year-ends.

Going concern notices scare investors and suppliers, but accountants and company directors are required to highlight nay possibility that the company may not be trading in 12 months time.

The Financial Reporting Council is currently reviewing the issue of going concern notices and is expected to issue new guidance to auditors and company directors within the next month.

The corporate reporting watchdog is concerned that companies will start issuing ‘boiler plate’

paragraphs which warn of exposure to economic conditions, but give little detail on a firm’s distinct circumstances.

‘They have to write about their specific conditions, not a general paragraph,’ says the FRC.

Steve Maslin, head of external and professional affairs at Grant Thornton, says the full effect of the credit crisis is only just beginning to kick in and that more company directors will need to make disclosures about things that impact the future funding of their business than has been the case in recent years.

‘I can’t think at the moment of a company that wouldn’t need to provide a greater level of detail because even if a company has cash in the bank, we’ve been going through a period when you haven’t even been sure that that money is safe,’ he says.

Cash in the bank is one problem, but it is getting cash from the bank that’s worrying most businesses. Many will face problems when their overdraft facility comes up for renewal as banks may be unwilling or unable to offer the same line of credit as they have in the past.

PricewaterhouseCoopers director Geoff Swales reckons that the majority of going concern warnings will come from companies that depend on bank financing.

‘Banks aren’t even willing to lend to each other at the moment,’ he says, ‘It’s a vicious circle that needs to be broken.’

FRC warns companies against 'going concern' complacency

David Jetuah — 2008-11-27T16:46:00.000Z

David Jetuah, Accountancy Age, Thursday 27 November 2008 at 16:46:00

The Financial Reporting Council says tough economic conditions will force companies to look at whether the going concern basis of accounting is right for them

The FRC has warned companies to be ready for the heightened demands of 'going concern' assessments in the current financial storm.

Some companies might have to drop the going concern basis of accounting completely:

'The difficult economic conditions being faced by many companies will necessitate careful consideration by directors when assessing whether it is reasonable for them to use the going concern basis of accounting, and whether adequate disclosure has been given of going concern risks and other uncertainties,'the FRC said.

Companies will still be able to get a clean bill of health from their auditors if they do decide the going concern basis is not appropriate, as long adequate disclosures are made.

The regulator rolled out an extensive guide for companies which said that the current economic conditions provide particular challenges for companies in preparing their reports.

Companies may have to spend more time reviewing key assumptions and models as going concern assessments will be 'particularly sensitive' this year.

'One consequence is expected to be an increase in the disclosures in annual reports and accounts about going concern and liquidity risk,' the FRC said. 'The current conditions will present challenges for all of the parties involved.'

The FRC said that directors would need to ensure that they prepare thoroughly for their assessment of going concern and made appropriate disclosures.

Auditors would also need to ensure that they fully consider going concern assessments and only refer to going concern in their audit reports 'when appropriate.'

'Addressing these challenges well before the preparation of annual

reports and accounts may help avoid a last minute problem that might unsettle investors and lenders unnecessarily,' the FRC added.

Further reading:

Get the full run-down here

BDO chief warns of 'challenging' audit season ahead

MPs to question auditors over banking crisis

AccountancyAge.com — 2008-11-26T11:55:00.000Z

AccountancyAge.com, Accountancy Age, Wednesday 26 November 2008 at 11:55:00

The Commons Treasury Committee is to question auditors about their role in the banking crisis and whether reform of the auditing industry is needed.

The Commons Treasury Committee is to question auditors about their role in the banking crisis and whether reform of the auditing industry is needed.

The influential committee will call for evidence on 'the role of auditors in the banking crisis and whether any reform to that role is desirable' by January 6 as part of its ongoing inquiry.

MPs have already sought and been sent evidence on the role of accounting standards as part of their investigation into how to secure financial stability, protect the taxpayer, customers and shareholder interests.

The announcement of plans to quiz auditors is likely to unsettle the Big Four firms, which successfully lobbied politicians against heavy-handed regulation earlier this decade after corporate scandals such as Enron damaged the profession's reputation.

Earlier this month, Peter Wyman, head of professional affairs at PricewaterhouseCoopers, said that all parts of the financial crisis, including auditing, should be 'examined' at a later date to help judge whether improvements could be made, such as expanding the scope of the auditors' role.

But he argued against a review of the audit profession and urged politicians not to 'shoot the messenger'.

BDO chief warns of 'challenging' audit season ahead

David Jetuah — 2008-11-26T09:53:00.000Z

David Jetuah, Accountancy Age, Wednesday 26 November 2008 at 09:53:00

Simon Michaels says that auditors, clients and their lenders will all have to work together to work out an objective opinion of 'going concern' which factors in the tough economic conditions.

BDO Stoy Hayward's managing partner has warned that the year-end reporting season will be a tough period for auditors and their clients, because jittery investors could take drastic steps in response to 'going concern' warnings.

Auditors are preparing to sign off annual reports as the year-end for many companies draws closer, but Simon Michaels said that the effect of adverse opinions would be even more marked as the hostile economic conditions continue.

'There's clearly going to be a challenging season of audits, with more uncertainty with the financial market where it is, about "going concern,"' said Michaels.

'It really is incumbent upon the profession to do everything they can to help management teams provide the clarity with regards to disclosures and reporting, but also working with the banking industry so that where there are committed facilities, which remove a degree of uncertainty around going concern, it doesn't create a downward spiral which is compounded as investor confidence, supplier confidence and credit insurer confidence is affected by a greater incidence of going concern qualifications.'

His comments came as BDO released its annual revenues for 2007-2008. The firm posted 11% growth in revenues to £353.1m for the year ended 4 July with profits of £65m. The firm has also been boosted by winning a number of high profile assignments including the valuation of Northern Rock and the receivership of financial heavyweight Dawnay Day.

However Michaels predicted that revenue growth would tail off next year and the firm would post single digit growth. 'I think [the growth] will be steadier next year, probably nearer single digit than double digit growth and I think that will be a profession-wide trend.'

The firm has been pushing for more transparency in the audit market and Michaels welcomed the FRC's audit inspection unit reports which are due out next month.

'Its about giving the market confidence in what the profession is doing, but it's more about challenging the institutional prejudices that exist where people think it’s a safer bet to buy Big Four and our view is that there is more choice out there.

'The position is compounded by Big Four only clauses [in audit contracts] and we will lobby to have those removed, because that does limit our ability to drive the practice forward.'

Simons added that he relished the challenge of taking BDO forward as the hostile financial conditions continued.

'When I was appointed managing partner, I couldn't have predicted that the financial markets were going to completely collapse, but that's where the challenge is. A real test of leadership is how you work with your colleagues to navigate a way through more interesting times. I wouldn't have wanted it any other way, in some respects.'

PCAOB faces Supreme Court challenge

AccountancyAge.com — 2008-11-21T11:44:00.000Z

AccountancyAge.com, Accountancy Age, Friday 21 November 2008 at 11:44:00

PCAOB wins court case, but faces new challenge to its constitutional legitimacy

The US Public Company Accounting Oversight Board is facing a new constitutional challenge before the Supreme Court.

The PCAOB has already won similar battles in lower courts in the US, brought by the Free Enterprise Fund and Beckstead & Watts, webCPA.com reported.

Now an advocacy group plans to take the challenge further, to the US's highest court.

The grounds for the challenge are that the body violates the constitution because appointments are made not by the president with the advice and consent of the Senate, but by the SEC acting as a body. The US constitution require direct individual accountability.

PCAOB spokesperson Lucy Harvey declined to comment on the latest action, the website reported, but did say: 'We are pleased with the court's decision and look forward to continuing to fulfill the mandate given us by Congress to protect the interests of investors.'

Fair value and IASB supporters watch out

Accountancy Age — 2008-11-20T16:48:00.000Z

Accountancy Age, Accountancy Age, Thursday 20 November 2008 at 16:48:00

What to make of the G20 statement on accounting standards?

On the plus side it appeared to fully endorse a single set of global standards, perhaps clearing the way for the US financial watchdog to back international accounting standards at last.

But it also stated the need for the standard setter to promote ‘financial stability’. But G20 seems to want stability recognised through the ‘governance’ surrounding standard setting and not through the standards themselves – a situation that would have been near impossible.

The outcome looks like typical politicial compromise. It was clear before the event that the French wanted stability to be a central part of standard setting, which the International Accounting Standard Board would not have accepted. Rejecting it would have given certain governments the opportunity to declare the IASB as no longer relevant and go off looking for their more favoured standard setting solution.

In many senses then, G20 can be read as the battle for IASB independence. It was one joined by the chairman of the board’s parent body in advance when he pleaded with the heads of state to protect the IASB’s ability to stand alone unfettered by the views of national governments.

But there is, on our reading of the G20 communiqué, still room to attack fair value through the work that will take place on mitigating ‘pro-cyclicality’ of the world economy. Fair value has been accused of promoting just that.

There are three months before the next G20 and the devil will surely be in the detail for answers to all five key areas of reform. Those who support the IASB and fair value will have to remain on their guard.

comment@accountancyage.com

‘Unqualified’ success for EC accounts is not all it seems

Joanne Christie — 2008-11-20T01:24:00.000Z

Joanne Christie, Accountancy Age, Thursday 20 November 2008 at 01:24:00

Auditors still unconvinced on the legality and regularity of the majority of EC spending

For the first time in 14 years, the European Court of Auditors’ broke with tradition and gave an ‘unqualified’ opinion on European Commission accounts. The decision took critics by surprise, many had sent out press releases slamming the forthcoming accounts.

But to say the EC got a clean bill of health is slightly misleading. While the auditors did concede the accounts gave a ‘fair presentation’, they remain unconvinced on the legality and regularity of the majority of EC spending.

The auditors singled out cohesion spending as the area most riddled with errors. Of a €42m (£34m) budget, the Court estimated 11% of cohesion funds had been wrongly distributed. The acceptable margin of error is 2%.

The EC is quick to point out there are no problems in spending on its own administration, and blames member states for failing to properly oversee the 80% of the budget that is distributed by countries independently of the EC.

But some argue this is simply passing the buck. One of the detractors, Open Europe, says the EC needs to take responsibility for the failures and must reform its ‘Byzantine spending schemes’. It lists projects such as a ‘certified organic’ farm located in a waste dump, a brothel and a cinematography course that ended up costing ?750,000 per student, as examples of waste.

But the EU insists it will be reclaiming funds wherever it finds money has not been well spent and the UK alone is looking at a repayment bill of £190m.

‘The UK is good at making sure the right sorts of people receive funds but not so good at making sure those people put in the right paperwork and respect all the conditions,’ was how the EC’s chief accountant Brian Gray summed up the UK’s administration of EU money.

Perhaps these demands for repayment, which couldn’t come at a worse time for most European economies, will force member states to adopt a more rigorous approach to doling out EU cash.

KPMG International hails US' IFRS intentions

Kevin Reed — 2008-11-19T09:49:00.000Z

Kevin Reed, Accountancy Age, Wednesday 19 November 2008 at 09:49:00

KPMG International's chairman hails the US' intention to converge its financial reporting into IFRS

KPMG International's chairman has highlighted the importance of the SEC's newly-released road map proposal to converge US reporting to international standards.

Timothy Flynn said the proposal to bring US public companies onto IFRS demonstrates markets are becoming borderless and converged standards best met investors' interests.

'We continue to believe that IFRS has the potential to become a much-needed common language for investors worldwide.'

Further reading:

IFRS to cost $3.5bn for US conversion

SEC thumbs up for 'early adopter' switch to IFRS

Sigh of relief for the IASB - but is it all over?

PwC removes concern over casino operator's finances

Kevin Reed — 2008-11-18T09:01:00.000Z

Kevin Reed, Accountancy Age, Tuesday 18 November 2008 at 09:01:00

PwC confident enough with the cards dealt to Las Vegas Sands that the auditor removes its going concern statement

The famous Las Vegas Sands casino business has had a going concern warning reversed, after raising new capital.

Las Vegas Sands, which is one of the biggest casino operators in Las Vegas, was issued with a going concern statement from its auditors PricewaterhouseCoopers a month ago. But after Sands raised over $2bn in new capital, PwC removed its concern, reported Reuters.

'We previously concluded that there was substantial doubt about the company's ability to continue as a going concern. Management has subsequently taken certain actions which we have concluded remove that substantial doubt,' PwC said in a regulatory statement.

The casino industry has been hit with a slowdown, problems accessing credit and the Chinese government has looked into Macau's growing market, Reuters reports.

Further reading:

A Crisis is a Terrible Thing to Waste

Big win for bingo company Rank Group

E&Y sued over US Lehman audit

Kevin Reed — 2008-11-14T11:52:00.000Z

Kevin Reed, Accountancy Age, Friday 14 November 2008 at 11:52:00

E&Y and US Lehman executives sued for miselading investors

A US investment pool has sued Lehman executives and the auditor of Ernst & Young for more than $150m (£101m) for fraud and misleading accounting practices.

The San Mateo County Investment Pool has alleged that US Lehman's executives made public claims about the company's financial strength, yet was privately struggling for survival, reported Dow Jones.

Lehman attempted to conceal its losses with the help of Ernst & Young, according to the suit signed by Joseph Cotchett, the lead counsel retained by the county.

'The defendants focused their efforts on trying to save their company and their jobs with little or no regard to how their egregious actions harmed those who in good faith invested in Lehman Brothers,' said San Mateo County Counsel Michael Murphy.

Lehman chief executive Richard S Fuld Jr, former CFOs Christopher M O'Meara and Erin Callan, former president Joseph M Gregory, other directors and Ernst & Young were named in the suit.

An Ernst & Young spokesman said in a statement: 'The complaint has no merit. Lehman Brothers' demise was triggered by dramatic and unprecedented market events that continue to be felt throughout the world.'

Lehman's representatives were unavailable for comment at the time of writing.

Further reading:

Read CNN Money's story

Auditing profession: no review needed

Peter Wyman — 2008-11-13T12:53:00.000Z

Peter Wyman, Accountancy Age, Thursday 13 November 2008 at 12:53:00

There is no need for a review of the audit profession

A casual reader of last week’s Accountancy Age would be forgiven for concluding that I am calling for a review of the auditing profession.

Let me be absolutely clear I am not.

The next reporting round will be one of the most challenging for directors and auditors, and one of the most important for investors; the last thing needed now is any such distraction.

Nor is there any case for a review. Following Enron, even though there had been no audit failure in the UK, the government initiated a comprehensive review of the regulatory regime of the accountancy profession whose recommendations, supported by parliament and the profession, brought into being the present regulatory structure for the independent setting of standards, the independent inspection of audit firms and the independent oversight of the professional institutes, through the Financial Reporting Council and its operating bodies.

These new arrangements have served the interests of users and preparers well.

There has still been no audit failure: on what possible basis could a further review be justified?

It is clear that the combination of fair value accounting, responsible reporting by directors and auditors’ insistence that financial instruments are properly marked to market, has provided investors and others with transparent and comparable data on which to base investment decisions.

The fact that the response to that data has been for investors to sell, and to continue to sell as worsening conditions are reflected in each iteration of results, is testimony that financial reporting is working well, despite the acknowledged difficulties of valuation in illiquid markets, rather than any failure of audit.

We are in the worst financial crisis in living memory and once it is behind us it will, of course, be the case that every aspect should be examined and improvements made where appropriate.

Corporate reporting and auditing should not be excluded, not because of any failure, but rather to see whether the scope of auditors’ work, or the form of reporting, could be enhanced. PwC certainly stands ready to play its part in this.

There is no justification for shooting the messenger just because the message is unpleasant.

Once the dust has settled, though, there may be a case for exploring whether the messengers’ scope should be increased.

Peter Wyman, global leader, public policy and regulatory matters, PricewaterhouseCoopers

Auditors: great expectations

David Wood — 2008-11-13T12:42:00.000Z

David Wood, Accountancy Age, Thursday 13 November 2008 at 12:42:00

The role of the auditor is grossly misunderstood

Whenever there is a financial scandal it doesn’t take long for politicians to look for scapegoats. Certain commentators have already pointed the finger at auditors.

The auditor is an easy target, but it is clear that their role is not fully understood by their accusers.

This is not a defence of auditors. But it is clear, to me at least, that a chasm exists between what the profession is actually paid to do and what wider stakeholders expect.

Auditors are tasked with issuing an opinion to the shareholders on the truth and fairness of an entity’s financial statements.

Note that the opinion is directed solely at the owners of the business, not other interested parties. Note also that the audit does not guarantee the health of that business nor vindicate the business model being used by the directors common misconceptions regularly used as sticks to beat the auditor with.

While hindsight would be a very useful audit tool, it is not currently available. Auditors must assess the evidence available at the date of signing in order to arrive at that opinion.

As business has become more complex, with the increasing use of derivatives to provide meaningful information, these have been required to be valued at their fair values inherently more subjective than historic cost especially where there is no liquid market.

The downside is that the use of more current information means that significant fluctuations in value are a possibility, even within a short period of time. Such fluctuations are no more the fault of the auditors than the current drop in property prices is the fault of surveyors.

What can be done to remove the expectation gap that exists? Efforts have been made over the years to provide greater detail in audit reports of the work undertaken by the auditor and their responsibilities. It is not obvious that such steps have improved matters.

Indeed, most respondents to the recent APB consultation examining the wording of auditors’ reports favoured minimising the length of such reports and removing much of the text relating to auditors responsibilities. This evidence suggests that most users of audit reports think they understand the auditor’s role.

So where does that leave us with those making ill-informed comments? Perhaps this is a perception gap which cannot be bridged.

David Wood is executive director, technical policy, at ICAS

EC accounts chief: complete signoff unlikely

Joanne Christie — 2008-11-12T18:56:00.000Z

Joanne Christie, Accountancy Age, Wednesday 12 November 2008 at 18:56:00

EC's chief accountant says the possibility of auditors ever signing off on all the underlying transactions in its accounts was 'unlikely'

Any improvement on the cautious seal of approval given to the European Commission’s accounts is doubtful under current European Court of Auditors’ rules, according to the EC’s chief accountant.

Brian Gray said that the clean bill of health given to the EC’s accounts, the first in 14 years, was good news, but the possibility of the auditors ever signing off on all underlying transactions was ‘unlikely’.

The Court said that while the accounts gave a ‘fair presentation’ on the financial position of the European Communities, it remained concerned over the legality and regularity in some spending areas, particularly those relating to cohesion policies and agriculture.

Gray said the 2% error rate allowed by auditors was restrictive.

‘The chances of getting it down to 2% in every aid scheme is very unlikely,’ he said.

‘It might be more appropriate if it was 0.5% for administration and maybe 5% for emergency aid schemes.’

He added: ‘Of these schemes, 80% are managed by the member states so it is their responsibility to check that people put in the right paperwork and respect all the conditions.’