The most recent articles from Accountancy Age

Reporting issues flagged by FRRP

Judith Tydd — 2008-10-09T20:55:00.000Z

Judith Tydd, Accountancy Age, Thursday 9 October 2008 at 20:55:00

Potential reporting issues for companies in the worsening economic climate says Financial Reporting Review Panel

The Financial Reporting Review Panel has highlighted potential reporting issues for companies in the worsening economic climate.

In a report based on the assessment of 300 company accounts, 138 of which were contacted by the panel which sought further information or explanation on various accounting items.

The panel has also advised company directors to be mindful of subsequent changes in accounting.

Sources of uncertainty affecting management’s estimates, revenue recognition criteria and relationships with special purpose entities have been highlighted as areas to note.

Panel chairman Bill Knight said that UK company directors are known for their compliance with standards, and the report has been designed to address areas more sensitive to change.

‘The panel is less likely to question directors whose business model is clear, who avoid boiler-plate descriptions and who are open about the specific risks and uncertainties that may challenge their business in the foreseeable future,’ said Knight.

Mark-to-market still fair game for politicians

Accountancy Age — 2008-10-09T17:13:00.000Z

Accountancy Age, Accountancy Age, Thursday 9 October 2008 at 17:13:00

Accounting standards for public companies are for the investors

This is what needs to be remembered when discussing something as important as suspending fair value accounting.

There has been unprecedented pressure for fair value to be suspended or removed. These calls switched from financial institutions to politicians.

Republicans wanted it suspended as part of the $700bn rescue package, the president had wanted it gone and the Tories finally added their views, with David Cameron rounding on this now most controversial of all standards.

Their intervention, though welcomed by banks, was not welcomed by regulators, the profession and, most importantly, investors few of whom saw in suspension a route to solving the credit crisis. Indeed, some see it as accountancy being used as a political football.

On Friday Europe pulled back from the brink but the situation is extremely fluid. Politicians may not have moved to kill fair value as yet, but the battle is not yet over.

Investors and regulators will need to continue re-emphasising the message because the attack could be renewed. Paulson’s rescue in the US reiterated the powers of the financial watchdog to suspend fair value.

We do not know at this time whether the right will be used, giving reason to believe it may yet be delivered a damaging blow. Changing rules in the heat of the moment is never a good idea, but experts fear a suspension is likely to turn into a permanent arrangement.

If it is to be a full time change then the alternatives need much more consideration and no politician seems able to offer a decent replacement at present.

comment@accountancyage.com

Avoid a next crisis: you could have told us

Jules Muis — 2008-10-09T17:07:00.000Z

Jules Muis, Accountancy Age, Thursday 9 October 2008 at 17:07:00

Thanks for your offer but its a bit late

So PricewaterhouseCoopers chairman Ian Powell is urging accountants to help prevent future financial crises and PwC is generously contemplating sharing its outlook on systemic risks with the world.

That is the kind of risk at the very base of the present chaos. Regretfully, the profession is too late this crisis around. So it focuses on helping avoid a next crisis. Optimistically assuming that in the process we, and/or our audit business model will survive the present one.

At the risk of sounding ungrateful for this excellent, if belated, proposal, we had better ask ourselves where the heck the profession was with its systemic observations to prevent the present one from happening. I can’t think of a profession closer to the coalface - to sense the tectonic shift dramatically affecting our communal fortunes, than accountancy.

In 1995 I became controller of the Worldbank. Like 2007, the sky seemed the limit. Five years later and Enron/dot.com saw the sky cave in.

I peppered my speeches and papers with the assertion that we have to understand the systemics of our professional ‘big picture’ environment. The paper I co-authored in 2005, ‘A shorthand survival kit for accountants and auditors in a turbo derivative world’, sets the scene of the root causes of the crisis to come.

Neither the individual accountant or the financial industry and standard setter appreciated that ‘I don’t know’ is a prudential reporting option.

Up until, and including, our respectable financial market oversight bodies, sharing in the same

anal denial about their ‘don’t knows’, albeit at a much higher level. All my sources to help me unite were courtesy of the profession and financial market wizards.

PwC has now concluded that it can beat this cold-water fear in bringing out in the open uncomfortable systemic truths after the crisis is over, if ever.

Any such early warnings system should be channelled through the institutes first; so as to better guarantee a free flow of potentially very sensitive, economic and financial circuit-breaking information.

This gives firms the freedom to ‘whistleblow’ whatever they wish on those threatening systemics.

The profession can’t ignore its potential in identifying systemic weaknesses. It will have to assume its public responsibilities that go with it.

Jules Muis was the first director general of the EC’s internal audit service , and before that was VP and controller of the World Bank

Insider Business Club: capital management

Damian Wild — 2008-10-09T16:49:00.000Z

Damian Wild, Accountancy Age, Thursday 9 October 2008 at 16:49:00

Our experts discuss whether working capital and cash management should be higher on companies’ agendas

Are companies getting better or worse at managing working capital?

Simon Terry, supply chain consulting partner, IBM

What we’ve found in research we’ve done with other analysts, and also some of the analysis we’ve done, as well as conversations we’ve had with clients is that generally things have declined in the last couple of years.

In 2005/06 working capital was fairly flat but, in 2007, across the board there was an average deterioration of about 4-6% in performance whether it be in days sales, days inventory held or in days purchasing. The analysis we’ve done has been across 130 companies but not one of these large, multi-national companies led on all three measures.

The other thing that caught us by surprise was that very few of the leaders in those organisations had a very clear idea about how their performance sat compared to their peer group. They may well have had an idea internally but they didn’t really have a clear idea about how they were performing against the rest of their industry.

Our analysis has shown that the gap between the best those in the top quartile and those who are in the middle ranking is around 30% and that’s 30% across those three working capital measures.

So there’s quite a gap between the best and the rest. There’s a lack of understanding where people sit compared with the rest of their peer group and the indications are that 2008 is going to be worse. People are giving away more advantageous sales terms to maintain those sales and inventory is mounting up as many companies are perhaps moving to more low cost source countries offshore to get their materials from. And they’re building up more inventory to cope with that uncertainty.

Has the current economic climate pushed working capital to the top of most corporate agendas?

Neil Morling, group finance director, EC Harris

Certainly it should do and it has done within the finance fraternity. But it’s almost taken the current challenges of the economy to kickstart the business into thinking about it. Unfortunately, and as is often the case, it’s almost a retrospective call to arms.

This doesn’t just present challenges within the business itself. At the same time we’re seeing the challenges of businesses growing across the international arena which in itself brings challenges of cash management.

So we’re seeing two to three factors coming all at once, hitting the need to manage cash on a far more proactive basis.

There’s the internal drivers more and more pressure from clients as well as more and more pressure from markets. And to some degree, when we’re seeing far more exotic trading models and offerings, it’s often difficult to keep the line between trading profit and cash performance.

There’s a whole host of issues starting to hit businesses on cash and it’s just being exacerbated by the current economic climate at the moment.

What’s the risk of not getting cash management right?

James Barbour, director of accounting and auditing, ICAS

Even though there was a boom in the economy one would expect cash management still to be at the forefront. Having said that, maybe with the boom, people’s attentions were focused elsewhere.

But tied in with that has to be appropriate cash management because cash is king. And those are the words that will be heard in most boardrooms at this moment.

Those who haven’t focused on these areas really will have to do so as there is a shortage of credit available. Companies will need to focus on how they are going to manage these things over the next 12 months or so maybe that’s me being a bit optimistic in just focusing on the next 12 months.

But it really is crucial in the short term to focus on proper cash management. Ask how are you going to get the cash in? You have to make sure you are selling to the right people who are able to provide the cash when you need them to pay. You have to manage that with your outgoings as well and look at effective inventory management.

It’s the real basics here that have to be applied to ensure businesses can continue in the current climate. As we all know, at the moment, businesses could be profitable on the face of it. But if businesses are not getting the cash in, the liquidity problem could lead them down the route of having to seek advice as to whether they could actually continue.

Chaired by Damian Wild

Watch the events and sign up at www.insiderbusinessclub.com

CSR assurance: growth industry

Paul Scott — 2008-10-09T16:10:00.000Z

Paul Scott, Accountancy Age, Thursday 9 October 2008 at 16:10:00

The boom in corporate social responsibility reporting has opened up an exciting career path in assurance – but it has got some growing up to do

Corporate non-financial reporting has entered the business mainstream, with two-thirds of the global FT500 publishing an environmental, sustainability or ‘corporate social responsibility’ report in 2007s.

These reports cover a range of issues, most usually environmental impacts, but increasingly including social, ethical, supply chain and even human rights issues. In ways they’re similar to annual report & accounts, so it’s not surprising that many of them have an external assurance statement to demonstrate that the information has been verified and may be relied upon.

Of the 3,000 CSR reports that will be published worldwide during 2008, around 750 will include an external assurance statement. But while verifications and audits for year end accounts are usually closely regulated and follow a standard format, this isn’t the case for the CSR assurance statements.

These reports are voluntary and the assurance statements aren’t regulated: their scope, the way they’re approached and the format and wording of the published assurance statements differ widely, making this a very confusing field for practitioners and clients alike. There is no ‘common currency’ of methodology, terms and definitions, and although there are various approaches (see below for a brief outline of the two leading ones) there is no single approach accepted and referenced by all provider types.

Our report looks at the individual elements and trends in the CSR assurance market, and gives an overview and guide for the perplexed. Here are some of the report’s findings.

Who’s providing CSR assurance statements?

Although there are several hundred different providers developing CSR assurance statements, three major provider types dominate the market: The Big Four, certification bodies and specialist consultancies. Together these provider types account for around 90% of the market, with non-Big Four accountants providing a further 2% share.

In 2005 The International Auditing and Assurance Standards Board (IAASB) issued ISAE 3000 as a standard for ‘other’ assurance engagements. This standard has been helpful for the accountants operating in the CSR field, so useful in fact that although developed by professional accountants for professional accountants, CSR assurance providers outside the accountancy profession are beginning to use it and reference it in their own statements.

The other specific standard in this field is the AA1000 Assurance Standard developed by AccountAbility (accountability21.net). This standard may be used by any assurance provider, and is used by accountants and non-accountants alike.

What are the trends?

Over the past decade we’ve seen growing professionalism and consolidation of the CSR assurance market. The smaller providers such as broader consultancies, individuals, trade bodies, academics are being edged out, and one of the biggest winners are the Big Four, with their increasing specialisation and global reach.

There are strong regional differences. Just under a third of European CSR reports include an assurance statement, yet in North America this figures drops to around 7%. Why is this? One possible explanation is that US reports do not yet show the depth and breadth of issues seen in European reports. With honourable exceptions, US companies appear more enthusiastic in reporting how money is spent rather than how it’s earned (witness the 8% of top 100 US companies currently producing ‘philanthropy’ reports rather than multi-issue CSR reports) and it may be argued that this type of disclosure does not demand or even benefit from external assurance.

How to ensure a CSR assurance statement is ‘meaningful’?

Our report demonstrates that the approach and communication of a CSR assurance statement are largely dependent on the type of provider engaged to do the work. In other words, an accountant, certification body or specialist consultancy will each have their own specific views on what CSR assurance is all about, with a body of evidence to back up their case. The ‘key elements’ (see box) form a solid foundation for a ‘meaningful’ statement regardless of provider type if they are all included then a client, or an assurer, won’t go far wrong.

However there are a couple of further pitfalls to avoid. If the assurance provider also happens to be the company responsible for writing the report, there’s an obvious potential conflict of interest and a clear lack of independence. Nevertheless, several companies persist in doing just this. If impartiality is fundamental to establishing trust through these reports, they’re missing the mark.

A further variant is the ‘opinion statement’: a glowing statement by an individual, perhaps an academic or even a ‘green celebrity’, with no stated methodology or evidence of investigation. Invariably, such opinion statements are passed off as verification or assurance statements. If you’re a client, despite the superficial attraction, best to avoid this route. As the adage goes, if a job’s worth doing at all, it’s worth doing properly!

The key elements

Using a combination of a best practice review across five countries and references in relevant initiatives & standards, the following key elements have been identified as essential for inclusion in a ‘meaningful’ CSR assurance statement:

Reference to standardised approaches and levels of assurance. The most commonly referenced approach is ISAE 3000, together with two others (AA1000AS and the GRI guidelines). The levels of assurance outlined by ISAE 3000 are the ‘reasonable’ and ‘limited’ levels familiar to accountants worldwide, but other provider types are beginning to introduce assurance levels of their own.

Specific declarations. It’s useful for the statement to include a range of information including but not limited to: the statement’s intended audience, a declaration of the provider’s independence, the respective responsibilities of client and provider, any disclaimers.

Methodology. How has the work been conducted? Has the provider looked only at internal paperwork, or have staff been interviewed, sites visited, data systems scrutinised and external stakeholders questioned? Does the statement cover the entire report or only selected information?

Provider recommendations and opinions. What are the provider’s views about the about the report and the company’s performance? How might the report be improved or performance enhanced? Often such information is provided in an internal report, but it’s useful to include views in the public statement for the benefit of external stakeholders.

Assurance conclusions. The most important key element – should be included in

every statement.

Paul Scott is MD of CorporateRegister.com. Its report, The Assure View, is available as a free download from CorporateRegister.com

Trustees back suspension of standard setting process

Gavin Hinks — 2008-10-09T11:09:00.000Z

Gavin Hinks, Accountancy Age, Thursday 9 October 2008 at 11:09:00

IASB will suspend due process to rush through measures to level playing field with US

The due process for setting international accounting standards will be suspended next week as the board moves to push through changes to match those under US GAAP for the reclassification of assets.

The suspension comes with the full backing of IASB’s trustees who issued a statement from their meeting in Beijing this supporting the IASB in its approach and in its independent role.

Trustee chairman Gerrit Zalm, former finance minister of the Netherlands, said: ‘We support the IASB in suspending the normal due process to take action in these present extraordinary circumstances. The goal must be to ensure that a fair and transparent level playing field related to financial reporting exists globally. We strongly believe that the IASB, as the independent standard-setter for more than 100 countries, is best placed to address financial reporting concerns in a manner that will improve confidence in the markets.’

The IASB hopes have a standard on reclassification in place by the end of next week.

Reclassification would allow some assets to move ‘held for sale’ to ‘held for investment’ a change which would mean that fair value would not be applied.

Politicians in the UK, US and Europe, as well as businessmen have all called for the suspension of fair value to aid the banks caught up in the current financial crisis. The US Treasury secretary reserved the right of Wall Street’s watchdog to suspend fair value if necessary.

EU commissioner Charlie McCreevey has said that Europe could not maintain fair value if the US called time on the standard. Yesterday, he gave a speech backing reclassification. He said he hoped national governments would act to put it in place even before it received the full backing and sign off from the EU.

However, the IASB has made it clear that it expects reclassification to be rare and will also work on putting in place an anti abuse measure to head off any illegitimate use of the standard.

Global strategy pays off for E&Y

Judith Tydd — 2008-10-09T10:50:00.000Z

Judith Tydd, Accountancy Age, Thursday 9 October 2008 at 10:50:00

Global integration strategy for E&Y drives a 16.2% rise in revenue in 2008

Ernst & Young’s global integration strategy has driven a 16.2% rise in revenue in the 2008 reporting year.

All service lines recorded a jump in profits with the global revenue totalling $24.5bn (£14bn).

The merger of 87 practices across Europe, the Middle East, India and Africa, and an additional 15 practices throughout Asia has propelled the year-on-year revenue increase to US$3.4bn - a growth rate of 16.2%.

EMEIA’s revenues went up from $9.6bn to $11.4bn, which represents an increase of 18% in dollar terms but a more modest 7.9% in local currency terms.

According to James S Turley, global chairman and CEO of Ernst & Young, the integration strategy has helped quantify the return on investment.

The strongest revenue reported is across the Asia-Pacific region, where a 34.3% increase was recorded, to $3.3bn. Within this region, Japan increased revenues by 42.6%, the Far East area grew by 32.3% and the Oceania area rose by 29%.

According to John Ferraro, global chief operating officer at Ernst & Young, the firm is mid-way through a four year $1bn investment program in penetrating emerging global markets.

‘These markets represent some of our best growth opportunities,’ Ferraro said.

More regulation expected in the wake of economic crisis

Nick Huber — 2008-10-09T10:25:00.000Z

Nick Huber, Accountancy Age, Thursday 9 October 2008 at 10:25:00

The crisis is expected to increase scrutiny of accountancy firms

The global economic crisis will result in more regulation of accountants and slow moves towards global accounting standards, experts have predicted.

As the banking crisis deepened this week academics said the economic fallout could have far-reaching implications for the profession.

Some pointed to parallels with previous economic crises and corporate scandals when governments pushed though regulation of the accountancy profession in an effort to restore order.

But, on a brighter note, experts said the current economic crisis was unlikely to trigger a wave of

litigation against auditors of collapsed firms.

Prem Sikka, professor of accounting at Essex Business School, said: ‘I expect accounting and auditing standard setting to be much more politicised and subject to greater intervention by state bodies.

‘When the dust settles down there is likely to be a closer scrutiny of auditors as many distressed and failed banks received clean audit opinions. Some collapsed within days of receiving unqualified

audit reports.’

Sikka, a vocal critic of the profession, also predicted that the Financial Reporting Council, one of the City’s top regulators, could be forced to monitor audit firms more closely or risk being replaced by a

new body.

He said audit firms could come under pressure to provide more information about their relationship with clients and directors and move to ‘real time’ audits, in which they scrutinise accounts of large clients daily rather than annually.

Many of today’s accountancy institutes and regulatory bodies were set up in response to economic crises and corporate scandals. The ICAEW was formed in 1853 after the widows and orphans scandals of the railway boom.

The UK’s secondary banking crisis of the mid-1970s helped usher in a new tier of regulatory bodies for the accountancy profession, including the Joint Disciplinary Scheme in 1979.

In the US, the Securities and Exchange Commission (SEC) was founded in 1934 to help restore market confidence and protect investors after the Great Depression.

Some experts said the accountancy profession was already highly regulated, making further regul-ation less likely. ‘The profession is much more regulated than doctors or lawyers,’ said Stella Fearnley, professor in accounting at Bournemouth University.

Sunil Poshakwale, professor of international finance at Cranfield School of Management, said the economic crisis had exposed shortcomings in the training accounting firms and institutes give their employees and members. ‘The accounting profession has been lagging somewhat in catching up with the pace of change in investment banking. They need to go back to the drawing board for training.’

Credit conditions to worsen in Q4

AccountancyAge.com — 2008-10-03T02:11:00.000Z

AccountancyAge.com, Accountancy Age, Friday 3 October 2008 at 02:11:00

Credit conditions continued to tighten in Q3 and are forecast to deteriorate further in Q4

Credit conditions continued to tightened in the third quarter and are likely to deteriorate further, according the latest Bank of England Credit Conditions Survey for the third quarter.

The survey found corporate credit availability had been tightened more than expected over the past three months and further reduction in corporate credit availability was likely in Q4.

Commenting on the survey, Hetal Mehta, Ernst & Young ITEM Club senior economic advisor, said banks were still unwilling to lend to each other and the amount of credit available for lending to other companies and individuals was still falling.

‘With the on-going financial turmoil, the situation is likely to worsen in the coming months – banks expect defaults on all lending to increase,’ he said.

View from the board: cash is king

Mark Freebairn — 2008-10-02T18:02:00.000Z

Mark Freebairn, Accountancy Age, Thursday 2 October 2008 at 18:02:00

I hosted a lunch last week. It was a lunch made up of finance directors from PLCs and private equity-backed companies, NEDs and investment bankers. Two things amazed me

Firstly, everyone turned up!

Secondly it was the first time that I’d heard 2011 as the year that people thought this ‘interesting market’ would last until.

Now I know finance people are supposed to err on the pessimistic side, but this surprised me and quite a few of the other people round the table.

However, the view was that the banking environment would need a couple of years to sort out its balance sheets so it could start lending properly again, and as a result businesses were going to struggle to raise the capital they needed to invest in growth.

Well, while depressing to hear, it all seemed to stack up. But given businesses were going to need to grow to keep shareholders happy how were they going to do that?

Ringing round their key investors and explaining that through forces outside of their control, the top and bottom line of the business was going to stagnate for the next 24 months doesn’t feel like a palatable option.

The answer was simple cash management. The companies people worked for were going to have to

spend what money they had much more wisely, tighten up their controls more in areas where doing so would unlock cash flow and really drive a ‘cash conscious’ mind-set out across the operational management.

That’s going to come from outside and it’s unlikely a bank is going to lend you money at the moment unless they trust the FD will spend wisely.

Alternatively it is going to come from inside and that’s only going to happen if finance find it, bring it back to the centre and make sure it is spent wisely. So any which way, the FD and their team is pivotal.

Oh and one final, cautionary point. We’re all used to auditors and investors who look at the financing arrangements and worry if anything coming up soon hasn’t been planned for.

Well coming up soon is slipping into the next couple of years.

So get contingency planning now and show your board and CEO

another reason why a good business can’t exist without an even better finance team!

Mark Freebairn is a partner at Odgers Ray & Berndtson

Knee-jerk reactions will do us no favours

Alex Hawkes — 2008-10-02T17:45:00.000Z

Alex Hawkes, Accountancy Age, Thursday 2 October 2008 at 17:45:00

The banking crisis has been less a financial storm, that cliché of business writing, than a financial hurricane

Sweeping all before it, it has laid waste to Anglo-Saxon banking as surely as Katrina destroyed New Orleans.

The collapse has prompted dramatic claims about the need for change, but we would all be wise to follow Sir Mike Rake’s counsel against knee-jerk reactions.

Some say short-selling is at fault for the crisis, others that it is all the fault of greed. Still others have criticised fair value accounting. More amazing are those who claim that there is a culture of greed that needs to be expunged, or that capitalism is on its last legs.

There’s no denying that such discussion makes the crisis more exciting, an epoch-changing event, but the reality will probably prove more mundane. The exact chain of events that has caused the current crisis must be investigated fully. The key question is how US banks and others around the world came to take on risky sub-prime mortgage assets without realising how risky they were.

Without jumping the gun on that question, appealing to bankers to be less greedy seems rather forlorn. Desire for money makes banks tick; but it needs to be allied to caution and sensible risk-management.

That isn’t a problem of Anglo-Saxon banking, it’s a problem of all banking. Likewise, the fear stalking banks across the world. If crises could be prevented, this one wouldn’t have happened. They are no more a reason to throw out capitalism than recessions are.

The US and the UK should remember that the regulatory response to Enron was arguably worse than the problem; regulators this time round should do what the bankers should have done: be a bit more cautious.

comment@accountancyage.com

So where do we go from here?

Penny Suhraj — 2008-10-02T16:24:00.000Z

Penny Suhraj, Accountancy Age, Thursday 2 October 2008 at 16:24:00

In the current climate of uncertainty our reporter looks at the opportunities and threats that the profession is facing

With the newspapers full of the banking collapse, and the global financial system lurching from one crisis to the next, many in the profession will be wondering what happens next?

It’s a question that taxes economists as much as it does auditors. John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, says the issues could be ‘very serious’ if they don’t get resolved.

‘But we just don’t know quite frankly… it isn’t a matter for a single forecast. There are so many different pressures [for companies and FDs].’

Hawksworth says any number of scenarios could emerge, the question appears to be more the depth of the recession than whether or not there will be one. So how are the industry’s service lines bearing up?

BDO partner Peter Hemington says: ‘We’re somewhat surprised that corporate finance transactions have held up very strongly with levels as high as they’ve ever been. There has been quite a lot of restructuring work that involves corporate finance, as well as restructuring which involves selling the business or restructuring the bank facilities.’

‘We’re also doing more public-to-private work, involving taking companies off the stock market.’

The crisis has also given acquisition opportunities to larger companies and other private equity institutions. ‘That is going to be the big issue for the next few years, with a lot of corporate activity around the private equity community very keen to buy companies,’ he says.

There have been some obvious high-profile insolvencies: Lehman Brothers the most notable. But some say banks are trying harder this year to avoid losing their cash.

‘These days banks are keen to avoid insolvencies. They prefer to restructure where they can. They want to catch problems as early as possible to see if they can help. There’s definitely a rescue culture which wasn’t there in the last recession 15 years ago,’ says Hemington.

Auditors will be hoping that the recession does not witness the levels of litigation seen in the past.

Mayer Brown partner Clare Canning says: ‘It is inevitable that, in the nature of economic crises, people look to the nearest deep pockets. Hopefully, putative claimants will have learnt from the experience of the BCCI and Equitable proceedings not to launch ill thought-through claims in an attempt to blackmail the professionals. In any event, it is too early for accountants to be in the frame and far from obvious that there will be any reason to criticise them.’

Whatever happens with litigation, some auditors have already lost high-profile clients, and it would be a surprise if more didn’t follow. That, combined with the devastating effects on the UK’s public finances and the consequent tax demands that will follow, is set to affect the profession for some time to come.

Levitt offers crumb of comfort to auditors

Gavin Hinks — 2008-10-02T16:01:00.000Z

Gavin Hinks, Accountancy Age, Thursday 2 October 2008 at 16:01:00

US treasury reports has more cons than pros

As the efforts to save the world economy reached fever pitch last week, among the statements issued by the US Treasury was the report of a panel asked to make recommendations on the audit profession.

For some it would have been a disappointing report. Jointly chaired by former Securities and Exchange Commission chairman Arthur Levitt and Donald T Nicolaisen, there were hopes the recommendations would include measures to protect auditors from the kind of catastrophe suffered by Andersen. Something along the lines of limiting auditors’ liability.

But there was nothing like that included in the report. Observers in the end were merely grateful that protection was recognised as an issue even though no steps were advised.

Lobbyists pointed to the co- chairmen, who is well known as being unsympathetic to the audit profession. As one told Accountancy Age: ‘What was needed were people with totally open minds. The battle in the end was would they even recognise that there was an issue.’

Levitt has been aggressive in his approach to audit firms. In June this year an interview appeared in the Dutch magazine De Accountant in which he expressed his liking for ‘audit only’ firms, a replay of his views that firms were conflicted by running audit along side other advisory services.

‘The profession is better managed today than ever before. But once again, this is a moving target. The firms are aggressively getting back into consulting services. I think there is a role for an audit only firm. We also need greater transparency to understand what condition a firm is in. We need their firms to provide fully documented audits of their own operations. They don’t do it at the present time, but I think that clearly is coming.’

At the beginning of September the US Center for Audit Quality issued a warning to the Treasury in Washington saying that it was failing to do enough to avert the risk of litigation destroying a large firm. The center was furious that the panel’s recommendations would not address auditor protection even though the issue had been discussed.

Cynthia Fornelli, director of the center, insisted that liability capping should be among the proposals the panel would make.

‘If this liability concern is not addressed, many of the committee’s other recommendations will prove unworkable due to the current litigation context.

‘And as we pointed out in our first letter, we believe that fulfilling the committee’s mandate to address “the sustainability of the public company auditing profession” includes meaningfully tackling this issue,’ she warned.

The report included up to 30 recommendations for dealing with the audit profession.

On the concentration of the audit market and the competition issue there was advice that regulators should monitor the ‘potential sources of catastrophic risk and the creation of a mechanism to ‘rehabilitate’ large audit firms in crisis.

The report followed through on Levitt’s belief that audit firms should publish annual reports (something already underway for a number of years in the UK) and said engagement partners should put their personal signature on an audit to improve accountability.

The panel also recommended that independent members should be appointed to audit firm boards with full voting rights.

In terms of recommendations there was nothing to tackle the belief that giving audit firms more protection was a route to encouraging other players into the market for large public company audits.

Observers believe the key members of the Treasury panel were reluctant to even acknowledge this as an issue let alone recommend a course of action. Because the final report does, it is being viewed as a step forward, however tentative that step may be.

Despite the concern over the report, lawmakers in the US are unlikely to do anything with it. Elections are a month away so it will be left to a new regime, once there is some calm around the credit crisis, to consider whether to take the recommendations in the report and turn them into action.

That may be some time away which might, in turn, create the breathing space necessary to force auditor protection and liability capping back on to the agenda.

A Democrat regime in the Whitehouse and at the Treasury could be persuaded to ignore the recommendations produced for a Republican government and find their own route forward on the audit profession.

Regulation is at crossroads, says Rake

Damian Wild — 2008-10-02T00:04:00.000Z

Damian Wild, Accountancy Age, Thursday 2 October 2008 at 00:04:00

UK's most senior accountants urge rulemakers to keep a principle-based approach to regulation in the market crisis

Two of the UK’s most senior accountants have warned that market turmoil has left regulation at a crossroads, but have urged rulemakers to learn from their experiences and not see sweeping, additional regulation as the answer.

Speaking at last week’s Financial Director Summit, BT chairman Sir Mike Rake said: ‘It’s incredibly important we don’t have a knee-jerk reaction to how we manage events in the future. We must have a principles-based approach to regulation and it must be global.’

Sir Mike said it would be important to ask questions about moral hazard, fair value, risk management and executive remuneration schemes but that the time for ‘intellectual debate’ would come later.

‘It’s absolutely clear regulation is at a crossroads,’ he told delegates. ‘We have to cure the disease and subsequently work out what caused it and prevent it.’

In his first major speech, new PricewaterhouseCoopers UK chairman Ian Powell said dealing with systemic risk in unregulated entities had to be a priority. ‘The real challenge is to improve our regulations and not just add more,’ he told the firm’s building public trust awards this week. ‘Regulatory change is an opportunity to simplify, streamline and look at the real costs and benefits.’

Powell urged further change.

‘We need a better mechanism to flag problems,’ he said. ‘I want the leading accounting firms to be willing to join the top table, with business leaders, with regulators, central bankers, credit rating agencies and others to identify ways of creating an early warning system.’

On the money with Damian Wild

Damian Wild — 2008-09-18T18:11:00.000Z

Damian Wild, Accountancy Age, Thursday 18 September 2008 at 18:11:00

Poor Business Week. No sooner had the well-regarded US magazine published its third annual Best Places to Launch a Career survey than the world of US business was turned on its head

Suddenly Lehman Brothers is looking like a decidedly unattractive place to launch a career, far from its attributed 29th best place. According to the survey the bank wants team players bursting with analytical and leadership skills.

I bet it does – but do the next generation of Masters of the Universe want Lehmans after it filed for bankruptcy protection this week? I doubt it.

And then there’s Merrill Lynch. Placed 21st on the league table, in 2008 it had to whittle down 20,000 applications for entry-level jobs to just 434 – a 2% conversion rate. Will it be quite so attractive a place to launch a career in 2009 after its sale to Bank of America?

Perhaps it will recover – but it does make you wonder how Bank of America failed to break the top 50 when its struggling rivals did so well.

That, of course, is the real problem with these surveys. All too often, with the ink on the page barely dry, they are overtaken by events. It’s happened to us.

Two years ago in our Top 50 league table we championed the extraordinary growth of the Midlands firm Wenham Major.

OK, it took almost a year before that extraordinary growth was discovered to have been built on a web of irregularities (in Business Week’s case the cover date of its careers edition was Monday, the day after Wall Street ate itself) but it still felt uncomfortably close.

I am tempted to speculate about the likely fate of others on the Business Week list – but my lawyer advises me against it.

Damian Wild is editor-in-chief of Accountancy Age