The most recent Analysis from Accountancy Age

Fair value: victim of a witch hunt

Gavin Hinks & David Jetuah — 2008-10-09T18:24:00.000Z

Gavin Hinks & David Jetuah, Accountancy Age, Thursday 9 October 2008 at 18:24:00

With politicians on both sides of the Atlantic looking for someone to blame for the economic crisis, fair value has become a convenient scapegoat. Gavin Hinks and David Jetuah look at whether it can survive the hysteria

Is this the end of fair value? Are politicians in the process of turning themselves into the authority on accounting standards?

Not since the demise of Andersen and the Enron scandal has accounting held centre stage in a crisis the way it has become a central issue in resolving the credit crisis. As politicians in the US, UK and in Europe grappled with plans to stem the crisis they turned on fair value and mark-to-market accounting, blaming them at best for contributing to the collapse of the banking system, at worst for being one of its root causes.

Republicans called for its suspension, Hank Paulson reiterated the right to suspend in his rescue bill for the US economy, French president Nicholas Sarkozy and his finance minister Christine Lagarde have identified it as ripe for an overhaul.

EU president Jose Manuel Barroso has indicated his approval of a suspension and Tory leader David Cameron this week said something had to be done.

Politicians in short have become convinced that killing mark-to-market accounting is part of the answer to the credit crisis.

It is not known what Paulson might do with the legislation at this stage but together the politicians’ actions have left regulators and accountancy professionals speechless with astonishment.

One regulator told Accountancy Age: ‘Fair value is being used as a political football by people that don’t know what they are talking about. It’s political support for the distortion of the truth. It will cause regulators and auditors trouble.’

Knee jerk reaction

The highest levels of the profession are incredulous. One Big Four partner said: ‘Generally, politicians know even less about accounting than the rest of the world.

‘To have a knee-jerk reaction to try and change the accounting rules by next week seems like an inappropriate way to treat something [The IAS project] that’s taken 25 years to establish.’

Should the politicians be in this position? Should they be taking control or should standard setting be treated like the setting of interest rates by central banks outside the control of politicians?

For US congressmen the question is easily put to one side because political control of the country’s national standard setter is within their grasp.

But for countries signed up to international accounting standards the position is very different because the IASB does not answer to any government or politician. As Nicholas Veron of the Bruegel Institute in Brussels points out, the fact that politicians should not interfere with international standards, is a function of geography.

That said the weekend saw French president Nicholas Sarkozy host a summit in which he dropped his own preference for suspending fair value.

Instead, the European leaders, including Gordon Brown, Angela Merkel of Germany and Italy’s

Silvio Berlusconi, called, among other things, for the same reclassification rules for assets that

exist in the US so that Europe’s companies would not be at a competitive disadvantage.

The rule allows for assets to be moved from ‘held for sale’ to ‘held for investment’ and thus avoiding the application of fair value.

Were the politicians pushing the IASB around? No, the IASB issued a statement the day before the summit signalling its willingness to look at reclassification as early as next week.

Its statement made two things clear however. Firstly, reclassification is ‘rare’. Secondly, a change to adopt the rule into IFRS will come along with anti-abuse measures.

This is then clearly not about allowing wholesale reclassification so that fair value will not apply. The IASB believes this is merely about levelling the playing field between the US and European competitors.

The IASB’s reclassification statement could well have been what was needed to head off a full frontal attack on fair value at the Sarkozy summit. Apart from the formal statements the board has retained a tactical silence, clearly not wanting to say anything that might upset rescue plans in the US or worsen the position of fair value in Europe.

Its cause might have been helped though by last minute lobbying launched on the eve of the European leaders’ gathering.

Just as everyone was packing their bags to head for Paris, the Association of British Insurers aggressively entered the fray putting out a statement demanding that fair value be left alone.

It was a clear indication that investors accept the accounting as it is and the politicians should heed the investors, it’s their interests at stake. Having said that, it is clear that no one quite knew what to expect from the meeting, perhaps least of all the leaders themselves.

The level playing field illustrates another worry. If the US does suspend fair value, European leaders will feel they need to do the same to maintain a competitive equilibrium. Everyone is concerned about unilateral action, like the Irish government’s guarantee for depositors, which attracted so much criticism.

Even if Europe stands by fair value while the US acts, the fall out would be damaging.

For one thing the whole project of persuading the largest capital market in the world to adopt international accounting standards would be called into doubt because international accounting standards currently embody fair value. This may be welcomed by some, but not at the cost of fair value.

There is however a much larger fear. If mark-to-market is suspended we might be saying goodbye for good. As one insider put it: ‘we’re trying to stop Europe from doing anything temporary. Solutions like this are rarely temporary. If it’s suspended there’s no way it will be allowed back’.

In the meantime, the credit crunch looks like it might be transforming accountancy just as it has transformed the capital markets and regulation. But in such a fluid environment, it remains to be seen whether it will be for the better.

Softworld: rescue packages

Kevin Reed — 2008-10-09T18:17:00.000Z

Kevin Reed, Accountancy Age, Thursday 9 October 2008 at 18:17:00

Softworld's exhibition could help save your business

As the downturn bites into cash reserves and improving efficiency is the name of the game, investing in new business software could be the most important decision you make this year.

One of the UK’s leading business software experts, Dennis Keeling, predicts that business will clamour for the latest IT tools to help steer their business through tough times.

‘People are looking at improving cashflow, reducing debt, and improving office efficiency, which can reduce headcount,’ says Keeling, chief executive of Business Software Intelligence.

With Keeling set to present ‘how to select specialist software applications’ at next week’s Softworld Accounting and Finance Solutions exhibition, he believes business can save millions of pounds with just a small investment in software.

‘By spending thousands they can save millions. Companies can buy software because it’s a capitalised item and can be written off over a few years, so they’re happy to approve budgets.’

He is joined by a number of top guest speakers at this year’s event held in London’s Olympia.

Holt JCB’s finance director Richard Briere discusses how to reduce complexity with end-to-end solutions, while Smith & Williamson’s Stephen Briggs will provide practical advice to SMEs on weathering the economic storm.

It has the largest number of exhibitors for a number of years, at around 50.

Two of the biggest players, Agresso and Coda, will exhibit together for the first time since they merged, boasting a full range of financial products and services to business of any shape or size.

‘We can offer existing customers new solutions to complement their current portfolio including Agresso’s HR and payroll solution to CODA customers and CODA’s powerful consolidation tool to Agresso customers,’ says MD John Crooks.

COA Solutions, formerly CedarOpenAccounts, will show its managed service offering at the show.

Winning Moves is launching its online benchmarking tool at the show, Winning Measures for Finance.

Developed in consultation with the profession, Winning Measures for Finance is designed to help accountants and financial professionals generate new income, attract new clients and strengthen their existing client relationships.

For more information go to Softworld.com

Overview: who is going to replace Cadbury's CFO

Judith Tydd — 2008-10-09T17:03:00.000Z

Judith Tydd, Accountancy Age, Thursday 9 October 2008 at 17:03:00

Prospects: The search is on to replace the Cadbury’s CFO

The world is no longer Cadbury for Ken Hanna, who is leaving the nation’s best-known confectionery giant. He leaves with the City certainly seeing him as one of their Cadbury’s Favourites: the challenge for his successor lies in keeping them sweet.

What's happened?

Ken Hanna’s confirmation last week that he’s stepping down from the highly-prized role came as a surprise to many pundits on the stock-market, as Hanna is regarded a popular figure in banking circles.

He steered the business through this year’s £1.2bn demerger from Schweppes, and helped integrate Adams, acquired in 2002, extending Cadbury’s exposure to emerging markets..

Credit Suisse analyst Charlie Mills said the Cadbury-Schweppes demerger was of particular significance. ‘It was a very unusual and complex demerger and that was certainly more complicated than many people thought, so he’s been around with some big corporate changes. He’s had a history of taking some fairly radical corporate moves especially at Dalgety [now Sygen Group plc],’ he said.

Analysts also believe Hanna’s departure to be significant, arguing his role in the Adams acquisition changed the landscape of the confectionery market.

The company’s share price fell 10p to 555.5p on news of Hanna’s resignation, and the share price of Inchcape plc, the car retailer business where he’s heading, rose 1.25p to 188.75p.

His departure from both CFO and executive director roles at Cadbury is effective from April 2009 following five years with the company. He starts his non-executive position with Inchcape in May.

What's going to happen?

A headhunter has been appointed to search for Hanna’s successor, but whoever takes over will find Hanna casts a long shadow.

Mills said the biggest challenge the incoming Cadbury CFO is presented with lies operationally with a major restructure taking place. ‘There’s an extensive restructuring program…they’ll need to deliver on targets set,’ he said.

Strategically, the incumbent will need to set the tone in a market that is increasingly driven by large-scale consolidation activity.

Despite the global financial collapse, the confectionery industry is relatively ‘recession-proof’, Mills said.

As for Hanna, analysts said the recent share price history of Inchcape shows the business underperforming, which could in part be due to the withdrawal of some products in China.

Hanna has experience of emerging markets so will need to use that to drive the car retailer forward.

Q&A: Steve Webster, on the final results of Wolseley Group

Cantos.com — 2008-10-02T18:09:00.000Z

Cantos.com, Accountancy Age, Thursday 2 October 2008 at 18:09:00

Steve Webster, CFO discusses the final results announcement of Wolseley Group, the world's leading distributor of heating and plumbing products

The group’s performance continues to be significantly impacted by market conditions. Talk me through the key numbers.

Well it’s certainly been a challenging year but despite that the sales have risen by 2 per cent to around £16.5bn. The trading profit declined by 22 per cent because of that challenging set of conditions to about £683m. We’ve had some one-off impairment charges this year and we’ve also had some exceptional restructuring costs around £76m in the year. After those items are taken into account, the operating profit declined by about 60 per cent.

I think the success of the year really has been the working capital on the cash side. We’ve improved our working capital cash to cash days by over 11 per cent. We’ve also increased our cash flow conversion rate from 148 to 185 per cent.

You’ve been working hard at improving cash flow and working capital in the business for quite some time now, so what actions have you put in place to strengthen the balance sheet?

Well we certainly had some very aggressive working capital reduction targets.

There have been some great performances in the businesses – Ferguson, DT, UK in particular – so we have reduced our cash to cash days by just over 11 per cent because of all those actions.

We’ve also set a target for the current year to improve the working capital cash to cash days by more than 10 per cent and again, we do expect some benefit from asset disposals and business disposals during the year.

Of course, we’re also expecting the benefit to come through from the restructuring actions that we’ve taken in the previous financial year.

Can I confirm that’s 11 per cent over the last year?

It’s 11 per cent over the last year, but 10 per cent more going forward. So 10 per cent on top of the 11 per cent that’s been achieved so far.

Finally, are you worried about running out of cash?

We’re very pleased with the success of the action we’ve taken this year which have collectively increased our covenant headroom by over £1bn. We will carry on with those actions and we’re confident that we will remain fully in compliance with our borrowing covenants through to 31 July 2009 and beyond.

For the full interview and more FD, CFO and CEO online programming go to cantos.com

Overview: London's new Lord Mayor - raging bull or paper tiger?

David Jetuah — 2008-10-02T17:35:00.000Z

David Jetuah , Accountancy Age, Thursday 2 October 2008 at 17:35:00

Prospects: is London's new Lord Mayor the man to save the City?

The City of London has been left reeling by the fall of Lehman Brothers and jittery investors are wondering who might be next. The government is far from flavour of the month at the moment, so the firm hand the Square Mile needs may have to come from another source.

Ian Luder stood for a two-part process at a ceremony at Guildhall at the beginning of the week to become the Lord Mayor of the City of London. He was apparently a shoo-in for the job, but in the present climate, is there going to be a City of London left for him to lord over and what is his real influence?

What’s happened

As an officer of the City of London Corporation, the municipal governing body of the City of London, Luder is charged with promoting the interests of the Square Mile as the world’s leading international financial and business centre.

The cheekier or braver commentators out there might say that Luder’s job is nothing more than a symbolic one with no real power.

They might also say he’s just there to head up a procession of floats at the Lord Mayor’s Show before racking up the air miles jetting across the globe to other financial powerhouse locations.

But that’s not to say the Grant Thornton man isn’t more than qualified to give ailing blue chips the benefit of his experience.

What’s going to happen?

With all the talk of companies upping sticks and changing their tax residencies, Luder’s CV includes specialising in the tax affairs of professional partnerships and their partners, professional institutions and charities, as well as internationally mobile executives, and could give businesses the shot in the arm they need.

Keeping the Lehman Brothers saga in mind, Luder is also no stranger to company upheaval. He qualified as a chartered accountant and as a chartered tax adviser with Arthur Andersen before leaving in the upheavals of 2002.

To give him his due, Luder’s role will also include hosting meetings with incoming business and overseas government visitors, for example meetings with finance ministers.

And in a financial world where uncertainty is the watchword, having Luder as Lord Mayor might just make the difference when it comes to keeping and wooing businesses to the UK.

Beware the liquidity trap, Tesco FD tells counterparts

Damian Wild — 2008-10-02T16:52:00.000Z

Damian Wild, Accountancy Age, Thursday 2 October 2008 at 16:52:00

Damian Wild reports from last week's Financial Director Summit, where senior figures discussed the major issues

Finance directors need to retain control of the corporate agenda and run their businesses on a cash basis to avoid falling victim to a liquidity trap, Tesco’s Andrew Higginson said during his keynote speech at the Financial Director Summit.

Higginson warned the UK was only at the beginning of the slowdown, with the problems that have ‘messed up’ banks yet to impact fully on the wider economy. ‘We are almost certainly in recession at the moment and all the consequences of that are yet to play out,’ he said.

Higginson, recently promoted to chief executive of retailing services but continuing in the FD role until a replacement is found, urged delegates to manage their businesses within their means.

‘If you haven’t got liquidity you are going to find it hard to get at the moment,’ he said. ‘Keeping control of the agenda, avoiding the tender loving care department of the banks, avoiding “something must be done” syndrome, is really at the forefront of what you should be doing at the moment and in the coming weeks and months.’

He warned ‘cash could kill’, with too many businesses ‘sleepwalking’ to their collapse by focusing on earnings instead.

At the same time he said it was essential businesses continued to invest and not assume growth was impossible in torrid market conditions. Despite tight credit markets, Tesco purchased a South Korean hypermarket chain in May for nearly £1bn its biggest-ever deal.

He said FDs should manage their relationships carefully and make their company important in the eyes of their bankers. ‘It’s better to owe a lot of money to a few banks,’ he said, rather than a little to many.

Maslin urges mid-tier auditors to tackle ‘invisible barriers’

Mid-tier firms need to do more to persuade large listed clients they are a viable auditor, but ‘invisible barriers’ need to be lifted to open up the market, Grant Thornton partner Steve Maslin told delegates.

‘There are smoke and mirrors and invisible barriers but how do we clear some of those barriers away?’ Maslin asked. ‘This is a long game and it’s partly down to us. We know we have to do something ourselves.’

He saw a role for regulators ‘to clear away some of the disinfomation’, citing banking covenants that stipulate companies must use a Big Four auditor, which were drawn up as ‘boiler plate’ agreements by lawyers with little client input. But he added: ‘We don’t believe anyone should do us a favour by imposing an artificial business model.’

Speaking on the same panel, PricewaterhouseCoopers vice-chairman Glyn Barker described Financial Reporting Council chief executive Paul Boyle’s comments earlier this year that the merger that created the firm should never have been allowed as ‘drivel’.

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.

Internal audit chiefs urged to grasp nettle

David Jetuah — 2008-10-02T00:38:00.000Z

David Jetuah, Accountancy Age, Thursday 2 October 2008 at 00:38:00

Professor Mervyn King calls for internal auditors to seize a more hands-on role and ‘put their neck on the block’ at the Institute of Internal Auditors annual conference

One of the world’s foremost corporate governance experts has called for internal auditors to seize a more hands-on role and ‘put its neck on the block’ at the Institute of Internal Auditors annual conference.

Addressing 250 of the UK’s top in-house auditors Professor Mervyn King said end-users of accounts were not getting a true reflection of a company from the bare bones of the balance sheet and urged them to make inroads into the areas of strategy, sustainability and foresight.

‘We are now dealing with foresight and undecided future events,’ said King. ‘Intangibles have become more valuable than tangibles. The true economic value of a company is not included in its book portfolio [on the balance sheet].

‘It’s a photo of a moment in time of what’s happening. Internal auditors need to provide more forward-looking information. Report only on the financial aspects of annual reports and you’re not giving stakeholders what they need to make informed decisions.’

King said that there was no company employee better-placed to understand risks and opportunities than internal auditors.

‘Internal audit can no longer be divorced from strategy.’

During the past year, there have been high-profile cases of companies looking inwards after problems emerged on the back of the credit crunch.

The scandal at Societe Generale saw questions being raised about the internal controls at the investment bank. King made the point that of the 100 largest organisations in the world in terms of employees, 51 were multinationals and 49 were governments. The scope of these multinationals, operating in many different countries, with a range of languages and currencies reflected the importance of the internal auditors’ role, putting their remit for transparency at the top of the list. ‘Transparency is the cornerstone of good governance. It has a withering effect on misconduct.’

King added that internal auditors should go on the front foot and push for a seat on company boards, with their appointments controlled by the audit committee.

‘The days of internal audit being “compliance-centric” are dead. This is no longer a backroom activity. It now has the most critical, critical function,’ King said.

Experts dismiss tax on City bonuses

Judith Tydd — 2008-10-02T00:36:00.000Z

Judith Tydd, Accountancy Age, Thursday 2 October 2008 at 00:36:00

Suggestions that City bonuses could be taxed more heavily are 'counter productive', says Grant Thornton

Any changes to tax structures in curbing the culture and volume of City bonuses won’t be effective, according to leading tax experts.

In a testing political climate, with the unions calling for a tax crackdown on the City, and bonuses selected as a particular target, there have been suggestions that bonuses could be taxed more heavily.

Advisers don’t see it as practical, however. Mike Warburton, senior tax partner at Grant Thornton, said historical evidence shows any changes in raising tax rates to be counter productive. He argues the current 40% rate is the correct level in maximising the level of income tax collected by the Treasury.

‘You can’t have something which says we’re going to have a special tax for people who work in the City and earn over a certain amount… I’m not trying to protect people who earn over £200,000 per year.

It would just be counter productive,’ Warburton said.

Chancellor Alistair Darling is under increasing pressure to implement a more transparent regime in the recording of bonuses paid to City executives.

The Financial Services Authority is thought to be considering measures in stemming the issue, including the possibility of banks being obliged to retain capital if excessive risks were carried out in securing bonuses.

Warburton said bank behaviour ought to change. ‘It would be wrong to apply a special tax rate for higher income levels because it’s been proved to be ineffective. Banks needs to have some moderation,’ he said.

According to Chas Roy-Chowdhury, head of taxation at the ACCA, irrespective of whether there is a change to tax structure, there needs to be an improved audit trail on bonuses paid, and a direct correlation between remuneration and how the bonus has materialised.

‘There really isn’t a simple answer. Whether it’s a good or bad idea, I don’t know. It’s difficult to see the profit trail of their work,’ he said.

Richard Murphy, advisor at the Tax Justice Network, said that there are limited options from a tax perspective, but that the Treasury could potentially increase the rate applied to employer’s national insurance on salaries over a certain threshold, nominating £200,000 as a prospective cutoff.

Regulators keep an expert eye on fair value calculations

Penny Sukhraj — 2008-10-02T00:35:00.000Z

Penny Sukhraj, Accountancy Age, Thursday 2 October 2008 at 00:35:00

Auditing of fair value calculations in the spotlight as IAASB issues an alert after task force reports back to its quarterly meeting

As banks reported somewhat disappointing annual results amidst the global financial crisis, little seems to have been pinned on issues directly related to their audits.

But the industry is in any case looking at how it audits fair value calculations.

The IAASB is issuing an alert on the issue. According to IAASB chairman John Kellas, the resolution to issue the warning came out of the group’s fair value task force, which reported back at the IAASB’s quarterly meeting a week ago.

Kellas said that the alert would refer to issues around fair value which include modelling, the imposition of assumptions in audit evidence and disclosures. Complex valuations are also among the priority areas.

‘This concerns the use of experts by auditors in looking at complex valuations. The auditors will have to question the need to draw on expertise of others. In some instances clients may also be using experts.

‘In these cases, the auditor might need to consider what instructions were given to the expert for the valuations, and whether the approach of the expert is consistent with the accounting framework,’ said Kellas

‘The kinds of assumptions, methods and models that they use are also likely to be questioned in terms of the requirements of the accounting framework.’

Auditors will also be expected to make judgments on the reliability of audit evidence, especially in cases where a value can no longer be ascertained in line with the market for an asset, because the market is no longer active.

The way in which auditors will assess fair value has also come under the scrutiny of the International Forum of Independent Audit Regulators, which noted it as an area under their attention in the course of inspection work.

With the international regulatory eye carefully watching their actions in the current period, auditors might find themselves being especially strict in their audits.

Some clients, particularly those in the banking sector, might prefer different rules.

However a recent assessment by market-players, facilitated by the International Accounting Standards Board has deemed that the rules will remain, pending a consultation on the valuation of assets whose markets have seized up.

While the rage about the unfairness of fair value continues, those who take issue with it will ultimately have to fall in line with the rules.

Lehmans administration: to the power four

Accountancy Age Staff — 2008-09-24T16:29:00.000Z

Accountancy Age Staff, Accountancy Age, Wednesday 24 September 2008 at 16:29:00

A tricky task is in store for the four administrators of Lehman Brothers

TO the power fourThey’re not quite the four horseman of the apocalypse, but their arrival certainly does not signify good times for the British economy.

Tony Lomas, Dan Schwarzmann, Mike Jervis and Steven Pearson are likely to become well-known names over the next few months and years as the administrators of Lehman Brothers International (Europe), the investment bank which has collapsed, leaving a derivatives web worth hundreds of billions of pounds to unwind.

WHAT’S HAPPENED?

The UK arm of Lehman Brothers went into administration after the cash from its US parent stopped flowing.

Joint administrators from PricewaterhouseCoopers were appointed on Monday of last week, and immediately set to work to figure out what it could salvage from the remains.

The good news, so far, is that many of the staff will at least get a last pay cheque, though slightly delayed. The greater worry was the uncertainty surrounding the derivatives book, and how it can be unwound without causing further turmoil and destruction of value.

WHAT’S GOING TO HAPPEN?

The four PwC partners share some key experiences of major administrations.

Jervis, Lomas and Pearson all worked on the wind-up of Enron’s European arm.

Pearson spoke of that administration when describing the difficulty of keeping all stakeholders informed on big projects like these.

In order to secure the sale of one Enron asset - the right to take gas from the North Sea Pearson and the rest of his team had to get consent from more than 100 stakeholders.

‘If you don’t anticipate all the stakeholders, the danger is when you need to get an asset restructured you could fall foul,’ he said.

Lomas and Pearson also worked on the MG Rover administration in 2005, which also resulted in the loss of 5,000 jobs and was politically sensitive.

The experience of both will come in handy, even if, as Lomas says, the Lehman administration is ‘larger and more complex’ than both.

In that sense, one man who will come in handy is Dan Schwarzmann. If the others have spent their time in the limelight, it is Schwarzmann who has been specialising in complicated financial insolvencies.

Not only did he handle the administration of split capital investment trust group Exeter Fund Managers, he also took charge of Independent Insurance when it collapsed in 2001.

‘You can’t predict where you’re going to go [in accountancy],’ Schwarzmann has been quoted saying. With the Lehman administration, unpredictability is almost a certainty.

Lehmans administration - the ultimate test

David Jetuah — 2008-09-24T15:51:00.000Z

David Jetuah, Accountancy Age, Wednesday 24 September 2008 at 15:51:00

Lehman Brothers administration is biggest and most significant since MG Rover

Lehman Brothers represents the biggest administration the UK has seen in recent years, certainly since MG Rover and, arguably, it is far more significant.

Administrators are used to peeling away the layers at companies with a lot of moving parts, but the fall of an investment bank is in a league of its own.

The prospect of unravelling Lehman’s derivatives book, which PwC’s joint administrator Dan Schwarzmann dubbed ‘extraordinarily complex’, is far from pretty.

Think about the number of transactions an investment bank makes in a day and the scale of PwC’s task is put into perspective.

The consensus in the insolvency community is that PwC is in for a bumper payday in return. One IP didn’t even ‘want to think’ about the fees PwC would make.

Last week it emerged that PwC had 80 staff initially working on the administration, with more expected to be brought in.

A Public Accounts Committee report showed that a partner could expect £425 for an hour’s work at MG Rover, as at 11 April 2005, while a manager’s hourly rate was £247. Taking inflation and higher demand for IPs into account, the hourly rate will have gone up by more than the rate of inflation.

One source familiar with these issues said that a middle manager could expect £300 an hour today. ‘If you think about 80 people getting paid at an average of £300 an hour, working 10-12 hour days, you can work it out for yourself.’

That would mean PwC racking up fees at more than £1m a week.

So how did PwC land the job ahead of everyone else?

‘I have no doubt PwC were the least conflicted. The Big Four have enormous conflict issues, increasingly so because of Sarbanes-Oxley,’ said a mid-tier IP.

‘When you provide a material amount of advice to that particular company you are ruled out.’

The administration will test PwC’s business recovery arm to the core but, perhaps more than anyone, it has the firepower to do the job.

It has about 900 staff in 23 offices and is the UK’s largest business recovery services practice, providing advisory services to lenders, creditors, companies and individuals.

Recovery means working with colleagues from other departments. PwC has already said it is also handling corporate finance, financial services, real estate, human resources, asset recovery and tax at the company.

PwC’s workload will become a lot easier if the firm manages to find a buyer for the solvent parts of the company. On the other hand, the administrators have already warned that they could not rule out more companies in the Lehman Bros Europe fold going under.

Councils set to fight ECJ VAT ruling

Judith Tydd — 2008-09-24T15:46:00.000Z

Judith Tydd, Accountancy Age, Wednesday 24 September 2008 at 15:46:00

Ruling on off-street parking VAT could hurt council pockets

Local councils could be forced to pay VAT on a range of services in areas where they compete with the private sector after a European Court of Justice recommendation on off-street parking.

Councils had taken HMRC to court, alleging that they did not have to pay VAT because they were not competing with the private sector in the parking area.

But the ECJ said that, in assessing the issue, any competition that was more than negligible would result in the councils paying VAT. It also said that an overall verdict on the issue needed to be reached, rather than simply working it out on a council-by-council basis.

Marc Welby, VAT partner at BDO Stoy Hayward, said other council services could be affected, including crematoria, welfare and child-care services.

Welby led the case for the councils and added he was optimistic they could win when the case comes back to the High Court because there was no evidence councils competed with the private sector. He said any resolution to the case would be unlikely for at least another year.

Audit resignations thrust into spotlight

Nick Huber — 2008-09-24T15:44:00.000Z

Nick Huber, Accountancy Age, Wednesday 24 September 2008 at 15:44:00

Audit resignations becoming more high profile follwing changes to the Companies Act

When KPMG resigned from the audit of XL Leisure in 2006, no one, it seems, paid much attention - until the company went bust, that is.

But auditor resignations like KPMG’s are set to become more high-profile following changes to the Companies Act, according to industry experts.

Under the old rules when an audit firm resigned and issued a section 394 statement it could explain its reasons for resigning for example, citing concerns over the governance of their audit client.

The auditor’s client had the option of trying to block a statement through the courts before it was filed with Companies House, however.

The most high profile example of this dispute was between PricewaterhouseCoopers and Jarvis, the road and rail infrastructure group.

In 2000 PwC won undisclosed costs on an indemnity basis in a High Court victory following a long-running dispute over audit fees and a statement lodged by PwC when it resigned as auditor.

Directors at Jarvis alleged that PwC’s section 394 statement had suggested there was ‘an unsatisfactory state of affairs’ in the way the company accounted for long-term contracts, and that the firm wanted to paint its resignation in ‘a more favourable light’.

The court issued a judgment asserting that the firm had acted with ‘total propriety’ and was highly critical of Jarvis.

Changes to the Companies Act offer more support. Under new rules auditors have to report their resignation statements to the Professional Oversight Board, part of the Financial Reporting Council, as well as Companies House.

Martin Jones, national audit technical partner at Deloitte, said: ‘Situations like this [KPMG’s resignation of the XL Leisure audit] are likely to get more early attention from regulators given the change in the law.’

The accounting irregularities at XL which collapsed last week leaving tens of thousands of passengers stranded abroad were caused by some of its staff delaying payment of invoices to Alpha Airports, an airline catering company.

The delay flattered XL’s figures ahead of a flotation of its then parent company, Avion, on the Icelandic stock exchange.

After an initial investigation into the accounting irregularities, KPMG still had concerns over the accounts but felt it was ignored. BDO Stoy Hayward, which replaced KPMG, says it subsequently dealt with the issue. In future, that kind of work might attract more attention.