2006-2007: Accountancy in review

As one of our writers points out in this section, there were no great
scandals this year to propel the profession into the public eye. Many would
argue, rightly, that was a good thing. But it does mean that in some senses
accountancy appears to have been a somewhat subdued profession.

But that is simply not the case. Growth in revenues has shown that the
industry has become one of the most dynamic and influential in British commerce.
Debate over audit quality and choice continues to rage, even though an
interventionist solution from regulators seems extremely unlikely. Tax
specialists remain in great demand despite continuing efforts by the government
to crackdown on abusive corporate tax planning. And the European Court of
Justice appears to have become the crucial arena in which UK corporate tax
policy is determined.

Finance directors have remained lynch pin figures in big business and part of
this year’s remodelling of Accountancy Age was designed to give greater
prominence to the men and women at the top of their profession.

Among the top FD’s we featured were BT’s Hanif Lalani, Prudential’s Philip
Broadley, Capita’s Gordon Hurst and Tesco’s Andrew Higginson, to mention but a
few featured in these pages over the year.

The public sector too made significant strides in improving financial
accountability. To highlight this we profiled leading finance figures in
government such as Home Office FD Helen Kilpatrick and Ann Beasley of HM Prison
Service.

So, despite the lack of a big scandal the profession has in many ways proved
as colourful as ever. Without doubt its importance to industry, trade and
commerce remains undiminished. Whether accountants work in practice or in the
corporate world they continued throughout 2006 to hold their place as the most
important advisers to business.

Our review here should give an idea of the most important events of the past
twelve months, but also an indication of where the profession may be heading in
the New Year.

If the events of 2006 are anything to go by, expect the
unexpected in the coming year, writes Gavin Hinks

Sometimes it’s the big issues, but often it is the unusual one-off stories
that stick in the mind most. One such event this year came from the otherwise
anonymous figure of Wayne Carnall.

Carnall is a former Securities and Exchange Commission enforcer and was at
this year’s Ask the Experts conference. When faced by a deluge of criticism of
his august former employer, he promptly replied with the accusation that his
critics were ‘anti-American’.

Though in itself the comment may have been innocuous, it emerged as a clear
indication of how pressured US regulators feel after the continuous knocking of
Sarbanes-Oxley legislation and the approach of the regulator.

Carnall may have wished he’d been somewhere other than London when the
brickbats started, something he may have had IBN common with David Berry, former
finance director of Transbus.

Transbus was the subsidiary instrumental in the collapse of bus manufacturer
Mayflower, an event which prompted an Accountants Investigation and Discipline
Board disciplinary hearings for some of the accountants caught up in the
debacle.

It was the AIDB’s first disciplinary, but it did not go well, with most
charges proving difficult to make stick.

This may, of course, have had something to do with Berry, who proved
impossible to track down by Grant Thornton, investigating on behalf of HSBC,
Mayflower’s bankers. GT was forced to report: ‘We are unable to interview Mr
Berry who, we were told, had moved to South America.’

While unusual stories like that may raise a wry smile, others give more cause
for concern. In July, Accountancy Age learned police were investigating the
filing of a false set of accounts at Companies House, an act intended, it was
believed, to damage the business concerned.

The false accounts disturbingly showed the company had suffered an £800,000
operating loss. Though the accounts could be removed from the register, the
longer-term risk to the company’s reputation was potentially disastrous.

As could have been the case with another shocking revelation that police had
inadvertently revealed the source of a tip-off to someone suspected of money
laundering.

The tip-off had come from an accountant, but the Serious Organised Crime
Agency spilled the beans about the informant’s identity to the suspect. A chill
went through the accounting community as the incident came about through a
routine suspicious activity report, something that wasn’t meant to happen under
the spirit of the legislation concerned.

Forecast

Will one-off shockers like these continue in 2007? They’re bound to and they’ll
come from where they are least expected. David Berry’s unavailability emerged as
part of a hearing that did not concern him directly, and experts had believed
their money laundering reports would remain confidential.

It is therefore, by definition, almost impossible to predict what is
otherwise unexpected. But let’s have a go. First, the Joint Disciplinary Scheme
is still investigating Ernst & Young over the audit of Equitable Life. As
you will have noticed, Equitable’s own case against its former auditor did not
pass without comment in the press, so expect newspapers’ City desks to follow
any further events keenly.

US legislators have also realised that Sarbox went too far, so we can expect
some movement there. Look out for all companies complaining at the millions they
spent on compliance only for the rules to change just a couple of years after
they were introduced.

But if you’re looking for something jaw-dropping, imagine the Financial
Reporting Council coming up with a radically interventionist policy to make sure
we have another global audit firm. (My colleagues elsewhere will argue, rightly,
that this is unlikely.)

This would not doubt prove shocking and lead to more threats by the Big Four
to leave the audit market. Though that would be a shame, given the hundreds of
millions they earn from it.

Prepare for intense consultation, lobbying and negotiation
between HMRC and business in 2007, writes Nicholas Neveling

‘We have moved headquarters before and we are not scared to do so again. The UK
used to be a good place to be for purely tax reasons. I am not sure if that is
the case anymore.’

When Chris Spooner, head of financial planning and tax at HSBC, uttered the
words above at a conference earlier this year, he opened up a wave of repressed
frustration among UK corporations and sent a clear message to tax authorities
that the current tax system was losing its competitive edge.

Spooner’s warning was soon followed by a report compiled by the Investment
Management Association showing an alarming rise in the number of investment
funds that have opted to domicile in jurisdictions other than the UK because of
tax. The CBI joined in with its own report, revealing that a number of companies
had abandoned the UK for similar reasons.

Indeed, complexity and competitiveness have been the most controversial and
topical issues on the corporate tax front over the past year.

HM Revenue & Customs has continued with its determined campaign to clamp
down on abusive tax planning and ensure that corporates pay their fair share,
while business has become increasingly irritated with convoluted tax law and
what it believes is an unnecessarily aggressive approach from the taxman.

With tensions between corporate taxpayer and taxman approaching breaking
point, the Varney Review on HMRC’s links with large business came out, shortly
followed by another HMRC paper entitled ‘Delivering a new relationship with
business’.

In these documents, HMRC pledged to provide business with more certainty over
tax affairs by providing a clearance service for all tax planning and make the
administrative side of tax less onerous by providing a single point of contact
at HMRC for businesses.

Nursing relations with frustrated corporates has not been the only concern
that would have troubled the tax authorities this year. The growing influence of
the European Courts on domestic tax affairs would also have insured a sleepless
night or two for Gordon Brown.

After losing the Marks & Spencer GLO at the end of 2005, the Treasury
lost out again when the ECJ ruled in favour of Cadbury Schweppes on the
controlled foreign company GLO. Before the end of 2006, the UK was bracing
itself for another multi-billion pound hit in the franked investment income GLO.

The ECJ rulings are expected to have massive implications for the way the UK
tax system is structured as authorities scramble to protect tax revenues
following the European decisions.

Ernst & Young international tax service partner Jason Lester summed up
the pressure the Treasury was under as a result of the ECJ decisions.

‘If you look at the Cadbury Schweppes ruling and the FII case, you could have
a situation where a business could move a subsidiary offshore, repatriate a
dividend tax-free and still attract interest relief. For the government it is
like staring down a three-barrelled gun,’ he said.

Forecast

Next year promises to be a year of intense consultation, lobbying and
negotiation for HMRC and business. The proposals in the Varney Review and the
paper on HMRC’s business relationships will need to be thrashed out as advisers,
businesses and the taxman attempt to implement what these documents have
promised.

The ECJ impacts will also inevitably be opened up to consultation as the UK
grapples with the implications of the various rulings. The fact is that the UK
cannot afford to continue offering interest relief as well as tax-free dividend
s from foreign subsidiaries and allowing businesses to establish controlled
foreign companies.

Something is going to have to give and, even though HMRC will do its best to
incorporate the views and wish-lists of all stakeholders, there are going to be
some groups that will miss out after the shake-up.

In the corporate tax world, 2007 is going to be at least as frenetic and
controversial as the last year has been.

After a turbulent year, the ICAEW is hoping for calmer waters to
sail on in 2007, writes Kevin Reed

Although the ICAEW’s management hoped that 2006 would see fewer headlines about
the institute, following its very public failure to merge with CIPFA months
earlier, its wishes would fail to come true.

As chief executive Eric Anstee licked his wounds and hoped to spend the year
pushing on with the institute’s strategies of international expansion, closer
relations with government and serving its members better, a conflict of interest
issue arose seemingly out of nowhere to cause ructions at Moorgate Place.

With president-elect Graham Durgan set to take over from Ian Morris, concerns
emerged over the award of a training contract to Emile Woolf International, a
company in which Durgan was a majority shareholder.

After a number of weeks, and rumblings within the council about
behind-the-scenes lobbying over Durgan’s position, the man himself decided
against taking up the president’s position.

Morris then led a review of the institute’s internal controls and put in
place processes to ensure any perceived or actual conflict could not arise
again.
The fiasco seemed to hit at the heart of the council, which was already going
through the process of some navel-gazing after it had been widely criticised ­
even among council members ­ for being too unwieldy.

Soon after, Anstee revealed that he would step down from the CEO’s post at
the end of 2006 ­ although he has stated that management knew of his decision to
quit long before the Durgan affair arose.

‘I am genuinely retiring,’ said Anstee. ‘I will stay in the role until we
find a successor.’

Discussing his time at the ICAEW, Anstee was defiant, despite much criticism
that the institute was in a much better condition after his time in office.

‘We’ve grown so much in the international field. Before the institute was in
reverse, given that business is global,’ said Anstee.

Michael Izza has now taken over from Anstee, and is looking for a period of
stability to carry on pushing the institute’s plans.

A more frivolous pair of characters to hit the headlines of Accountancy Age
in 2006 were Richard and Judy.

Their tax battle against HM Revenue & Customs was a serious one, claiming
they could set their agent’s fees against the tax on their earnings.

The decision rested on whether the entertainers were ‘theatrical artists’.

Having viewed Richard Madeley’s infamous ‘Ali G’ impression, special
commissioner Howard Nowlan used it as an example of the pair performing as
artists and that much of their work was improvised.

He famously suggested that newsreaders were not entertainers: ‘I would
certainly accept that newsreaders and the weathermen on television are not
theatrical artists. Few will forget Angela Rippon’s “high kick”… but I still
consider that their role is passive.’

Forecast

New ICAEW chief executive Michael Izza is joined by new ICAS boss Anton Colella.
They have both described their roles as ones of continuing the good work their
predecessors had left them with, but Izza has been more pronounced in saying his
style and thoughts will come to the fore in the near future.

Whether this involves scrapping with ICAS over name changes seems unlikely,
but with consolidation still in the ICAEW’s plans, issues may come to a head
over the next 12 months.

‘If the UK profession is fragmented, it punches below its weight and
sometimes we don’t have the influence we should,’ Izza told Accountancy
Age.

The ICAEW has managed to anger the other UK bodies in one way or another,
such as ditching collaboration on CPD, over the past two years. It is difficult
to see if 2007 will be any different.

Tax cases involving the likes of Richard and Judy are always a possibility.
However, the tax advisers for both famous and less well-known people are follow
ing the pages of Accountancy Age at the moment to see what HMRC’s next move will
be in its battle to recoup tax owed from holders of offshore accounts.
Gaining access to Barclay’s offshore client base could prove to be a watershed
in HMRC’s fight.

Other banks will fall under HMRC’s might in the coming months.

David Jetuah looks back over a watershed year and towards the
chilling spectre of IFRS compliance in 2007

‘May you live in interesting times,’ says the ancient curse. If that’s the case,
there are more than a few companies and FDs that fell foul of the hex in 2006.

It would be fair to say that it’s been a watershed year in terms of commerce
and accountancy. Companies continued to iron out teething problems resulting
from the tougher regulatory demands that are now an established feature of the
business landscape, while leading figures in the scandals, which triggered major
reforms, learned their fate.

Enron’s ex CFO Andrew Fastow plea-bargained his way to a five-and-a-half-year
prison term after turning star witness for the prosecution. The company’s
chairman Kenneth Lay only escaped a lengthy jail term because of his sudden
death.

On the domestic front, the implosion of healthcare IT provider iSoft is still
causing severe fallout after major accounting flaws were uncovered. An ongoing
AIDB probe

has placed former auditors RSM Robson Rhodes and iSoft directors, including
Sir Digby Jones, under the spotlight for the preparation and approval and audit
of the 2003, 2004 and 2005 accounts.

In better news for the mid-tier, Baker Tilly’s landmark vindication after
qualifying the accounts of music company Sanctuary proved one of the high points
of the year. A probe by the Financial Reporting Review Panel found that
prior-year adjustments made to the group’s 2005 accounts should have been
presented ‘as a correction of fundamental errors and not as changes in
accounting policy’, a point raised by Baker Tilly when it qualified Sanctuary’s
internal accounts in February.

Building and maintenance group Interservetook a £25.9m hit in its asset
valuation after a serious accounting bungle. The company was left red-faced
after irregularities in its industrial services unit came to light, which led to
the write-down. To add insult to injury, the review by KPMG and lawyers
Linklaters cost the company another £5m.

The bitter debate which raged over audit concentration was refuelled as the
US endorsed a new act blocking overseas companies from accepting or handling
money obtained from online gaming in the US. The move robbed BDO of its only
FTSE 100 audit, as Partygaming dropped out of the top echelon of UK businesses.

PricewaterhouseCoopers won another audit after FTSE 100 retail giant GUS
demerged into Experian and the Home Retail group. This followed Brit Insurance
dropping Mazars for E&Y and Group 4 Securicor switching from Baker Tilly to
KPMG.

Forecast

The chilling spectre of IFRS compliance looms large for AIM companies next year
as market experts make calls for businesses on the junior exchange to prepare
adequately or face the consequences. Grant Thornton’s Steve Maslin warned that
the consequences of non-compliance could be grave for companies listed on the
highly competitive exchange.

‘If they don’t work out the impact and then problems arise over how the
accounts are shaped under IFRS, investors may find the stocks unattractive. Also
review panels may criticise the accounts.’ Blue chip female FDs became something
of an endangered species this year as the main market has buckled under some
surprise resignations and numerous takeover battles. Alison Reed’s departure
from Standard Life dealt a severe blow to the already fragile number of senior
female FDs, but she, along with Margaret Ewing, is expected to make a return in
2007. Speculation has been rife that the BAA former CFO will touch down at
Deloitte’s doors.

PwC’s Chris Lucas is set to take over from Barclays departing FD Naguib
Kheraj. Lucas’ extensive knowledge of the audit function at PwC has raised
questions over whether the company can continue as Barclays’ auditor when he
takes over the financial reins at the banking giant. The rest of the Big Four
and, perhaps rather optimistically, the mid-tier will be watching with interest,
as will Accountancy Age.

It’s been a busy 12 months for audit and compliance and we can
expect more of the same, writes Penny Sukhraj

There was no equivalent of Enron, neither was there the passing of a
Sarbanes-Oxley in 2006. But the year for the audit profession was by no means
quiet.

One of the most provocative debates was the Oxera paper on choice in the
audit market. The paper concluded there wasn’t enough choice and resulted in the
creation of the Markets Participants Group (MPG), to find solutions from a
market level and avoid regulatory intervention.

The Big Four predictably moved into a collective defense as the research
confirmed claims that there is not a competition issue, as such, but rather an
issue with business leaders and their limited perception that only the Big Four
‘brands’ can deliver high-quality audits.

Oxera served to disseminate more information around the capability of other
firms and, while the research offered no solutions, it got people thinking about
the issue of audit choice.

The first application of IFRS got underway with little fuss, despite earlier
complaints that the principles-based standards were too long, complex, and
demanded far too many disclosures.

Yet when the US Securities and Exchange Commission began issuing comment
letters on these first filings, FTSE 100 FDs complained bitterly and publicly.

The government even drew up protective legislation to ensure Sarbanes-Oxley
rules would not affect the LSE, in the event of a hostile takeover from Nasdaq.

Ironically, the SEC itself began to backtrack on the stringent Sarbox rules in
the wake of companies delisting because of burdensome US regulation.

After a year of companies spending millions on compliance, the US
vice-president admitted on national television that it could have gone too far.

‘I think you can make a case that Sarbanes-Oxley went too far. The fact of
the matter is, when we had, for example, Enron and WorldCom, the problems that
developed from the standpoint of those companies, those activities were illegal
before there was any additional regulation put in place,’ Dick Cheney said.

The British government addressed auditor liability this year and introduced
proportional liability into the companies bill. Now an Act, the legislation also
leaves it up to firms and clients to decide what the proportion will be.

A late addition to the bill is the allowance for the use of the Freedom of
Information Act to the FRC’s Audit Inspection Unit reports.

Other continental laws have also come into play. News of the MIFID
directive’s cost of about 81bn (£509m) is unwelcome.

But even more unwelcome is the thought that the FRC may ­ unless another
solution is found sooner ­ have to hire staff to conduct SEC-type policing of
companies listed on the LSE.

In the marketplace, firms redefined their sizes: KPMG merged with its German
counterpart, and Deloitte did the same with its Swiss member firm.

Forecast

It remains to be seen how effective and creative the MPG will be in working
together to drive a market-led course of action.

On the US regulatory front, it is fascinating to note increased political
sentiment around reviewing Sarbox, much to the dismay of the audit firms, as
another line of revenue slowly disappears.

Audit committee chairmen may try to make use of the Freedom of Information
Act to obtain the reports carried out by the FRC’s Audit Inspection Unit.

Although the AIU may simply seek to change the rules which govern how the
reports are conducted to prevent successful use of the FOI Act.

More mergers could be on the horizon for Deloitte, insiders suggest, while
KPMG UK awaits news of whether their French counterpart will take up its offer.

Also interesting to watch next year, is the AIDB’s decision on the first public
tribunal, in which PricewaterhouseCoopers defended itself for more than four
weeks. Will the number one firm be exposed or vindicated?
A busy year ahead, no doubt.

But let’s hope Peter Wyman’s comment, ‘…corporate scandals that rocked the
world at that time were not seen, and will not be seen, in the UK…’ will not
tempt fate.