Corporate merry go-round
The Hundred Group of Finance Directors, the low-profile organisation of the
UK’s highest-profile FDs, picked 2005 as the year to step out of the shadows.
The group, chaired during the year by AstraZeneca FD Jon Symonds, pledged £5m
towards a research centre project with Oxford University to look at taxation
policies and policy options. It also stood against the IASB’s proposals to
implement a fast-track technical corrections policy. New chairman, Prudential FD
Philip Broadley, announced that he would look to expand the group’s scope in
Brussels, where issues that matter to FDs are ‘increasingly’ decided upon.
Deloitte partner Neil Wood won Accountancy Age’s Award for Personality of the
Year, for his efforts as Olympic bid FD. The former FD of the Manchester
Commonwealth Games, David Leather, was also handed a key role, as interim FD of
the Olympic Delivery Authority’s transition team.
Pensions, IFRS and the occasional scandal made 2005 a big merry go-round for
UK plc. The pension crisis emerged as a major concern for FDs, as the
introduction of pension accounting standard FRS17 saw billions of pounds in
pension deficits suddenly appear on balance sheets.
Actuaries estimated the deficit of the FTSE100 would be £37bn, prompting
listed heavyweights ranging from BT to HBOS to reassess asset allocations and
reduce deficits with huge cash payouts.
IFRS, meanwhile, produced its own set of problems after the launch in
January. Symonds again spoke out, warning that accounts were becoming more
complex. Analysts claimed that the new standards obscured underlying value and
some companies, such as Cattles and Venture production, felt the force of the
new standards on their stock prices and profits.
The introduction of IFRS and Sarbanes-Oxley, however, did not prevent more
accounting problems and scandals emerging. Refco, the booming brokerage,
collapsed into bankruptcy when it emerged that CEO Philip Bennett had allegedly
concealed a $430m (£243m) debt from investors.
Back in the UK, the accounts of Morrisons fell into disarray when it
discovered that the revenue recognition policy at acquisition Safeway was
different to what it expected. Meanwhile, music company Sanctuary Group warned
of a serious capital loss because of aggressive accounting policies.
See you in court
It’s a short walk from many of the nation’s top accountancy firms to the
Royal Courts of Justice, but many partners will wish they hadn’t made it.
E&Y was on the receiving end of a mind-blowing £2bn court action this
year from Equitable Life, the court proceedings kicking off in April.
But if E&Y partners were worried that their capital would disappear into
Equitable’s with-profits fund, their fears were eased from almost the first days
Equitable’s arguments proved threadbare, and E&Y laid on a scornful
critique of the mutual’s points, until it finally agreed to walk away in the
late summer, with E&Y paying only its costs.
PricewaterhouseCoopers and KPMG would both have been roped into the show, had
it not ended prematurely. When the case closed, a PwC expert witness had only
just taken the stand for Equitable.
Deloitte found itself in the high court, attempting to injunct Accountancy
Age and the profession’s disciplinary body, the Joint Disciplinary Scheme, from
publishing complaints about chairman Martin Scicluna. The injunction was lifted
The firm was also in court as liquidator in the epic BCCI battle with the
Bank of England, with similar success. The case against the bank, alleging
misfeasance, proved to be an impossibly high target and was dropped in November.
Deloitte partners now face an anxious wait to see whether or not they will have
to pay part of the costs that BCCI’s estate would normally pay.
The mid-tier firms were also in court, with BDO seeing off a £3m lawsuit over
a bankruptcy, and Smith & Williamson involved in a case over R&D tax
credits that blew up into a fully fledged tax row.
Protection from catastrophe
This year was one of the most eventful on the regulatory front for some time,
and will undoubtedly be seen as a vintage one for the audit profession, with
firms finally getting the protection from catastrophe that they have spent so
long clamouring for.
In November, the government published the company law reform bill, which
included clauses that will allow auditors to negotiate proportionate liability
with their clients. After extensive arguments with the investor community,
surrounding concerns over the potential impact on audit quality, auditors
convinced the government that they should only be liable to damages relative to
their responsibility for any problems that happen with clients.
As part of a quid pro quo arrangement, auditors can now face charges over
‘knowingly or recklessly’ giving an incorrect audit opinion. But even here the
profession has got off lightly, as original plans would have seen auditors
facing up to seven years in jail. This has now been reduced to an unlimited
While companies and their accountants have been getting to grips with IFRS
and Sarbanes-Oxley, they will no longer have to deal with the introduction of a
mandatory operating and financial review, following its surprise scrapping last
month. As many companies were already producing one for their 2005 annual
report, the benefits of this last-minute move will be somewhat lessened.
The Financial Reporting Council has also just completed its first full year
with upgraded powers, and the last under the stewardship of chairman Sir Bryan
Nicholson. But the accounting watchdog did not escape 2005 without criticism,
some accusing it of being ‘toothless’ after reports into the audit work of the
Big Four and analysis of over 200 company accounts found little to write home
Alongside this, a review of the Turnbull guidance on internal controls made
few significant changes. The body did exercise some of its powers, however, with
the Accountancy Investigation and Discipline Board laying its first complaints
against PricewaterhouseCoopers over its audit of collapsed bus manufacturer
Mayflower and an investigation into Deloitte’s work on MG Rover.
Battles with the taxman
Two issues dominated tax in 2005: avoidance and the ECJ. Gordon Brown
continued his campaign against avoidance throughout the year, with volumes of
new rules that saw Tolley’s tax guide reach double the size it was in 1997.
The chancellor extended the disclosure rules and introduced new clampdowns on
national insurance, capital losses and arbitrage, in particular.
HM Revenue & Customs won two huge cases, against Dextra on employee
benefit trusts (EBTs) and against Debenhams on the use of card-handling schemes.
Dave Hartnett, the director general of HMRC, pledged in an interview with
Accountancy Age, that the department would be seeking to make avoidance ‘not
worthwhile’ by 2008.
KPMG’s troubles in the US, where it paid a $456m (£261m) fine to stave off an
indictment and potential meltdown, threw the issue of advisers’ work and tax
revenues into sharp relief, and the debate raged through the Autumn.
Avoidance moves have now extended the tax base to such an extent that
corporation tax is set to hit £50bn by 2007/08. Surveys from international
organisations this year repeatedly stressed the UK’s declining global
competitiveness as a result.
Ranged against the avoidance moves have been the levelling effects of
international, and particularly European, law. M&S took on HMRC over group
reliefs, while Vodafone disclosed that its case on controlled foreign company
rules was worth almost £2bn, making it one of the largest tax cases ever fought
in the UK.
The government faces tens of billions of liabilities over the cases, but
refused requests for information on the precise extent of the claims.
In the public eye, though of less importance to government revenues and the
corporate taxpayer, the battle over tax credits reached fever pitch, with MPs
increasingly frustrated with HMRC’s attitude.
Brown ‘solved’ the issue by declaring that the government would not claw back
cash, unless an individual’s income rose by more than £25,000.
Plans for a ‘love-in’ between three of the profession’s biggest institutes
were left in tatters, leaving just recrimination and bad blood between many of
the professional bodies.
The year began with the ICAEW and CIPFA left to rue CIMA’s decision to drop
out of talks for a three-way ‘super institute’, with concerns about the loss of
the management accountants’ institute identity and qualification proving to be
fundamental sticking points.
Those for and against the proposals went into public relations overdrive as
the October vote approached, with the ICAEW receiving criticism for spending
over a million pounds on its campaign. However, the UK’s most senior accountants
clubbed together to sign a letter backing the merger.
Ultimately, the vote fell narrowly short of the two thirds required by both
sets of members. CIPFA voted heavily in favour, but only 65.7% of the ICAEW
members who voted were in favour of the plans.
ICAEW chief executive Eric Anstee has vowed to keep integration alive, while
insisting that controversial plans to change the institute’s name to the
Institute of Chartered Accountants will continue, much to the anger of ICAS. The
ICAEW’s ditching of CCAB collaboration on continuing professional development
also raised eyebrows.
With rumours abounding that the ICAEW is approaching a deal with the
Institute of Financial Accountants on ‘further collaboration’, expect more
rivalries to boil over into 2006.
On a more positive note, the year ended with the institutes banding together
under the CCAB banner to lobby the Treasury successfully for a tax spreading
relief over the introduction of abstract 40 – the clarification of revenue
recognition accounting rules that was feared would collapse hundreds of firms
and small businesses under the weight of a one-off tax hike.
After much anticipation, international financial reporting standards finally
went live, while the profession heard plans to have a cap on auditors’ liability
by the summer.
January also saw Vodafone announce that IFRS would boost profits by £6.8bn
and KPMG revealed its revenues had risen by only a modest 6% during the course
of the year.
Deloitte obtained an interim injunction against Accountancy Age and the
Joint Disciplinary Scheme over the publishing of complaints relating to Capital
AstraZeneca revealed it would cost ‘tens of millions’ of pounds to implement new
US internal controls legislation. MPs demanded that the National Audit Office be
given access to the accounts of the Queen and Prince Charles.
The company law reform white paper was published with auditor liability
limitations, and accountants agreed partners should sign off on audits.
The Budget attempted to decrease red tape for small businesses and the
chancellor moved to head off the encroachment of the European Court of Justice
on UK tax law.
Deloitte asked staff to work a 50-hour week during busy times.
Equitable Life’s £2.6bn claims against its former auditors Ernst &
Young opened in the High Court. Deloitte’s injunction against Accountancy Age
and the JDS was thrown out.
The BBC announced it would cut its finance department by two-thirds.
Accountancy Age revealed that fraudsters were stealing the identities of
accountants to legitimise the accounts of bogus companies.
Dynasty star Joan Collins was sued for £36,000 by Mayfair-based accountants
Citroen Wells. The Financial Reporting Council expressed concerns that it might
not be able to do its work if it became subject to the Freedom of Information
The profession received a boost from the Queen’s speech, which placed
liability reform firmly on the legislative agenda.
The FRS was back in the news when it concluded there were ‘no systemic
weaknesses’ in the work of the Big Four firms.
In court, Equitable Life added another £100m to its claims against E&Y,
only to drop it four days later.
In the US, the Supreme Court overturned Andersen’s 2002 conviction for
obstructing justice the charge that caused the disintegration of the firm.
Tragedy and violence rocked London, as suicide bombers killed 52 people. Staff
at Morley Scott received counselling after helping victims on the bombed bus in
Meanwhile, newly released Inland Revenue papers revealed tax inspectors in
the 1960s were divided as to whether the financial dealings of James Bond
creator Ian Fleming amounted to ‘tax avoidance’.
Deloitte hit the headlines once again, when accountancy watchdog the AIDB
announced an investigation of the firm’s work as auditor at MG Rover.
In tax, it emerged that small companies could face inheritance tax charges,
even when no one had died. Tax was also bad news for KPMG, as the firm faced
accusations that it had sold abusive tax avoidance schemes in the US.
Equitable Life’s case against E&Y finally collapsed in the High Court, and
the firm claimed it had no disciplinary case to answer. The popularity of the
Big Four as employers was unharmed by their court travails, however, as they
revealed record levels of graduate recruitment.
HM Revenue & Customs launched a new campaign to beat VAT avoidance.
The ICAEW and CIPFA finally saw their plans to merge scuppered by a
poll of members in which the proposal lost by just 540 votes.
Meanwhile, the government extended its anti tax avoidance measures to cover
City bonuses, as one of HM Revenue & Custom’s top men claimed that tax
avoidance would be completely stamped out by 2008.
At the biggest Accountancy Age Awards so far, Olympic bid FD Neil Wood was named
Personality of the Year, while E&Y chairman Nick Land scooped up the prize
for Outstanding Contribution.
In court, the action by liquidators from Deloitte against the Bank of
England, claiming that it failed to protect the interests of BCCI investors,
collapsed after 12 years.
The government shocked the profession by dropping the mandatory operating and
financial review. The move prompted much confusion, and the Financial Reporting
Council insisted that an OFR remained best practice in its view.
The chancellor caused further consternation in the pre-Budget report, which
will push corporation tax over the £50bn mark for the first time.