Review of the Year – That was the year that was

Liability cap delayed again[QQ] In the past year, accountants have continued to warn the business community that another Andersen could be just around the corner unless liability reform is tackled.

Unfortunately, while the business world looks convinced, the government has needed more persuasion.

In fact, the saga of auditor liability was rarely out of the headlines in the past 12 months, and, with no resolution, the issue looks set to rumble on. In July, accountants labelled an Office of Fair Trading review into an audit liability cap ‘sloppy’. Nonetheless, its finding, that a cap would not boost competition or significantly effect the chances of a firm collapsing, proved pivotal.

Come September, trade secretary Patricia Hewitt killed plans for a cap, but offered some hope to auditors by proposing a new regime of proportionate liability on a contract by contract basis. This compromise failed to make it into the companies bill, so auditors’ hopes now hinge on legislation being included in the second, larger companies bill, which may make an appearance in 2005. If not, it will be 2006 before any changes are made.

Accountants began the year reflecting on the costs to their reputations of the Parmalat scandal, which left Grant Thornton and Deloitte battling to reassure clients that events in Italy would have no consequences for their UK practices.

In March, it was the turn of smaller accountancy firms to take a hit when the audit threshold rose to £5.6m, sending the number of firms registering for audit tumbling. The Society of Professional Accountants has said that only 70% of its members are now registered for audit. But full effects were yet to be felt, with 35% considering deregulating next year.

March also saw the arrival of new money laundering regulations. Most slammed the rules as unreasonably harsh, with accountants facing up to 14 years in jail for failure to report.

Some threatened to adopt a ‘shop the lot’ approach to safeguard themselves. The National Criminal Intelligence Service, which receives the reports, spent the remainder of the year denying that it had been ‘flooded’ with submissions.

The regulations also prompted a showdown in September between accountants and lawyers. The latter, it was claimed, held an unfair advantage because they could invoke legal privilege to exempt themselves from the rules when giving tax advice.

Accountancy firms were also given a rap on the knuckles in June when the Commission for Racial Equality warned they must do more to fight racial discrimination, after an Accountancy Age survey found that just 4% of partners came from ethnic minorities.

Insolvency practitioners entered quieter times in 2004, with figures released in August confirming that corporate insolvency was approaching an all-time low. But personal insolvency hit an all-time high as UK consumer debt passed the symbolic £1 trillion mark.

FDs in the news and on the move
Finance directors, it seems, had far more in common this year with football managers than their fellow chartered accountants.

A constant threat of ‘the chop’ and the glaring media spotlight combined to make it one of the most stressful jobs in business today.

While the back-pages of the tabloids are routinely full of tales of (football) managerial woe, in the past 12 months Accountancy Age has been punctuated with stories of FDs on the move (not necessarily on the up) and boardroom shake-ups.

The highest profile mover and shaker of the year, and some would say most infamous, was former Royal Dutch/Shell group finance director Judy Boynton.

She took on the role of CFO in June 2001, before taking a seat on the executive board of directors in 2003. But that was as good as it got for Boynton. She now joins a number of the oil giant’s management executives on the sidelines following its oil reserves debacle in March. The whole affair has led to the formation of a far less complex board structure that should help the company’s corporate governance battle.

With the oil giant’s stakeholders watching anxiously for the dust to settle on the oil giant’s problems, Boynton has taken a more back seat role – continuing to work for Shell in an ‘advisory capacity’.

The whole sorry affair saw the FTSE100 lose one of its few female FDs. And by November, Alison Reed, FD of Marks & Spencer, joined her. Reed stood down as part of a management shake-up that saw its board cut from six to three. She will leave early next year. Only BAA’s Margaret Ewing, Pearson’s Rona Fairhead and Helen Weir at LloydsTSB remain to carry the torch for female FDs in the top division.

Speaking of LloydsTSB, we should not forget serial executive Philip Hampton. The one-man decision-making machine left the financial institution in February after two years, following speculation that he clashed with chief executive Eric Daniels over dividends. Daniels has re-emerged as Sainsbury’s chairman, where his skills will be sorely tested. The retailer has not had a good time of it over the past 12 months, and went through a boardroom rejigging that resulted in the imminent departure of FD Roger Matthews. There’s no rest for Hampton – he recently published a review of how the UK’s national regulators and 468 local authorities enforce regulations on business.

Carlton and Granada’s merger at the start of the year saw a number of senior finance appointments and boardroom reshuffling. Neil Cannetty-Clarke took the top role of FD group finance and strategy.

Selfridges saw former FD and chief executive Peter Williams leave just nine months after filling the shoes of well-respected Vittorio Radice. Another prolific non-executive, Allan Leighton, joined as deputy chairman.

Regulation and more regulation
The year began with corporations struggling to come to terms with a plethora of compliance. The combined code on corporate governance ‘had been in force for less than a month and, as Financial Reporting Council chairman Sir Bryan Nicholson wrote in the first issue of Accountancy Age this year, it was a ‘considerable task’ for company boards to cope with.

The code was an amalgam of the Higgs report on the boardroom, the Smith report on audit committees, and the longer-standing Turnbull guidance on internal control.

But no sooner had it been formulated then it was on the move again. At the launch of the expanded FRC at the beginning of April, Sir Bryan announced that the Turnbull guidance, drawn up in 1999, would be reviewed. The team that eventually took on this task was headed up by HSBC finance director Douglas Flint and has recently issued its first consultation document on the review.

The beefed-up FRC also had a few new roles that were aimed at clamping down on impropriety. The vastly expanded Financial Reporting Review Panel changed its working practice so that it would proactively study 300 accounts, rather than wait for cases to be referred to it.

Throughout the year, the government and the accounting world grappled with the issue of the operating and financial review – due to come into force before the end of 2004.

The OFR, which will look at a company’s strategy as well as its social and environmental impacts, sparked controversy due to the speed of its implementation and for the introduction of the phrase ‘due and careful enquiry’ in the auditors report, which many felt raised too many legal questions.

As the end of the year draws near, the government has relented on both issues, dropping the questionable phrase entirely and giving companies an extra three months to prepare.

Of course, it isn’t just regulation on this side of the Atlantic that is kicking up a storm – the much feared implications of the Sarbanes-Oxley Act are also coming to a head.

Arguments over the ability for the Public Company Accounting Oversight Board, created in the wake of Sarbox, to inspect and discipline non-US audit firms have reached an almost amicable conclusion, with the board introducing a sliding scale of reliance on other oversight systems. It is expected that the PCAOB will rely almost completely on the UK’s current system and avoid unnecessary interference as far as possible.

By far the most troubling aspect of Sarbox has been the introduction of section 404 on internal control, which has laden US-listed companies with resource-straining requirements. This has seen many European companies desperately searching for a way to escape the burden by de-listing from US exchanges.

Taxing times ahead
The past 12 months have been some of the most interesting for tax in recent memory. In particular, the 17 March Budget announcement of a new tax avoidance disclosure regime marked one of the most fundamentally important changes in tax legislation in history.

Accountancy firms, lawyers, barristers and internal company tax departments are now very much in Gordon Brown’s sights as he attempts to fill an estimated £8bn black hole in the country’s finances.

It was, according to some, merely the thin end of the wedge and the pre-Budget announcement of retrospective action was further proof of government intentions. Big Four firm Deloitte called it the most ‘fundamental change in tax law in years’.

But it isn’t the only sea change in tax. The March Budget offered Brown a chance to stop companies benefiting from a zero rate of corporation tax on the first £10,000 of profits. He introduced a 19% tax on dividends instead, to stop a seemingly endless tide of small businesses that were taking advantage of a tax break that the government had itself established.

The 19% dividend tax was just one example of Brown’s seemingly endless clampdown on small business taxation. Section 660, the so-called husband and wife tax, has been a constant theme, culminating in a case heard by Revenue special commissioners in the summer.

This was ultimately lost by the taxpayer – a small IT consultancy company called Arctic Systems – although it has appealed with the backing of the Professional Contractors’ Group.

Intense press interest in section 660 has quietly incensed the Revenue, which fails to see what the fuss is all about. It seems, however, that it is in a minority.

And as if fundamental changes to tax legislation were not enough, we also had the most fundamental change to our tax authorities, arguably in history. The merging of the two departments, to be managed by the former chairman of mmO2, David Varney.

It has taken the government almost 150 years to react to an original recommendation from William Gladstone. And the merged department has immediately paid dividends with the pre-Budget announcement of a Small Business Unit at the Revenue, to be chaired by its deputy chairman, Dave Hartnett. The ultimate aim of the SBU would be a combined return for small business taxation – a massive potential fillip for the community, should it go ahead.

Less positive is the seemingly unending attack from UK plc and Europe on our tax system. Just last week, the government suffered two further blows when Marks & Spencer received a date for its European Court of Justice case with the Revenue, and 15 company groups had their fight with the government referred to Europe.

It is a combination of several factors, including an expected decrease in tax and audit fees, that has led to intense speculation that the big accountancy firms will return to mainstream consultancy.

With a turnover of £10.1bn and a 31% share of the European market – double the size of the second-placed German market – UK consultancy firms should be looking to an even more prosperous 2005.

This is great news, of course, but 2004 has also seen its fair share of disappointments, with several high-profile IT and supply-chain failures and errors within big-ticket projects at Sainsbury’s, the Child Support Agency and the Department for Work and Pensions.

Sainsbury’s has since announced that its head of IT, Maggie Miller, will leave in March next year, while other executive heads are sure to roll in the coming months. This isn’t a good sign, but should serve as a serious wake-up call to the large and long-term projects taking place as we speak.

By far the biggest of these is the NHS National Programme for IT that is being steadily, but ‘effectively’, rolled out ‘within budget’.

If we were to choose one word to sum up consultancy in 2004 it would be ‘transparency’. A lack of transparency was the verbal accusation issued by John Connolly, chief executive and senior partner of Deloitte, when he sparked a clash between himself and the remainder of the Big Four.

With the non-compete agreements running out in mid-2005 and with Nick Land, chairman of Ernst & Young, saying the firm will not re-enter ‘big-ticket’ IT consulting work, it remains to be seen which direction the large accounting firms will take.

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