IT has been a year of unprecendented turmoil – so what does 2009 hold in store? Gavin Hinks reads the tea leaves
In July this year Accountancy Age ran the headline ‘Will you save UK
plc?’. At the time we were attempting to propose to readers that they were part
of the solution to the worsening economic conditions and therefore possessed the
skills and knowledge to help politicians find and implement the solutions that
would be necessary.
By October we could very well have written: ‘Will you be saved from the
politicians?’, because of the venom that emerged for fair value/mark-to-market
accounting in the wake of the collapse of Lehmans and the crippling seizure that
gripped the money markets. It has been an extraordinary year.
But how does the profession emerge from this period and what are their
for next year?
This was the year that high politics became preoccupied with accountancy
standards and, especially, the fair value principle. There had been criticisms
of fair value all through the credit crunch as businessmen turned on the
accounting as the reason why their write-downs had been so vast. But the
Lehman’s collapse in September triggered near hysteria among board room
executives and politicians alike as they clamoured to claim that fair value was
at the heart of the problem and if only we suspended it then the global economy
might just be a better place.
The problem was investors liked mark to market and saw it as the simple
medium of telling it like it is. They might concede that it wasn’t perfect, but
it was the best that we had at hand so no point in doing away with it.
Regulators agreed, not least the International Accounting Standards Board,
which has enshrined fair value in its standards. Because of this the IASB became
the target of those who had historically disliked the standard because of what
it did to their accounts, or because of their long standing suspicions of the
project to bring standardised accounting to the world.
In the US politicians proposed emergency legislation to suspend it. If that
had happened then the convergence project to persuade the US to take on IFRS
would have been dead in the water. Emergency bills failed but the TARP bill to
rescue the US economy did make specific demands to review fair value.
However, that was the least of the IASB’s worries. In Europe French president
Nicholas Sarkozy gave every indication of wanting to do away with fair value
accounting for derivatives. This would have buoyed the balance sheets of French
banks and potentially those of the state banks of the German lander. In the run
up to the November G20 meeting there were clear signals that the French were
prepared to attack fair value and potentially isolate the IASB.
It didn’t work. But we go into 2009 with a degree of uncertainty still
hanging over fair value and the IASB.
Firstly, the IASB has been asked for improvements in key areas by the end of
the year. This now appears as a near impossible timetable. Key regulators are
concerned that if the IASB – working in partnership with US standard setter FASB
fails to deliver it will give European politicians, notably
the French, the opportunity to insist, through the European Commission, that
European banks can ignore key elements a so called carve out of IFRS when
accounting for derivatives.
Such an event would once again threaten the future of the international
standard setter simply because its work would be ignored by a key constituent
the EU. The US rulemakers might then wonder what’s the point of pursuing
accounting standards the Europeans couldn’t even buy into.
There is another G20 scheduled for April which means that the New Year could
easily see the IASB under attack again in the run up to the heads of state
There’s a further issue potentially exacerbating the problem. Gerrit Zalm,
the chairman of the IASB’s parent body, the IASC, looks like he could step down
after accepting a new job as deputy chairman of the bank that will be formed f
rom the merger of Fortis and ABN Amro in Holland.
That job will be demanding and potentially create conflicts with his IASC
role which is to ensure that the standard setter is doing what it should be
doing. The IASB needs a big hitting diplomat and canny political operator to
guide it through the current turmoil and losing Zalm, if he goes, will be a
Few topics concern you more than tax and the past year has seen plenty to
chew over. The big one of course was sorting out what would be done with the
taxation of foreign profits.
This was the watershed issue that apparently threatened to send countless
companies looking for new overseas bases with less onerous tax demands.
The consultation was under way but the uncertainty had already driven some
companies to move their base overseas, including advertising giant WPP, grocery
distributer Henderson, Regus and Shire Pharmaceuticals.
But the pre-Budget report saw measures that put the corporate collective mind
The question is what does 2009 hold? Well, the PBR gave us reduced VAT rates
(down 2.5 percentage points) and saw the deferral of a new higher rate of
corporation tax for small businesses and on income shifting for family
The theme here is holding back from raising taxes while business struggles
through the recession. And that is the short term message even though tax
revenues will be dropping as a result of lower profits and in spite of a growing
It will, of course, make Gordon Brown and his chancellor Alistair Darling
vulnerable to attack, but next year should see little change in the tax strategy
except for some tinkering around the edges. This will especially be the case if
the government detects a recovery because it would not want to threaten economic
improvements ahead of the next election.
Indeed, depending on what the economic indicators are like the chancellor may
feel he has to offer even more fiscal stimulus. Just before the PBR this year
many organisations including the Institute of Directors lobbied hard for a
general cut in the corporation tax rate. That’s a demand that could well return
in the New Year if order books dry up dramatically.
The headline grabbing administrations at the moment are
PricewaterhouseCoopers’ partners’ work on investment bank Lehman Bros and
Deloitte insolvency practitioners’ handling of Woolworths. By the time the turn
of the year comes around Woolworths may well be resolved by a sale of the
business, but the work on Lehman is likely to continue well into the New Year.
PwC is running what professional observers believe is the biggest insolvency
in UK corporate history bigger than Barings and bigger than Maxwell. Up to 500
PwC experts have at some time be deployed while the fees could run into millions
each week. It’s complexity means that it will run and run.
As the recession grinds on into the New Year its almost inevitable that we
will hear more bad news about big insolvencies especially in financial
services. Only last week London Scottish Bank went into administration under
Ernst & Young.
If Christmas goes badly retailers will be threatened and if the housing
market continues to crumble then housebuilders could follow.
All this adds up to boom time for the administrators and insolvency
specialists who will attempt to capitalise on failing businesses. Firms will
also hope their business recovery departments are fit enough to compensate for
the revenues that will surely be lost by other service lines.
Key issues to watch out for
Firms face pressure to rein in their redundancy programmes in this downturn
because when they did it during the last economic decline following the dotcom
crash it was enormously difficult to rebuild headcount and expertise.
BDO Stoy Hayward
The firm has explosive issues on the horizon. Firstly, the firm will have to get
its work underway valuing the assets of the nationalised Northern Rock with a
view to compensating share holders. It carries considerable political risk.
Secondly, the BDO Seidman case in the US is likely to conclude. This is the
case that will attempt to demonstrate that BDO International should be liable
for damages against the firm’s US member after it lost a negligence claim of
$500m. All international firms will be watching to see what the implications may
be for their networks.
Our special Barack Obama issue in October highlighted the influence the new
president will have on the profession. He will appoint new people to the SEC and
they will make decisions on fair value and the progress towards the adoption of
international accounting standards. Failure to back either of these would
seriously damage the project to introduce a single set of accounting standards
to the world. We wait to see what he does in power.
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