Review of the year - Flashback 2002

But we should not be surprised, as an Accountancy Age and PKF football finance survey revealed back in August. That survey told us the debt crisis hanging over British football had got so bad that directors of many clubs had to personally guarantee loans to raise borrowing levels and keep teams alive.

Almost half of the 22 FDs interviewed for the survey, on the condition of anonymity, refused to divulge the levels of interest they were paying on loans. And to rub salt into football fans’ wounds, nearly half of clubs have facilities which are repayable on demand. In effect, the future of many clubs is in the hands of their bankers.

The catalyst to the present situation was the collapse of ITV Digital back in March. The channel had agreed a deal for television rights with the Football League worth £315m, which was agreed at the height of the game’s popularity.

But the slump in advertising revenue, and an abundance of football on television seriously lowered the value of those rights. Football League clubs now face the very real prospect of insolvency.

From a financial point of view, football clubs have not had it so bad since well before the boom years of the mid-nineties. The average value of football shares over the past 12 months has dived by about 40%, and as a result the game is out of favour with the London Stock Exchange.

But the crunch is not likely to come until the end of the 2003/04 season when the Premiership renews its deal – probably with BskyB – over television rights.

Some believe the broadcaster will get away with offering far less money.

Others say that because of the overriding loyalty of football clubs’ fans the contract will maintain its value.

Only time will tell.

Microsoft enters the business software world

The year experts believed Microsoft would stamp its authority on another industry sector failed to materialise. When the Redmond giant snapped up Danish business software group Navision earlier this year, commentators saw it as the perfect companion to US-based Great Plains.

And directly in the sights of Microsoft’s newly created Business Solutions software division would be the current darling of the London Stock Exchange, Sage.

But according to Paul Harrison, finance director at the Newcastle-based group, the arrival of Microsoft has had little, if any, impact. ‘We are not really seeing, two years after the acquisition of Great Plains by Microsoft, any change on the ground in terms of our competitive landscape,’ says Harrison. ‘Neither are we seeing SAP have any impact.’

Bullish words from Harrison, who doesn’t expect this situation to change because all the evidence points to Microsoft and SAP targeting the mid-market.

But walking round the October SoftWorld show at the Birmingham NEC, you would be forgiven for thinking Microsoft had taken over the world already.

Everywhere you looked there was a Microsoft Business Solutions logo, which perfectly illustrated the seriousness with which Microsoft is taking the business software market. ‘I suppose you could say we have been busy this year putting together the company,’ said Simon Edwards, director of Microsoft Business Solutions in the UK.

‘We have been working on polishing up our development plans and product roadmap. There has been a lot of work behind the scenes and under the cover.’

Despite this, Edwards is quick to point out that Microsoft Business Solutions has grown 15% this year, without taking into account the acquisition of Navision and that he was happy with that.

And next year should be more interesting. Microsoft will launch its eagerly awaited customer relationship management product towards the end of next summer.

And as the first real component of its .Net vision, the industry will watch with interest.

Standards

International accounting standards became a reality this year with FDs, IT departments and company boards sitting up and paying attention to the impending deadline and the mounds of work they will have to complete before 2005.

Despite the doom and gloom in the accountancy industry following the US accounting scandals and corporate collapses, the International Accounting Standards Board, led by Sir David Tweedie, saw a silver lining. Now more than ever the world needs a single set of high quality accounting rules which the investor community can rely.

But it still has a crucial battle on its hands to get the US to adopt international rules despite having a former IASB board member, Robert Herz, at the helm of the US standard-setting body, FASB.

But things are on full steam ahead.

Most large accountancy firms now have fully fledged desks dealing solely with information relating to the switch from UK GAAP to international rules. IAS-dedicated conferences around the world have been packed compared to previous years and the IASB has begun issuing the first in a series of new and updated accounting rules.

So despite facing immense political pressure from the US and Europe and often personal threats the IASB kicked off its round of publication of new standards with one of the most controversial of all – accounting for share options.

After years of heated debate, the IASB chairman published plans to require companies to book all employee stock options in the accounts as an expense.

The move is backed by Accounting Standards Board chairman Mary Keegan who is recommending the measure be adopted in the UK by 2004 – a year earlier than necessary.

This was followed swiftly by a second publication this month on accounting for business combinations which has also caused somewhat of a furore in the UK.

Under the plans there would be no option to amortise goodwill, instead it would be tested annually for impairment. According to the standard setter, goodwill amortisation is too arbitrary and analysts are said to disregard the figure in the accounts anyway. The ASB already has reservations over the proposals which it regards as an attempt to solve a problem that exists almost exclusively in the US.

This is just the beginning. Next year will see more new and updated accounting rules on topics such as pensions and financial instruments.

Consulting out, LLPs in

At the beginning of the summer PricewaterhouseCoopers continued its sluggish process to separate its consulting arm. Instead of its announced initial public offering in the US it jumped on the rebranding express with Monday, the new name for PwC Consulting once it was separated from its accounting parent later in the year.

The launch made for confusing press cuttings on the Monday that announced Monday’s launch. A tour of its new website (www.Monday.com) was no more illuminating. The site was rich with flash graphics and buzzwords (think ‘fresh’, ‘proud’ and ‘enjoy the ride’).

Then in a quick turn of events, a sale to IBM was announced clearing the way for PwC to become a limited liability partnership and henceforth publish its accounts by country. PwC has said it is now set to adopt LLP status on 1 January 2003 with a view to publishing fee income by country at the end of next year.

On the back of the publication of its global results, a spokesman for the firm said: ‘If all goes according to plan the firm will go LLP on 1 January 2003’.

The firm had been due to adopt LLP status this year but due to the delayed sell off of its consulting arm it had to put back its schedule.

Unless Deloitte & Touche, which is reviewing a decision to move to LLP, makes a move soon it will be the only Big Four firm not to take the step to adopt this legal status.

In an unexpected move this month Horwath Clarke Whitehill became the first accounting firm outside of the Big Four to announce plans to separate its consulting arm. The new business, to be known as Blue Spark Consulting, will be financially independent of HCW, although it will retain the existing staff of Horwath Consulting.

FDs speak out

This year has been a fairly hectic one for the FD. With the fallout from Enron and WorldCom, the pressure to ensure accounts are properly completed and signed off has given them a lot more to think about than perhaps was previously the case. Yet, as most of the results of our Big Question surveys over the year have shown, they’re still on the ball.

At the beginning of the year, FDs showed their impatience for the arrival of the euro, with 61% wanting a referendum to take place in 2002. This of course still hasn’t happened but the convergence of currency with many EU countries is certainly an issue that FDs would like addressed, especially as European accounting standards are about to be synchronised. In January, half also thought that the UK economy would manage to avoid a recession, which it has just about managed to achieve.

The image of accountants has no doubt taken a battering over the past year or so, and it seems this tarnished reputation has confused FDs somewhat.

Back in February, 69% said they would still encourage their children to take up accountancy as a profession, yet the following month well over half said that they were ready to give up accounting for a new career.

With the controversy surrounding auditor independence we asked finance directors in May whether they would prefer it if an independent body appointed their company’s auditor. This suggestion was dismissed almost out of hand with three-quarters rejecting the idea of external influence and the issues regarding the damage to the industry it would cause.

Despite the issues of integrity, it seems few are willing to pay the price to improve reputations. Despite talk of accounting firms raising fees, 70% in our survey said they would not pay more to ensure the integrity of their financial statement.

The issue of integrity and independence was again thrown into question in October when nearly one in three finance directors said they were unable to be objective about their accounts, although many didn’t actually see this as a problem.

Towards the end of the year the issue of fee padding raised its ugly head, with 80% of respondents expressing a belief that accounting firms padded their bills, although the firms themselves have denied this sort of practice occurs. If fees do rise in the new year, this proportion will increase.

The independence debate

The US Sarbanes Oxley Act was hastily introduced this summer, but has proved controversial from the outset, particularly with regard to its impact on non-US companies that are listed on US stock markets. It has caused such a stir on this side of the Atlantic that European and British politicians hit out at US legislators for ‘overstepping the mark’.

Frits Bolkestein, the European commissioner for single markets, attacked the US government saying ‘Sarbanes-Oxley has been drafted in a rush and it shows. There is such a thing as over-reacting and overshooting the mark’.

Trade and industry secretary Patricia Hewitt stepped in telling her opposite number in Washington to lay off UK audit firms and reform parts of the now notorious Act.

Despite the UK government’s attempts to tone down the US Act, UK regulation of the industry has not been immune from scrutiny. At the beginning of this year Hewitt launched a series of inquiries into the role of non-executives, auditor independence and the structure and funding of the new independent regulation, among others.

Hewitt is set to report on the outcome of these in January. The UK cannot be accused of knee-jerk reactions. It’s over a year now since Enron collapsed and questions were raised over the auditors’ work. And still nothing of any great significance has changed. Nevertheless reform is on the cards.

Contentious debate around mandatory audit firm rotation and the outright ban on providing non-audit services to audit clients could be side stepped if the government moves to give audit committees greater powers.

Sources suggest the co-ordinating group on audit and accounting issues, set up by Hewitt to look at the independence of UK auditors, will not go down the route of rotation or a blanket ban on services. Instead, the trade minister is expected to announce a strengthening of UK ethical rules and audit committees’ powers. One insider predicts: ‘General indications are that if we keep an open mind and look at ethical codes we can strengthen the framework to avoid the threats to auditor independence.’

Most commentators in the industry believe this is the most productive way to ensure independence of auditors. But we’ll have to wait until January at the earliest to find out.