Review of the year – 2007

Alistair Darling

Man of the year? Alistair Darling

Taxing times for HMRC
The last 12 months have been what can only be described as an Annus Horribilis
for HM Revenue & Customs.

Concerns about the effect of overstretched resources at HMRC came to a head
in November when Alistair Darling announced, to gasps from the house, that more
than 20 million individuals’ personal details had been lost on two unencrypted

While advisers warned HMRC’s efficiency drive would further damage the
already fractious relationships between them and the taxman and unions said
morale was at an all-time low, the revelation still exceeded their fears.

And yet the year began well for the taxman.

With its online tax filing systems operating robustly, tax professionals
drove uptake of self assessment online filing for 31 January up to nearly three
million, up almost 50%.
This was despite a mass strike by the Public and Commercial Service Union on
deadline day, in protest at outsourcing, privatisation and plans for another
12,500 jobs to disappear at HMRC, between now and 2011.

ICAEW tax faculty chair Paul Aplin said at the time that advisers had asked
for a system with capacity and robustness which ‘HMRC had delivered’. But just
weeks later he bemoaned its PAYE system, which failed to the extent that the
filing deadline was extended by over a week.

Later in the year HMRC hit the headlines again over its so-called ‘tax
amnesty’, which offered to deal with the mass of information it had on offshore
bank account holders from the five major high street banks.

Accountancy Age found itself at the centre of the non-domicile taxation row,
which erupted during the Tories’ successful party conference. Tory leader David
Cameron quoted Accountancy Age (using figures from The
) that there were 200,000 non-doms in the UK, and the Tories would
introduce a tax on them. Official figures pointed to just more than 100,000,
while the Treasury made the surprising move to suggest that only 15,000 of these
would pay the proposed Tory rate.

But back to the data disc debacle ­ the worst is surely still to come for
Having already lost its chairman Paul Gray, PricewaterhouseCoopers UK chairman
and senior partner Kieran Poynter is leading a review of HMRC’s systems,
controls and processes that could prove costly for others.

IT chiefs await his review nervously, and if he states that the department
needs more resources to function effectively it would put Darling and prime
minister Gordon Brown under serious political pressure.

Poynter could even suggest the unlikely scenario that the two departments be
de-merged, if he finds bringing them together has led to a collapse of
processes. If this is the case, Brown will have some explaining to do.

A spirit of togetherness
It has been a big year for consolidation in practice. The one which captured the
attention of the accountancy world was Grant Thornton teaming up with RSM Robson

Robson Rhodes had jilted previous suitor RSM McGladrey after it was unable to
guarantee funding as the credit crunch started to bite its paymasters in the US.

Grant Thornton proved to be a white knight and according to Michael Cleary,
CEO of the newly formed Grant Thornton UK, the merger would help to break down
those market perceptions of Grant Thornton not being a firm normally associated
with the blue-chip audit market.

‘We are now gearing ourselves to stimulate competition and offer stakeholders
greater choice in this space, ‘ Cleary vowed.

The Big Four might not be shaking in their boots, but KPMG did take steps to
establish a European powerhouse. Its UK, German and Swiss arms combined to
create KPMG Europe, regardless of the Dutch firm getting cold feet and deciding
not to join the party.

In the mid-tier, Mazars and Moores Rowland also went down the aisle creating
a £90m firm while Smith & Williamson’s international network Nexia teamed up
with the global network of Saffery Champness to create Nexia International.

In 2008, the chances of the Big Four turning into the Big Three is remote to
say the least, but it will come as no surprise if there are more mergers further
down the food chain- it’s just a matter of where and when…

Arctic monkey business
‘This is not a test case’, the taxman has repeatedly said about its battle
against the Jones’ husband and wife business Arctic Systems.

But in the end, HM Revenue & Customs effectively proved it was such when,
having lost its battle in the courts, it called on the Treasury to announce it
would change tax law to reverse the decision.

Over several years HMRC fought Arctic Systems over the way it structured its
salaries and dividends across the husband and wife business.

Losing unanimously in the House of Lords, government was advised by the tax
profession not to make a kneejerk reaction. Hours later the Treasury said it
would reverse the Lords’ decision, albeit through consultation.

An Accountancy Age freedom of information request found that the taxman had
no idea what the long-running battle had cost the taxpayer, however a figure of
£500,000 has been suggested as the likely sum it forked out.

Bourn ultimatum
The last few months have been less of a rollercoaster ride and more of a
freefall for Sir John Bourn. One of the nation’s most senior public figures,
charged with making sure that government spending is kept in check, had to
suffer the indignity of having his expenses gone over with a fine-tooth comb
after a £336,000 expenses bill came to light in May.

Sir John was then exposed to a barrage of criticism so fierce that rumours
began to circulate that his position as National Audit Office chief was under
serious threat.

Sir John hung on doggedly, but when his expenses records showed he enjoyed
the hospitality of companies previously under the NAO spotlight – notably BAE
Systems – it appeared to be the last straw.

Ironically, the official reason he gave for resigning from the NAO in January
2008 is that a new Companies Act clause would create a conflict of interest
between his NAO job and his role as chair of the Professional Oversight Board
which oversees practice accountants.

Public Accounts Committee chiefs had been gearing up to haul Sir John in
front of the panel to explain whether his actions had compromised the activities
of the board, and he resigned days before the grilling was due to take place.

Sir John’s troubles are far from over. A revamp of the Financial Reporting
Council’s corporate governance processes, means he and other chairs of
committees will have to submit themselves for re-consideration for their posts.

The worst case scenario might see Sir John forced to step down from his POB
post, but it’s more likely that he will cling on. What is a cast-iron certainty
is that Sir John’s movements will be watched very closely next year.

Rock and a hard place
It turned out that RSM McGladrey was one of the first victims of the credit
crunch as its holding company suffered because of the scale of its sub-prime
mortgage exposure.

The financial epidemic soon turned into a pandemic, racing across the
Atlantic to infect some of the UK’s banking heavyweights.

Northern Rock bosses will regard 2007 as a year to forget. As liquidity
collapsed, its

business model, based on wholesale funding, collapsed too.

In the last week, banking titans representing the UK arms of Citigroup,
Goldman Sachs and UBS had to defend the fact that the vehicles used to snap up
the risk on these sub-prime loans were kept off balance sheet.

Stateside, former SEC chairman Arthur Levitt has gone on record to say that
he thought further writedowns were lurking around the corner and urged the
Financial Accounting Standards Board to close the loophole which allowed banks
to keep these vehicles off their balance sheets.

In fact, debate about accounting has never been far away when discussions of
the credit crunch have taken place.

Banks across the were fretting over the accounting for complex derivatives as
US banks sought to draw a line under the crisis of confidence in the markets.

As UK regulators struggled to deal with a run on Northern Rock, US banks were
reporting third-quarter numbers including new estimates of the value of complex
sub-prime mortgage related instruments.

The market for such instruments collapsed, meaning banks could no longer use
‘mark-to-market’ templates and have had to construct complicated models in order
to report under ‘mark-to-model valuations.’

These models have been open to abuse in the past, notably by Enron

A senior member of the profession issued a chilling warning to banks: ‘The
market is

what it is, and people who try and build their wishes and dreams into
valuation models will find that that is not consistent with the accounting

An accounting rule overhaul looks on the cards which will force banks to be
more transparent, but it may be too little too late as the damage has already
been done- one bank has already been bailed out. Hopefully Northern Rock will be
an isolated case.

Setting the international pace
The international standard-setter could not be accused of having an uneventful

The International Accounting Standards Board has, however, been accused of
several other things during 2007 – of being unaccountable, ignoring its
constituents, undemocratic, selling out to the US and excluding NGOs.

Perhaps the most unprecedented was the row over the segmental reporting
standard, IFRS 8, which rapidly brought on inflammatory comments about the body
from politicians, investors and a host of others.

The standard was adopted wholesale from a US standard.

The result polarised stakeholders, causing its final acceptance into Europe
to be a long and unnecessarily drawn out affair Ð arguably undermining the
credibility of the IASB.

European Parliament MEPs lambasted it for not taking on board the concerns of
its constituents and then finally accepted the standard but warned it to conduct
impact assessments before issuing standards in future.

Certainly it was a year in which the convergence agenda accelerated Ð shortly
after the EU’s acceptance of IFRS 8 Ð when the US Securities and Exchange
Commission gave the green light on dropping the requirement for foreign issuers
to reconcile IFRS to US GAAP.

The US may also soon offer its own companies the choice between the two.

No doubt the body’s stature has increased as more than 100 countries have
agreed to adopt IFRS. Now the IASB is in the process of formulating a process
which would provide accountability to its various stakeholders.

In the meantime, former Dutch minister of finance, Gerrit Zalm – the new head
of the IASB’s trustee committee – is to take his place next January, perhaps to
divert some of the political pressure away from Sir David Tweedie.

Zalm has already set his path, sternly saying he will not accept local
versions of IFRS – as propagated by rebel European constituencies.

Audit choice
The audit profession this year concluded the process of consulting over ways in
which to broaden the choice of audit firms available to publicly listed

By the end of the process, the large firms no longer pretended the lack of
choice was merely a figment of the regulator’s imagination and accepted that the
state of things did indeed pose some risks to the capital markets.

Ideas of opening up ownership of the audit firms have emerged but the firms
seemed reluctant, and dismissed the idea with arguments over the risk of
compromising on auditor independence.

Yet a European Commission study argued that investment by sources outside of
the partners themselves could increase competition and choice and relieve the
risk of failure to one of the Big Four, which would certainly rock the markets
with a ripple effect all round.

Given the current subprime turmoil it is clear this would be entirely

The US is currently wading into the debate, and could move further ahead,
perhaps with proposals of how to open up ownership, while maintaining

But the UK will want to remain in poll position on this one – so perhaps a
further consultation over the details lies ahead.

The cover stories
Debate and controversy about regulation or HM Revenue and Customs may grab the
headlines in Accountancy Age, but the year saw its fair share of one-off
stories. Not least among them the day the Vantis office in Wokingham was struck
by a letter bomb (front page 8 Feb). As it turned out the bomb was aimed at a
client, not the firm, but two members of staff were injured nonetheless. It must
have been the only
time a UK accountancy firm has come under attack.

Big Four firms have recently indicated they are making a significant comeback
in consultancy but in May it was the consultants on the attack. In ‘Consultants
dismiss Big Four challenge’ both Accenture and Gapgemini chiefs accused the Big
Four of lacking breadth in their service lines.

Our Top 50 usually makes headlines and this year was no exception as our
annual survey of the profession revealed that revenues of the biggest 50 had
grown by a staggering £1bn. However the survey also revealed little improvement
in the number of partners who were women or from ethnic minorities.

The environment is on everyone’s agenda so in July as everyone prepared for
the Live Earth campaign Accountancy Age devoted an entire issue to the role of
accountants in battling climate change. The upshot was that accountants may be
much more important than they first thought.

Celebrities also featured in the news. Chat show king Michael Parkinson wrote
off a substantial sum invested in a company used in a plan for earning tax
relief. The company was one of four being investigated by HMRC. Parkinson was
advised on the relief by Vantis.

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