MELTDOWN – Review 2001

It took just ten minutes one Sunday in October for the judge to sign Railtrack’s execution order. In the simple act of bringing in Ernst & Young as the administrator for the nation’s rail network, transport secretary Stephen Byers created one of the most spectacular corporate collapses the UK has seen.

But it was also the event that perhaps best marks the end of the business year. We come out of 2001 with business collapse and rescue hogging the headlines and we are sure to see more of the same in the New Year.

Railtrack is up there with Barings, ironically also placed in the hands of E&Y, and it is as politically sensitive as the Rolls Royce receivership of the early 1970s.

E&Y has been handed what one seasoned insolvency practitioner calls ‘a poisoned chalice’. Under the 1993 Railways Act, Alan Bloom and his team were appointed ‘special railway administrators’, a post which in essence leaves them in the hands of the transport secretary.

Since then, it has not been clear who would have the final say in the future of Railtrack, though smart money will be on Byers getting his way with a company limited by guarantee solution. The fallout from the administration order will be far-reaching and will suck up accountants’ time.

Such cases always attract the attention of litigators, and with 225,000 shareholders, innumerable creditors and Railtrack directors themselves, the courts could be busy for many years.

The role of Railtrack’s auditor, Deloitte & Touche, has been under scrutiny as there are serious ‘going concern’ issues to be addressed and E&Y itself could be in the firing line for its role as a government adviser during the original flotation of the company in 1996.

Question marks still hang over the quality of Railtrack’s asset register, a document that will become increasingly important as E&Y looks for a way of selling on the company. And Railtrack’s chief executive, CIMA-trained accountant Steve Marshall, won’t go quietly.

Whether Stephen Byers will survive the political storm remains to be seen, and he has certainly not won new friends in the world of public sector financing. In fact for a time it looked like the Railtrack collapse could undermine confidence in the government’s flagship public private partnership policies.

But it appears some behind-the-scenes lobbying has calmed nerves – which will come as a relief to several of the larger firms that have benefited from lucrative public sector work as private sector activity dries up.

If the gods were smiling on E&Y by giving the firm an insolvency appointment that brought in Pounds 2m in the first two weeks, then they evened the score with Equitable Life.

An equitable life?

Just over a year ago Equitable closed its doors to new business after a Lords ruling on the life insurer’s guaranteed annuity rate policies left it with liabilities of Pounds 1bn.

While the firm awaits a letter from Equitable’s lawyers which will set out the ‘serious concerns? that fellow Big Five firm PricewaterhouseCoopers has about E&Y?s audit at Equitable, policyholders are voting on a compromise deal.

PwC incidentally picked up the audit after E&Y stood down ‘in the interests’ of its client, earlier in the year. E&Y has, throughout, maintained a robust stance on its audit at the life insurer, saying that it stands by its work.

But if the firm does not give satisfactory answers to the PwC questions, Equitable has said it will consider legal action. E&Y has complained that at no time during the Herbert Smith investigation was it approached by the forensic accountants at PwC, though Equitable maintained it had full access to all records.

The case has been hanging over E&Y all year and is set to do so for the foreseeable future. There is also the threat of an investigation by the Joint Disciplinary Scheme.

But it is not only E&Y in the firing line. The FSA has carried out an investigation into its own role in the affair. The report, published in October, found serious shortcomings in communication at the new super-watchdog, and Ruth Kelly, the Treasury secretary, announced a far wider review, to be chaired by former accountant Lord Penrose, due to report in the second half of next year.

Overall it hasn’t been an easy year for the Big Five. With last year’s battle with the Securities and Exchange Commission concluded, the firms might have hoped for a less combative year in 2001.

Alas no. The economic downturn has firmly gripped the accountancy industry with announcements of job cuts being the rule rather than exception. In November Andersen announced cuts that will affect around 350 UK staff. PwC has requested 330 voluntary redundancies at PwC Consulting – the second round of job cuts the business has experienced.

Graduate recruits did not escape the culls either. KPMG said it was to shed up to 10% of its consulting staff. E&Y axed 200 jobs in October with the possibility of more to come.

In August, PwC announced a third round of cuts in its US consultancy arm affecting around 800 staff. More staff cuts followed in January and April.

Profits also took a hammering this year. Deloitte Touche Tohmatsu joined the growing chorus of firms to announce a substantial slowdown in revenue growth when it reported almost a 4% drop for the past financial year. In October E&Y posted global results showing that growth had slowed by half.

However, it has not been all gloom and doom. Once again this year saw income in the non-traditional service lines of insolvency, corporate recovery and corporate finance increase faster than the traditional accountancy offerings of audit/accounting and tax.

The future is LLP

E&Y became the first organisation in the UK to convert its business to full limited liability status. The move is the result of a lobbying campaign by E&Y and other firms, including the threat of locating offshore to reduce the firm?s potential liabilities.

But they are not out of the hot water yet, as this month, the Confederation of British Industry predicted things will get worse.

It may have been tough for the Big Five this year but the emergence and extraordinary growth of hungry accountancy-based consolidators Numerica and Tenon has caused the development for mid-tier firms to a degree never seen before.

Both groups, which are floated on the Alternative Investment Market, have emerged to create firms of considerable size. Not only that, but they have forced almost every mid-tier firm to consider their own options in relation to joining or becoming a consolidator themselves.

Numerica launched in July after pulling off its first acquisition, that of London-based firm Jayson Newman, closely followed by NMGW.Then in October Numerica chief executive officer Tony Sarin said that Levy Gee, the driving firm behind the group, would be dropping its brand during 2002. And only this month, Numerica began trading on AIM after raising £30m, with more funds likely to be raised for further acquisition in a bid to reach its target of achieving a turnover of £70m by 2003.

Meanwhile Tenon, the UK?s largest consolidator, enjoyed a fruitful year reaching top ten firm status after acquiring the non-audit businesses of the Lathams Group, Scott Oswald, Jennings Johnson, the Godfrey Allan Group and corporate recovery business of Horwath Clark Whitehill.

Last month Tenon became a top ten firm after announcing four acquisitions worth £67.4m. The money was spent on the non-audit business of the Independent Partnership ? formerly BDO Stoy Hayward?s East Midlands office ? as well as Southampton-based Dhand Hatchard Davies and the London-based Statham Gill Davies Partnership and Livingstone Guarantee.

The group launched its corporate finance arm specialising in deals worth between Pounds 3m and Pounds 100m earlier this month. Its image was somewhat tarnished, though, by the profits warning it issued last week.

Both groups also promise much next year, and the money is available to continue their collective march up the Accountancy Age Top 50 league table.

More mid-tier fun

Despite the deal-making scramble on the consolidation scene the traditional mid-tier had a quieter 12 months.

Mid-tier firms account for one fifth of the fee income of the Accountancy Age Top 50. Average growth among these firms almost halved from 21.4% in 2000 to 11.2% this year.

Grant Thornton and HLB Kidson, having gone public on their intention to merge, found the deal coming very publicly unstuck early in negotiations. Fears that a handful of Kidson’s offices would be superceded by the Grant Thornton network led to Kidsons partners failing to ratify the deal.

Both firms have since turned their attention elsewhere. Kidsons’ national managing partner Ray Greatorex at first said the firm would pursue organic growth. If he was withdrawing to nurse a collective bruised ego, he didn’t for long and by the end of October talks between his firm and Baker Tilly were taking place, a deal that could create a Pounds 150m firm.

Baker Tilly had only recently emerged from abortive talks with Horwath Clark Whitehill, and the former’s national managing partner Laurence Longe was non-committal on the outcome. ‘We have held open exploratory talks with HLB Kidsons. The market is profoundly changing and it would be odd if we were not making such inquiries. However, such conversations do not always lead to a merger.’

BDO Stoy Hayward also faced restructuring this year. The first signs came in April, when 11 partners moved on. By July the firm was discussing its options in earnest: flotation, LLP and a move to a national partnership structure from a regional network are all on the table.

Fee income was up 16% taking the firm just past the £200m mark at its March 2001 year end. But the management line-up underwent changes. Simon Bevan stepped down as Stoys? south-east managing partner, saying he missed client work. And only last week the firm?s Southampton office revealed it was in talks to leave the group.

IR35: a battle royale

The spotlight fell on central government when the now notorious IR35 tax rule found its way to the High Court this year. Nothing in the arcane world of accountancy and tax could match the passion and determination with which contractors attempted to overturn IR35.

Thousands of self-employed contractors, mainly from the IT sector, mandated the Professional Contractors Group to take the case to the High Court to get the hated rule thrown out. Contractors had long battled with the Inland Revenue claiming IR35 would force them to pay much more tax than was fair and would, as a consequence, drive thousands of IT workers to flee the country in search of work.

But the drama really started to mount when the High Court opened its case and the PCG waited for the ruling. Citing the Human Rights Act, the PCG claimed in court that IR35 was anti-competitive and breached European law.

The beginning of April saw contractors pack a room at the Royal Courts of Justice to hear Mr Justice Barton’s ruling. In true knife-edge court drama he allowed IR35 to stand and came down in favour of the Revenue.

PCG members were horrified but walked away claiming a minor victory because Justice Barton agreed with many of their points. But on the substantive arguments the judge could not concur and the Revenue ruled the day.

Angry, and still certain its members had a case, the PCG pushed ahead to seek a hearing in the Court of Appeal. Only recently the contractors’ barrister Gerald Barling QC was once again in court arguing that IR35 contravenes European law.

When the hearing finished the group was upbeat and optimistic that this time it would go the right way for contractors. However, it is uncertain when a ruling will emerge. And even if the PCG fails there is always the European Court of Human Rights. At this rate contractors will enter 2002 still battling their greatest tax foe.

IT: small is beautiful

On the technology front the year 2001 will unfortunately go down in the archives as a year of struggle for the bulk of the accountancy software providers, the last thing many needed after a wretched 2000.

Technology development is suffering due to issues such as euro compliance not bringing about sufficient business to offset the recent problems faced by many, linked with a slowing economy and post Y2K lethargy, not to mention success rates generally being demonstrated only by substantial costs.

Companies have been dogged by cutbacks in research and development, job losses and problems associated with mergers and in the case of QSP, a spectacular collapse unfolded before the eyes of delegates at this autumn’s Softworld Accounting & Finance show.

A BASDA survey during the summer revealed an alarming number of vendors in maintenance-only mode, hotly disputed by some, but no matter how you look at it, that has been the case.

Mergers and acquisitions bring their own difficulties. Navision’s acquisition of Damgaard for example, has created uncertainty because the companies have not yet found a way to merge their technologies, despite claims this brings strengths to the company. Microsoft’s acquisition of Great Plains hasn’t moved forward with any great gusto, but a massive UK campaign set to begin next year, could change this.

The continuing development of the internet continues, while many have been considering the possibility that many companies will be drawn to collaborative computing or collaborative commerce business models.

Meanwhile the fight for market share in the small and medium end of the market looks set to intensify, with the likes of Microsoft, Access Accounts, Hansa and Sage slugging it out. This follows a time when relatively few companies thought the profit at the smaller end of the market was worth targeting.

On the plus side, many vendors believe 2002, particularly the second half, will provide a great deal more to cheer about. Time will tell.

Following in accountants’ footsteps

This year saw Accountancy Age continue to delve into the opinion of UK finance directors with its weekly Accountancy Age/Reed Accountancy Personnel Big Question survey. As usual the results were sometimes surprising, and at others shocking, but they never failed to be fascinating.

In an early survey FDs concluded accountancy was a suitable career option for their children. Reaching the national papers the research found 69% of FDs would encourage their children to follow their footsteps into the profession. One respondent said it was very ‘lucrative’ role leading to the possibility of working anywhere in the world.

In July 83% FDs pointed out they never took ‘sickies’ and in November, 40% told pollsters they would work for free to save their company after the FD of property company Regus took that same measure.

2001 has also seen opinion on the euro evolve. In June Accountancy Age found just 33% in favour of the UK joining the euro. By October opinion had shifted. Our last euro survey found 50% of FDs were prepared to enter the single currency.

The Big Question also highlighted the business fallout from the 11 September atrocities. Just last week one in three FDs, 32%, admitted to have changed their business plans as a direct result of the tragedy.

Accountancy Age surveys also probed the effects of the current economic downturn. With an eye on the crucial issues of the day we asked if companies were pushing ahead with Christmas parties. Four out of five finance directors told Big Question pollsters they still intended to make funds available for a seasonal bash.

AccountancyAge in the news

The redesign of Accountancy Age kicked off a year of unprecedented media attention for the UK’s leading accountancy and finance magazine. The magazine, which circulates to almost 80,000 finance professionals weekly, has gone from strength to strength as national and international newspapers, radio and online media have followed up exclusive stories.

Coverage of stories has ranged from the national newspapers in the UK to the Times of India, the Star of Malaysia, the Adviser in New Zealand, as well as several local radio programmes and specialist TV stations.

Well before the media began reporting on the effects for the UK of the US economic slowdown, Accountancy Age was warning of mounting pressures. This was followed up by a scoop on the successor to the Inland Revenue’s Hector – tea lady Mrs Doyle. Accountancy Age broke the story which was reprinted in most of the nationals, including the front page of the Financial Times. A story about Bill Clinton and whether the Revenue should classify him as an ‘entertainer’ for tax purposes became a front page lead in the Guardian.

Our weekly Big Question surveys polling finance directors on topics as diverse as Britain’s membership of the euro or whether FDs would encourage their children to follow in their footsteps, have consistently received media attention. One of the surveys gave a resounding endorsement of Gordon Brown and his potential as an FD. Almost four times as many voted for Brown over Michael Portillo.

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