REVIEW OF THE YEAR - The best of 1996

January

1996 kicks off with ACCA confirming its New Year resolution to quit the Joint Disciplinary Scheme. The association, (which pays around u850,000 of the JDS’s annual costs) gave its two partners – the English and the Scots ICAs notice last July that it had had enough of paying for a scheme that it hardly ever used. ACCA says it has not referred a case to the JDS for more than a decade, although it has to pay around #850,000 every year towards its running costs. Prognosis for the JDS’s survival in its present form looks bleak as ACCA says it will not rejoin any disciplinary regime that is not pan-professional and proven to ‘have a substantial independent element’.

The English ICA suffers the first of two serious knock backs of 1996, losing an egm on its plans to introduce optional papers to its examinations programme. John Cook, a Wirral-based sole practitioner, who took on the institute by calling the egm, says the rejection of the optional exam papers showed the need for wider consultation on any future planned changes.

Andersen Consulting scoops its biggest ever UK contract worth u344.5m as Sears outsources its accounting services and information technology.

Under pressure after unveiling weaker than expected half-year results, Sears expects the deal to result in ‘substantial rationalisation’ among internal staff numbers and a #20m-#25m saving by 2000.

High street banks mount an assault on the accountancy heartland by launching a new direct telephone tax advice service. NatWest is planning to launch a range of new taxation services to exploit the self-assessment revolution and Barclays has recruited hundreds of new staff for its new phone service based in Peterborough.

February

History is made. KPMG becomes the first of the Big Six to throw open its books to public scrutiny. Among other hitherto unknown secrets revealed is the remuneration package of senior partner Colin Sharman: #740,000 a year including profit share and pension payment. The figures also reveal a 28% rise in group profits on gross fees up 6.8% to u588.8m. KPMG’s dramatic move, following the incorporation of its audit arm late last year, is a first step before the firm publishes its audited accounts next year.

Harrods chairman Mohammed Al-Fayed launches an unprecedented attack on the audit profession – interested ‘only in their fees’ – and announces plans to set up a new corporate watchdog to clamp down on the ‘haphazard’ current system of regulation. The profession is deeply unimpressed.

Merger talks between the English ICA and CIMA collapse, destroying any future attempts at rationalisation ‘for a decade’ say the presidents of both institutes. CIMA members were all for it, according to questionnaire responses, but only 36% of their ICA colleagues voted for the marriage.

This leads to accusations that the ICA council has once again misread the mood of the people it represents.

The Law Commission, chaired by Professor Andrew Burrows, publishes a sweeping rejection of the profession’s call for reform of joint and several liability. But leading firms cling to hopes that the DTI, the final arbiter, is keeping the door open after it grants a fresh three-month consultation period.

Ernst & Young launches a paper aimed at rallying the professional troops to attack the Accounting Standards Board’s draft Statement of Principles.

The firm labels proposals on valuation ‘half-baked’ and the overall framework ‘fundamentally misguided’.

March

A row brews that will rumble on into the summer over Ernst & Young’s criticism of the ASB’s Statement of Principles. The board’s chairman David Tweedie lays into E&Y’s criticisms by saying that it had ‘all the vision of the mole and the eloquence of a whoopee cushion’. But the firm retorts that the criticism emanates from what had previously been a ‘silent majority’.

Accountancy Age predicts serious trouble for the Revenue over its proposed formal system of pre-transaction rulings. Tax accountants round on it for taking an unfortunate tone that is ‘distasteful to say the least’.

The Revenue angrily denies suggestions that it plans to charge for obtaining informal rulings. Two weeks later, deputy chairman Steve Mattheson admits this will happen after all.

Deloitte & Touche’s handling of the BCCI liquidation comes under fire after a Luxembourg court report claims the firm has overcharged for its work. Fees for the first six-month period came to #2.6m, about #1m too much it says. The BCCI job kept the firm’s earnings throughout the recession close to pre-slump levels, unlike Big Six rivals which were forced to slash headcounts.

April

The thorny issue of self-regulation draws fierce fire from key members of the English ICA after a very public dispute over the exact status of the proposed Review Board. Deloitte & Touche admits to long-standing reservations, as do Grant Thornton and Ernst & Young. Coopers, however, proves to be the stick in the mud, describing the proposals as a ‘sensible compromise’.

Public debate over corporate governance is in full swing when it emerges that ACCA’s feisty chief executive, Anthea Rose, earns a tidy #100,000 in salary, benefits and pension contributions. ACCA is the first major accountancy body to disclose salary levels of its most senior staff. The earnings of English ICA top dog Andrew Colquhoun remain a secret, while CIMA will only say it is debating the question of whether or not to publish.

Non-Big Six firms continue to lose out in the FTSE-100 audit market.

Clark Whitehill loses its prestigious Woolwich Building Society audit in early April, two weeks after the very public sacking of society chief executive Peter Robinson. The dismissal, giving joint auditor KPMG free rein, comes after a routine internal audit prompts allegations over the misuse of company expenses and assets.

Accountants’ efforts to explain possible tax planning scenarios under a future Labour government backfire after shadow chancellor Gordon Brown accuses the profession of peddling rumour, innuendo and ‘Tory lies’. Brown’s attack is believed to have been prompted by KPMG’s decision to hold a series of tax seminars warning about the impact of a future Labour government.

In the ensuing chaos, most firms cancel public seminars, replacing them with a round of highly secret events for clients only.

May

Accountancy Age discovers that Customs & Excise is planning retrospective legislation to block a ‘potentially crippling’ flood of VAT recovery claims in the wake of the department’s Court of Appeal defeat by furniture retailer Primback. Customs’ potential loss is estimated at #5bn.

The English ICA is considering a radical overhaul of constitutional procedures in a bid to stop a repetition of several embarrassing policy defeats already suffered this year. Peter Gerrard, former senior partner at solicitors Lovell White Durrant, is called in to lead the review.

Secret negotiations between ACCA and the English and Scots ICAs pave the way for Son of JDS. A working party is set up to tackle the scope and objective of the disciplinary scheme, opening the door for ACCA’s return after it withdrew, taking u850,000 funding with it, earlier in the year.

A deluge of negative comments look set to force the Inland Revenue to abandon plans for a system of paid-for pre-transaction rulings. Business objects to the loss of the current free and informal rulings system.

June

The UK’s top 100 companies are paying 0.5% more for statutory audits than last year, but their auditors’ earnings from add-on services grew by more than 9%, research by Accountancy Age reveals. KPMG client NatWest tops the audit league with total fees on #15.6m, including u11.5m in add-ons.

Andersen Consulting is set to divorce its audit and consultancy partner Arthur Andersen as part of a radical review of the US-based organisation’s worldwide operations. Sources close to the firm state profit-sharing concerns and increasing rivalry as the main factors behind the planned split.

Deputy Prime Minister Michael Heseltine is keen to meet Big Six senior partners to thrash out a solution to the thorny problem of limiting liability.

Accountancy Age learns of Government plans to examine the potential for reform of the joint and several liability system.

Big Six firms mount major campaigns to hang on to newly qualifieds in the face of big money offers from industry and finance. Lucrative contract offers are tempting high-flyers to desert the profession in droves.

July

The future of Wickes auditor Arthur Andersen is thrown into doubt as shares in the DIY retailer are suspended following the news that its performance has been overstated because of misbooking profits. Contracts involving dozens of suppliers were responsible for Wickes exagerating its profits by at least #20m last year.

Sir David Tweedie and the Accounting Standards Board are forced to admit that the Statement of Principles must be rewritten following Ernst & Young’s successful ambush. The SoP generated a record 179 responses, but Tweedie insists that current cost accounting is not on the agenda, and that the substance of the report will not change very much. ‘The debate was somewhat hijacked and went off in a different direction,’ he says.

English ICA chief executive Andrew Colquhoun writes to the Privy Council to try to scupper ACCA’s attempt to allow its members to use the word ‘chartered’.

The States of Jersey legislative chamber approves LLP legislation in principle by a narrow 25-19 majority. Deputy prime minister Michael Heseltine is preparing a ‘quick fix’ plan for limited liability partnerships, a dramatic policy shift reflecting Government concern about Ernst & Young’s and Price Waterhouse’s plans to move to Jersey.

Big Six firms react with disappointment, but little surprise, at the European Commission’s green paper on the role of auditors, which concludes that no action can be taken at EC level to deal with the liability problem.

The Government imposes an immediate ban on VAT claimants recovering money from Customs & Excise for cases that are more than three years old. The move is an attempt to stop a huge funding gap opening up in the wake of a number of significant courtroom disasters for Customs.

August

Andersen Worldwide scraps plans to hive off Andersen Consulting as a separate company. An alternative, to split the group into small ‘market focused’ units, is criticised by insiders for its failure to address the problem of the profit-sharing arrangement which favours Arthur Andersen partners at the expense of those in Consulting.

City law firm Allen & Overy raises doubts about whether the courts will allow Jersey-based LLPs to limit their liability. Clark Whitehill starts forging links with the Isle of Man, paving the way for a second – and cheaper – offshore LLP haven. The firm is reportedly advising the Manx government on new legislation, which would probably offer a quid pro quo of extra disclosure in return for a reduction in the #5m bond required by Jersey.

National Power announces that finance director Brian Birkenhead is to retire, though he will remain as chairman of the 100 Group of Finance Directors.

Legalisation of brothels would yield a #s5bn tax bonanza for the Government, according to Chantrey Vellacott’s Maurice Fitzpatrick.

KPMG – the first Big Sixer to publish plc-style accounts – appoints Grant Thornton as auditor. The National Audit Office was first choice but says: ‘We are not registered to audit companies so the talks folded.’ Kidsons Impey and one other Group A firm are thought to have tendered.

The English ICA is criticised for giving bad advice to its members on money laundering laws. Practitioners who fall foul of the legislation may find themselves in jail.

Retailer Dixons Group says in its annual report that it is continuing to ignore some of the Greenbury recommendations on the structure of remuneration committees.

Michael Gibbons, a former senior partner with KPMG, is appointed private secretary and accountant to Diana, Princess of Wales.

September

Former Touche Ross tax partner Alfred Williams is at the centre of a major u16.5m fraud scandal on Jersey involving Cantrade Private Bank Switzerland.

Williams is charged with 21 fraud counts surrounding allegations that he audited currency trading figures claiming false profits.

The breakdown of controls at the asset management arm of merchant bank Morgan Grenfell prompts calls for auditors to take a wider role in protecting investor and shareholder funds. Leading professionals fight back denying a decline in the quality of their work despite ‘cut-throat’ competition.

Confusion grips Customs & Excise officers after a directive placing a blanket ban on all VAT pay-outs under the new three-year rule is issued and then withdrawn within hours.

The six leading accountancy bodies agree proposals to establish a Review Board to oversee the accountancy profession. A press conference, to trumpet the publication of a consultation paper by the six institutes, descends into farce as CIMA decides to wreck proceedings by publicly rubbishing the working party’s plans for the future ownership and control of the Auditing Practices Board. CIMA says the APB should be put under the aegis of the Financial Reporting Council. Chris Swinson, English ICA vice-president and the working party’s chairman, is left shocked and confused by his unexpected public mauling.

October

Price Waterhouse’s auditing future with troubled property consultants Chesterton International comes under threat following the discovery of ‘serious accounting errors’ worth #900,000 that force its chief executive’s resignation. This year the firm raked in u126,000 in audit fees and u199,000 in knock-on business. PW survives, however, following a vote of support by the audit committee.

The UK Accounting Standards Board fails to block proposals for an international accounting standard on deferred tax that rules out the current UK practice of allowing partial provisioning. The International Accounting Standards Committee’s decision threatens to isolate the UK standard setter and prompts calls for the ASB to be clear about where it stands in relation to international standards.

Coopers & Lybrand is forced to rethink its strategy on opening a UK law firm following the shock departure of almost the entire tax law team which was to form its nucleus. ‘It leaves the road wide open for Ernst & Young to beat Coopers,’ one of the remaining lawyers admits.

Price Waterhouse succeeds Andersens after the latter resigns as auditor at Wickes. The troubled DIY retailer has been under investigation by PW and solicitors Linklaters & Paines because of its u50m profit overstatement.

The business was worth #260,000 in audit fees and another u436,000 on non-audit work to Andersens.

Hundreds of small and medium-sized practitioners face cuts in income following demands by the Inland Revenue that self-employed workers in the construction industry, estimated at 400,000, must shift to direct employment.

November

ACCA shoots itself in the foot. Professor Prem Sikka calls yet another egm at the association. The vote goes against Sikka and just as President Langard and chief executive Anthea Rose reach for the Champagne bottles to celebrate, vice-president Jim Waits goes and puts his foot in it up to his neck. In a wild and vitriolic speech, Waits accuses Sikka of anti-semitism and academic sleaze. He caps off his performance by saying that Sikka should set up his own body The World Association of Non Chartered Certified Accountants.

The Big Six file an agreement with the Office of Fair Trading and the European Commission to cap liability for due diligence work to the value of a deal or u25m.

The ASB’s mooted SAYE programmes come under fire this week. Roger Ager, Tesco company secretary, challenges the proposal as Tesco could be hit by a u10m SAYE profit and loss charge if the change proceeds. He claims: ‘We have had very little notice or discussion and would have liked proper and adequate debate.’ The ASB decides to extend its examination of the accounting treatment of SAYEs into the new year after the huge outcry.

The High Court rules that Customs & Excise’s refusal to honour payments agreed before the three-year rule was introduced is illegal.

Kenneth Clarke launches his ‘Spend and Save’ initiative in an effort to recoup #6.7bn lost through tax avoidance. The profession groans. ‘It’s disgraceful how they can blur the distinction between tax evasion and legitimate tax avoidance,’ says Mark Lee, Clark Whitehill. The PRP tax relief cut proposal is greeted with similar delight.

December

Martin Brown, Customs’ director of VAT policy, sends a senior staff member to the Institute of Fiscal Studies to aid a study of tax avoidance. He defends the decision, aimed at bolstering the anti-avoidance measures in the Budget.

Ernst & Young becomes the second Big Six firm to publish its financial affairs in a full report and accounts. Its 12% rise in net fee income rank it number four in the league table of UK accountancy firms. Pannells follows suit, the second Group A firm to do so.

WEDDED BLISS

This has been the year of the big money divorce. Charles and Diana, Fergie and what’s his name, Bob and Paula – they’ve all been at it. And they all have high profile solicitors. And low profile accountants. But don’t be fooled. The suits – quiet men with short haircuts, Armani and big anonymous Mercs (S-class, blue/black – mushroom leather) – they’re the ones running the money. The silent ones, as we pros know them, have their hands up everyone’s backs.

These are the guys who quietly fix the wife. Who are paid by some husbands just not to get involved. It’s an anorak’s paradise. It’s the world of the millionaire’s defence: ‘Don’t bother working out what I’m worth, because I can meet any settlement that the court decides’. And of accountants’ fees with lots and lots of zeros on the end. And we’re not talking instalment plans here or no VAT if it’s cash.

It’s the promised land for us hack litigation support accountants who spend our lives knocking about Runcorn County Court hoping that the judge will move the case to Stockport because Stockport’s the big time (the town has a BigUns Ribs next to the court that does the full monte for u1.99 week days with a free diet Coke). And that’s another thing. In our world, Coke means Coke. Brown runny stuff. It won’t stay in a line.

Accountants doing matrimonial are always for the wife. Husbands’ mid-life crises (they start at 30 in Runcorn) are always sorted by bunking off with the bimbo. And that leaves a dumped wife spitting feathers. Enter our hero.

There’s a standard format to turning over the husband and I reckon we could show the London suits the way home here. You see, some of it doesn’t really change. Watch the credit card statements around the bimbo’s birthday and see the heavy debits. It’s just that they’re going to be Tissot not Timex, La Croix instead of Littlewoods and Daphne’s not Dunkin’ Donuts.

And we could lead the way on the wife’s needs allowance. No more of those careful lists of household bills, pharmaceutical requirements, six-monthly manicures, facials and split ends. Now it’ll be the regular liposuction, the Harvey Nick’s account, the driver, The Lanesborough (dump the Travel Lodge) and a special allowance for the habit. And it’s got to be good stuff mind, no junk.

It would be paradise for those of us who spend our ancillary relief work trying to screw a wife (sorry about that) down to less than u20,000 per annum spendable, particularly when she’s still hopping mad about the two tills, the suitcases to the Isle of Man and the bung that she used to get weekly. In readies.

So, go to town, add a few noughts and then go for the husband’s jugular.

Or something like that.

Our only problem, if we move into the big league, is dumping big Eddie.

Big Eddie comes from St Helens and he does matrimonial surveillance work.

Well, he calls it that. His idea of sophisticated eavesdropping is a pint glass (straight, no handles) against the wall. Empty, mind. He’s fallen asleep outside more Happy Eaters than we can remember and he still has to park on a hill. We can’t see him slipping into Daphne’s undetected though he doesn’t always wear the bike clips now that he’s got the Lada and we’ve persuaded him to bin the cap. Don’t even ask about the pigeons.

On second thoughts, though, maybe we should stick to the small money divorce after all. Staff loyalty does count, and we’d miss Eddie. He works cheap and he does turn out on a cold night. And we’d probably be useless in those cases where the drinks bill runs into thousands, annual cost of dog similar. What do we know about Neckar, Branson (pickle family?) and Quaglino’s? Could we price in the private jet, the Polo pack (?) and the shoot with HRH and Jackie? No. Maybe we’re better off dealing with skimmed takings, stashed cash and Runcorn County Court on a wet Monday.

Who needs the big money cases when there’s always legal aid? (Joke).

It’s actually wet every day at Runcorn County Court. But a good anorak keeps the worst out.

John Malthouse is Principal of Malthouse & Co

QUOTES OF THE YEAR

‘It has all the vision of a mole and the eloquence of a whoopee cushion’ Sir David Tweedie on Ernst & Young’s response to the Accounting Standards Board

‘I’ve been rushing around with a brush and shovel ever since the (Nick Young) fraud came to light’ Jim Gemmell, Clarke Whitehill senior partner

‘If they want to make money by misrepresenting us, that is up to them’ an aide to Gordon Brown on accountancy firms’ ‘bias’ against Labour

‘The younger a chartered accountant is, the more he lacks testicular capacity’ Stephen Bland on young accountants’ lack of fighting spirit

‘I will continue to pay UK tax on whatever meagre earnings I receive’ PW partner John Whiting on the possible effect of Jersey LLPs

‘Why doesn’t the EU deal with real issues? Who cares whether custard creams have got custard or cream?’ A Eurosceptic response to an English ICA survey on the bugbears faced by small businesses

‘Why Jersey? Most people have never heard of it and think we’re off to New Jersey’ John Rink, managing partner of City law firm Allen & Overy, urging a rethink of Big Six plans to move to Jersey

‘Football is an industry of two haves: the haves and the have-nots’ Gerry Boon, head of Deloitte & Touche’s football industry team, on the financial gulf in British soccer

‘The ICA has elaborate listening techniques, but hears very little’ Michael Snyder of the LSCA

‘If you ran someone over at the traffic lights you could get fined less’ Richard Murphy, partner at Murphy Deeks Nolan, on the Inland Revenue’s powers to punish misstatements under self-assessment

‘You mustn’t quote me. I don’t want to provoke a visit from the JMU’ North London accountant, too afraid to give his name

‘It’s like homosexuality – everybody agrees it’s an acceptable alternative, but nobody is arguing to make it compulsory’ Jamie Borwick on issuing non-voting shares

‘All those bloody fools in the Bank of England are trying to turn off the recovery’ Professor Patrick Minford on alleged attempts by the banking fraternity to choke economic growth

‘I don’t think it’s fully thought through by the Government – which is par for the course’ British Airways CFO Derek Stevens on the Budget’s capital allowances

MAD COWS …

1996 will long be remembered as the year when ‘mad cow’ became rather more than just a dubious term of endearment.

Unfortunately, while BSE remains a political football, the full impact on the industry can only be guessed at. The negotiations within the UK and Europe are intense and the longer they continue the more damage will be done and the further outside the storm’s British epicentre it will spread.

The crisis has resulted in the mooting of several prospective aid packages and slaughter scheme. But it’s the selective cull – the slaughter and removal from the food chain of all animals related to infected animals – that has hit the headlines: the total number initially identified was 47,000 projected to rise to 120,000 by April 1997.

The accounting and taxation implications of BSE are legion. Year end valuations, for a start. Many farming businesses have financial year ends on 31 March or 30 April. The public concern over BSE has resulted in a zero market for some classes of livestock at these times.

It’s common to value home-bred or substantially home-bred animals at the year end for tax purposes at 60% of their market value as an estimate of their cost of production. Because nothing is selling, the Inland Revenue will accept one of the following as the market value of stock during the period between 20 March 1996 to 31 May 1996, both dates inclusive: the compensation that will be paid on the slaughter of the animal, 1 ECU or 85.66 pence per kilogram liveweight plus the relevant top up payment, set initially at 25 pence per kilogram.

(An adjustment will be necessary for the change in weight of the animal between the balance sheet date and the date of slaughter); the compensation rate per kilogram times the estimated liveweight of the animal at the balance sheet date; or the latest normal market value prior to the announcement by the government on 20 March 1996, less 20% for beef cattle, 30% for cull cows and 40% for bull calves born to dairy cows. Deemed cost can then be calculated as 60% of the calculated market value.

Many farming business with accounting year ends prior to 6 April 1996 will be half way through their two-year period and the valuation will be important. A low one will reduce the profit but only 50% of this reduction will get tax relief, unless a tax loss is made. As the market has recovered to some extent, the additional amount will be subject to tax in the following year and the farming business will have lost out on up to 50% of the reduced value in calculating taxable profits. Averaging and cessation rules can also be considered for tax planning.

Compensation payments for the compulsory slaughter of trading stock (ie those not on the herd basis) are subject to special rules. Extra Statutory Concession (ESC) B11 allows the compensation to be treated as trading income for tax purposes and to be spread over a three year period following the year of slaughter. The Inland Revenue has indicated that ESC B11 does not apply to the Over 30 Month Slaughter Scheme as the compensation is not compulsory and does not relate to whole herds.

If a policy of compulsory slaughter of herds is introduced most farming businesses will be on the herd basis and the normal rules will apply.

For those farmers that aren’t, subject to the rules, an opportunity is given to elect for the herd basis in respect of that class of animal.

The impact on individual businesses has varied considerably depending upon their enterprise mix. Some farmers are being positive and stocking up with beef animals and dairy heifers on the assumption they’ll be in short supply next year and will therefore command premium prices. Meanwhile the political debate continues.

Gary J Markham is agricultural consultant at Grant Thornton

… AND ENGLISHMEN

One summer evening in early July, a young footballer stepped up to the penalty spot in the closing shoot-out of the Euro 96 semi-final match between England and Germany. He missed.

And Germany went on to win the cup.

It was Gareth Southgate’s ultimate ‘bad kick day’.

The luckless Southgate plays for Aston Villa, one of 20 clubs that make up England’s Premier Football league. According to a survey by Deloitte & Touche, the turnover of the Premier League for 1995 was around u323million, 34% up on the year before. What has really fuelled this massive increase is the burgeoning income from ‘sidelines’ like television rights and the sale of merchandise – from the standard team strip to Manchester United’s own brand cola.

The 20 clubs as a group managed to break even in 1995 with profits to the tune of u6.3m, although this disguises Manchester United (u20m), Tottenham (u5m) and Chelsea (u3m)). Many are still privately owned, although some are now quoted on the main or satellite markets.

Of particular interest to the analysis of the Southgate penalty miss is the whole question of the market value of football players. A player’s value, as with anything else, is determined by a myriad of factors including overall market conditions and the individual’s recent performance. It seems unlikely that a single ‘bad kick day’ would significantly affect his immediate value. There might well be rather less tolerance for a bad kick month.

A player’s market value on the accounts has to be set against the absence of any official or unofficial standard accounting policy. By way of example, according to their respective 1995 accounts, Tottenham, Chelsea and Manchester United do not reflect the market value of their players in their accounts; instead, they simply calculate the difference between the transfer fees paid and received and flow the resulting net figure through as a debit or credit to the profit and loss account.

There is a tendency towards not recognising the value of the players in the balance sheet, partly as a result of the European Court of Justice decision in the Bosnian case which effectively prevents a transfer fee being paid when the player moves from one club to another, either during or at the end of his contract. Where the player asks to move, the club normally takes the whole of the transfer fee; while if the club initiates the move then around 15% of the transfer fee goes to the player.

So in terms of Southgate’s value to Aston Villa, did the missed goal have any lasting effect? Probably not. In any event, Southgate has scored financially. Out of the missed penalty has come a starring role in tongue in cheek television advertising for Pizza Hut.

Suki Bhurji and Maurice Fitzpatrick are members of the sports industry group at Chantrey Vellacott.