The Year Ahead – Global warning


year of a Labour government will be a busy time for accountants. There are major hurdles ahead for the IT industry, while business optimism is high and it’s D-Day for mergers. By Hooman Bassirian

1998 will be a crunch year for the profession’s six leading accountancy bodies. Despite persistent rumours that the smaller and financially weaker organisations will be forced to merge with a rival to avoid total extinction, the one topic set to dominate the professional bodies’ plans throughout the coming year will be the future regulation of the profession.

The six bodies, led by the English ICA, have been working for the past two years to find an acceptable answer to the growing public disenchantment with the profession’s ability to regulate its members’ conduct and ensure those who break the rules are punished.

The work has been done by a cross-institute working party led by English ICA deputy president Chris Swinson.

The most important element of the working party’s proposals is the review board proposed to police the profession. In theory, the review board will be run by an independently controlled and funded foundation that will have no direct links with the accountancy bodies.

Whether the review board will ever get off the ground will be known in the next few months. Swinson has promised to present a finalised version of his proposals for the Department of Trade and Industry, which has to approve the scheme by Easter to enable the review board to become operational by summer. Swinson originally promised to have the scheme up and running by January 1998.

Outstanding issues, such as the future of the Joint Disciplinary Scheme, the profession’s highest disciplinary body, have yet to be resolved.

The Swinson working party was trying to tie-up the loose ends before Christmas.

The biggest headache confronting Swinson and his team will be finding someone to head the review board. An appointment for a high-profile chief is expected early in the New Year but finding someone suitable has proved difficult. On paper, the review board’s boss will be chosen by the Foundation but individual institutes have put forward their own candidates. Several have been sounded out privately, but sources claim National Audit Office boss Sir John Bourn is a front runner for the post.


By John Stokdyk

1997 will go down as one of the golden years for the financial software industry. But the outlook for the next 12 months will be less shiny. IT professionals will have to mend the potentially catastrophic implications of the year 2000. And as 1 January 1999 looms, companies will also have to face the challenge of adapting their business systems to handle transactions in both the pound and the euro.

Paul Lord, managing director of financial software company Walker, predicts the upper end of the business software market will feel the crunch in 1998. With enterprise application implementations taking from six to 12 months, they will see their licence revenues drying up this year.

‘Unless vendors have adopted the faster implementation times expected in the Windows NT marketplace – typically six weeks rather than six months – they are running out of time,’ says Lord. Consultancy and maintenance will be the diamonds of 1998.

In the mid-range sector, where most of the action is, market researcher Jyoti Banerjee is predicting 1998 will see the ‘big squeeze’. In Banerjee’s view, the international market will eventually coalesce around five international players: Britain’s Systems Union and Sage, the Danish developer Navision, Exact Software from the Netherlands and Great Plains Software from the USA.

Rationalisation in the market could fuel a spate of acquisitions and mergers, but Banerjee suggests the consolidation process has been taking place quietly all along, with fewer companies sharing a growing portion of sales.

Nowhere is this more evident than in the low end of the domestic UK market.

Having absorbed its Multisoft subsidiary into the corporate fold, Sage has opened a gap on its nearest competitors. Sage is attempting to replicate the strategy with recent acquisitions in Germany and France by repackaging all its different software products under the same brand. The first wave of these new products will emerge in January and by the end of the year it should be apparent whether the UK’s leading supplier will succeed in its effort to become one of Banerjee’s international ‘Big Five’.


By Phillip Inman

The government’s determination to keep a tight hold on public finances has spurred companies to think positively about business opportunities in the coming year, despite the high value of the pound and the prospect of even higher interest rates.

The latest economic outlook survey by the management accountants’ association, CIMA, reveals the vast majority of companies believe stable growth will carry on through 1998.

‘The consistent optimism of CIMA members about the economic outlook continues unabated,’ says the report. ‘Among respondents 76% are fairly or very optimistic about the outlook for their businesses for the next 12 months.’ And 64%, the report states, believe the UK economy will remain strong.

The Budget, expected in April, is likely to cause businesses little concern after the Green Budget in November, which confirmed Labour’s desire to please the business community.

One cloud on the horizon is European Monetary Union. It is likely to cause immense practical problems, if only because most companies seem to be ignoring the issue. Surveys suggest few companies outside the FTSE-100 or the financial services industry have allocated many brain cells to thinking about the implications of economic and monetary convergence.

Yet the pace of integration is about to speed up dramatically.

Like a gang of smartly dressed bouncers, the European Council of Ministers is due to decide who is in and who is out of the Euro club in May. Whether or not chancellor Gordon Brown stays outside is irrelevant. Some of our strongest trading partners and rivals will have a single currency. There will be a fully-functioning European Central Bank, a revamped exchange rate mechanism and several ‘pacts’ devised at the Amsterdam Summit – chiefly a stability pact and a growth and employment pact.

If nothing else, companies need to discover if their accounting systems are able to cope with euros. But on a broader level, they will be looking at a different business landscape. The UK will be forced to recognise a more active and interventionist EU with policies designed to keep everyone on the path to the euro, whether they like it or not.


By Jon Bunn

We will soon find out whether the Inland Revenue or tax professionals have been telling the truth about self-assessment. The Revenue has stuck rigidly to its line that it is a success, while the profession has taken every opportunity to knock the tax revamp with a succession of dire warnings about penalties, computer failures and investigations.

All will become clear in the days and weeks after 31 January – the final deadline for 8.5 million taxpayers due to submit new-style returns. Tax agents’ hopes remain high that the Revenue will offer a last-minute extension of the deadline, but Doug Smith, the department’s self-assessment chief, remains adamant: ‘That would be unfair to the millions of taxpayers who have filed on time. We will not be extending the deadline or waiving penalties for late submission.’

UK companies will also be preparing for corporate self-assessment, which comes on stream in July 1999. Businesses with a July reporting date must start preparing a year in advance.

Of more concern is the change in business travel taxation. New rules on triangular travel (from home to meeting to work) come into play in April and will force companies to rethink their expenses policies.

Business car drivers are also likely to be hit – not only by a hike in petrol duties, but also by a long-awaited announcement on the taxation of company cars. John Whiting, Price Waterhouse’s head of direct tax, forecast that chancellor Gordon Brown will either remove the 2,500 mile threshold that currently slashes the 35% taxable benefit by a third or switch to a system that taxes private mileage.

‘By the end of the Budget,’ Whiting said, ‘more company car drivers will be seriously thinking about taking the cash option.’

The Budget also promises to reveal the future of capital gains tax.

Results of a lengthy consultation period were expected in the Green Budget.

Instead of asking for comments on a set of proposals, the government presented a blank sheet. The result? More than 150 submissions and 170 ideas. We must now wait until the spring.

As much fuss is likely to be created by the general anti-avoidance rule (GAAR), a draft of which is due to be published in the summer. A GAAR, which would allow the tax authorities to strike out any schemes smacking of avoidance, is unlikely to come into play until 1999 at the earliest.

Astonished tax experts have given a frosty welcome to government plans to sell off 450 Inland Revenue offices.


By Jonah Bloom

And they’re off: the runners and riders in the 1998 Public Sector Stakes.

This promises to be quite a race, so let’s have a look at their form.

Not many backers for the NHS Trust accountants, some of whom will almost certainly fall at the first. Behind the ‘partnership’ rhetoric of the White Paper are clear signs Frank Dobson would like to devolve power to GPs and community nurses, aligning clinical and financial responsibility. Service contracts will be extended, so instead of re-negotiation at the end of every year they will stretch to three or even five-year terms. And the government is promising to shift as much as #1bn from what it calls ‘bureaucracy’ to ‘frontline’ services. Redundancies look likely.

The Treasury PFI taskforce is looking good under the guidance of new chief executive Adrian Montague, ex-Dresdner Kleinwort Benson globe-trotter.

But he faces several tricky hurdles in the coming year. Although the Inland Revenue and Customs & Excise look likely to sign up for new PFI schemes, one or two of those already in place will be audited next year and another negative verdict from the comptroller and auditor general could be damaging.

The Treasury is unlikely to embrace the Accounting Standards Board’s (ASB) proposed amendment to FRS 5 because it would effectively add the liability for many of the schemes to the Public Sector Borrowing Requirement.

Expect a battle between the Treasury and the ASB, which could end in the ASB compromising on the application of its rigorous ownership tests or the Treasury exempting the public sector from the new rules.

As always, the going will be pretty tough for local government accountants, but those who last the course and fulfil the ‘trust’ placed in them by John Prescott may be rewarded with an end to capping in 1999 – look out for the ‘to cap or not to cap’ consultation paper.

Resource accounting will place government departments under increasing pressure as all will be expected to have prepared resource accounts, as well as the traditional cash accounts, by 1 April. They will not be published, but it is odds-on that one or two reports of problems with the new accounts will leak out. An inflation accounting method is also being piloted. Accountants hope it will be an also ran.


By Phillip Inman

The Bank of England Act should make it to the statute book by 1 April this year. The act will transfer banking supervision to the new Financial Services Authority (FSA) and kick off the transformation of UK financial services regulation.

In the autumn of 1999, when the Financial Regulatory Reform Bill comes into force, eight other regulators will give up their role and hand over to the FSA.

While most regulation experts agree a shake-up of self-regulation in the City is needed, they are concerned the chancellor has created a monster that will prove unmanageable – even for FSA chairman and ex-McKinsey consultant Howard Davies.

Prominent critic Michael Taylor, of Reading University, goes further.

He claims the conflict of interest that has dogged the existing regulators – that they represent the interests of both the buyers and sellers of financial services – will also undermine the FSA.

In answer, Davies has already published a series of documents that set out how consumers and practitioners will be involved in the decision-making process.

This year he will continue to set the tone of the organisation. For instance, he has said he wants the authority to take preventative measures rather than wait for problems to arise on matters such as the year 2000 computer problem.

Accountants are set to get a better deal from the FSA. After the initial shock at the FSA’s decision to regulate their investment business, most will find turnover thresholds have been set high enough to exclude them.

Firms that conduct a large volume of investment business will probably find out later this year that most of the monitoring work has been delegated back to their professional bodies.

Industry and commerce is likely to see further cuts in red tape, but doubt remains over some measures put forward by Department of Trade and Industry boss Margaret Beckett, including the alarming proposal to allow company directors to go ex-directory. Insolvency practitioners have made representations against the plan, which would obscure the identity of directors at a time when they are supposed to take more responsibility for company failures.


By Hooman Bassirian

The European Commission will settle the fate of the proposed mergers between Coopers & Lybrand and Price Waterhouse and KPMG and Ernst & Young by the summer.

The commission’s competition authorities have already received the Coopers and PW merger submissions. And as Accountancy Age went to press they were awaiting KPMG and E&Y’s plans.

Under the EC’s competition rules, it will hold an initial 30-day investigation into each submission. It could then launch a full investigation lasting up to four months.

PW and Coopers were forced to re-submit their plans a few weeks ago, after the two firm’s practices in Sweden said they needed more time to deal with domestic regulatory authorities. The EC is now expected to announce in the middle of this month whether it intends to go for the second-stage full investigation.

The US partners of KPMG and E&Y began voting on the merger in the middle of December. The UK partners will vote this month, with the result being announced in February. Both sets of firms are confident their respective mergers will get the go-ahead from the European and US regulators. What is less certain, however, is what restrictions the commission will place on the firms in business sectors where clients and national competition authorities have expressed concern over an unfair restriction in competition.

In the UK, the Office of Fair Trading (OFT) has so far received more than 50 responses to a questionnaire it circulated last autumn among the 100 Group of Finance Directors on their reactions to the mergers. The responses will be used as part of the OFT’s own submission to the commission during its first stage investigation in January.

It is likely the commission will ask both sets of merging firms to give up some audit clients among the FTSE 100 companies in the UK. The OFT’s submission will be instrumental in determining how many audit clients, from which markets, will come under the European Commission’s axe.

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