Accountancyage.com Latest updates

Corporate insolvency market faces fair trade probe

Becky Ashall — 2009-11-12T15:58:00.000Z

Becky Ashall, Accountancy Age, Thursday 12 November 2009 at 15:58:00

OFT to report on the structure of the insolvency market next year

The Office of Fair Trading has revealed that it is conducting an in-depth study of the corporate insolvency market.

The investigation will look at the structure of the market and the appointment process for insolvency practitioners. It will also search for features in the market which may result in inequalities, such as higher fees or lower recovery rates for certain groups of creditors.

It follows recent concerns raised by the government and Insolvency Service over the way insolvency practitioners are appointed.

The study will collect and analyse data from accountancy firms, law practices, government, regulators and trade bodies, with the OFT planning to release its findings at the end of 2010, unless it is necessary to conduct a second stage.

Clive Maxwell, OFT senior director of services, said: “We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers. Efficient insolvency services are an important component of a modern market economy.”

Listed accountancy company Tenon welcomed the announcement, stating that it supported “our long held belief that a competitive and transparent market within the insolvency industry is in the best interests of all stakeholders, including practitioners, creditors and the public”.

The Forum of Private Business argued that the probe must deal with "phoenix" companies starting over again. It said that smaller creditors suffer when companies start up again under a different name.

FRC board still undecided on MG Rover charges against Deloitte

Mario Christodoulou — 2009-11-12T15:49:00.000Z

Mario Christodoulou, Accountancy Age, Thursday 12 November 2009 at 15:49:00

Watchdog sends preliminary report to the Lord Mandelson

The audit watchdog has not yet decided whether to bring charges against Big Four firm Deloitte over its audit of collapsed British car maker MG Rover, it said in a letter to business secretary Lord Mandelson.

The Accountancy and Actuarial Discipline Board (AADB) is still considering whether to take action against Deloitte as it trawls through the lengthy BDO report into MG Rover and the events which led to the collapse of the company.

The body said it expects to arrive at a conclusion within months.

“After the completion of the investigation the AADB’s Executive Counsel will make an assessment as to whether to lay charges against Deloitte which would be heard in public before a Tribunal convened under the AADB’s Accountancy Scheme,” the body said in a statement.

“It would be inappropriate for us to comment on the investigation at this time.

The Executive Counsel’s decision will be announced in due course.”

Deloitte escaped any blame in the BDO report referred to the Serious Fraud Office (SFO) earlier this year by Lord Mandelson. The SFO did not pursue criminal charges following the car maker’s collapse.

A Deloitte spokesman reiterated that there has been no criticism of Deloitte's conduct or the fees it took for its audit work or non-audit work.

“The (BDO report) confirmed that our independence and objectivity was not in any way impaired, whether by the level of our fees and the ratio of audit to non-audit fees, or otherwise,” he said.

“In fact, the (report) specifically stated that 'Deloitte's own procedures for safeguarding its independence and objectivity met, or even exceeded, the standard required by the ICAEW'.”

MG Rover has been under investigation by the AADB since 2005.

The AADB noted that, for the six years investigated, Deloitte’s total fees were £30.7m, of which audit fees amounted to £1.9m and non-audit fees £28.8m.

The body said there were already industry-wide investigations into the potential conflict between audit and non-audit work.

The AADB said it was looking into the broader relationship between audit and non-audit services and the continuing uncertainty surrounding, “whom the auditor is acting for in circumstances in which there may be conflicts between the interests of the company being audited and the personal interests of the directors of the company”.

It added that it had written to the International Accounting Standards Board about some of the wider issues raised by the MG Rover collapse including "going concern" considerations.

Read the full AADB statement: Progress Report on FRC review of matters raised in Inspectors' Report on Phoenix Venture Holdings/MG Rover

New fair value standard rushed out by IASB

Mario Christodoulou — 2009-11-12T10:45:00.000Z

Mario Christodoulou, Accountancy Age, Thursday 12 November 2009 at 10:45:00

International standard setter publishes replacement for IAS39 in wake of banking crisis

The International Accounting Standard’s Board has released its contentious fair value standard, ending one of the most controversial projects in its short history.

The new accounting rule, hastily revised and reworked in the wake of the international financial crisis, aims at reducing the complexity of the fair value principle.

Fair value - the accounting principle which forces companies to value assets at their every day market value – came under sustained attack in the immediate wake of the financial crisis as banks and other financial institutions watched on as the value of their financial instruments plummeted in severely depressed markets.

The IASB, which already had plans to revise the standard, were forced to accelerate their efforts to bring in a replacement, which was released today.

The board’s swift actions enjoyed broad support from a number of international institutions and countries, however differences remain between its approach to the rule those proposed by its counterpart in the US.

The diverging standards will be a challenge that will need to be overcome if the world’s largest economy eventually decides to take on international accounting rules.

All eyes will now be fixed on Europe’s reaction to the accounting rule, with recent signs suggesting there might be some reluctance to adopt the principle.

European Commission officials expressed fears in a letter to the IASB that the fair value rule could add volatility to accounts.

If Europe rejects the IASB’s standards it would deal a major blow to proponents of international standards and likely encourage American detractors who already say the board is prone to political manipulation.

In a statement IASB chairman David Tweedie said he has delivered on his promise and commitment made to the G20, who asked the board to review the accounting rule.

“Benefiting from unprecedented levels of consultation with stakeholders around the world, the IASB has made significant changes in its initial proposals to improve the standard, provide enhanced transparency and respond to stakeholder concerns,” he said

Companies will now have the option to adopt the standard for their next set of accounts. The rule will however become mandatory by 2012.

Read the full IASB statement: IASB completes first phase of financial instruments accounting reform

CVA preferrential status idea for white knights dropped

David Jetuah — 2009-11-12T10:35:00.000Z

David Jetuah, Accountancy Age, Thursday 12 November 2009 at 10:35:00

Government cans "super priority" proposal for lenders bankrolling Company Voluntary Arrangements

Government insolvency chiefs have shelved plans to allow emergency funders to leapfrog other creditors when getting repaid.

The idea of "super priority" status for lenders bankrolling Company Voluntary Arrangements was floated in a consultation earlier this year, but the option was dropped on the strength of the responses received.

More than fifty businesses, individuals, and representative bodies responded to the consultation, which also suggested other ambitious measures the government hoped would spur lending.

In a ministerial statement, the government said: "In relation to rescue finance, the views of respondents were more divided. A number suggested that in practice the availability of new finance for companies seeking to restructure was less of an issue than had been indicated, and that the need for legislative change was not apparent.

"Stakeholders also recognised the need to balance the benefits of possible legislative changes against some of the risks, particularly if changes had a negative impact on the behaviour of lending institutions towards businesses in general.

"Having considered the consultation responses on this issue, the Government has decided that it will not for the moment be taking forward the finance-related proposals.

We will however continue to work with stakeholders to monitor the position going forward."

The proposals included extending a Chapter 11-style moratorium against creditor action to medium and larger-sized companies so they could also benefit from a "breathing space" from their debts.

After a positive response, these plans are still on the cards.

The moratoria proposals were broadly welcomed," the government said. " Respondents made a number of helpful comments and suggestions as to how the potential benefits could be maximised, whilst minimising the risks to creditors.

"The Insolvency Service will be taking forward more detailed development of the relevant proposals over the coming months, building on feedback received from the consultation."

Brinkley FD and CEO step down

Rachael Singh — 2009-11-12T00:27:00.000Z

Rachael Singh, Accountancy Age, Thursday 12 November 2009 at 00:27:00

Troubled mining company sees top two execs leave

The finance director and chief exec have both stepped down at Brinkley Mining with the company yet to announce any successors. The company stated earlier this year it was required to make an acquisition which could constitute a reverse take-over and if it failed to create an investment strategy by December, the company’s ordinary shares would be suspended from trading on AIM. It also reported, if the strategy was not implemented by June 2010, the company would hold a shareholders’ meeting to consider whether or not to seek other investment opportunities or to wind up the company and distribute any surplus cash back to shareholders.

Mark Fresson, the FD, joined Brinkley in August 2008. Prior to that he was head of tax at derivatives brokers Bache Commodities, where he spent over five years. He trained with Touche Ross and also worked as head of tax and accounting at Nomura International for over four years.

Other industry moves include Marcus Leek, who takes on the FD role at voucher and coupon company Valassis. Leek has specialised in industry rather than practice and held senior finance roles at Sainsbury’s, Caudwell, Torex Retail and Jenks Holdings. He replaces Tony Oliver who has left the company to take up a FD role at recruiters Pulse Staffing.

Another accountant who has walked down the industry path is Mike Fryer who takes up a financial controller role at primary care premises developer MedicX. He joins from Feather and Black, the furniture company, where he was FC and was group financial controller at computer parts manufacturer SSD Drives Group.

Audit quality under pressure as firms cut costs

Mario Christodoulou — 2009-11-12T00:26:00.000Z

Mario Christodoulou, Accountancy Age, Thursday 12 November 2009 at 00:26:00

FRC warns firms to maintain high standards as recession bites

Audit quality could be the latest casualty of the downturn as accounting firms cut costs in some of the toughest market conditions seen in ten years, regulators warn.

The Financial Reporting Council (FRC) wants accounting firms to maintain high audit standards despite near unprecedented pressure on profit margins.

Paul George, head of the FRC’s Professional Oversight Board, is concerned that a general downturn in audit work might see firms concentrate on their bottom line at the expense of audit quality.

Markets rely on auditors to provide assurance and comfort about company performance and data. It’s feared cost cuts could promote a culture where their own business growth is more important than audit quality.

“Any prolonged reduction in investment in audit, be it recruitment, training or investment in systems or any behavioral changes to a realignment of personal objectives will have a long-term impact on audit quality,” he said.

“[The FRC] has an important function as a counter balance in the equilibrium between commercial pressure and audit quality.”

The board has found no drop in audit quality, but noted one case where audit man hours were cut and another where staff rewards were altered to reward business growth at the expense of audit quality.

This year industry giant PricewaterhouseCoopers changed its bonus criteria to emphasise business growth, which jumped from 25% to 40% as a proportion of its KPIs. Meanwhile, audit quality portion dropped from 25% to 20%.

The FRC’s audit inspection unit, which investigated the issue, said the underlying message represented “a potential risk to audit quality”.

It noted however the change was small in terms of total remuneration “and was not intended to undermine the importance of audit quality”.

The inspection unit also found that in one case PwC staff were told to reduce audit hours by 5%.

In its 2009 transparency report, PwC said bonuses are arrived at against individually tailored balanced scorecard of objectives, including member’s responsibilities, performance and overall profitability.

Richard Sexton, head of assurance at PwC, said he would noever compromise audit quality on cost grounds. “Quality is a must have and it is just part of the job… Quality is what drives our reputation and if we let quality drop then our reputation drops and we may as well not be in the business,” he said.

The unit also inspected PwC’s big four rival KPMG and found audit quality was not significantly represented in performance assessment.

“We concluded from our review… that the achievement of audit quality objectives does not have as significant an impact on partners’ overall performance assessment as their achievements in other roles,” the report found.

According to a KPMG report, the firm rewards its staff based on service,

professionalism, knowledge, accountability, business focus, problem solving, relationship building, staff development, drive, resilience and “making an impact”.

KPMG, along with the rest of the industry, is under considerable pressure since the recession. In August, Ernst & Young’s head of assurance John Flaherty said retendering “driven on the grounds of price” was at its highest level in 10 years.

George said he was conscious of commercial pressures and said he had noted actions taken to maintain margins.

“While we have not identified that any individual action has had a direct adverse impact on audit quality, we are highlighting the risk,” he said.

IN OUR VIEW

Who do auditors service – investors or themselves? The answer to this question will colour your view on close to every emotive audit issue, not least of all this one. The Big Four and their mid-tier cousins are suffering. Revenue is down. Competition is stiff. Something needs to give. Audit quality,we are repeatedly told, is sacred. Now,many will see just how sacred it really is.

FRC urges caution on KPMG audit mix

Mario Christodoulou — 2009-11-12T00:26:00.000Z

Mario Christodoulou, Accountancy Age, Thursday 12 November 2009 at 00:26:00

External and internal audit blend could breach guidelines, regulator says

Big Four firm KPMG has refused to say whether it will continue to promote controversial Rentokil-style audits, now under review by regulators who are yet to decide on whether they breach ethical codes.

KPMG’s low-cost external-internal audit blend known as extended assurance, in use for FTSE 100 business services business Rentokil Initial is under scrutiny by the UK reporting regulator, the Financial Reporting Council. KPMG declined to comment on whether it will continue to promote the package during the FRC review, citing commercial sensitivity.

Last week the FRC urged companies to use caution when considering the arrangement while it investigates whether they are in line with ethical standards. A statement said: “Paul Boyle, chief executive of the FRC, said companies should be ‘cautious’ not least because it could prove to be inconvenient and/or costly to change such arrangements should [the FRC change] the Ethical Standards”.

The news came in a week when Kevin Chidwick, FD of FTSE 100 car insurer Admiral Group, told Accountancy Age he would consider using the service. In the past KPMG itself said it was receiving interest in the package.

Debate began on the issue in July when Rentokil, announced a switch from long-term auditor PricewaterhouseCoopers to KPMG, which promised to significantly reduce audit costs by extending the external audit work to areas commonly performed by internal auditors. The arrangement raised eyebrows among the Big Four, with some concerned it could be skirting ethical guidelines.

Audit standards warn against two threats when an external auditor undertakes internal audit work. The first, known as the self-review threat, warns against an auditor reviewing its own work. The second, known as the management threat, warns against internal auditors, performing a management role.

KPMG has staunchly defended the arrangement describing it as, “perfectly feasible to do in the spirit and letter of the law”.

IN OUR VIEW

When there’s this much concern, about an issue, the regulator should examine it, if only to provide the industry with clear, unambiguous guidance. In the end KPMG might be left with egg on its face, or it could emerge as an innovator.And in this scenario it would be of no surprise to see its rivals follow their lead.

Asda loses 18-month flapjack VAT dispute with the taxman

David Jetuah — 2009-11-12T00:25:00.000Z

David Jetuah, Accountancy Age, Thursday 12 November 2009 at 00:25:00

VAT decision could have wide-ranging consequences for suppliers to retail giants

You can’t have your cake and eat it when it comes to flapjacks, following a recent tax tribunal ruling.

Asda has lost an 18-month dispute with the taxman, which involves a former professional wrestler, tycoon Peter Jones, and the indirect tax levied on the oats, seeds and honey-based product.

The decision has far-reaching consequences for businesses grappling with the task of placing their products on the shelves of retail giants.

Beyond being just another “cake versus biscuit” VAT wrangle, the case could have implications for the broader spectrum of suppliers who may suffer because their clients may be less inclined to buy as many units of a product, if they cannot claim the VAT relief.

John Whiting tax policy chief at the CIoT said: “It’s a great illustration of how difficult and how dangerous this issue is. The supplier who starts out with a product thinking it is zero-rated only for it to be standard rated could see its business model and profitability altered.”

Bill Gill, head of VAT at Asda, said: “We are very disappointed because the product had been developed to get some high-energy healthy products into people that really needed it.”

The issue of whether products can be zero-rated for VAT purposes has always been fought tooth and nail by businesses and the taxman. There have been battles over smoothies, teacakes (M&S’ victory was worth £3.5m) Jaffa Cakes and now flapjacks have hit the courts.

Gill called for a level playing field to be established: “It’s difficult to see in some of the other products [that have gained VAT exemptions] how it is so different, but the judges were very fair nonetheless.”

The flapjacks case arose after former professional wrestler turned entrepreneur Chris Thompson developed Crohn’s disease, which saw him suffer rapid weight loss.

He devised the idea of high energy seed-stacked flapjacks and made a successful pitch to business tycoon Peter Jones in an Asda “Dragons’ Den”-style competition. This led to the flapjacks hitting the shelves of the supermarket giant but the taxman took issue with the product’s exemption from VAT, HMRC claiming it was “confectionary” not a “cake”.

Asda argued the product was to be a “Seed Stacked flapjack”, a traditional “oat flapjack but with added seeds for health and digestive benefits”.

HMRC argued that “the difference between flapjacks and cereal bars has narrowed due to the development of cereal bars and their current proliferation on the market.”

Tax judges ruled the flapjack was a cereal bar, which led to the standard rating, but CioT’s policy chief also called for the kinks in law to be ironed out.

“36 years after the introduction of something that was supposed to simplify tax we’re still talking about the difference between a cake and a biscuit,” Whiting added.

IN OUR VIEW

In the wider scheme of things, the decision shows businesses and entrepreneurs face a climate of uncertainty because the rulings are arbitrary as every product has its own unique list of ingredients, which may or may not match the criteria needed to win an exemption.

IPs draw line in the battle for bankruptcies

Rachael Singh — 2009-11-12T00:24:00.000Z

Rachael Singh, Accountancy Age, Thursday 12 November 2009 at 00:24:00

Official Receiver assuming bankruptcy work it was not intended to take, according to insolvency practitioners

A turf war has broken out after insolvency practitioners claimed that government bankruptcy specialists with the Official Receiver (OR) were beginning to assume work they were never intended to take.

Private sector IPs have claimed the OR should be taking on bankruptcies where there are only cash assets, but has expanded its remit to work involving other forms of asset territory belonging to insolvency practitioners.

The row revolves around regional OR centres, established a decade ago, which IPs say were created to deal with bankruptcies that involve only cash assets.

Neil Hickling, director of restructuring at Smith & Williamson, said: “When the regional centres were set up they were only going for the easy cash assets work then they started looking at the other cases with equity.”

He said his firm has had to shift focus onto corporate administrations which he believes is not an isolated case.

The Insolvency Service, head office for the OR, hit back at the claims. A spokeswoman said: “It is wrong to say that the regional centres were created solely to take on bankruptcy cases where no assets are involved.”

She added: “Where assets are straightforward, there is no obligation for the cases to be passed on, and our research has shown that, when cases particularly bankruptcies remain with the OR, they often achieve a much better result for creditors than similar cases which are passed to IPs.

“Complaints on this matter are rarely received, suggesting that this is a very minor issue.”

The OR has been accused of lacking the expertise of the private sector and not being regulated to the same degree. A source close to the issue said: “The OR does not have the resources or the qualifications to investigate assets properly.”

Tenon estimated there are 70,000 bankruptcies a year with just 5,000 having assets.

Further reading:

Bankruptcy turf war

HMRC flexes its muscles with company probes

David Jetuah — 2009-11-12T00:24:00.000Z

David Jetuah, Accountancy Age, Thursday 12 November 2009 at 00:24:00

HMRC using new powers to look deeper into company records

The insurance industry has claimed the taxman is ratcheting up the number of probes into businesses’ corporate tax, VAT and PAYE payments following the introduction of new powers.

On 1 April 2009 HMRC was allowed more scope to request and examine company records and insurers are now seeing a hike in the number of claims for the cost of accounting support during an investigation.

The insurance is purchased by accountants on behalf of businesses and in the period January to September 2008 Abbey Protection received 1,416 claims compared with 1,347 claims in the same period in 2009, but this includes a slump in requests before the new rules kicked in.

"Unsurprisingly, we saw a reduction in the number of insurance claims being made by accountants in the first quarter of 2009 as presumably HMRC was waiting for the new powers to come into force before launching enquiries,” said David Marples, consultancy manager at Abbey Tax Protection.

The numbers of claims received in September 2009 were 25% higher than in September 2008 as Abbey received 154 compared to 128 year-on-year.

"This would suggest that the HMRC enquiry ‘machine’ is now fully switched on,” said Marples.

Marples also flagged up the fact that HMRC is increasingly giving consideration to ‘cross-discipline’ issues whenever an enquiry is opened. These issues means businesses may be hit with tax, VAT and

PAYE enquiries at the same time.

Customer letters seen by Accountancy Age show that the taxman is either tasking one investigator to handle all the probes, or informing businesses that VAT or PAYE investigators have also been called in.

"This may help HMRC reduce the number of checks they carry out overall but that is little comfort to the business selected for an enquiry who will effectively be subjected to three enquiries at once.”

"This approach is likely to increase the accountancy costs of dealing with the enquiry,” said Marples.

He warned that after identifying errors on a return under enquiry, HMRC will also seek to make adjustments to earlier years returns using its “presumption of continuity” powers, further increasing the workload on businesses.

"Where HMRC is looking to scale back adjustments into much earlier years it may be necessary to challenge the position and again, this is likely to increase the accountancy costs of the defence.”

An HMRC spokesman said: "HMRC looks at compliance risks across the whole business spectrum, and carries out targeted action where appropriate.

"The new information powers, introduced in April 2009, represent a sensible aligned approach to maintaining the tax system. They allow HMRC to work more effectively and reduce the burden on compliant taxpayers."

IN OUR VIEW

The taxman is clearly right to ensure that business are paying the correct amount of tax but must also make sure that the burden of an enquiry does not become too heavy.