Dispatch (UK/ROW edition)
| by Paul Gosling 06 Aug 2008 Topic: News |
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EU takes action on auditor liabilityThe European Commission has proposed limits on auditors' liability to protect the Big Four from further reductions in numbers, threatening the viability of a competitive market for company audits. It hopes the move will also strengthen mid-tier audit firms, enabling them to compete better against the Big Four. No specific limit is proposed on auditor liability - member states would determine their own national limits and their own method for limiting liability. Instead, the Commission recommends key principles that would underpin liability limitation - that any limitation is fair for auditors, audited companies, investors and other stakeholders. The Commission also specified that the limitation of liability should not apply in the case of intentional misconduct on the part of the auditor, or where the limitation would be insufficient if it did not also cover third parties. It also insists that damaged parties must retain the right to be fairly compensated. Charlie McCreevy, the Internal Market and Services Commissioner, said: 'After in-depth research and extensive consultation, we have concluded that unlimited liability combined with insufficient insurance cover is no longer tenable. It is a potentially huge problem for our capital markets and for auditors working on an international scale. The current conditions are not only preventing the entry of new players in the international audit market, but are also threatening existing firms. In a context of high concentration and limited choice of audit firms, this situation could lead to damaging consequences for European capital markets.' Three possible methods for liability limitation are listed in the Commission's 'recommendation', but it makes clear that any other equivalent method might be used. Member states should choose the method that best suits their needs. The Commission's preference is for a cap on liability, or a combination of proportionate liability and a cap, with proportionate liability suggested as a less preferred alternative. The Commission's recommendation arises from a mandate for investigation and proposals laid down in the 2006 Statutory Audit Directive. Time limit on tax refunds to be cutUK taxpayers will only have four years to claim rebates of overpaid tax, instead of the current five years, under legislation going through Parliament as part of this year's Budget that amends the Taxes Management Act. But the change will not affect HM Revenue & Customs' right to recover underpaid taxes over a much longer period. Where there is fraud or negligence on the part of a taxpayer, HMRC can recover underpaid income tax for a period going back as far as 20 years and 10 months. According to UHY Hacker Young, the change will particularly affect the elderly, with an estimated 200,000 pensioners paying too much tax last year. Many pensioners overpay tax because of incorrect PAYE codes on pension annuities. A system of taxing pensioners' annuities with an automatic 22 per cent income tax deduction from most annuities at source regardless of tax liability is currently being replaced. Almost half of claims currently submitted will be debarred or partially debarred under the revised time limit, says the firm. Claims over the period currently permitted for claims are worth an average of £1,963. Rob Durrant-Walker, of UHY Hacker Young in York, said: 'The changes are weighted in HMRC's favour. If taxpayers are careless, HMRC can demand back tax of more than four years, but if HMRC is careless and collects too much tax, taxpayers will only be able to seek redress for four years' overpaid tax. It's one rule for HMRC, one rule for the taxpayer. In the case of pensioners being overtaxed, the fault lies with HMRC. 'Other taxpayers could also be hit as you can bet that when there is extra tax to be collected HMRC will try to use spin and allege neglectful behaviour from the taxpayer in order to get around their own time limit. HMRC does not proactively identify which taxpayers have overpaid and it can take years for overpaid tax to come to taxpayers' attention.' German corporate snooping scandal widensA corporate culture apparently common to many German companies has been revealed, in which private investigators are hired to investigate journalists who write critically about their businesses. A criminal investigation is currently taking place into the actions of Deutsche Telekom and its use of customer data. In a statement, Deutsche Telekom said: 'According to recent findings, there were cases of misuse of call records at Deutsche Telekom in 2005 and, according to latest allegations, also in 2006. The allegations made against the company do not relate to any unlawful use of the content of calls - in other words they do not concern the tapping of calls.' Deutsche Telekom is alleged to have examined its call records data to see which employees were in phone contact with journalists who wrote negative stories about the company. René Obermann, the chairman of the board of management and chief executive, said: ' We have called in the public prosecutor's office and will support them in their full investigation of these allegations.' He added: 'I am shaken to the core by these allegations.' The company accepts that it has internal control 'weaknesses', which allowed private investigators to be engaged without authority from the board. Following an internal investigation into tip-offs of malpractice, the company made 'far-reaching staffing and organisational changes in the group security department'. Dr Gerhard Schäfer, a former Presiding Judge at the Federal Court of Justice, will act as an expert in the company's own investigations of alleged data misuse and proposed strengthening of procedures. According to press reports, Deutsche Telekom employed global security experts Control Risks at the time in question. In a statement, Control Risks said it was 'disappointed to be implicated in the current investigation'. Further allegations have emerged suggesting that other German companies have also engaged private investigators to examine links between staff and journalists. The claims are particularly damaging for Deutsche Telekom, which is still over 30 per cent state-owned and whose T-Mobile subsidiary has a growing share of the markets in the US and the UK. Former group chairman Klaus Zumwinkel resigned over allegations of tax evasion that are still being investigated and led to an international row between Germany and Liechtenstein, where Zumwinkel held bank accounts. Pressure grows on IASB and fair valueThe International Accounting Standards Board is to reconsider whether 'fair values' should always reflect exit values, or whether in some circumstances they should use entry values. Ken Wild, global leader of international accounting standards at Deloitte, said the project is 'very significant'. While exit price valuations might be the most relevant and fair value of a financial instrument, said Wild, this would not be true, for example, with furniture and fittings, where replacement cost was a more significant issue. 'With different items you need different measures,' he suggested. The setting-up of a review on the use of exit and entry values in the use of fair valuations was disclosed by the IASB in its Annual Report. The decision followed receipt of over a hundred submissions challenging the assumption that exit values should always be used, as is required by SFAS 157. 'When completed, the results of the review will help the Board decide whether to retain the term 'fair value' or to redefine it or replace it with a more specific term that is appropriate in the particular circumstances,' said the Annual Report. 'The Board expects to publish in 2009 an exposure draft of an IFRS on fair value measurement guidance and hopes to issue the ensuing standard in 2011.' The IASB is also forming a new group to consider the specific problems of valuing illiquid securities, in response to complaints from banks and insurers that fair value has seriously exacerbated the impact of the credit crunch. Accountants, regulators, banks and insurers have been invited to a founding meeting. Action was urged on the IASB by the Financial Stability Forum, with backing from the G7 governments. Meanwhile, progress is being made on the creation of an IASB oversight board, with the US Securities and Exchange Commission, International Organisation of Securities Commissions (IOSCO), the European Commission and Japan's Financial Services Agency meeting together to create an International Accounting Standards Committee Foundation Monitoring Group. European Commissioner, Charlie McCreevy, said the new body would increase the accountability of the IASB. However, it is also likely to be a forum to play out the major tensions that exist between regulators and the IASB. Christopher Cox, chairman of the SEC, has hinted that the creation of the oversight body is a condition of the early acceptance of IFRS in the US, which the Federal Accounting Standards Board says it wants in place in about five years. UK to strengthen financial regulationA new structure of UK financial regulation has been announced by Chancellor of the Exchequer Alistair Darling. In place of the tripartite system of joint regulation between the Financial Services Authority, the Bank of England and the Treasury, a new structure will give clearer responsibilities to each, with more emphasis on regulatory co-ordination. Under the new arrangements, the FSA will remain the sole banking supervisor and will be given extra powers to tackle market abuse and ensure investor confidence. The Bank of England will have stronger powers to carry out a new statutory duty to protect financial stability. A financial stability committee of the Bank will be created and Sir John Gieve, the deputy governor responsible for financial stability, is to retire. The Chancellor made the announcement of the changes in his annual Mansion House speech, where he also revealed that he had appointed Sir James Crosby, former chief executive of HBOS, to review the funding of mortgages. He pointed out that where a decade ago almost all funding for mortgages came from deposits, a third was now financed through inter-bank borrowing and that the implications of this change need to be evaluated. To deal better in future with threats to the global financial system, the International Monetary Fund and the Financial Stability Forum need to play an increasing role, argued the Chancellor. He said that the UK Government had secured support for 'the expanded use of international colleges of supervisors' to provide an international oversight of threats to the financial system. HMRC roasted over data lossHM Revenue & Customs lost the personal data of 25 million child benefit recipients because of weak data management and inadequate controls, a review conducted by Kieran Poynter for the UK Government has concluded. Poynter's report made withering criticisms of security in the department. While no malice was involved, it found the data catastrophe was caused by failures by more than 30 HMRC officials and also by staff at the National Audit Office. The evidence points to 'institutional deficiencies' in HMRC that produced a climate in which data security was not taken seriously enough, said Poynter, the chairman and former senior partner at PricewaterhouseCoopers. There was laxity at both HMRC and the NAO, which meant there were no clear rules on data transfers. Internal procedures at HMRC were so weak that data were released to NAO without proper authorisations. HMRC's despatch of child benefit data to the NAO by insecure surface mail led to the massive data loss. But, Poynter found, the same insecure procedures had been used before. This created a precedent leading to repeated breaches of proper controls. A protocol for data transfer between HMRC and NAO had been agreed, but was 'somewhat informal', not properly enforced and regularly circumvented - even though the recipients were the government auditors who should have been aware of the need for effective data controls. Departmental failure was all the more serious because several HMRC staff were not only aware of the risks of insecure transportation of highly secure information, but actually reported their concerns. NAO also expressed its worries. However, these anxieties were never communicated to senior staff within HMRC. A range of factors were involved in the institutional and cultural weaknesses that led to the data loss taking place, reported Poynter. These included a lack of awareness and training among HMRC staff about the importance of effective data controls. There was a lack of clarity, governance, accountability and communication regarding data protection. No senior staff member at HMRC had responsibility for data control. Poynter has recommended a series of measures to strengthen management of HMRC, particularly on data controls, and acknowledged that many reforms were already being implemented. A new leadership team is now being forged at HMRC. Paul Gray, its chairman, stood down when the data loss was established. Mike Clasper has now been appointed as his permanent replacement, working for HMRC three days a week. He joins from private equity group Terra Firma. In brief
France gives up on tax harmonisation
Heritage asset value disclosures strengthened
Woolworths fined
Pension funds pessimistic about deficits
FRC updates Combined Code
Finance execs dissatisfied with their departments
Call for more tax staff
ICFR gets backing from Big Four | |