Dispatch
| by Paul Gosling 04 Apr 2005 Topic: News |
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The European Commission has demanded fundamental changes to the governance arrangements of the International Accounting Standards Board, which would see Europe becoming much more powerful in determining future standards. Trustees of the International Accounting Standards Committee Foundation would cease to be self-appointed if reforms proposed by the European Commission were adopted, with more trustees coming from the European mainland. The latest move by the European Commission is an attempt to deal with the underlying conflicts which led to months of argument and muddle over the introduction of international accounting standards relating to the use of fair value in the treatment of financial assets and liabilities and regarding portfolio hedging, which eventually led to the Commission adopting a modified version of IAS 39. In a letter to the IASCF, in response to its consultation process on its own proposed governance reforms, the EC suggested five key modifications. One would be that trustees no longer select and appoint their own successors. In future, says the Commission, a larger proportion of trustees should come from jurisdictions where IASs have been or are being adopted. The role of trustees should be strengthened, argues the EC, so that they more closely monitor the work of the IASB. Funding of the IASB should move away from voluntary contributions from accounting firms and listed companies, so that the risks of conflicts of interest are reduced. And there should be a larger required majority amongst trustees, so that disputed standards are less likely to be adopted. The IASCF had hoped it had resolved the problem of conflicting international interests by issuing proposals that would have increased the diversity of membership of the Committee, reducing the influence of the US and UK. But the Commission's response shows that serious tension remains at a time when the IASB was hoping to concentrate on getting international standards adopted in the US and Japan. Richard Martin, ACCA's head of financial reporting, said: 'I'm sure there is a lot of frustration [at the IASB]. They have spent the last four years trying to get things sorted out with Europe, but this is still rumbling on. But it is the EU's adoption of international standards which has put IASs on the map and encouraged many other places to say we must get on and do something. I can't imagine that without those steps from the EU the Japanese would have been making these moves towards adopting IAS.' ACCA has submitted its own comments on the governance consultation, urging that 'it is unacceptable for certain parts of the world (notably Africa and South America) to be ignored' in the appointment of trustees. The letter from ACCA went on to stress that the mix of trustees should not only consider the world's capital markets, but also a wider definition of economic activity given that IFRS is increasingly being adopted by companies operating outside the main capital markets. ACCA also argued that the International Federation of Accountants (IFAC) should continue to have the right to nominate five trustees, rather than allocating a number of trustee positions to the big accountancy firms. Like the European Commission, ACCA called for an end to self-selection of trustees, given the move internationally to greater transparency and accountability amongst regulatory bodies. 'The continuation of self-selection will be unacceptable to many stakeholders,' said ACCA. The IASCF declined to comment on the European Commission's letter - published on the IASB website at www.iasb.org/docs/2005-itc/cl66.pdf - which was discussed at the Foundation's March meeting. Progress is being made regarding the controversial IAS 39. A meeting of the IASB has discussed a modified version of the standard to settle concerns over the reliability of valuation mechanisms for assessing the fair value of financial assets and liabilities, which seems to draw general support. However, the treatment of portfolio hedging remains unresolved.
Sarbanes-Oxley has not just increased the workload and income of the major firms operating in the US. It has stimulated a worldwide surge in demand for qualified accountants. Across the US, the talk is of a growing crisis in the recruitment of experienced qualified accountants. The shortage is such that the big US firms have even been recruiting in Australia. Demand for qualified accountants has been complicated by changes to the American Institute of Certified Public Accountants' examination and study curriculum, which has typically delayed qualification by a year, slowing down the flow of qualified accountants entering the profession. The AICPA response to the Enron, WorldCom and other corporate crises which reduces the supply of qualified accountants has fallen into place just at the same time that demand sparked by Sarbanes-Oxley is being fully felt. Some US universities are now reporting a big shift towards accountancy amongst their graduates, with salaries for qualifieds rising sharply. But while practices in the US are looking to many other countries for recruits, they are hampered by the weak dollar in seeking qualified accountants from Europe. Demand in the UK is, in any case, similarly high, with KPMG looking to South Africa, Singapore and Malaysia to help meet its needs. Keith Dugdale, director of recruiting and resources at KPMG, said: 'There really is a desperate dearth of talent at the moment, especially around newly qualifieds. Part of it is our own fault, because three years ago all the firms cut back on training of graduates, so the pool was not topped up. And there is a substantial amount of new work around, arising from the new corporate compliance legislation. Our business is growing very substantially, in some areas by around 20%, and there is huge competition from investment banks and consultancies who want to get hold of people trained by the big firms.' But the impact of increased demand is not being felt just by the Big Four. Many smaller accounting practices in the US are now merging, to enable small firms to create a scale of operation which gives them more chance to win some larger contracts - providing more competition for the Big Four, but also helping to meet the greater demand not just for auditors, but also to assist firms improve compliance procedures. However, the tougher regulatory environment seems to be stifling many smaller firms. While the big firms are benefiting from a surge in demand from corporate clients and raised fees, smaller firms are struggling to cope with the regulatory impact on their own practices. The latest Kato Partner Survey in the UK found a large disparity between profits recorded by the largest and smallest firms. Many partners in small firms are barely achieving profits per partner of £100,000 a year, leaving partners to take home as little as £50,000 to £60,000. The survey recorded that it was generally agreed that the minimum profit per partner should be £180,000. Differences in the situation of smaller and larger firms was also illustrated by the response to the Kato survey when partners were asked about the biggest threat to the profession. The most commonly quoted threat was the increasing cost of regulation - which appears to be driving higher fees for the largest firms, rather than presenting them with a threat. Recruitment does seem, though, to be a universal problem, noted as a major challenge for small firms as well. Phil Shohet, managing director of Kato - a specialist consultancy advising firms on reorganisation and merger and said that there was an ongoing move towards amalgamation into larger practices. 'There was a lot of activity, especially amongst smaller firms moving up,' said Shohet. 'People were getting fed up with a heavily over-regulated profession.' Firms with four or five partners were typically losing to regulation responsibilities the equivalent of one partner full time, the proportionate impact of which can be cut significantly by expanding to 20 or so partners. Shohet explained: 'Enron and WorldCom have now reached Accrington, as someone there told me the other day.' The City of London could lose ground as a major financial centre to the developing Asian cities, according to a new report. Dubai, Singapore and Kuala Lumpur might all gain as financial centres at the expense of London if the UK does not relax the regulatory control of the Financial Services Authority, suggests a report, The Leviathan is Still At Large, from the Centre for Policy Studies think-tank. Posed as a letter to the chief executive of the FSA, John Tiner, the CPS document called for more of 'a light touch regime'. It describes the FSA as 'one of the most powerful, and one of the least accountable, institutions created in the UK since the war'. 'London has to work to maintain its pre-eminent position in financial services,' said report editor, Tim Knox. 'Some financial services, those which are more mobile, could move. The greatest danger is faced in the most innovative areas of finance. They could go wherever they like.' However, Knox sees the threat coming from Asia rather than the US or elsewhere in Europe, where regulatory systems are also strict. 'The impact of over-regulation can be seen in the increasing ineffectiveness of the provision of financial services products to low income households,' argued Knox. 'While that may not be moving away from the City, it is certainly reducing the size of the market. In interviews, people in firms in the City said to us that if it keeps going like this then some aspects of our business will be lost to better climates.' The CPS - which is politically close to the Conservative Party - argues that the FSA is a defensive and risk averse regulator, encouraging in turn regulated companies to become defensive and risk averse, holding them back from the dynamic and competitive attitude needed for the UK economy. The timing of the CPS report is unfortunate for the FSA, which has recently had a downpour of bad publicity. Responsibilities of the FSA have been extended over recent months to include general insurance, long term care insurance, mortgages and equity release loans, while amended FSA regulations have led to the depolarisation of the financial advice market. But the FSA plays down any threat to the role of the City, saying that it is strengthening its world position, not losing market share. 'We are sensitive to industry concerns around the burden of regulation and we have already set in train a number of initiatives to address them,' said John Tiner. 'Our direction is absolutely clear. We believe that efficient markets are the best means of providing benefits to both industry participants and their customers. That's why, where we have discretion - which is limited, where we are required to implement European legislation - we intervene only where there is a market failure and where regulatory intervention is likely to be cost-effective. We take a risk-based approach which accepts that some failures neither can nor should be avoided.' The latest London business survey produced for the Confederation of British Industry by KPMG provided limited support for the FSA's case. While London does face threats to its position, the regulatory strength of the FSA is not quoted at the top of the list. But the report stressed that while a sound regulatory regime is necessary, too much new regulation imposed too quickly risked damaging the financial sector. Transport weaknesses and skill shortages were quoted in the KPMG report as the two major problems facing London, with labour regulation receiving more hostility across the business spectrum than the FSA's regulatory approach. Crime was another frequently quoted problem, causing concern to more than half the companies in the survey. There also appeared to be dissatisfaction with public administration, while there was widespread disquiet about the cost of doing business in London. More than a third of businesses questioned had either moved some functions out of London, or planned to do so. Favoured locations included elsewhere in the UK and the Indian sub-continent. Ian Barlow, London senior partner for KPMG, said: 'London's prosperity and status as a world class city is vital to our businesses. We can see some progress in tackling crime, but the pace of progress on transport infrastructure is far too slow.'
It was Gordon Brown's ninth Budget. But while he used it to proclaim unprecedented sustained economic growth, critics say his latest tax avoidance measures have gone over the top and will drive investment away from the UK. 'It was a widespread attack on international tax planning,' argued Richard Collier-Keywood, head of PricewaterhouseCoopers' UK tax practice. 'It will hit both UK based and inward investors. It will increase income for the Government in the short-term, but ultimately it will encourage companies to reduce their footprint in the UK. Yesterday's tax reliefs are becoming today's tax avoidance.' The clampdown on the treatment of cross-border transactions which reduce tax liabilities was quoted by Collier-Keywood as a particular grievance, as was the elimination of Stamp Duty Land Tax relief for commercial investment in deprived areas. This view was endorsed by Stephen Herring, tax partner at BDO Stoy Hayward. 'I am not sure if the Chancellor has considered all the ramifications,' he suggested. 'The relief from SDLT has just gone overnight. A number of businesses will have built this into their business projections. Now, unless they have a binding contract, they will have to pay the full 4%.' Herring thinks that in cases such as these there is good reason to phase in changes, rather than implement them immediately. Chas Roy-Chowdhury, ACCA's head of tax, believed that one message from the Budget was that the Government will be keen to extend the tax avoidance reporting regime. 'Most of the [new] anti-avoidance measures proposed come out of the reporting regimes,' he said. 'It's got the intelligence and is now clamping down on them. The Government will consider the reporting regime a success. So they will be rolling this out to areas such as stamp duty and inheritance tax if the Government gets in again after the next election. There is a lot more to come on this.' ACCA colleague, Glenn Collins, head of business advisory services, was disappointed that more had not been done for small business. He said: 'Nearly half of the 20 issues ACCA identified as requiring government action to help SMEs and general taxpayers could have been directly actioned by the Chancellor. But there were only minimal steps taken on stamp duty and inheritance tax, while other crucial areas were left completely untouched. He has not put small businesses first.' Both ACCA and the Federation of Small Businesses welcomed moves towards lighter touch regulation. FSB national chairman, Carol Undy, said: 'There are currently over 300 different kinds of inspections carrying a right of entry into business premises and the whole army of inspectors desperately needs to be rationalised. Every single inspection interrupts day-to-day business. Hardworking business owners must be able to concentrate on what they are good at - job creation and wealth generation.' Undy added that while moves to merge 35 inspectorates into nine was a step forward, this should not be the end of the road. The FSB was also pleased at proposals to offer more flexible systems for small firms to pay tax. However, Chas Roy-Chowdhury cautioned that several of the initiatives announced by the Chancellor - such as the combining of VAT and corporation tax returns - amount to little in practice. 'It will just be pinning together two tax returns, probably,' he warned. But Mike Warburton, tax partner at Grant Thornton, said that the Chancellor should be recognised as having carried out his overtly political responsibilities to the Government. 'The most significant thing is that he did what he needed to do, which is to secure the 'grey voter' who might have drifted away,' said Warburton. While the tax avoidance measures are expected to recover £660m, rather more than this - £800m - is going to pensioners in a flat rate £200 council tax rebate. 'This is his biggest single giveaway,' pointed out Warburton. And while the lifting of the stamp duty threshold from £60,000 to £120,000, costing £250m, will have virtually no impact in the house price hot spots of London and the South East, they will have 'a big effect' in politically important battle zones such as Wales, Eastern England and the North. 'It is targeted at poorer areas where the Government needs the vote,' said Warburton. 'It is a blatantly political Budget.' For details of ACCA's tax and small business manifestos, please see the Members' Supplement to this issue. | |