International Accounting Standards
| by Paul Gosling 08 Jul 2004 Topic: News |
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FEE calls for co-operation on global standards The Fédération des Experts Comptables Européens (FEE) has called for the rapid introduction of truly global accounting standards, warning against any separation between IFRS and European Commission-endorsed IFRS. FEE says that parties which have difficulty in agreeing the composition of international standards should �come to reasonable solutions in a co-operative manner�. FEE�s position comes amidst continued wrangling between banks and insurers on the one hand, backed by French President Jacques Chirac, and the IASB on the other. Particularly at dispute is whether derivatives should be included on banks� and insurers� balance sheets at market value. Despite reports that a negotiated settlement between the IASB and bankers had moved closer, Europe�s major banks have again placed pressure on the European Commission and national politicians not to endorse IAS 39. The stand-off is making it increasingly difficult for accountants and companies to meet the 2005 deadline for implementing international accounting standards. �As a general principle, FEE calls for global standards,� said David Devlin, President of FEE. �As a consequence, we emphasise the need for �endorsed IFRS� to be the same as �IFRS�. The [European Commission�s] endorsement process should not be used as a means to create European standards. Only global standards will meet the wider objectives of financial stability, efficiency and transparency and provide the benefits of increasing confidence in financial markets, reducing the cost of capital and facilitating global investments. �There would be serious drawbacks if elements of IFRS were not to be endorsed, as EU standards would be seen as very much second best. There would also be serious implications for audit reporting if �endorsed IFRS� were different from �IFRS�: IFRS could no longer be referred to as the reporting framework.� ACCA endorsed FEE�s position. Richard Martin, head of financial reporting at ACCA, said: �FEE�s statement underlines the broad consensus across the accounting profession in support of international standards. This is at a time when the debate has continued on what should happen. This seems to be a clear position from FEE that the European accounting profession would like the European Commission to get a move on and endorse the standards and make 2005 possible. �The delay in endorsing the full set of standards is going to be a negative fact for a proportion of European companies and damages the perception of what is going on. Are we producing standards of the highest quality for investors, or will the standards be compromised to buy-off particular interest groups? In all of this we must remember there is a bigger interest group than just the financial institutions involved in this. There is a danger here of sending out the wrong messages.� Meanwhile, the UK�s Accounting Standards Board (ASB) has supported the adoption of IAS 39 from 1 January. �The widespread introduction of IAS 39 will strengthen financial reporting in Europe� said ASB chairman, Mary Keegan. �In the absence of a standard on the recognition and measurement of financial instruments, those dependent on a high quality of financial reporting - the investors in the international capital markets, and their investment analysts - would regard information provided by EU listed companies as potentially inconsistent and lacking in transparency. That would have very damaging consequences and would seriously undermine the integrity of financial reporting within the EU. Although we recognise that concerns about the standard remain, our view is that none is of sufficient significance to outweigh the benefits that would result from adoption of IAS 39 in time for application from 1 January 2005.� Meanwhile, a survey conducted by PricewaterhouseCoopers has concluded that while three-quarters of European listed companies have now begun the move towards using IFRS, a significant minority remain under-prepared. Perhaps most worryingly, 80% of surveyed companies have yet to decide how to explain to markets the impact on their results of the change from existing national standards to IFRS. Ian Dilks, the partner responsible for PricewaterhouseCoopers� IFRS conversion services in the UK, said: �Ideally, companies should be further ahead with their preparations for IFRS conversion. But perhaps this is no surprise given that the final text of many of the standards they are being asked to implement has only recently been released. The task ahead, according to those that have already converted, should not be underestimated. Some investors and analysts have indicated that share price volatility may occur in some cases, if companies are unable to demonstrate this year that they have �IFRS 2005� under full control. Companies that have made only limited progress will need to move fast - for them, the next six months are crucial.� Case closed: Versailles� directors jailed One of the most infamous accounting frauds of recent times has finally reached its conclusion with Versailles� former chief executive and finance director each jailed for six years. Fred Clough, the finance director, was in control of a complex web of scores of offshore bank accounts and offshore accounts and pleaded guilty to the fraud charges. Carl Cushnie was convicted of misleading the market, with the jury apparently believing that it was implausible for such a comprehensive fraud to have taken place without Cushnie�s knowledge. Versailles had been a short-term shooting star stock, at one point valued at £630m. Detailed investigations into the high-flying company, which provided bridging finance to smaller companies, began with a UK Department of Trade and Industry inquiry into its accounting practices. That, in turn, spurred a Stock Exchange investigation, with fears that the shares had become overrated and the turnover inflated. Share values had trebled in little over a year, after the company recorded profits which rose for three years in a row by more than 50%. The company�s crisis worsened when it emerged that Cushnie had sold £29m worth of Versailles� shares without disclosing that the company was subject to a DTI investigation. While Cushnie declined to give evidence during the trial, Clough told Southwark Crown Court that all but one of the loans made by Versailles were illusional - a means of circulating money through the network of companies and bank accounts. Total losses are in the region of £150m. The Serious Fraud Office is now seeking to recover millions from assets held by Cushnie and Clough, after what is regarded as one of its most successful inquiries and prosecutions. It is reported that as well as holding millions in cash in foreign bank accounts, the pair also own properties overseas and expensive cars. Prior to setting-up Versailles, Cushnie and Clough had together run a computer consultancy, Pentagon Business Systems, which collapsed in 1989. Cushnie was unaware that, previously, Clough had been imprisoned in Jersey. Apparently he was aware that Clough had been struck off by the ICAEW in the 1960s - a fact which Clough generally succeeded in concealing. Meanwhile, another long-running financial saga was moving towards its close. Two hearings of the Joint Disciplinary Scheme found Martin Marcus, former deputy chairman of Queens Moat Houses, guilty of dishonest conduct, removed him from membership of the ICAEW and fined him a quarter of a million pounds, plus costs - the largest fine ever handed out to an individual by the JDS. Bird Lurkin, former auditor of Queens Moat, was severely reprimanded by the JDS and fined £17,000. Three years ago, Maurice Hart - a partner in Bird Lurkin, who became a director of Queens Moat on his retirement from the accounting firm - was fined £50,000 and removed from the ICAEW for his part in the Queens Moat affair. Hart was found �not [to] have the technical skill or experience to be the audit partner of a listed group of hotel companies� - though he became chairman of the Chelsea Building Society subsequent to the Queens Moat accounting crisis. Bird Lurkin and Hart were also found to have been compromised by serious conflicts of interest. Hart continued to hold a financial interest in Bird Lurkin after he joined Queens Moat, where he became chairman of the company�s audit committee. Despite this, Bird Lurkin continued as the QMH auditors. More than half the fee income at the accountancy firm came through the single client, QMH. As well as Hart, several other Bird Lurkin staff joined Queens Moat after leaving the accountancy firm. Queens Moat reported a pre-tax profit in excess of £150m for 1992, the accounts for which were signed-off by Bird Lurkin. But the JDS found that the profit was artificially constructed through the use of �inappropriate accounting policies or the misapplication of the accounting policies stated in QMH�s accounts�. Among the devices used to report a profit were capitalisation of interest on acquisition of assets and the management of hotel assets through separate companies, with Queens Moat paid a management fee. When the accounts for 1992 were restated, the company was found to have made a loss in excess of £1bn. Before Queens Moat�s listing was suspended in 1993 it had a market value of £728m. It is currently for sale at about £360m and still carries a debt burden of about £630m as a legacy of its near collapse in the early 1990s. AIB admits �unacceptable� practices Deloitte�s Irish practice has been appointed to investigate a variety of contentious practices implemented by the Allied Irish Bank, which have severely damaged the bank�s reputation. The results of the inquiry have been in part anticipated by Irish Taoiseach (Prime Minister) Bertie Ahern, who called for anyone found guilty of wrongdoing at the bank to be �punished�. The AIB scandal broke when it emerged that an Irish Financial Services Regulatory Authority investigation had determined that AIB had been overcharging foreign exchange customers since 1996, by a total of 20m euros. In response, the AIB lodged 25m euros with the Central Bank of Ireland to repay customers and provide them with compensation. The AIB says it can identify 80% of customers involved, but recognises that tracing some clients will now be difficult. It also issued a guarantee that where customers could not be traced, the bank would not benefit from improperly obtained funds. An independent investigation was then established, with Lauri McDonnell - a former Irish comptroller and auditor-general - appointed as independent assurer of the investigation and, with Deloitte, appointed to conduct the investigation. The final report will consider the bank�s internal control mechanisms, as well as the reasons for the long-term overcharges. It is also required to clarify the total amount of overcharging. After the appointments were made, AIB agreed to extend the investigation�s remit to consider whether there were other instances of widespread customer overcharging and, in particular, the bank�s alleged practice of automatically imposing payment protection policies on some classes of mortgage customers. But the bank then admitted that a second investigation of AIB had been conducted on behalf of IFSRA towards the end of last year. A statement from the bank explained: �In late August 2003, the managing director of AIB Investment Managers Ltd (AIBIM), a subsidiary of AIB, was made aware of a former client relationship between it and a British Virgin Island investment company, Faldor Ltd, and alerted the senior management and board of AIB. This relationship was formed in 1989 and ceased in 1996. The funders and beneficiaries of Faldor were five former senior executives of AIB and the funds were managed by AIBIM. Initial inquiries by AIB into the origins and activities of Faldor, which indicated possible tax evasion, resulted in AIB Group Compliance immediately contacting IFSRA and agreeing the terms of reference for an investigation to be undertaken.� This has turned out to be a much more serious and significant scandal than that of the overcharges. The investigation, conducted by Maurice O�Connell, former governor of the Central Bank of Ireland, led to a payment of _800,000 by AIB in settlement of unpaid tax. It is alleged that Faldor was used as a conduit for the release of share trading profits. AIB admits that O�Connell found that the offshore Faldor fund had been involved in breaching Irish tax laws, to the benefit of five senior executives in some of Ireland�s most important companies. AIB is not naming the five people. However, current chairman, Dermot Gleeson, said of the bank�s former tax related behaviour: �A number of the practices disclosed were completely unacceptable.� �There are taxation consequences arising from some of the practices identified in the investigation,� said a statement by the bank. �These amount to approximately _800,000 including tax, interest and penalties which AIB will underwrite.� The chief executive of the state-owned airline, Aer Lingus, Tom Mulcahy, responded by resigning over the affair, because, he said, his previous position as chief executive of AIB was bringing �adverse publicity on Aer Lingus�. It is not alleged that Mulcahy was a beneficiary of the Faldor fund, but he is now subject to investigation by Ireland�s Revenue Commissioners over his own tax affairs. Almost simultaneously, a beneficiary of the offshore fund, Roy Douglas, announced that he would take nearly immediate retirement from his position as chairman of Irish Life and Permanent. The statement from Irish Life and Permanent said that the retirement was because Douglas was about to reach age 60 and made no mention of the AIB scandal. Former AIB chief executive, Gerry Scanlon, also a former chairman of the Irish Stock Exchange, issued his own statement in response to the disclosures, acknowledging that he had been an �indirect and unknowing beneficiary� of the Faldor fund. The Revenue Commissioners have now launched a comprehensive investigation into the tax liabilities of the bank, which is expected to last months. In a brief statement, the Commissioners said: �Revenue has commenced a full investigation of all tax matters arising from recent disclosures regarding the AIB Group and related entities/individuals. The team is led by Revenue�s Investigations and Prosecutions Division and also includes officers from the Large Cases Division.� To underline the seriousness of the crisis facing AIB, the Dail (the Irish parliament) has launched a parliamentary inquiry into the affair. AIB is refusing to give evidence until other investigations have been completed. CSR should be given equal status to financial reporting Corporate social responsibility reports should be accorded equal weight and status with financial reports, the Fédération des Experts Comptables Européens (FEE) has argued. But for CSR reporting to achieve investor credibility it is essential that reports obtain independent assurance, FEE says. �CSR reporting without assurance is rightly seen as little more than advertising,� said Lars-Olle Larsson, chairman of the FEE Sustainability Assurance Group. �FEE, which represents leading practitioners in CSR reporting, believes that credible assurance is the key to increasing confidence in such reporting in the eyes of the world�s capital markets.� FEE proposed a seven-point set of principles to provide confidence in CSR reporting. Reports should be independently assured; reports should contain sufficient information to verify independence of the assurer; GRI, the standards setter for CSR reports, should ensure that there is no conflict between sustainability indicators and independent assurance; sustainability indices such as FTSE4Good should check that CSR reports have been assured; outside stakeholder interests should increase their awareness of the issue of assurance; national governments and the European Commission should monitor the implementation of CSR legislation in France, Denmark and Sweden; and national standards setters should consider whether there is a need for a national standard on assurance for sustainability. David York, head of auditing practice at ACCA - who acted as an editorial adviser to the FEE on producing its paper on IFRS - endorsed the FEE position. �While numbers and standards of reporting on environmental, social and sustainability issues are undoubtedly rising, too many organisations are still using such reports as window dressing, to give an appearance of tackling �green� issues,� he said. �The assurance process is key to ensuring the credibility of a sustainability report, to both its internal and external stakeholders. In addition, organisations can also benefit from the insights provided by the third-party process and assurance statement. These can provide insights to the gaps, strengths and weaknesses of internal management and reporting processes.� ACCA points out that environmental reporting, in particular, has become a mainstream issue, with the advance of climate change, the need to account for emissions trading and, in the UK, the need for quoted UK companies from the beginning of 2005 to produce Operating and Financial Reviews which take account of their social and environmental performance. �We don�t expect masses of detailed performance data to appear in the OFR, but we do expect to see significantly more disclosure and discussion of risk related issues and the impact of emissions trading regimes on the balance sheet positions of major companies,� said Roger Adams, ACCA�s executive director - technical. The benefits of CSR reporting have been hinted at by figures published by FTSE, which suggest that the establishment of FTSE4Good has led to improvements in companies� social and environmental performance. The FTSE analysis concluded that 266 companies had improved environmental practice, with 47 making changes to meet new human rights criteria. There has been a �strong impact� on disclosure and commitments from listed companies, said FTSE. One of the latest companies to commit to creating a CSR strategy is Cisco Systems, one of the world�s two largest companies, by market value. Cisco is responding to criticisms of the IT sector�s social and environmental performance, particularly through procurement practices. A recent �Clean up your computer� campaign by the Catholic Agency for Overseas Development urged consumers only to buy products from companies with good labour standards amongst suppliers, which led IBM to adopt a code of conduct for suppliers. In the next financial year, Cisco commits itself to provide CSR training for all its 36,000 staff around the world, with �integrated CSR processes� to be applied across the company from the 2006/7 financial year. It is expected that the �digital divide� in computer access will be one of the issues tackled by Cisco�s CSR analysis. Adrian Godfrey, Cisco�s worldwide CSR director, said: �About two years ago our language was about philanthropy, corporate giving and community involvement - and mainly focused on the US,� he said. �The reality was that it was a public relations tool, but today the language has changed to talk about CSR on a more strategic level, about how it can help with market sector development and partnerships. And it has moved from a US to a global focus.� Where the giant Cisco leads, it might be expected that many more companies will follow. Chinese banks told to sue debtors China�s senior banking regulator has demanded that the country�s banks launch a �get tough� policy to crack down on bad debts, valued across the banks at more than US$200bn. Liu Mingkang, head of the China Banking Regulator Commission, told the banks to sue their customers if necessary. The Chinese Government apparently believes that the level of non-performing debts - 80% of banks� loans, 40% of their value, according to Standard & Poor�s - is so severe that failing to tackle it could risk the country going into recession at some point. Liu said that the banks have a responsibility to create in China �a credit culture�. The Government is also concerned that failure to resolve the level of banks� indebtedness by 2007 will create a crippling overhang on the country�s domestic banks, which will then have to face international competition under commitments made to the World Trade Organisation. Some analysts warn that the high level of debt is a symptom of excessive and inefficient investment - echoing what many economists believe was a primary cause of the end of Germany�s post-war boom. The Chinese Government has already bailed out the Bank of China and the China Construction Bank by giving them $HK45bn (£3.1bn), with another $HK65bn predicted to be following soon. It is also expected that China�s central bank, the People�s Bank of China, will raise interest rates in order to slow down the country�s booming economy. Initial efforts by the Chinese Government to tackle growing consumer debt through tightening credit terms have shown success, with new car sales falling by 19% in May. Industrial demand has slackened through a Government move raising bank reserve requirements from 7% to 7.5%. China�s economic policies were backed by Standard & Poor�s, which conducted a survey of confidence amongst fund managers. In its quarterly report on Emerging Markets in Asia, S&P said that fund managers found continuing optimism. James Tew, head of fund research at Standard & Poor�s, said: �China�s economy accounted for a quarter of global GDP growth over the past five years, so if it is overheating, it will affect economic prospects worldwide. Despite difficult conditions, fund managers in the region managed to find opportunities to add value through stock selection in domestic consumables such as clothing, cosmetics and pharmaceuticals, and well-timed profit taking.� Meanwhile, Chinese banks are also taking action to get ready for competition from foreign banks and compliance by 2007 with the Basel rules on risk management and capital adequacy. The country�s leading banks are now investing billions of US dollars in buying modern IT systems to provide new integrated risk and marketing analysis of customers. Bank expenditure on IT is rising by 23.9% annually, reaching a projected $US10.5bn by 2006, according to research from Celent Communications. The opening of the trial of Russian �oligarch� Mikhail Khodorkovsky for tax evasion, fraud and embezzlement could damage investment in a country that has rapidly opened up in recent years to Western funds. Khodorkovsky, a billionaire and Russia�s richest person, had been chief executive of Yukos, where he remains the largest shareholder. Yukos is the country�s largest oil producer and its shares have fallen in value with the onset of the trial - halving since their peak last year - with investors fearing that the outcome of the case might lead to a crippling tax bill and possible company bankruptcy. Yukos has already been served a supplementary $3.4bn tax bill for 2000. Further billions of dollars may be demanded for subsequent years. Khodorkovsky is accused of evading $2bn in due taxes. Allegations on Khodorkovsky centre on the activities of Menatep, an investment vehicle through which Khodorkovsky and his partners - Vasily Shakhnovsky, Leonid Nevzlin, Mikhail Brudno and Vladimir Dubov - controlled Yukos. Shakhnovsky has previously been convicted of tax evasion, for which he received a one year suspended sentence, but acquitted of forging documents. He had already voluntarily paid $1.8m in unpaid taxes and associated penalties. Nevzlin, Brudno and Dubov have all fled Russia in anticipation of arrest. Another Khodorkovsky associate, Platon Lebedev, is being tried alongside him. Khodorkovsky�s lawyer, Robert Amsterdam, has said that conviction is a foregone conclusion. �It is a show trial to help the Government expropriate Yukos,� he is quoted as saying. Khodorkovsky will receive something approaching the maximum 10-year sentence possible under the charges. There is speculation in Moscow that a successful prosecution of Khodorkovsky could be followed by cases brought against other Russian magnates. One of these is Russia�s second richest citizen, Roman Abramovich - owner of the UK�s Chelsea Football Club and governor of Russia�s Chukotka region, who is also the biggest shareholder in the Sibneft oil company. Sibneft and Yukos agreed last year to merge in a deal that has been ruled as unlawful by a Moscow arbitration court. The court decided that the Yukos share issue to pay for the purchase of the majority shares in Sibneft was not valid. A report by the Russian state auditor, Sergey Ryabukhin, concluded that Sibneft had received illegal tax breaks worth £20m from the Chukotka state, via shell companies controlled by Sibneft. The auditor added that Chukotka was effectively bankrupt. Stephen O�Sullivan, head of research at one of Russia�s largest investment banks, the United Financial Group, told accounting & business that the level of damage from the Khodorkovsky case to Russian investment �depends on the outcome of the case�, though the markets were assuming Khodorkovsky would be found guilty. �The next question is what happens to his stake in Yukos,� he added. If the Russian state confiscates them �this would be expropriation�, with potentially serious damage to the prospects for overseas investment in Russia, he predicted. KPMG Australia drops insolvency The insulation of audit firms from non-audit functions is continuing apace. KPMG Australia has announced that its corporate recovery practice becomes, from this month, an independent insolvency firm, known as McGrath Nicol & Partners. The change involves nine KPMG partners and 140 staff - representing 4% to 5% of KPMG Australia�s business. �The imperative for this change is client-driven; our bank audit clients, particularly those who are SEC registrants, have in recent times restricted our ability to compete for corporate recovery work,� said KPMG Australia�s chief executive, Lindsay Maxsted. �After careful consideration, KPMG Australia believes the separation responds positively to client demand and will enable partners and staff in this area to maintain the competitiveness and vibrancy of the business in the longer term. �KPMG is the first of the Big Four firms to take this step in the Australian market in relation to its corporate recovery business, reflecting its commitment to leadership in the Australian capital markets and its desire to ensure that the pre-eminent practice it has built in this area over several decades remains intact. Increasingly, KPMG will position itself with strong strategic alliances alongside its core audit, tax and advisory offerings. We look forward to seeing McGrath Nicol & Partners grow and continue to succeed in the market.� McGrath Nicol & Partners will sub-lease premises from KPMG and be located in the same buildings, and will remain strategically aligned to KPMG, but with independent business operations. Some KPMG corporate recovery partners and staff will remain as part of KPMG�s advisory practice, providing restructuring and turnaround services. The new firm is led by departing KPMG insolvency partners Tony McGrath and Colin Nicol. It is reported that under pressure from the SEC, major Australian banks, including ANZ and St George, were no longer prepared to refer insolvency work to the firm because of perceived conflicts of interest. Bank referrals accounted for 80% to 90% of KPMG Australia�s insolvency work. International standards for SMEs: IASB publishes discussion paper The IASB has published a discussion paper on its proposal to develop a separate set of international accounting standards for SMEs. The discussion paper, Preliminary Views on Accounting Standards for Small and Medium-sized Entities, sets out the IASB�s preliminary views on aspects of the proposal and invites comments on them by 24 September 2004. Introducing the discussion paper, Sir David Tweedie, IASB chairman, said: �In most countries, many or even all entities have a legal obligation to prepare financial statements that conform to a required set of accounting principles that are generally accepted in that country. Those statutory financial statements are normally filed with a government agency and are available to creditors, suppliers, employees, government and others. The great majority of those entities are small or medium-sized entities - no matter how you define �small� or �medium-sized�. Few countries require those entities to prepare financial statements that comply with the full requirements of the IASB�s standards developed primarily for use in international capital markets.� But ACCA is concerned that the IASB�s proposal may result in a final document which will be of little practical use to those businesses or their stakeholders, or do little to support companies� efforts to develop. While ACCA welcomes the fact that IASB has launched the discussion paper and hopes that it will stimulate debate about the type of accounting standards which should apply to SMEs, it is concerned that the resulting standards will not be relevant to a vast number of companies because they will be adaptations of international standards which apply to multi-national listed companies with different needs and resources. Professor Robin Jarvis, head of ACCA�s small business unit, said: �While we welcome the discussion paper we are concerned that the end document, which is expected to run to 500 pages, will be of little use to the intended audience. Part of the concern is focused on the fact that IFRS are written for listed companies which account for less than 1% of all enterprises. Rather than try to adapt these, in an ideal world, we would prefer to see a �bottom up� approach where standards were written with SMEs very much in mind. �ACCA also wants to see a clear definition of the term SME within the discussion paper. When IASB refers to SMEs, is it referring to unlisted companies - which could be huge concerns - or is it really addressing the needs of small companies, which make up more than 99% of all enterprises?� Further details and the text of the discussion paper are available at www.iasb.org.uk. | |