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Category: Accountant Abroad

The beginning of the end of US GAAP

Accountant Abroad

There is an increasing indicative trend that US accounting
standards — which were once considered sacrosanct for accountants the world over
— have begun to decline in terms of importance. Instead, the International
Finance Regulatory Standard (IFRS) are emerging as the most popular accounting
standard internationally.

The Financial Accounting Standards Board and the Financial
Accounting Foundation of USA plan to host a public forum in June 2008 to discuss
a new national blueprint for moving the United States to International Financial
Reporting Standards.

The forum will include participation by the American
Institute for Certified Public Accountants, the Internal Revenue Service, the
Securities and Exchange Commission, the Public Company Accounting Oversight
Board, business representatives, educators, and lawyers, who will discuss the
stumbling blocks on the way to setting up international accounting standards.

FASB Chairman noted that the board continues to work with the
International Accounting Standards Board (IASB) on their convergence project to
create “something better than either U.S. GAAP or IFRS alone.”

Developing an ‘improved version of IFRS will be a complex
process,’ and that ‘a smooth transition will not occur by accident.’ As a
result, the blueprint looks to ‘identify the most orderly, least disruptive, and
least costly approach’ to move U.S. public companies to IFRS.

Those changes include getting rid of ‘carve-outs,’ local rule
exceptions adopted by some countries that deviate from the version of IFRS that
is sanctioned by the IASB. Another adjustment supported by FASB Chairman would
be to strengthen IASB’s position as an independent standard setter by
establishing a sustainable source of funding. (It currently is supported by
private-sector donations.)

One idea is to require countries that adopt IFRS to fund the
organisation. In 2002, the Sarbanes-Oxley Act boosted FASB’s independence by
requiring government funding for the board and its parent, the FAF. Before that,
funding came from the private sector.

The call for a single set of global accounting standards will
mostly likely require a single standard setter, and that organisation may
probably not be FASB. Indeed, last week FASB member Thomas Linsmeier said the
“least important question [regarding the switch to IFRS] is what happens to FASB.”
Linsmeier, speaking at an industry conference sponsored by Pace University’s
Lubin School of Business, said that from a broad perspective, FASB’s survival
should not be what motivates the decision about moving to IFRS.

Before a transition to IFRS becomes a reality, however, other
issues will have to be addressed, including how to change the CPA exam to
coincide with IFRS, and how to rework accountant training, education, and
auditing standards to put the American system in sync with international rules.
What’s more, the industry will have to evaluate how adoption of IFRS may change
SEC policy and legal arrangements that are based on U.S. GAAP.

Next month’s blueprint meeting will also be a good
opportunity to work out which road companies eventually will take to become
compliant with IFRS. The most pressing question is whether to operate dual
accounting systems and have companies choose their adoption date within a
specified window of time, or have FASB set a specific deadline for all companies
to make the jump to IFRS.

Whichever path is taken, a few big accounting-practice issues
will have to be settled between FASB and IASB before U.S. companies adopt the
global standards. They include defining liabilities and equity, reworking
financial statement presentations, and revamping lease accounting and
revenue-recognition rules.

In the meantime, FASB will continue to work on wringing
complexity out of GAAP. For example, by the end of June, FASB’s staff is due to
release proposals on hedge accounting to resolve practice issues and make
disclosures easier to understand. Further, the staff expects to issue proposals
to eliminate qualified special-purpose entities from the accounting literature
by revising FAS 140, and improve FIN 46R, the rule on consolidating
variable-interest entities.

The SEC is also committed to moving U.S. companies to IFRS.
The commission’s chief accountant said that ‘theme’ at the SEC continues to be
to move toward international accounting standards. To quote the chief accountant
“I think to compete in the future, we will have to move to IFRS.”

(Source : CFO.Com/US)

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The beginning of the end of US GAAP

Accountant Abroad

The International Federation of Accountants (IFAC) has voiced
strong opposition to what it sees as attempts to radically change or suspend the
use of fair value accounting without proper due process.


The federation warns against making changes at a national or
regional level which would worsen reporting differences and further confuse
financial markets, resulting in a lessening of confidence in financial
reporting. This would be exact opposite of what is required in current
circumstances. Reducing transparency is not the answer . . . . and it will not
serve the interests of investors.

IFAC believes the additional guidance from the International
Accounting Standards Board (IASB) and the United States Financial Accounting
Standards Board, as well as the International Auditing and Assurance Standards
Board in its Staff Audit Practice Alert, Challenges in Auditing Fair Value
Accounting Estimates in the Current Market Environment, has been very
valuable and will contribute to the public interest through more consistent
application of the standards.

Investors require a single set of accounting rules but a
current European Commission review of fair value accounting threatens to
undermine transparency and comparability. The Commission is due to host a
meeting in Brussels to discuss accounting reform, including further relaxation
to fair value.

Transparency, comparability and consistency in financial
reports is of utmost importance to the investor. In the view of the Investment
Management Association, making changes suggested by the Commission by the end of
October poses a risk that this may not be maintained and that such changes could
result in unhelpful reporting. Even though the current credit crisis requires
swift measures by governments and regulators, fundamental changes in accounting
should be implemented only after due process and the involvement of all
stakeholders.

The International Accounting Standards Board agreed to rush
through changes that allowed some valuations of some financial instruments —
securities — to duck a fair value calculation by being reclassified from ‘held
for sale’ to ‘held for investment. The European Commission eventually endorsed
this move in mid week, but only after considering pushing through changes that
would have allowed financial institutions to reclassify a much wider spectrum of
financial assets, including derivatives.

The US Securities and Exchange Commission is to take
mark-to-market accounting to task in a series of roundtables that will examine
the role fair value played in the current market turmoil.

The first roundtable takes place on 29 October and consists
of two panels, one discussing the relationship between fair value and the
financial crisis that has enveloped the major banks and the second examining
potential changes to the current accounting models.

Fair value has been lambasted by financial figureheads and
politicians in the US, UK and Europe for intensifying the effects of the credit
crunch, with many calling for the model to be suspended during the current
turmoil.

(Source : www.accountancyage.com)

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IFRS — FAULTY FRAMEWORK?

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In the UK, the House of Lords report on audit published in March this year created headlines on competition and choice in the audit market and on the audit of banks. While their Lordships made many of their remarks specifically in respect of bank auditing and bank accounting, there were criticisms that were more generic, stemming from the rules-based nature of IFRS and the evidence suggesting that IFRS was an ‘inferior system’, which limited auditors’ scope to exercise ‘prudent judgment’. They went on to recommend that the use of IFRS should not be extended until the ‘long and uncertain process’ of achieving general agreement on IFRS was complete.

Considering that all publicly-held companies in the UK are required to report using IFRS, these are damning criticisms and ones that bear wider examination. While there is a general agreement that IFRS is a theoretically sound framework for financial reporting, practice suggests that all is not well. The reality is that companies are effectively using their own individual financial reporting frameworks when they communicate with the market. GAAP measures tend not to be broadcast, but frequent reference is made to ‘adjusted (EBITDA) (Earnings Before Interest, Taxes, Depreciation and Amortisation)’. The more cynical might suggest that everyone adjusts their EBITDA to suit themselves and that it forms a sort of ‘earnings before the bad stuff’. However, many auditors insist that GAAP figures have equal prominence with non- GAAP measures, the reality is that analysts and the media reflect other measures, such as free cashflow and maintainable earnings.

There are also a number of areas where business people intuitively distrust IFRS and those tend to relate to areas where the economics implicit in accounting judgments fail to reflect the business decisions behind them.

For instance, in IFRS, the excess of the acquisition cost over the individual net tangible asset values of a business acquired represents a number of intangible assets, whereas under UK GAAP it was all bundled together as goodwill. The values attributed to brands, customer lists and other such intangible assets, all require separate valuation exercises using theoretical models and a number of variable inputs.

The resulting values can vary greatly, depending on the inputs used. I have rarely met anyone in business who ascribes values to intangible assets in such a way, when considering a business acquisition or otherwise, and it is hardly surprising that doing so for accounting purposes causes a degree of the financial reporting outputs to be distrusted.

This distrust of formal financial reporting has contributed to the annual report becoming more a document of record than a live source of information. Companies are now more sophisticated and have a number of channels through which information is given to the market. When taken in conjunction with the blandness and sheer volume of narrative reporting and disclosures in annual reports, it is little wonder that some now see them as anachronistic.

What is to be done? On IFRS, I remain convinced that it is the nearest thing to a conceptual framework that can work globally and scalably for different sizes of companies. However, there are areas where it has become overly complex and produces results that just do not make sense to people in business. These need a long hard look, particularly around asset and liability valuation, impairment, intangibles, share options and deferred taxation. It should be fundamental that an accounting framework is scalable so that we can actually have comparability between companies that have different ownership characteristics, but which might otherwise be identical. IFRS can be put in this position if its complexities are resolved and if its rebalances use fundamental principles to give weight to prudence, comparability, reliability and understandability.

If the Lords’ report can start a sensible debate around IFRS and financial reporting more generally, it will have been worthwhile, irrespective of its sharp analysis of the competitive framework of audit.

[Source : James Roberts, Accountancy, May 2011 (excerpted)]

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Changing Face of the Auditor’s Report

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Our July 2013 issue focused on accountability. There cannot be a more relevant backdrop to the recent global developments taking place in enhancing the role of audit and the auditor’s reporting model.

A concern we have often heard but has remained unaddressed over the decades is the ‘expectation gap’ between the role of an auditor as expected or perceived by the users of the financial statements and what the real role of an auditor is under the applicable laws and regulations. The primary reason for this gap is the lack of communicative value of the auditor’s report. Investors have often indicated that auditors, in the audit process, obtain and review critical information relating to the company, areas of significant impact on the company’s financial position and exercise of management judgement around these areas. These insights do not make it through to the auditor’s report creating a gap between the information that is available to the auditors and their appointers. Consequently, the primary purpose of the audit report has remained limited to opining on whether the financial statements pass or fail the ‘true and fair’ presentation test.

To address these concerns, regulators around the world have worked together and are proposing changes in what is seen as an overhaul of the auditor reporting model.

On 25th July 2013, the International Auditing and Assurance Standards Board (IAASB) issued an exposure draft (the ED) of Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs). The ED revises a number of existing ISAs and proposes a new ISA. The new ISA (ISA 701) Communicating Key Audit Matters in the Independent Auditor’s Report introduces requirements to include ‘key audit matters’ (KAMs) in the auditor’s report of listed entities. KAMs are those matters that the auditor considers of most significance in the audit of the entity’s current period financial statements.

Other changes to the auditor’s report are proposed by revising other ISAs including ISA 700 Forming an Opinion and Reporting on Financial Statements.

In summary, key changes in the auditor’s report proposed are as follows:

• Reporting Key Audit Matters

• A new section on the auditor’s opinion on the management’s assessment and appropriateness of the use of going concern basis and whether the auditor has identified a material uncertainty casting significant doubt on the entity’s ability to continue as a going concern

• A statement of auditor’s independence and compliance with other ethical responsibilities under the applicable law and regulations

• An improved description of the auditor’s responsibilities

• Reporting on the auditor’s responsibilities relating to other information

• Engagement partner’s name in the auditor’s report of listed entities.

While the IAASB was working on these proposals, the regulator on the other side of the North Atlantic Ocean wasn’t far behind. Within a matter of few days, on 13 August 2013, the Public Company Accounting Oversight Board (PCAOB) issued its own new auditing standard The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion with related amendments for public comment. The objective of this new PCAOB standard is, in essence, the same as that of the IAASB’s, i.e., to make the auditor reporting model more informative and relevant to investors and other financial statement users.

In addition to the existing pass/fail opinion, key proposals of the new PCAOB auditing standard in the auditors’ report are as follows:

• Reporting Critical Audit Matters (CAMs) identified and addressed by the auditor during the audit of the current period’s financial statements.

• Enhance the current reporting language by including the phrase ‘whether due to error or fraud’ in the context of whether the financial statements are free of material misstatements

• A specific statement on the auditor tenure (i.e. the year since the auditor has been serving the company consecutively)

• A specific statement on the auditor independence and compliance with the United States federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and the PCAOB

• Communication related to other information in accordance with the new PCAOB auditing standard proposed concurrently—The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report

Although the IAASB’s and the PCAOB’s proposals refer to the key reporting matters differently—key audit matters vs. critical audit matters—the guidance around how these matters will be determined by an auditor is similar. These are both identified as significant risks or areas involving significant auditor judgment; areas that posed significant difficulty in obtaining sufficient appropriate audit evidence or forming an opinion on the financial statements; and those that required an auditor to significantly change the planned audit approach. Under both sets of standards, these are matters of such importance that they are communicated by the auditors with those charged with governance, e.g. the audit committee.

In addition to the IAASB and the PCAOB proposals, the European Commission is also working on similar projects that will change the auditor reporting model through new/revised accounting and audit directives. The changes proposed by the IAASB and the PCAOB are expected to be effective from fiscal periods beginning on or after 15th December 2015. However, different countries may adopt a different timeline in implementing these changes in their version of the ISAs. For example, even ahead of the IAASB’s proposals, in June 2013, the Financial Reporting Council already revised ISA 700 (UK & Ireland) The Independent Auditor’s Report on Financial Statements and is effective from the periods commencing on or after 1st October 2012 for the companies reporting against the UK Corporate Governance Code. Some of the changes in the ISA 700 (UK & Ireland) are over and above those proposed by the IAASB. For example, the ISA (UK & Ireland) also requires the auditor to report on how the concept of materiality was applied in planning and performing an audit.

The way ahead
These changes seem distant and are still at the proposal stage. It should be borne in mind though that these are based on extensive outreach activities conducted by the international regulators and have closely followed each other’s projects. Therefore, these are quite likely to make their way through to the final standards.

As regards the impact on audit reporting in India is concerned, the global developments may put forward an interesting challenge to the regulators and standard-setters in India. Currently, paragraphs 4 and 5 of the Companies (Auditor’s Report) Order, 2003 already require reporting on specific items but these may not align with the definition of a key/ critical audit matter referred to in the IAASB and the PCAOB proposals. Also, there are proposals that do not currently exist in an auditor’s report under the Indian Companies Act. Accordingly, it will have to be seen whether Indian audit reports get even longer by bringing on board these additional sections to make it more consistent with the global reporting model or get a bit more concise by replacing/ removing some of the items reported on currently.

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Governance – Rethinking Takeover Regulations in UK in the Wake of Kraft’s Conquest of Cadbury

Accountant Abroad

Workers at the Cadbury plant
in Keynsham, in the west of England, thought they had a sweet deal. In the
middle of a takeover bid for the British confectioner last year, the U.S. food
company Kraft pledged that the factory, earlier slated for closure by Cadbury,
would remain open if it won the company. When the deal wrapped, though, the
pledge soured. Too much of Keynsham’s production had apparently been shifted to
Poland to reverse its closure, Kraft lamented. The plant, after more than 75
years making chocolate, will shut next year, its staff of 400 among the early
casualties of the $ 18 billion deal.

Few hostile bids for a
British firm and a beloved brand have ruffled the country’s business and
political chiefs the way Kraft did. But the debate took a twist. Although the
Americans were excoriated for their U-turn, the pivotal role of short-term
Cadbury investors in handing the firm to Kraft sparked calls for a rethink of
the way takeovers are governed in the U.K.

And that’s exactly what the
Takeover Panel, the independent body that sets the rules for deals involving
U.K. firms, is doing — undertaking a review of the mergers and acquisitions
process with an eye on reform. The government is poised to unveil its own
recommendations for change, Business Secretary Vince Cable said to a
parliamentary committee on July 20.

Few would dispute any
British claim of being the takeover capital of Europe. According to Dealogic,
which tracks global M&A, the U.K. has seen more than twice as many of its
companies bought since 2005 as any of Europe’s other leading economies. Among
the conquests : airport operator BAA bought by Spain’s Ferrovial, British Energy
bought by France’s EDF and iconic car maker Jaguar and steel maker Corus taken
over by India’s Tata Group.

Chalk at least some of that
up to the Anglo-Saxon brand of capitalism, one that European continental
regulators have often resisted. France, for instance, has bluntly protected its
‘national champion’ companies from hostile offers. With boards and the
government less able to meddle in the takeover process in Britain, says Roger
Barker, head of corporate governance at the London- based Institute of
Directors, it is “very much an outlier in terms of the openness of our market
for corporate control.”

To make deals tougher for
acquirers to execute, the Takeover Panel is considering ways to grant
longer-term shareholders in a target firm more power to decide the fate of an
offer. One proposal being considered would see the threshold for an acquisition
increased from 50% plus one of the voting rights to 60% or higher. Another would
disenfranchise investors who buy a target’s shares after an offer has been made
by denying them the right to vote on the bid.

Both ideas have their flaws.
U.K. corporate law permits a shareholder to control a company with 50% plus one
by, for instance, issuing resolutions to dismiss the board and appoint a new
one. That such a stake would no longer grant ownership seems incongruous.
Depriving newer investors of the right to vote on a takeover, meanwhile, makes
presumptions about their motives and desirability that won’t always be fair.
After all, the reason there are short-term shareholders is that some long-term
shareholders sell out. They are voting with their feet. Disenfranchising on
those grounds, says Michael McKersie — an assistant director at the Association
of British Insurers, which represents major investors in U.K. stocks — “is just
a form of discrimination.”

Other proposals, though, are
less fraught. Giving shareholders in a bidding company a say in the process
seems sensible, since those left holding stock in the combined entity have far
more to lose from a poorly judged acquisition. Big deals involving a British
buyer sometimes require approval from the bidding company’s shareholders. For
instance if Kraft were a U.K. company, it would have needed shareholders to
approve the move for buying out Cadbury.

The City is not anticipating
revolutionary change within the Takeover Panel’s recommendations. Any radical
measures to ensure that deals are decided on the basis of long-term-shareholder
value rather than short-term speculation, would be more likely to come from the
government. The Institute of Directors’ Barker, for one, is betting on the
government to take some significant action. Officials are already mulling plans
to subject big deals to greater regulatory scrutiny before an offer has
officially been tabled. That’s far too late to help workers at the Cadbury plant
in Keynsham. But it just might make the deal’s aftertaste a touch less bitter !

(Source : Time, 16-8-2010)

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Impact of IFRS on Banks

Accountant Abroad

International accounting standards will make it harder for
banks to keep assets off their balance sheets, a UK regulator said on Monday,
while the United States continues to mull whether to broaden its use of foreign
rules.

Under current U.S. accounting rules, companies can keep
certain loans, such as those linked to risky mortgages and credit card debt, in
off-balance sheet vehicles known as ‘qualified special purpose entities’ (QSPEs).

The United Kingdom adheres to international financial
reporting standards (IFRS), which have more flexible accounting rules, but have
forced firms to include more assets on their books. It is said that having a
precise rule may be advantageous, but a precise rule also makes it possible to
design something that is precisely just outside the rule. Therefore the more
principles-based approach under IFRS adopted under UK (Generally Accepted
Accounting Principles) makes it much more difficult to design something in such
a way that it is off-balance sheet.

Few companies that have to adopt international accounting
standards have had to put about 200 off-balance sheet entities back on their
books. Many of the vehicles that were brought back on the balance sheet were
originally created using U.S. accounting rules and “a lot” were set up as QSPEs.
The SEC is examining whether to allow domestic companies to use international
standards instead of U.S. accounting rules.

Foreign-listed firms in the United States can already forego
U.S. standards for international rules and the SEC is expected to come up with a
“roadmap” to broaden use of IFRS. The treatment of off-balance sheet items is
one of many accounting methods that is being examined and debated.

The U.S. accounting rule maker, the Financial Accounting
Standards Board, will soon propose to eliminate the QSPEs. However, the board
has delayed the implementation of the rule change and said it should take effect
for reporting periods after November 15, 2009.

China pushes forward producing accounting, auditing and financing talents :

China’s three National Accounting Institutes are to teach
annually 100,000 people and help them become senior professionals in accounting,
auditing, and financing over the next five to ten years.

Meanwhile, another 1,000 will receive training and teaching
from the three institutes and reach an international level of competence each
year, according to the Chairman of the Institutes’ board of directors.

He raised these two ambitious goals after a board meeting
recently, which analysed the achievements and experiences of the institutes over
the past ten years.

Beijing National Accounting Institute was the first of the
three to be founded in 1998, and had taught more than 130,000 people over the
past decade, averaging 13,000 per year, according to figures from the
institute’s journal. The other two are in the eastern metropolis of Shanghai and
the coastal city of Xiamen, founded in 2000 and 2002, respectively.

Led and supported by multiple state departments, the
institutes are expected to produce talents in accounting, auditing and
financing, who will work as experts and professionals in the country’s
macro-economy management departments, large and medium-sized enterprises and
financial organisations.

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Investor Protection – Shareholder Nominees As Directors

Accountant Abroad

A new rule in the US makes
it easier for minority investors to remove
profligate and ineffective board
members


We have witnessed in recent
times how SEBI has been introducing measures to regulate market players in its
quest to protect small investors. There has been some speculation that the
regulator may introduce provisions to force companies to appoint directors
representing small investors and employees. In this context the following report
on the fallout of a new SEC ruling allowing investor nominees for board
positions makes interesting reading.

The Securities and Exchange
Commission, the US securities market regulator, recently voted in favour of a
proposal that requires companies to put candidates nominated by investors on the
proxy statements sent to stockholders before director elections. Such candidates
can be put up by investors or groups that will be eligible to offer nominees.
The new regulations will let investors owning 3% of a company nominate directors
on corporate ballots, a step that may help shareholders oust board members
accused of non-performance and a failure to boost shareholder value.

The SEC acted in response to
investor complaints that company-selected directors failed to rein in
compensation and risk-taking that led to more than $ 1.79 trillion of writedowns
in the financial sector during the credit crisis. Business groups, including the
US Chamber of Commerce, have fought the change, arguing that labour unions and
pension funds will misuse the threat of proxy fights to seek concessions that
would harm companies.

SEC chairperson Mary
Schapiro said before the vote : “These rules reflect compromise and weighing
competing interests; as with all compromises, they do not reflect all the views
of any one person or group. They are rational, balanced and necessary to enhance
investor confidence in the integrity of our system of corporate governance.” The
SEC has considered permitting so-called proxy access since 2003, only to back
away in the face of opposition from corporations and concern that the agency
would lose a law suit.

The Chamber of Commerce, the
nation’s biggest business lobby, is weighing the possibility of filing a
lawsuit. The organisation had worked with Washington-based lawyer Eugene Scalia
about a year ago to analyse the SEC’s rule-making process on the matter.

“Using the proxy process to
give labour unions, pension funds and others greater leverage to try to ram
through their agenda makes no sense,” David Hirschmann, chief executive officer
of the Chamber’s capital markets unit, said in a statement. The business lobby
“will continue to fight this flawed approach using every method available.” he
said. Scalia, a partner at Gibson Dunn & Crutchei; has won suits against the SEC
over rules for mutual funds and fixed-indexed annuities on the grounds that the
agency made procedural missteps in writing regulations.

Under the SEC’s proxy access
rule, shareholders will be able to nominate at least one director and as much as
25% of a company’s board. Investors will be required to hold the minimum amount
of stock at least through the date of the election, and couldn’t use the rule if
they hold the shares for the purpose of changing control of the company.

“Smaller reporting
companies” with less than $ 75 million in market capitalisation will be exempt
from the rule for three years, the SEC said. Nominating dissident directors
previously required that shareholders mail a separate ballot with the names of
competing candidates and persuade other investors to vote along with them.
Activist investors such as Carl Icahn and Nelson Peltz have waged proxy fights
to get their candidates elected to boards of companies they said were
under-performing.

Various institutional
investors and the bodies representing pension and labour funds have opined to
the effect that the process was time-consuming and too expensive for all but the
wealthiest shareholders. One of the lessons of this current economic downturn is
to be mindful that governance is a significant risk factor and the new
regulation that affords greater accountability will go a long way towards
mitigating that risk. However, the rule won’t necessarily cut costs for
investors because of filing requirements the SEC has mandated. The legal costs
for meeting the process may ultimately be as much as the printing costs sought
to be avoided.

As for possibilities of
litigation arising out of the new rule, one view is that the SEC is susceptible
to litigation, because the rule doesn’t allow shareholders to reject proxy
access if they don’t want it or set “different parameters for ownership
thresholds and holding periods”. There is room for a very serious legal
challenge on the grounds that the rule is internally inconsistent. It will be
interesting to see how investors respond to the new opportunity handed out to
them.

(Source :Bloomberg/Financial Express, 30-8-2010—
excerpted & edited report)

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IFRS implementation Û Auditors’ Training

Accountant Abroad

Earning your stripes as a certified public accountant is not
an easy job. This is about to get even more complicated as the United States
Securities and Exchange Commission is moving toward adoption of International
Financial Reporting Standards (IFRS).

There is going to be a scramble to train people who are in or
headed for financial accounting careers. Plus, there will be a host of issues
that arise for the profession: Training institutes and firms will be stretched
to prepare auditors for the switch. Accounting firms may face new legal
liability. And, investors will have a new breed of financial statements to
study. There’s work ahead for all involved.


Principle-based v. rule-based :


One thing most accountants have probably learned is this :
U.S. GAAP largely is considered a rules-based set of standards, while IFRS is
considered more principles-based and, therefore, subject to more interpretation.
This requires that accountants know business, the economics behind transactions
and the accountant’s responsibility to society to report things that reflect
economic reality. Without this knowledge, data could be presented in ways that
could be misunderstood or misleading. If rules are going to be less specific,
then intent needs to be understood.

Will professors focus more on principles and the conceptual
framework for the rules rather than on the rules themselves ? But will there be
time to teach anything but regulations and the how-to mechanics of accounting ?
These questions remain un- answered.

There is a need to graduate students who know more ‘canon’
than context since partners and managers can do the interpretive work. There is
a requirement for entry-level people who know enough rules to be effective when
sent out on a job. Most agree that principles will be of increasing importance
in training the next generation of accountants as there is more judgment needed
in applying IFRS.

However, this does not take away the fact that focus needs to
be on the conceptual framework, which is more heavily relied upon in IFRS.
Professors can round out this knowledge by comparing IFRS specifics to those of
U.S. GAAP.

This brings in the issue of litigation. One can take a legal
stand when it comes to rules by saying that ‘These are the rules. We made sure
the company conformed to them.’ This is not the same with principles. They can
be interpreted differently, and the interpretation that seemed like a good idea
during audit might not look as good in front of a jury. In light of legal
issues, the shift to fewer rules and more principles will prompt accountants to
hone skills in documenting interpretations and procedures clearly and concisely,
resulting in the entry-level person turning into a critical thinker and a good
writer.

The other point to ponder is discussions between auditors and
corporate management over disclosures and unqualified financial statements. IFRS
may give managers more power in negotiating with auditors over rules’
interpretation and adverse opinions in statements. Issuing an audit opinion is
the auditor’s discretion including the type of opinion to issue. However, there
is a school of thought which opines that this could result in additional
disclosures in the financial statements whether by way of a footnote or
otherwise. If this takes place, then investors will need to work harder to
understand the financial health of companies they’re researching.

World-class catch-up :

Since 2005, companies in the European Union have been
adhering to IFRS, a circumstance that some feel puts U.S. markets at a
disadvantage. “Banks are interested in IFRS because U.S. regulations place a
significant cost on firms.”

GAAP compliance makes U.S. markets more expensive places to
raise capital and less competitive than foreign markets. That was particularly
true for foreign firms, as they had to reconcile statements to U.S. GAAP prior
to this past January, when the SEC dropped the GAAP-reconciliation requirement.
The fact that the SEC said it’s OK to file under IFRS is tantamount to saying
those standards are acceptable.

IFRS may soon be acceptable for U.S. securities issuers, too.
The SEC voted on August 27, 2007 to publish for public comment a proposed
roadmap that could lead to the use of IFRS by U.S. issuers beginning in 2014.
The proposed multi-year plan sets out several milestones that, if achieved,
could lead to the use of IFRS by U.S. issuers in their filings with the
commission. With market globalisation as a driver, the push to bring U.S.
accounting in line with international standards is definitely on. This is going
to result in a requirement for much more robust IFRS education. Academics expect
IFRS questions to first appear on the CPA exam this year. Convergence between
the two standards — U.S. GAAP and IFRS — already is under way.

(Source : knowledge.Wpcarey.com)

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Auditors should try old-fashioned auditing

Getting back to basic checks may be the only way for accounting firms to avoid flawed audits — says Emile Woolf, forensic and litigation consultant.
    One of the defining features of the economic crisis is disclosure of high-level fraud on a breathtaking scale. Although the auditors’ traditional mantra —‘It is not the purpose of audits to detect fraud’ —is repeated at every opportunity, somehow those who rely on audits as a safeguard do not get the message.

    The battle against public expectation has been waged since the beginning of auditing. Various attempts have been made to ‘educate’ investors on what they should expect, but none has succeeded in persuading the public or the courts that the profession’s perception of audit scope is sustainable whenever a higher level of effectiveness is warranted. Routinely bland, mechanical expressions in audit reports carrying more hope than conviction, fill pages, but are read only by insomniacs seeking a cure. Much of that nonessential tidbit in the audit report is now being trimmed.

    It is true that by no means all expectations of audit effectiveness are justified. In the midst of the BCCI debacle Emile Woolf received a box of golf balls with the (then) PriceWaterhouse logo after Emile Woolf wrote an article highlighting the absurdity of seeking to pin the Bank of England’s supervisory failures on BCCI’s auditors. Similarly unwarranted expectations were voiced when Equitable Life’s auditors, Ernst & Young, were misguidedly sued for not anticipating potential consequences of a dispute on guaranteed annuities that was resolved only when it finished up in the House of Lords.

‘Auditability’ Pressures

    Informed opinion is sensitive to the distinction between baseless exploitation of auditors as deep-pocket scapegoats, and auditing that is indefensibly substandard. But with the expansion of global markets, the ‘auditability’ of major enterprises becomes inversely proportional to the scale of their operations, and short-circuiting basic procedures by auditors inevitably follows.

    Currently in the news is the fraud at Satyam, India’s outsourcing giant. Its founder and chairman has confessed publicly to orchestrating a scam over several years resulting in massive cash overstatements. How ironic that last September Satyam was given the Golden Peacock award by the World Council on Corporate Governance, and in 2007 its crooked chairman was named Ernst & Young Entrepreneur of the Year ! It is too early to comment on the Satyam audits, but following these admissions, PriceWaterhouse, the Indian arm of PwC, formally withdrew audit opinions previously issued. In a letter to Satyam, released by the Mumbai Stock Exchange, the auditors stated that they had ‘placed reliance on management controls over financial reporting’ when signing off the accounts. Whether or not this means they did not, independently, confirm bank balances inflated by some $1 bn (£0.7bn), is not known.

    Either way, history shows that no matter how plausibly firms re-invent technical justifications for relying on the work of others, their neglect to perform the most obvious procedures lands them in trouble — over and over again.

Missing the Obvious

    In one of many examples from my case-book, had the auditors merely opened the company’s ‘private cash-book’ they would have seen columns blatantly recording the finance director’s substantial personal expenditure and illicit ‘loans’ to finance department personnel (mainly the FD’s relatives). Instead they relied on ‘high-level IT systems reviews’ in which the FD obligingly collaborated.

    Executives of another cash-strapped company conspired to sit on millions of pounds of receipts from debtors instead of remitting them to the finance company that had discounted related invoices months earlier. The breach could have been discovered by comparing one of the balances listed on the finance company’s month-end reconciliation with the corresponding sales ledger balance. Instead, the auditors relied on analytical procedures framed on unchecked representations of one of the conspirators.

    There is a common thread that threatens to mire the reputations of some major firms if a systemic flaw, now embedded in their auditing culture, is not rooted out. Relying on high-level ‘management controls’, unsupported by basic transactional checks on company records, has never been justified. It is time to resurrect that thing called good, old-fashioned auditing.

    Source : Accountancy, March 2009.

Security alert

Accountant AbroadLately there
have been quite a few reported cases of lost customer data both in the
government or public sector domain as well as in private corporate sector. This
is forcing information security up the corporate agenda.

It seems as though with every new day comes a fresh
revelation of an organisation that has lost some customer data. First there was
the loss by Revenue & Customs Department of two discs containing details of 25
million child benefit recipients. Then the Ministry of Defence admitted that
details of 600,000 applicants to the armed forces were stolen from a laptop in
the boot of a naval officer’s car. Those were just the two largest such
revelations in the UK. There have been many others, such as the loss by the
vehicle registrar in Northern Ireland of the personal details of more than 6,000
car owners.

It is not only government bodies that are failing to protect
customer data. Private businesses are also struggling. To give just two examples
in insurance industry, Norwich Union has lost £3m of customer money through
identity fraud, and Nationwide lost a laptop containing 11m customers’ details.
There are signs that cases such as these are finally driving the issue of data
security up the corporate agenda, forcing senior executives to consider the many
ways in which sensitive data can go astray.

Perhaps the most obvious way to lose data is through the
physical loss of a storage device such as a laptop, a disc or an external hard
drive. According to recent research, business travellers in the UK lose a
staggering 8,500 laptops and other mobile devices in UK airports every year.
Stockport Primary Care Trust recently revealed that it lost the personal medical
records of 4,000 NHS patients on a USB stick.

Helen Hart, a senior associate at law firm Stevens & Bolton
LLP, says : “Data should only be able to be copied over to portable storage
devices with the consent of the company and with such data being passworded. As
passwords can be cracked quite easily by experienced hackers, data should be
encrypted if possible. Organisations that already encrypt information should use
the most up-to-date technology as older methods are easier to hack.”

According to Jim Fulton, vice-president of marketing at
Digital Persona, more and more companies are beginning to use fingerprint
biometric technology. He says : ‘The technology has evolved and is now more
reliable and durable, as well as more affordable and practical. Fingerprint
readers are being embedded into an increasing number of mobile devices like
phones, PDAs, laptops and even USB memory sticks.’

However, for most data it is not necessary to go this far.
Secure encryption is by and large very simple and affordable. In fact, as Jim
Selby, European product manager for Kingston Technology, points out : “The most
shocking aspect of the loss of 25m records by the Revenue, the data on the two
discs could easily have been stored on an inexpensive and easy to use encrypted
two gigabyte USB drive costing just about £ 65.”

Last year, US clothing retailer TJX, had 45m records stolen
in what is perhaps the largest corporate data theft on record. The thieves
managed this by simply parking outside one of the company’s shops and accessing
its wireless Internet system. As Mario Zini, business development director at
Claranet, says : ‘Companies are making ever greater use of the Internet, and
this is exposing their data to ever greater risk.’

Most corporates are now well used to fending off hackers.
Patrick Walsh, director of product management and marketing for eSoft, outlines
the extent of the attacks : “If you put a computer on the public Internet, it
will be scanned by hackers within minutes. If a service such as a Secure Shell
server is publicly available, it is likely to be a matter of minutes before
hackers attempt common username and password combinations at fast rates. An
unpatched Windows machine on the public Internet without a firewall will be
compromised in under 10 minutes.”

He goes on to outline the following steps that companies can
take to protect their systems : “Antivirus scanning must happen for all files
that come into an organisation, not just those that arrive as email attachments.
Websites known to host phishing attacks, malware, and exploits should be
blocked. This list must be updated in real time. Peer-to-peer and instant
messaging applications should be strictly controlled. Email with phishing
attacks should be blocked before it reaches the end user. All confidential data
between home offices, branch offices, and headquarters should be encrypted and
sent over a virtual private network.”

While those technical enhancements will go a long way towards
protecting a company’s customer data, on their own they are not sufficient.
Martha Bennett, research director at Datamonitor, says : “Information security
is much like physical security. Whatever sophisticated alarm systems a home
owner puts in place, burglars will always find a way in if they try hard
enough.” Any business that wants to protect its customer data needs to go beyond
a purely technical solution to implement proper processes and training.

David Cole, security consultant at risk management
specialists DNV IT Global Services, says : “One of the main areas where
organisations fall down in securing information is lack of employee training.
Many have focussed on installing the latest technology to protect their data
while not addressing the weakest link in any organisation — employees
themselves. Good training can bring the threat of data theft alive for
employees, to help them understand and advocate information security policy.”

Providing  this  training  is far  from  simple.  The threats  change  on an almost  daily basis, and few people are sufficiently enthused  by data security to maintain   a focus  on  it.  Joe  Fantuzi,   CEO  of Workshare, describes how one of his products  can help:  “The  key is continual  reinforcement.   Our Workshare Protect scans all documents  leaving the system  to check for any sensitive  data,  and  then asks the user if he or she actually wants  to send it out. Google recently sent out a Power Point presention that  contained  confidential  information  on projected financials in the speaker notes. If they’d used our system they would probably have been spared this embarrassment.”

Clearly, there is much to be done. William McKinney, marketing director of Sterling Commerce, stresses the importance of building a strategy. “Companies tend to be reactive,” he says “Don’t just leap on the latest threat in the media. – Take time to look at your business and work out where the threats lie. Where are your points of weakness? Which is the most sensitive data ?”

Devising and implementing this strategy is a long-term project that will require most businesses to invest significant quantities of time and money. However, a growing number of businesses are sufficiently concerned by the threats of not only fines from regulators, but also negative media coverage that they are starting to act. It is not before time.

Better  data  security  in seven  steps:

    1. Classify your data according to its sensitivity and confidentiality to ensure that the security measures are appropriate to the risk.

    2. Perform a formal risk assessment to identify security vulnerabilities and to ensure appropriate risk mitigation.

    3. Embed formal accountability for data security in job descriptions.

    4. Employ appropriate tools such as encryption and biometrics where sensitivity or confidentiality is a key issue.

    5. Ensure the corporate audit committee has information security as a key item on its agenda.

    6. Encourage the board to recognise its final accountability for security. It needs to ask the right questions and allocate appropriate resources.

    7. Provide all staff with repeated education and reminders about their responsibility for security.

(Source:    accountancymagazine.com/March2008)

Don’t Underestimate India’s Consumers

Accountant Abroad

“Don’t Underestimate India’s Consumers”,
says John Lee
who is a fellow at the Centre for Independent Studies, Australia and visiting
fellow at Washington’s Hudson Institute. He has authored the book ‘Will China
Fail?’ His analysis of the distinction of current domestic market push in China
and India makes interesting reading.


Western multinationals are often attracted to China’s size,
but they’re bypassing Asia’s true shopping powerhouse

The scale of China has always fascinated merchants. In 19th
century England, spinning-mill owners were convinced they would reap profits
beyond their dreams if they could just get every Chinese to buy one
handkerchief. Alas, the one man one handkerchief plan never took off, and for
multinationals hoping to tap China’s masses, the country continues to
disappoint. Since the global economic crisis, Beijing has constructed a way
around a slump. Roads, ports, railways: Name it, and China is building it. But
its consumers aren’t pitching in. As a percentage of the gross domestic product,
Chinese consumption is the lowest of any major economy at less than one-third.
Almost all the country’s growth this year has come from infrastructure spending
or speculation in domestic assets.

Western multinationals should consider fantasizing about
India instead. The momentum for its bounce back comes from Indians, including
the poor, buying their way to growth. The demand for handbags, air travel, and
fine dining in Mumbai may have eased, but domestic consumption accounts for
two-thirds of the Indian economy — twice China’s level!

China’s problem is that its top-down, state-led model of
development (not to mention its artificial suppression of the Yuan) structurally
impairs domestic spending. According to Minxin Pei, director of the Keck Center
for International & Strategic Studies, three-quarters of China’s capital goes to
the 120,000 odd state-controlled entities and their many subsidiaries, leaving
40 million plus privately owned businesses to fight for scraps. The upshot:
Business profits tend to end up in state coffers, not Chinese wallets. Wage and
income growth, even for China’s urban residents, hovers at about half the level
of GDP growth over the past 15 years.

India’s bottom-up private sector model, for all its chaos and
bureaucracy, provides a stark contrast. While the nation badly needs
infrastructure, its consumers are in a far better position to spend. India can
now boast of an overwhelmingly independent middle class about 300 million
strong, as against China’s 100 – 200 million, depending on the parameters.
Profits from India’s businesses, large and small, go into Indian pockets rather
than the state coffers.

The contrast sharpens outside these two nations’ cities. Half
of China and two-thirds of India live in rural areas. That’s about 700 million
people in each. The rural half of China is falling behind. Back in the
mid-1980s, the mainland’s urban-rural income ratio was 1.8. It now stands at
about 3.5. Although per-capita incomes have risen, an estimated 400 million of
mainly rural residents have seen net incomes stall or decline over the past
decade. Yasheng Huang, a professor at the Massachusetts Institute of
Technology’s Sloan School of Management, estimates that China’s absolute levels
of poverty and illiteracy have doubled since 2000! In India, they’ve been
halved. The urban-rural income gap has steadily declined since the early ‘90s.
Over the past decade, economic growth in rural India has outpaced growth in
urban areas by almost 40%. Rural India now accounts for half the country’s GDP,
up from 41% in 1982. World Bank studies show that rural China accounts for only
a third of GDP and generates just 15% of China’s growth. Meanwhile, rural India
is chipping in about two-thirds of the overall growth.

Jagmohan S. Raju of the University of Pennsylvania’s Wharton
School points out that every major Indian consumer company knows it can’t
succeed without reaching the villages. That’s why Indian companies arguably lead
the world in innovative low-income products. Telecom provider Bharti offers the
world’s lowest call rates; Tata Motors sells the world’s cheapest car. And the
push for the villages has led to a well-developed consumer marketplace
throughout India.

For Western brands chasing the luxury market, both China and
India offer abundant opportunities. But when what you sell is suited to — and
scaled to — millions of city and country dwellers, it makes sense to aim your
ef¬forts at India — at least for now.


(Source :
Bloomberg BusinessWeek,
February 1 & 8, 2010)

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Auditing Companies’ Ethics

Accountant Abroad

Questions have been raised about the conduct of business on
the back of the global market collapse. Is the profession ready to be called
upon to audit companies’ ethics ? Michelle Perry reflects on this question in an
article published in Accountancy magazine (February 2009).


As the bewildering number of strands to the present global
financial crisis unfolds and new precedents are set daily, the role of the
accountancy profession in the financial meltdown is under review.

In the wake of the corporate collapses that began with Enron,
the finger was pointed keenly at auditors, who were demonised to such an extent
that lawmakers in Europe and America were kept so busy drafting new accounting
rules and regulations that any real in-depth analysis of the causes of those
corporate disasters didn’t happen until long after new rules were already in
place. But the rules did not prevent Madoff’s giant Ponzi scheme — at this
stage, it isn’t clear whether any of the audit firms should have known about the
scheme when they performed, for example, due diligence work for clients and
funds that lent him the money. And upon reflection of PricewaterhouseCooper’s
statement that its audits of Satyam were conducted ‘in accordance with
applicable auditing standards and were supported by appropriate audit
evidence’, it becomes apparent that the rules did not stop senior financial
executives from producing fictitious numbers.

Authorities aren’t making those same mistakes this time
round. So far, regulatory muscles haven’t been flexed in terms of drafting reams
of new rules, but questions are being asked again about whether auditors could
have done more to mitigate the current corporate collapses in this financial
crisis.

No more rules :

Although the profession says there are lessons to be learnt
from this current crisis, for now it doesn’t support the creation of any new
rules. ‘It’s wrong to say this is all about unethical behaviour by companies. We
would be very nervous about new standards,’ says Steve Maslin, Grant Thornton’s
head of external professional affairs. ‘What comes out of the analysis of this
financial crisis isn’t that we need new standards but that they are better
policed.’ Nina Barakzai, an ethics expert who sits on IFAC’s ethics standards
board, supports this view : ‘We don’t need to change any regulations until we
know why we are changing them and how that will impact on other things . . . It
becomes more important to stick with principles now in the current climate.’ To
ensure better policing of the existing rules, Maslin suggests companies could do
more to regularly check the composition of the executive and non-executive
boards to see if they are ‘fit for purpose’.

One issue that keeps resurfacing is the role of auditors in
assessing business ethics, and whether it is possible to accurately measure a
company’s ethics. The profession has always been supportive of increased
disclosure and narrative reporting, breaking ground with the development of the
operating and financial review (OFR), or the Business Review. Narrative
disclosure has increased significantly over the past decade and continues to
rise, but assurance of this for the most part is not widespread, and anyway its
currently unclear as to whether any existing assurance in this sphere did
anything to prevent the present financial crisis.

The question remains, is it possible to assess and measure
the business ethics of people and are auditors the best placed to do it ? There
are issues of conflict to seriously consider. Accountants may have the most
appropriate skills but aren’t often independent enough to do this kind of
reporting. You won’t get the equivalent of audit report on financial statements
by way of an audit opinion on business ethics.

Like many in the profession, Maslin is concerned that we
ended up forcing companies to report on so many different items that already
weighty financial reports have become even longer. Accountants nonetheless have
a role to play in fostering ethical behaviour in business.

‘In terms of measuring business ethics, we are really in our
nappies,’ says Leo Martin, Director and co-founder of Good Corporation, which
has developed a standard to measure companies’ business ethics. Martin points to
the Siemens corruption scandal, currently in the courts, as an example of how
difficult it would be to catch such unethical behaviour in an audit : Siemens
agreed to pay a record $ 1.34 bn (£ 970 m) in fines in December 2008 after being
investigated for serious bribery involving top executives and management board
members. The inquiry revealed questionable payments of roughly $ 1.9 bn between
2002 and 2006, leading to investigations in Germany and the US.

‘Most auditors would never catch that behaviour because it
didn’t appear in the accounts. That requires a different kind of auditing and
whistle-blowing,’ Martin adds. Auditors are already working closely with
anti-corruption and fraud organisations like Transparency International to
develop controls to combat corporate corruption, and research what role they can
play in detecting corruption.

Laurence Cockcroft, former Chairman of Transparency
International, says management attitudes have changed considerably since the mid
1990s in a positive way and there’s greater awareness now. We are in a new era,
but there’s a long way to go,’ he says.

Independence is integral :

What is certain is that any assurance or auditing of business
ethics must remain unquestionably independent, and more importantly be perceived
to be independent too. Credibility is vital in the current market.

The AIU – Audit Inspection Unit, part of the Professional Oversight Board, found the top seven audit firms’ methods of conducting audit to be generally acceptable, but the report also pinpointed a number of problem areas, expressing concerns over independence and ethical behaviour at several of the firms it reviewed. Accountants are keenly aware of the need to highlight their credibility and that objectivity is where auditors have to avoid compromising. There is general agreement the problem lies in the fact that there are vast questions of judgment involved. Normally these are discussed and mutually resolved; however, behind-the-scenes debate between auditors and boards isn’t appreciated as much as it should be.

Firms must work to allay any concerns the regulators and investors have and heed their suggestions to help restore credibility in the financial systems. No one knows what will happen next in terms of the global economy but economists and business experts predict worse is still to come, which means that the profession will need to illustrate its robustness.

Excerpted from article by Michelle Perry in Accountancy [ICAEW – UK] February 2009.

Singapore Spells Out Six Tenets of Regulation

Accountant abroad

Post-crisis world requires high regulatory standards, while
also allowing for innovation and risk-taking


The recent global financial crisis, which resulted in the
failure of complex financial products and the collapse of several foreign banks
elsewhere, has led to calls here (in Singapore) and globally for tougher
regulation of financial institutions.

In a treatise released on June 8, the Monetary Authority of
Singapore (MAS) shed light on its own position, saying that regulations must not
become too stringent in an attempt to prevent any kind of company shortcoming or
failure. At the same time, it also warned that Singapore’s regulatory regime
should not swing too far in the opposite direction, with an overly dynamic
approach adopted at the expense of a stable financial system. Setting out what
it calls six ‘tenets of effective regulation’, it says it has to tread a middle
ground that sees high standards of regulation, while allowing well-managed
risk-taking and innovation.

Its so-called monograph comes at a time when international
regulatory standards are being reviewed and tightened worldwide by
policy-makers. Among other things, new capital rules — dubbed Basel III — are on
course to be implemented by major financial jurisdictions, including Singapore.
MAS said that while new international regulatory standards will mean some
tightening here, the shift will not be dramatic. It will use its tenets to
design regulation in the post-crisis world and help ensure its approach is
relevant and effective in achieving what it calls a sound and progressive
financial services sector.

In releasing the monograph, MAS said it is looking to foster
shared understanding and ‘shared ownership’ of its approach and objectives with
industry players. The six tenets that will be used to guide its actions are :

  • outcome focussed;


  • shared responsibility;


  • risk appropriate;


  • responsive to change and
    cycles;


  • impact sensitive; and


  • clear and consistent.


These six tenets or principles are seen as being at the heart
of MAS’ approach to regulation.

The ‘outcome focussed’ tenet is evident, for example,
in housing loan rules which serve to encourage prudent lending and proper credit
assessment by financial institutions. This is in line with MAS’ financial
stability objectives and the Government’s policy of promoting a stable and
sustainable property market. To meet these goals, MAS has put in place property
lending limits. The 80% loan-to-value regulatory limit, for example, requires
banks to maintain a ‘prudent buffer’ in their housing loan portfolios, and
encourages property buyers to be more circumspect when making purchases. The
‘shared responsibility’ tenet is demonstrated through the MAS guidelines on
fair dealing issued last year. They spell out the responsibilities of the boards
of directors and senior managements of financial institutions for delivering
fair dealing outcomes to customers.

In underlining its six tenets, MAS stressed that a balanced
regulatory approach was needed, with effective regulation guided by a range of
considerations. These include transparency and clarity, the balance of costs and
benefits, and meeting international standards while remaining appropriate in the
local context.

MAS’ monograph has met with a broadly positive industry
response. Barclays Capital economist Leong Wai Ho said that Singapore “was one
of the well-managed economies” with a sound
banking

system, and added
that the ‘mission statements’ were “really about MAS facing up to an evolving
landscape”. “Market players must play their part and share the responsibility to
ensconce a level playing field,” said Mr. Robson Lee, a partner at investment
banker Shook Lin & Bok.


And MAS deputy managing director Teo Swee Lian noted in a statement that success
in achieving effective regulation “requires more than MAS setting demanding
standards of itself”. He noted that the industry played a key role in the
implementation of regulation. They should not rely on the Government to
prescribe or legislate in a knee-jerk response whenever there are adverse market
developments. “Industry has a critical role to play by taking shared
responsibility for and ownership of the regulatory objectives, as well as
instituting high standards of governance and controls for itself.”


(Source : The Straits Times, Money Supplement, 9-6-2010)

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Lehman’s illegal gimmicks

Accountant Abroad

A court-appointed United
States bankruptcy examiner has concluded there are grounds for legal claims
against top Lehman Brothers bosses and auditor for signing off misleading
accounting statements in the run-up to the collapse of the Wall Street bank in
2008, which sparked the worst financial crisis since the Great Depression. A
judge this week released a 2200-page forensic report by expert Anton Valukis
into Lehman’s collapse that includes scathing criticism of accounting ‘gimmicks’
used by the failing bank to buy itself time. These included a contentious technique known as ‘Repo 105’ which temporarily boosted the bank’s balance sheet
by as much as $ 50 billion.

The exhaustive account
reveals that Barclays, which bought Lehman’s US businesses out of bankruptcy,
got equipment and assets it was not entitled to. And it reveals that during
Lehman’s final few hours, chief executive Dick Fuld tried to get British Prime
Minister Gordon Brown involved to overrule Britain’s Financial Services
Authority (FSA) when it refused to fast-track a rescue by Barclays. With Wall
Street shaken by the demise of Bear Stearns in March 2008, Valukis said
confidence in Lehman had been eroded : “To buy itself more time, to maintain
that critical confidence, Lehman painted a misleading picture of its financial
condition.” The examiner’s report found evidence to support ‘colorable claims’,
meaning plausible claims, against Fuld and three successive chief financial
officers.

Valukis said the bank tried
to lower its leverage ratio, a key measure for credit-rating agencies, with Repo
105 — through which it temporarily sold assets, with an obligation to repurchase
them days later, at the end of financial quarters, in order to get a temporary
influx of cash. Lehman’s own financial staff described this as an ‘accounting
gimmick’ and a ‘lazy way’ to meet balance-sheet targets. A senior Lehman
vice-president, Matthew Lee, tried to blow the whistle by alerting top
management and the
auditors. But the auditing firm ‘took virtually no
action to investigate’.

During the bank’s final
hours in September 2008, Fuld tried desperately to strike a rescue deal with
Barclays, but the FSA would not allow the British bank an exemption from seeking
time-consuming shareholder approval. The British finance minister, Alistair
Darling, declined to intervene and Fuld
appealed to the US treasury secretary, Henry
Paulson, to call Prime Minister Gordon Brown, but
Paulson said he could not do that,” says the
examiner’s report.

“Fuld asked Paulson to ask
(then US) President George Bush to call Brown, but Paulson said he was working
on other ideas. In a ‘brainstorming’ session, Fuld then suggested getting the
president’s brother, Jeb Bush, who was a Lehman adviser, to get the White House
to lean on Downing Street.

Barclays eventually bought
the remnants of Lehman’s Wall Street operation from receivership for $ 1,75
billion — a sum that has enraged some bankruptcy creditors who believe it was a
windfall for the British bank.

The examiner’s report finds
grounds for claims against Barclays for taking assets it was not entitled to,
including office equipment and client records belonging to a Lehman affiliate,
although it says these were not of material value to the deal — the equipment
was worth less than $ 10 million.

The report into the bank’s
demise revealed last week a similar addiction to accounting hallucinogens like
those seen in the Enron case. Until now, the big mystery was how the Wall Street
giant could have been reporting healthy profits right up until the
moment it keeled over and died — bringing most of the Western economy down with
it. But the latest investigation reveals financial transactions known as Repo
105 and Repo 108, used to remove temporarily tens of billions of dollars of debt
from the bank’s balance sheet at the end of every accounting period. As the
banking crisis grew, so did Lehman’s addiction to such trickery. Executives even
referred to Repo 105 as “another drug we’re on” in emails uncovered by the
report.

A lawyer for Fuld has
rejected the examiner’s findings. Patricia Hynes of the law firm Allen & Overy,
said Fuld did not structure or negotiate the Repo 105 transactions, nor was he
aware of their accounting treatment. She added that Fuld “throughout his career
faithfully and diligently worked in the interests of Lehman and its
stakeholders”. A spokesman for the London-headquartered auditors of Lehman told
Reuters the firm had no immediate comment because it was yet to review the
findings.

The capacity for Lehman to
continue to shock after a year of books and revelations is itself a shock. But
the biggest surprise is how little has changed since Enron and the scams of the
last financial bubble. Regulators like to caution against simply addressing the
specific causes of past scandals when trying to prevent future ones, but it is
as if all the Wall Street rules introduced to clean up accounting have only
encouraged finance directors to study the history books more closely for
inspiration.

Edited version of the article
by Andrew Clark

(Source : Mail &
Guardian Online, 23-3-2010

Web address : http://www.mg.co.za

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LWSPRMS Act – Let Wall Street Pay for the Restoration of Main Street Act

Financial transactions tax : Recipe for disaster ?

    Wall Street is widely blamed for causing the current economic mess in the US, so why not let it pay for it ? The idea is to impose a 0.25% tax on the value of stock transactions, and on a variety of derivative transactions. Indeed, a Bill introduced last week in the US House of Representatives is called the “Let Wall Street Pay for the Restoration of Main Street Act”. Proponents of this Bill believe the legislation could raise $ 150 billion per year.

    A small increase in trading costs would, according to supporters, be a manageable burden, and it will be borne by the speculators who the Bill’s authors apparently believe (to judge by the Bill’s name) created the financial mess. Across the Atlantic, Prime Minister Gordon Brown of Britain has supported the idea as a way to take the burden off taxpayers during a time of financial crisis. In reality, the tax would deal a poorly-timed blow to long-term investors everywhere.

    Proponents of a transactions tax misunderstand the way markets work. The bubble in home prices in the US was not caused by the rapid buying and selling of individual family homes. The financial crisis was primarily a liquidity crisis and a credit crunch, and the major problem with collateralised mortgage- backed bonds was that they declined significantly in value and became illiquid. A transactions tax that would have reduced trading and made repurchase agreements more costly could have made the problem even worse. Moreover, the Wall Street would not actually foot the bill for the presumed $ 150 billion tax as the authors of the Bill believe. In fact, the tax would simply be added to the cost of doing business, burdening all investors; not just the speculators. Some argue that high-frequency traders, who reportedly execute 70% of the equity market trades, would pick up the lion’s share of the Bill. But high-frequency traders are not villains — they play an important role in improving market efficiency.

    Often mischaracterised as speculators, high-frequency traders scour markets for minor mispricings and arbitrage trading opportunities. They buy and sell stocks in an instant, hoping to earn pennies on a trade. Far from destabilising or creating volatility in the market, their actions significantly increase trading volume, reduce spreads, promote price-discovery, and ultimately reduce transaction costs for long-term investors. Such trades might not be doing God’s work, but they are socially useful.

    Transaction costs have declined significantly over the past ten years, thanks to the many structural changes in equity markets, including trading in decimals instead of eighths, the proliferation of scores of trading venues that function as exchanges, and an explosion of high-frequency trading. US-based investment management company Vanguard has estimated that total transaction costs on an average trade have fallen by at least 50%, resulting in approximately $ 1 billion of annual savings to its investors. When magnified across the whole investment industry, investors have probably saved tens of billions of dollars in transaction costs.

    Transactions taxes would make most current high-frequency trades unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidity would decline, bid-offer spreads would widen, and all investors would pay significantly higher costs on their trades.

    A tax on financial transactions would have to be imposed internationally to prevent a particular national market from being disadvantaged. It would be very difficult to achieve universal international consensus regarding the details of such a tax. In our environment of global capital markets, it would be virtually impossible to enforce it reliably.

    Article by Burton Malkiel and George Sauter

    (Source : Wall Street Journal — Edited excerpts published in Mint / December 10, 2009)

Ponzi scheme

Accountant Abroad

Chapter Eight

Ponzi’s Ghost

All scams are basically the same,

and the people running them are typically not very bright,

but they’re brighter than their victims,

which is all they need to be.

— David Marchant, investigative journalist

Carlos Bianchi left Italy in the waning hours of the
nineteenth century, arriving in the New World to change his name from Carlos to
Charles and from Bianchi to Ponsi. By the end of World War I, he’d not only
served time in a Montreal jail for cheque forging, he’d changed his name again,
this time from Ponsi to Ponzi.

Around 1919, looking for greener pastures, Ponzi left Canada
for Boston where, one day, he received a letter from someone in Italy containing
an international postal reply coupon. Still in existence today, it’s a simple
method of paying for postage in one country with the currency of another — if
you will, the global answer to self-addressed stamped envelopes. Because someone
in, say, Glasgow, can’t buy stamps to pay for return postage for his
correspondent in, say, Vancouver, Canada, he buys one of these coupons from his
local post office. Worth a fixed amount, the fellow in Glasgow sends it to his
correspondent in Vancouver who exchanges it at his local post office for a stamp
which covers the postage back to Glasgow.

What caught Ponzi’s eye was that the coupon he received from
Italy had been purchased in Spain. He soon learned that while international
postal reply coupons were priced at fixed rates of exchange, actual currency
rates fluctuated to the point where this particular coupon had cost only about
15% of the value of the US stamps he could buy with it. In other words, coupons
bought in Spain and cashed in the States represented an instant profit of nearly
660%. So Charles Ponzi promptly announced his entry into the international
postal reply coupon business.

However, instead of funding the venture himself, which might
have been legal and would have been profitable, he invited investors to join
him. As he outlined the plan, he would personally travel to Spain to buy tens of
thousands of coupons, bring them back to the States where he would exchange them
for stamps, and then wholesale the stamps to businesses. Promising 40% profits
in just 90 days, he reinforced investor confidence with the old trick of forming
a corporation with a legitimate-sounding name: ‘The Securities and Exchange
Company’, which, of course, abbreviated to ‘S.E.C.’

For the first few months, money trickled in slowly but
steadily. It’s when he upped the promise to 100% profits that the flood-gates
opened and, on good days, hundreds of thousands of dollars arrived at his S.E.C.
In fact, he got so rich so quickly that, within six months, he purchased a large
stake in a New York bank and a Boston import-export firm. The only problem was,
his fortune wasn’t based on postal reply coupons, he was simply spending his
investors’ money.

Towards the middle of 1920, the Boston Post newspaper
began asking questions. Reporters canvassed post offices all over town, only to
discover that Ponzi couldn’t possibly be buying as many coupons as he claimed,
because that many coupons hadn’t been cashed in. The newspaper articles brought
investors to Ponzi’s front door demanding their money back. While fervently
praising the scheme, he obligingly returned investors’ money, plus interest,
paying them with the money sent in by new investors. Robbing Peter to pay Paul
worked for a while, but by August, the Boston Post was claiming that Ponzi was
millions of dollars in debt.

Maintaining a calm and reassuring exterior, Ponzi did what
conmen typically do when faced with the truth — he sued the messenger. He filed
a $ 5 million claim for damages against the Post and then, in the next
breath, announced a $ 100 million international investment syndicate. Before he
could get it off the ground, the Massachusetts State Banking Commission closed
down his bank. Newspapers across the country jumped on the bandwagon, reminding
the public of Ponzi’s earlier scuffles with the Canadian authorities, while
auditors fine-tooth-combed his S.E.C.’s books. They quickly discovered that
legitimate transactions were negligible. In fact, the grand total was a mere
$ 30. It meant that Ponzi never even bothered with his international postal
reply coupon idea.

His house of cards crumbled to the tune of $ 3 million. Ponzi
went to jail for a few years in Massachusetts, was allowed out on parole,
skipped and headed for Florida where he set up a real estate scam which earned
him another trip to prison. At the time he admitted, ‘Only a fool would have
trusted a crook like me.’ Around 1930-31, he was deported home to Italy. From
there he made his way to Brazil, where, eventually, he died penniless. His
legacy is the ‘Ponzi scheme’, and his ghost blithely lives on.

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Bring back substance

Accountant Abroad

When ‘true and fair’ accounts disclose either favourable
results that are factually unsupportable, or a position much worse than
warranted due to an ‘accounting quirk’, with no bearing on actual performance,
we are bound to wonder what is going on.

Arbitrary losses may arise when a company is forced to
separate its foreign exchange credits from the transactions that they cover,
even when inventory is costed at the FE rate for all decision-making purposes.
Or results may be burdened with the ‘value’ of options granted to a company’s
directors, when all we ever wanted was a note on the options granted, their
pricing, and how much they made when exercised. Worse, if the company cancels
the options, the grant cost allocable to future years becomes an immediate
revenue hit, even though it will never actually be paid.

A deferred tax ‘liability’ arises with virtually every ‘fair
value’ revaluation (even when there is no intention to sell), despite deferred
tax not being a liability at all under the International Accounting Standards
Board’s own definition.

The requirement to split land and buildings in property
revaluations, to calculate deferred tax on only the building portion of the
revaluation, then split that portion between ‘recover through use’ and
‘recover through sale’ and apply different tax rates over different time
horizons, is enough to convince you that we are dealing with the ramblings of an
unhinged mind.

Little wonder that we come across instances of exasperated
non-compliance.

A note in the accounts of one public company: ‘In view of
the size of the property portfolio, and the complexity of determining the
residual value and anticipated sale dates of these properties, and the fact that
any deferred tax liability raised will be offset by deferred tax assets,
management believe that an exercise to determine the requisite amounts would
require expenditure well in excess of any expected benefit.’


Arbitrary and indiscriminate :

The reverse effect can arise too. British Telecom’s pension
fund deficit doubled to £ 5.8 bn in the second quarter of 2009. Yet its IAS 19,
Employee Benefits, ‘mark-to-market’ measure of liabilities showed a £1 bn
improvement ! Said a spokesman : ‘While BT is obliged to report the IAS
19 figure each quarter, it has no relevance to the funding of the
scheme.’ To what, pray, does it have relevance ?

Banks continue to be the main beneficiaries of
‘compliance-generated’ profits. Years ago Enron showed that the most deceitful
words in the accounting lexicon are ‘off balance sheet’, yet banks still dodge
toxic asset impairment recognition by using credit derivatives held in
off-balance sheet vehicles.

General Electric in the US agreed in July to pay a settlement
of $ 50m (£ 30m) without admitting or denying wrongdoing following Securities
and Exchange Commission allegations that it fiddled its accounting repeatedly,
to preserve its reputation for ‘making the numbers’.

The SEC refers to discoveries by inhouse accountants of
misstatements that more senior executives ordered them to ignore. Two (out of
four) violations descended to the level of fraud, including an Enron-type scheme
to inflate profits by booking phony sales. In none of these cases has there been
a breach of standards or a murmur from the auditors. Yet giving such accounts
the true and fair imprimatur insults readers’ intelligence. The abiding
principle of preferring substance to rule-based form has all but been abandoned.

Our accounting rules have descended into farce and do not
lack mirth; however, they utterly lack commonsense.

Excerpted from an article by Emile Woolf
(Source : Accountancy, October 2009)

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