As you prepare the themes in the final section of the P4 syllabus guide (“emerging themes”) it might be interesting to know that after a recent trip to Zurich, Switzerland, I asked my friends in the financial industry what was happening these days after all the drama of the bailouts and credit crunches.
They told me that life is getting back to “normal”: the banks are making money again; he said: “the bonuses will be back: borrowing at 0% from the central banks and investing in corporate bonds at 1% and 2% means unlimited, riskless profit… nothing has changed, except that there are fewer banks, making larger profits.”
The French have a saying: “Plus ça change, plus c’est la meme chose” (the more things change, the more they stay the same).
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-11 19:22:232009-11-11 19:22:23Is life getting back to normal?
Royal Bank of Scotland (the UK based banking group) has had its fair share of troubles of late. It made some acquisitions that in retrospect were a clear mistake, such as its purchase of ABN Amro. It failed to manage risk properly, having chosen to fire its risk manager; allegedly for making too much noise about the company taking too many risks. The result of this all was a taxpayer bail out and the enforced departure of its chief executive, Sir Fred Goodwin.
At the time it became obvious that stakeholders were going to require a good degree of blood letting at board level, the bank’s chairman discussed the situation with Sir Fred. As a result, Sir Fred chose to resign, taking his right to an annual pension of £703,000 with him. Had he been fired, his pension rights would have been closer to zero.
Much public comment and anger followed, with virtually all of this aimed at the outgoing CEO. But where were the non-executives? The general duties of non-executive director are:
Remuneration: decide appropriate pay (including pensions) for executive directors in the circumstances.
Internal control and risk management supervision. History shows that this is at least questionable.
Scrutinise the executive directors.
Strategy: contribute to strategy.
Sir Fred Goodwin was entitled to his pension. He later voluntarily chose to waive £200,000 per year, but universal legal opinion is that he would have been entitled to the full amount, because the non-executives allowed him to resign.
Perhaps the press and the public are venting their frustration and anger too much at the executive directors?
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-11 18:50:172009-11-11 18:50:17Royal Bank of Scotland. Where were the non-executives?
The examiner clearly reads a good newspaper on a regular basis and perhaps gets inspiration for future examination questions.
Which newspaper do you read?
In her article ‘Examiner’s approach to Paper P7 (ACCA)’, which appeared in the January 2007 edition of Student Accountant, Lisa Weaver made the following comments:
“A note on current issues – there is likely to be at least one requirement per exam dealing with a current issues topic.”
“Candidates should appreciate that they are expected to read around current issues and not rely on manuals from tuition providers. Good quality newspapers, professional journals, as well as ACCA’s website, provide sources of information on current developments in audit and assurance.”
I recalled the examiner’s comments when reading in the Sunday newspapers about the G20 conference earlier this year. I also recalled that since 2005, candidates sitting for the advanced level auditing paper have had to be familiar with the international anti-money laundering standard and know the implications of its recommendations.
Have you read a good newspaper today yet? Nothing wrong with starting with sports section, my personal preference, but make sure you read the rest of it as well!
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-08 19:36:392009-11-08 19:36:39G-20 conference requests public listing of money laundering territories
Those of you who enjoyed the corporate governance parts of ACCA and CIMA may be interested – or excited, or irritated, depending on your point of view! – to know that the US Congress is considering legislation requiring the roles of the Chairman and the Chief Executive Officer to be split between two people.
This is big stuff. Why, you must be thinking, that is precisely the recommendation (read: requirement, hint, hint) of the Combined Code in the UK, and this feature distinguished it from the American Sarbanes Oxley law, which never mentioned such a split.
The reason is cultural: the Americans have always believed that one guy has to be in charge of a company, whether his name is Jack Welsh (General Electric) or, in an earlier age, Harold Geneen (of ATT).
In his book, “The Age of Turbulence” Alan Greenspan endorses this “John Wayne” approach to management. One guy in charge is the way to go. And now, after all the controversy on corporate mismanagement, bailouts and excessive executive remuneration, Congress is looking at … requiring the separation of the Chairman and CEO roles at US companies.
Watch this space…
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-04 19:21:022009-11-04 19:21:02Corporate governance across the Atlantic.
A lot has been said about bankers’ bonuses in recent years, with a general view amongst the public that paid to bail out the banking system that they are excessive.
Bankers, unsurprisingly, say that without packages that include large elements of performance-related bonus, the banking industry would not attract the top talent that a complicated business needs. So goes the argument.
So who is right? The answer is simple enough; they both are. Without bonuses, ambitious people are likely to relax, creating inefficiency. As banking is widely seen as the central nervous system of the capitalist system, lethargy in banking would hurt us all.
Yet it seems that many bankers (other than directors of the bank) had bonus systems linked only to short-term profit measures. Had they been paid in a more carefully crafted cocktail of short- and long-term measures that deterred risk taking (eg long-dated share options), then the perceived pattern of excessive risk taking for inadequate return may have been curbed. Perhaps the same discipline that affects the remuneration committee should pervade all remuneration deals.
With ambitious and aggressive people the rule is simple: WYPIWYG (what you PAY is what you get). If bankers were paid to take high risks on derivatives and not held back in pay terms for taking risk, it might be harsh to see it as their fault for doing what their remuneration package incentivised them to do.
Putting together a remuneration package for a banker without bonuses is arguably like making a cosmo cocktail without the vodka.
Speaking of which, I’m writing this on a Friday at 8.00pm. Time for a cocktail of my own. Cheers!
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Everybody is calling it a merger, but do mergers really exist? And from what date does the combination happen?
Key aspect 1: Determining if IFRS 3 applies and identifying the acquirer.
IFRS 3 applies only to combinations as a result of which an entity (identified as “the acquirer”) obtains “control” of “the acquiree”. Is that the case?
Yes: Xerox is set to acquire 100% of ACS, with ACS expected to “continue to operate as an independent organisation” (branded “ACS, a Xerox Company”) and with Lynn Blodgett (ACS CEO) reporting to Ursula Burns (Xerox CEO).
Key aspect 2: Determining the acquisition date
IFRS 3 requires the combination to be acquisition accounted for at the date when control is obtained. Is the “acquisition date” determinable based on released information?
Not quite: the agreement was signed by the two boards on 28.09.09, but the transaction is “expected to close” by the end of Q1-2010.
Key aspect 3: Recognising and measuring the consideration transferred
IFRS 3 requires consideration transferred to be fair valued at acquisition date, with any transaction costs being expensed and not included as part of the consideration. How does it work in the case?
Xerox is set to pay $18.6 in cash and issue 4.9 shares in exchange of 1 ACS share. Considering share prices on the eve of the deal being announced, such consideration would have amounted to $6.2 billion. However, due to the subsequent fall in Xerox’ share price , the fair value of the agreed consideration went down to $5.5 billion. By the “acquisition date”, the fair value of this consideration may again vary. As to the costs of issuing the new shares raising the $3 billion expected to be needed to finance the deal, IFRS 3 would want them expensed in acquirer’s books and NOT considered as part of the consideration paid (and, therefore, potentially capitalised as goodwill).
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-04 18:09:132009-11-04 18:09:13Xerox Corporation and Affiliated Computer Services (BPO world leader) unveil planned new business combination
Pricing is an important area of ACCA and CIMA. There are a variety of pricing methods discussed in the syllabus including customer based pricing and competition based pricing. Broadly speaking, the former is based on the amount that customers would be willing to pay for benefits whilst the latter involves setting prices based on the prices of competing products.
In the UK, the Toy Retailers Association has just released their list of the top 12 toys that they expect to be most in demand in the UK this coming Christmas.
The interesting thing about the list is that the average price of the toys is just over £26. This compares to an average price of £32 in the Christmas 2007 list. This represents a fall of nearly 20%.
Has this fall been driven by cost savings by the manufacturer on labour or material? Or maybe reductions in transport and storage costs?
My guess is that the toy manufacturers are aware of the recession and the impact on parents buying power (customer based pricing issue). They are also aware that the toy industry is an extremely competitive industry and at the moment their competitors will be offering cheaper products (competition based pricing).
Either way, I’m sure that there won’t be a lot of children debating this issue on Christmas day when they open their presents!
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-04 12:06:182009-11-04 12:06:18Thinking of Christmas already?
So what exactly was important about yesterday (31 October 2009)?
Yesterday was an important day for any individuals that submit their income tax returns as a hard copy paper return rather than filing them online.
31 October 2009 was the deadline for submission of an individual’s paper income tax return for 2008/09. To be precise, the paper tax return should have reached HMRC by midnight on Saturday 31 October 2009 to avoid penalties.
If the paper returns are submitted late then there is an automatic penalty of £100 for late submission of returns.
What will be interesting this year however is the impact that the postal strikes have had. For those of you reading this outside of the UK who are not aware, there have been a number of days of industrial action by workers from the Royal Mail and this has resulted in postal delays. HMRC have stated that there will be no extension to the 31 October deadline. If however you can prove that the strike delayed your submission then you may be able to appeal the penalty.
Either way, the key thing to remember for your exam is that the deadline for submission of the paper returns is 31 October.
I’m sure that all F6 students are aware that the deadline for submitting an online return is after the paper return deadline. The deadline for submitting an online return for 2008/09 is 31 January 2010 and one thing is for sure and that is that if the online submission is late you are unlikely to be able to appeal against the late submission penalty on the basis of the postal strike!
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-01 17:53:542009-11-01 17:53:54So, what deadline is on 31 October?
It was announced recently in the UK media that Britain’s Big 4 auditing firms have been left exposed to a surge in negligence claims, after the Government refused to limit further the damages they could face.
The Big 4 have been lobbying hard for a cap on payouts, but although Lord Mandelson, the Business Secretary, appeared sympathetic to their concerns, he indicated that he was not prepared to change the law at this stage.
This decision has come as a great blow to the accounting firms, believing that there may not be another opportunity for a change in the law for some time. There fear is that they will be targeted by investors and liquidators looking to recover losses from big company failures and Madoff-type frauds.
Under existing company law, directors can agree, with shareholder approval, to restrict their auditors liability, but to date, no leading companies have done so.
Three of the Big 4 face litigation in relation to Bernard Madoff’s $65 billion fraud.
In 2005 Ernst & Young was sued for £700 million by Equitable Life, the claim was eventually dropped, but would have bankrupted the firm in the UK if successful.
Earlier this year KPMG were sued for $1 billion by creditors of New Century, a failed sub-prime lender.
Big 5 became Big 4 of course following the collapse of Arthur Andersen in the wake of the Enron scandal.
Some fear that Big 4 dominance of the audit market is such that British business would be subject to a state of disarray if a massive court action were to reduce Big 4 to Big 3! It was announced in the UK media that Britain’s Big 4 auditing firms have been left exposed to a surge in negligence claims, after the Government refused to limit further the damages they could face.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-10-21 19:39:392009-10-21 19:39:39Audit firms in the UK left unprotected against claims of negligence
This was one of the headlines that recently caught my eye, remembering that auditor’s liability is one of the few ‘new topics’ in ACCA P7.
In August 2009, the UK Law Lords on a split decision (3:2) upheld an earlier ruling by the Court of Appeal in a multi-million pound action brought by the liquidator of Stone & Rolls (a commodity trader) against their auditors Moore Stephens.
The Law Lords ruled that the auditors were not liable for failing to detect a £58 million fraud perpetrated over a number of years.
The fraud involved the CEO of Stone & Rolls, a Croatian businessman called Zvonko Stojevic, using the firm as a means of defrauding banks by means of a letter of credit scam.
The split decision perhaps provides less clarity than the auditing profession might have wished for in relation to the court’s view on an auditor’s liability for the detection of fraud.
The senior Law Lord, Lord Phillips, said “It does not seem just that in these circumstances, Stone & Rolls should be able to bring about a claim that it had set about inducing.”
Lord Manse, dissenting said “the world has sufficient experience of Ponzi schemes ….. for it to be questionable policy to relieve from all responsibility auditors negligently failing in their duty to report on such companies’ activities.”
We could be seeing a whole number of new claims against auditing firms worldwide as companies go into liquidation in the current economic crisis.
What’s your view on this case? Who knows the examiner might ask you!
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-10-18 19:38:162009-10-18 19:38:16Auditors cleared in landmark negligence case
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