June 2015

Who audits the auditors?

Published on: 29 Jun 2015

It’s a great life being an auditor. You visit your clients and can ask as many questions as you like.

After all, your job is to confirm the accounts are showing a “true and fair view” or to be more precise, your job according to “International Standard on Auditing (ISA) 700, Forming an Opinion and Reporting on Financial Statements”, is to “form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.”

So, that’s the job of the auditors.

Who checks the quality of the audits though?

In the UK, the Financial Reporting Council (FRC) undertakes annual quality inspections of the largest auditing firms in the UK including Deloitte, EY, KPMG, pwc and a number of mid tier firms.

The latest annual report has been released and whilst there has been an improvement in the performance compared to previous years with 67% of all audits inspected in 2014/15 being assessed as either good or only requiring limited improvements, 33% of the audits inspected fell below the highest standards set by the accounting regulator and were classified as either requiring improvements or significant improvements.

Let’s just pause there for a moment.

What this is saying is that one in every three audits undertaken by the leading accounting companies in the UK have been classified as needing improvements or even worse, needing significant improvements.

Three of the more common issues identified in the report were:

  • Insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgement such as impairment testing and property valuations.
  • Insufficient or inappropriate procedures being performed. This is common to many areas including revenue recognition.
  • The failure to adequately identify the threats and related safeguards to auditor independence and to appropriately communicate these to audit committees.

The FRC do however appear to be trying to improve things and have introduced various initiatives.

For example, they now “require firms to develop action plans to address the weaknesses identified in individual audit engagements and firm-wide procedures”. In conjunction with the development of these action plans they now require firms to undertake a detailed rootcause analysis of the factors contributing to the issues arising from the inspections and those action plans together with the related analyses will then be subject to follow-up inspections.

A copy of the report can be found here.

The FRC also prepared individual reports for the Big 4 and they can be found on the following links:

Deloitte

EY

KPMG

pwc

Is it clothing or a blanket?

Published on: 13 Jun 2015

If you’ve just had a baby the concept of taxation is probably one of the last things on your mind but for anyone who has purchased a SnuggleBundl for their baby there is an interesting link to taxation.

blog-Snugglebundl-268x275According to the manufacturers the SnuggleBundl is “the world’s first lifting wrap for babies. This beautiful multi-award winning hooded baby garment ties at the front and the soft, strong handles on this wearable wrap let you lift and lay your baby so gently that they’ll stay sleeping”.

It seems that they have been selling very well and there have no doubt been lots of parents, babies and possibly very small adults who are extremely pleased with the warmth and comfort of the SnuggleBundl.

The tax authorities though had different things on their minds. They were more concerned as to whether the SnuggleBundl was baby clothing or was a blanket.

And the reason the tax authorities were so concerned about the classification was because of?

Well, the reason was all down to VAT. As is the case in a number of countries, the UK tax authorities do not levy VAT on children’s clothes. They do however levy VAT at 20% on blankets.

The tax authorities claimed the product was a blanket whilst the company claimed it was clothing.

The simple difference was that if it was classified as clothing it would be sold for £34.99 whereas if it was classified as a blanket it would be sold for £41.99 (£34.99 plus 20% VAT of £7).

This difference in price would have a major impact on the number of SnuggleBundl’s sold as it’s a big difference for a parent if they have to pay £34.99 or £41.99 for the item.

Given that in both of these cases the company would end up with the same amount of money, it was obvious why the company wanted it to be classified as clothing (if the item was classified as a blanket and sold at £41.99 the £7 VAT would need to be paid over to the tax authorities by the company leaving them with £34.99).

In what no doubt caused a huge sigh of relief the company (plus a few happy gurgles by some babies) the company won the case and the courts found that the product was in fact clothing and not blankets.

The directors of the company can sleep peacefully now…

Who would learn from who?

Published on: 09 Jun 2015

Keeping your clients happy is key in any business. Every now and then an organisation comes up with an extremely creative way of improving things for their clients.

blog-selfie_pensioner-275x275 (1)Humanitas is a retirement home in Deventer in the Netherlands.

A retirement home is accommodation that has been designed to look after the needs of old people and whilst lots of these homes do a good job in terms of looking after their clients by way of the accommodation, food and medical support one area which is often lacking for the elderly residents is fresh communication.

In the Netherlands there is a shortage of accommodation for university students and Humanitas realised there was a nice opportunity to link the shortage of accommodation for students with the need for the elderly residents to have fresh communication.

Given that the retirement home had surplus rooms they have decided to let university students live at the retirement home free of charge. The only requirement is that they have to spend at least 30 hours per month acting as “good neighbours” to the elderly ladies and gentlemen they share the accommodation with.

Yes, the university students are being provided with free accommodation in exchange for agreeing to spend time with the pensioners who live there.

I think this is a really great idea and will benefit both the students and the pensioners.

Importantly though, will we see a sudden surge of pensioners taking selfies whilst wearing a traffic cone on their head and challenging each other to drinking games…

Not the brightest individual.

Published on: 04 Jun 2015

Be honest now – have you ever thought that it would be nice to be able to cheat in your exams and get away with it? Have you ever thought it would be great to be able to pass your exams with ease without putting in any real effort?

blog-exam-cheat-man-275x275Well, if the thought has crossed your mind you are not the only one. The girlfriend of Ayan Zhademov thought it would be a good idea to cheat in her exams and she managed to persuade 20 year old Mr Zhademov to help her cheat.

Unfortunately for the lady (but fortunately for all the hard-working honest students who were sitting the exam) the plan wasn’t the smartest and her boyfriend didn’t look much like a woman.

“Didn’t look much like a woman” – why does it matter whether or not he looked like a woman I hear you say?

Well, the plan was for Mr Zhademov to pretend that he was his girlfriend and to sit her exam for her.

When the day of the exam came around, he wore her clothes together with a wig and lots of make-up.

It was reported that despite his efforts to dress up as a woman he simply look like a man wearing a dress and make-up which had been put on badly. The exam invigilators noticed something was wrong and became even more suspicious when he spoke as he had an extremely deep manly voice.

The end result was that he was caught out, his girlfriend failed her exam and he was fined £1,400.

The morale of the story is that it doesn’t pay to cheat and no matter how tempting it may appear to be, just don’t do it. Not even if your girlfriend or boyfriend is a genius and looks exactly like you.

The ExP Group