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How can you make a salary of £26,000 stretch to buying a horse riding business, a holiday home, luxury holidays and a Range Rover costing £45,000?

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It seems that not all accountants are 100% honest.

Whilst the vast majority of accountants are  trustworthy there were two court cases in the UK this week that resulted in jail sentences for accountants.

Gary Gordon, who previously worked for the Big 4 firm PricewaterhouseCoopers, stole £45,000 from his employer UK Mission Enterprises. He rather unimaginatively simple diverted the cash into his own accounts.

He apparently had a gambling habit and didn’t appreciate the amount of money that he had stolen. He’s been jailed for 16 months.

£45,000 however pales into insignificance when compared with £1.3 million which was the amount that Tracey Laws stole from her employer Inchcape Limited.

Inchcape Limited is the parent company of a number of motor trading companies in the UK and for nearly 10 years Laws wrote 75 fraudulent cheques totaling £750,000 to her own horse riding school (which she had set up with money that she had already been stolen from her employers). She had also fraudulently transferred over £500,000 to her husband’s decorating company.

Despite having a maximum annual salary of £26,000 during her time with Inchcape she managed to buy a horse riding school, a holiday home, luxury holidays and a brand new Range Rover.

It wasn’t these mis-matched spending habits that caught her out though. Her crime was uncovered by accident when one of the motor trading companies was changing payment systems and two employees noticed a cheque made out to West Acres Stables (the stables owned by Laws).

These two observant individuals noticed that the handwriting looked very much like the handwriting of Tracey Laws. It turned out that it was her hand writing and the end result was that Laws was jailed for four years last week.

No doubt there are new internal controls in place at Inchcape and looking on the bright side for Laws she will at least save her annual accountancy membership fees going forward and she will also have her bed and breakfast supplied free of charge by Her Majesty’s Government for the next few years.

What will make Ernst & Young different from the rest of the Big 4? Will it be an Executive Decision or…

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According to reports this week, Ernst & Young will be the first of the Big 4 to appoint non-executive directors to its global advisory council.

This is a major move for the accountancy profession.

The profession has been under increasing regulatory pressure for a while now and the decision to appoint non-execs is reportedly in response to the new audit firm governance code that was published earlier this year.

The revised Ernst & Young advisory council structure will in broad terms mean that Ernst & Young will have a board structure which is similar to the multi-national companies that are their clients. Their remit will include monitoring strategy and risk.

Their global advisory council currently includes 36 senior partners. These partners will soon be joined by 4 non-executive directors drawn from the business and regulatory world.

The names of these non-execs will be disclosed later this year and although I’m not a betting man I’d probably have a wager that their CVs will not include the names of Deloitte, KPMG or PricewaterhouseCoopers.

Auditors are good at lots of things but could we spot what’s happening to the bees?

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I often believe that society at large does not get best value for money from auditors.

That’s not to say that we deliver bad value for money.  Quite the contrary in fact; audit work does not attract especially high fees, has high costs of provision and very high insurance costs as a result of fairly high risk of litigation.

All of these factors conspire to mean that audit work is often not undertaken by smaller firms of accountants at all – the risk/ return profile is just not good enough.

Today, I noticed that the UK government had committed to spending up to £10 million for urgent research by eminent scientists into why the population of bees and other pollinating insects is rapidly falling.  Answers are needed soon – bees play an essential role in the food chain that we all depend on.

There are significant amounts of money spent on government research and enquiries. For example, the results of an enquiry into the “Bloody Sunday” killings were announced last week.  This enquiry had reportedly cost £100 million in fees, with a further £91 million in disbursements.  It had also taken fourteen years to reach its conclusions.

Now, I rather doubt that most auditors have the scientific skills necessary to determine the reason for bees’ decline, but I suspect that they do have the skills necessary to identify the key assertions by witnesses to the Bloody Sunday killings, obtain and evaluate sufficient, appropriate evidence and then reach a conclusion.

This process is often known by an alternative name of “auditing”.  Our skills are already used in forensic investigations.  I wonder why people don’t think to use us in other situations where establishing facts is so critical?

With our innate focus on VFM audit and the natural sense of urgency that comes from having to report on financial statements within a matter of months, I can’t help but wonder if auditors would have been able to do the job for less than £191 million and sooner than fourteen years.

How much would you charge for an hour of your time? £900,000 would probably be ok as long as lunch was included….

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It’s tough to qualify as an accountant. The exams are difficult and it’s hard work. The rewards, both financial and non financial however, can justify all of this hard work.

If you work for a firm of accountants then the fee income of the company is largely based on the hourly charge out rates of the employees. I’ve got a feeling though that no matter what your position is within your company you won’t be able to command a charge out rate of £900,000 per hour!

On Friday however a mystery individual paid $2.6 million (approximately £1.8m) for lunch with Warren Buffett, the 79 year old billionaire head of investment giant Berkshire Hathaway and world’s 3rd richest man.

Arguably the most famous and respected investor in the world, Mr. Buffett auctioned his time in aid of the Glide Foundation, a San Francisco charity . Assuming a 2 hour lunch the winning bid of £1.8m results in an impressive hourly equivalent of £900,000.

The winning bidder can take seven of his or her friends along to the New York steakhouse, Smith & Wollensky and are free to ask anything although Mr. Buffett will not be disclosing what he is buying or selling.

Of course, I’m also assuming that someone will make the reservation for the meal rather than risk turning up and not being able to find a table for 8 people as the restaurant is fully booked…

Allegations about two of the Big 4 and “espionage”? Make sure you don’t do this in your exam…

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So the June ACCA exams are finally starting today. After all the hard work students all over the world are facing that unique mixture of excitement, fear and anticipation as they turn over their actual exam papers for the first time.

One thing that really goes without saying though is that when you’re sat in the exam hall you shouldn’t be looking at the person next to you and trying to see what they are writing.

Although exams aren’t being sat in these two particular buildings occupied by PricewaterhouseCoopers and Ernst & Young in London, there have been various allegations recently that the buildings are a little too close for comfort.

Three years ago PwC moved into an office next door to EY. At their closest point the buildings are approximately 10 metres apart. This has led to concerns that the rival companies could spy on each other.

PwC have apparently made the first move to reduce the threat of “espionage”. In order to prevent EY employees spying on them through the windows they have installed automatic blinds that close as soon as audio-visual equipment is turned on. The offices have also been designed so as to prevent any computer screens from being visible through the windows.

EY were reported to be evaluating their options in response.

Whatever the outcome of this is, all of us here at ExP would like to wish you the very best in your exams and sincerely hope that you don’t feel the need to try to spy on your neighbour in the exam! GOOD LUCK.

Liverpool FC: You’ll never walk alone; or You’re never a going concern?

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Liverpool FC are in the news at the moment with their manager Rafael Benitez leaving by mutual consent last night. Liverpool are one of the most famous football clubs in the world. Last month they released their accounts for the year to 30 July 2009.

Their financial results weren’t very impressive with their accounts showing the biggest loss in their history (£55 million) as well as significant loans (£250 million).

Their auditors, KPMG, stated that Liverpool are now “dependent on short-term [bank loan] facility extensions” and “this fact indicates the existence of a material uncertainty which may cast significant doubt upon [Liverpool’s] ability to continue as a going concern”.

Most of you will know that going concern is a fundamental accounting assumption.  In the normal run of things, the financial statements make no mention of it.  Similarly, the audit opinion makes no specific mention of going concern, except in unusual circumstances.

Ignoring the specific issues involving Liverpool, going concern generally presents a tricky problem for the auditor.  If an auditor mentions going concern as a specific worry, it is likely that the company will fail.  The act of mentioning it could become a self-fulfilling prophesy.

Some would argue that there’s a significant divergence between what auditors actually say and what readers hear.

Looking at the three ways of reporting on going concern under ISA 705:

Situation 1: The company appears likely to be a going concern.

What auditors say: Nothing.

What auditors mean: The company appears to be a going concern, but there are no guarantees.

What investors hear?: All is well. Invest with no fear of possible insolvency.  Go forth and be merry.

Situation 2: Additional disclosures about elevated uncertainty about going concern.

What auditors say: The financial statements give a true and fair view, but we emphasise the disclosures by the directors about the elevated going concern risk in note x…

What auditors mean: The company’s continuing existence depends on the outcome of this external event.  It could go one way or the other, but it’s impossible to say which.  Take caution.

What investors hear?: The company is in serious trouble.  Run away.  If you are a depositor in a bank, get all your money out right now before it’s too late.

This difference in what we say and what people hear means that this option is hard to use.

Situation 3: The company is not a going concern

What auditors say: Either an adverse opinion (if the accounts aren’t prepared on a break up basis) or unqualified opinion with emphasis of matter (if they’re produced on a break up basis).

What auditors mean: The company is probably not a going concern.  It might be in the process of an orderly winding down in order to return money to investors.  Take extreme caution in investing, as there’s a very short time to recover your investment.

What investors hear?: RUN FOR THE HILLS! If you have already invested money in this company’s bonds or shares, you’ve lost it; make your peace with your grief and move on.

So in effect, mentioning going concern could be the kiss of death for many companies.

Could there be a better system to use? The international market for bonds for example has long had a well understood and much more subtle system, using gradings such as the Standard and Poor’s grading system of grading risk of default on bonds from AAA rating (virtually no risk) to BBB (becoming speculative) to D (virtually dead).

In the current high risk, post recessionary environment, might it be better for to adopt a similar system for going concern and thus the company’s shares as well as bonds?  The directors could present a separate report on going concern and assign their own S&P style grading, which the auditor could then perform a review engagement upon under ISRE 2400, giving investors explicit but limited assurance on the directors’ classification. By doing that, the spectrum of risk that going concern represents could be more accurately reflected in the financial statements.

Going back to Liverpool, there’s a view that some football clubs are too big to go out of business and I’m sure that most Liverpool supporters believe they will still be cheering on their team for many years to come and the subject of “Going Concern” isn’t top of their agenda.

It’s ACCA exam results time so there will be…

It’s ACCA exam results time so there will be some nervous people waiting for an email or the post to arrive. Best of luck to all of you that are waiting for the results.

I’m probably showing my age but when I qualified a fair few years ago the results of the exams were published in the Times newspaper on the Saturday morning when the results were due to arrive by post. The early editions of the newspapers would be available the night before in London so if you lived in London you could get your results on the Friday night before the results were in the paper on the Saturday.

At that time I wasn’t living in London but the Big 4 company I worked for organized some people to pick up some papers in the evening and staff a phone help line where students could call to see if their name was in the paper. After calling and finding out that I had passed I couldn’t resist the temptation to call 10 minutes later to double check!

Before you laugh at me for calling twice, for those of you that will be getting good news in an email then I’m sure that you’ll check the email more than once!

If you’re keen on getting started on your next papers then head over to our ExPand pages and download a copy of our ExPress notes to get you started. We’re releasing some great new free learning resources on our ExPand site next month so keep watching for some really exciting developments.

Singing, dancing, puppets and Enron. Of course it makes sense…

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I had a great weekend and on Saturday was lucky enough to see the play Enron at the Noel Coward theatre.

Enron is arguably the best known corporate bankruptcy in recent years. The US energy and communications giant collapsed in 2001 owing approximately $60 billion. The collapse of Enron is well documented.  Jeffery Skilling, the CEO of Enron, was keen on mark-to-mark accounting systems which allowed notional value to be given to ideas which might pay off in the future. Billion dollar losses were disguised as profits. Skilling was sentenced to 24 years in jail for fraud and Kenneth Lay, Enron’s founder, died before sentencing.

Enron was also a major factor behind the introduction of the Sarbanes-Oxley Act and also the collapse if its auditor Arthur Anderson resulting in the “Big 5” becoming the “Big 4”.

Whilst on the face of it a play about accounting fraud at a US corporation doesn’t sound the most exciting thing to watch it really was very well put together. Theatre, dancing, singing and puppets all added to the drama!

The play was great and if you do get an opportunity to see it I’d strongly recommend that you do so.

My husband is in the medical profession and he is always joking that accounting and finance is easy. Unfortunately the play was so good at explaining complex financial issues in a relatively straightforward way that he is now even more convinced that finance concepts are easy to understand!

Shutting the stable door

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A UK director of one of the Big 4 firms pleads guilty to false accounting and fraud, having fraudulently claimed more than £500,000 in expenses in order to finance his wife’s extravagant lifestyle!

The director told police that he had stolen the money because “he did not want her lifestyle to suffer”, being afraid that she would divorce him. Apparently his fraudulent claims were kept below £5,000, meaning that they did not require further authorisation!

A spokesman for the firm said:

“Mr Wetherall’s frauds were detected via our own internal checks and he was dismissed in 2008. A thorough internal investigation was carried out and the case was then handed over to the police.”

The firm also stated that they had changed their internal procedures to prevent such fraud being committed again.

That could be useful I guess when advising client’s on their internal control systems in relation to expense claims!

Audit firms in the UK left unprotected against claims of negligence

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.