PRESIDENT BLOG - Brendan Murtagh

Re-examining the role of audit - vital for accountancy

ACCA believes it is vital for the accountancy profession to re-examine the role of audit and to question whether a sufficiently strong case is being put forward for the benefits that audit can provide to businesses, the economy and society. We firmly believe that audit has a key role to play as a source of public confidence in financial reporting but note that there is currently little published research that seeks to demonstrate the value of audit in promoting business trust.
 
ACCA is seeking to change this situation by holding high-level roundtable events on the future direction of audit in a wide range of markets, and having recently spoken with influential accountants and other business leaders around the world, we put forward the following agenda as a contribution to the ongoing debate.

While we reject claims from those critics who argue that the audit model is broken, we propose that the profession should develop approaches in respect of larger entity audits that pay more heed to the needs of a wider circle of stakeholders than simply current and future investors, and hence meet better the demands of the market.

This, we believe, will be achieved by extending the scope of the audit from giving an opinion on financial statements alone to engaging on issues such as risk management, the effectiveness of corporate governance, and testing the assumptions around an organisation's business model and its likely sustainability.

Would auditors be up to the job? We believe they would – it should not be forgotten that the same firms regularly take on a wider approach to the auditing of public sector bodies, where they report not just on the financial statements (as most bodies provide services rather than make profits), but also cover corporate governance and, in the UK, efforts by their clients to secure value for money for the taxpayer.

Single set of principles a priority for the UK and Ireland

Our response to the UK Accounting Standards Board's consultation on The Future of UK GAAP placed great emphasis on convergence of accounting standards in the UK and Ireland as necessary so that all companies in these countries report under a single set of accounting principles.

ACCA believes that there is little sense in maintaining the current system, where three tiers of accounting standards are in operation; international financial reporting standards (IFRS), full UK and Ireland standards and financial reporting standards for smaller entities (FRSSE). Instead, we want to see the use of full IFRS and IFRS for small and medium-sized enterprises (SMEs), with the phasing out of the FRSSE.

The benefits are numerous, including the comparability between the reports of listed and unlisted companies in the UK and Ireland. The comparability between reports of companies across jurisdictions, which would contribute to cross-border trade and 'levelling of the playing field'. The preparation of accounting information on a more consistent basis, helping to simplify internal reporting, and so reducing costs for companies.

In addition, the adoption of a single set of standards would bring greater simplicity for accountants in preparing or auditing financial statements as familiarity with only one basis for preparation would be required. This in turn would reduce the scope for confusion and complexity. The training and education of accountants and users would be simplified by being based on a single system of financial reporting. And we must not forget the substantial savings of resources involved in maintaining a separate system of UK GAAP.

As ever, your views on this are welcome.

Accountants for Business: one size doesn't fit all

ACCA's most recent technical paper entitled Living up to Expectations has identified three fairly distinct and coherent groupings as emerging from an effort to benchmark the experiences of businesses smaller than those of the Economist Intelligence Unit (EIU) panel against larger SMEs, and to contribute to a better understanding of how accountants are supporting small businesses through the recovery.
 
Strategists
More numerous than any other grouping (39% of respondents to ACCA's Global Economic Conditions Survey Q4 2009), the Strategists believe that small business owners need to take a moment as economic conditions improve in 2010 to look at the big picture and make robust plans for the future. More than other members, they tend to advise small businesses to seek out opportunities as markets begin to recover, to invest and to explore new or niche markets.
 
Competitives
Competitives believe that the downturn offers a rare opportunity for smart businesses to build a strong competitive advantage. They advise on competitive pricing, achieved by cutting costs or building more efficient operations, as well as on maintaining or improving quality and customer service. More than a quarter (26%) of the respondents to ACCA's Global Economic Conditions Survey Q4 2009 were classified as competitives.
 
Defensives
Defensives typically advise small businesses to be extremely cautious: to prepare psychologically for tough years ahead and to focus on survival. In particular, Defensives are preoccupied with maintaining strong cash flows, improving financial controls and reducing reliance on other organisations, including lenders. This group was also noted as being more likely than any other to direct small businesses to government assistance programmes. Just over one-third (36%) were classified as Defensives, including a substantial part of the sample in western Europe (44%) where they are substantially over represented.
 
The findings of this study suggest that the advice of professional accountants has rarely been more valuable. At the global level, the consensus view appears to be that survival can no longer be the sole preoccupation of small businesses.

For some, time and resources will now allow a brief period of reflection and planning that could yield benefits in the future. Others must wade straight into the recovery in search of competitive advantage. However, in those regions where the recovery is weakest, large numbers of finance professionals are still advising businesses to prepare for the worst.
 
Small businesses appear to have outperformed larger organisations against most of the key indices monitored by ACCA, despite facing disproportionate cash flow pressures and benefiting less from government intervention. In particular, their refusal to engage in indiscriminate cost cutting is serving them and the global economy reasonably well.

Tax after the financial crisis

A new ACCA position paper entitled Tax After the Financial Crisis has just been issued which looks at a range of key issues relating to tax and asks questions such as 'did tax cause the crisis?'

The paper calls on policy makers to consider a number or recommendations, including:

The UK's tax system needs to become less complex and more stable in order to enable business planning. It should also be benchmarked against a larger number of economies than just the G7.

Governments should employ the 'think small first' principle when considering tax legislation.

There should be consistent consultation with business on taxation issues.

Corporate tax legislation should be largely removed from the Finance Bill to provide more possibilities for thorough examination of important clauses.

ACCA endorses the idea of sunset clauses whereby tax legislation is periodically overhauled and consolidated to bring it up to date and make it easier to follow. Outdated laws should be removed.

Governments and tax authorities should devise clear metrics to gauge whether the tax system is being appropriately and sufficiently reviewed.

Your views, as ever, are most welcome.

Diversity and equality in SMEs - there's a challenge ahead

As we start the month of February, let us hope the coming months will continue to bring a faster global recovery and stability.

ACCA and the Federation of Small Businesses (FSB) recently held a discussion on the diversity and equality in small and medium-sized enterprises (SMEs). One of the key findings from the meeting was that SMEs will need to be increasingly mindful of equality and diversity issues.

The Equality Bill is currently undergoing Committee stage consideration in the House of Lords, and SMEs have been exempt from some of the provisions, such as reporting on the pay gap between male and female employees.

However, the implications of the Bill could still be profound. SMEs are often ill-informed about the benefits of a diverse workforce and ill-equipped to seize the opportunities it offers. SMEs employ 59% of the private sector workforce – if they cannot do their part for equality and diversity voluntarily, the entire agenda could be in trouble.

Panellists at the event (including ACCA's CEO and MPs) found that small businesses are among the government's strongest allies in its efforts to improve equality and diversity. Working for a small business is itself a way for many to sidestep discrimination or negative attitudes, and a way out of disadvantage.

Small businesses are able to achieve these positive outcomes for employees without the benefit and burden of written policies. Also noted was an explicit and systematic commitment to equality and diversity is necessary for small businesses themselves to reap the full benefits of a diverse workforce.

As ever, your views on this are welcome.

Year end brings first concrete signs of recovery

ACCA's fourth quarter Global Economic Conditions Survey has provided us with the first firm evidence that economic conditions are finally improving – albeit with good old accountancy caution still firmly in place.

Nearly half of the 1700 respondents worldwide believe economic conditions are about to improve or already doing so. And there are also signs that demand, access to finance and cash flow are recovering. 

But a growing number of finance professionals across regions are forecasting a very weak recovery, with 11% of respondents now expecting the downturn to last another three years or even longer. Of course that still means the overwhelming majority believe recovery will be with us sooner.

On balance, ACCA shares that view, expecting at least another year of challenging economic conditions, while conceding that the more pessimistic of our members have a point.

I'd like to thank everyone who has contributed to the quarterly survey, making it one of the world's largest and most representative surveys of economic confidence.

I would also like to send seasons greeting to everyone who is celebrating at this time of year, and to wish you all a happy and healthy 2010.

Finding a way out of the crisis

On 1 December, ACCA is organising a top-level event in London that looks at the role the finance professional can play in leading us out of the current crisis.

Along with ACCA's chief executive Helen Brand and an outstanding line-up of experts, I will be discussing a range of issues and challenges that we face now and in the coming months.

Professor Andrew Chambers will be speaking on the issue of the Walker report; Andrew Lennard, from the Accounting Standards Board, will address the current fair value issues; Philippa Foster Back, director of the Institute of Business Ethics, will address the role of ethics in the current crisis; and Angela Knight, chief executive of the British Bankers' Association, will be looking at how EU regulation changes will impact on banks in the UK.

I am looking forward to the presentations and debate, and we will keep you up to speed on the issues that arise from this event.

A welcome announcement from Brazil

Luiz Inácio Lula da Silva, the Brazilian president, recently gave a rallying call to arms ahead of the COP 15 summit. He was adamant that if the deadlock in negotiations is to be broken – and some form of deal reached at Copenhagen – leaders will need to attend the event in person. And in this regard, we at ACCA are in complete agreement.

In order for the log jam to be cleared it is crucial that country leaders – including Barack Obama – attend the summit. As we pointed out in our paper, The UN Climate Change Conference, 2009 (COP 15), there will be no better time to try to enact a successor to the Kyoto agreement before the Protocol expires in 2012. Therefore, every effort must be made if a deal – or, more likely, an agreed route to a deal – is to be reached this December.

Pursuing the creation of a global carbon economy is critical in the fight against climate change. Cap-and-trade schemes, sustainable business initiatives, and alternative energy technologies will all be discussed at Copenhagen. It is vital that at the very least there is consensus on the best way forward for such schemes and that they are promoted internationally. Agreement on a way forward in Copenhagen means that we will be able to begin forming a global plan to combat a global problem.

As ever, your views on this are welcome.

Tax havens - it’s time to be more open and for big countries to stop using them as a distraction...

One of the key targets of the larger western governments during the recession has been the tax havens, for their alleged encouragement of tax evasion. There has been unprecedented pressure for them to 'open the books'.

While ACCA strongly believes in transparency, along with the right of governments to pursue tax evaders – and accepts that some offshore centres may not have helped themselves – there is a view that governments who cry 'foul' are operating double standards.

In ACCA's new policy paper Competition or Coordination? Reassessing Tax in a Global Environment, we argue there is a strong suspicion that the attack by leading nations on tax havens is driven by a dislike of the downward pressure on tax rates that they engender, along with an attempt in some cases to distract attention from the underlying reasons for their budget deficits.

Tax havens need to volunteer as much information as possible but, in return, the rest of the global economy needs to accept these jurisdictions fully and not act out of pique at efficient low-tax economies.

Your views on this are welcome, as ever.

Recovery claims may just be wishful thinking

Any theories that the global economy is on the road to recovery look more like wishful thinking if ACCA's latest Global Economic Conditions Survey is anything to go by.

The largest number of respondents we have had for a quarterly survey – 1,200 finance professionals in 92 countries – shows that in the third quarter of 2009, while more of us believe the downturn has 'bottomed out', we also believe that a reliable recovery is still more than a year away.

Not surprisingly, there has been a reported rise in late payment as well as supplier and customer bankruptcies. Worryingly, investment in staff fell at an accelerated rate and investment in capital projects, which had previously shown signs of stabilising, seems to be weakening further.

There is good news in some parts of the world, with the Asia-Pacific region, Africa and, to some extent, Central and Eastern Europe reporting much higher levels of business confidence and more optimism than their counterparts in Western Europe and the Americas.

Does this coincide with your experiences – and when do you expect to see a sustainable upturn?