Archives For Ian Welch

By Ian Welch, head of policy, ACCA

Ian Welch

ACCA has consistently stated that the view of investors should be at the heart of standard-setting and financial policymaking. Too often their voice is not heard as rules are being made or proposals formulated.

But who exactly are the investors? How have their asset allocations and investment strategies changed since the Global Financial Crisis (GFC)? And, of most direct interest to accountants, what do they want from corporate reporting?
ACCA is undertaking a four-stage project examining the UK and Ireland investor landscape, post-GFC and the first two reports, based on interviews with key players and a survey of 300 investors carried out concurrently, reveal trends of far greater international application.

The increase in short-termism is one clear trend. The traditional domination of markets by pension funds and insurance companies has been eroded both by greater international ownership of companies, and by the emergence of other players such as hedge funds and private equity firms, with shorter-term investment horizons. And even the traditional players have switched much of their investment from equities to bonds, as a result of the GFC.

Added to this , the vastly increasing proportion (estimated by some to be 80%) of trades that takes place via computer in nano-seconds has left a question mark on who the owners of companies actually are – and how companies can meaningfully engage with investors who hold shares for a very short time. We have already seen international policymakers, such as the G20 and EU, responding with measures to enhance long-term finance and address the ‘ownership vacuum’. More is needed, it seems.

Low interest rates are another key trend. Central bank activism, leading to loose monetary policy, historically low interest rates and currency wars throughout Europe and the US has been a major response by the authorities to the GFC. This has had a clear effect on investors, making them search for yields in riskier investments.

Perhaps inevitably, the greater pressures on investors has seen a constant demand for more information and transparency -and the proliferation of new technologies such as mobile and social media has led to massively more corporate information being available, much of it on a real-time basis. But how much it is useful, and how do investors prevent themselves being overwhelmed?

Intriguingly our research revealed a dichotomy – and one which leaves policymakers with much to ponder. Three-quarters of investors say that, that the quarterly report remains a valuable input to their investment decision-making. Yet, at the same time, almost half of investors believe mandatory quarterly reporting should be abandoned, with almost two-thirds believing the increase in information has encouraged “hyper-investment” and taken up excessive amounts of management time.

This suggests a “tragedy of the commons” effect, whereby individual investors want to consume quarterly reporting for their own self-interest, despite recognizing that this focus on shortening time horizons is damaging for the overall market’s long-term interests.

Fully 45% said they had little use for the annual report – and worryingly, two-thirds said their faith in company reporting had declined since the GFC. Almost half that believe management has too much discretion in the financial numbers they report. While perhaps not surprising, these are nonetheless chastening findings for standard-setters and policy-makers to reflect on.

Is there any good news for the profession? Yes for auditors – much maligned of late – as external assurance of company figures seemed to be their main source of credibility. And investors claimed that they would be prepared to pay more to have additional information available contemporaneously as long as it was externally verified. This would put pressure on the audit profession – but it should consider it carefully as a way of regaining the initiative following recent critical political and regulatory inquiries on audit.

There is much here for many other parties to chew over, and ACCA will be following this up with a series of events designed to bring key players together to thrash it out, before releasing stages 3 and 4 in this research series, which will look at the ‘real-time’ issue in greater depth and investigate corporate reaction.

But for now, accounting standard-setters and regulators must consider the criticism of standards and the annual report. Policy- makers must wrestle with the quarterly reporting conundrum. And the investors themselves must consider how to get their voice more clearly heard when policy decisions that affect them are being made. If they really are prepared to pay more for a wider audit, then now would be a good time to let that be clearly known.

This post first featured in The Accountant, June 2013


Ian Welch

By Ian Welch, head of policy, ACCA

With pressure on public finances being at an all-time high on most countries – and public trust in both business and governmental institutions seemingly being at the other end of the scale – the role of finance professionals will come under increasing scrutiny.

Our new report, Setting high professional standards for public services around the world, analyses all aspects of public sector accountants’ roles and makes the crucial – and topical – observation that finance professionals must promote whistleblowing laws and policies to ensure that communities can have confidence in how their taxes are being spent.

Accountants have a critical role to play in rebuilding waning public trust by championing the cause of developing anti-corruption procedures and cultures. To do this, they will have to work with other stakeholders to help eradicate fraud and corruption, through a combination of education, fraud-awareness programmes and training in forensic accounting.

This is no easy task, but it can be done. In the UK, the newspapers are currently full of stories of scandals in the healthcare, social care and police sectors – all of which came to light through whistleblowing by public sector staff. The fear of retribution and repercussions are always there. But it is even more vital than ever, at a time of unprecedented constraints on public spending, that finance professionals feel able to highlight issues where public money raised through taxation is misspent or misused – and that those responsible can be held to account.

ACCA also calls for proper separation between the accounting and auditing functions within all governments. In some countries that does not exist, which impairs accountability and transparency. The report accepts there is a challenge in educating the populace about the audit process – and in making it more transparent – to ensure public confidence.

Yet it could be argued that the public sector is, in many ways, ahead of the private sector in this respect. The ongoing regulatory and political inquiries into the role of audit – highlighted in this space last month – reflect a wider public sense of dissatisfaction with the auditors of banks and other major institutions. ACCA has consistently argued that the role of audit itself needs to be extended to take in issues such as risk management, internal controls and corporate governance. And yet the public sector is already there – in most developed countries ‘value for money’ audits are the norm. These are notably wider in scope than their private sector equivalents.

Under VFM audits, not only do the financial statements receive a true and fair opinion, but the auditors also have to comment on aspects of corporate governance and the effectiveness of the organisation’s arrangements to secure value for public money. There is also a wider variety of reporting in the public sector, driven by its multiple stakeholders (politicians, citizens, investors, pressure groups etc) which require reporting innovations such as scorecards. Audits have to satisfy all these requirements and audiences, which can be challenging.

Yet many of these audits are done by the same firms who seemingly find innovation much harder to bring into their private sector work. In the UK, the long-awaited report by the Competition Commission on audit competition has just been published and among its findings, the Commission concludes that there is considerable ‘unmet shareholder demand with regard to information supplied by auditors’ and that by putting the demands of management ahead of investors, auditors ‘competed on the wrong parameters’. Overall, the Commission’s report is a fairly bleak assessment of the current situation.

It is however, weaker on practical remedies to improve the situation. Amazingly it doesn’t mention liability once – yet concerns over liability have been shown, via outreach carried out by ACCA and others since 2009, to be a serious deadweight on innovation. This issue simply has to be addressed.

But firms – and the wider profession – also need to reflect on whether there is more they can do to bring some of the more interesting aspects of public sector audits to bear on their private sector work. This really might start to bridge that intractable expectations gap.

This post first appeared in The Accountant in February 2013

A couple of financial stories this week have made this observer delve back into his archive.

The ongoing success of Nationwide, by far the biggest of the UK's remaining building societies, was highlighted by the Independent newspaper, which compared its achievements to the miseries which have affected the banks in recent years. The paper rightly celebrated the fact that Nationwide, almost alone, had fought against the tide of demutualisations of the 1990s.

Back in 2006 I wrote a report for Parliament on the demutualisations  and I, too concluded that Nationwide's independence was something to cherish – not only because, on balance, the building societies offered consumers not only a better deal on products and services but that the sector relied, to an unhealthy degree on Nationwide to show that mutuality was still sustainable at a large scale organisation. And I believe that it deserved, and still merits, praise for not joining the herd.         

But it would wrong not to 'fess up to things which proved to be wrong. For which was the organisation I pointed to, as the 'main success story of the demutualisers' six years ago? A certain Northern Rock, which notoriously crashed 18 months later. At the time of the report, Northern Rock was growing exponentially and seemingly doing everything right. So I can join the massed ranks of pundits who did not see the crisis to come. Did anyone?

And just when banking regulation seemed to have left the front page, the crisis at JP Morgan has brought it right back again. In 2009, after the financial crisis had reached full speed, ACCA put together a report which looked at principles of good regulation. We argued that the 2008 crisis had sprung largely from poor governance in banks and the creation of over-complex giant organisations in which risk management functions did not have sufficient clout, and management too often had insufficient understanding of the financial products that were being sold.

Of course, we await the full story of the JP Morgan crisis. But from the outside it seems déjà vu. Regulation can usually be improved and, to work most effectively, we argued, have the buy-in of the organisations being regulated. But outright opposition to a regulator is rarely a good option. As the Independent rightly points out modern capital markets are complex places that require complex regulation. But if If JP Morgan chief executive Jamie Dimon reckons the Volcker Rule on proprietary trading is too complex to implement, it follows his bank is too complex too.

By Ian Welch, head of policy, ACCA
The half-jokey jibe at the profession which UK Prime Minister David Cameron made recently, when he said he did not want his government being just 'seen as a bunch of accountants' has upset some of the professional bodies, two of which have gone into print to complain.

While I think the comment should be seen in the throwaway spirit it was intended, there is a more serious issue involving the government and accountants. Since the onset of the global financial crisis, qualified accountants have played increasingly central roles in businesses, providing greater input into strategy and working well outside of the traditional finance function.

But at ACCA's recent symposium of its global forum chairs, there was a general consensus that the profession was in some ways under siege – the ever-increasing regulatory burden aimed particularly at larger entities means finance directors may be too bogged down with compliance that they will be unable to devote enough time to enhancing business performance. Which is not what economies need right now.

Auditors too, are under relentless political and regulatory scrutiny across the world, following the crisis. And with audit being the best-known part of the profession, all accountants will suffer in reputational terms if auditors remain under sustained fire. And while ACCA agrees that audit needs to evolve and widen in scope, let’s not throw the baby out with the bathwater.

Governments need to be more aware that finance professionals can play a crucial role in generating economic recovery. Consider a few of the typical things that accountants do: the preparation of financial statements, the provision of strategic guidance for business, or the provision of assurance services. At the SME level surveys  consistently show that accountants are the top advisers to these businesses.

And accountants are also involved in redefining what business success means. Given the effects of the financial crisis – recessions, job losses, austerity measures, and continuing crises of confidence – the accountancy profession is increasingly looking at how we measure true value. Do we just look at balance sheets and profit statements, focusing just on the financials, or do we look at the wider value that business brings to the public and society? Our work on sustainability and more recently integrated reporting, is aimed to ensure that business performance is judged in the round. And by putting their ethics training into action and following through on the values of the profession they represent, qualified accountants have the opportunity to spread the public value message throughout the business world.

The accountancy profession is strong enough to withstand a few jibes and jokes. Ever since the famous Monty Python sketch in the early 1970s, it has taken a good few blows. But governments need to realise that recession is not the best time to alienate the very people who will help business recovery by blaming them for the economic situation and piling on regulatory burdens. Let accountants and governments work together to solve our problems not battle against each other.

By Ian Welch, head of policy, ACCA

Just when it seemed that the debate on the future of audit was taking a well-earned rest for a few weeks until the EC's post-Green paper draft legislation (expected in November) the UK's accountancy regulator decides to stir the pot. 

In two wide-ranging reports out today, the Financial Reporting Council outlines the responses, and proposed follow-up to, its major consultation paper issued in January, Effective Company Stewardship – Enhancing Corporate Reporting and Audit. ACCA will be responding on all the various issues covered, including narrative reporting, risk reporting, and governance in due course, but here I will look at the auditing issues it has raised.

The first point to note is that on one of the EC's favourite issues – the length of time that auditors typically remain in post – the FRC has nipped in ahead of Commissioner Barnier and has floated the idea of mandatory tendering of audit firms after 10 years, or at least for companies to have to explain why tendering has not happened. The EC (and the US regulator, the PCAOB) seem to be favouring mandatory rotation after a similar length of time – so tendering might be seen as an attempt to coax Brussels into this softer, more palatable option. ACCA is opposed to forced rotation, which could add to costs and force companies to lose the most appropriate auditor, but it is hard to argue against having to put the audit out to tender once a decade. Given that some sort of reform is inevitable, that proposal would be one the profession should not go to the barricades to prevent.

But on the more fundamental issues of audit reform, the FRC comes out from its consultation process with a clear view – it is the audit committee, not the auditor, which should be responsible for providing the key information in annual reports; the paucity of which has led companies to come under strong criticism from users. The FRC also notes the Lords and Treasury Select Committees’ conclusions that 'audit is not meeting user and/or public expectations, and that there is a need for greater transparency about the judgements made by management and auditors in the course of preparing and auditing financial statements'. The EC and PCAOB meanwhile have both focused on the possible provision of such information by the auditors.

The audit committee should take the lead role, says the FRC, because the company is responsible for the report and statements and it is their views 'that are wanted by and should be reported to investors and other users.' The FRC argues that it is the board and management that have direct access to these users, so auditors should not be 'making judgements that are properly those of management'. Just to reinforce the point, the FRC says that auditors might be tempted to use boilerplate standardised language whereas the audit committee is 'more likely to be specific to the business.'

Given that the FRC has based its conclusions on 100+ responses from market participants and its accompanying document spells out the summary findings from those discussions with companies, investors and analysts, it makes disagreement difficult. After all, policy should be evidence-based. But while ACCA supports an enhanced role for the audit committee we should be wary of raising expectations too much and assuming this is a panacea to all problems. Also as some of the FRC's respondents point out, there is a concern at the 'circularity in the system that would arise from the [proposed] requirement for the auditor to review the report of the audit committee, which is supposed to be overseeing their work.'

There is not much to warm auditors generally in the report. The current audit report is 'opaque and wholly uninformative'. And there was, it seems, ‘little enthusiasm for external auditors to be given mandatory responsibilities for validating risk reporting'. Why so? The reasons given include that it was not appropriate for the company's willingness to take on risk to be assured as it was a commercial decision. This seems curious, given the strength of feeling among investors that the FRC has identified for more information on risk. And, except in relation to financial controls, 'it was felt that audit firms did not have the expertise to assess risk management and internal controls'. Yet in the US, there is a requirement for audit firms to report on internal controls. The FRC's main suggestion for improving auditing is to revise the auditing standards relating to reports by auditors to audit committees and so make auditors give greater detail on the factors they relied on in their judgements on areas such as controls, materiality and accounting policies.

While ACCA would agree that auditors should not seek to replace management's responsibilities, we have consistently argued for an extension of the role of audit to take on additional reporting in areas like internal controls, risk and governance. While we disagreed with much of the EC's Green Paper proposals on structural reform, we nonetheless applauded its willingness to look at an enhanced reporting role for audit. Ditto the PCAOB's proposed 'Auditor's Discussion and Analysis' free-flow report. The FRC has rejected these ideas and put the onus for communicating with shareholders and other users wholly on management and boards' shoulders.