Archives For John Davies


By John Davies, head of technical, ACCA

There is no doubt that professional advisers have on occasions been implicated in money laundering schemes.

Numerous cases have been reported of solicitors being successfully prosecuted for being involved, innocently or otherwise, in such activities; there have been other cases where solicitors have been found to have been actively complicit.

Given the expertise that is called for in order to devise and execute the more sophisticated laundering schemes, it is perhaps only to be expected that criminals will seek out the advice of technical experts who understand how business works and how laws and practices can be manipulated to facilitate substantial transfers of criminal property.

The UK Government is conscious of this and is seeking to step up its efforts to tackle serious organised crime. In a new Bill, presented to Parliament last week, the Government has included a clause to make it a criminal offence to ‘participate’ in an organised crime group. While there is no express reference in the Bill to accountants and lawyers, the Home Office’s press briefings in advance of its publication made it clear that accountants and lawyers were very much the targets of the new measure.

The Bill would make it a criminal offence to take part in any activities that the person concerned knows or suspects are the activities of an ‘organised crime group’ or which would provide help to such a group.

Few would argue with the proposition that involvement in serious criminal activities should be actively discouraged by the law.

The question is whether we need another criminal offence in this area with the additional pressure and uncertainty it would impose on professional advisers.

Under the Proceeds of Crime Act as it currently stands, any person, whether a professional adviser or not, commits an offence if s/he becomes directly involved in holding or transferring criminal property or becomes involved in an arrangement which s/he knows or suspects facilitates such activity.

Accountants and lawyers have additional specific responsibilities to inform the authorities, again on the basis of either knowledge or suspicion, if they come across information suggesting that any of the aforementioned offences have been committed. While there is an exemption from disclosure to cover circumstances of legitimate professional privilege, that exemption is not available where the adviser is aware that the client’s motives in seeking advice are criminal.

In addition to the above, accountants and lawyers are obliged to take all reasonable steps to verify the identity of new clients, ascertain their motives and to monitor on an on-going basis the financial transactions of their clients.

Failure to comply with any of these requirements is already a serious matter and punishable by large fines and long prison sentences. The following comment by a solicitor jailed in 2006 for failing to satisfy a court’s retrospective judgment about what he should have known about his clients sums up the force of the current law:

‘I made a simple mistake, amounting even in its worst interpretation, to no more than an error of professional judgement, from which I made no benefit … all sole practitioners and money laundering reporting officers (MLROs) in professional practices should take heed.’

So what will the new measure achieve that is not achievable under the present rules? As the above example shows, those who conduct professional work for groups of individuals who turn out to be criminals, already run a serious risk of prosecution and imprisonment, even if they make an honest mistake about the client’s motives. An accountant or lawyer who has even a suspicion that he has come across an organised crime gang in the course of his work will already be covered by an obligation to pass on his information to the authorities.

Rather than introducing stringent new offences which don’t appear to add much to what we have, we should surely be focusing on ensuring that we optimise the effectiveness of the existing framework. The regulated sector in the UK, one of the most comprehensive of its kind in the world, provides over 300,000 suspicious activity reports to the National Crime Agency every year, yet there remains a widespread perception that the extensive efforts that go into providing this information do not translate into effective enforcement action against serious crime.

A study by CCAB, to be published on 23 June, brings together the views of stakeholders on both sides of the fence about the operation of the UK’s anti-money laundering regime. It reports that some practising accountants are not convinced that the regime is as efficient as it might be. In particular some feel that there is too much regulatory focus on prosecuting cases of non-compliance with rules and too little emphasis on using the information advisers supply to clamp down on serious criminal activity. They call for a greater effort by regulators to share information with individual firms about how the system is working, with the intention of encouraging more of a shared commitment to the ultimate aims of the exercise.

The Government should heed the feedback from practitioners before it enacts its new Bill. Tackling money laundering is a cause that is vital to both the economy and wider society, and one that accountants and other regulated parties are generally happy to contribute to for that reason. But buy-in from those at the sharp end is crucial, and for that to happen the authorities need to resort to the carrot as much as the stick.



By John Davies, head of technical, ACCA

It has always been the case that the first step for any entrepreneur wanting to set up in business is to work out what structure would be most appropriate for their business.

For many people, the choice of business form will seem fairly straightforward. If you want to protect your privacy and retain complete control of your business, and are prepared to be financially responsible for its debts, you will probably choose to operate as a sole trader or with trusted colleagues in a partnership. If on the other hand you value the protection of limited liability status you will opt to become a limited company. These two fundamental forms have each existed for well over a century and remain hugely popular.

But it is no longer true to say that the choice of form available to new entrepreneurs is quite as black and white as the above would suggest.

Recent years have in fact seen a significant expansion of the diversity of business forms available to new and existing businesses. Here are a few examples of this movement:

  • The limited liability partnership (LLP) was introduced in 2000. The LLP is a hybrid form, half-way between a partnership and a company. It has the hallmarks of the traditional partnership in that its partners are free to arrange the firm’s internal affairs more or less as they see fit, but it resembles a company in that it is a corporate body and is required to prepare and publish annual accounts. The LLP is available to any type of business but is especially attractive to professional firms that wish to take advantage of protection from personal liability for their individual members.
  • The community interest company (CIC) is a company structure which is expressly intended to be appropriate for enterprises with social or community benefit in mind, rather than purely for the financial advantage of its proprietors. To achieve this the format requires profits made by the company to be ‘locked in’ so as to be channelled towards furthering its corporate aims.
  • Public service mutuals are a new vehicle designed to deliver functions hitherto delivered solely by the public sector. The UK Government is actively encouraging the take up of mutuals as a means of cutting central government costs and has raised the prospect of 1 million public sector workers being transferred to mutual by 2015.

A new report by Tomorrow’s Company, contributed to by ACCA, reviews the new landscape of UK business forms and urges entrepreneurs, advisers and governments to consider the opportunities that are afforded by this expansion of choice.

What choice means is that, for the entrepreneur, it need no longer be a straight choice between partnership and company – depending on the motives of the person starting up the business, one can now contemplate becoming a social enterprise or a charitable incorporated organisation as well as a sole trader and a company limited by shares or guarantee.

From the perspective of government, the report argues that more attention needs to be paid to business form when considering its dealings with private sector businesses and the issuing of contracts to them. It poses the question of whether companies with overtly commercial business and funding models are the right sort of entity to be delivering public services, referring, as an example, to the recent case history of care homes being taken over by listed companies which have aggressive funding models.

And for advisers, such as practising accountants, it means that there is a much wider range of information that they can provide to clients wishing either to set up in business from scratch or to review their existing structure or form.

What this all means is that businesspeople today have more options as regards the structure of their firm and more freedom to organise the way they organise their business so as to align it with the expectations of their consumers and stakeholders. The report makes for interesting reading by any one who has ever felt constrained by the choices available to them.

board appeal

By John Davies, head of technical, ACCA

Trust is one of the fundamental elements of the landscape in which the professions operate and is seen as one of the key qualities that professionals can bring to the business world.

Clients go to accountants, lawyers and doctors because they want expert, specialist advice that addresses the particular problem they have; they are prepared to pay for that advice because they trust the adviser to give them good advice which best suits their needs. Businesses employ professionals for similar reasons.

Governments for their part realise that the economic and social needs of society benefit from the services provided by professional advisers and have long been prepared to allow the activities of those advisers to be regulated in accordance with professional norms.

Today, we are facing a crisis in this fundamental element of trust. Simply put, politicians and the general public are questioning whether business and the professions can be depended on to run their affairs in the interests of consumers and society in general.

Auditors have been criticised from many quarters for being too close to their clients and for failing, as a result, to act competently and objectively. It has been argued that the rules on fair value accounting, which deal with the way that investments are measured and reported, are framed in a way which gives a misleading picture of the health of the reporting company. Insolvency practitioners are often accused of being complicit in the winding up of businesses that could be saved. And the prevailing economic climate has seen a material increase in the incidence of in-house fraud, and an accompanying concern about how accurately frauds and other forms of financial crime have been reflected in companies’ accounts, with, by consequence, questions about just how ‘true and fair’ some financial statements actually are.

The current concerns actually spread much wider than the professions themselves. The series of collapses in the banking sector in 2008-9 has led to exhaustive re-examinations of how the major banks are run: the UK’s Commission on Banking Standards has concluded, this month, that one issue (among many) that needs in future to be addressed is the process by which individuals are appointed to senior positions in the industry: there needs to be much greater emphasis on ensuring that the individuals in those positions are not only technically competent but can be relied upon to act in a prudent and responsible fashion. The public sector has seen a series of governance-related scandals that have revealed not only gross failures of operational effectiveness but a worrying determination on the part of management to cover them up and to prevent public-spirited individuals from divulging information about them.

This key issue of trust was the centrepiece of the 2013 meeting of the chairs of ACCA’s global forums, the group of expert bodies that advise ACCA on its technical and research work. The meeting considered just how widespread the problem was, how justified the criticisms were, and how the professions might respond so as to re-establish a relationship of trust with clients, employers, governments and wider society.

To help in the discussion of this topic, the meeting heard a presentation from Lawrence Evans, the president of the consultancy firm Edelman-Berland, which produces the Global Trust Barometer, the leading global study of trust and reputation.

Mr Evans drew out a number of key findings from his firm’s latest survey. They confirmed not only that the problem of trust was widespread but that, for all the scandals and the criticisms made of the business world by politicians, people still actually trust business more than they do politicians.

He stressed that the way forward for business was for it to make a strong commitment to transparency. There was a strong correlation, he claimed, between trust and transparency, and the more open and forthcoming businesses were, the greater the likelihood that stakeholder trust would follow. He also reported a strong link between trust in an entity and consumer attitudes towards it – the stronger the degree of trust, the more positive consumer behaviour was likely to be, and vice-versa. Another relevant finding from his survey, one that is encouraging in the context of the issue of trust in the professions, was that people generally placed more trust in the word of subject experts within a business than they do in CEOs.

Mr Evans’ findings suggest that, for all the important problems that the accountancy profession is currently having to wrestle with, accountants are still, potentially, a strong force for good. His contention that transparency offers the way to stakeholder trust is a message that needs to be heeded by businesses of all kinds, in both the private and public sectors, and one which reaffirms the strategic importance of accountancy. Transparency is, after all, what accountancy should be all about – the presentation of information which reveals an accurate picture of the business health of an entity – and a combination of technical competence and a commitment to openness, both qualities that ACCA actively encourages in its members, appears to be the formula which can lead directly to enhanced business effectiveness.

The waiting game

accawebmaster —  15 March 2012 — Leave a comment

By John Davies, head of technical, ACCA

The content of last night’s Lords debate shouldn’t really come as a surprise to anyone who’s been following the audit debate in the UK closely: the Lords’ Economic Affairs Committee members stuck to their positions and the minister stuck to the Government’s position. The Lords might be concerned that the Government haven’t fully supported their criticisms of the UK’s audit market, but really the Government has steered a very reasonable course.

The Government may have been more cautious than the lords on the dialogue between auditors and regulators, and they have disagreed with the lords over International Financial Reporting Standards (IFRS), but it can hardly be accused of sitting on the fence or not taking the issue seriously when it has referred the audit market to the Office of Fair Trading, which has consequently passed the matter to the Competition Commission.

We agree with the government that IFRS did not encourage or result in a loss of prudence in accounting before the financial crisis, and we support the government’s position that there shouldn’t be a ban on the provision of non-audit services to clients by their auditors. We don’t agree with the government or lords’ position that there should be a further reduction in the audit requirement for small businesses. We would urge the Government to reserve the right to legislate to achieve greater auditor-regulator dialogue, something the department of Business, Innovation, and Skills wasn’t keen on in their original response to the lords’ report.

The problem here though, and the problem for the audit debate in the UK, is that action all depends on what happens in Brussels. The proposals from Brussels are far from finalised and the Government has wisely decided that waiting for a final decision from Brussels before making its own move is the best course of action.

ACCA has been fully engaged with the audit debate at both UK and EU level and will continue to make the case that audit is key to both re-establishing trust and market confidence and to contributing to investor protection because it provides easily accessible, cost-effective and trustworthy information about the financial statements of companies.

By John Davies, head of technical, ACCA

Today sees Vince Cable announcing plans to give ‘more than 100,000’ small businesses the chance to choose whether or not they audit their accounts. The department of Business, Innovation, and Skills (BIS) tell us that over half a billion pounds could be saved.

This isn’t the first time that Cable was wandered into SME-audit territory.

There are a couple of points to make regarding these latest proposals.

The current UK exemption criteria amount effectively to gold-plating of the EU’s ‘fourth directive’ - the directive only requires companies do not exceed two out of three tests (turnover, balance sheet and employee numbers) to qualify as small businesses. Currently in the UK, small companies must fulfil both the balance sheet and turnover criteria, rather than ‘any’ two of the three. On this basis, aligning UK exemption criteria to the EU criteria is not unreasonable.

Theoretically though, it will open up the possibility that companies with turnover of much higher than the turnover threshold (£6.5m) will in future be able to opt out of the audit. We have to acknowledge that fast growing companies, and the increasing number of companies which employ very few or no staff, are likely to be able to claim this statutory exemption. In respect of such companies we would expect lenders of finance to remain keen to see audited accounts from them, so this must be taken into account in projecting cost savings.

As regards the potential savings for the SME sector, the FT reports that BIS claims that the average cost of an audit for a small company is £9500. We should wait to see how they come to this figure but on the face of it, it seems like something of an exaggeration.

BIS will also allow companies which are part of a group to be exempted (currently group companies are only exempt if their group as a whole is 'small'), on condition that their parent companies guarantee their debts. The principle of audit exemption for group of companies is already established, so this would be an extension of it, albeit a significant one. But remember, any material guarantee of subsidiary company debts will represent a liability for parent companies so this cannot be presented a win-win situation for them; as for stakeholders in small companies, any guarantee is of course only as good as the solvency of the guarantor.

If subsidiary companies exempt themselves from audit, the audit of the consolidated accounts would also become altogether more difficult, since the group auditor would not be able to use the results of the audit of any of the group companies. This would materially increase the amount of work and time involved in the group audit, and its cost.