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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

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Chas Roy-Chowdhury-14

By Chas Roy-Chowdhury, head of taxation, ACCA

I gave evidence to the House of Lords Select Committee on Economic Affairs recently about corporation tax and how revenue is now being secured from companies through other means.

The bigger picture needs to be looked at when it comes to how corporations are taxed in the UK. There are other and additional ways by which companies in the UK are taxed, for example through VAT and through National Insurance Contributions (NICs).

A publication produced by the Office of National Statistics back in March, shows VAT numbers have held up remarkably well since the economic downturn because, the VAT rate has gone up to 20 per cent. That is probably what we need to look at in terms of the basket of taxes that we have moved towards—those companies that we know are going to be tied into the UK rather than those that can look at different locations to do business that are more favourable for them, taking tax as one of the factors and one of the components that they look at.

The fundamental problem is that large companies are by nature multinational – their shareholders, activities and customers are spread across the world – whilst national governments are not.

There is a tax chasm between what governments seek to capture by way of corporation tax and what companies, many of which are global in terms of their shareholders, activities and customers, generate in terms of global profits.

In practice, existing rules are highly complex and differences between countries can be exploited well within the law. HMRC has adapted to this and is not sitting on its laurels as some other Parliamentary committees have suggested. They are quick and effective and have developed a greater understanding of how companies work. The majority of corporations go through the tax process with ease. HMRC has achieved this despite declining resources.

ACCA wants to see tax simplicity. But that’s a big ask. Adam Smith’s four principles of what makes a good tax system – proportionality, transparency, convenience, and efficiency – still stand centuries later. I don’t think we’re near this and I also think we are in danger of losing trust in the tax system.

The House of Lords Economic Affairs Committee also raised the issue of naming and shaming those who have promoted aggressive tax avoidance or tax evasion schemes.

ACCA believes if naming and shaming is going to be introduced for tax avoidance, which is legal, the bar needs to be set very high. The complexity of the tax system means there is a risk that mis-interpretation could result in naming and shaming of a tax adviser; this could result in severe reputational damage.

We have long been calling for greater regulation of tax advice. While ACCA and other accountancy bodies have strict regulation and standards, anyone can set up and offer tax advice without those safeguards in place.

There’s no denying that all this is a very tricky and complex situation. But it is heartening to see that the issue is being discussed at international level, from the EU, to the US; and of course the G8 will be looking at the avoidance/evasion debate in June when it meets in Ireland.

 

By Iain Hasdell, chief executive of the Employee Ownership Association

IASB

The current level of UK fascination with, and enthusiasm for, employee ownership is unprecedented.

It is now the most prominent alternative to conventional forms of business ownership in the UK. Interest in it within business communities is increasing daily. The number of employee-owned businesses is currently growing at an annual rate of 10 per cent. And there is a growing realisation that employee ownership in its many forms drives economic growth, innovation and quality whilst spreading wealth and optimising the fulfilment of employees. It already contributes, according to figures from the Employee Ownership Association (EOA), more than £30 billion each year to UK GDP.

The fact that it is a growing economic force in the UK is partly a reaction to our economic context. This context has called into question the short-termism of conventional forms of business ownership and the consequences of that on the economy and our communities. But the emerging popularity of employee ownership is also a response to the compelling evidence of its economic benefits, particularly the high levels of productivity and innovation it delivers. The Deputy Prime Minister will be discussing this when he launches a key EOA report on the economic business case for more employee ownership at the inaugural Oakeshott lecture on 27 March. The Coalition has confirmed a capital gains tax break for employers who sell their company to their employees in the Budget.

Despite the current momentum there remains much to do to create the kind of future for employee ownership that the EOA, with our members and a range of partners, have consistently sought. A future in which there is far greater awareness of employee ownership, its benefits and implementation options; there is a simplification of those options; and there is better access to finance and advice for organisations that want to create and/or fund employee ownership.

Work on all of those strands continues apace, mainly under the auspices of the Government sponsored Employee Ownership Implementation Group Chaired by Jo Swinson, the Minister with responsibility for employee ownership. After the Budget the Group will start to execute a significant awareness programme that will include a specific focus on accountants and financial advisors.

The majority of accountants and financial advisors, with some brilliant exceptions, do not yet fully understand employee ownership, the various models that are available, how to finance transitions to employee ownership and how corporate financial governance needs to work in businesses that are owned by their employees. Consequently they do not introduce the option of an employee buy out often enough and are sometimes found wanting when it comes to serving the needs of clients who are pursuing employee ownership. The awareness programme will really help to overcome this issue. There are encouraging signs that the accountancy profession is picking up the gauntlet of employee ownership in a very positive way. As the profession does this it will be making a vital contribution to the future growth of employee ownership in the UK.

The Implementation Group will also soon be launching a series of standard legal documents that will make it far easier to implement employee ownership. This is the simplification agenda in action.  And the Group is making progress on the development of an asset class of patient capital and social investment that aligns with the financial requirements of employee ownership.

So employee ownership continues to blaze a trail. We really are in the decade of employee ownership. It is now becoming a core component of the UK’s economic growth agenda. It is a successful business model in every sector of the economy that constantly challenges the conventional wisdom of those who suggest business ownership always needs external investors. And a range of measures are being put in place for the longer term to support the current growth in the number of employee-owned businesses in the UK.

Businesses, professional bodies and a host of others need to put their shoulders to the wheel to keep up this momentum – indeed to increase it. I am sure they will.

Let us all grab this great opportunity whilst we have it!

Chas Roy-Chowdhury-14

By Chas Roy-Chowdhury, head of taxation, ACCA

As the 2013 UK Budget approaches next week, ACCA called for the Chancellor of the Exchequer to use the Budget to increase the personal allowance threshold further than planned, without decreasing the level at which the 40 per cent tax band bites.

From 6 April this year, those turning 65 years old will no longer benefit from the higher personal allowance pensioners receive, which means some pensioners, who fall into the new 40 per cent tax bracket because of income from savings, dividends and part-time work, will be bitten by their tax bill.

This is a classic example of giving with one hand and taking with the other. It looks good for the Government to say that they are extending the personal allowance, but it is only true for the ever-shrinking population of 20 per cent taxpayers. By dropping the threshold for the 40 per cent income tax bracket, many hardworking people who will begin paying 40 per cent for the first time will lose the benefits of the increased personal allowance and they will need to pay additional tax on such things as savings and dividend income.

This is no longer the 1980s where only a small number paid the 40 per cent income tax. Many people who are working but struggling at the lower end of that bracket will not get much respite from an increase in the personal allowance. The Chancellor of the Exchequer should use the Budget on 20 March to give taxpayers a much-needed boost and raise the personal allowance for all income tax rates otherwise it is being less than honest.

Thirty years ago only five per cent of workers paid the 40 per cent tax rate – this has now more than doubled to more than 15 per cent today, which means more people will be affected by this change, even if their salaries do not sit comfortably in that threshold i.e. are on the borderline.

Is it fair to do this to pensioners who have paid their taxes throughout their working lives, only to penalise them for saving some of their pay for later in life?

It will be interesting to see how the Budget pans out and how the general public react to it as I believe it will be challenging times ahead.

Don’t forget to follow our Twitterfeeds for live coverage and comment on the Budget as it is announced on Wednesday 20 March from 12.30pm.

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By Paul Moxey, head of corporate governance and risk management

It’s now 20 years since the Cadbury Code was introduced. This is the code adopted by the Listing Authority and the London Stock Exchange to restore trust in the City and in financial reporting and ensure that scandals such as BCCI, Polly Peck and Maxwell could not happen again. It set out 19 best practice principles for corporate governance – few people had heard of the term then. Its provisions, in fewer than 600 words, covered the role and structure of the board, audit and reporting on the company’s position including going concern, board remuneration and internal control.

The Code has grown through the years as it went through several iterations. It is now administered by the FRC and called the UK Corporate Governance Code and its principles and provisions take up around 5,500 words, roughly ten times as many as the original code.

Has the Code done a good job? Most experts think it has. The UK has seen few corporate scandals in the last 20 years and many would say that is thanks to the code and they are probably right. But has governance helped create value? We have had the financial crisis and, for savers and investors, little growth in share prices for the last 10 years.

We have however seen the growth of an industry of governance specialists and advisors and we have seen the failure of several banks and, as a society, we bear the scars. ACCA says that the bank failures were governance failures. Others see things differently and in December 2010 the FSA concluded its first inquiry into the failure of RBS saying it did not find evidence of governance failure on the part of the board. This surprised many people. If a company fails surely that points to governance failure unless the reason for it was clearly not to do with the board. It is hard to think of how the failure of RBS was not to with the board unless we consider they were just victims of circumstances.

Is a board responsible for what goes on or a victim of it? Let’s consider Barclay’s role in fixing LIBOR? The Treasury Committee, in its inquiry this summer, heard that the FSA, in a recent review, had considered Barclay’s governance to be satisfactory. The official conducting the review was reported to have said Barclay’s governance was ‘best in class’. During the same period, others at the FSA were concerned about the culture of Barclay’s at the top. Lord Turner, the FSA Chairman, wrote to the then Barclay’s Chairman about what the FSA saw as behaviour at ‘the aggressive end of interpretation of the relevant rules and regulations’ and about the bank’s ‘tendency to seek advantage from complex structures or favourable regulatory interpretations’. Lawyers call this creative compliance and it sounds a little like Enron.

It illustrates the main problem today with both governance and regulation – there is more to compliance than compliance. The focus with both governance and regulation has been on compliance with provisions -in the case of governance, with the Code’s provisions, where the banks and other companies of course fully comply with the letter. It is much harder to tell if companies follow the spirit of the Code and it seems that essentially no one has been looking at how companies do this. The culture at the top of an organisation and the tone set by the board are crucial to whether or not there is good governance but it is very hard for outsiders to judge. Very few company governance reports convey a real sense of this although there is usually plenty of well-crafted text to tell us everything is just fine.

The FSA is changing its approach to regulation to one where supervisors are allowed to exercise judgement. This will make it easier for them to decide when the spirit of a code or regulation is being followed. It may be harder to get a board to respond appropriately. The Treasury Select Committee Chair interpreted Lord Turner’s letter to Barclay’s as a reading of the Riot Act. The Committee report however makes it clear that neither the CEO nor the Chair of Barclays seemed to get the message although Barclay’s board minutes recorded the seriousness of the matter as it recorded ‘Resolving this was critical to the future of the Group’. The Committee report says that judgement-led regulation will ‘require the regulator to be resolutely clear about its concerns to senior figures in systematically important firms’.

A judgement approach is needed for how everyone else looks at governance for companies – investors and their advisors, the media and regulators – and us. As we hear more and more stories about the tone at the top of organisations such as News Corp and the BBC, and about the minimal amounts of UK tax paid by UK household names such as Amazon and Starbucks, it behoves us all to look more closely at large organisations and how they are governed -not just whether they comply with the rules. We should be asking more questions of our leading corporations and holding them to account.