Stanley Carter

October 24, 2017

Corporate governance

Compliance with the UK corporate governance code among FTSE 350 companies has improved this year, but governance and reporting remains “patchy”

According to Grant Thornton’s (GT) corporate governance review, 66% of the 350 biggest UK companies declared full compliance, up 4% from last year.

However, only 33% of the FTSE 350 provided informative insights, down from 64% in 2014.

The report found that longer-term viability statements, internal control reporting and gender diversity had seen little improvement since last year, while investor engagement continues to decline.

Moreover, only 12.5% of the FTSE 350 reported that the remuneration chair held face-to-face meetings with shareholders regarding executive remuneration.

Grant Thornton also revealed diversity in the boardroom still lacked improvement, with only 26% of FTSE 100 board roles filled by women and 77% of the FTSE 100 and 85% of the FTSE 250 without a woman in an executive role.

The report also found improvements in culture-related reporting, with 39% of companies now providing a strong overview of the culture of their organisation, up from 20% last year.

But GT said it was “disappointing” that only 29% of CEOs made personal reference to culture in their opening statements despite the Financial Reporting Council (FRC) recently highlighting the role’s importance in setting and embedding a company’s culture.

For the UK economy to thrive post-Brexit then companies needed to ensure they were complying with governance requirements.

October 23, 2017

The impact of rising inflation

A claim by one of Britain’s most senior accounting bodies, to the effect that a planned crackdown on the misuse of offshore trusts would be likely to devastate the finances of hundreds of thousands of lower-paid workers who didn’t know they were doing anything wrong.

A submission made by the Institute of Chartered Accountants in England and Wales to the parliamentary debate about the finance bill contains a warning about the potential impact of the plan to impose a tax charge in April 2019 on loans from so-called “employee benefit trusts”.

Many of these trusts were set up in the past by employers whose main aim was to avoid tax and national insurance – generally by setting up an offshore trust which, instead of conventional pay set-ups, ‘paid’ their low-paid employees – including nurses, teachers, IT workers and cleaners – through the medium of low/zero rate ‘loans’ which would never need to be repaid. And, while the FT notes that there is little room for sympathy for those (often senior) employees who went into the tax wheeze willingly, there is a case for leniency toward those lower-waged (and often under-informed) workers who were simply told that this was how they would be paid, with no element of choice in the matter.

The point now, as the ICAEW says, is that the tax reach of the April 2019 clawback may go as far as twenty years. And that some of the most vulnerable may even face bankruptcy. A “sympathetic and flexible” approach is required from HMRC, it says, which would allow people extended time to pay their bills.

October 20, 2017

The UK’s financial regulation system is a protection racket for the elite

There’s no easy way of saying it: political corruption is endemic in the UK. Regulatory bodies and government departments resemble protection rackets with one aim: to protect elites and corporations from retribution – and prevent parliament from developing effective laws. We’ve just seen the latest example.

The Financial Conduct Authority (FCA), the UK’s banking regulator, has just refused to publish its 361-page report on misconduct at the state-controlled Royal Bank of Scotland (RBS).

The FCA investigation was prompted by the Tomlinson Report published in November 2013, which showed that instead to rescuing struggling businesses, banks made money by asset-stripping and destroying them. This was followed-up an investigation by the FCA and in November 2016 it published what purported to be a summary of its full report.

Subsequently, the BBC obtained a leaked version of the report. It referred to “inappropriate action” by RBS’s Global Restructuring Group (GRG) against struggling businesses. The group was supposed to nurse them back to health.

Instead, the inappropriate action experienced by 92% of the businesses included complex loans, higher interest rates, and unnecessary fees. Businesses could not easily return to good health. For the period 2013-2015, GRG handled 16,000 companies – and about 10% survived.

Many ended up in administration and liquidation, with their assets were sold cheaply. RBS has set aside around £400 million to deal with possible claims. The secret FCA report is not only an indictment of RBS, but also of other banks, accountants and lawyers who have long feasted on small businesses.

Now, after some arm-twisting, the FCA has agreed to permit a lawyer advising the House of Commons Treasury Committee to compare a summary of the report. This is not good enough.

People are entitled to see the full scale of the scandal, and remedial legislation cannot be drafted without sight of the whole report. Yet the regulator’s impulse is to shield RBS and its accomplices.

October 18, 2017October 20, 2017

Poor financial reporting

Poor financial reporting by banks and other financial institutions can be seen as a core contributor to the financial crisis and the lack of trust in the financial sector that ensued. Despite the lessons of a decade ago, we are still hearing of accounting scandals today – Tesco, BT, Carillion to name but a few.

Financial reporting is critical to trust in business. Misleading accounts will undermine the confidence of investors and other stakeholders to the point where financial support can dry up and the franchise is lost.

Most accounting involves judgment and all judgment contains an ethical dimension. Fund managers should always remember that International Financial Reporting Standards (IFRS) are principles-based; therefore, financial statements which are prepared in accordance with IFRS reflect judgments and assumptions made by boards.

Bearing in mind that shareholders are the primary users of financial statements, they should provide feedback – both positive and critical – to boards of investee companies about the quality of their financial reporting, especially their consistency and comprehensibility. Indeed, those who are signatories to the UK Stewardship Code have a responsibility to consider the quality of a company’s reporting and they should not shirk from fulfilling this. Their views should be seen as invaluable and should be listened to and evaluated carefully by independent non-executive directors.

October 17, 2017

UK organisations are struggling to meet the challenges of paying gig economy workers

According to new research out today from ROC Consulting, the global consultancy dedicated to digital Human Capital Management (HCM). Just over half (56 per cent) of UK private sector decision makers and little more than a third (39 per cent) of their public-sector equivalents believe their payroll can meet the challenges, despite 74 per cent agreeing that changing staffing models require new ways of paying workers.

With the ONS revealing that self-employment rose 22% from 2008 to 2015, and currently accounts for 15% of the UK workforce, the results suggest that traditional payroll systems are not being used effectively to help secure the best short-term talent.

Fifty six per cent of IT and Finance decision makers agree they need to find better ways to pay quickly, but cut offs and systems mean that 59 per cent are unable to pay a new starter until a new payroll cycle has started. When the majority (78 per cent) still pay monthly, and 60 per cent would not consider paying daily, new workers could wait for up to six weeks before receiving payment.

London-based businesses felt they were better prepared for the gig economy (65 per cent) versus the UK as a whole (50 per cent), and more likely to pay daily (64 per cent against 39 per cent).

October 16, 2017

South East of England office market at highest volume

Investment in the South East of England office market reached £1.3 billion in the third quarter of 2017, the highest quarter on record since 2013, the latest index shows.

Despite a slow first half of the year, this takes total office investment in the South East in 2017 to 2.3 billion, some 60% higher than the 10 year average for the period from the first to the third quarters. Overseas buyers were the source of the majority of investment in the third quarter, with foreign equity accounting for 67% of volumes, according to the index report from real estate firm Knight Frank.

The report shows, however, that occupier activity in the South East has by contrast, not been as brisk. Take-up reached 544,400 square feet in the third quarter, bringing the 2017 total so far this year to 2.1 million square feet, some 11% short of the 10 year average for the period.

It also shows that average deal size has been lower in 2017, with only three deals over 50,000 square feet completed in comparison to nine by the third quarter of last year. Nonetheless, the M4 corridor, which has been the subject of significant development activity in the past 12 to 18 months, has held its respective long term take-up trend with 1.2 million square feet transacted in 2017.

Demand from the Telecoms, Media and Technology (TMT) sector has been particularly strong this year, with the sector accounting for 37% of take-up. Of the office space under offer in the South East, 54% is located along the M4 corridor; suggesting a strong end to the year.

October 12, 2017

TMF Group to float on London Stock Exchange

Services firm TMF Group is set to announce a £1bn float on the London Stock Exchange this week, shunning a listing in Amsterdam in favour of the City.

The business services firm could announce its IPO as early as tomorrow.

The float, which could raise as much as £200m or more, will be the third biggest London IPO this year after Allied Irish Banks and Charter Court Financial Services.

The company, which provides tax, admin and legal support services, already boasts more than half of all FTSE 100 companies as clients.

TMF is headquartered in Amsterdam, and was reportedly considering listing on the Dutch market but its private equity owner DH has now settled on London.

It is thought the complexity of Brexit will provide opportunities for the company as firms turn to its services for extra support.

The firm employs more than 7,000 people, and has more than 50,000 clients. City A.M.understands that around 80 per cent of TMF’s business is predictable at the start of every year, because its services are necessary rather than discretionary.

TMF’s biggest client accounts for just one per cent of revenue.

Goldman Sachs and HSBC were leading advisors on the deal, with a syndicate of other banks.

October 10, 2017

Accounting reforms and post – Brexit

The International Accounting Standards Board (IASB) has instructed its staff to prioritise the development of new type of financial performance measure to be included in IFRS statements.

The board expressed a preference for a measure based on earnings before interest and tax (EBIT) over parallel plans to include a management-defined measure of performance.

The IASB also signalled a preference for a modified version of EBIT over any off-the-shelf definition.

The decisions came during the board’s latest discussions on its Primary Financial Statements project.

The body that advises the European Union on accounting matters, EFRAG, has published a draft comment letter in support of an IASB draft statement on materiality.

In a webcast to introduce the proposals, IASB member Francoise Flores said: “The definition of materiality is easy to understand but difficult to apply. It is a totally company-specific notion that requires the exercise of judgement tailored to a company’s circumstances.”

In the context of financial reporting, material information is data that is either significant or relevant.

Flores added: “Currently, there is little if any guidance in IFRS on how to make materiality judgements. This lack of guidance can be regarded as partly responsible for IFRS disclosure requirements not being sufficiently challenged in practice from a materiality perspective and rather being used as a checklist.”

The IASB’s practice statement is non-mandatory. Interested parties have until 5 January 2018 to comment on the EFRAG draft.

UK should maintain international standards post-Brexit

The Institute of Chartered Accountants in England and Wales (ICAEW) has warned that the UK has failed to give sufficient thought to the implications of its vote to leave the EU.

In a policy discussion paper on the implications of Brexit for financial reporting, the institute said it supported a UK-specific endorsement mechanism for new international standards.

The report’s authors argued: “[A] new national mechanism could function more smoothly and far more quickly than the EU’s, and indeed this should be regarded as a key prize available to the UK from the change in endorsement arrangements.”

The paper also considered the option of accepting all international financial reporting standards (IFRS) as issued by the IASB with no modifications, as well as continuing to participate in the EU’s current endorsement mechanism.

Finally, the ICAEW also called for the UK to join the IFRS Foundation’s Monitoring Board and the Accounting Standards Advisory Forum.

Under the rules governing membership of the two bodies, there is no current basis for UK membership of either body.

IPE has learned that UK government officials are considering separate proposals for a UK endorsement mechanism – possibly modelled on the Australian model.

October 9, 2017October 20, 2017

Digital Accounting

The small business accounting industry is experiencing a rapid sea-change as a wave of technology continues to transform the way businesses manage their finances. And for accountancy practices across the UK, riding that wave is a must if you’re serious about your practice making it through the next decade.

According to Xero’s 2016 State of Accounts research report, just over half (59%) of small businesses don’t think they’ll need an accountant in 10 years’ time and 56% believe they’ll use accountants for help with tasks outside of accountancy in the future. What’s more, less than half (42%) of small businesses expect to talk face to face with their accountant in the future.

So, with a massive change underway, how can you approach your practice’s successful transition to digital accounting?

Thinking strategically about your practice isn’t something you can do in between day-to-day client management. It’s important to give your firm’s strategy the attention it needs.

Technology is central to any digital strategy, and choosing the right software for your practice could be the difference between surviving and thriving. How you use it is based on a number of factors, such as the size of your firm, your clients’ sector and niche requirements and your practice’s areas of expertise. Spend time weighing up the benefits and make sure you’re looking ahead to where your firm will be in the future.

And while changing software may cause disruption at the beginning, don’t be put off. Plan for interruption and some hurdles, and be sure to manage your team’s expectations by being clear and communicating the benefits the change will bring. It’s equally important for your clients, and that’s where being prepared and clear on your digital strategy will help.

As with any major change in the way someone works, moving a client’s accounts online can be met with resistance. But if you’re armed with the right information, you can easily allay any concerns. Prepare clients with a clear on boarding and training plan to ensure that they’re comfortable and supported.

If there’s one thing we’ve learned from our partners about going digital, it’s that it’s not an easy feat. That’s why starting with a clear strategy and planning ahead as much as possible for any hurdles and challenges is key. And once you’re over that initial hump, it’s smooth sailing and well worth the time.

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