International Accounting Standards
| by Paul Gosling 09 Jul 2003 Topic: News |
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UK inward investment - going up, down or sideways? Conflicting reports have led to confusion over the impact on inward investment in the UK of the Government�s decision, for the moment, not to join the euro. A study from Ernst & Young shows the UK remains the primary destination for European inward investment, despite the country being outside the eurozone. Moreover, the fastest growing destinations are countries outside the EU - such as the Czech Republic, Russia and Turkey - which offer low costs, large growth potential and increasingly stable economic environments. Overall, the picture painted by E&Y is of declining investment in the eurozone, the UK and the European Union as a whole. This most likely reflects the economic downturn in the United States. At the same time, it is clear that lower cost environments are seen as ever more attractive. Barry Bright, head of the location advisory team at Ernst & Young in London, said: �What we are seeing in inward investment terms is that the financial benefits of being within the euro are counterbalanced by concerns over reductions in growth rates in part due to countries not having control of their own interest rates and exchange rates. The recent euro appreciation, if sustained, may exacerbate this issue. The real message from these figures is that overall economic factors are more important in attracting investment than membership or non-membership of the euro.� However, European Commission figures have challenged this perception. European monetary affairs commissioner, Pedro Solbes, stated in a parliamentary answer: �FDI [foreign direct investment] data compiled by Eurostat shows a much larger increase of FDI inflows in 1999 and 2000 for the euro area than for other member states. This can be interpreted as evidence of a positive impact of the Economic and Monetary Union on cross-border direct investment.� The pro-euro lobbying group, Britain in Europe, calculated that the UK lost £108bn in overseas direct investment as a result of being outside the eurozone. While it might be assumed that the UK would lose more from a reduction in inward investment from the US than some other European countries - because of its long-standing economic links - Commission figures demonstrate that the other two non-euro members of the EU, Denmark and Sweden, also suffered from a reduction in their share of FDI. But British Chancellor of the Exchequer, Gordon Brown, has concluded that the investment test - one of five needed to be ticked to trigger a referendum to go into the euro - had not yet been passed. He suggested that, at the present euro/sterling exchange rate and without economic convergence, the risk was too great of investment being made on damaging and unsustainable terms. Significantly though, he argued that in the long-term - with entry into the euro on the right terms - there could be both greater and higher quality cross-border investment into the UK. Using very positive language on the euro, Brown said: �With Britain in the euro, business could benefit through greater access to a more integrated European capital market. And if, on the basis of sustained and durable convergence, we could lock-in stability for the long-term, then business could see a cut in the cost of borrowing on a sustainable basis with a long-term boost to cross-border investment flows and foreign direct investment in the UK. �Our assessment makes clear that, with the advent of the single currency, trade within the euro area has already expanded and that, with Britain in the euro, British trade with the euro area could increase substantially - perhaps to the extent of 50% over 30 years.� ACCA believes that the warmth of these words makes it clear that the Government intends to hold a referendum during 2004. Chas Roy-Chowdhury, ACCA�s head of tax, said: �Whatever view one has on the euro issue, UK business will at least have a clearer idea now of where it stands. It is clear from the chancellor�s statement that the Government has decided to take this issue to the British people next year.� He added: �The chancellor said that only one of the five tests have so far been met - but he put great emphasis on major reforms aimed at ironing out the remaining problems on convergence and flexibility over the next 12 months. One must wonder, though, why it has taken six years to reach this stage and yet just one year to achieve convergence with the European economies, given it is such a major undertaking.� Roy-Chowdhury also welcomed the news that the chancellor will establish a fiscal stability pact, reporting direct to Parliament, similar to the current Monetary Policy Committee. He said: �This will take the politics out of tax and is an important step which ACCA has been urging him to take for a long time. We are also pleased that he gave a nod to tax competition between states, although he should not forget the fact there are some useful tax co-ordination measures across Europe which would be of benefit to business, and which could be adopted.� Money laundering rules bite harder Accountants and lawyers should become subject to more rigorous inspection of their role in money laundering, according to the anti-corruption lobbying group, Transparency International. It has warned the UK Government that it must take stronger action against money laundering, or else risk serious damage to London�s position as a global financial centre. TI argues that accountants have a �poor record in reporting suspicious transactions�, implying that recent laws requiring them to notify law enforcement agencies about possible money laundering should be enforced more strictly. It added that the Government should do more to ensure that estate agents, casinos and high value goods auctioneers are aware of their obligations to report possible money laundering under revised European rules, which come into force in the UK towards the end of this year. The report, written by Marcus Killick, chairman of the Gibraltar Financial Services Commission, reveals that the number of suspicious transaction reports made by accountants to the National Criminal Intelligence Service has actually more than halved between 1998 and 2001 as a proportion of the total of such disclosures. It says that some accountancy bodies should do more to expel members who do not do enough to report clients. The report quotes NCIS as saying that, where accountants and other professionals do report on client wrongdoing, the results are often very effective. One recommendation of the report is that accountants should be subject to independent on-site visits, possibly by the Financial Services Authority, to check on compliance with money laundering regulations. It adds that the UK Government has until now allowed financial service providers to focus too much on the bureaucratic hurdles of showing identification papers - which can be forged - and too little on the more general and demanding �know your customer� requirements. John Drysdale, chair of TI (UK)�s money laundering working group and a former director of the Robert Fleming merchant bank, said: �The British Government has so far failed to contain the growing menace of money laundering. Despite laudable efforts to tighten the UK�s anti-money laundering regime, too many weaknesses remain and the Government must now dedicate adequate resources to ensure that proceeds of crime are not legitimised by the UK�s financial system. Money laundering undermines the integrity of the global financial system and could ultimately compromise our economic prosperity.� Sha Ali Khan, ACCA�s head of monitoring and supervision, responded: �It is essential that accountants behave responsibly and discharge their responsibilities with regard to the prevention and detection of money laundering. ACCA makes every effort to ensure that its members are fully aware of their responsibilities under money laundering regulations. We have provided courses and seminars as well as substantial written guidance on the subject. �It is interesting to note the recommendation made that the FSA should undertake visits to firms of accountants to review their compliance arrangements. ACCA�s Monitoring Unit visits all its UK practising firms and an integral part of these visits is a review of the firm�s money laundering compliance arrangements. I believe that ACCA�s conduct in this important regulatory issue is extremely robust.� The UK�s Home Office estimates that dirty money represents about 2% of the UK�s gross domestic product, or approximately £18bn, while the International Monetary Fund calculates that between $500bn and $1.5 trillion are laundered every year through the global financial system. Under the new European Union Money Laundering Directive, all EU countries must implement new requirements on accountants and other professionals to report their suspicions on clients. This brings some other European countries into line with the law in the UK. The Directive is being applied in member states� law at exact dates of countries� own choosing, but most are expected to comply by the end of this year. KPMG Forensic warned that the Directive will also impact on many other businesses, which will have to reconsider allowing customers to pay cash for high value goods. Car dealers, jewellers, travel agents and department stores may all need to review their cash acceptance policies, warned the firm. As a result of the Directive, businesses must decide whether to accept cash for transactions above 15,000 euros (£10,450) - and if they do, they must register with their country�s customs authority and appoint a money laundering reporting officer. Karen Briggs, head of KPMG�s Forensics Regulatory Services practice, said: �The thrust of the new regulations is to prevent criminal assets being laundered through the purchase of physical goods such as property, precious metals, cars or even casino chips, rather than through monetary or financial channels. However, for a number of businesses, the costs of implementing the new Directive may mean that they decide that it actually outweighs the benefit.� International standards: protagonists step up a gear American International Group - AIG, the world�s largest insurer - has stepped-up its long-running propaganda war on international accounting standards, on behalf of itself and other insurers. AIG claims that the proposed use of fair value would lead to much greater volatility in annual reports, making them less useful to major investors such as insurers. It is similarly concerned at the use of fair value to assess insurance liabilities, which it wants valued at the amount that might be regarded as normally required to settle them. AIG has been lobbying the International Accounting Standards Board for two years against the move to fair value, which it argues could encourage corporations to invest more heavily in derivative products, to improve the appearance of accounts prepared on a fair value basis. Insurers are paying extremely close attention to the question of accounting standards, with many of them facing interrogation about their own accounting practices. There are concerns that many have used contentious methods of counting assumed future profits to prop-up their balance sheets, while some may have insufficient reserves to meet likely future liabilities. AIG itself is regarded as financially secure but it has been involved in a sequence of public debates on the transparency of its accounts, with analysts demanding further information in order to better understand the company�s precise financial situation. This has its own irony, given that AIG has recently hired many forensic accountants to assist the insurer more accurately to assess the financial situation of companies in which it invests. Earlier this year AIG increased its reserves by $3.5bn to cover the risk of a big increase in liability claims, not least from auditors caught up in accounting scandals. AIG has also been challenged on some of its business practices: notably its lending to the so-called �sub-prime� (poorer borrowers) market and its underwriting of political risks in Zimbabwe. But international accounting standards have been under close scrutiny from members of the profession, as well. Some influential voices have said that it is not worth achieving international convergence on standards if it is at the expense of having principle based standards diluted by the US rule based approach. ACCA President, Sam Wong, said: �ACCA believes that convergence around ISAs should become a feature of regulatory intervention in all developed, developing and transitional markets, as should the need to construct robust oversight and governance mechanisms. We expect to see this soon in the Asia Pacific region as well as in Central and Eastern Europe, where the new EU member states seek flexible regulatory mechanisms which ensure market credibility without asphyxiating market participants with US-style rules and regulations.� But he warned that there must be flexibility in many areas to ensure their universal applicability. A case in point, he said, was with International Financial Reporting Standards. �The IFRS programme has, to date, been largely driven by the reporting requirements of large listed companies,� Wong argued. �This work is essential and must continue. �But the International Accounting Standards Board itself has been slow to acknowledge the reporting needs of the vast mass of smaller companies. The recent draft auditing standards issued by the International Auditing and Assurance Standards Board tell a similar tale - they are not designed for smaller firms of auditors, which will consequently struggle to apply them, putting at risk global acceptance of ISAs. This would be a great pity. �Flexibility is also important in the area of auditor liability, which is a real issue for all auditing firms. But the solution does not lie in the direction of fixed liability caps or disclaimers contained within the auditor�s report. Rather, there should be a globally recognised endorsement of the principle of proportional liability.� RSM Robson Rhodes has warned that the cost of initial adoption of the IASB�s inaugural standard on International Financial Reporting Standards (IFRS) could cost the UK�s listed companies £500m to implement by 2005. The biggest cost impacts will come, says the firm, from retraining and recruiting staff or agencies to undertake detailed conversion work; the adoption of new systems to improve the way data is gathered and analysed; the updating of reporting manuals; briefings for boards and audit committees; amending share and other incentive schemes; changing bank covenants; explaining the move to IFRS to investors, analysts and others; and additional audit costs relating to the restating of 2004 comparatives and to the 2005 accounts. Anthony Carey, technical partner at RSM Robson Rhodes, said: �This is the finance director�s equivalent of Y2K - time is running out for companies to address these issues in good time. The stark choice is plan now or panic later. The move to international accounting standards is an important milestone for UK Plc, affecting the smallest AIM companies as much as the giant global players. It will involve significant time, costs and disruption. It will also, however, bring the benefits of a stronger single capital market across the European Union.� | |