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The Costa Opportunity

Looking at the Wilkins-Kennedy site, it suddenly struck me what a great opportunity they could be missing. They have a Spanish section on their main website. Why not try a blog communications site aimed at the ex-pat communities on the Costa Blanca, Costa del Sol and so on.

There are 10s of thousands of ex-pats here. Many are high wealth. But guess what? 53% return within the first year. Think about the tax consequences of that? What could you usefully talk about? What about offshore investments? What about asset liquidation? What about Spanish witholding tax on property disposals? What about the reality of walking around with large brown paper bags with the proceeds you're not declaring to Hacienda on a property sale? There really is a big market out here for someone from the UK with imagination.

Anyone that can unravel the goings on at Hacienda has got to be onto a winner.

And while you're at it, think about the pleasure you'd derive from deducting flight and hotel costs to Alicante or Valencia airports from your profit calculations. Oh yes - I'm getting a Costa Ripoff site going soon...could be a good companion. Any offers? I can big it up in the Costa Blanca rags.

Big Four spanking - again

The US Public Company Accounting Oversight Board has dished out another spanking - this time to E&Y and PwC. Earlier, it had a crack at KPMG and D&T.

 

The range of errors or ommissions found go from the sublime to the ridiculous but as Jack Cieslielski says:

"It’s not encouraging stuff to read; you’d like to think that the Big Four would do a higher-quality job in what should now be their mainstay business - auditing. But you also have to recognize that the tension between regulator and regulated is what makes the process work for investors. If the day ever comes when the PCAOB doesn’t find some flaw in the way public accounting firms operate, investors should be concerned that the regulator isn’t doing its job. "

Cold comfort for investors that have witnessed a litany of cock-ups and downright cheating that seem to float by the Big Four with little or no discernible impact. And this on the back of the FSA saying it believes the Big Four are now so large it is virtually impossible to regulate them on a global basis using current structures. 

 

I don't get it. How can a profession, that makes lofty claims of independence and has disciplinary processes in place continue to command the public trust when this kind of report keeps surfacing at regular intervals? Of course the markets are becoming inceasingly complex and that regulation is a significant burden. What's changed to make life more difficult? Is it the case that regulators are getting better at spotting under-performance? Is business deregulation going too far and creating the kinds of gap that make cheating so much easier and less detectable? Is training so shabby that the audit report is little more than a sham, glossed over by a recognised brand?

 

When the so-called leading lights of the profession can't get basic audit procedures right, then there is little hope for the rest of the profession. Is it any wonder that trust - that most valuable of professional commmodities - is being steadily eroded in the minds of many.

 

Technorati Tags : audit, compliance, FSA, ethics, KPMG, Deloitte, PwC

 

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Baker Tilly doesn't get Sanctuary's tune

It's a musical day. Earlier, AccountancyAge reported that Sanctuary Group, which counts Morrisey, Nancy Sinatra, Elton John and Kelly Osbourne among its portfolio of artists:

"Is understood to have treated advances to artists as assets rather thanexpenses. The company also recognised revenues from rights to its back catalogueup front, even though the cash was only due over a longer period. Sanctuary isworking with auditors Baker Tilly to review its accounting policies and toestablish the extent, if any, of capital loss."

This is wrong, wrong, wrong. Baker Tilly are the auditors of record. Surely the company needs an external review. If the allegations are correct then what on earth was it thinking? Advances as assets? Come on. A quick reading of the latest interim accounts should have been enough to send out alarm signals. Amounts advanced total £39 million out of  total net assets of £133 mllion.

In its trading statement released June, chairman Andy Taylor said:

"The Group’s Recorded Product Division has suffered from a greater degree of slippage of releases than previously experienced, particularly in Sanctuary Urban...The Board views the underperformance and reduced profitability as regrettable and unacceptable but also as the result of a set of issues that are being urgently addressed."

Nowhere is there any hint of a potential capital loss although its share price has slumped 90% since July.

When I was involved in the 'bizz' during the early 1980s, keeping finances under control was extremely difficult. It needs an iron hand and attention to detail. In this case, it looks like Baker Tilly has allowed itself to be persuaded to agree a dangerous course.

There's a genuine lesson here. We all want to satisfy clients. But at any price?

Technorati Tags : Baker Tilly, ethics

OCR v FBI - come on, give me a break ?I

AccountingWEB has a confusing piece about a new SA100 under discussion at HMRC. Author Rebecca Benneyworth says (eventually through responses):

"The use of OCR is the issue
I was aware that the reason for not approving a facsimile version was that the form would be OCR processed, and that structurally HMRC have an issue with control over user printed forms for OCR processing, and therefore do not approve printed facsimiles. This is exactly the issue."

But this is still confusing. She then goes on to say:

"By deciding to go down the OCR route - and I agree, if I were at HMRC it would definitely be my answer to processing costs and errors, a decision has been made which has a significant effect on users. The only options for advisers are to file online or to transcribe manually onto HMRC issue forms."

I then spoke with Valerie Murrel who was at a recent HMRC meeting. She believes HMRC is not aware of the growing burden of of bureaucracy as a cost that is becoming increasingly difficult to pass on to clients. Moreover, she says compliance cost is something about which clients are becoming increasingly resentful.

There are problems with this argument. It:

• Ignores the possibility of innovation.
• Assumes the status quo on the part of the profession. This is reactionary.
• Is clear there is a gaping void between HMRC and representatives of the profession and other interested parties.

Here's an alternative view. If you are:

• In the compliance game then your business has to be automated and you must have super slick processes. If not, then you have no chance of making money.
• One of the vast majority of practices where compliance is 70% of your business then great. The other 30% beats the 80/20 Pareto rule. You're already on your way to doing something extraordinary.
• In the second group, you've to do the same as the first group so you're cost profile for the compliance work diminishes and your opportunities to differentiate improve.

That's a different way to look at this.

In the meantime, I want to make it clear that I 100% support anyone who is actively promoting client interests at government level. It is clients who have to comply not us and if the situation reaches a point where they refuse, then government should be aware of that risk.

What I don't support though is a profession that is self-serving to the point of being considered an irrelevancy. That's what's happening at the moment.

KPMG makes elementary errors

The US version of AccountingWEB details the PCAOBs finding on KPMGs performance. The detail revealed should give heart to any audit partner losing sleep over audit standards:

"In their exhaustive examination of 76 audits, the PCAOB found many significant errors in 19 audits, one error leading an unnamed client’s board to restate their initially reported earnings according to the report. The report also stated that KPMG auditors set their threshold for corporate accounting mistakes too high on at least two audits. The number of mistakes should have initiated a more detailed examination but did not.

Deficiencies included failure to address companies’ sometimes significant departures from GAAP compliance and perform certain audit procedures properly according to the report. A major criticism in the PCAOB report was KPMG’s failure to obtain and preserve documentation to support the conclusions of the audit.

In some cases, KPMG did respond after being informed of these deficiencies. There were additional efforts by KPMG and their clients that “led to a change in the issuer’s accounting or disclosure practices or led to representations related to the prospective changes,” the PCAOB report said.

KPMG Chairman Timothy Flynn responded in his prepared statement, “KPMG has reviewed the finding identified during the inspection … and has concluded that, with one exception, no new facts came to our attention that caused us to believe that our clients’ previously issued financial statements should be restated or our auditors’ reports withdrawn.”

I don't know about you but this is a savage indictment of a global firm. What's worse, KPMG brushes aside its culpability. I wonder what would have happened if such a scandal had emerged in the UK. How many partners would have been hauled up before the headmaster and given a good spanking?

Given there is an atmosphere of distrust at this time, it is crucial you distance your firm from this kind of thing. That means ensuring internal communications are sufficiently friction free so where weaknesses are spotted, everyone gets to know - toutes suite. This technology can facilitate that.

In the meantime, let's hope audit partners at KPMG are losing sleep - just for a change.

Compliance podcast

Yesterday, I recorded a podcast conversation with Jeremy Roche, CEO of CODA Group. I've known Jeremy ever since he arrived at CODA and during that time, I've found him excellent at explaining technology to the business in a way that most people can understand. This podcast is the first of what I hope will be many that address issues of importance to professional accountants. Many of the issues relate to large companies but the principles we discuss are the same for large and small organisations.

Download the MP3 file here

Show notes to guide you to stuff you're interested in:
00:00 - 00:30 - Intro including music from Sinch - Identity Theft
00:31 - 02:30 - Setting the scene, the legislative landscape
02:31 - 06:40 - Auditing processes rather than transactions, gaining business effectiveness and avoiding pitfalls
06:41 -  09:39 - US experience to date:
09:40 - 17:45 - Looking at specific examples like bad debt provision, how that impacts cross departmental processes and how these processes might change over time.
17:46 - 19:50 - Mitigating audit costs by shifting the focus from transactions to process
19:51 - 21:16 - Benefits to be found from taking a process approach
21:17 - 24:23 - Is this real? What about the lessons to take away?
24:24 - 26:54 - Looking to the future
26:55 - 27:13 - Customer reference - sorry folks, it's a month away but I will go back and get it!
27:14 - 28:15 - Closing discussion
28:16 - 29:08 - Outro and closing music: The Honour Recital, Pain Will Ease

Music for download can be found at PureVolume

In order to listen to this podcast, you will need an MP3 player like Real Audio. If you want to download to your iPod then you will need iTunes. This podcast has been automatically uploaded for RSS so if you want to access it from FeedDemon for future listening then you can grab it from there.

As always, we didn't cover everything and some of Jeremy's remnarks are contentious. If you have comments or questions about this show, or suggestions for our future shows, email me at dahowlett@gmail.com or call my SkypeOut number in the UK at +44 207 7193 2146. You can email your comments, questions and suggestions as MP3 file attachments, if you wish (max. 5Mb attachment, please!). I'll be happy to see how I can include your audio contribution in a future show.

Document management - a business case

Professional firms buy software because they need to, not because it might make a difference to the business. In virtually all cases I've seen, the driver was improved efficiency. Not once have I seen the prime objective as being improved effectiveness. This is where document management will challenge your thinking. Traditionally, DM has been seen as a way of reducing paperwork and storage. Today, it's seen as a way of combating compliance costs. In reality it should be the starting point for client intelligence.

In a good DM system, you will be able to collaborate on the creation of policy documents, interpretations, create a repository of intelligence on issues like tax decisions, local economic trends and so on. This is in addition to filing capabilities. Such a system should be searchable and capable of being readily updated, with version control if needs be.

This can be conducted by using proprietary tools. But technology is on the move again and so the ability to assemble applications and re-assemble in short order has taken on important meaning. That's why I advocate a different approach. I believe that using open-source products as opposed to proprietary holds the key to allowing you to reduce your dependency on more expensive tools with the service and maintenance costs that go with it.

If you agree with that then you need tools that are fully web-enabled. This is likely to be very different from the technologies you currently use. It has huge implications for how you communicate. And potentially huge benefits. Having open access to documents that are logically linked allows the organisation to learn faster, more cohesively and more effectively. That will have a direct impact on performance and client interaction. That's a long way from an electronic filing system that solves compliance issues. Isn't it?

Pub VAT audits

Have any of you seen this about VAT visits and pubs? If not then don't be too ashamed at not keeping up to speed. It's buried inside the Government News Network site. Back to the press release. This has to qualify is one of the most badly spun pieces of double talk I've seen in years.

Unless I'm totally out of touch, then the last I heard, VAT exists to enforce collection, not provide help to businesses. How about this:

"We recognise that businesses need information and support, which is tailored to meet their individual circumstances. We have learned a lot about those needs through our VAT assurance visiting programme. We will be working with individual pubs and the industry as a whole, to help Public Houses pay the right tax at the right time, and to provide information about the schemes we offer, which can simplify VAT matters."

What a crock of shit - as our US cousins might say. But they let the cat out the bag when they add:

"The letters and advice will be backed up by a programme of visits to pubs by VAT assurance officers, some of which will be without an appointment. Visits like these play an important part in allowing HMRC to gain an understanding of how businesses work, and to address the specific problems and concerns of individual businesses."

But hang on. At the end of the release there are notes to editors where it says:

"The purpose of the visits is to check the books and records of the business and offer one to one advice on VAT matters"

So now you have it. They're doing VAT audits in disguise. But it's not that simple. Not only do they plan on spot checks, but in the process they'll be adding to their store of knowledge. But they don't have any. And what they do have is no good anyway. The last available public record of what Revenue Inspectors know about running pubs was based on data collected in 1987. And what they say is that:

"No two houses' overall rates of gross profit will be the same, as there are so many factors, differing from house to house, which affect the final result. Tenanted and managed houses with the same kind of trade, in the same locality, should have results falling in the same range, as should free houses in Scotland. Free houses in England and Wales should make more."

Now you know that, you can respond to the threat at a local level by reviewing your publican clients (if there are any left!) and advise accordingly through your community friendly website.

Kill the spreadsheet

The free lunch that spreadsheets represent will have to be paid for - at a premium.

Earlier today, I spoke with Dennis Keeling, CEO of BASDA the trade organisation for the UK (and some of Europe's) software development community. In essence, studies undertaken with PwC and others reveal that spreadsheet proliferation is one of the chief causes for audit cost hikes in the wake of the need for SarbOx compliance. Keeling said that in a typical large organisation, there can be up to 3,000 spreadsheets all of which have to be audited.

The main problem with spreadsheets and one I've commented on regularly for over 10 years, is their ad-hoc, uncontrolled nature. Development is almost always undertaken by people who don't have formal development skills and so the spreadsheet is rarely documented. There are many examples of how this impacts organisations.

I recall speaking with Heineken where the UK FD passed his home grown monthly reporting spread to a colleague who, through no fault of his own, screwed up interest payment allocation to the tune of some  £1 million per month - four months elapsed before anyone noticed anything unusual. Then there was the building society that overpaid £135 million when purchasing a mortgage 'book.' The calculations to support the purchase were made using a defective spreadsheet. In the US, defective spreadsheets are blamed for incorrect electricity demand calculations that led to a massive over commitment in forward buying of power. The figure runs into billions of dollars.

The problem can be partially avoided where back end systems functionality allows for reporting from inside the system, but as Keeling notes: "People have for whatever reason chosen to use spreadsheets instead of available functionality." I suspect this is more to do with implementation of features after core rollout.

According to BASDA, a number of mid-range accounting packages may need to be re-engineered so they incorporate automated reporting and so avoid the manual input that plagues spreadsheets. The idea is that work and process flow will characterise the systems of tomorrow.

Audit  teams will only have to audit the system once and then apply tests to the outputs. It means that over time, consolidation in an already consolidating market for accounting software is likely to accelerate. That translates into reduced customer choice.

Equally worrying is the lack of compliance related skills among mid-tier accounting professionals. Sarbanes-Oxely has wide impact, much wider than listed companies. Anyone that has a trade relationship with US firms will be impacted over time. But it's only the thin end of the broader compliance wedge. Keeling agrees. Already the EU is looking to enact legislation similar to SarbOx so again, over time, SarbOx style compliance will become mandatory.

If this is an area likely to impact your clients, there is an opportunity to skill up and perhaps offer services to other practices or even the Big Four.

The detailed (and excellent) report is available for purchase by contacting BASDA here

SarBox and IT

Later today, BASDA will be holding an afternoon conference to discuss the impact of SarBox on IT. To give you an idea about why this is  of interest, the notes from BASDA say:

"BASDA and PWC have been busy over the last 12 months developing a White Paper on the 'Implications of Sarbanes Oxley on IT'.  It has taken us this length of time as there was nothing, relating specifically to IT, that we could refer to.  It has also enabled us to highlight the findings from the first filings and include these in the recommendations."

I'm hoping to catch up with Dennis Keeling, BASDA chief executive after the conference in order to get some perspective on this issue.