Should auditor rotation be compulsory ?

After  a delay due to preparation for the ubiquitous UCAS applications, I have found time to comment on an article regarding the calls for the auditors of large companies to switch every ten years in the midst of the £1.1 billion Olympus fraud which was perpetrated over a long period of time and exacerbated by the “cosy relationship “ which was cultivated with its auditors, one of the big four firms, KPMG.

The Guardian article, and former Olympus president Michael Woodford, cite the need to change auditors frequently due to the decreased risk of such frauds occurring as an indirect result of an arguably too cosy relationship between companies and their auditors.

Whilst I unequivocally agree with the sentiment of changing auditors frequently to minimise internal fraud risk, there are also a host of other benefits attributable to changing auditors. The first is an increase in competition, not only between the big four auditors, but an increase in competition which could potentially also “second –tier “ firms such as BDO to compete for lucrative auditing contracts. An increase in competition drives productivity and standards and will help to prevent the “big four “ from becoming complacent and resting on their laurels and becoming complacent.

Furthermore, an increase in second-tier firms competing for large contracts could potentially mean that the big-four would have resources free to help HMRC fight the ever-increasing problem of tax avoidance and fraud. Corporate Tax Fraud is almost impossible to accurately estimate, VAT Fraud is estimated at over 9 billion a year, and is now the preserve of organised criminal gangs, and there are over 14,000 methods of tax avoidance employed by high-net-worth individuals. It is not unreasonable to conclude that a decrease in the aforementioned “cosy “ relationships between companies and their auditors would also decrease the prevalence of tax-avoidance /evasion schemes employed by these same companies too. 

AccountingWeb article : Corporate Tax Avoidance.

I’ve just stumbled upon an insightful article on AccountingWeb, one of my favourite sites with regards to learning more about tax policy , accounting practice and HMRC.

This article is mostly factual and centres around HMRCs new policy of targeting SMEs in a government initiated “crackdown “ on tax avoidance. As someone who has been researching and writing about the sizeable damage done to the economy by large, transnational corporations, this confuses and surprises me.

Small and medium sized businesses are the lifeblood of the economy. Research has shown that they are amongst the main employers and drivers of growth within our economy, yet lending to small businesses has declined consistently over recent years , and more than ever, large businesses are exploiting tax loopholes and abuses such as transfer pricing , exacerbating the advantage they already have over small businesses by means of their economies of scale and ability to hire the most skilled and experienced accountants and financial services professionals.

As such, when we consider not only this, but HMRCs hugely inaccurate estimates on the scale of corporate tax avoidance (article forthcoming ) , one can only reasonably conclude that HMRC ultimately cannot tackle the problem of corporate tax avoidance by large corporations. Here is the pertinent extract from the article :

“HMRC’s tax receipts from investigations into small and medium-sized businesses have increased by 31% in the last year, according to figures obtained by accountancy firm UHY Hacker Young.

“Compliance” investigations into SMEs raised £565m for HMRC in 2012-13, up from £434m in 2011-12 (year ending March 31), Hacker Young said.

In the 2010 Spending Review, the Chancellor set a target to net an extra £7bn a year in additional tax revenues from compliance activity.

“Small businesses are bearing the brunt of HMRC’s tougher approach to tax investigations,” said Roy Maugham, Tax Partner at UHY Hacker Young.”

Royal Mail update

An interesting follow up to the recent Royal Mail article suggesting a significant undervaluation of the distinctly British institution. It is important to note that simply because the company’s market value has increased on its first day of public trading, that does not mean that it was inherently undervalued. An example of this would be Facebook, which after a sharp initial increase in value, suffered a major plunge and has only recently recovered to reach its IPO (initial public offering ) value.

“Private investors who bought their shares directly from the government will have to wait until at least Tuesday if they want to sell. About 690,000 people were granted 227 Royal Mail shares worth £749.10 (at the 330p float price) following overwhelming public demand for the shares. The public applied for more than seven times the number of shares available to them, which meant nearly everyone did not get as many shares as they had asked for.

More than 36,000 people who applied for more than £10,000 worth of shares were prevented from buying any at all. About 40 people applied for shares worth £1m or more.

Cable said the government told the "very big wealthy investors … you wanted a big chuck, we can't give it to you".

City investors, hedge funds and pension funds applied for more than 20 times the number of shares available to them. More than 800 City investors applied for shares, with 500 being left empty-handed.

Sources said 90% of the shares reserved for the City went to "responsible institutional investors" such as pension funds. Investors include Threadneedle, Fidelity, Blackrock and Standard Life.

However, the remaining 10% of shares have been granted to "other investors", including hedge funds. Cable had said the government would prevent the shares from going to "spivs and speculators".

It is understood that about 20% of the shares available have gone to sovereign wealth funds – including those of Kuwait, Norway and Singapore – and other foreign funds. Royal Mail's 150,000 employees collected 10% of the shares free of charge, worth about £2,200 each at the flotation price and now worth £2,900. Employees were also allowed to buy a further £10,000 worth, but are not allowed to sell for three years.

Hayes said the share price rise would not make "one scintilla of difference" to employees' widely expected intention to vote for strike action on Wednesday. Days of nationwide industrial action could start as soon as 23 October.”

Royal Mail Privatisation

In the 1980s, the cost of keeping a miner in work for one year would have been enough to pay off his mortgage in its entirety and buy him a new Rolls Royce; Privatisation was the answer to Britains economic woes then, but it is not now.

The Royal Mail privatisation is, In my opinion , fraught with inherent flaws. For starters, it is undervalued hugely. Experts have placed the market capitalisation of Royal Mail at around £4.5 billion, yet the value estimate given by the government is £2.6 billion, a decrease of around 40%. The £2.6 billion valuation is of course hugely flawed, as it appears not to accommodate or account for the $1 billion in property assets and $2.8 billion in tax credits , meaning that it won’t have to pay tax for the foreseeable future. Furthermore, the government has retained the huge liability of its pensions, giving an even sweeter deal to investors.

It is, however in these investors that we see the biggest flaw of it’s privatisation : The government anticipates 70 % of the shares to be purchased by “large institutions “, or in other words, large banks and investment firms. The shares are forecasted to rise, leaving big banks in the red and many individual investors in the black. If the sale is to benefit the public, why is it the big banks that have helped no end in creating the financial crisis and subsequent recession which apparently necessitates its sale ?

Proponents of the Royal Mail privatisation cite it as being a convenient and effective way to reduce the budget deficit, which I find ridiculous.$2.6 billion is a drop in the ocean that is British national debt, which is forecasted to hit £1.5 trillion in 2015. Furthermore, the company recorded a £400 million profit last year, and , in the words of the government, is “on the road to sustained profitability”, and by extension, is on the road to contributing nicely to corporate tax receipts.

Now, however, it is on the road to large investors who will profit from the government’s incompetent valuation skills, and private investors who will end up buying into something which they already own, and end up not really owning it.

Retail sales falling

An interesting article from the Guardian which aptly illustrates the huge number of factors which influence consumer expenditure, an important component of Aggregate Demand.

“Retail sales growth eased back last month as clothes stores suffered amid volatile weather, according to new figures.

BDO's monthly high street tracker showed like-for-like sales across the retail sector, excluding grocery and online sales, increased by 0.6% last month - down sharply on the 3.5% surge recorded in August. Fashionsales fell 2.1% in September in a "challenging" month for clothing retailers as they were buffeted by changeable weather conditions, according to the accountancy and business advisory firm BDO.

It added that sales progress was held back as many firms chose not to launch heavy discounts in favour of protecting their profits. Retailers were also up against strong comparatives from a year earlier, when widespread discounting saw sales leap 3.5% higher.

Don Williams, national head of retail and wholesale at BDO, said: "September saw a game of nerve being played, with bolder retailers driving footfall and conversion imaginatively rather than resorting solely to price led promotion."

BDO added that retail sales were moving back into a "more regular pattern of growth". Homewares retailers continued to enjoy double digit sales growth, up 12.8%, thanks to Britain's housing market revival, helping non-fashion sales overall rise 3.7%. Online sales growth slipped to 23.7% from 26.7% in August, the report found.

BDO tracked sales at around 85 non-grocery retailers with annual sales of between £5m and £500m.

Official figures showed retail sales volumes fell 0.9% month-on-month in August as spend on food slumped after the barbecue boost from July's heatwave.”

Just read an interesting article which I found surprising, for one would of course expect markets to lose confidence and react negatively to such a piece of news :

"US stock markets recovered their losses Tuesday morning even as thebiggest government shutdown in close to 20 years began.

All the major US markets opened up after falling sharply Monday as it became clear Washington was at an impasse. Most of the major European and Asian markets were also rising.

The Dow Jones was up 48 points, or 0.3%, to 15,179 after the first hour of trading. The Standard & Poor's 500 rose nine points, or 0.6%, to 1,690. The Nasdaq composite rose 23 points, or 0.6%, to 3,795.

The dollar, however, took a hit — it fell 0.5% against the Japanese yen, to 97.78 yen, while the euro rose 0.1% to $1.3544.

The federal shutdown will send more than 800,000 federal workers home without pay, close national parks – and has been predicted to have a negative impact on the still insipid recovery in the housing market.

In a note to investors, Dan Greenhaus, the chief strategist at broker BTIG, said investors were more concerned over the looming row over raising the US debt ceiling than the shutdown. He said a common view "which has grown considerably in acceptance, is that the House is 'getting it out of their system' now so the eventual debt ceiling debate can be solved more easily."

Greenhaus said a short-term shutdown of one week would have little impact on growth, "but the longer this drags on, the more impactful it will be," he warned. And he added that he was "growing increasingly nervous" about the upcoming debt ceiling debate.

Bruce Bittles, the chief investment strategist at RW Baird & Co, said it was clear that investors were discounting the row and any potential clash over the debt ceiling. "We have been through this several times before. Markets reacted well yesterday, after the initial sell off there was virtually no selling in the US. The assumption is that it won't last that long and that it won't be that damaging to the markets," he said.

Bittles said the larger danger was "complacency".

"Investor complacency is widespread and deep-seated," he said.

He said the Federal Reserve's recent decision to keep up its $85bn a month quantitative easing programme may have underpinned investor confidence but that if the debt ceiling talks collapse, that confidence could be shaken and lead to a selloff."