International Accountant 126

Using

In this issue

of inflation by using AI-based scenario planning.

be other options, as Richard Simms (FA Simms & Partners) explains.

Students 6

Practice makes perfect!

The series of three financial reporting papers require active learning. This article asks what you can do to be successful in your preparation for each of the papers, and the key takeaways that you will need to use your time as constructively as possible. Practice makes perfect and makes passing these exams much more likely.

AutumnStatement 12

Autumn Statement 2022

Chancellor Jeremy Hunt delivered his Autumn Statement on 17 November 2022, setting out proposals to address a £55 billion gap in the UK’s finances, with half of that amount being raised through increased taxation.

Duediligence 22

Knowing who your client really is! Collecting identity information and risk assessing prospective or current clients is a key part of a firm’s client due diligence processes. However, the process is incomplete until any information gathered has been verified. Checks for suspicious activity and discrepancy reporting are also crucial steps in client due diligence, says David Potts (AIA).

Financialplanning 9

A lighthouse in the storm! Global inflation has its grip on the world economy as organisations learn to adjust to its impact on business performance. Fast action and decisiveness are in order to remain afloat among geopolitical tensions, the resulting supply chain disruption and increasing market uncertainty. Tim Caudill (Jedox Inc.) asks how businesses can offset the effects

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Professionalchange 16

How accountants can save the world Recording and advising on money-based transactions has been the superpower of accountants for centuries. But the world is changing, and using money as the primary measure of success is no longer enough. Peter Ellington (Triple Bottom Line Accounting and University of East Anglia) asks how accountants can use their position to save the world – and the ten areas they should focus on.

Liquidation 20

Is liquidation the only option?

If your client’s business has suffered since the pandemic, liquidation might seem inevitable. When faced with what seems like an impossible situation, your clients may feel like they have little or no choice in the matter. But there could

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Auditing 26 Restoring trust in audit

The auditing profession has been in the headlines a lot over recent years and not for the right reasons. There will always be an ‘expectations gap’ where audit is concerned but this cannot be used as an excuse for poor quality audit work. Steve Collings (Leavitt Walmsley Associates) explains the importance of audit and how the profession is striving to improve levels of confidence in its findings.

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Technical 30 Global updates

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Negotiating uncertain terrains

Since the last issue of International Accountant, we have lived through yet another turbulent time of change – and are now learning to live with our second prime minister, third home secretary, and fourth chancellor this year. The Autumn Statement on 17 November, made by the latest chancellor Jeremy Hunt, struck a markedly different tone to that of his predecessor. He is attempting to reduce the national deficit by a combination of cutting public spending and raising taxes – partly by freezing tax thresholds to pull more people into the tax system. Accountants have never had to negotiate a more uncertain terrain than they have in 2022. Read more about the Autumn Statement on page 12.

Inflation is a growing problem, and companies must learn to adjust to its impact on business performance. Peter Caudill asks how businesses can offset the effects of inflation by using AI-based scenario planning, exploring methods including business partnering, predictive planning technology, and sensitivity planning (see page 9).

Certainly, the need for thorough and stringent auditing is clear – and the profession must improve levels of confidence in its findings. On page 26, Steve Collings sets out the different types of audit opinion and levels of assurance, including modified and unmodified opinions, and examines what we can do to narrow the expectations gap and

Angela Partington Editor, IA

Contributors to this issue

TIMCAUDILL

Tim Caudill is Director of Solution Advisory at Jedox, Inc. and has over two decades of domain expertise primarily focusing on financial software implementation, as well as leading corporate finance teams. .

STEVECOLLINGS

restore public trust in our findings. David Potts sets out the importance of client due diligence and the crucial steps of verification, checks for suspicious activity and discrepancy reporting (see page 22).

Another reflection of our times can be found in Richard Simms’ article on company liquidation (see page 20). Economists from Goldman Sachs have predicted that UK inflation could top 20% as recession looms and fuel prices spiral. But liquidation is not always the inevitable answer for struggling businesses, and there are solutions available to firms in distress. Informal arrangements with creditors can allow businesses to repay debts within mutually agreed terms. Creditors’ Voluntary Arrangements, which mean compromise from creditors in return for payment from future profits, can provide a sustainable business with the breathing space it needs to stabilise. And administration is a way of protecting a struggling business from legal action.

However, there is room for some positivity and a forward looking approach to the benefits that accountancy can bring. On page 16, Peter Ellington proposes ten ways in which accountants can save the world by placing a value on natural and social capitals, in addition to our current reliance on monetary capital. For organisations to succeed and survive, he argues, accountants must measure the use and protection of all three capitals, and he aims to stimulate critical thinking about our over reliance on traditional views of wealth.

Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, where he trained and qualified. Steve qualified as a Chartered Certified Accountant in 2005. .

PETERELLINGTON

Peter Ellington is CEO and Founder of Triple Bottom Line Accounting, a UK based digital practice providing a range of services to SMEs, including accounting, sustainability and financial control. He is Associate Professor at Norwich Business School at the University of East Anglia.

DAVIDPOTTS

David Potts is director of operations at the AIA, and is responsible for maintaining AIA’s international recognition and implementing the professional body’s regulatory strategies and annual review cycle.

RICHARDSIMMS

Richard Simms is the managing director of FA Simms & Partners. Much of his time is spent advising clients with regards to financial problem resolution.

Global transparency and exchange of tax information

Significant progress on transparency and the exchange of tax information is being made across the world, according to the OECD’s Global Forum. In its ‘Peer Review of the Automatic Exchange of Financial Account Information 2022’ report, the organisation notes that jurisdictions are automatically exchanging information on 111 million accounts, and are ensuring that financial institutions comply with their legal obligations.

The report contains the first peer reviews with ‘effectiveness ratings’ for the 99 countries and jurisdictions that committed to starting Automatic Exchange of Information (AEOI) in 2017 or 2018. It shows that virtually all jurisdictions have put in place the necessary legal frameworks and successfully started exchanges, and are exchanging information without significant timing or technical issues.

Two-thirds of the jurisdictions ensuring financial institutions are reporting accurate information have been given ‘On Track’ ratings. A further 15 jurisdictions are found to have put in place credible compliance frameworks. The need for further implementation actions led these jurisdictions to be rated as ‘Partially Compliant’. And 19 jurisdictions have been found to have fundamental deficiencies in their frameworks; they

CARBON

have not yet completed the development of their operational frameworks to verify financial institutions’ compliance. They were rated ‘Non-Compliant’.

‘The Global Forum continues to shape the tax transparency landscape,’ said OECD Secretary-General Mathias Cormann. ‘Widening access to financial account information for tax administrations helps ensure everyone pays their fair share of tax, and boosting revenue mobilisation worldwide, particularly for developing countries.’

In 2022, countries automatically exchanged information on 111 million financial accounts worldwide, covering total assets of €11 trillion. Over €114 billion in additional tax revenues have been identified through voluntary disclosure programmes, offshore tax investigations and related measures since 2009.

‘The Global Forum is working to guarantee that all its members are supported to implement the tax transparency standards, and to use them to fight tax evasion and mobilise domestic resources,’ said Maria Jose Garde, Chair of the Global Forum. ‘No jurisdiction can be left behind. This has defined the spirit in which our 165 members work together to keep advancing tax transparency, and it shall continue to be the case.’

Calls for a new carbon accounting standard

Specific accounting standards are urgently needed for new asset types such as certified carbon offset credits, says a new report from Imperial College Business School.

The report, ‘Financial accounting for carbon finance: a new standard for a new paradigm’, shows how emerging global carbon markets and new

investable assets make the need for new accounting regulations more pressing in the fight against climate change.

The new accounting standards will also be a major step towards achieving transparency, the researchers said. Despite the lack of clarity around accounting standards, in 2021 global carbon markets grew to a record

AUDITING

FRC report on good environment for auditing

The Financial Reporting Council (FRC) has published a report on what makes a good environment to stimulate auditor scepticism and challenge. The report also provides examples of good practice from the FRC’s ongoing supervision work.

A critical attribute of an auditor’s mindset and behaviour is exercising professional scepticism and challenge when performing audits. The most significant quality issues identified by the FRC over a number of years involve the inconsistent application of professional scepticism and challenge, resulting in the poor application of professional judgement.

It concludes that four elements are essential to a good environment for scepticism and challenge: the learning environment, the culture and operating model of the audit firm, and the wider ecosystem. An audit firm needs to encourage good practice through a culture that promotes scepticism and challenge, and enable auditors to apply these behaviours in the day-to-day audit work through the firm’s operating model and processes.

The report can be found at: bit.ly/3VnEncZ

$851 billion. Accounting standards –particularly around carbon credits – are now widely considered crucial to scaling up carbon markets and achieving net zero by 2050.

To achieve change report author Dr Raul Rosales said there needs to be a rethink on the definition of carbon offsets. Rather than being classed as intangible assets or inventories, carbon offsets should be considered as investable assets used as part of a bank’s offering to corporate clients for ‘offsetting’ and ‘hedging’ purposes.

AIA announces new Council members

AIA is pleased to announce the addition of five new members to its Council. Rebecca Hossain, Dr Peter Ellington, Dee Shah, Kim Robinson, and John Froggett bring a wealth of skills, experience and knowledge to further strengthen the board. Their strong professional backgrounds will support AIA to continue to grow and deliver its strategic objectives. The five also have proven leadership ability, which brings the right balance of challenge and support to this key governance role.

In line with its Constitution and Code of Ethics, AIA’s corporate governance structure comprises the Council and several Committees, which are formed of AIA and lay members acting as ‘critical friends’, driving forward the corporate strategy and ensuring that we act in the public interest. The new additions build on the diverse composition of the Council, which reflects the global membership, and contribute to the goal of achieving gender balance on the board by 2025.

Philip Turnbull, AIA Chief Executive, said: ‘I am delighted to welcome our newest members of the Council. I strongly believe the new appointments will further enhance the effectiveness of the board and reaffirm our commitment to gender balance, equality, sustainability, inclusivity and diversity.’

AIA NEWS

CORPORATEGOVERNANCE:DIVERSITYANDINCLUSION

AIA’s commitment to achieving gender balance on the Council

AIA believes that people of all genders have equal rights, responsibilities and opportunities, including economic participation and decision making. Gender inequality is a pressing moral and social issue and a critical economic challenge. Gender equality is essential for economic prosperity.

At AIA, we embrace people’s differences and believe diversity and inclusion are vital for the sustainability of our organisation, the accountancy profession and the economies in which our members operate.

AIA considers that the diversity of thoughts, ideas and ways of working that people from different backgrounds, experiences, genders and identities bring are beneficial to the success of the organisation. The advantages of having a range of perspectives in decision making – and in our board representing our members – is indisputable. The Council is comprised of 53% other ethnic backgrounds against 47% white British/Irish.

46% of our global membership is female. The AIA Council currently stands at 29% female and it is a key strategic goal to ensure that the Council reflects our membership. We aim to achieve

gender balance and reach 50% by 2025 or earlier.

AIA Chief Executive Philip Turnbull said: ‘It is in the public interest that the governing bodies of all professional accountancy organisations should represent their membership, and society as a whole. Our Council members highlight the ethnic diversity of an international organisation. The benefits of inclusion and diversity to support the development and implementation of AIA’s strategy are clear; we are also committed to achieving gender balance on the Council to strengthen our diversity.’

Interestedinbecomingalay member?

We are currently looking for lay members to join the Council. Lay members are board members, who are not members of AIA but individuals chosen to provide an independent element to the workings of our governance. Lay members are encouraged to bring their different professional experiences and capabilities to the board’s deliberations.

To express an interest please forward a copy of your CV and a covering letter highlighting your skills and experience to: council@aiaworldwide.com

A safe space for all

Boards should be a safe space for all. Ranjana Bell MBE discusses the importance of diversity and inclusion in business with the AIA Council.

In November, the AIA Council welcomed Ranjana Bell MBE to discuss creating a safe space for difficult and courageous conversations around diversity and inclusion. The dialogue formed part of the ongoing training programme for AIA’s governing body and our commitment to nurturing a diverse and inclusive environment throughout our organisation.

Ranjana has worked in the field of equality and diversity for over 40 years. She currently chairs the Strategic Independent Advisory Group for Northumbria Police and is an independent member of Northumbria Police Misconduct Panels. She has been co-chair of the Scrutiny Panel for Race and Religious Hate Crime for the Crown Prosecution Service and a Steering Group member for Asian Business Connexions, as well as a government appointed Commissioner for the Women’s National Commission, and chair of the North East Equality and Diversity Partnership.

AIA President, Shahram Moallemi, said: ‘It was a pleasure to welcome Ranjana to speak with us today. She facilitated a discussion around key diversity and inclusion topics, such as ‘What is unconscious bias?’ and ‘What does being inclusive actually require me to do in my business?’

‘The Council is made up of people from a huge variety of backgrounds and we value the advantages of having a range of perspectives contributing to our decision making. Ranjana’s presentation highlighted the importance of keeping equality and diversity front and centre and the need for a committed leadership where dignity and respect are core to the business philosophy.’

AIA AML Supervisory Activity Report 2021/22

AIA has published its professional body supervisor report, which explains work that we have carried out to ensure accountants prevent criminals from using their services to launder money.

AIA supervises its practising members for the purposes of the UK Money Laundering Regulations 2017 (amended 2019), where AIA is listed in Schedule 1 as an approved supervisory body. In the Republic of Ireland, AIA is a designated body under the Criminal Justice (Money Laundering and Terrorist Financing) Act. This work is overseen by HM Treasury, the Office for Professional Body AML Supervision (OPBAS) and the Republic of Ireland Departments of Finance and Justice.

The AIA’s strategy is to provide robust anti-money laundering (AML) supervision through a risk-based approach. This requires firms to assess risks and target resources to the areas or products that are most likely to be used to launder money. We offer support to members through education, guidance, training, compliance checklists and templates.

The report covers:

● our role in tackling money laundering and terrorist financing;

● firms and individuals in scope of the regulations;

● monitoring and supervision activity;

● reporting suspicious activity;

● whistleblowing and anti-money laundering disclosures;

SCHOLARSHIPS

● emerging risks; and ● upcoming areas of focus and supervisory activity

George Josephakis, Chair of the AIA Regulatory Oversight Committee, said: ‘AIA continues to take its role as an AML professional body supervisor for accountants extremely seriously. This includes enforcing compliance where breaches are detected, and educating members on their AML obligations.’

In this reporting year, we have seen key activities relating to educating members on new requirements, resulting from sanctions imposed by governments in the UK and across the EU on Russia following the illegal invasion of Ukraine in February 2022 Building on our previous year’s activities, we have invested in staff training; undertaken a review of supervised Trust or Company Service Providers; made a specific data request relating to sanctions compliance; and delivered high-quality training and guidance to members.

The full report is available at: bit.ly/3GVBoo4

2023 scholarships launched

AIA has launched its 2023 scholarship programme to support students with strong career aspirations in accountancy or audit to obtain the AIA professional qualification, with full financial assistance.

The Accountancy Scholarship UK and AIA Commonwealth Scholarship opportunities represent one of the steps that AIA is taking to develop financial education and provide students with a

real chance to fulfil their potential. Both scholarship programmes are fully funded via AIA Achieve Academy.

We are committed to a policy of equal opportunity and non-discrimination, and encourage applications from a diverse range of candidates.

The scholarship programmes are open for applications until 28 February 2023. Read more and apply at: www. aiaworldwide.com/study/scholarships/

Practice makes perfect!

The three financial reporting papers require active learning. Practice makes perfect and makes passing these exams much more likely.

This article considers the three financial reporting papers and asks what you, the student, can do to be successful in your preparation for each of the papers in this series:

● As you would expect, the Foundation paper requires a basic knowledge and understanding of financial statements.

● The Professional Level 1 paper requires a knowledge of more complex financial reporting issues, including consolidation.

● The final Professional Level 2 paper requires detailed knowledge, understanding and critical evaluation skills of all the accounting standards detailed on the syllabus.

TheFoundationpaper

The Foundation paper may initially appear quite straightforward as it is simply composed of 25 objective test questions. On the law of averages, someone with no knowledge would score around 25%, so some students may believe they can easily pass with a low level of knowledge. However, the multiple choice questions are designed to test not only basic knowledge but also understanding, so the level of preparation required is quite significant.

In recent papers, students have been asked to complete tasks such as calculating a profit or loss on disposal, with the calculations requiring: a knowledge of the method of depreciation; an understanding of how it is calculated; and the intricacies of full year or pro rata. Then, and only then, can a student correctly calculate the profit/ loss on disposal.

A further example might be in relation to cash flow, where a student may be asked the amount of cash outflow for additions to non-current assets. This would involve a more detailed understanding of how to derive the additions from the opening and closing balance, and details of disposals and depreciation. This does not just involve following a process, but applying your knowledge of the process to work backwards to reach the correct answer.

With objective test questions such as these, students need to prepare in detail, just as they would for a paper with longer questions –perhaps even more so, as it is not possible to gain partial credit for objective test questions. Don’t just memorise the content, practise questions in all areas of the syllabus.

Keytakeaways

1. It’s not just about learning the material; it is about understanding.

2. The best way to build understanding is by attempting practice questions.

3. There is no partial credit for method marks so your knowledge and understanding must be secure.

ProfessionalLevel1

Professional Level 1 represents a progression from the Foundation paper and assumes that the core concepts of double entry and preparation of

Whatcan youdotobe successful inyour preparation foreachofthe threefinancial reporting papers?

financial statements are secure. All the questions are compulsory so students must cover all the syllabus.

Time management becomes important as there is a lot to do in the given time. Two key areas which students must master are: preparation of company financial statements from a trial balance with adjustments; and preparation of consolidated financial statements. Students should be confident in the content of all the financial statements; namely, the statement of profit or loss, the statement of financial position, the statement of changes in equity, and the cash flow statement.

For the question on the presentation of individual company financial statements, the adjustments may test knowledge of the correct accounting treatment for inventory, grants, depreciation, accruals and prepayments, and doubtful debts among others.

● Timed conditions: Practising the completion of clear, accurate workings and the presentation of the financial statements under timed conditions is the best way of achieving success in these questions. They are process driven, so repetition of these processes as part of your exam preparation is critical.

● Completion of practice consolidation questions: This will enable students to build up their skills and their ability to complete these questions under time pressure. Cash flow statements are a largely numerical

process and with practice students can become very adept at preparing this financial statement. The more times that students can repeat and refine these processes, the more skilled the student will become.

● Exam preparation: Question practice is essential. Find a couple of hours to set aside. Start with a blank sheet and attempt the question. You will be slow at first and each time you make an error you will learn from it. Don’t repeat this error. The next time you attempt a question it will be slightly faster, and you will make a different error. Don’t give up. It is better to make these errors at home before the exam. Each time you attempt a question you will improve your speed and make fewer mistakes. This is essential if you hope to pass Professional Level 1.

There are other elements within the paper covering accounting standards, but these can be learned separately and are not too challenging at this level.

Keytakeaways

1. Attempt practice questions which involve preparing financial statements from a trial balance with adjustments under timed conditions.

2. Practise consolidation questions under timed conditions.

3. Make flashcards or similar summaries of the key points of other accounting standards.

ProfessionalLevel2

The Professional Level 2 exam builds on both Professional Level 1 and the Foundation level. If your foundations are shaky, then you will need to fill any gaps in your knowledge.

Hopefully, by the time you reach Professional Level 2 you are confident with the preparation of individual and consolidated financial statements, leaving you time to learn some of the additional complications that may be tested at this level.

The examiner assumes you know how to prepare a straightforward set of consolidated financial statements so may now include more testing calculations, such as disposals of group companies, deferred consideration and impairment of goodwill.

● Critically evaluating accounting treatments: This ability will also be required. It involves more than just completing the calculations, but rather an understanding of why this is the preferred accounting treatment. This requires students to think about the reason for the calculations and how it fits with the Conceptual Framework.

● More challenging standards: More challenging standards will be tested, including share-based payments, deferred taxation, foreign currency and

financial instruments, to name but a few. These standards are conceptually more difficult. It is important that as you work through the course, you summarise each standard with the key points listed.

● Exam preparation: Write in your own words what the key requirements of each standard are and then attempt questions on the standard. Try to note down scenarios that can be used in an exam question. Each time you attempt a question, make a note of the scenario that the examiner used so that next time you face a similar scenario you will know how to proceed. It may seem that the examiner continually examines a standard in a different way but there are a limited number of types of scenarios that can be used for each standard. As you work through the material you will start to see commonalities in the questions, and this is a sign that you are starting to master the subject area.

Keytakeaways

1. For each standard, note the objective of the standard and the key requirements. Practise questions relating to the standard and note the scenario and how it needs to be dealt with under the accounting standard.

2. Practise writing critical evaluation of accounting standards, reflecting on the reasons for the accounting treatment and how it fits into the conceptual framework.

3. Keep your learning active. Attempting to answer questions is the best method to learn the subject material.

Theneedforactivepreparation

Financial accounting is challenging. The progression through the three papers requires a cumulative acquisition of knowledge and understanding of the preparation of financial statements, starting from basic identification and summary of transactions, through more complicated group structures to complex accounting standards.

At each stage, students must continually practise questions, and this is the key to success in this subject area. Reading questions and then reading the solutions is not enough. You must start with a blank page and attempt a question under timed conditions to replicate the exam situation.

If you can’t do a question under these conditions, then keep practising until you can and then you will be rewarded by success in your exams. Good luck!

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Ateachstage studentsmust continually practise questions,and thisisthekeyto success.

Global inflation has its grip on the world economy as organisations learn to adjust to its impact on business performance. Fast action and decisiveness are in order to remain afloat among geopolitical tensions, the resulting supply chain disruption and increasing market uncertainty. It is an interesting time to be an accountant today –a role that can be a lighthouse in the storm.

The financial planning and analysis (FP&A) landscape has notably changed over the last few years due to many challenges, including a global pandemic, energy crises, climate change, cyberattacks and remote work. In addition, a rapid rise in prices and interest rates that began in 2022 has continued to garner international concern and action. In many countries, inflation has reached 40 year highs, and energy and food prices have seen the biggest price increases.

A lighthouse

In the United Kingdom specifically, inflation reached double digits by September 2022. In mid-October, Prime Minister Liz Truss resigned after just six weeks in office amongst market turmoil and a failed tax-cutting budget. Meanwhile, the consumer market continues to react, with the Consumer Prices Index (CPI) surging to 10.1% within a 12 month span from last September. A large price increase in food and non-alcoholic beverages, as well as furniture and household goods, contributed to this surge. These numbers indicate that the cost of living and covering basic needs have consumers tightening their wallets for other purchases. What does this mean for business? And what can organisations do to offset this trend?

It starts with scenario planning. But first, let’s look at what inflation is and how to adapt to it.

FINANCIAL PLANNING AND ANALYSIS

Theinflationaryenvironment

The roots of inflation have many origins, but the common thread lies in a decrease in supply or an increase in demand that results in higher prices that eventually bring supply and demand back into equilibrium. In recent years, price increases have been tied back to supply chain disruption, a reduction in oil production and other energy-related factors. In order to have a clearer understanding of inflation and the ways in which to adapt to the circumstances, finance professionals can keep three things in mind.

1.Whileinflationisaglobalissue,its impactandratescanvarybycountry

Inflation rates have differed substantially by country, discrepancies that highlight the complexity of inflation, and the importance of developing a strategy for planning and managing in an inflationary environment. In Japan, for instance, inflation reached only 3%, which was an eight year high for the country, while the UK’s rate has reached double digits.

challenges.

Athreefoldapproachtoinflation adaptation

FP&A professionals can adapt to an inflationary environment in three powerful ways: business partnering, predictive planning technology and finally, sensitivity analysis and scenario planning.

1.Businesspartnering

Economic uncertainty and business partnering are intertwined: the higher the uncertainty, the greater the need for closer partnering between FP&A professionals and the broader business. FP&A professionals have the chance to embrace their role as strategic advisors to their organisations, a role that requires consistent and meaningful interaction with people across all departments.

FP&A professionals are not just on the receiving end of data, but rather have the ability to co-create strategies for both managing and planning for the characteristic volatility of our current environment. As business partners, they can seek opportunities to increase revenue and/or reduce expenses such as:

● Product portfolio: examine the entire portfolio and seek opportunities to remove unprofitable products, bundle products as a way to increase revenues and increase prices.

● Expenses: consider a zero-based budgeting process and require the business to review and justify all expenses.

● Working capital: work closely with treasury to develop cash management strategies that maximise working capital.

2.Multipleindexeshelpmeasureinflation, andeachprovidesuniqueinsights

According to the eurozone Harmonised Index of Consumer Prices, the industry-specific inflation rate ranges from -0.8% for education to 19.7% for housing, electricity and gas. When finance professionals determine which index and forecast to rely on for planning, it is important to understand what each index includes in its calculations, and which indexes are most relevant and appropriate to use for a particular organisation.

3.Inflationaffectsindustriesdifferently

Finance professionals are required to understand how inflation affects respective industries, the current inputs and the assumptions that can be used to model it over the coming months and years. According to one report, the manufacturing industry has been one of the hardest hit sectors in terms of inflation (see bit.ly/3OgY5EQ).

Supply chain disruption, labour shortages and logistical planning all contribute to the industry’s

2.Predictiveplanningtechnology

With the ever-increasing need to include external drivers, sensitivity analysis and a review of multiple different scenarios, the need for digital transformation in financial planning is more important than ever. According to the FP&A Trends Survey 2022, respondents who utilised technology were happier with the forecast than those who did not. Only 39% of respondents rated forecast satisfaction as either good or great; however, the number jumped to 50% for organisations using a cloud-based planning tool and 63% for those using artificial intelligence (AI) as part of the planning process.

According to a recent BARC topical survey, the use of predictive planning is skyrocketing. One in four organisations already use predictive algorithms and machine learning productively to produce their plans and forecasts in less time, with less effort and with better and more accurate results (see bit.ly/3TK0b1k). Key findings from the survey include the following:

FP&Aprofessionalshavethe abilitytoco-createstrategies forbothmanagingand planningforthevolatilityofour currentenvironment.

FINANCIAL PLANNING AND ANALYSIS

● 94% of users already benefit, or expect to benefit, from predictive planning technology.

● Productive use of predictive planning technology in corporate planning has increased nearly sevenfold in two years, from 4% in 2020 to 27% in 2022. 64% of users increase quality and accuracy of forecasts with predictive planning technology.

● 1% of organisations have failed at using predictive planning technology.

Companies that embrace predictive planning and AI technology can have a more robust and complete planning process. Technology alone will not magically make an existing plan more accurate, but it does provide organisations with a better ability to receive greater insights into drivers of KPIs and to use these drivers more accurately. Technology allows for finance professionals to import external data such as commodities pricing fluctuations to build databacked plans that inform confident decisions. A robust cloud-based planning tool can make it easier to collaborate across the business, implement external drivers, use AI and machine learning to illuminate trends, alerts and opportunities, and compare business scenarios.

Despite the opportunities that predictive planning and AI technology offer to finance professionals, misconceptions still abound. AI is a mature technology that takes the heavy lifting out of data management. Automation replaces manual tasks, which frees up valuable time, resources and focus for finance professionals to concentrate on more strategic tasks.

3.Sensitivityanalysisandscenario planning

Much like an allergy test that examines how the skin responds to various elements, sensitivity analysis is a process that takes a key input and sees how a key driver changes because of that input. It is based on what-if scenarios that determine what would happen under particular circumstances. An example of a sensitivity analysis is taking the cost of lumber and seeing the impact on a building contractor’s overall profitability at different lumber cost points.

Running a sensitivity analysis on key drivers and inputs can help FP&A professionals determine how each driver and input will affect the overall financial health of the organisation. One way to start is by taking the top three to five expense drivers and running a sensitivity analysis on each of the inputs to see how rising costs will affect overall financial health. Doing this will help to determine when an organisation may need to raise more cash or increase prices to ensure its overall wellbeing and financial health.

Stasis in the world of finance is a death sentence today. A static budget with only a single point estimate won’t cut the mustard in today’s rapidly changing environment, and the need to run multiple scenarios is more important than ever. Every organisation has to build its planning focus around multiple scenarios that could occur in the coming months and years.

Every organisation needs to ask itself: what will we do if inflation stays stubbornly high for the next two to three years? What will we do if the global economy heads into a major recession? These questions are the first step in modelling and planning for potential scenarios.

Technologyasatalentmagnet

Smart organisations attract smart talent, and in today’s talent environment, it is absolutely critical to think of technology as a talent lever. According to a study by Future Forum, embracing digital tools is a key component in building connections with employees (see bit.ly/3UMnIzR). It is clear that there is a relationship between innovative companies and higher degrees of employee engagement, experience and satisfaction.

Consistent with quarter-over-quarter findings, people who work at companies they consider technology innovators continue to show higher employee experience scores in all categories, including 1.5x higher scores on productivity, 2x higher scores on a sense of belonging, and 2.5x higher scores on overall satisfaction.

Smart businesses equip their employees with powerful planning tools. Those that do not will risk losing or not attracting the best talent at all. All finance professionals want to be positioned for success, and to be successful they need to be equipped with advanced planning tools. Providing the right solutions to do that will increase the likelihood of employee engagement for everyone.

Summary

FP&A professionals can help the business manage an inflationary environment by incorporating business partnering, predictive planning technology, and sensitivity analysis and scenario planning in their planning processes moving forward.

The opportunity for FP&A professionals to make a real impact on their organisations has increased during these times of uncertainty. Adapting to this changing environment allows the finance organisation to continue evolving from a back-office function to that of a value-added strategic partner. Technology can help finance professionals be equipped for stormy weather in order to maintain not only the balance sheet, but organisational balance too. ●

Author bio TimCaudillisDirectorof SolutionAdvisoryAmericas atJedoxInc

Autumn Statement 2022

This article sets out the highlights of the 2022 Autumn Statement.

Chancellor Jeremy Hunt delivered his Autumn Statement on 17 November 2022, setting out proposals to address a £55 billion gap in the UK’s finances, with half of that amount being raised through increased taxation.

All paragraph references are to the Autumn Statement, which can be found at bit.ly/3i786IU.

Personaltaxes

Reductiontotheadditionalrateband threshold

The additional rate threshold for income tax will reduce from £150,000 to £125,140 with effect from 6 April 2023 (paras 2.7, 5.20).

The new threshold is £125,140 because the personal allowance is abated where the individual’s taxable income is between £100,000 and £125,140 (i.e. £100,000 plus (£12,570 x 2)). Had the new additional rate threshold been £125,000, this would have led to an effective marginal tax rate of 67.5% for income between £125,000 and £125,140 due to the withdrawal of the personal allowance and the 45% tax rate.

This change affects the taxable income of English, Welsh, Northern Irish and non-resident taxpayers and the savings and dividend income of Scottish taxpayers. Scottish taxpayers pay income tax on non-savings non-dividend income (commonly referred to as ‘non-savings income’ in practice) in accordance with the Scottish income tax rates and bands. Although the Welsh government has the power to vary the rate of income tax that applies to non-savings income of Welsh taxpayers

(although no such changes to the rates have been implemented to date), it cannot vary the levels of the tax bands or create new tax bands.

The Scottish Budget is due to take place on 15 December 2022, but even if the Scottish government decides not to mirror this change and retains the threshold for the top rate (the name for the Scottish additional rate) at £150,000, this does not mean that Scottish taxpayers with nonsavings income between £125,140 and £150,000 in 2023/24 will pay less income tax than those in the rest of the UK. This is because the gap between the higher rate threshold that applies to Scottish taxpayers (£43,662) compared to the rest of the UK (£50,270) on which the difference in the tax rate is 21% (41% Scottish higher rate less 20% basic rate) outweighs the larger gap between the top rate and additional rate thresholds on which the difference in the tax rate is 4% (45% additional rate less 41% Scottish higher rate).

Individuals with income between £125,140 and £150,000 may wish to consider accelerating income

or delaying income tax reliefs in order to increase their taxable income in 2022/23 and reduce their taxable income in 2023/24 to ensure more income is taxed at 40% rather than 45%.

Incometax,NIC,capitalgainstaxand inheritancetaxthresholds

The following announcements for various thresholds were announced:

● Capital gains tax annual exempt amount: Reduced from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024 (para 5.21).

● Inheritance tax nil rate band and residence nil rate band: Frozen for a further two years until 5 April 2028 at £325,000 and £175,000 respectively. The residence nil rate band taper will continue to start at £2 million (para 5.19).

● NIC for employed persons: The upper earnings limit for employees and the upper secondary threshold, apprentices upper secondary threshold, and veteran upper secondary threshold for employers will remain frozen

at £50,270 (i.e. the same as the higher rate threshold) until 5 April 2028. The lower earnings limit for employees will be frozen at £6,396 (the 2022/23 level) in 2023/24. The primary threshold for employees will remain frozen at £12,570 (i.e. the level of the personal allowance) until 5 April 2028. The secondary threshold for employers will be fixed at the current level of £9,100 from 6 April 2023 to 5 April 2028. The employment allowance, available to most small employers which reduces their liability to secondary Class 1 NIC, will remain unaffected at £5,000. The freeport upper secondary threshold will be fixed at £25,000, but it is unclear as to how long the freeze will remain in place (paras 5.17, 5.18, 5.26).

● NIC for self-employed persons: The Class 4 NIC lower profits threshold increases to £12,570 (i.e. the level of the personal allowance) on 6 April 2023 and will remain frozen at this level until 5 April 2028. The Class 4 NIC upper profits limit will remain frozen at £50,270 (i.e. the same as the higher rate threshold) until 5 April 2028. The Class 2 NIC weekly contributions for 2023/24 will be £3.45 (increased from £3.15 per week in 2022/23). There is some confusion surrounding the Class 2 NIC small profits threshold as paragraphs 5.17 and 5.18 contradict each other. The HMRC Press Office has been approached for clarification (paras 5.17, 5.18).

● NIC voluntary contributions: The Class 3 weekly contributions for 2023/24 will be £17.45 (increased from £15.85 per week in 2022/23) (para 5.18).

● Dividend nil rate band: Reduced from £2,000 to £1,000 from 6 April 2023 and to £500 from 6 April 2024 (para 5.21).

● Income tax higher rate threshold: The higher rate threshold (which is the basic rate band plus the personal allowance) is frozen at £50,270 until 5 April 2028. This means that the basic rate band remains £37,700 for this period. The higher rate threshold applies to the taxable income of English, Welsh, Northern Irish and non-resident taxpayers and the savings and dividend income of Scottish taxpayers.

A Scottish Budget announcement is expected on 15 December 2022 to clarify the position for Scottish taxpayers (para 5.17).

● Personal allowance: The allowance was already frozen at £12,570 until 5 April 2026. The Chancellor has extended this freeze to 5 April 2028. This also means that the transferable tax allowance (also known as the marriage allowance) is frozen at £1,260 until the same date (para 5.17).

● Blind person’s allowance: The allowance is £2,870 for 2023/24 (increased from £2,600 for 2022/23) (para 5.22).

© James Veysey/Shutterstock

AUTUMN STATEMENT

Rates for all other vehicle bands will also increase by 1% in 2025/26. A maximum appropriate percentage of 37% will then be fixed in 2026/27 and 2027/28.

Businesstaxes

OECDPillarTwoandtheUKmultinational top-uptax

The government confirmed it will continue with the implementation of the OECD’s Pillar Two proposals as expected, but with a little more detail on expected timescales. In July 2022, draft legislation was published setting out the provisions needed for the UK’s adoption of the Income Inclusion Rule (IIR), the main charging mechanism of the OECD’s Global Anti-Base Erosion (GloBE) rules, by introducing a new multinational top-up tax in the UK. The new tax will apply for accounting periods beginning on or after 31 December 2023 (para 5.30).

● Married couple’s allowance: The maximum allowance is £10,375 for 2023/24 and the minimum allowance is £4,010 (increased from £9,415 and £3,640 in 2022/23). The level of the taxpayer’s adjusted net income determines whether the allowance is abated, but the threshold for 2023/24 has yet to be released (para 5.22).

Car,vanandfuelbenefitcharges

The provision by an employer of a car or van made available for private use can trigger a charge to income tax through the benefits code. Whilst company cars are a common taxable benefit, a charge arising from the provision of a van is less common due to the fact that no taxable benefit arises if the van is provided for business use with only small amounts of private use (para 5.36).

From 6 April 2023, car and van benefit charges will rise in line with CPI. The same will apply to car and van fuel benefit charges.

Companycartax

It is intended that there remains an incentive for the provision of electric and ultra-low emissions cars, and that taxpayers have long-term certainty in this area. Therefore, it has been announced that the Autumn Finance Bill 2022 will set rates until 5 April 2028 (para 5.35).

From 2025/26 onwards, appropriate percentages for electric and ultra-low emission cars with CO2 emissions of less than 75g/km will increase by 1% per year until 2027/28. A maximum appropriate percentage of 5% will apply for electric cars and 21% for ultra-low emission cars.

In the Autumn Statement 2022, the government confirmed its commitment to implement the second charging mechanism of the GloBE rules, the undertaxed profits rule (UPR), but with effect no earlier than accounting periods beginning on or after 31 December 2024. It has also been confirmed that a supplementary qualified domestic minimum top-up tax (QDMTT) rule will be introduced with effect for accounting periods beginning on or after 31 December 2023. This will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than a prescribed minimum of 15%. This would allow any top-up tax due under the Pillar Two framework from UK economic activities to go directly to the UK Exchequer, rather than to another country. Draft legislation for the QDMTT has not yet been published, although the provisions will be included in Spring Finance Bill 2023 along with those referred to above for the IIR.

Researchanddevelopment

The government announced changes to the rates of relief for research and development expenditure under the RDEC and SME relief schemes. The changes will apply to expenditure incurred on or after 1 April 2023 and will be included in the Spring Finance Bill 2023. The intention is to rebalance the reliefs available under the two schemes and is a step towards a single RDEC-like scheme for all companies.

The new rates are as follows:

● RDEC: 20% (currently 13%);

● SME additional deduction: 86% (currently 130%); and

● SME tax credit: 10% (currently 14.5%).

new single scheme and will work with industry

The government intends to consult on the design of a

Thegovernment announced changesto theratesof reliefforR&D expenditure undertheRDEC andSMErelief schemes.

to understand whether further support is needed for research intensive SMEs. The Spring Finance Bill 2023 will also include changes to R&D reliefs announced at the Autumn Budget 2021: expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance.

Anti-avoidanceonshareforshare exchanges

The government will introduce legislation in the Spring Finance Bill 2023 to treat shares in a nonUK company held by an individual as located in the UK where the shares were acquired in exchange for shares in a UK company. In particular, the new rules are intended to prevent non-UK domiciled individuals from applying the remittance basis to gains realised on a subsequent disposal of the non-UK company shares and to dividends received in respect of those shares. The new rules will apply with immediate effect to share exchanges and schemes of reconstruction carried out on or after 17 November 2022 (para 5.41).

The rules will apply only where both companies are close companies (or would be if they were resident in the UK). A UK company for this purpose is one incorporated in the UK and a non-UK company is one incorporated outside the UK. The individual must hold at least 5% of the shares in the UK company before the exchange and 5% of the shares in the non-UK company afterwards. Exchanges involving debentures also fall within the rules.

Where the conditions are met, the new holding of shares in the non-UK company is treated as located in the UK for capital gains tax purposes, as a ‘deemed UK holding’. Distributions in respect of such a holding are not foreign income for income tax purposes. Deemed UK holding treatment will continue following a disposal to a spouse or civil partner and to new holdings following further share exchanges. Additional shares acquired in the same non-UK company will also be treated as located in the UK. It will be possible for an individual to opt out of deemed UK holding treatment by electing to disapply the capital gains tax share reorganisation provisions on the exchange. The effect is that a capital gain will arise at the time of the exchange. An election must be made by the first anniversary of 31 January following the tax year in which the exchange took place.

VATandindirecttaxes

VATregistrationthresholdfrozenfor furthertwoyears

The government announced that the VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2024. This measure maintains the

VAT registration threshold at £85,000 and the deregistration threshold at £83,000. These thresholds have been in place since 1 April 2017 (paras 2.13, 5.290.

The Office of Tax Simplification (OTS) previously identified in a report published on 7 November 2017 that the VAT registration threshold may cause distortions, particularly given that the UK’s VAT registration threshold is more than twice as high as the EU and OECD averages. The OTS sets out that a lead option to deal with such distortions would be to lower the thresholds. However, it was acknowledged that reducing the thresholds could simply move the point at which the distortion takes place. Despite this background, the maintenance of the current VAT registration thresholds aims to provide businesses with certainty and allow them to make decisions in the knowledge that current thresholds will not change until at least 31 March 2026.

Climatechangelevymainratesand discounts

The government will legislate in Spring Finance Bill 2023 for the following climate change levy (CCL) main rates and discounts in 2024/25:

● the main rate of CCL on gas to £0.00775/kWh in 2024/25 (from £0.00672/kWh in 2023/24)

● the main rate of CCL on electricity will be frozen at £0.00775/kWh;

● the main rate of CCL on solid fuels will rise to £0.06064/kg (from £0.05258 in 2023/24);

● the main rate of CCL on LPG will remain at £0.02175/kg;

● the percentage discount on CCL main rates available through the climate change agreement scheme will remain at 92% for electricity and 77% for LPG; and

● the percentage discount on CCL main rates available through the climate change agreement scheme for gas and solid fuels will be adjusted to 89% (from 88% in 2023/24).

Vehicleexcisedutyonelectricvehicles

From April 2025, vehicle excise duty will apply to electric cars, vans and motorcycles under legislation that is to be introduced in Autumn Finance Bill 2022 (para 2.9).

Zero-emission cars first registered between 1 April 2017 and 31 March 2025 will be liable at the standard rate, which is currently £165 per year. New zero-emission cars registered after 31 March 2025 will be liable at the lowest first year rate, which currently applies to vehicles with CO2 emissions from 1g/km to 50g/km at the rate of £10 a year. From the second year of registration onwards, the standard rate will apply. ●

Produced by Tolley

TheVAT registrationand deregistration thresholdswill notchangefor afurtherperiod oftwoyears from1April 2024.

How accountants can save the world

CEO

Recording and advising on moneybased transactions has been the superpower of accountants for centuries. But the world is changing, and using money as the primary measure of success is no longer enough. We are accelerating into a new era of responsible capitalism, where items that did not carry a monetary valuation (natural and social capitals) are being called into account. This article refers to three types of capital:

● Money-measured capital: The measurement of possessions gathered through the creation of monetary wealth and day-to-day movement in economic transactions.

● Natural capital: The essential resources on which humanity and all living things depend, including air, water, soil, plants, food, biodiversity and climate.

● Social capital: How we function together as people. Social capital enables society to be effective. It includes collaboration, fair distribution, trust, participation and caring for each other.

For organisations to succeed and survive, accountants must measure the use and protection of all three capitals. This article aims to stimulate critical thinking and acknowledge the over reliance on traditional views of wealth.

PeterEllington

andFounder,Triple BottomLineAccountingand AssociateProfessoratthe UniversityofEastAnglia.

We ask how accountants can use their superpowers to save the world – and the ten areas they should focus on.

It sets out a new era for accounting that drives business success in a rapidly changing world. It promotes purpose-driven accounting looking to the future rather than the past.

People are starting to understand that lack of respect for the natural world is costly and that inequalities in society are insupportable. Meanwhile, environmental and social issues put assets at risk, and investors are starting to require that their money positively impacts society and the environment. Consumers are becoming aware of the impact of their consumption choices and switching their purchases to environmental and socially positive sources. Employees want to work for companies that positively impact their communities, society and the environment. Governments will be forced to act by creating new taxes and laws in response to these demands. These forces are changing business models and the plans of organisations. Accountants must include the impact on financial plans, business cases, budgets and cash flow forecasts. Failure to do so will result in business failure and missed opportunities. We set out below ten of the ways that accountancy professionals can use their superpowers to save the world.

Area1:Thecapitalaccount

● The format of the operating statement: A primary focus of financial reporting is the isolation of the capital account. Its expansion is measured through a focus on monetary profits. The figure at the bottom of an operating statement is profit, and everything before that either increases or decreases it. The layout implies that more profit is good and less profit is bad. Financial statements suggest that profit is the primary purpose for being in business and anything reducing profit is wrong.

● Exclusion of natural and social capital: The capital account and accounting currently focus on monetary values, while a growing bank account and profit line equate to success. However, focus on the money-measured capital account is no longer adequate. The proper stewardship of natural and social capitals is becoming prevalent and equally important, while enhancing the value of the money-measured capital account.

Action: Celebrating other matters besides monetary profit is vital in business, and preparing alternative statements to drive a business’s purpose is becoming essential.

Area2:Wilfulblindness

● Historical limitations: Many people involved in accountancy and business are aware of the limitations of education. Until recently,

the myopic focus on money and the moneymeasurement of wealth have not been linked to an existential crisis such as climate change. But this is not the case any more.

● Busy with now: Accountants are busy people, counting the money, calculating the taxes, and assuring investors that accounts show a true and fair view of the monetary value of assets and transactions. There is limited time to look at the economic tidal waves of inflation, recessions, climate change, biodiversity loss and social upheaval. It is easy to avoid thinking about difficult things that do not have an immediately recognisable monetary value.

● Hyperobjects: Timothy Morton describes climate change as a hyperobject – an event or phenomena so vast that it is beyond human comprehension. When explained compellingly, people can start to see the world through a different lens and understand the issue. But soon after, their day-to-day world (that is more easily comprehended) takes back control.

● Human condition: We are all bound by politics, power structures and agency. We are creatures of habit and dislike change. Even scientists can be ignored to the preference of pundits. Many issues affecting our stocks of natural and social capital are subject to exponential forces. The speed of change and the urgency required of us is beyond our comprehension.

Action: It’s time to critique accountancy and to make changes before it’s too late. Accepting the status quo is not sustainable.

Area3:Language

Those new to accountancy struggle with the language as it uses words not found in our everyday vocabulary. Financial conversations are usually about business, giving accounting its unique grammar and language. Topics we would otherwise include in everyday social interactions are excluded because they are not about business and profit. Consequently, the grammar and vocabulary of finance normalise the exclusion of social and environmental issues in business discussions.

Thissetsoutanewerafor accountingthatdrivesbusiness successinarapidlychanging world,lookingtothefuturerather thanthepast.

PROFESSIONAL CHANGE

students how to apply accountancy rules, often with a commercial, client-centric focus on creating shareholder value. Accountancy knowledge seldom looks ahead to include the disciplines and knowledge that accountants will need to serve businesses and society in the future. It tends to ignore social and environmental issues, or includes them as addendums to the primary role of accountants as servants of the equity stakeholders.

Action: Giving consideration to accountancy’s unique language would allow space to be made in business conversations for natural and social capitals. In finance meetings, put time aside for discussions about how the finances will affect the business’s environmental and social impact. Consider how environmental and social issues will flow through into monetary values over time.

Area4:Structureoftheaccountancy profession

● Lack of enforcement: The accountancy profession states that accounting aims to support the broad public interest but does not always mandate this behaviour. Practitioners can be allowed to ignore the issues facing society, adopting new practices as a voluntary act. This approach is too passive.

● Difficult to access: Training in the issues of climate change, environmental issues, biodiversity loss, social inequalities and responsible business is not mandated; members can ignore them. Training courses in sustainability take time, and sustainability standards are lengthy and challenging to interpret. Access to education and resources must be made easier.

● Lack of urgency: The International Federation of Accountants (IFAC) and Professional Accountancy Bodies acknowledge the pivotal role that the profession must fulfil in transitioning to a net zero world. Accountancy bodies are like armies in the fight against climate chaos, yet their soldiers (accountants) are rarely volunteering to join the fight.

Action: Until the accountancy profession mandates its members to act on behalf of the broader needs of society, the focus of accountancy will not change. The profession needs to accept that its actions are not sustainable and must be significantly altered. Action needs to be faster, communicated to all members, less passive and more accessible.

Area5:Accountancyknowledge

Accountancy knowledge is based on a technical understanding obtained from textbooks and lecture notes. At best, it demonstrates to

Action: Until accountancy knowledge is focused on the future requirements of business and society, it will remain technical and based on historical practices. It will fail to prepare accountants for the future. Knowledge fit for future requirements must be prescribed as part of an urgent accountancy curriculum review.

Area6:Accountancycurriculum

The role of accounting as the servant of capitalism is rarely challenged in education. Students are taught that adopting existing capitalist values will meet all of society’s needs – but do not sufficiently consider the global realities of climate change, inequality and social upheaval. The accounting curriculum is failing to keep up with change, and the impact of natural and social capitals on finances.

Action: Accounting education needs to be radically reformed to put morality, the environment and the longer-term needs of society at its centre. Students must be made aware of alternative paradigms beyond shareholder capitalism. This should start with a review of the accounting curriculum by accountancy bodies and educators across both professional and university education.

Area7:Continuingprofessional developmentofaccountants

Continuing professional development follows in the footsteps of accountancy education. It is technical, rules-based, and applied to increase profits for shareholders. Climate change and ESG (environmental, social and governance) professional education are voluntary, as if those issues won’t affect organisations.

Actions: Respect for natural and social capitals must be added to continuing professional development as mandatory for qualified and trainee accountants, and a curriculum review should be conducted by the stakeholders involved. Accountants cannot be trusted advisors to businesses on issues they do not understand.

Accountancymustconsiderthe costofbusinessactionsrelatedto theenvironmentandsociety.

Area8:Stakeholders(people)

Accountancy’s social contract allows the profession to manage itself with minimum government interference. In return, society should expect accountancy to function as a cohesive and influential mechanism for economic and social management. Its traditional view of monetary profits and capital results in a bias towards the shareholder-stakeholder group. Other stakeholders (employees, customers, governments, suppliers and the environment) are often secondary to the needs of shareholders.

Action: The accountancy profession needs to assert the broader remit of accounting to fulfil their potential in society. Failure to act for the good of society needs to be rigorously enforced. Addressing the needs of all stakeholders will pre-empt the future needs of the shareholderstakeholder group; subsequently, all of humanity will benefit.

Area9:Externalitiesareignored(planet)

Accountancy ignores anything that cannot be easily measured in financial monetary terms. No acknowledgement occurs in the accounts until there is a delivery of goods or services, an invoice or payment. This is rapidly changing, as erosion to natural and social capitals are affecting money-measured capital. Accounting for climate change and ESG matters is becoming a precursor for future survival and success.

Action: Accountancy must consider the cost of business actions related to the environment and society, and account for their organisation’s use and impact on natural and social capitals. Governments will inevitably incentivise changes in behaviour. Smart accountants will measure the use of natural and social capitals before they become monetised in economies

Area10:Accountantsmustrealisetheir powertomitigateriskandfocuson purpose

The accountancy profession has focused on complying with rules and conventions invented for the industrial age. But with technological advancements and more innovative ways of working, accountants can be much more. Accountants can help businesses to become forces for good by guiding clients to achieve a triple bottom line (measuring the impact on people, planet and prosperity). They can use their skills to help businesses succeed commercially, as well as protecting and nurturing natural and social capitals. By being smart with money and finances, accountants can drive businesses forward to improve the environment and society.

ThePowerofAccountancy

Action: By automating the mundane and ordinary functions of accounting, accountants can create time to make a profound difference to businesses by helping business owners realise their purpose. They can achieve this by applying the strengths of accounting to avoid waste, improve efficiency and drive commercial success. Accountants can measure and record natural and social capitals. They can imagine how our use of other capitals will affect the money-measured capital account in the future. Accountants can be a force for good, helping purposeful businesses to succeed, while ensuring that society and the environment are not adversely affected.

This article is not arguing against profits and financial efficiency. Instead, it asks for the structures of accountancy to be critically assessed. It proposes that we acknowledge accountancy’s weaknesses, extend its remit and change the role of accountants so that they act for the common good. It highlights that in the future, environmental and social issues will no longer be separate from financial success and that accountants must grasp this reality.

This article is adapted from the doctoral thesis ‘Powerful knowledge in accounting education’ by Dr Peter Ellington, CEO of Triple Bottom Line Accounting Ltd. ●

Author bio

PeterEllingtonisCEOand FounderofTripleBottom LineAccounting,aUKbased digitalpracticeprovidinga rangeofservicestoSMEs.

HeisalsoanAssociate ProfessorattheUniversity ofEastAnglia.

Is liquidation the only option?

Ifyourclient’sbusinesshassufferedsincethepandemic,liquidationmight seeminevitable.Buttherecouldbeotheroptions,asRichardSimmsexplains.

RichardSimms Managingdirector, FASimms&Partners

The post-Covid landscape has not been kind to UK businesses. Economists from Goldman Sachs have predicted that UK inflation could top 20% as recession looms and fuel prices spiral. In recent research by business insurance company Simply Business, 54% of small business owners cite rising fuel and energy costs as the biggest challenge for them right now.

If your client’s business is struggling with rising bills and heading towards insolvency – or is already in an insolvent position – it’s likely that liquidation is a word that has been batted around. It might not be what they want to do. But when faced with what seems like an impossible situation, they may feel like they have little or no choice in the matter.

That’s not always true. In this article, I’ll look at the potential solutions available to a business in distress that are an alternative to liquidation.

Informalarrangement

For most businesses in trouble, an informal arrangement will be the first option to consider. If the money owing is to one or two creditors, and your client has a good relationship with them, then this type of arrangement is worth pursuing. The key here is for the client to be able

to maintain a strong relationship with those owed money and therefore to prevent enforcement action against the business happening without advance warning.

For the creditor, an informal arrangement will sometimes be preferable to a formal one. If the creditor company is a supplier, they might have an eye on doing future business with the indebted firm.

The advantage for your client is that they have the flexibility to create bespoke arrangements with each creditor. It’s important that the creditor agrees that the new payment terms replace the existing terms. Please be aware, though, that your client cannot show preferential treatment to one creditor over the other. If they do end up in a formal liquidation process, any informal arrangement will be looked at by the licensed insolvency practitioner and any preferential situation will be reviewed.

The first step in an informal arrangement is to contact the creditor directly to explain the situation that your client’s company is in and to request a discussion on setting a plan in motion. Once the creditor has agreed to this proposal, it will be your job as the distressed firm’s accountant to help them put forward a credible case to the creditors, based on a detailed cash flow forecast. This means having to prove

that any plan to repay the debt is realistic and achievable. With your expertise, you should be ideally placed to help your client devise this plan, which will prove the longer-term viability of their business.

In cases such as these, we are often called upon to provide a sanity check of any proposal. It’s generally worth consulting an insolvency practitioner before you go to your client’s creditors with any type of offer. They are best placed to make sure that it’s fair and legal, so that you can avoid any negative repercussions for your client.

One problem with informal agreements is that by their nature they are informal. The lack of legally binding terms means that at any time the creditor may back out of the agreement and pursue legal action against your client’s company, leaving them completely unprotected. It is vital that all steps and decisions are properly recorded so that the business owners and the advisors are not exposed to litigation if the informal arrangement doesn’t go to plan. A paper trail of agreements with each creditor will be very important.

Creditors’VoluntaryArrangement

We regularly use a Creditors’ Voluntary Arrangement to provide a sustainable business with the breathing space it needs to stabilise. It will mean compromise from creditors in return for payment from future profits. But that is better for them than the alternative of a possible no return in a liquidation.

Although similar to the informal arrangement discussed above, a Creditors’ Voluntary Arrangement is legally binding. All (unsecured) creditors must also get the same pence in the pound.

Working with an insolvency practitioner, your client will need to create a plan for repayment of their debts, which will then be sent to their creditors. The creditors will then respond to the action plan by voting, at a creditors’ meeting, on whether to accept it.

If it is accepted, your client will then need to work with the insolvency practitioner to implement the action plan and set up a schedule of monthly repayments. This schedule will determine how much each creditor is paid each month and how long the Creditors’ Voluntary Arrangement will last (usually three or five years).

Remember that the terms of a Creditors’ Voluntary Arrangement can be flexible. For example, we have seen occasions where creditors have accepted an arrangement where a liquidation may have looked like the only option. The significantly lower cost and speed of distribution to creditors can mean a quicker and higher payment to creditors.

Administration

If your client’s company is insolvent but has a core business that works, company administration is a way of protecting it from legal action by creditors and from potential liquidation. It essentially puts the company’s financial situation on pause while the company director(s) work with an insolvency practitioner to see how – and if – the business can be saved.

Your client’s company needs to have a predictable cash flow and significant assets or value to make a company administration viable. If an administration is decided on and entered into, the company’s chosen insolvency practitioner becomes the administrator during the process.

It’s the insolvency practitioner’s role to look at cash flow and assets, to see what is working – and what is not. They will then send a proposal to the company’s creditors, detailing the situation and confirming whether they believe the company can be rescued. If rescue looks possible, they will also set out how the company will repay its debts.

A pre-pack administration might also be an option. In this case, all or some parts of your client’s business and its assets will be sold to a different company, which in some cases may be owned by the existing company director(s). The proceeds from the sale repay the creditors as much as possible and the old company can be liquidated. Your client’s business, under the new company, can then carry on trading without the debt. Any business sale must be for market value.

The viability of these options will very much depend on the company’s individual situation. For some, liquidation might be the only way forward. If so, remember that – in some cases – they can still start again, sometimes after buying the goodwill and assets of the old company. This is a complex process that must be handled by an insolvency practitioner so that the correct steps are followed. The same principle applies: as it is administration, any sale of assets or goodwill must be for market value.

For businesses that are in a bad position now but have good long-term prospects, liquidation can be avoided. With careful planning, these businesses can be guided through and onto a better future. ●

Author bio RichardSimmsisthe managingdirectorof FASimms&Partners.Much ofhistimeisspentadvising clientswithregardsto financialproblemresolution.

Ifyourclient’scompany isinsolventbuthasacore businessthatworks,company administrationisawaytoprotectit fromlegalactionbycreditors.

Knowing who your client really is

Verification, checks for suspicious activity and discrepancy reporting are all crucial steps in client due diligence, says David Potts

Collecting identity information and risk assessing prospective or current clients is a key part of a firm’s client due diligence processes. However, the process is incomplete until any information gathered has been verified and occasionally a firm may be obliged to report suspicious activity or a discrepancy during onboarding or a continuing relationship.

Verifyingclients

Criminals often seek to mask their true identity by using complex and opaque ownership structures. The purpose of a firm’s client due diligence is to know and understand a client’s identity, so that any money laundering or terrorist financing (MLTF) risks can be properly managed. Effective client due diligence is therefore a key part of MLTF defences.

By knowing the identity of a client, including who owns and controls it, a firm is not only fulfilling its regulatory requirements but is equipping itself to make informed decisions about the client. Good client due diligence helps a firm to construct a better understanding of the client’s typical business activities. By understanding what normal practice is, firms find it easier to detect abnormal events, which in turn may point to MLTF activity.

DavidPotts Directorof Operations, AIA

The Money Laundering Regulations stipulate that client due diligence must be applied not only at the start of a new business relationship but also at appropriate points during an ongoing relationship, and particularly where there is any doubt about the reliability of the identity information or documents obtained previously for verification purposes.

Firms must identify their clients so that they can be sure they understand and know who the client is. This means collecting ID documents like passports, driving licences and utility bills. They must also identify any beneficial owners so that the ownership and control structure of their clients can be understood.

Once the client has been identified and an initial risk assessment has been carried out, then evidence is required to verify the identity information gathered during the first stage. This means obtaining documentation or other information from independent and reliable sources, and this stage is called client verification:

Indicationsofmoneylaundering:redflags

Remember that red flags such as those highlighted here might not mean anything in isolation but taken together can provide a strong indication of money laundering.

● Transactions: Are transactions unusual because of their size, frequency or the manner of their execution, in relation to the client’s known business type?

● Assets: Does it appear that a client’s assets are inconsistent with their known legitimate income?

● Identity: Has the client taken steps to hide their identity, or is the beneficial owner difficult to identify?

● Political status: Is the client engaged in unusual private business given that they hold a prominent public title or function? Or do they have ties to an individual of this nature?

● Geographic area: Is the collateral provided, such as property, located in a high-risk country, or are the clients or parties to the transaction native to or resident in a high-risk country?

● Structures: Are there complex or illogical business structures that make it unclear who is conducting a transaction or purchase?

● Resources: Are a client’s funds made up of a disproportionate amount of private funding or cash, in relation to their socioeconomic profile?

● Behaviour: Is the client behaving oddly in either a personal or a public capacity, given the nature of their role in the business? Or do they have links to people acting oddly?

● Documents: Are information or documents being withheld by the client or their representative, or do they appear to be falsified?

● Choice of professional: Have you, or other professionals who are involved, been instructed at a distance, asked to act outside of your usual speciality or offered an unusually high fee?

Verification involves validating that the identity is genuine and belongs to the claimed individual or entity and must be completed using an independent, authoritative source. Documentation purporting to offer evidence of identity may emanate from several sources; however, these documents may differ in their integrity, reliability and independence. Some are issued after due diligence on an individual’s identity has been undertaken; others are issued on request, without any such checks being carried out. For example, certain documents issued by government departments and agencies or by a court could be considered the most reliable form of identification.

For clients who are individuals, you must obtain the full name, date of birth and residential address of your client. You can verify this by using documents issued by an official body – this is deemed to be an independent reliable source, even when provided by the client, such as a passport. You must retain a copy of this identification and your verification within your client file. Ensure they are valid and recent documents in line with your riskbased approach. Where there is an increased risk specifically relating to the identity of the individual, it may be appropriate to request additional, supplementary documents. Where appropriate, evidence of source of wealth and source of funds can be obtained from searching

Find out more at www.aiaworldwide.com/my-aia/aml/suspiciousactivity-reporting and access specific guidance for UK and ROI regulated firms related to spotting the red flags of money laundering and terrorist financing.

public information sources like the internet, company registers and land registers.

The full name of the company, the registered number and the registered office address and, if different, principal place of business, must be verified. Firms must also take reasonable measures to determine and verify key information about the company. Beneficial owners should be verified on a risk-based approach, so for highrisk clients, more verification work should be performed. If the firm has exhausted all possible means of identifying the beneficial owner of the company, the firm must take reasonable measures to verify the identity of the senior person in the company who is responsible for managing it, and keep records in writing of all the actions the firm has taken and any difficulties it has encountered.

Electronicclientverificationresources

There are several electronic databases or online platforms which firms may use to check and maintain information on a client’s identity. Many of these services can be found online and are often used by firms as part of client identification

Identification Risk Assessment Verification

Whennottomakeadiscrepancyreport...

You do not need to report in specific circumstances:

● If you have already made a discrepancy report, you do not need to report the same discrepancy again.

● If the discrepancy is resolved in the time between identifying it and submitting a report, you do not need to report it.

● It is not a discrepancy when the entity holds information that we do not include on the PSC register.

● A spelling error is not a discrepancy; for example, Jon Smith instead of John Smith, or a missing or slightly different spelling of a middle name.

● Minor variations in an address is not a discrepancy, or where a nationality of Welsh, English, Scottish or Northern Irish is given but the register shows UK.

● A PSC must own more than 25% of shares to be registrable, so you do not need to report a missing PSC if they own 25% or less. (This does not impact people who are PSCs because they control the company in another way.)

● Where a company has claimed an exemption from providing their PSC details because they are trading on a regulated market, PSC details will not be shown on the register so you do not need to report a discrepancy.

procedures. Under the UK anti-money laundering (AML) regime, information from electronic databases is an acceptable form of verification of clients’ identities.

This means that electronic identification can be used either as part of a wider process or, where appropriate, as the only source of identification. However, the firm remains responsible for ensuring that they adequately verify all their clients’ identities. There are inherent weaknesses in relying on third party software to undertake due diligence and it is important that firms take steps to mitigate associated risks.

For example, before using electronic client verification resources firms, AIA recommends that firms assess whether the information received from these databases is sufficiently reliable, comprehensive and accurate. It is useful to consider whether:

● the system draws on multiple sources;

● the data is up to date; and

● there are regular tests to ensure the integrity of the data.

AIA encourages all members to consider their own client identification needs and not to conclude that any ‘off the shelf’ product will be necessarily appropriate in all cases. Firms should take a risk-based approach, considering the depth of scrutiny needed on a case by case basis. Some clients may be considered higher risk and therefore warrant more extensive checks; for example. where politically exposed persons (PEPs) are present or the client operates in a high-risk jurisdiction.

It is vital that firms record evidence of your information gathering and client verification as this will be assessed during any monitoring review. Overall, the firm has a responsibility to demonstrate that all reasonable steps have been taken to satisfy themselves that the client is who they purport to be.

Spottingandreportingsuspiciousactivity

Occasionally, information can come to a firm in the course of undertaking client due diligence which means they are required to file a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR).

If you suspect that money laundering may be taking place, you are legally obligated under the 2017 Money Laundering Regulations to submit a SAR or STR. It is important to consider whether or not it is appropriate to continue to act for the client and continue a business relationship.

Recognising warning signs of money laundering is a continual challenge but there is guidance available to help: typologies, alerts and sector guidance provided to AIA members.

Customer due diligence is a key part of a robust risk-based approach. There are several key red flags that could indicate that there is a strong chance of money laundering being present. One of these may also be where you are unable to verify the identity of your client, documents do not match originals presented by your client or your client is evasive when you look to seek verification of their identity.

Reportingdiscrepancies

Under regulation 30A(3) of the Money Laundering and Terrorist Financing (Amendment) Regulations (MLR) 2019, firms must report any discrepancies between information collected from a relevant register and while undertaking AML requirements under the regulations such as client due diligence or ongoing monitoring.

Before establishing a business relationship with any UK company or entity, the firm must obtain proof of their client’s registration on the People with Significant Control register, or an excerpt of the register. In addition, from 10 March 2022 a firm establishing a business relationship with a trust must obtain proof of the trust’s registration on the Trust Registration Service (TRS) if the trust is required to be registered.

If the firm identifies a discrepancy between the information that they gather during client take-on processes and the information that is on the PSC register or TRS, the firm must report that discrepancy to Companies House or HMRC as applicable.

A person with significant control (PSC) is someone who owns or controls a company.

A company can have one or more PSCs. The purpose behind discrepancy reporting is to ensure that the information on the PSC register is adequate, accurate and current. Discrepancy itself is not defined within the Regulations, but there is an expectation from government that material differences should be reported. A discrepancy therefore is when the information that an obliged entity holds about a beneficial owner is different to the PSC information recorded by Companies House.

This could include:

● a difference in name;

● an incorrect entry for nature of control;

● an incorrect entry for date of birth;

● an incorrect entry for nationality;

● an incorrect entry for correspondence address;

● a missing entry for a person of significant control or a registrable beneficial owner; and

● an incorrect entry for the date the individual became a registrable person.

A discrepancy should be reported as soon as reasonably practicable after the discrepancy is discovered, which would normally be within 15 working days of establishing that a material discrepancy exists.

This means that firms have the opportunity to discuss the potential discrepancy with the client to establish whether an inadvertent error has been made and will be corrected without delay. The outcome of any such discussion with the client will allow the business to conclude whether a material discrepancy exists and is reportable. Businesses are not obliged to discuss the identified discrepancy with the client before making a report.

Businesses do not have to wait for a response from Companies House or HMRC before taking on their clients. The decision as to whether to establish a business relationship with that entity is up to the business, based on their usual riskbased approach. Businesses should assess the relevance of any discrepancies within their client due diligence process. In particular, if it appears the discrepancy is intentional, the business should consider whether other information you have received from your client is true and reliable.

A discrepancy report is not a substitute for a SAR but finding a discrepancy does not in itself require a regulated firm to submit a SAR. The normal tests for when a SAR is required still apply – those that we have discussed previously.

In the case of a ‘designated person’ in the Republic of Ireland, Regulation 20(3)(b) states that if a designated person carrying out customer due diligence on an entity, or otherwise, forms the opinion that there is a discrepancy between the information in the central register (RBO)

and the information the entity must hold in its internal register of beneficial ownership, then the designated person shall deliver, in a timely manner, to the Registrar notice of that opinion, specifying the particulars as respects which the foregoing discrepancy exists. This is completed using Form DN1 which must be submitted online via the RBO Sharefile account. More information is available at bit.ly/3hLOAlc

Specific guidance on using online reporting tools is available at bit.ly/3UUaNfe. However, you should be prepared to provide company information, the nature of the discrepancy and any other relevant information to make your report easier to complete. It should take around ten minutes. You should then keep records of any reports made for a period of five years in your client file.

Adiscrepancyshouldbereported assoonasreasonablypracticable afteritisdiscovered,whichwould normallybewithin15workingdays.

Companies House will then investigate the discrepancy report and, in most cases, contact the company. If the information on the register is incorrect, Companies House can use a new power which allows them to remove incorrect information. They will expect the company to update the register and will undertake compliance action if this does not happen.

If a business identifies a discrepancy on the PSC register or TRS and the client corrects the discrepancy within a reasonable period, the business does not need to make a report to Companies House or HMRC if they are satisfied that the PSC register or TRS is now correct. This is on the basis that no material error would exist. Similarly, if there is a change in ownership of a client, a discrepancy between the PSC register and the information collected is only reportable if the client does not update the PSC details within the permitted time period for doing so. ●

Findoutmore

If you’ve missed an AML update webinar you can catch up quickly and easily online, for free. There are a wide variety of topics available which provide in-depth guidance on specific AML requirements: www.aiaworldwide.com/my-aia/aml Guidance on CDD requirements: www.aiaworldwide.com/my-aia/aml/cddrequirements/

Author bio

DavidPottsisdirectorof operationsattheAIA.

Restoring trust in audit

Collings Partner,LeavittWalmsley AssociatesLtd

The auditing profession has been in the headlines a lot over recent years and not for the right reasons. Critics have lambasted the profession for failing to carry out audits with sufficient rigour and not spotting serious failings by directors. Recent high profile corporate collapses have also brought auditing into question, and it is fair to say that the Financial Reporting Council (FRC) are striving to improve confidence in audit. But should all the blame lie with the auditing profession when a public interest entity fails?

Auditors cannot prevent directors from carrying out unorthodox practices and no auditing standard in the world will stop criminal activities such as fraud or money laundering. There is also the ‘expectations gap’, which is the difference between what the auditor is expected to do to comply with professional standards, legislation and guidance, and what the general public believes the auditor should be doing.

ISA (UK) 200 ‘Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (UK)’ outlines the purpose of an audit, which is ‘to enhance the degree of confidence of intended users in the financial statements.’

The standard then goes on to explain how this is achieved as follows:

‘This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

In the case of most general purpose frameworks, that opinion is on whether the financial statements

Steve

Steve Collings explains the importance of audit and how the profession is striving to improve levels of confidence in its findings.

Author bio SteveCollingsistheaudit andtechnicalpartner atLeavittWalmsley AssociatesLtd.

are presented, in all material respects, or give a true and fair view in accordance with the framework.

An audit conducted in accordance with ISAs (UK) and relevant ethical requirements enables the auditor to form that opinion.’

Hence, an auditor carrying out an audit in the UK is required to conduct an audit in accordance with ISAs (UK). Auditors in other countries may be subject to their own national requirements which may be ISAs that have been ‘tweaked’ to be country specific, as is the case for the UK.

Typesofauditopinionandlevelofassurance

In most cases, an auditor will express an unmodified (unqualified) opinion (the types of opinion are discussed later in this section). Here, the auditor is providing reasonable assurance that the financial statements give a true and fair view (or present fairly, in all material respects) and have been prepared in accordance with the applicable financial reporting framework. The auditor is not providing maximum or absolute assurance due to the inherent limitations of an audit as follows:

● Financial statements include subjective estimates and other matters which require judgement.

● Internal controls may be relied upon which have their own inherent limitations.

● Representations from management may have to be relied upon as the only source of audit evidence in some areas.

● Audit evidence is persuasive, not conclusive.

● The auditor does not test all transactions and balances – they carry out audit procedures using audit sampling (see ISA (UK) 530 ‘Audit Sampling’).

It follows that an audit may not detect a material misstatement even if it has been planned and carried out in accordance with professional standards. However, this limitation cannot be used as a justification for poor audit work. At the conclusion of an audit, the auditor is required to express an opinion on the financial statements. This opinion may be unmodified (unqualified) or modified (qualified).

Unmodified(unqualified)opinion

This opinion confirms that the auditor is satisfied the financial statements give a true and fair view (or present fairly, in all material respects) the entity’s financial affairs as at the reporting date. It also states that the financial statements have been prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g. FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland or International Financial Reporting Standards).

Modifiedopinion

The types of modified opinion include:

● qualified ‘except for’ opinion;

● adverse opinion; and

● disclaimer of opinion.

Qualified‘exceptfor’

A qualified ‘except for’ opinion is expressed when the effects of a misstatement in the financial statements is material, but not pervasive. This means that the matter giving rise to the qualified opinion is confined to a specific area of the financial statements but does not affect the remainder of the accounts.

Hence, the auditor will state that ‘except for’ the matter giving rise to the qualified opinion, the financial statements give a true and fair view (or present fairly, in all material respects).

Adverseopinion

An adverse opinion is expressed when a misstatement is material and pervasive. A matter is considered ‘pervasive’ if, in the auditor’s judgement, the effects are not confined to specific elements, accounts or items of the financial statements. If they are confined to these specific elements, they are considered pervasive when they represent, or could represent, a substantial proportion of the financial statements. In relation to disclosures, the misstatement must be considered fundamental to the users’ understanding of the financial statements.

Adverse opinions may be expressed in the following situations:

● the financial statements have been prepared on the wrong basis (for example, the going concern basis when the going concern basis of accounting is considered inappropriate);

● non-consolidation of a material subsidiary; and

● a material misstatement exists within a balance which represents a substantial proportion of the assets or profits (for example, where a profit could turn into a loss).

Disclaimerofopinion

A disclaimer of opinion is expressed when the auditor has been unable to obtain sufficient appropriate audit evidence and the effects of any possible misstatements could be pervasive. A disclaimer of opinion is not an opinion in itself because the auditor is unable to form such an opinion and may be expressed in the following situations:

● a failure by the client to keep adequate accounting records;

● a refusal by the directors to provide the auditor with written representations; and

● a failure by the client to provide evidence over a single balance which represents a substantial proportion of the assets or profits or over multiple balances in the financial statements.

Restoringconfidenceintheauditprofession

The UK government is striving to restore confidence in the auditing profession. To that end, the government is carrying out the following steps:

● establishing a new regulator in the form of the Audit, Reporting and Governance Authority (ARGA). It is expected that the transition to ARGA will complete in 2023;

● recognising the public interest in large private entities by ensuring they meet the same high standards of reporting and accountability as expected from larger, listed entities;

● making large companies’ more useful with better information about the risks they face and what information has been assured and strengthened review powers for ARGA;

● strengthening reporting about companies’ internal controls which underpin true and fair accounts, through the Corporate Governance Code;

● improving the quality of audit and making it more informative, driven by ARGA’s

Tax Think Tolley.

responsibilities for standards, inspection and approving registration of auditors for the most significant companies;

● boosting resilience, competition and choice in the audit market, through the introduction of a ‘managed shared audit’ requirement for FTSE 350 companies and requiring an operational separation of audit and non-audit practices;

● making directors of the country’s biggest companies more accountable for significant failures in their corporate reporting and audit related duties; and

● strengthening oversight of the accountancy and actuarial professions to build confidence in the professions and in the UK.

Conclusion

Confidence in the auditing profession has been hit due, in large part, to the high-profile corporate failings which have been seen over recent years (e.g. Carillion and Patisserie Valerie). There will always be an ‘expectations gap’ where audit is concerned but this cannot be used as an excuse for poor quality audit work. Only time will tell if the government’s attempts at restoring confidence in the audit profession are successful or not, but it looks like things are heading in the right direction. ●

Tolley’s Tax Planning Series 2022-23: > Tolley’s Tax Planning for Owner-managed Businesses 2022-23 > Tolley’s Expatriate Tax Planning 2022-23 > Tolley’s Estate Planning 2022-23

Also available: > Tolley’s Tax Planning 2022-23 > Tolley’s International Tax Planning 2022-23

Emerging MPERS needed during a volatile business environment: Part 2 | Malaysia

Date: 14 December 2022 | Time: 10:00 - 11:00

Speaker: Dr Lau Chee Kwong, Associate Professor of Accounting with the Nottingham University Business School, Malaysia

The Covid-19 pandemic has slowed down economic activities, if not followed by a severe economic recession. This is worsened by the inflationary pressure, increases in interest rates, energy and food crisis, disruptions to supply chains, etc. around the globe. Consequently, this presents reporting entities with greater challenges ahead in preparing their financial statements and for auditors in rendering assurance services. This course provides a practical review of the MPERS topics (applicable to the private entities in Malaysia) needed for preparation of financial statements during volatile business environment.

This course aims to help participants:

● identify the likely affected accounting items during volatile business environment;

● assess the reporting principles in

The course will focus on:

● onerous contracts and other provisions;

Why ESG values are integral to future economic sustainability

Date: 9 January 2023 | Time: 12:30 - 13:30

Speakers: Dr Peter Ellington, founder and CEO of Triple Bottom Line

the relevant MPERS for the relevant accounting items; and

● apply the relevant MPERS principles to account for the impacts.

● events after the reporting period; and ● going concern.

Accounting; Andrea Finegan, Chair of the Schroders Greencoat valuation committee; and Fran Ellington, Triple Bottom Line Accounting In the final part of the sustainability

workshop series, we will examine ESG, and why their values are integral to future economic sustainability.

Topic 1: Recap from previous sessions: Recap session 1 and session 2.

Topic 2: ESG risks and opportunities: Compliance costs, technology, market, reputation, acute and chronic effects of climate change, biodiversity loss, irresponsible buying and selling and societal breakdown. GRI sector reports and resources. SASB materiality map

Topic 3: Evaluation of financial impacts: Where can these changes come from: investors, governments, consumers, staff, customers, society, the environment itself, technology, economic drivers. UKCIP – BACLIAT workshop: markets, logistics, process, finance, people, premises.

Topic 4: ESG reporting: Why ESG puts a business ahead of the issues and makes the finances more resilient.

IESBA releases comprehensive research on the impacts of technology on ethics

TheInternationalEthicsStandards BoardforAccountants(IESBA) hasreleaseditsTechnology WorkingGroup’sfinalreport, ‘IESBATechnologyWorkingGroup Phase2Report’.AspartofIESBA’s TechnologyInitiative,theboard determinedtotakeasystematic, risk-basedandphasedapproach toexploretheethicsimplications oftechnologicaldevelopmentson theaccounting,assurance,and financefunctions,andidentify actionstorespondtostakeholder expectations.

BuildingontheFebruary 2020Phase1Report,itdocuments theimpactsofdisruptiveand transformativetechnologiesonthe workofprofessionalaccountants, andprovidesextensiveanalysisand insightsintotheethicaldimension ofthosedevelopments.Thereport alsodiscussestherelevanceand importanceoftheoverarching principlesandspecificprovisions intheInternationalCodeofEthics

INTERNATIONAL

IASBamendsIAS1Presentationof FinancialStatements

The IASB has issued amendments to IAS 1 Presentation of Financial Statements that aim to improve the information companies provide about long-term debt with covenants.IAS 1 requires a company to classify debt as non-current only if the company can avoid settling the debt in the 12 months after the reporting date. However, a company’s ability to do so is often subject to complying with covenants. For example, a company might have long-term debt that could become repayable within 12 months if the company fails to comply with covenants in that 12 month period.

The amendments specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or noncurrent. Instead, the amendments require

forProfessionalAccountantsin layingouttheethicalguardrailsfor professionalaccountantsasthey faceopportunitiesandchallenges intheirworkasaresultofrapid digitalisation.

Thereportsurveysthe technologylandscapeand summarisestheoutcomesofthe WorkingGroup’sfact-findinginto theethicsimplicationsofinnovative technologiessuchasartificial intelligence,blockchainandcloud computing.Itexplores–through theethicallens–variousrelated issues,includingdatagovernance, cybersecurityandrelianceon,oruse of,experts,andprovidesinsights intothoseissuesandthequestions theyraise.

Thereportincludesten recommendationswhichtheIESBA willfurtherconsider,someofwhich itisalreadyaddressingindeveloping technology-relatedrevisionstothe Code.Theseincludetheneedfor transparencyandexplainableAI;

a company to disclose information about these covenants in the notes to the financial statements. The IASB expects the amendments to improve the information a company provides about long-term debt with covenants by enabling investors to understand the risk that debt could become repayable early.

The amendments also respond to stakeholders’ feedback on the classification of debt as current or noncurrent when applying requirements introduced in 2020 that are not yet in effect. They are effective for reporting periods beginning on or after 1 January 2024, with early adoption permitted.

UKANDIRELAND

FRClaunchesconsultationonaudit committeesstandard

The Financial Reporting Council (FRC) has launched a consultation on its

datagovernance,includingcustody ofdata;ethicalleadershipand decisionmaking;therelianceon anduseofexperts;thethreshold for‘sufficient’competence;and businessrelationships.

Thereporthasbeeninformed bytheIESBA’sTechnologyExpert Groupandtheinputofadiverse groupofstakeholders,including investors,regulators,thosecharged withgovernance,firms,national standardsetters,professional accountancyorganisations,public sectororganisationsandacademics.

Stakeholders,includingthe InternationalFederationof Accountants(IFAC)(anditsmember organisations),nationalstandards setters,academics,firmsand othersareencouragedtostudyand leveragethereport’scomprehensive findingsastheyconsiderhowbest toreinforcepublictrustinthe workofprofessionalaccountantsin businessandinpublicpracticeinthe ageofdigitalisation.

draft proposal for a minimum standard for audit committees.This follows the government’s response to its consultation on restoring trust in audit and corporate governance, which set out its intention to give the Audit, Reporting and Governing Authority (ARGA) statutory powers to mandate minimum standards for audit committees in their role on the external audit.

The purpose of the standard will be to increase performance across audit committees in the FTSE 350, ensuring a consistent approach and supporting a well-functioning audit market. The FRC is now seeking the views of its stakeholders on the draft standard, particularly those from FTSE 350 companies. Following the consultation, the plan is for the standard to be available to committees on a voluntary basis by the end of 2023, ahead of the planned legislation that will make the standard mandatory. The consultation will run until Wednesday 8 February and respondents should submit their comments to acstandard@frc.org.uk

The Financial Reporting Council has published its Annual Review of Corporate Governance Reporting, which found an improvement in the quality of reporting against the UK Corporate Governance Code. The FRC has seen year-onyear improvements in reporting, and importantly more companies are disclosing the areas within the Code that they have chosen to explain rather than comply. However, the report also found that too few companies are providing meaningful explanations.

A common theme throughout the report is the lack of disclosure in relation to the outcomes and impacts of governance policies and practices. Companies need to demonstrate, within their reporting how their governance has been improved. The FRC was also disappointed to see minimal disclosure about board engagement with major shareholders – with some companies simply stating that there had been meetings without providing further information on their engagement and its outcome. These are important to give investors and the public information which is critical for market confidence and lowering the cost of capital.

The assessment, which comprised 100 randomly chosen FTSE 350 and Small Cap companies, supports the FRC’s growing body of evidence on those areas where companies report well and where improvements could be made. That evidence will help inform the work of the FRC as it consults on revisions to the Corporate Governance Code next year.

The FRC’s CEO, Sir Jon Thompson, said: ‘In uncertain economic times, how companies govern themselves is more important than ever. The UK Corporate Governance Code continues to provide a clear and flexible basis to support better governance and well-run companies. This year, we have continued to see a good standard of reporting but companies still need to go further in reporting how they apply the Code’s principles and comply with the provisions, describing the actions and outcomes that come from them to improve market confidence and facilitate better stewardship.’

The FRC now holds a body of evidence on those areas where companies report

well and where improvements could be made. It was pleased to see that workforce engagement issues continue to be high on companies’ agendas, although disclosures on outcomes of the engagement are almost exclusively in relation to flexible working matters. Where companies engaged their workers in reviewing corporate culture, purpose, values or desired behaviours, most reported on the positive impact of such an approach. Reporting on wider stakeholder engagement is generally of a good standard. However, there is often insufficient narrative on the outcomes from the engagement, including feedback received, or commentary on whether the board acted on any of the issues raised and how decisions align with company strategy, or culture, purpose and values.

EUROPE

TheEBApublishesguidelineson remotecustomeronboarding

The European Banking Authority (EBA) has published its final guidelines on the use of remote customer onboarding solutions. These guidelines set out the steps that credit and financial institutions should take to ensure safe and effective remote customer onboarding practices in line with applicable anti-money laundering and countering the financing of terrorism (AML/CFT) legislation and the EU’s data protection framework. The guidelines apply to all credit and financial institutions that are within the scope of the Antimoney Laundering Directive.

These guidelines establish common EU standards on the development and implementation of sound, risk-sensitive initial customer due diligence policies and processes in the remote customer onboarding context. They set out the steps financial institutions should take when choosing remote customer onboarding tools and when assessing the adequacy and reliability of such tools, in order to comply effectively with their AML/CFT obligations. The guidelines are technologically neutral and do not prioritise the use of one tool over another.

The guidelines have been developed in response to the European Commission’s request in the context of its Digital Finance

Strategy, published in 2020. They are also in line with the EBA’s legal mandate to lead, coordinate and monitor the EU financial sector’s fight against money laundering and terrorism financing.

The Anti-money Laundering Directive sets out what financial institutions should do to comply with their AML/ CFT obligations but it does not set out in detail what is, and what is not, allowed in a remote and digital context, when onboarding new customers. This has created risks where regulatory expectations of credit and financial institutions’ remote onboarding practices were unclear. It has also made the uptake of new or innovative forms of customer identification by credit and financial institutions more difficult. These risks and challenges were amplified by increasing demand for non-face-to-face customer take-on options during the Covid-19 pandemic.

ESMAtoworkonESGdisclosuresas anewunionstrategicsupervisory priority

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, is changing its Union Strategic Supervisory Priorities (USSPs) to include environmental, social and governance (ESG) disclosures alongside market data quality.

The new priority of ESG disclosures replaces costs and performance for retail investment products and represents an important step in the implementation of the ESMA Strategy, which gives a prominent role to sustainable finance.

ESMA and the National Competent Authorities (NCAs) intend to accompany the growing demand for ESG-related financial products. They will foster transparency and comprehensibility of ESG disclosures across key segments of the sustainable finance value chain such as issuers, investment managers or investment firms and hence tackle greenwashing.

In addition, ESMA aims to gradually promote an increased scrutiny on ESG disclosures through effective and consistent supervision. This also implies building supervisory capabilities to fully embed sustainable finance into daily

Improvementsincorporate governancereportingbutmanystill fallingshort

TECHNICAL

supervisory work and supervisory culture. ESMA and the NCAs will take active steps to protect investors and facilitate investments in a credible ESG market.

In the context of the second USSP, market data quality, ESMA has already developed and applied common methodologies and thematic reviews. Both ESMA and NCAs will continue to engage into further targeted and concerted supervisory work. The USSPs are an important tool through which ESMA coordinates supervisory action with NCAs on specific topics. The aim is to provide a structured and comprehensive response to address key market risks across the EU. NCAs are required to take these priorities into account when drawing up their work programmes.

ESMA and NCAs will continue working together in the areas of ESG disclosures and market data quality. At the same time, ESMA and NCAs will follow-up on the previous work, namely monitoring closely the evolution of costs as a key element for investors protection.

UNITEDSTATES

FASBseeksinputontheproposed newchapterofitsconceptual framework:thereportingentity

The Financial Accounting Standards Board (FASB) has issued a proposed new chapter of its Conceptual Framework that describes a reporting entity. The Conceptual Framework is a body of interrelated objectives and fundamentals that provides the FASB with a useful tool as it sets standards. A Statement of Financial Accounting Concepts is nonauthoritative and does not establish or change generally accepted accounting principles. Stakeholders are encouraged to review and provide comment on the proposed chapter by 16 January 2023.

The proposed chapter would become Chapter 2 of FASB Concepts Statement No. 8, ‘Conceptual Framework for Financial Reporting’ It would establish concepts that the Board would use in developing standards of financial accounting and reporting. It would provide the Board with a framework for developing standards that meet the objective of financial reporting

and enhance the understandability of information for existing and potential investors, lenders, donors, and other resource providers of a reporting entity. Stakeholders are asked to provide input on the characteristics of a reporting entity described in the proposed chapter. This includes a description of a reporting entity as ‘a circumscribed area of economic activities that can be represented by general purpose financial reports that are useful to existing and potential investors, lenders, and other resource providers in making decisions about providing resources to the entity’. It also describes the three features of a reporting entity:

1. Economic activities of the entity have been conducted.

2. Those economic activities can be distinguished from those of other entities.

3. The financial information in general purpose financial reporting faithfully represents the economic activities of the entity in the circumscribed area and is useful in making decisions about providing resources to the entity.

The proposed chapter is available at: www.fasb.org

To assist companies, ACRA has developed and published a new guidance document for the RONS.

Companies and Limited Liability Partnerships (LLPs) which are unable to identify a registrable controller who has a significant interest in or significant control, are required to identify individuals with executive control as their registrable controller(s). For companies, directors with executive control and the Chief Executive Officer must be identified as its registrable controller(s). For LLPs, partner(s) with executive control must be identified as its registrable controller(s).

Companies and LLPs which were previously unable to identify a registrable controller are now required to record the prescribed particulars of individuals with executive control in their existing Register of Registrable Controllers (RORC) by 5 December 2022. The same information must also be lodged with the ACRA central register.

MASBissuesanarrow-scope amendmentstoMFRS16Leases

ASIAPACIFIC

StrengtheningSingapore’s corporategovernanceregime

The Accounting and Corporate Regulatory Authority (ACRA) implemented new requirements to strengthen Singapore’s corporate governance regime, and reaffirm Singapore’s commitment to combatting money laundering, terrorism financing and other threats to the integrity of the international financial system. The requirements are now in effect following the passing of the Corporate Registers (Miscellaneous Amendments) Act. Companies (including foreign companies) are required to maintain a Register of Nominee Shareholders (RONS) at their registered office or at the registered office of their appointed Registered Filing Agent. The RONS will need to contain prescribed particulars of the nominator(s) of the company’s nominee shareholder(s). Companies must set up their RONS by 5 December 2022.

The Malaysian Accounting Standards Board has issued Lease Liability in a Sale and Leaseback (Amendments to MFRS 16 Leases). The Amendments is word-for-word Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases) issued by the International Accounting Standards Board (IASB).

The Amendments clarify how companies should measure the leaseback liability that arise in a sale and leaseback transaction. Although MFRS 16 includes requirements on how to account for a sale and leaseback at the date the transaction takes place, it has not specified how to measure the sale and leaseback transaction when reporting after that date.

The Amendments add subsequent measurement requirements for the lease liability arising from a sale and leaseback transaction by clarifying that a sellerlessee in a sale and leaseback transaction shall subsequently measure the leaseback liability by applying paragraphs 36 to 46 of MFRS 16. They will not change the accounting for leases other than those arising in a sale and leaseback transaction.

The Amendments shall apply for annual reporting periods on or after 1 January 2024. Earlier application is permitted.