International Accountant 112 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT

JULY/AUGUST 2020 ISSUE 112

Summer Economic Statement 2020 Self Assessment: should you defer the second payment on account? Whistleblowing: encouraging employees to voice their concerns

The role of audit committees

Audit Tr a i n i n g Offices Tr a i n i n g t h e n e x t generation of auditors B y b e c o m i n g a n A I A A p p r o v e d A u d i t Tr a i n i n g O f fi c e , y o u a r e c h o o s i n g to set your practice apar t from the competition; you are also choosing to provide your trainees with the most relevant and appropriate q u a l i fi c a t i o n s t o s t u d y i n o r d e r t o b e c o m e a q u a l i fi e d a u d i t o r.

W h y B e c o m e a n A p p r o v e d A u d i t Tr a i n i n g O f fi c e ? Cost Effective Approach Attract and Retain Staff Ongoing Support and Guidance International Recognition Training Office Certification

CONTENTS

In this issue Contributors 2 Meet the team

News and views

Man arrested on suspicion of £495,000 furlough fraud

AIA news

VAT reporting 6

Criminality checks for anti-money laundering supervisors

most common stumbling blocks. Mike Parkes (GoSimpleTax) asks whether you should defer a client’s second payment on account.

The shifting sands of compliance Digitisation is coming to Europe. Marco van der Veer (Accordance) considers tech-enabled VAT reporting and digitisation – the major forces reshaping VAT in the EU.

of law and trust in public institutions. Dr Jackie Harvey and Dr Peter Sproat (Northumbria University) examine the issues of corruption and beneficial ownership in Nigeria.

Audit reports

Students 8 Current issues in auditing: part 4 Students must be familiar with professional practice issues and pronouncements as part of their understanding of professional auditing.

Economic Statement

Summer Economic Statement 2020 A guide to the key announcements and the government’s “plan for jobs”.

Whistleblowing 18

The health of the market Paul Afteni and Jennifer Chan (Willis Towers Watson, FINEX) ask how challenger firms in the audit sector are affected by the regulatory and market reforms.

Learn to act without fear Whilst many businesses work in a dynamic “open space” environment, they do not have an “open door” culture where employees are actively encouraged to voice their concerns. Chris Biggs (Theta Financial Reporting) asks what the case of Rihan v EY tells us about whistleblowing in accountancy.

21 Audit committes

Dates for your diary

More vital than ever Carol Der Garry and Weng Yee Ng (FRA) review the role of audit committees in overseeing the quality of audit in the UK, which is increasingly important as companies face disruptions and uncertainty during the Covid-19 crisis.

Self Assessment

Choosing the right time For those that are new to the Self Assessment tax return process, payments on account are one of the

AML 21 Smoke and mirrors Corruption is an inhibitor to economic development and can undermine the rule

Editorial Information International Accountant, the bimonthly publication of the Association of International Accountants (AIA).

Editor Rachel Rutherford E: editor@aiaworldwide.com T: +44 (0)191 493 0281

International Accountant Staithes 3, The Watermark, Metro Riverside, Newcastle Upon Tyne NE11 9SN United Kingdom

Advertising For advertising opportunities advertisingsales@lexisnexis.co.uk

+44 (0)191 493 0277 www.aiaworldwide.com

AIAWORLDWIDE.COM | ISSUE 112

Subscribe to International Accountant subscriptions@aiaworldwide.com

Upcoming events

Technical 30 Global updates

Design and production LexisNexis, Quadrant House, The Quadrant, Sutton, Surrey SM2 5AS www.lexisnexis.co.uk Printed by The Manson Group Ltd, St Albans, Herts, AL3 6PZ This product comes from sustainble forest sources.

AIA does not guarantee the accuracy of statements made by contributors or advertisers or accept responsibility for any views which they express in this publication. ISSN: 1465-5144 © Copyright Association of International Accountants

Editor’s welcome

Rachel Rutherford Editor, IA

Contributors to this issue PAUL AFTENI

Paul Afteni is Head of Financial Services Professional Indemnity at Willis Towers Watson, FINEX, leading a specialist team responsible for the placement and servicing of professional indemnity insurance. CHRIS BIGGS

Chris Biggs is the MD of Theta Financial Reporting. He specialises in advisory services addressing complex GAAP, including financial instruments, impairments, asset finance and leasing, commercial asset finance and lease structuring. JENNIFER CHAN

Jennifer Chan is an Associate Director, Claims Advocate at Willis Towers Watson, FINEX. She specialises in commercial litigation, insurance and professional negligence.

t continues to be an unsettling time for many of us. Whilst in the UK we are experiencing an easing of lockdown measures, I know some readers in other jurisdictions are experiencing another wave as the coronavirus pandemic continues to present challenges for financial professionals and businesses across the globe. AIA are continuing to help members with guidance and information via the news channels and Covid-19 Hub, as well as ensuring that we offer continuity of services and support. Whilst the support packages and standards protocols differ throughout the world, we have rapidly collated the necessary information to ensure that members are able to fulfil their roles as accountants and finance professionals, and to help businesses and sole practitioners to deal with the impact and the recovery from the pandemic. In response to a growing number of recommendations and endorsements from our members, AIA have launched the AIA Membership Referral Scheme. The scheme is our way of thanking members for highlighting the benefits of

membership and helping us to grow our professional community and expand our influence in the sector. Further details of the scheme can be found on the AIA news pages. In this issue, we tackle some of the big issues in accountancy at the moment, looking at audit reform and the role of audit committees in overseeing the quality of audit in the UK, which is increasingly important as companies face disruptions and uncertainty during the Covid-19 crisis, as well as how challenger firms in the audit sector are affected by the regulatory and market reforms. We ask what the case of Rihan v EY tells us about whistleblowing in accountancy and how companies can create a culture where employees are actively encouraged to voice their concerns. We also examine the issues of corruption and beneficial ownership that can undermine the rule of law and trust in public institutions. And finally, we have expert insights and commentary on the Chancellor’s Summer Economic Statement 2020 and a guide to the key announcements and the government’s “plan for jobs”.

CAROL DER GARRY

PETER SPROAT

Carol Der Garry is a partner at FRA, with 35 years of professional experience as a certified public accountant in forensic investigations, auditing and accounting. Her practice focuses on accountant and auditor liability matters, including assessing complex accounting and auditing issues.

Dr Peter Sproat is Senior Lecturer at Newcastle Business School, Northumbria University, teaching fraud, financial regulation and risk management. His publications cover counter-terrorist finance legislation and the effectiveness of money laundering and asset recovery legislation.

JACKIE HARVEY

Dr Jackie Harvey is Professor of Financial Management and Director of Business Research at Newcastle Business School, Northumbria University. Her primary focus is anti-money laundering policy and asset recovery; the second is the criminal interface with internal organisational structure. MIKE PARKES

Mike Parkes is technical director at GoSimpleTax. He has a detailed understanding of personal and small business taxation, bringing depth of knowledge to the product development process, driven by the user’s journey and maximising tax savings.

MARCO VAN DER VEER

Marco van der Veer is head of technology at Accordance. He specialises in VAT and technological change management, and is responsible for future-proofing VAT compliance offerings, working alongside strategic partner SOVOS to integrate bespoke technology into their service offering. WENG YEE NG

Weng Yee Ng is a director FRA, holding more than 16 years of experience in external and internal audit and forensic accounting, with expertise in compliance reviews, internal investigations and litigation support. ISSUE 112 | AIAWORLDWIDE.COM

News FRAUD

HONG KONG

A West Midlands man has been arrested as part of an HM Revenue and Customs (HMRC) investigation into a suspected £495,000 Coronavirus Job Retention Scheme fraud. HMRC officers executed a search warrant in the Solihull area and arrested the 57 year old. This is the first arrest in connection to alleged fraud relating to the Job Retention Scheme. Computers and other digital devices were seized, and funds held in a bank account relating to his business have been frozen. Richard Las, Acting Director, Fraud Investigation Service, HMRC, said: “The Coronavirus Job Retention Scheme is part of the collective national effort to protect jobs. The vast majority of employers will have used the CJRS responsibly, but we will not hesitate to act on reports of abuse of the scheme. “This is taxpayer’s money and any claim that proves to be fraudulent limits our ability to support people and deprives public services of essential funding. “As usual, we have built steps in to prevent mistakes and fraud happening in the first place, but anyone who is concerned that their employer might be abusing the scheme should report it to HMRC online.” Any concerns should be reported at bit.ly/2BYrpzA. AIAWORLDWIDE.COM | ISSUE 112

More than £27.4 billion has been claimed through the Job Retention Scheme supporting 1.1 million employers and 9.4 million furloughed jobs. The Coronavirus Job Retentioon Scheme has four lines of defence: ●● Employees have to have been on a payroll on or before 19 March, preventing the use of fake employees. ●● Claims are only accepted from employers known – and authenticated – by HMRC. ●● All claims are assessed by a specialist team within a 72 hour window. ●● Proportionate and reasonable interventions are taken with customers after the money has been paid. The 57 year old man was also arrested in relation to a suspected multi-million pound tax fraud and alleged money laundering offences. A further eight men from across the West Midlands have also been arrested as part of this linked investigation, which involved the deployment of more than 100 HMRC officers to 11 locations. Further computers and other digital devices were seized, plus business and personal records.

JEROME FAVRE/EPA-EFE/Shutterstock

istockphotot:ShaunWilkinson

Man arrested on suspicion Hong Kong Fund of £495,000 furlough fraud passes Bill

Secretary for Financial Services and the Treasury Christopher Hui welcomed the passage of the Limited Partnership Fund Bill by the Legislative Council. The new ordinance establishes a limited partnership fund regime which enables funds to be registered in the form of limited partnerships in Hong Kong and will take effect on 31 August. Mr Hui said that as Hong Kong strives to develop into an international asset and wealth management centre, the new ordinance made impressive strides on this front in attracting investment funds to set up and operate in Hong Kong. He added this would further promote the city’s private equity market and drive demand for local related professional services, and in turn strengthen Hong Kong’s position as an international financial centre. The limited partnership fund regime is an opt-in registration scheme administered by the Companies Registry. It is a common constitution form for private funds such as private equity funds.

News MONEY LAUNDERING FINANCIAL REPORTING COUNCIL

FRC announces sanctions against Grant Thornton

EU refers Austria, Belgium and Netherlands to the European Court of Justice

Grant Thornton has also agreed to the following non-financial sanctions: ●● a severe reprimand; ●● a declaration that the audit did not comply with relevant requirements; and ●● a package of measures directed at improving the quality of future audits, comprising: 1. the establishment of an Ethics Board to oversee the firm’s compliance with Ethical Standards and requirements with the Board to provide reports to the FRC for three years; 2. a review of its Ethics Function to identify any skills/resource gaps; 3. increased training to staff on relevant ethical issues; and 4. further improvement to the firm’s policies and procedures to ensure compliance with ethical standards and requirements. Grant Thornton will also pay £207,000 in respect of Executive Counsel’s costs in the matter. Claudia Mortimore, Deputy Executive Counsel, said: “It is vital that audit firms comply with ethical standards and requirements and create the necessary culture and control environment so that their people really understand their importance.”

istockphotot:carterdayne

The Financial Reporting Council (FRC) has fined Grant Thornton UK LLP £3 million (discounted to £1.95 million for admissions and early disposal) for: (i) firm-wide failures to ensure compliance with ethical standards and requirements between 2014 and 2017; and (ii) the loss of independence in relation to its audit of Conviviality Retail Plc (the company) for the year ending 30 April 2014 (the audit ).

The European Commission has referred Austria, Belgium and the Netherlands to the Court of Justice of the European Union, with a request for financial sanctions, for failing to fully implement the 4th Anti-Money Laundering Directive into their national law. Executive Vice-President Valdis Dombrovskis said: “We have robust EU rules in place but they must be applied consistently and efficiently. We will make sure that everyone in both private and public sectors applies the rules rigorously. We have launched many infringement procedures to ensure the full transposition and application of our rules.”

Following an assessment of the notified measures by these member states, the Commission has concluded that the 4th Anti-Money Laundering Directive has not been fully transposed into national law. The incomplete transposition concerns fundamental aspects of the anti-money laundering framework, such as: ●● betting and gambling legislation (Austria); ●● mechanisms under which the Financial Intelligence Units exchange documents and information (Belgium); and ●● the information to be provided on the beneficial ownership of corporate and other legal entities (Netherlands).

IRELAND

Ireland updates guidelines on online tax evasion reports Tax and Duty Manual “Guidelines on the processing of online tax evasion reports” (see bit.ly/32bdwbL) has been updated as follows: ●● Clarification has been added that tax evasion reports (TERs) can be

submitted to Revenue anonymously, with the exception of those TERs that are submitted via the MyEnquiries (MyAccount or ROS) services. ●● Updated Revenue “Contact us” links have been included. ●● A new Revenue Anti-drug smuggling email address has been provided where members of the public (and businesses) can submit details of their suspicions of drug smuggling. ISSUE 112 | AIAWORLDWIDE.COM

Achieve

Interactive Distance Learning Programme

Achieve is an interactive distance learning study programme designed speciďŹ cally to help students prepare for the AIA exams. The programme also offers: Personalised Study Planner Tailored to your Individual Requirements Mock Exam with Written Feedback Regular Tutor Marked Practice Questions Free Webinars and Webinar Recordings Interactive Online Discussion Forum

Enrol now to achieve your goals at www.aiaworldwide.com/achieve

AIA

NEWS ANTI-MONEY LAUNDERING

MEMBERSHIP

AIA launches Membership Referral Scheme

Criminality checks for anti-money laundering supervisors

Are you enjoying the benefits of AIA membership? Do you know someone who’d benefit from joining AIA too? Recommend a friend or colleague for AIA membership today and share the rewards on offer. The AIA Membership Referral Scheme is our way of thanking members for highlighting the benefits of membership. Recommendations and endorsements from our members play an invaluable role in growing our professional community and expanding our influence in the sector. To refer a friend or colleague, follow these simple steps: 1. Share your AIA membership number and www.aiaworldwide.com/ enquiry-form with whoever you are referring for membership.* 2. Your friend or colleague will use your link and membership number to make an enquiry, and the AIA Team will get in touch to talk them through the application process. 3. If they join AIA, you’ll get a £50 credit to your AIA account and their first year’s membership will be extended to 1 October 2021. 4. You’ll see the credit on your AIA account as soon as your referral’s membership has been approved. 5. Keep referring! There’s no limit to how many people you can refer for membership. *The AIA Membership Referral Scheme is open only to Associate or Fellow membership applications.

The Scheme

AIA has responded to the consultation on changes to the sourcebook for professional body anti-money laundering supervisors – criminality checks. In general, AIA is supportive of measures taken to improve and strengthen barriers to entry for individuals who do not meet fit and proper tests at the point of application. However, it is unclear at the present time how the amendments suggested to the sourcebook will realistically offer additional protection in practice. Relevant individuals and firms must already declare to professional body supervisors (PBSs) at any point when they receive a relevant conviction which would affect any fit and proper status. PBSs would continue to rely on

self-declarations for a maximum of five years, unless a significant evolution of intelligence sharing is undertaken whereby PBSs are informed by law enforcement or criminal justice networks when relevant individuals have received a relevant conviction. Notwithstanding this restructure, an arbitrary time period of five years does not add additional reassurance that individuals have not been convicted of a relevant offence for the purposes of Regulation 26 should they have failed to declare this offence in the preceding five years. AIA would also argue that placing additional administrative burdens on regulated firms continues to make more attractive operation outside of the regulated sector. ISSUE 112 | AIAWORLDWIDE.COM

AIA News HONG KONG

AIA Hong Kong Branch AGM The AIA Hong Kong Branch 45th Annual General Meeting was held on 23 June 2020 at 7.30pm at The Chinese Restaurant, Craigengower Cricket Club (CCC) in Happy Valley. During the AGM, five Executive Committee members were elected: Mr Fung Wai Ying, Mr Ho Chi Wai Savio, Dr Ho Mook Lam William, Mr Wong Ping Yuen Fred and Mr Wong Yiu Shing Simon. After the AGM, the first Executive Committee Meeting was held which elected the office bearers, consultants and co-opted members.

Executive Committee for 2020/21

●● President: Dr Ho Mook Lam, William FAIA ●● Vice President : Mr Ho Chi Wai, Savio FAIA and Mr Wong Ping Yuen, Fred FAIA ●● Hon. Treasurer: Mr Hui Hon Chung, William FAIA ●● Hon. Secretary: Mr Tsui Chi Yuen, Terence FAIA

●● UK Representative: Mr Jong Koon Sang FAIA

Members of Executive Committee

●● Mr Chan Chun Yu, Alex AAIA ●● Ms Chan Mei Mei, May FAIA ●● Dr Chan Ying Kwok FAIA ●● Mr Chiu Ho Man, Ebony FAIA ●● Ms Chu Choi Ha, Karen FAIA ●● Mr Fung Wai Ying FAIA ●● Mr Li Cheung Hung, James FAIA

NAVIGATE THE COMPLEXITY OF TAX

●● Mr Lo Wing Hing, Simon FAIA ●● Mr Wong Man Kit, George FAIA ●● Mr Wong Yiu Shing, Simon FAIA

Co-opted Members

●● Ms Cheung Chi Wai, Anna FAIA ●● Mr Lok Tong Man, Tommy FAIA ●● Mr Yeung Chik Hang, Antoninus AAIA Congratulations to all who were elected and the AIA Hong Kong Branch on another successful year.

Tolley®Guidance Find solutions quickly, understand how to apply them and avoid undue risks. Tolley®Guidance gives you direct access to critical, comprehensive and up-to-date tax information that you can rely on. Written exclusively by tax professionals for tax professionals, Tolley®Guidance combines tax technical commentary with practical guidance, so you can confidently deal with your clients’ needs. Whether you need to update your knowledge, gain deeper understanding or gather information about a specialist area, Tolley®Guidance can help you with step-by-step examples and simple guides. Devote more time to clients, instead of hunting for answers.

RELX (UK) Limited, trading as LexisNexis®. Registered office 1-3 Strand London WC2N 5JR. Registered in England number 2746621. VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are registered trademarks of RELX Inc. © 2019 LexisNexis SA-0719-077. The information in this docuSment is current as of July 2019 and is subject to change without notice.

AIAWORLDWIDE.COM | ISSUE 112

STUDENTS

Current issues in auditing: part 4 Students must be familiar with professional practice issues and pronouncements as part of their understanding of professional auditing.

IES 8 Professional Competence for Engagement Partners

IES 8 Professional Competence for Engagement Partners responsible for statutory audits of financial statements (revised) has applied since July 2016. This responds to the risk that as engagement partner work becomes more specialised, it is possible that they are not up to date in all aspects of current technical developments. As their practice administrative duties increase, it is also tempting to delegate the specialist CPD to other members of the firm. This then renders their knowledge insufficient to support the complex evaluation of audit evidence to come to an appropriate audit opinion.

ÂŠ istockphoto/Visual Generation

he International Federation of Accountants (IFAC) framework â&#x20AC;&#x2DC;A framework for audit quality: Key elements that create an environment for audit qualityâ&#x20AC;&#x2122; (bit.ly/2Z3JK6O) provides a comprehensive overview of the factors driving audit quality at an engagement, firm and national level. It reiterates much of the previous guidance but contextualises the ideas within the debate around the increasing focus on public interest. The problems in ensuring audit quality in audit firms are clearly not easy to resolve as the regulatory review into audit firms in the UK routinely highlight areas of weakness. The spate of recent high profile audit scandals in public interest entities would support the idea that these problems result in poor quality in practice. It is therefore vital that students understand how audit quality is promoted and safeguarded in audit firms. This is an area that is frequently examined in this paper. In the UK, there is evidence that audit firm quality procedures are not as robust as the regulator might prefer. There is also evidence that the audit firms have a tendency to underestimate problems with their own work. This is not entirely unexpected, as subconscious bias will tend to mean that auditors who work within a specific audit culture will not be able to appreciate its weaknesses. It is very difficult for an audit firm to be objective about its own quality. However, there is an increased focus from IFAC and national regulators on firm audit quality policies and the monitoring of such.

ISSUE 112 | AIAWORLDWIDE.COM

STUDENTS

Professional judgment

As the engagement partner review supporting the development of this opinion is a critical function of the audit, audit quality can only be assured where professional competence is assured. This becomes a specific issue where the audit partner is rotated as part of the maintenance of independence or as a client business becomes increasingly specialised. As part of the firm’s policies on audit quality, there must be safeguards to ensure the professional competence of the firm’s partners. AIAWORLDWIDE.COM | ISSUE 112

Audit quality can only be assured where professional competence is assured.”

Professional judgment remains a key area of concern to regulators. The 2019 Brydon Review recommends that: “ARGA (the new UK Regulator) should revisit the existing definition of professional judgment with a view to strengthening, and demonstrating better, the use of judgment in audit.” The developing ideas in “ED Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants” (2019) articulate key areas that all professional accountants should consider to ensure that professional judgment is robust. This includes the following: ●● Obtain and understand information relevant for making reliable judgments based on facts and circumstances known to them. ●● Make informed challenges of views developed by others. ●● Be sensitive to the integrity of information, including the source of the information and the appropriateness of its presentation.

STUDENTS Audit quality policies in audit firms

“Audit is vital to investor confidence in UK companies. Poor quality audit work remains unacceptably common. “The latest audit inspections for 2018/19, which relate principally to audits of companies’ December 2017 year ends, found 75% of FTSE 350 audits reviewed were good or required no more than limited improvements, compared to 73% in 2017/18. No firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits to meet this standard. Looking across all audit reviews completed at the largest seven firms, the outcome was 75% compared to 74% in 2017/18. In the reports published today, each firm has committed to specific actions to enhance audit quality including, for the worst performers, detailed audit quality improvement plans. The FRC will assess the success of these initiatives and secure further action if necessary. “The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgmental issues. This has been a recurring finding over a number of years and it can have many contributory factors. These include the mindset of audit teams, especially an absence of professional scepticism in evaluating evidence presented by company management, tight reporting deadlines and the complexity of the judgments involved. Familiarity is also a factor arising from longstanding audit relationships, particularly if the company comes to be considered as ‘the client’ for the auditor, rather than the shareholder or investor.” “Firms’ Audit Quality Monitoring” Financial Reporting Council (2019) ●● Withhold judgment pending thoughtful consideration of all known and relevant available information. The ideas around acting with integrity have also been further developed to expand from the idea of fair dealing and truthfulness and the requirement to be straightforward and honest in all professional and business relationships. Integrity also requires having the determination to act appropriately when confronting dilemmas and can include: ●● standing one’s ground when facing pressure to do otherwise during the course of performing professional activities; and ●● challenging others as and when appropriate, even when doing so creates potential adverse personal or organisational consequences.

Emphasis on understanding facts and circumstances

The issues raised above are consistent with the ideas I highlighted from IFAC Exposure Draft 17: Professional Judgment – Emphasis on Understanding Facts and Circumstances. This is a key area of understanding for students at paper 15. The paper is concerned with the application of understanding and judgment to scenarios raised in the questions, and students are expected to show that they are applying professional judgment robustly. “Professional judgment involves the application of training, knowledge and experience, taking into account the nature and scope of the professional activity being undertaken. When exercising professional

The ideas around acting with integrity have been further developed to expand from the idea of fair dealing and truthfulness.” judgment, it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles.” Students should ensure that they are familiar with the debate around professional judgment and the ED 17 in their wider reading to contextualise the emerging debates around auditor conduct.

Professional scepticism

Professional scepticism continues to be an ongoing issue. The FRC in the UK regards the poor application of professional scepticism as core to compromising the ability of the auditor to robustly challenge management judgment and therefore a significant contributor to recent audit failures. These include Carillion Plc, Thomas Cook Plc, Patisserie Valerie Plc and others. IFAC is currently reviewing its guidance on professional scepticism in order to meet public expectations and ICAEW has recently published a really helpful and practical insight into professional scepticism in the practice. This highlights some of the core challenges that compromise the ability of an auditor to maintain a sceptical mindset, including time pressure and a lack of situational context. As boards strive to achieve faster reporting deadlines, time pressure is increasing. As audit clients become more complex and audit teams work against deadlines without really becoming immersed in the business, commercial factors seem to be conspiring to make being sceptical more difficult. An understanding and appreciation of the developing debate around scepticism is important to ensure that this final paper in audit embeds this critical skill area in students. See bit.ly/3gHtui1 and bit.ly/3faUpSP.

Developments in international ethical standards

As all student accountants will be aware, the last few years have not been easy for the reputation of the profession. In the United Kingdom, the collapse of Carillion Plc was followed by months of media comment and a government Select Committee Report into the corporate failure. This lack of confidence in the ethics of accounting firms has driven the review of the functioning of the audit market and may see some substantial ISSUE 112 | AIAWORLDWIDE.COM

STUDENTS changes to audit practices over the next few years. This focus on the conduct of auditing firms is by no means limited to isolated cases of Big Four audits of PIE’s causing concern – and the problems relate to audits throughout the world. It is against this evidence of concerns over the quality of accounting ethics that the new International Code of Ethics for Professional Accountants was published last year, coming into force on 15 June 2019 came into force. And in December 2019, the Brydon Review – Assess, Assure and Inform was published (see bit.ly/2BOAFWL). There are a number of very important developments to the new 2018 Code which, if adopted correctly, should do much to resolve some of the problems in ethics evidenced in recent scandals and to help to re-establish the reputation of the accounting profession. The IESBA launched the Code in April 2018 with the statement: “While the fundamental principles of ethics have not changed, major revisions have been made to the unifying conceptual framework – the approach used by all professional accountants to identify, evaluate and address threats to compliance with the fundamental principles and, where applicable, independence.” The substantive revisions to the Code are summarised: ●● an enhanced conceptual framework, which includes extensive revisions to “safeguards” throughout the Code that are better aligned to threats; ●● strengthened independence provisions regarding long association of personnel with audit clients; ●● strengthened provisions relating to offering and accepting of inducements, including gifts and hospitality that apply to both professional accountants in business (PAIBs) and professional accountants in public practice (PAPPs); ●● strengthened provisions dedicated to PAIBs, including: ●● a new section relating to pressure to breach the fundamental principles; and ●● revised provisions relating to the preparation and presentation of information; ●● clarifications about the applicability of PAIB provisions to PAPPs; ●● new material to emphasise the importance of understanding facts and circumstances when exercising professional judgment; and ●● new material to explain how compliance with the fundamental principles supports the exercise of professional scepticism in an audit or other assurance engagements. Students are reminded that three articles regarding issues raised by the Code were published by AIA in the Student Accounting in July, August and September 2019. AIAWORLDWIDE.COM | ISSUE 112

Exercise of Professional Judgment 120.5

A1 Professional judgment involves the application of training, knowledge and experience, taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment, it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles. In obtaining this understanding, the accountant might consider, among other matters, whether: ●● there is an inconsistency between the known facts and circumstances and the accountant’s expectations; ●● the information provides a reasonable basis on which to reach a conclusion; ●● other reasonable conclusions could be drawn from the information being considered; ●● the accountant’s own preconception or bias might be affecting the accountant’s judgment; and ●● the accountant’s own expertise and experience are sufficient, or whether there is a need to consult with others with relevant expertise or experience.

Reasonable and Informed Third Party 120.5

A2A1 The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner. Proposed Application Material Relating to: (a) Professional Skepticism – Linkage with the Fundamental Principles; and (b) Professional Judgment – Emphasis on Understanding Facts and Circumstances. Exposure Draft 17. International Federation of Accountants (IFAC) May 2017

Other issues

The Brydon Review has proposed a wide range of reform ideas to resolve the ongoing issue with audit and include: ●● the inclusion of fraud analysis in the audit remit; ●● a replacement of true and fair with present fairly in all material matters; ●● a greater focus on going concern; ●● a change to audit committee composition to include a wider range of members, not only those from the accounting profession, but also including those with “an enquiring mind and able to make robust independent decisions”; ●● an alteration in audit scope to extend to the directors’ statements regarding their discharge to the public interest; and ●● the development of a new professional corporate auditing body. Whilst the detailed recommendations may be beyond the content of Paper 15, the issues that they debate represent the very real concerns and challenges facing the global profession and students should be familiar with these. ●

ECONOMIC STATEMENT

Summer Economic Statement 2020 A guide to the key announcements and the government’s “plan for jobs”.

n 8 July 2020, Chancellor Rishi Sunak delivered an economic update to the House of Commons. The update was named “a plan for jobs” and was structured around three pillars: supporting jobs, protecting jobs and creating jobs. In the category of supporting jobs, Sunak announced a new policy, the jobs retention bonus (to follow on from the coronavirus jobs retention scheme (CJRS)) under which an employer who brings back a furloughed worker and employs them continuously until the end of January 2021 will receive a £1,000 bonus per employee. Throughout the period from the end of the CJRS until the end of January 2021, the employee must earn an average wage above the lower earnings limit for NICs (£520 per month); more details are expected to be published on this in the coming weeks. There has already been substantial criticism of this policy because it supports only employers who chose to claim under the CJRS, rather than those who, in some cases at considerable cost to their businesses, chose to continue to pay their staff without claiming support.

ISSUE 112 | AIAWORLDWIDE.COM

ECONOMIC STATEMENT

Despite the extraordinary support we’ve already provided, we face profound economic challenges. The world’s activity has slowed, with the IMF expecting the deepest global recession since records began.” Rishi Sunak, Chancellor of the Exchequer There were also announcements of additional funding to support jobs for young people in particular, such as the “kickstart scheme” which is to fund work placements for 16–24 year olds on universal credit. On protecting jobs, the announcements included “eat out to help out”, which is a discount on eating out in participating restaurants, as well as two temporary VAT cuts, explained further below. On creating jobs, the chancellor focused on the need to restart the housing market, linked as it is to consumer confidence and, in turn, the economic recovery. Alongside the SDLT temporary cut explained below, other policy announcements included grants to support households in making their homes more energy efficient; and a promise of new legislation in summer 2020 on planning reform.

Temporary reduced SDLT rates for residential property

As was widely rumoured in the press, the chancellor announced temporary reduced rates of SDLT for acquisitions of residential property from 8 July 2020 to 31 March 2021. The reduced rates will be achieved by two measures: ●● increasing the nil rate band upper threshold limit from £125,000 to £500,000; and ●● increasing the nil rate band upper threshold limit that applies to the net present value of residential rents from £125,000 to £500,000. This means that if you complete or substantially perform an acquisition of residential property between 8 July 2020 and 31 March 2021, you will generally only start to pay SDLT on the amount that you pay above £500,000. It is not clear whether the reduced rates will apply where contracts are exchanged between these dates but completion occurs afterwards. The higher 3% rates of SDLT will continue to apply on top of the standard rates. The temporary rates are as follows: AIAWORLDWIDE.COM | ISSUE 112

Part of relevant consideration

Rate of SDLT

Higher 3% rate of SDLT

£500,000 or under

£500,001–£925,000

£925,001–£1,500,000 10%

13%

Over £1,500,000

15%

12%

The temporary rates for residential rents are: Net present value

Rate of SDLT

Not more than £500,000

More than £500,000

1% of value that exceeds £500,000

The special rules for first time buyers do not apply in the period from 8 July 2020 to 31 March 2021. The rates of SDLT will revert to the prior rates and thresholds on 1 April 2021.

Temporary VAT cut for hospitality

From 15 July 2020 to 12 January 2021, the reduced (5%) rate of VAT applies to supplies of: ●● eat-in or hot takeaway food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises in the UK; ●● accommodation in hotels, B&Bs, campsites and caravan sites; and ●● admission to attractions like cinemas, theme parks and zoos. The intention is to support businesses and jobs in the hospitality sector. There are no more details at this stage, but further guidance is promised “in the coming days”. The VAT treatment of supplies of holiday and hotel accommodation has frequently been considered by the courts, because these are excluded from the VAT exemption for supplies of land and buildings, and there can be significant difficulties interpreting what exactly is meant by holiday and hotel accommodation. The issue was considered by the Court of Appeal last year in Fortyseven Park Street Ltd v HMRC [2019] EWCA Civ 849. Supplies of caravan pitches and camping facilities are also excluded from the exemption, and these too are a complicated area. These difficulties in borderline cases would be expected to apply similarly to the temporary reduced rate. Most supplies of food are zero-rated, but food supplied in the course of a catering business is an exception, and is therefore standard-rated. Hot takeaway food is classed as being supplied in the course of a catering business. The temporary reduced rate will therefore bring the rate of VAT on hot takeaway food down to 5%, but it will still be treated less advantageously than cold takeaway food, which will remain zero-rated. This report is by Lexis®PSL Tax, which provides advisers with practical guidance and precedents and links to trusted sources. ●

SELF ASSESSMENT

Choosing the right time Mike Parkes asks whether you should defer a client’s second payment on account. Mike Parkes Technical director, GoSimpleTax

or those that are new to the Self Assessment tax return process, payments on account are one of the most common stumbling blocks. Despite being introduced as an initiative to help taxpayers spread their tax payments, it often results in annual frustration and can actually harm your client’s cash flow if they’re caught unawares. That’s why, in response to the Covid-19 pandemic, HMRC announced that it would allow taxpayers to defer their second payment on account (that would have normally been due on 31 July 2020). It is hoped that this gives taxpayers the chance to prepare. But is that the right course of action?

What is a payment on account?

Payments on account are advance payments towards your client’s next tax bill. They’re calculated based on the amount that your client paid the previous year. HMRC splits this amount into two, and places the deadlines for payment six months apart from one another. For the 2019/20 tax year, the first was due by midnight on 31 January 2020, and the second would normally be made by midnight on 31 July 2020. This latter payment is what can now be deferred, as long as it is eventually paid by 31 January 2021. If your client had a £5,000 tax bill for the 2018/19 tax year, for instance, they would need to make two £2,500 payments on account towards their 2019/20 tax bill. But if their 2018/19 Self Assessment bill was less than £1,000 or if over 80% was deducted at source (such as employment), then they will not need to make a payment on account. They would simply need to pay any outstanding tax by 31 January.

What are your client’s options?

Author bio

Mike Parkes has a detailed understanding of personal and small business taxation, bringing depth of knowledge to the product development process.

If your client is required to make payments on account, they will still need to pay their second one. However, as HMRC has offered taxpayers the opportunity to delay this, your client can choose to make their second payment as late as 31 January 2021, alongside the submission of their Self Assessment tax return. HMRC will not charge any interest or penalties should your client choose to do this. However, by delaying their second payment to January, they do run the risk of having to fulfil all their tax responsibilities at once. This could result in your client having insufficient funds in place to cover all their tax liabilities. Your client therefore has three options. ISSUE 112 | AIAWORLDWIDE.COM

SELF ASSESSMENT

If your client can afford to pay their tax bill as they would normally do, they should do.” Option 1: Pay in accordance with the original July deadline

If your client can afford to pay their tax bill as they would do normally, they should do. If anything, it creates a sense of “business as usual” in an otherwise tumultuous time. I appreciate that, for many, paying in July will harm their cash flow. However, it is my view that clearing debt where possible is more sustainable and allows January to mark the start of a new financial year – and a fresh start.

Option 2: Reassess and reduce liability

If you’re doubtful that your client can afford a second payment on account right now, calculate their 2019/20 tax liability before 31 July 2020. This will confirm the actual amount to be paid in July 2020, January 2021 and July 2021, and give clarity to your client. To do this, you need to file their 2019/20 Self Assessment tax return early. Filing early won’t mean that they have to pay their tax bill early, after all – but it does allow you to determine what their total tax bill will be ahead of time. From here, you can consider two key points: 1. Does the July 2020 payment on account need to be deferred? 2. Do the January 2021 and July 2021 payments on account (for the 2020/21 tax year) need reducing to reflect the impact that Covid-19 has had on them?

Option 3: Defer to later in the year

With GoSimpleTax, accountants and expats can get a clear picture of their obligations. All your income can be logged in an easy-to-understand format, and their software will highlight areas where you can potentially reduce your tax liability through tax relief. AIA members receive a 25% discount on GoSimpleTax. Simply take the trial below and you will be emailed your discount code. Register for your free trial today (www.gosimpletax.com/tax-aia) and stay abreast of all the latest tax changes. When you’re ready to file your Self Assessment tax return, upgrade to the full service, with volume discounts available for accountants, and submit straight to HMRC.

AIAWORLDWIDE.COM | ISSUE 112

About GoSimpleTax and your AIA Member Discount

Of course, there will be some clients that are unable or unwilling to pay anything towards their tax bill in July now that they can defer. In this instance, it’s important that you remind them of the Self Assessment late penalties should they wish to push this all the way back to 31 January and be unable to make payment at that time. Yes, they will have your support in ensuring that they file and pay before any deadline. But deferring could have an impact on their cash flow in 2020/21. If your client is also VAT registered and has deferred their VAT payment, then it is worth noting that this also needs to be paid by 31 March 2021. Ultimately, it falls to your client to make the decision that best suits them. However, it is my view that, by giving your client oversight and helping them plan their 2021/22 payments now, your client will be in a much safer position. ●

VAT REPORTING

The shifting sands of compliance Marco van der Veer considers tech-enabled VAT reporting and digitisation – the major forces reshaping VAT in the EU. Marco van der Veer Head of Technology, Accordance

urope may only just be waking up after its coronavirus induced sleep, but there are major technology and legislative changes shifting the sands of compliance and accounting practices that have taken no time off at all. Digitisation is coming to Europe. It’s not coming at the same speed in all places, and the approaches across the bloc are significantly different, often contradictory and usually complex to manage. But over the next decade, tech-enabled VAT reporting and digitisation will reshape VAT in the EU. There is much that businesses and accounting professionals need to be doing to prepare themselves for the seismic shifts in both mindset and practice that will occur in the coming years.

The need for digitisation

Though the coronavirus pandemic has caused an unprecedented lull in business activity across a range of sectors, it may conversely heighten the need for and interest in digitisation. With a global recession predicted and many EU countries set to be hit hard, tax authorities may streamline their plans to move towards digitisation, and the unparalleled and at times unfettered access to business data it offers –

ISSUE 112 | AIAWORLDWIDE.COM

VAT REPORTING which helps to limit fraud, lessen the VAT gap and generally boost a nation’s coffers. Europe sits some way behind other parts of the world in terms of digitisation, and indeed EU tax authorities may look to the control afforded to their Latin American counterparts with significant envy. Chile is widely recognised as the gold standard of digitisation. Under the complex Chilean invoicing system, all invoices go to the tax authority for clearance before the customer sets eyes upon them. This means that there is no capacity for businesses to forget or wilfully mislead the authorities with regards to their income, and the state has a full and frank appraisal of the sales made by companies.

Information is power

Information is power – and in the case of finance related information, it is potential income. Though approaches to adopting digitisation practices differ and some countries are at a more advanced stage than others, we should be under no illusions that digitisation is the trend in the EU. Italy has introduced an e-invoicing system, under which invoices are sent to customers and tax authorities simultaneously. France has signalled its intentions to adopt an e-invoicing system, marking 2023 as the implementation date. The closest thing the EU has to Real Time Reporting (RTR) is the Hungarian system, in which reporting and invoicing are due within an eight-hour window of one another. Though enhanced reporting requirements are usually initially rolled out for larger businesses, the trend in Hungary and elsewhere is to extend requirements to businesses and transactions of all sizes. From 1 July, all B2B transactions of any value need to be reported to the Hungarian authorities, and all B2C transactions from 1 January. Other systems, like Polish SAF-T and Making Tax Digital in the UK, may not reflect pure digitisation, but do reflect the requirements for greater data on the part of tax authorities, and for tech enabled filing, which in turn requires streamlined digitisation on the part of businesses.

A piecemeal approach

As the above examples illustrate, the movement towards digitisation and tech-enabled VAT reporting in the EU could best be described as piecemeal. Member states respond to their own needs and initiatives, which are in no small measure affected by political tendencies and requirements. All of this at times sits at loggerheads with the overall aims of the EU, which is to harmonise the VAT system across the bloc. For businesses and accounting professionals, the impact is one of immense complexity. There are different systems in each nation, different timelines for new interventions and different reporting requirements, both in terms of time AIAWORLDWIDE.COM | ISSUE 112

and information, to attend to. Compliance is an increasing burden, and with greater requirements for information there are fewer corners to be cut.

The One Stop Shop

However, the EU has thrown a lifeline to cross‑border businesses by way of the One Stop Shop (OSS). OSS is an expansion of the existing Mini One Stop Shop (MOSS) for digital services, and has been introduced to mitigate new e-commerce directive changes to the rules on intra-EU B2C supplies of goods and services. OSS will allow businesses to register and file a single VAT return in one member state, reporting the relevant B2C supplies for all member states – thus significantly lessening the administrative burden. But OSS is not without its own teething problems and there are various issues to be aware of. Significantly, the EU reached preliminary agreement for a six month postponement on implementation of the e-commerce directive in light of the pandemic to 1 July 2021. Whether this affects the timelines for national implementation of digitisation plans remains to be seen.

Digitisation is coming

Yet whether sooner or later, digitisation is coming. As a result, businesses and accounting professionals must get ready. Preparing for digitisation requires not just a change in procedures, but a paradigm shift in the way accounting is embedded into wider processes. The time of handing an accountant a stack of invoices and a spreadsheet at the end of each billing cycle is over. Tech-enabled VAT reporting requires not just VAT experts – to whom work can always be outsourced – but expert IT professionals working hand in glove with them. Many multinational firms are already beginning to shape the way they work and how systems are designed with digitisation in mind, involving advisors, IT staff and process teams in the design of internal processes so that they work for later digitisation. Key to systems redesign is to recognise that, no matter how onerous in the early stages, what you get out is what you have put in. If systems are badly designed, then there is a higher risk that data sent to tax authorities in the future will contain errors, which in turn increases the risk of non-compliance and its related sanctions. There is a clear imperative for companies to review how their accounting takes place and the relationship it has with IT and wider processes, to ensure seamless compliance in the long term. A wholescale redesign and fundamental mind shift are time consuming and potentially expensive – but staying wedded to old processes as a digital revolution happens is a risky strategy that could lead to problems down the line. Getting internally ready for tech-enabled VAT reporting and digitisation is a process that businesses of any size cannot afford to miss out on. ●

Author bio

Marco van der Veer specialises in VAT and technological change management, and is responsible for futureproofing VAT compliance offerings.

WHISTLEBLOWING

Learn to act without fear Chris Biggs asks what the case of Rihan v EY tells us about whistleblowing in accountancy. Chris Biggs MD, Theta Financial Reporting

Y has bolstered criticism that some firms have acted as enablers for financial misconduct. EY was found liable for covering up evidence of money laundering and forcing out a whistleblower. It was ordered to pay approximately $11 million in damages. The case of Rihan v EY [2020] EWHC 901 was brought by Amjad Rihan, a former EY partner in Dubai, who exposed evidence of money laundering by gold refiner Kaloti Jewellery International. According to the website Inequality.org, Rihan was removed from an audit on the quality and propriety of Kaloti’s business practices when he sought to report the evidence to authorities. This has bought new questions to the accounting and auditing space about the role that whistleblowing has within the sector, and how the industry reflects on this landmark case.

The need for a new culture

Whilst many businesses work in a dynamic “open space” environment, they do not have an “open door” culture where employees are actively encouraged to voice their concerns, something that we have seen in this case. A recent survey called “Silence in the City 2” by charity Protect (see bit.ly/38l0xoT) found that 70% of those who spoke up about workplace wrongdoing were victimised, dismissed or felt forced to resign after whistleblowing. 33% of concerns raised were ignored by the employer. The chief executive of Protect Liz Gardiner commented in the report that since the financial crisis of 2008, the manner in which so many whistleblowers continue to be ignored is particularly disappointing (see her comments in the box “A need for change”).

ISSUE 112 | AIAWORLDWIDE.COM

WHISTLEBLOWING

The ethics of whistleblowing

Ethically, it is the right thing to “blow the whistle” if someone is worried about wrongdoing in their workplace and wants to speak out about it. Professional accountants are required to abide by whistleblowing policies that are embedded in the codes of ethics and rulebooks of all major accounting bodies. These policies safeguard the credibility and integrity of the accounting profession. Whistleblowing is central to a company’s risk management policy as it protects the company from any wrongdoings whether related to fraud, breaches of laws and regulations, or professional misconduct. Recent corporate scandals are testament to the fact that poor risk management practices have irreversible consequences, such as financial losses, but also severe reputational damage. The question remains as to why developing a culture of speaking up remains a challenge for many? Well, with a third of concerns raised being ignored by employers, there needs to be more than just lip service; a major change in corporate culture is called for. This is an epidemic. In order to foster a culture of trust, employees must be able to have an off-therecord conversation with their colleagues and leaders, without fear of their concerns being dismissed or of repercussions, on a suspected case of wrongdoing.

Implementing policies

Many employees are not made aware of these policies or trained appropriately. More importantly, there is little awareness on: ●● what channels of reporting are available; ●● how the information will be handled (confidentiality); ●● what actions will be taken to investigate; and ●● how outcomes will be communicated back (transparency), especially if complaints are anonymous. Under-documented by many businesses in this space is that the fear of repercussions for reporting is real. Although the Public Interest Disclosure Act (PIDA) 1998 makes the victimisation of a whistleblower unlawful, there are still worrying statistics that 70% of whistleblowers report they have been victimised, dismissed or forced out of their jobs. This is fundamentally wrong. © istockphoto/solidcolours

How to bring about change

So how, as a sector, can we begin to bring about cultural change? The tone set by business leaders, upper management and line

AIAWORLDWIDE.COM | ISSUE 112

WHISTLEBLOWING Liz Gardiner: A need for change

“We were hoping to see stronger results here and this is a real failing in whistleblowing cultures. Managers, chief executives and boards need to be the drivers of change when it comes to an improved whistleblowing culture. We were particularly sad to see that over half of whistleblowers (58%) said their reports of victimisation were also ignored by their employer. Our findings suggest that it is time to review how the whistleblowing law works and place a positive duty on employers to prevent victimisation, rather than leave it to the individual who has suffered to navigate the tribunal system. “Our research found that many whistleblowers were reporting on systemic and organisation-wide problems – which any good employer ignores at their peril. Over 90% reported through internal channels first – it is clear that whistleblowers are giving their employer a chance to put things right by speaking up, but the employer is not listening-up in response. “At Protect, we work with many financial services employers who understand the value of whistleblowing and strive for best practice in this area. We hope that the findings of ‘Silence in the City 2’ will encourage financial sector employers to review whether their arrangements are working. However, all employers need to consider what more they can do to improve their engagement with staff, make the words in their policies about protecting victims a reality and demonstrate that sanctions are taken against those who treat whistleblowers badly. Until that happens, whistleblowers will choose to be silent in the City, and we will all be the poorer for it. “This case [Rihan v EY] has brought up a number of topics that the professional service industry must reflect upon. First and foremost, this is a reminder to all that whistleblowing is a crucial aspect of the sector and all firms must have stringent whistleblowing policies that are in place, accessible to all staff and abided by every echelon of the business. The protection offered to whistleblowers is key and must never be in any doubt. “Despite this, the facts and circumstances in whistleblowing cases are often complex in their nature and not clear cut and so there must be proper processes to report cases, utilising independent and trusted consultations. The fact that Mr Justice Kerr openly criticised EY’s integrity and ethics in this case should be a serious warning to all that strong whistleblowing policies are not only a requirement but set a precedent for open and transparent business.” Liz Gardiner, chief executive, Protect management has to work towards a culture of fostering trust. This includes but is not limited to the following elements: ●● Reporting a concern should be normalised and not be a career defining moment. ●● Leaders must give assurance that whistleblowers will be treated with respect and dignity, and listened to with empathy and objectivity. ●● Leaders must encourage reporting without repercussions of victimisation or the identity of whistleblowers being revealed. ●● Leaders must show determination and persistence in bringing about these changes and maintaining a positive environment. As well as a culture, this also need to be supported by a strong written policy. A good policy is one that is clear, prescriptive and flexible about:

Author bio

Chris Biggs specialises in advisory services addressing complex GAAP, including financial instruments, impairments, and asset finance and leasing.

Employees are empowered to blow the whistle and to do so without fear. A positive approach to whistleblowing inspires confidence between employees and leadership.” ●● who can report: employees but also suppliers, non-executive directors, etc.); ●● what can be reported; ●● anonymity and confidentiality; ●● the method of reporting: a hotline, a dedicated Whistleblowing Champion or Compliance Officer; ●● investigations: the procedures for dealing with concerns and whether a third-party supplier will be involved; ●● remedial action: how and when action will be taken; ●● feedback to whistleblowers: whistleblowers should be advised of the report unless there is a specific reason for such information to be withheld; and ●● behaviours: encouragement of professionalism and disciplinary action for victimisation. This has to be presented, recognised and respected by all levels of an organisation. Moreover, employees should be aware of where this policy is available and what support is available at each stage of raising a concern. As well as having a written policy, training and continuing refresher training are vital to create a team with a strong and transparent way of working and reporting. Training must cover three key areas: how to raise a concern; how staff will be protected; and how the concern will be dealt with. Employees are empowered to blow the whistle and to do so without fear. A positive approach to whistleblowing inspires confidence between employees and leadership, and is particularly appealing when it comes to attracting new talent from Generation Y. To conclude, judging by the alarming statistics and recent events, we are still a long way from bringing change in the accounting sector and in realising the fact that listening up could have averted many corporate crises. Leaders can consider success in creating a positive culture if their employees are comfortable in reporting a concern without the thought of their actions being a career defining moment. Until then, there is clearly a lot of work to do, as has been made evident by the case of Rihan v EY. ● ISSUE 112 | AIAWORLDWIDE.COM

AML

Smoke and mirrors Dr Jackie Harvey and Dr Peter Sproat examine the issues of corruption and beneficial ownership in Nigeria. Dr Jackie Harvey Newcastle Business School, Northumbria University Dr Peter Sproat Newcastle Business School, Northumbria University

F AIAWORLDWIDE.COM | ISSUE 112

ew would dispute that corruption is an inhibitor to economic development and can undermine the rule of law and trust in public institutions. Such is the global concern that the international community has produced various international conventions aimed at its containment, including the 1997 OECD Convention on Combating Bribery of Foreign Public Officials and the 2005 United Nations Convention against Corruption. More recently, all members of the United Nations signed up to the UN’s Sustainable Development Goals (SDG), which include a pledge to “substantially reduce corruption” (SDG16.5) and strengthen the “recovery and return of stolen assets” (SDG16.4).

AML A key focus of the efforts to reduce corruption at the international level has been the attempt to prevent criminals from using the global financial system to disguise the proceeds of their crimes. For 30 years, the Financial Action Task Force (FATF) – an inter-governmental body set up in 1989 by the G7 – has attempted to introduce and monitor a set of anti-money laundering (AML) standards across the world. Since being listed in the appendices of the 1990 “Financial Action Task Force on Money Laundering Report”, its 40 Recommendations on AML have required national governments to impose duties on the financial sector to identify their clients, monitor their financial activities and to report any suspicious activities to the authorities for investigation. It also encouraged states to bring in measures to facilitate the recovery of the proceeds of crime, including corruption.

The Financial Action Task Force Recommendations

Its 1990 Report also indicated that the FATF’s approach would be reliant upon co-operation between states. There was an expectation of collective action and that the wider the range of countries applying their recommendations, “the greater their efficiency would be”. So here we come across the problem of applying the same “one-size fits all” Recommendations across the world. Only a small number of academic authors have really challenged the presumption that something considered appropriate and achievable within the G7 could be replicated within countries with different social norms, cultural values and rules of law. The FATF 40 Recommendations came into being in 1990 following a G7 in Paris in 1989. The agenda for the Paris meeting contained 11 issues, the last of which was drugs. It was in this context that the issue of money laundering was raised, along with references to the recovery of these criminal assets and the creation of a financial action task force. Since then, the FATF has expanded its ideas in a variety of ways: ●● Firstly, it has encouraged countries to look for more than drug-related money laundering. Incrementally, it widened its purview first to include the laundering of the proceeds of serious or organised crimes and later all acquisitive crimes, and even the financing of

A key focus of the efforts to reduce corruption at the international level has been the attempt to prevent criminals from using the global financial system to disguise the proceeds of their crimes.” 22

terrorism and the proliferation of weapons of mass destruction. ●● Secondly, it increased the range of institutions that should monitor and report suspicious financial activity well beyond banking into sectors as diverse as the legal profession and casinos. ●● Thirdly, it deepened the duties placed upon institutions within the regulated sector in a variety of ways. For example, the “know your customer” (KYC) rules that surround the initial opening of a financial relationship have been replaced by “customer due diligence” (CDD) – a never ending set of obligations. One particularly difficult issue in regard to the latter is addressed in Recommendation 24, which requires a country to ensure “there is adequate, accurate and timely information on the beneficial ownership and control of legal persons”. The Recommendation is framed in furtherance of an effective information exchange framework between different agencies within a jurisdiction, as well as bilateral information sharing between different jurisdictions. Unsurprisingly, this has increased interest in ideas surrounding the form, formation and access to national registers of company ownership.

Nigeria: the challenges of AML

Our research on the disguise of beneficial ownership to launder the proceeds of grand corruption from Nigeria considers all of these issues. To this end we have looked at: ●● grand corruption and the ways in which the proceeds of corruption in Nigeria have been disguised and moved across the globe; ●● the nature and extent of information exchange and cooperation between anti-corruption agencies within Nigeria and internationally as countries attempt to recover stolen assets; and ●● the practical limitations faced by Nigeria in creating an open register of company ownership (something to which it has made a political commitment). Over the years, Nigeria has responded to criticism from the FATF by producing an extensive array of anti-money laundering and anti-corruption legislation. Unfortunately, much is overlapping and has led to the creation of a complex range of agencies. Further, two key pieces, the Proceeds of Crime Act and the Companies and Allied Matters Act, are currently “stuck” in a legal limbo due to lack of consensus over their scope and content.

Reporting requirements

Aside from that, there are a range of practical challenges that immediately present themselves within the context of AML in Nigeria. There are extensive reporting requirements placed upon the banks within the country. The banks are required to monitor and report upon all transactions above 5 million Naira (approximately $13,000) ISSUE 112 | AIAWORLDWIDE.COM

AML for individuals and, more significantly, 10 million Naira for companies. They are also required to produce monthly reports of all transactions by those account holders who have been identified as politically exposed persons (PEPs). Given the importance of the government as a major employer within the formal sector, together with the extensive family networks, there are in practice a very large number of PEPs. With such extensive reporting, the result can be that, in effect, nothing is reported. Outside of the formal banking sector, the designated non-financial institutions fall under the regulation of a single agency, the Special Control Unit Against Money Laundering (SCUML), which has a herculean task of monitoring a diverse and geographically dispersed range of some 20 different regulated sectors with a limited number of staff. Nigeria’s AML efforts are further hindered by the fact that more than half of the economy is cash based; and outside of the main urban areas, if records are kept they will be largely paper based.

the government has resulted in an absence of collaboration and coordination between various agencies that is longstanding and structural. All of these issues have diluted agencies’ effectiveness in relation to the investigation, prosecution and recovery of the proceeds of corruption.

Customer due diligence

The operational reality

Aside from the reporting, the regulated sector is required to undertake KYC/CDD. This may be reasonably straightforward when faced with an individual who has been a business client of many years, but generally this is more difficult when that counterparty is a legal person and the bank, for example, is required to identify a company’s beneficial owner or owners. Currently, to comply with due diligence, banks have to appoint lawyers to undertake manual searches of the largely paper based registry records maintained by the Corporate Affairs Commission (CAC). Moreover, there may be little point to the laborious task for, as with records collated in other countries (including the UK), the data provided to the registry has not been checked for accuracy. One encouraging development in this area is that earlier this year, the Nigerian Extractive Industries Transparency Initiative (NEITI) launched its own register of companies operating within the important extractives industry sector. However, a search of the register reveals information on linked companies but not on who owns whom. It is clear that information can be open but unless it is accurate it is of little use. In this regard verification methodologies will be key, particularly where information is to be submitted or maintained through annual confirmation statements.

Culture of secrecy

In addition to the problems with data collection caused by reliance on paper based systems and the overlapping mandates of different investigatory agencies such as the EFCC (Economic and Financial Crimes Commission) and the ICPC (Independent Corrupt Practices And Other Related Offences Commission), the observed “culture of secrecy” (Transparency and Accountability Initiative, 2018) within AIAWORLDWIDE.COM | ISSUE 112

Given the importance of the government as a major employer, together with the extensive family networks, there are in practice a very large number of politically exposed persons.”

It is this operational reality that has created the conditions that high profile individuals within Nigeria have been able to exploit for their own ends. The names Sani Abacha, Goodluck Jonathan and James Ibori all spring to mind as individuals who, over a number of years, were able to remove hundreds of millions of dollars from the country. One of the latest is Mrs Diezani AlisonMadueke, the former Minister for Petroleum Resources under Goodluck Jonathan, who oversaw Nigeria’s state-owned oil company. She was able to use her influence to direct a subsidiary of the Nigerian National Petroleum Corporation to award contracts to shell companies (created in Nigeria) that were owned by existing business associates. From Nigeria, the proceeds of those illicitly awarded contracts were then laundered through companies (and banks) in the BVI, Switzerland, the US and the UK. In the latter two countries, the proceeds were used for the successful purchase of various assets, including extensive property in London, a $50 million condominium located in one of Manhattan’s most expensive buildings – 157 W. 57th Street – and the Galactica Star, an $80 million yacht that was built in the Netherlands. There would have been multiple points at which Suspicious Transaction Reports or Suspicious Activity Reports could have been made – not only within Nigeria but also within both the US and the UK, certainly from banks and also from estate agents. Greater transparency of beneficial owners is unlikely to provide the panacea; indeed, a search through the UK Companies House shows companies still registered to the named business associates in the Alison-Madueke case. This research is supported by the DFID funded Global Integrity Anti-Corruption Evidence (ACE) Programme. Further information about the project is available at bit.ly/3dWX9BR. ●

Author bio

Dr Jackie Harvey is Professor of Financial Management and Director of Business Research at Newcastle Business School.

Author bio

Dr Peter Sproat is Senior Lecturer at Newcastle Business School, teaching fraud, financial regulation and risk management.

AUDIT REPORTS

The health of the market

Paul Afteni Head of Financial Services Professional Indemnity, Willis Towers Watson, FINEX Jennifer Chan Associate Director, Claims Advocate at Willis Towers Watson, FINEX

he recent series of high profile audit failures which have led to the collapse of companies such as BHS, Carillion and Thomas Cook have put the spotlight firmly on the UK audit sector and prompted a number of industry wide reviews and recommendations for wholesale reform. This article will summarise the various reports that have been commissioned to review the current health of the UK audit market and the key recommendations that have been proposed. In addition, it will consider the opportunities that this presents for mid-size audit firms who currently sit just below the “Big Four” firms – EY, KPMG, PWC and Deloitte – and the risks that should be considered by such firms before seeking to take advantage of the opportunities for new business that the audit reforms have initiated.

Scrutiny from independent reviews

In December 2018, Sir John Kingman published an Independent Review of the audit regulator, the Financial Reporting Council (FRC) and his recommendations on the need for changes to regulation through legislation. This included a proposal to replace the FRC with a new independent statutory regulator, accountable to Parliament to be called the Audit, Reporting and Governance Authority (ARGA). In April 2019 came the final report from the Competition and Markets Authority (CMA), which proposed a range of measures to make the system more independent and to increase choice, competition and resilience within audit. The CMA also focused on addressing the barriers facing smaller so-called “challenger firms” from

entering the FTSE 350 audit market. Taking account of the recommendations put forward in the Kingman report and following extensive discussions with audit firms, investors and major UK companies, the CMA proposed that there should be a separation of audit from consulting services. In addition, the regulator put forward the idea of mandatory “joint audits”, involving challenger firms, to develop the capacity needed to review the UK’s biggest companies. Further remedies the CMA put forward were: the introduction of a market cap to reduce the number of FTSE 350 audits carried out by the Big Four audit firms; and resilience measures in the event of an audit firm, especially one of the Big Four, failing. More recently, in December 2019, the Brydon Report, authored by former London Stock Exchange chairman Sir Donald Brydon, contained 64 recommendations as to how to increase confidence in the audit sector and prevent unnecessary collapses. Some of the key recommendations in the report include: ●● a redefinition of audit and its purpose, providing greater clarity about who audit is for and reinforcing its role as a public interest function; ●● the creation of a stand-alone and transparent audit profession, to be governed by overarching principles; and ●● an obligation on auditors to inform, and the need for them to be suspicious as well as sceptical, thus endeavouring to identify corporate fraud. ISSUE 112 | AIAWORLDWIDE.COM

Paul Afteni and Jennifer Chan ask how challenger firms in the audit sector are affected by the regulatory and market reforms.

AUDIT REPORTS How are challenger firms affected?

Whilst all these reports promulgate similar intentions to introduce root and branch reform to the UK audit industry, the recommendations they set out also focus on introducing more competition and resilience to the audit market. This provides several new opportunities for challenger firms that represent the next tier of UK audit practices, as well as to those firms that have so far struggled to break the dominance of the Big Four over the UK’s coveted FTSE 350 audit market. The proposed reforms and stricter regulatory requirements have opened several new revenue streams for challenger firms and exposure to clients who would previously have only considered appointing one of the Big Four auditors. Consequently, numerous practices are positioning themselves to compete for mandates from top PLCs. The most obvious risk is whether challenger firms have the relevant expertise, requisite skills and sufficient resources to undertake the most complex audits. As highlighted above, a key reason for the proposed reforms, including the introduction of the challenger firm model, is to generate increased capacity to the existing pool of suppliers able to offer complex audit services. Inherent in this proposed reform is the fact that until now, firms outside of the Big Four have struggled to break into the FTSE 350 audit market and thus will be less experienced in undertaking such work. Industry regulators such as the Prudential Regulation Authority (PRA), which was created following the 2007–2008 global financial crisis to supervise the stability of banks and insurers, requires that an auditor has the “required skills, resources and experience to perform its function under the regulatory system”. The PRA held discussions last year with a number of challenger firms over concerns about their ability to audit a major investment bank. Following on from this is the question of whether, when considering the potential risks to the business, challenger firms will be able to obtain affordable professional indemnity insurance (PII) cover and at the right capacity level. The PII market is currently in the midst of a hard cycle of increasing rates which does not yet appear to have reached its peak. PLCs, particularly FTSE 350 companies, are likely to require unlimited liability from their auditors, and firms will need to consider not only what PII requirements will arise because of this work, but also assess how large their PII limit. In some cases, this may be multiples of their current limits purchased, and as the additional exposure will emanate from auditing activity, it is likely to result in significant additional costs, perhaps more restrictive cover and higher self-insured retentions. Insurers rate risks on a number of factors, one of which is the split of work of the practice. For example, tax advice is seen as a systemic risk; i.e. one with a higher frequency of claim notification. However, audit work is one of a catastrophic nature, less frequent but of much greater severity and these are rated accordingly by insurers. Therefore, AIAWORLDWIDE.COM | ISSUE 112

Until now, firms outside of the Big Four have struggled to break into the FTSE 350 audit market and thus will be less experienced in undertaking such work.”

Author bio

Paul Afteni leads a team responsible for the placement and servicing of professional indemnity insurance for large accountants, independent financial advisors and insurance brokers.

Author bio

Jennifer Chan is an Associate Director, Claims Advocate at Willis Towers Watson, FINEX.

accountancy firms considering undertaking PLC audits face a two-fold issue: scarce capacity and subsequent increased PII costs. Although there are a good number of insurers approved to provide PII insurance to the profession, many of those have limited or no appetite for practices undertaking audit work (particularly PLC audit), creating low supply for the demand of firms undertaking this type of role.

How will changes be implemented

Whilst the reforms suggest a wider division of labour in the PLC audit sector with co-operation between firms on particularly large audits, they do not provide a clear suggestion of how changes will be implemented or operate in practical terms and this is something upon which the government is actively consulting via the Business, Energy and Industrial Strategy (BEIS) select committee. For example: ●● Will the challenger firm work alongside a member of the Big Four as joint auditors? ●● Will practitioners and the government back a shared audit approach whereby one audit firm is appointed as the statutory auditor and takes overall responsibility and liability for the audit, whilst another supports the statutory auditor on certain aspects of the audit? ●● Will the challenger firm simply operate in an independent peer review-type function once the audit has been undertaken by the statutory auditor, who is more likely to be a member of the Big Four? Many in the industry cannot yet answer these questions with any certainty, and all options represent their own hazards and challenges. Indeed, it is currently unclear which should be considered the riskier approach. The likelihood is that this will only become apparent once a period in “the new world” has been completed and a track record is established. However the CMA has made clear in their recommendations that, whilst they supported mandatory joint audits and thought further consideration should be given to the use of peer reviews, they did not support shared audits as they feared these would lead to challenger firms being subordinate to the Big Four statutory auditors – with the latter ultimately dictating how the audit is carried out. Any firm considering entering the audit marketplace will need to consider the implications that this decision will have on their business. Yes, there is undoubted opportunity to develop a greater profile in the audit sector, but there are other important considerations to address. The claims-made nature of PII means that once you have undertaken any kind of business, the risk is considered by PII insurers at every renewal of your PII. Currently, whilst there is limited appetite, cover is available for audit work at all levels for accountancy practices in the PII market. However, a high-profile, significant audit failure claim in the market could result in PII insurers withdrawing cover in respect of audit work going forward, leaving firms with potential uninsured business risk going forward. ●

AUDIT COMMITTEES

Carol Der Garry and Weng Yee Ng review the role of audit committees in overseeing the quality of audit in the UK

he role of audit committees in ensuring audit quality is increasingly important during the Covid-19 crisis, as companies face disruptions and uncertainty, and financial strain and risks increase as directors’ duties are impacted by changes implemented by regulators. The current pandemic has also brought a number of challenges to external auditors in executing their routine annual statutory audits, such as limited accessibility to information and audit evidence and the need to conduct audit procedures remotely. However, stakeholders and regulators continue to focus on the role of audit committees in preventing and mitigating the risk of financial and accounting misstatements.

Carol Der Garry Partner, FRA Weng Yee Ng Director, FRA

Audit committees have a distinct role calling for them to act independently from a corporation’s executives and to protect the interest of shareholders, in particular on internal control and financial reporting. The audit committees’ key responsibilities in relation to external auditors include: ●● assessing the integrity of the company’s financial statements, including reviewing significant financial reporting judgments contained in them; ●● oversight over the external audit tender process, appointment, remuneration, terms of engagement, independence and objectivity; ●● reviewing effectiveness of the external audit process; ●● ensuring appropriate policy and prior approval for external auditor’s provision of non-audit services; and ●● reporting to the board on how these responsibilities have been discharged. In response to continued emphasis in the UK concerning audit quality and the importance of the audit quality oversight role of the audit committee, a number of authorities in the UK have commissioned studies and issued guidance to address this concern. These include practice aids, guidance documents, reports, studies and independent reviews issued, or commissioned, by the Financial Reporting Council (FRC), the Competition and Markets Authority (CMA), the Parliamentary Committee on Business, ISSUE 112 | AIAWORLDWIDE.COM

More vital than ever

Background

AUDIT COMMITTEES Energy and Industrial Strategy, and the Institute of Chartered Secretaries and Administrators to name a few. Also of relevance to UK foreign private issuers, in December 2019, the US Securities and Exchange Commission’s statement reminded audit committees of their responsibilities for oversight of financial reporting, internal control and the external, independent audit process. While these reports and guidance were commissioned by different agencies, common key themes mentioned are the effectiveness of audit committees in overseeing auditors and in ensuring the quality of the audit.

2019 Audit Quality Practice Aid for Audit Committees (“Practice Aid”) addresses is that audit committees should discuss audit quality inspection reports issued by the FRC’s Audit Quality Review team and remedial actions taken, in order to ensure that the audit committees fully understand the potential implications for the quality of their audits.

Auditor independence, conflicts of interest and potential bias

Arguments around “cultural fit,” “chemistry” and “personal relationship” have been raised regarding companies’ relationships with their statutory auditors. However, these concerns – as well as concerns around auditor independence, conflicts of interest and potential bias – continue to persist and have been noted in independent reviews commissioned by the UK government and CMA (see bit.ly/2D7N48s). The audit committee should be able to explain how it has assessed characteristics such as the auditor’s mindset and firm culture, and the auditor must demonstrate to the audit committee that they exercised professional scepticism and made appropriate challenges of management. Audit committees should probe the audit firm’s culture, independence, conflicts of interest and potential bias.

Impact of Covid-19

Amidst this emphasis, the Covid-19 environment and changing UK government laws have increased risks for directors, and in some instances, blurred lines on directors’ duties. For example, the government has instituted a temporary suspension of wrongful trading, thereby reducing the threat of personal liability for directors for wrongful trading for the period of the Covid-19 pandemic. However, given changes to insolvency legislation, wrongful trading provisions have not been entirely suspended, and it is not entirely clear whether any circumstances remain in which a court could order contributions for wrongful trading. Therefore, in some cases, the changing requirements create nuanced situations and audit committees will need to be cautious and vigilant as they exercise their duties.

Involvement of experts/specialists and consultations

Considerations for audit committees

Whilst the various guidance suggests best practices and points of reference to members of audit committees on how to implement those requirements, below are some practical considerations and challenges that audit committees should consider.

Audit committee and auditor interaction The audit committee must determine the appropriate level and timing of interaction with the external auditors and the nature of questions to ask. Audit committees should be ready to challenge their auditors when information with which they are provided is not clear. And consideration should be given as to how the audit committee can corroborate information provided by the external auditors.

Author bio

Carol Der Garry has 35 years of professional experience as a certified public accountant in forensic investigations, auditing and accounting.

Audit firm’s internal quality control procedures

In order to ensure the audit is being run effectively, audit committees should seek to understand the quality controls, such as training, technical support and “tone at the top” that the external audit firm has in place. Quality control procedures, or a lack thereof, might not always be obvious. One aspect that the FRC’s December AIAWORLDWIDE.COM | ISSUE 112

Author bio

Weng Yee Ng holds more than 16 years of experience in audit and forensic accounting, with expertise in compliance reviews, internal investigations and litigation support.

Some of the FRC’s recommended best practices for audit committees require specific skill sets and knowledge to execute; however, audit committee members will not always have the required skills or knowledge. The audit committee should assess whether to obtain support, either internally within the company or externally through advisors, taking into consideration availability of budgets. Support and consultation may be required in assessing the appropriate accounting treatment and disclosure requirements for complex, judgemental and technical areas, such as deferred taxation, pension calculations, valuations, impairments and going concern.

Audit Quality Indicators

In a May 2020 FRC publication, the FRC provided information about a number of case studies of Audit Quality Indicators (AQIs), as well as information about the most useful indicators of both poor and good audit quality within the UK. The study found that if AQIs are used properly, they can be a vital tool in helping audit firms to detect audits at risk of not meeting necessary standards for audit committees to hold audit firms accountable (see bit.ly/2ZDStMh). The FRC’s Practice Aid recommended that audit committees should discuss with the auditor the AQIs used by their firm, and the results of the firm’s own monitoring processes for the audit business.

AUDIT COMMITTEES Documentation and evidence

The UK Corporate Governance Code requires the audit committee to report to the board on how it has discharged its responsibilities, including how it assessed the independence and effectiveness of the external audit process. When companies fail or businesses struggle, the level of stakeholder and regulatory scrutiny tends to increase, and the question about whether audit committees have appropriately discharged their responsibilities inevitably arises. This contributes to the importance of audit committees evidencing their reviews and assessments through proper documentation – not only to demonstrate to the stakeholders that they have carried out their responsibilities diligently, but also to protect and defend themselves in the event they are challenged. The FRC’s Practice Aid does not provide detailed guidance as to how the review and assessment should be documented, the level of granularity or detail, or who takes the lead in preparing the documentation; the audit committee may wish to take advice in this area.

The roles and responsibilities of audit committees, in particular with respect to ensuring the quality of the audit, have been in the limelight.”

What should audit committees do?

First, audit committees should review current practices and perform a gap assessment; i.e. ascertain what is required versus what is currently performed, which will highlight areas and procedures requiring further action by the

STAY ON THE RIGHT TRACK WITH TOLLEY

audit committees. The audit committee should then evaluate the gaps identified and ascertain where external support or consultation may be required. Next, audit committees should have in-depth discussions with the company’s external audit team to assess the quality and effectiveness of the audit and ensure that adequate contemporaneous documentation is prepared to evidence the discussions and conclusions reached. If unsure, audit committees can refer to the guidance and practice aid issued by regulators and government agencies, and seek professional advice, as needed.

Conclusion

Even without the Covid-19 pandemic, the roles and responsibilities of audit committees, in particular with respect to ensuring the quality of the audit, have been in the limelight. The strain Covid-19 has on businesses creates even greater pressure to meet financial expectations. This can lead to a heightened risk of potential fraud and accounting misstatements. And changing UK government laws may increase risks for directors by blurring lines on directors’ duties. These situations will naturally lead to greater emphasis on audit committees to demonstrate that they have duly discharged their responsibilities, in particular by evidencing transparent contemporaneous considerations, to ensure robustness of audit quality. ●

Tolley’s Tax Annuals 2020-21 The Tolley annuals, organised by tax area, provide straightforward explanations and worked examples on common scenarios you will come across in practice. With extensive cross-referencing to the legislation, case law and HMRC Manuals guidance, you will stay on track with current and future changes. Titles include: >

Tolley’s Income Tax 2020-21

Tolley’s Corporation Tax 2020-21

Tolley’s Capital Gains Tax 2020-21

Tolley’s Inheritance Tax 2020-21

Tolley’s Value Added Tax 2020

Tolley’s National Insurance Contributions 2020-21

Save money and buy them in a set

Order now: lexisnexis.co.uk/annuals20

RELX (UK) Limited, trading as LexisNexis®. Registered office 1-3 Strand London WC2N 5JR. Registered in England number 2746621. VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are registered trademarks of RELX Inc. © 2020 LexisNexis SA-0620-010. The information in this document is current as of June 2020 and is subject to change without notice.

ISSUE 112 | AIAWORLDWIDE.COM

Events

CPD deadline fast approaching All AIA members are required to submit their annual CPD declaration by 1 October each year as part of the renewal process. To meet our CPD requirements you must:

●● complete at least 20 units of verifiable CPD each year; ●● complete at least 120 units of CPD over a rolling three-year period; ●● keep your online CPD record up to date;

●● complete your annual CPD declaration on 1 October every year; and ●● keep evidence supporting your CPD record for each rolling three-year period (in case you’re selected for a review).

Online CPD partners AIA has partnered with four leading online CPD partners to provide you with an extensive range of online courses, covering a broad range of technical and professional development. These are listed below with details of their offerings for AIA members.

BEIJING NATIONAL ACCOUNTING INSTITUTE

INSTANT CPD

Accountingcpd.net is a leading provider of online CPD for accountants, bringing together professional bodies, acclaimed authors and the development expertise of Nelson Croom, to offer members a wide range of online CPD courses. It’s CPD that really make you think. Find out more: www.aiaworldwide.com/ accountingcpd-net.

Instant CPD provides online and on-demand HD video CPD courses. Their suite of courses, presented by expert lecturers, range from tax and technical to strategic and professional development. All courses come complete with notes, PowerPoint slides and brief multiple choice tests. Instant CPD is an accredited CPD centre by the CPD Standards Office and its courses are taken by thousands of accountants. Members can instantly access the HD video courses after purchasing from Instant CPD and watch them at their convenience. Upon completing a course, members can download and print an accredited Certificate of Completion. Find out more: www.aiaworldwide.com/ instant-cpd.

AIA has an agreement with Beijing National Accounting Institute (BNAI) to conduct online CPD free of charge for AIA members. BNAI will offer 100 hours of courses, from which AIA members can select up to 40 hours for their own CPD. After completing the selected course and reaching the prescribed learning hours, AIA members will have the option to print an online certificate in order to authenticate and validate their yearly CPD requirements. Find out more: www.aiaworldwide.com/ bnai. ACCOUNTINGCPD.NET

For many years AIA members have been able to use online CPD courses, published by Nelson Croom, to fulfil their CPD requirements. Now you can get those same great online CPD courses much more easily, by buying direct online from Nelson Croom’s online shop for accountants at www.accountingcpd.net.

TOLLEY ONLINE SEMINARS

AIA members in practice have access to Tolley Online Seminars as part of the AIA practising certificate package. Keep your tax knowledge up to date in a manageable way that works with your schedule. The monthly CPD seminars are delivered by industry experts in 15 minute online sessions, available to watch on your desktop, laptop or mobile. The seminars are developed and delivered by leading industry lecturers. Download and watch them where and when suits you. Find out more: www.aiaworldwide.com/ tolley-tax-intelligence. You can view the full range of conferences, seminars, webinars and partner events at: www.aiaworldwide.com/events.

The AIA CPD deadline is the 1 October each year and members are required to complete a CPD declaration as part of the AIA renewal process. If you have any questions, please contact the AIA’s Membership Department as soon as possible. Email: membership@aiaworldwide.com. AIAWORLDWIDE.COM | ISSUE 112

Technical INTERNATIONAL

Global coalition issues guidance on how businesses can adopt a long-term value creation agenda In the wake of unprecedented economic disruption due to the Covid-19 pandemic, many companies are rethinking their fundamentals and assessing how their corporate purpose, strategy and business model will drive long-term success. To support businesses in this uncertain environment, the International Federation of Accountants (IFAC), the International Integrated Reporting Council (IIRC) and Association of International Certified Professional Accountants (the unified voice of the American Institute of CPAs (AICPA), and the Chartered Institute of Management Accountants (CIMA) have released new guidance for chief financial officers (CFOs) and finance teams to navigate their organisations toward long-term value creation. “Covid-19 is the greatest threat to value creation we’ve seen in generations. As a result, many companies are juggling a handful of pressing priorities, including protecting cash flows, ensuring long‑term value creation and delivering positive societal impacts,” said IFAC CEO Kevin Dancey. “The CFO and finance function can partner with management to overcome

INTERNATIONAL IASB issues amendments to IFRS 17 Insurance Contracts to help companies with implementation The International Accounting Standards Board has issued amendments to IFRS 17 Insurance Contracts aimed at helping companies to implement the Standard and making it easier for them to explain their financial performance. The fundamental principles introduced when the board first issued IFRS 17 in May 2017 remain unaffected. The amendments, which respond to feedback from stakeholders, are designed to: ●● reduce costs by simplifying some requirements in the Standard; ●● make financial performance easier to explain; and ●● ease transition by deferring the effective date of the Standard to 2023

the challenges associated with understanding and driving long-term value creation.” The report contains actionable insights for CFOs, finance teams and business leaders to sharpen their perspective on value creation beyond the financials, including how to: ●● understand the value creation process; ●● identify principal opportunities and risks related to the organisation’s strategy and business model; ●● develop an integrated view of performance and value, with balance sheet, business and societal perspectives; and ●● drive priorities for value creation into decision making and reporting. The approach outlined in this report helps CFOs and finance teams to think about how to ensure that all relevant information around performance, opportunities, risks and trade-offs are available to internal decision makers, investors and other capital providers. It also enables the corporate mindset to evolve from shareholder value creation to a longer-term stakeholder value creation perspective.

and by providing additional relief to reduce the effort required when applying IFRS 17 for the first time. Hans Hoogervorst, chair of the International Accounting Standards Board, said: “We have listened to feedback and made changes to IFRS 17 that will help companies with the implementation of this much-needed Standard.” The deferral of the effective date by two years, to annual reporting periods beginning on or after 1 January 2023, is intended to allow time for an orderly adoption of the amended IFRS 17 by jurisdictions around the world. This should enable more insurers to implement the new Standard at the same time. The board has also issued an amendment to the previous insurance contracts Standard, IFRS 4, so that eligible insurers can still apply IFRS 9 Financial Instruments alongside IFRS 17.

“With an estimated 80% of enterprise value now made up of non-financial assets such as brand recognition, human capital and customer satisfaction, organisations that understand how to create and deliver value will be better positioned to achieve sustainable success,” said Barry Melancon, CPA, CGMA and CEO of the Association of International Certified Professional Accountants. “Accounting and finance professionals are uniquely positioned to bring together the insights and data needed by management teams to inform a value creation agenda, which is particularly important during this time of uncertainty.” “Business leaders are under growing pressure to marry profit with purpose. A value creation agenda delivers exactly this,” said Charles Tilley, CEO of the IIRC. “Building on the International Integrated Reporting Framework, this new report will guide CFOs to better understand, measure and report on value creation and impact. The result is comprehensive measurement based on a company’s value drivers that can be used to steer long-term sustainable development.”

IFRS for SMEs Update published The June 2020 IFRS for SMEs Update is now available, and includes following: ●● an update on the second comprehensive review of the IFRS for SMEs Standard; ●● an update on the SME Implementation Group (SMEIG); and ●● information about online resources. View this on the IFRS Foundation website.

EUROPE Joint statement on the revision of the Non-Financial Reporting Directive in the context of Covid-19 The European Union, and the world economy, are facing one of the biggest ISSUE 112 | AIAWORLDWIDE.COM

Technical challenges of our time in designing the means and tools to foster a green economic recovery. It is more important than ever for both the private and the public sector to work together on policy priorities that governments should take in reaction to this crisis. The current Covid-19 crisis puts the world at a crossroads with important choices to be made on the best ways to come out of the crisis and improve resilience from an economic, social and environmental perspective. The response should not weigh one element against the other; on the contrary, Covid-19 has shown how economic, social and environmental aspects are interlinked. That is why we support a sustainable recovery, including the necessary focus on social issues and the implementation of the European Green Deal with its goal of climate neutrality by 2050. As the objectives are clear, we now have to put in place the right tools and incentives for each stakeholder from both public and private sector to play its role. The European Commission indicated in its recently published consultation on a renewed Sustainable Finance strategy that companies should prioritise key stakeholders’ long-term interest. We see that the revision of the Non‑Financial Reporting Directive (NFRD) is an important element of achieving this. As a group of stakeholders with different backgrounds but a common interest in sustainable finance, we believe the following matters are instrumental in the upcoming revision of the NFRD to make a leap forward in improving the quality, comparability and consistency of information on environmental, social and governance matters. ●● Expand the scope: Whether companies have a significant impact on the environment and society does not depend on their size or legal status, neither are investments limited to assets listed on stock exchanges. We therefore recommend reviewing the scope beyond large publicly listed entities to cover those companies that have a significant impact on the environment and society as a result of economic activities and business models to ensure well targeted reporting. It is important though to have a balanced approach towards creating a reporting system that as an end result would ensure smart reporting, feasible for all kinds of companies. AIAWORLDWIDE.COM | ISSUE 112

●● Disclosure of non-financial information in the annual management report: Assessing a company’s performance and future resilience does not stop at financial numbers and risks. Including nonfinancial information in the publicly available annual management report could help to improve the connectivity between financial and non-financial information (NFI) and inform the stakeholders to the fullest extent about a company’s performance, risks, future development and impact on the environment and society. Such disclosures, however, should be based on a materiality assessment to ensure that they pertain to matters that are truly relevant to the company and its long-term value creation. If supporting information is disclosed separate from the management report, clear links and synergies to the management report should be provided. Disclosing non-financial information in the annual management report would also ensure proper supervision of compliance by national authorities. ●● Strengthen the social and governance aspects: We understand that climate-related issues have been at the centre of attention due to the urgency of the matter. Sustainability, however, encompasses wider ESG factors. Environmental, social and governance considerations within a company are interlinked and often “E” and “S” follow the “G”. Therefore, reporting should look equally at all matters of sustainability (E, S and G). In this respect, there is a particular need to improve disclosures on social matters, including human rights, employee issues, and health and safety, as well as governance matters such as the board’s and management’s overview of non-financial risks and opportunities, and description of governance processes. ●● Minimum mandatory reporting requirements: A common and harmonised level of reporting is necessary to ensure comparability, consistency and reliability. Therefore, the legislation should provide a mechanism for clear guidance and develop a minimum set of reporting requirements, including sector specific requirements. The legislation should specify key principles for its application and disclosure, while detailed content and requirements should be developed in a reporting standard to allow their dynamic development in response to a fast-changing context. Materiality

determination should be the basis to prepare relevant and meaningful disclosures. ●● Build on existing reporting initiatives: We recognise the need to consolidate the different existing reporting initiatives to ensure some level of simplification and comparability on a global level. Each of them encompasses strong elements in their respective areas, but none of them is probably covering the full set of ESG issues relevant for comprehensive non-financial reporting. Going forward, it is necessary to build on these initiatives and take into account international developments. ●● International role of reporting standards: We welcome the EU’s ambition to be the spearhead in sustainability related policy. However, we need to bear in mind that challenges such as the worldwide climate crisis requires global efforts and solutions. Companies operate and sell cross-border, as investors invest beyond their domestic market only. Therefore, any EU proposal for future NFI standards should ensure comparability and compatibility at a global level as companies need to comply by a broadly recognised reporting standard to be able to meet the information needs of stakeholders in a global market. ●● Ensure legislative consistency: NFRD requirements should be coherent with relevant existing (or imminent) requirements and avoid duplication of reporting legislation, considering the purpose and scope of different legislation, for example: ●● disclosures regulation for institutional investors; ●● taxonomy regulation; and ●● the Shareholders Rights Directive. Other initiatives such as E-GAAP (environmental accounting) should also be taken into account to help companies produce the necessary information internally.

Accountancy Europe leads the non‑financial reporting debate Accountancy Europe has released three publications to shape the debate on non-financial information (NFI) reporting. Accountants have the skills and knowledge to lead this discussion. Based on its expertise, Accountancy Europe urges more reliable EU NFI

Technical reporting, offers a view on NFI assurance, and progresses the debate on a global NFI standard setter. In its response to the European Commission (EC) Non-Financial Reporting Directive consultation, it supports corporate reporting that connects financial and non-financial information and advocates for strengthening NFI assurance requirements, building a common comprehensive NFI standard and tackling the substantial issues in NFI reporting. In particular, the EU should consider the following: ●● Standard setting requires a multi‑stakeholder approach with robust, independent governance and sufficient resources. ●● A voluntary, simplified reporting standard for SMEs could reduce the administrative burden and effectively support delivering information on demand. ●● The materiality definition should be clarified to encompass wider impacts on society and the environment. ●● Assurance should be mandated at an EU level. ●● The scope should encompass all companies that significantly impact the environment and society. ●● NFI should be disclosed as part of the management report, and needs to cover what is material to the company. Accountancy Europe has also released “Setting up for high-quality non-financial information assurance in Europe” to supplement its consultation response. This position paper investigates three conditions to provide high-quality and consistent NFI assurance across Europe: ●● The EU regulatory framework should mandate independent external assurance. ●● All assurance service providers need to abide by professional standards (competence, quality and ethics). ●● Public oversight should cover all assurance service providers. In the broader debate to improve NFI reporting, the EC announced that it intends to develop a European NFI standard setter. Before this announcement, Accountancy Europe issued a Cogito project where an independent task force built the case for setting global interconnected NFI standards. The new “Follow up paper: interconnected standard setting for corporate reporting” analyses the feedback received from over

40 respondents. The key takeaways include: ●● developing a “system solution” should be the ultimate goal to deliver global NFI reporting standards connected to financial information; ●● achieving this goal could be in steps, such as bilateral moves towards closer aligning NFI reporting standards, policy developments and expanding the mandates for multilateral organisations; ●● following a “building blocks” approach, where regional or sectoral requirements may be added to the core set of global NFI reporting metrics; ●● building on the best of NFI frameworks and standards may be quickest; and ●● embracing the leading role that the EU has to play. A significant achievement of this project is the exclusive statement from CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative and the Sustainability Accounting Standards Board, which confirms their commitment to working together towards a globally harmonised system. This answers stakeholders’ calls for NFI initiatives to move more decisively towards convergence. This work to achieve reliable and comparable NFI reporting facilitates the shift to a sustainable economy. If corporate information is transparent, includes environmental and social impact, and can be verified, stakeholders can make the right decisions to help move to a sustainable economy.

UK AND IRELAND FRC principles for the operational separation of audit practices The FRC has announced its principles for operational separation of the audit practices of the Big Four firms. The objectives of operational separation, which is world leading, are to ensure that audit practices are focused above all on delivery of high quality audits in the public interest, and do not rely on persistent cross-subsidy from the rest of the firm. The desired outcomes include the following: ●● Audit practice governance prioritises audit quality and protects auditors from influences from the rest of the firm that could divert their focus away from audit quality.

●● The total amount of profits distributed to the partners in the audit practice does not persistently exceed the contribution to profits of the audit practice. ●● The culture of the audit practice prioritises high quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism and judgment. ●● Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society. These final principles follow upon extensive discussions with the audit firms. The FRC is now asking the Big Four firms to agree to operational separation of their audit practices on this basis and to provide a transition timetable to complete implementation by 30 June 2024 at the latest. An implementation plan should be submitted to FRC by 23 October 2020. The FRC will then agree a transition timetable with each firm. Thereafter, the FRC will publish annually an assessment of whether firms are delivering the objectives and outcomes of operational separation. FRC CEO Sir Jon Thompson said: “Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the United Kingdom following the Kingman, CMA and Brydon reviews. The FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm. The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time.”

IAASA publishes compendium of financial reporting decisions IAASA, Ireland’s accounting enforcer, has published a further compendium of financial reporting decisions. These decisions relate to accounting treatments applied by Aminex plc, Astute Capital plc, Bank of Cyprus Holdings plc and Datalex plc in their financial reports. These decisions cover a range of accounting matters as follows: ●● FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland; ●● IAS 1 Presentation of Financial Statements; ●● IAS 12 Income Taxes; ISSUE 112 | AIAWORLDWIDE.COM

Technical ●● IAS 24 Related Party Disclosures; ●● IAS 34 Interim Financial Reporting; ●● IAS 37 Provisions, Contingent Liabilities and Contingent Assets; ●● IAS 40 Investment Property; ●● IFRS 6 Exploration for and Evaluation of Mineral Resources; ●● IFRS 7 Financial Instruments: Disclosures; ●● IFRS 9 Financial Instruments; and ●● Transparency (Directive 2004/109/EC) Regulations 2007 (as amended). These decisions include instances where the company voluntarily agreed to enhance its accounting treatment or disclosures in future financial reports to address matters identified in the course of IAASA’s examinations. IAASA’s policy on publishing financial reporting decisions and the criteria to be met for such decisions to be published is set out in IAASA’s Policy Paper on Publication of IAASA’s Financial Reporting Findings. The financial reporting decisions for each company are included in a compendium of decisions which can be accessed on the IAASA website. IAASA will continue to publish selected financial reporting decisions periodically.

UNITED STATES FASB approves new standards and a proposed effective date delay The Financial Accounting Standards Board (FASB) has approved the issuance of two upcoming Accounting Standards Updates (ASUs): one that improves financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity; and one that improves how not-forprofit organisations present and disclose contributed non-financial assets, also known as gifts-in-kind. The FASB also voted to issue a proposed ASU that would delay the effective date for its standard that improves financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care and annuities.

FASB to Issue ASU to improve convertible instruments and contracts in an entity’s own equity Under the upcoming ASU, the accounting for convertible instruments will be simplified by removing major separation AIAWORLDWIDE.COM | ISSUE 112

models required under current Generally Accepted Accounting Principles (GAAP). Accordingly, more convertible instruments will be reported as a single liability or equity with no separate accounting for embedded conversion features. Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception will be removed and, as a result, more equity contracts will qualify for the scope exception. The upcoming ASU also will simplify the diluted earnings-per-share (EPS) calculation in certain areas. In its original July 2019 Exposure Draft, the FASB also proposed simplifying the accounting for equity contracts by reducing form-over-substance based accounting conclusions that are driven by remote contingent events in the assessment of the derivatives scope exception. However, based on mixed feedback from stakeholders, the FASB decided not to include those proposed changes in the upcoming ASU. Consequently, the FASB plans to continue to explore improvements on this aspect of the guidance in a separate Phase 2 project. “The upcoming ASU will address areas of liabilities and equity guidance that stakeholders identified as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” stated FASB chairman Russell G. Golden. “We expect it to result in improved comparability of information for financial statement users and reduced cost and complexity for preparers and auditors.” The upcoming ASU will be effective for public business entities that meet the definition of a US Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after 15 December 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after 15 December 2023, including interim periods within those fiscal years. Early adoption will be permitted. The FASB expects to issue the upcoming ASU during the third quarter of 2020.

FASB to issue ASU on accounting for contributed non-financial assets by not-for-profit organisations The upcoming ASU will require a not-forprofit organisation to present contributed non-financial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets.

It also will require a not-for-profit to disclose the amount of contributed non-financial assets received, disaggregated by category, that depicts the type of contributed non‑financial assets, and for each category of contributed non‑financial assets received (as identified in (1.)): ●● qualitative information about whether the contributed non-financial assets were either monetised or utilised during the reporting period. If utilised, a description of the programmes or other activities in which those assets were or are intended to be used. ●● The not-for-profit’s policy (if any) about monetising rather than utilising the contributed non-financial assets. ●● A description of any donor restrictions associated with the contributed non‑financial assets. ●● A description of the valuation techniques and inputs used to arrive at a fair value measure in accordance with Topic 820, Fair Value Measurement, at initial recognition. ●● The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient not-for-profit is prohibited by donor restrictions from selling or using the contributed non‑financial assets. The upcoming ASU will be effective for annual reporting periods beginning after 15 June 2021. It is expected to be issued during the third quarter of 2020. The FASB also directed the staff to determine if educational efforts are necessary for valuing contributed non-financial assets and to monitor how the ASU improves transparency by providing better information to users.

FASB to issue proposed ASU that would delay standard for insurance companies that issue long-duration contracts Finally, FASB voted to issue a proposed ASU that would grant insurance companies that issue long-duration contracts, such as life insurance and annuities, an additional year to implement Accounting Standards Update No. 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. Stakeholders will have 45 days to comment on the proposed ASU, which the FASB expects to issue in the coming weeks.

GET TO THE BOTTOM OF TAX

AIA practising members get access as part of their membership subscription.

Tolley®Library Find the answers you need from sources you trust. Tolley®Library gives you quick and easy online access to the UK’s largest and most trusted source of accountancy and tax information. Get more than 100 years of experience and information (including Tolley, Butterworths, Simon’s and De Voil), the latest news, detailed expert commentary or a judgement from the archives. Our comprehensive online library puts our wealth of knowledge and expertise at your fingertips.

RELX (UK) Limited, trading as LexisNexis®. Registered office 1-3 Strand London WC2N 5JR. Registered in England number 2746621. VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are registered trademarks of RELX Inc. © 2018 LexisNexis SA-0418-020. The information in this document is current as of April 2018 and is subject to change without notice.

International Accountant 112

Articles inside

Technical

Dates for your diary

Audit committes

Audit reports

Self Assessment

AML

Whistleblowing

most common stumbling blocks. Mike Parkes (GoSimpleTax) asks whether you should defer a client’s second payment on account

Students

AIA news

News and views

In this issue