Via the wonderful Ruth Bender (@Ruth999), I'm directed to a post from Francine McKenna - think an American Richard Murphy in a dress - who is wibbling about auditing again.

10. The Big 4 audit firms don’t bother looking for fraud.

Absolute, complete nonsense.  Auditors' responsibilities in respect of fraud are prescribed in auditing standards.  There's an entire auditing standard - ISA 240 - dedicated to explaining what auditors must do in respect of assessing the risk of fraud in the financial statements.  The big firms now follow a global methodology that is consistent with ISAs.

ISA 240 makes it clear that the primary responsibility for preventing and detecting fraud lies with the management of the company and with those charged with governance. Not the auditors.  However, they do have some responsibility, as set out in the standard. 

There's a neat article by Martyn Jones that explains more here.

9. The Big 4 firms aren’t comfortable being watchdogs. They don’t even like being CALLED watchdogs

Francine is woefully confused here.  The 'watchdog vs bloodhound' distinction comes from a judgement by Lord Justice Lopes in Re: Kingston Cotton Mills Co. (1896) in which he was arguing that auditors are not responsible for detecting fraud.  Auditing standards in recent years have extended their role considerably, beyond the plodding watchdog.  So it's small wonder they don't like being called watchdogs; the term simply isn't relevant any more, unless you like living in the 1890s.

8. Big 4 firms should NEVER be asked to conduct internal investigations into alleged illegal activities for their audit clients.

Rubbish; it makes sense to permit those charged with governance complete freedom to decide for themselves who is the best appointee.  The alternative means hiring a complete unknown who will need time to get up to speed with things, in a situation where time is usually of the essence.

7. You know what Global Network means. It means shifting blame.

The firms' structures are largely a result of national regulation.  Until fairly recently, many regulators required all local audits to be undertaken by local audit firms, owned by local partners.  This meant that they had to be separate partnerships, bound together by good intentions only.  Now, McKenna's charge is blown apart by events, as we see regional and global partnerships being set up by the big firms.

6. The Big 4 will never again be indicted for an audit failure.

McKenna makes two basic arguments - the firms are too big to fail because (1) there already isn't enough competition and (2) the government can't afford to lose 100,000 jobs.  The second point is idiotic - the employees at Arthur Andersen aren't still unemployed; most of them found work immediately at the other accounting firms.  Similarly, if a Big 4 firm were to fail, those audits would still need to be done, and would probably get done by many of the same staff who currently service them.

I tend to view the fact that the audit firms aren't being indicted as evidence that they haven't done anything indictable, rather than being part of some grand conspiracy.

6.a “Final Four” means no competition and no straight answers. Ask a Big 4 audit partner for a Yes/No answer on valuation, for example, and you won’t get one.  

Well, jeez, Francine.  Maybe that's because valuations are just a teensy bit complicated and don't lend themselves to childish 'yes/no' answers?

5. The  auditors have a lock on the business (read, “ratings agencies”).

There are loads of auditors to choose from.  Unfortunately most of them are too small, too inexperienced or lack the global reach that big companies need.  And those charged with governance are always going to pick a big firm with a reputable name over some lesser firm, because they need to demonstrate that they appointed a sensible firm of auditors instead of some pushover.

4. Why do the auditors support IFRS and mark-to-market accounting? International Financial Reporting Standards (IFRS) are supposedly on the way for the US, the last big holdout. Forget rules-based guidance, where it’s easier to say an accounting treatment is right or wrong. Principles-based guidance leaves wriggle room and a pretty sure shot at sneaking liability caps for the auditors in through the back door. 

I'm with Ruth on this one.  Francine's point doesn't stand up to scrutiny, when you consider that US GAAP is one of the most detailed bodies of accounting literature imaginable, yet still suffered the most horrendous problems in variable application.  Rules-based guidance isn't easier to apply; it merely translates a single judgement into a thousand judgements over whether the detailed rules have been followed properly.  She really couldn't be more wrong on this point.

3. Campaign candy from K Street. 

In other words 'policy makers didn't enact the policies I wanted them to, so I'm going to throw my toys out of the pram'

2. Big 4 firms have systematically avoided liability for audit failures. 

This is patently a lie.  Big 4 firms have been sued successfully for large sums all over the world where their audits have been found wanting.

I guess she means they haven't been sued enough for her liking, but that's merely in her opinion, which hasn't exactly proved to be accurate in preparing the article.

1. AND THE #1 THING TO KNOW ABOUT ACCOUNTING FIRMS…

Lawyers are perceived as part of the problem

Well, lawyers are part of the problem.  The best bit about America is that lawyers are widely recognised to be part of the problem too.  But McKenna's article was written for a roomful of lawyers so it's no surprise she was sucking up to them.

If McKenna really wants auditors to do the right thing, she has a funny way of going about it.  Threatening them with bigger fines and more swingeing penalties won't encourage better auditing, but more risk averse behaviour.  It will also suppress economic activity, to the detriment of investors and people generally.  That's a heavy price for everyone to pay just so the anti-audit brigade can have their day in the limelight.  Don't buy it.

Filed under: Auditing, Other blogs with tags audit liability, audit quality, big 4, francine mckenna, idiots, ifrs, lawyers, too big to fail
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So the longest and daftest moniker in world accountancy is to be no more.  PricewaterhouseCoopers are ditching their name, for branding purposes at least, in favour of what everyone calls them already - PwC.

Except no, it's going to be 'pwc' in all lower case and with a daft splodge described by Andrew Brooks as a print snafu.

Anyway, this is a good a time as any to remember the fiasco when PwC, er pwc, saw the website to promote the sale of their consultancy business cybersquatted in the UK.  The animation that's referred to included, if my slightly hazy memory serves me correctly, a farmyard animal.

Filed under: Auditing, Other blogs with tags andrew brooks, donkey, pricewaterhousecoopers
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India is raising its interest rates aggressively to curb inflation.

The perceived 'wisdom' continues to be that deflation, not inflation, is  the problem.  So in the UK we persist with a strategy of low interest rates, even though inflation has remained above the target for God knows how long.  Like a drunk perpetually making excuses for himself, Mervyn King has blamed the stubbornly high inflation on a litany of one-off factors.

When will we accept that our experts are wrong and that it's time for some of India's medicine?

Filed under: Current issues, Economics with tags india, inflation, interest rates, wall street journal
4085No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F09%2Findiaflation%2FIndiaflation2010-09-17+08%3A13%3A25Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4085

Via Twitter, we find the following in the Tax Journal:

The Chancellor has told MPs that they will be ‘pretty staggered’ by new, independent estimates of the tax gap.

‘Labour members seem to forget that their people were in power for 13 years. We have inherited this situation, and we will be taking steps to reduce tax avoidance, including tax avoidance by the richest people in our society, so that everyone makes a contribution,’ George Osborne said during a Commons debate on public expenditure cuts.

The Guardian reported that the figures would be published by the Office of National Statistics this week.

Osborne added: ‘We are putting in place the measures that I believe will improve HMRC and enable it to focus on reducing that tax gap.’

Ritchie will, for the second time in a day, be pleased as punch.  Yet I suspect this isn't the knockout punch he's hoping for.  This is probably a bit of Osborne politicking.  It's good to put the boot in to your predecessors, especially over something as emotive as tax.  If he can suggest that the last lot left unpaid tax with vested interests, it makes them look bad and him look good.  It also lets him keep the pressure up on big business, in case they get any ideas about how a Conservative government might treat them.

And that remains true, even if the tax lying in the supposed gap never gets paid (because it doesn't exist).  In the meantime, Ritchie is most welcome to address properly the criticisms of his prior work on the tax gap, such as his complete abject failure to account for double tax relief, or his gross overestimation of the tax gap that arises from the black economy.

Filed under: Politics, Taxation with tags conservatives, double taxation, george osborne, idiots, richard murphy, tax avoidance
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Ritchie is as pleased as punch because one of his blog entries from last year has been included in a publication:

Page 27 is a case study. It’s this blog, by me.

You might like to answer the questions the authors raise:

1. Murphy comments on the different theories of accounting under IFRS and UK GAAP. What are the differences and why is IFRS deemed inappropriate for local authorities?

2. based upon the arguments by Murphy should we have different accounting systems? For local authorities? For different countries?

3. What approach is Murphy using when he addresses the question of accounting for local authorities?

4. Why do you think IFRS has been adopted for local authorities? Is it scientific or unscientific?

From blog to accounting theory.

Critics please note.

Indeed I do.  This reads not so much as an endorsement of Murphy's burblings but as a comprehension test.  In particular, question 3 is more about his approach than it is about whether his arguments are valid.  Question 3 could indeed be restated "Is Murphy's argument valid?"

The answer, invariably, is no.

No doubt Wiley think there's lots to discuss in this post, as there are in many of his posts.  But they're not agreeing with him here, far from it.

Filed under: Accounting 101, Other blogs with tags idiots, ifrs, public sector, pwned, richard murphy, uk gaap, wiley
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Meantime, there's an interesting issue of the occasional "Letter from Washington" series from the Henry Jackson Society.  Written by Lawrence J. Haas, former Communications Director to Al Gore, it bemoans the inability of the US government to find a path to fiscal sustainability.  It sets out the reasons why a balanced budget in the US is unlikely in the foreseeable future.

It contains the following gem:

In Washington, policymakers raise revenues in a few major ways (e.g., social insurance taxes, personal and corporate income taxes) and spend the money mostly on a few key programs (e.g. Social Security, Medicare, Medicaid, and defense). The road to fiscal sustainability runs through those revenue sources and spending programs.

This is true in the UK too.  Because we spend so much money on welfare, it's ludicrous to suppose that the budget can be balanced without affecting it at all.

Filed under: Economics, Taxation with tags deficit, henry jackson society, lawrence j haas, tuc
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The TUC has published a report entitled "Where the money goes: How we benefit from public services".  It's being bigged up in the media and at the TUC conference as evidence that those wicked Tory cuts are being aimed deliberately at the poor.

I don't agree.  The report is riddled with errors and statistical blunders and, frankly, isn't worth the paper it's written on.

First up, it's sort of obvious that the welfare state, if targeted properly, should give more to the most needy and less to the better off.  Therefore, any cuts to the welfare state - if they're to raise any amount of money at all - are inevitably going to affect the poor more than the rich.  That's virtually axiomatic.

Secondly, the TUC report claims that "people do not have an awareness of the value of public services they receive in return for the taxes they pay ¹."  However, due to the redistributionary nature of taxes, and the extensive welfare benefit system, many people do not pay taxes sufficient to fund the public services they receive.  So we don't have a system where people pay as they go; we have a system where some people pay more and a lot of people pay less in order that we can all enjoy public services, some of which are only available to those who haven't paid for them.  This is important, as the TUC is trying, erroneously, to equate paying tax with receiving services.  Lots of people receive services without paying tax.  This is why they get into a mess on page 12, where they are bewildered why there's a "collapse" of the link between paying tax and receiving services.  Of course there is - because some people pay so others can consume.  Small wonder there's a disconnect there.

Thirdly, on page 23, they state that the cash value of public services "show how much better off individuals are with the provision of publicly funded welfare services than they would be without them."  This is an appalling blunder.  Because they're comparing post-tax income with post-tax income plus public services.  Duh, of course you're better off after you've got some of your money back than you are beforehand.  To really be able to make this case, they need to analyse post-tax income plus public services with pre-tax income.  But that would undermine their argument that everyone benefits from public services.  Some people - the net payers - are most definitely not, at least not on this analysis.

The pre-tax/post-tax error is throughout this document, and it makes a real mockery of their argument.  As an example, their "Family 2", a family with income of £78k a year, apparently receive "value" worth £24,503, of 45.8% of their net income.  However, using the TUC's figures, we can see that they pay tax of £24,732 per year, so are net losers on the deal.

It gets worse.  Public services are costed at their tax-inclusive costs.  So, the cost of education includes the pre-tax cost of teachers.  So we're comparing the costs of the public sector including tax to the incomes of families after they've paid tax.  It's no surprise that the 'value' of the public sector seem high compared to the incomes of the people who benefit from it.

The biggest howler of all, though, is saved for the end.  The TUC report seeks to analyse who will lose from proposed spending cuts, showing that our Family 2 will "lose" £1,859 once those evil Tory cuts are imposed.  Yet a large proportion of the cuts are allocated to lower education benefits received by their daughter.  But, who actually believes she will receive a lower level of benefit?  She'll probably still go to college.  She'll probably still get a degree.  The cuts won't in fact be borne by her at all, but by lower salaries for teachers.  That's a different argument than the one the TUC is trying to make.

Similarly with housing benefit - the cuts won't, in the main, be borne by benefit recipients but by landlords who will have to decide whether to accept lower rents with their existing tenants or risk long vacancies.

There's not much of their argument left.  In short, this is a shoddy, erroneous analysis which doesn't deserve the coverage it has received in the national press.  Of course, Ritchie thinks it's great.

Filed under: Economics, Taxation with tags deficit, idiots, richard murphy, tuc, welfare benefits
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Ritchie's standing behind his flawed tax gap figures again:

Unsurprisingly as a result there are those who would like to suggest that I’ve got my calculations wrong.

I'd suggest that it's unsurprising because Ritchie's calculations are wrong.  I explain more here, but in short it's because he fails to recognise that the economy is boosted by illegal activity, and that a fair proportion of that boosted activity is taxed.  It's a fallacy to account for the illegal activity as entirely contributing to a tax gap without recognising that, without the gap, the overall economy (and with it the tax take) would also have been smaller.

It's fair to say that I don't share Ritchie's politics.  But that's irrelevant to why I criticise his workings.  They're just plain wrong, and they'd continue to be wrong even if I suffered a Road to Damascus conversion to communism while playing The Red Flag on the tin whistle.

Filed under: Other blogs, Taxation with tags idiots, richard murphy, tax evasion, vat
4038No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F09%2Fmore-tax-gap-calculation-flaws%2FMore+tax+gap+calculation+flaws2010-09-13+10%3A54%3A47Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4038

Ritchie witters on about the Last Night of the Proms.  Personally, while I love the Proms generally, you'd have to either kidnap me or bribe me with considerable amounts of untraceable money to convince me to even as much as watch it on TV.  Life's too short to watch the tired jingoistic crap that passes for much of the second half.

Still, whatever floats your boat, I guess.  But Ritchie's plain wrong on two points:

First – how much we owe to the BBC – and its public funding. What chance Sky would have ever created something so good?

Err, if you weren't so busy watching nationalistic music on tv, you might have noticed that many of the most critically acclaimed shows in recent years - The Sopranos, The Wire, and Mad Men -  were all created by private companies.  OK, so these aren't classical music concert series, but it's a stretch to give the BBC all the credit for the success of the Proms.  There is a market for classical music; although, ,if anything, it's crowded out by public sector activity.

And not everything the BBC does is great. Far from it.

Third – how incongruous the singing of ‘Land of hope and glory’ was.

That’s not what we live in. The ConDems have reduced us to a land of fear. Bankers to a land of shame.

‘Land of fear and shame’ it is then.

What a sorry state we’ve reached.

But there are ways out. Thankfully. And that’s what this blog is, in no small part about these days. Recreating hope when the ConDems have sought to eliminate all cause for it.

No, now we've shed 13 years of disastrous Labour rule, we finally do have hope.  Hope that we can see our great country put back on the right track, more fiscally responsible, more confident, more sustainable and happier.  That can only be achieved with a balanced budget with much lower costs and lower taxation.

Tax and spend simply doesn't work.  And with the government turning their back on the failed Labour experiment, we have a chance of Britain becoming Great again.

Filed under: Other blogs, Politics with tags bbc, idiots, proms, richard murphy
4032No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F09%2Fland-of-tax-and-more-tax%2FLand+of+tax+and+more+tax2010-09-13+10%3A35%3A56Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4032

Andrew Brown, a nice enough chap (I know him from way back), asks:

But is there any point in whining babies and toddlers attending Mass, if they can’t stay calm and not disturb other people? They gain nothing from the experience, and in any case don’t need to be there.

Of course there is.  We should tolerate whining babies and toddlers because, well, we were whining babies and toddlers ourselves once upon a time.  And the church hopes that some day these babies will grow up to be the next generation of churchgoers.  Without them, the church is finished.

And it's worse than that.  Brown admits that he stayed at home watching the baby while his wife went to church with his other children.  For many couples, stopping going to church because of a baby means that they never go again.  So as well as losing the next generation, the church risks losing some of the current generation too.  It's a price that simply isn't worth paying.  Let the babies cry.

Cultivating the next generation is a major focus for all membership organisations, including the professional accountancy institutes.  Facing a shrinking membership base as a result of the lack of any protection from competition for the services most accountants do or, indeed, any protection even of the term accountant, the accountancy bodies have started diversifying into new service offerings.  They've also looked to other countries as a source of growth.

Let's hope they succeed; if they don't, life for accountants will get decidedly uncomfortable - and expensive - in the years to come.

Filed under: Institutes, Other blogs with tags acca, andrew m brown, icaew, protection of term accountant, telegraph
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