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Pan-European database on inspections of audit firms has been launched

UKSA welcomes this month’s launch of a common database on which European audit regulators will be able to study each other’s inspectors’ reports on the ten largest European audit firm networks: PwC, KPMG, Deloitte, EY, BDO, Grant Thornton, Nexia, Baker Tilly, Mazars and Moore Stephens. These are responsible for auditing ‘public interest entities’ (PIEs) -- banks, insurance companies and other companies of similar importance.

Inspections of audit firms of are performed periodically with the objective of improving the quality of audits. They generally include a review of the audit firm’s internal quality control procedures and a review of selected audits to test compliance with professional standards. This non-public database will enable inspectors’ findings to be exchanged between the 27 European countries involved, contribute to a consistent understanding of issues and help establish common approaches in addressing audit deficiencies.

This Europe-wide project was initiated by the European Audit Inspection Group established in 2011 whose website is Although of limited scope, the announcement is most welcome.

UKSA further welcomes recent evidence that PIEs are prepared to put their audits out to tender and break too-long-established auditor relationships. UKSA wants to see more substantial improvements in the conduct of audits and much better auditor accountability. Private investors have lost too much in recent years to have confidence in an unchanged audit process.

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Information Rights for Nominee Accounts

The UKSA policy team has been investigating use of sections 146/147 of the Companies Act. These enable investors using nominee accounts to receive information from the companies in which they invest, but only if the nominee account provider chooses to “nominate” the beneficial owner for this purpose. The great majority of stockbrokers don’t do this and UKSA is beginning to challenge their reticence.

Claims are sometimes made in the media that investors have the right to be nominated, but this isn’t so. It has even been suggested by those who advocate the nominee system for all purposes that the Act gives investors the right to “demand representation”, but this isn’t so either. Investors using nominee accounts are not in a position to demand anything: they are wholly dependent on what their stockbrokers are prepared to provide.

Information rights, if granted by your stockbroker, can give you, free of charge, everything except the right to vote and the legal rights of ownership. This is for main-listed companies only, not those on the AIM. UKSA thinks the provisions of the Act are not good enough (see the attached paper) and is now seeking improvements to the Act. An article in The Private Investor (November 2013) explains the first steps being taken in this direction.

INFORMATION RIGHTS : UK Shareholders’ Association Position Note

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A paper prepared by the UK Shareholders’ Association on the prudence concept in accounting has been published today. Please see the attached file to read the full paper.

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The Future of IFRS. UKSA Policy Group representative talks at European Parliament

Thanks to Dr Kamal and Mr Stolojan for arranging this meeting, and for giving me the chance to represent the views of investors. I am somewhat overawed by the experience and skills of my fellow panellists.

My background is that I am a member of the FCA, a former auditor, now working with UK Shareholders’ Association.

UKSA represents its members who are private shareholders in quoted companies, who directly own around 12% of the UK market. That was worth about 220bn euros recently. I have been working with and am today representing a group of major UK investment institutions who jointly manage something over 250bn Euros of investments.

As well as the Swedish equivalent of UK shareholders, the European grouping of such bodies – called Eurofinuse- has also now expressed support. Brief summaries of the views of both our UK coalition and of Eurofinuse are available for you if required.

We all support the idea of international accounting standards so long as they produce the right answer but we are worried. We think accounts should
- show a true and fair view
- be drawn up on a prudent basis
- report on the stewardship, by the directors, of the shareholders’ money

When accounts are drawn up this way they can
- improve economic stability
- underpin responsible corporate governance
- help to rein in excessive pay and incentivise the longer term view from management.
We think those advantages are clearly in the public interest.

The G20 group of nations in 2009 endorsed the aim of establishing a single set of high –quality global accounting standards. They believe that such standards will strengthen the financial system and reduce the prospect of similar crises occurring in future.
[ICAEW Paper “The future of iFRS” Nov 2012]

True and fair
The 4th Directive says ” ….. annual accounts must give a true and fair view of a company's assets and liabilities, financial position and profit or loss “. A concept, which from a UK viewpoint, started as long ago as the 1940s. It has never been precisely defined in English law as that law has recognised that how true and fair is arrived at may change. But it is in EU law and is supported by a number of cases, some of which are referred to below. It includes the idea of maintaining the capital of the company and ensuring that dividends are only paid out of “profits made”.[4th Directive].

IFRS, on the other hand, include unrealised profits- and these can be calculated on assumptions only- Mark to model- and this has required the UK ICAEW to issue guidance involving over 140 pages attempting to reconcile IFRS to the law, both UK and EU. IFRS accounts, on the other hand, are not required to show the distributable profits.
Does this fit with the law?

Accounts did not give any warning of the financial crisis. One example was raised by the UK banking commission. The accounts of a bank called HBOS showed provisions of circa 300 mn euros for the year to 31 Dec 2007 …. . Around 28bn euros were written off in the next 4 years. I am sure there were some clues as to what was coming. But the accounts didn’t reflect those clues.

Why was this?
At least in part because accounting standards have progressively reduced the importance of the concept of prudence and eventually in the 2010 conceptual framework the IASB removed it completely. They said the concept- the Americans call it conservatism – was biased.

But is it?
I think we have become intellectually arrogant. We think we can measure risk. We allow banks to have “risk adjusted capital”, but the evidence shows that we cannot measure risk. Virtually no-one foresaw the crisis; no-one foresaw the interbank market coming to a halt. Lord Stevenson, chair of HBOS said it was unforeseeable. But it happened and demonstrates that we can never know what the future will bring.

Another example. The London Times newspaper recently commented that the statistical odds of gold dropping in price as steeply as it did were a once in 4700 plus years.
But it happened last month.

So, if realistically we cannot truly measure risk, what are we to do?
We need to return to the concept of prudence. I could argue that not having prudence was in itself a bias- a bias to optimism and a bias to the view that we are able to really measure risk.

Apart from the need to be prudent if we cannot measure risk, there is also the legal requirement to account on a prudent basis. …valuation must be made on a prudent basis, and in particular: (aa) only profits made at the balance sheet date may be included,” (4th Directive). These requirements have been reinforced by several court cases such as Tomberger [1996] DE+ES Bauunternehmung[1999[ and Banque Internationale pour l’Afrique Orientale [2003] . Unfortunately the Conceptual Framework of the IASB has dropped this concept. The IASB has said, through its chairman Hans Hoogervorst in a speech to the London School of Economics last November that “The Conceptual Framework is the foundation of our standards.” So how can Standards which do not include prudence comply with EU law?

The IASB defines the objective of its standards as being to produce “information useful to existing and potential investors, lenders and other creditors…”. (IASB Conceptual Framework para OB1). There is no reference to a true and fair view nor to the idea of stewardship. As largely long term investors- there can be few investors with a longer term view than those managing pension savings for example-we want accounts to demonstrate how our money had been used. We call that stewardship.

This view has been supported recently by Standard Life, a large UK investment manager, in a letter to the Financial Times. Guy Jubb, the signatory is, I think, here today.

So what is to be done?

We need in the EU to consider whether the current IFRS
- help or hinder economic stability
- now comply with EU requirements as to the showing of a true and fair view

and to

- ensure that the standards which are endorsed for EU use produce the prudent view that the Directives require.

We can then hope that the next financial crisis will be flagged up sooner giving chance for action to be taken to minimise or even avoid some of the enormous financial and social consequences of the present crisis which we have seen, and still see across Europe, today.

Roger A Collinge
At the European Parliament on 8th May 2013

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Alternative Investments and Gold

With the ongoing financial problems in the World it is a more than usually uncertain time for investors. The problems in the Euro-zone continue with new crises flaring up every few months. Developed countries seem unable to reduce debt to comfortable levels. The banks continue to be dysfunctional. The UK and many other countries seem to be permanently in danger of slipping back into recession. The bond markets offer the lowest yields ever and may implode at any time. Meanwhile we are threatened simultaneously by both deflation and inflation and cash in any form is a wasting asset, with the major nations competing to destroy their fiat currencies. One of the few bright spots are the equity markets which have done very well so far in the year to date, with the S&P500 up 11%, the FTSE All share up 10% and the Nikkei up an astonishing 34%. But for how long, with some 'experts' forecasting an imminent pull back. However other equally wise 'experts' are saying a wall of homeless cash is going to prop up prices well into into 2014 and maybe beyond..

So where is the bewildered investor to invest? If you have bonds or shares should you hold or sell the lot, or maybe just sell a few or even buy some more? But if you do sell or have some spare cash already where are you going to put it?

Not surprising some investors are looking at alternative investments to spread their risk and preserve and enhance their capital. 'Alternatives' are a very diverse group but the common theme is to buy something tangible and possibly fungible. They range from the downright scary such as ostrich farms and repossessed property in Bradford or Detroit to relatively conservative assets such as farm or forestry land or high value collectibles. Some are obvious scams but many are bona fide and can produce good returns, often independently of stock market cycles. All come with a caveat emptor stamp; just as much as buying shares or possibly more as most are unregulated.

One alternative investment which stands apart from the rest is gold. Its detractors dismiss it as a commodity metal, which doesn’t pay a return and is consequently impossible to value and has very little use apart from jewellery. Its fans however call it the ultimate tangible form of money, an insurance against the inevitable worthlessness of all fiat currencies. For those who incline to the latter view there are several ways of owning gold. The most straightforward is to buy a few coins and hide them under the bed. However that has its obvious drawbacks. Another way used to be to ask your bank to buy some and keep it for you. We all know how safe the banks are! It simply became part of the banks balance sheets. More recently since the advent of ETFs in the 90's it became possible to buy gold and other precious metals indirectly in a convenient cheap and liquid way without the security problems of holding bullion. There were and still are also unit trusts and investment trusts investing in gold. But for conservative investors non of the above is satisfactory as the underlying gold is not legally owned by the beneficiary, similarly to shares in nominee accounts. The solution to this problem is to own gold through a managed account in a vault but with the investors name on the bars, a bit like holding fine wine in a bonded warehouse with your name on the box. A Uk based company which offers this service is Bullion Vault . Then finally there are gold mining shares, which have some advantages and some disadvantages compared with holding bullion.

Gold is particularly interesting right now as it has crashed by 21% from its peak after a decade long bull run, from the 'Brown bottom' of $250 in 1999 to its peak of $1883 in 2011. As of 27th April it has recovered 4% of this loss with a fierce battle going on between speculators and institutions who are selling cyber gold and several central banks together with millions of Asians who are buying bullion. Will this be the last chance to buy some gold before it hits $2000 or is the end of the 'barbaric' metal as a serious investment?

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April 2013

Housebuilder Persimmon’s AGM takes place at York Racecourse on Thursday, April 18, but for the company’s management this will be no gamble. Last September, shareholders were persuaded to approve what the board has called a ‘long term incentive plan’ and now the remuneration report reveals that virtually all available grants have been made. UKSA’s detailed analysis of the LTIP shows that the so-called incentive is almost non-existent and these grants are little better than gifts.

One third of the grants have been made to just four executive directors – one of whom will retire at the AGM. These include a ‘golden goodbye’ to the retiring CEO (worth £4m at the present market price of Persimmon’s shares), which makes nonsense of what is supposedly a long term incentive scheme. Furthermore, although the report follows mandatory guidelines, the full cost of the scheme is hidden from those shareholders not prepared to undertake laborious analysis, yet this is precisely what the institutional shareholders are now expected to do and in this instance appear, in the main, to have failed.

UKSA calls on Aberdeen Asset Managers, BlackRock Investment Management, Franklin Templeton Investments, Legal & General and other institutional investors who failed to stop the LTIP’s abuse of shareholder funds to vote now to reject Persimmon’s remuneration report.

The press release and letter to institutional shareholders are attached below, together with an analysis of the Persimmon's LTIP scheme by a member of UKSA's policy team and correspondence between UKSA and Persimmon Chairman Mr. Nicholas Wrigley.

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When will the government stop depriving investors of ownership rights?

March 12th was ‘Ownership Day’. This worthy initiative, hosted by parliament, was intended to encourage the active exercise of shareholder rights, by and on behalf of all investors in company shares. But one essential ingredient was missing. Savers investing through nominee accounts cannot enjoy the legal rights of ownership, because this was blocked by parliament when it passed the 2006 Companies Act.

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