My prediction for 2003 is that the UK will see an increase in the number of corporate failures due to a difficult economic and trading environment. However, these failures will in no sense have the features of an open Enron and will not give cause for concern that there is some systemic failure of UK accounting, auditing or corporate governance.
The profession, working with government and the regulatory bodies, needs to show real leadership and skill to restore confidence in the integrity of financial reporting, corporate governance and auditing after the spate of corporate scandals in the US which have plagued 2002.
We will soon see the final reports from the Derek Higgs Review and from the government's coordinating group on accounting and auditing. I expect both reports to contain good, workable proposals which will be welcomed by investors, the business community and the accountancy profession although, no doubt, there will be aspects of each that we are not in complete agreement about.
The institute council has already done much in recent months to ensure the UK is seen as having a fundamentally sound financial reporting system but, of course, there is always room for improvement. The institute has already introduced a number of measures in recent months to assist nonexecutive directors and to enhance auditor independence. Further refinements may well be necessary through 2003.
President's Page, page 120Chris Dickson Executive Counsel, Accountants' Joint Disciplinary Scheme
As I peer into the future, I see the report on the DTI's review of accounting regulation. This rejects government involvement in regulation and discipline, and finds little scope for further statutory underpinning. But it contains some challenging thoughts which give rise to debate within the profession during the year: are accountants really an homogeneous group, suitable for 'one size fits all' regulation; and should non-members of accountancy bodies contribute to the cost of regulating and disciplining those who are? Sharply-focused ahead, a vista of ordinary members of ICAEW, ICAS and ICAI opens up, good men and women doing their best to provide an excellent service to their clients. Their concern, in this post-Enron era, is with change for change's sake. They point to the regulatory machinery built up by their profession over the years, epitomised in the fine quality of the APB. Their 'take' on what they see? If it ain't broke, don't fix it!Ian Plaistowe Chairman, Auditing Practices Board
The European Commission should finalise in 2003 its proposal to have audits in the EU in 2005 conducted in accordance with International Standards on Auditing.
This will be a big step forward in internationalising the world's capital markets - but the UK will need to be careful that it does not lead to any decline in UK standards; at present several UK standards are 'better' than their international counterparts. Various bodies will publish proposals which will follow up to Auditing Practices Board's (APB) paper on aggressive earnings management which was published before the recent spate of audit horrors in the US.
While APB is busy improving its relevant standards, there is an urgent need for others to prepare guidance on matters which are not in APB's remit. For example, the review of the role of audit committees by the Financial Reporting Council has the opportunity to raise the quality of corporate governance substantially; the DTI's Company Law Review will be critical in setting the right tone for the OFR and financial reporting.
And the government's reviews of the implications of Enron and of the regulation of auditors should lead to more effective regulation of auditors.
It is going to be another busy year!David Brew Chief Executive, ICAS
2003 will be a watershed year for the accountancy profession as we reassert the core value of integrity of the chartered accountant. Monitored self-regulation will give way to independent public standard-setting on a statutory basis, possibly under a reformed Financial Reporting Council. This will require new, more transparent funding mechanisms based on the 'user pays' principle and backed by legislation. Audit could become unattractive if liability is not limited by law. Governance reviews will stress the key role of the audit committee in underpinning auditor independence, despite concerns that enhancing its role might compromise the UK's single-tier board structure. Tensions may arise with the EU if the SEC applies US legislation to foreign firms with a heavy hand. Some companies may delist if there is not full reciprocity between jurisdictions. The die will be cast for many years to come.Richard Post Director, Reed Accountancy Personnel
Accountancy recruitment will be crucial next year: accountancy has consistently been the number one skill shortage area throughout 2002. This offers excellent opportunities for 2003, and strong candidates will be at a premium. Our 2002 accountancy salary survey has shown salaries have risen at least in line with inflation, making the field attractive for graduates eager to move into a profession that offers good starting salaries, particularly if they plan to own property in London. Conversely, the growth of accountancy in the regions outside of the M25 may direct attention for vacancies away from the City. The faster growth of the counties, in comparison to the City, is something we expect to impact a great deal on 2003. As smaller and medium-sized companies look to move away from the high rents of London, this dispersion of accounting talent could cause some interesting effects.David Illingworth Deputy President, ICAEW
By the time I take over as president we all hope that the Enron debate will have calmed down a little. Nevertheless the debate will continue and we will have a leading role in bringing forward practical and workable solutions to enhance confidence in audit quality and corporate governance.
A key factor in restoring confidence in financial reporting is the adoption of international accounting standards. As professionals we need to make a serious push in 2003 if we are to be ready for 2005.
Early in 2003 Council will consider whether to proceed with our own compulsory Practice Assurance scheme. If they do it will be voted on by members at the annual meeting being held in June. One of my early tasks will be to ensure that if we do implement Practice Assurance it is in a sensible and sensitive way, with strong and effective marketing to sell the benefits of using a chartered accountant. 2003 is also likely to be the year when we address the thorny issue of compulsory professional development. The days of box ticking are fast disappearing and I want to help design a system that both helps members meet their career goals and keep their skills up to date. Getting these three things right will do much to enhance our reputation.Peter Jenkins Group Finance Director, Numerica Group plc
In his book The Road Ahead Bill Gates said: 'We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10'. However, who could have predicted the US accounting scandals and downfall of Andersen two years ago?
I think that the accountancy profession will continue to be dominated by the fallout from these events over the next year. In particular, the major audit firms may be forced to make structural changes in order to appease regulators. They, in turn, will vie with each other for supremacy, causing confusion for the regulated.
As a result, accountancy globalisation may not move as far forward as we might expect, particularly if there are any significant accounting scandals in companies which have adopted IAS (or UK GAAP).
I don't see the UK economy improving much and profits will be hard to come by. We will need some good news - perhaps England will beat Australia in a test match next year!Alan Gibson President, UK200 Group
The lack of governance that emerged in Enron at the end of 2001 has acted as a catalyst to the major accounting firms in the UK to float off their consultancy and outsourcing divisions in the current year with a view to deflecting similar legislation to Sarbanes Oxley recently put on the statute book in the US.
The accountancy profession in the UK will feel pleased to have come through unscathed from both its own internal review of independence in public company audits and an Office of Fair Trading enquiry on pricing.While there is little doubt that corporate governance will feature highly on the agenda for 2003 so long as the profession can point to the efficacy of its newly created Accountancy Foundation and soon to be adopted Practice Assurance scheme then it will be well armed to face the tribulations of the new year.
The practising accountant should be grateful after a year of financial scandals to be held still in such high esteem.Dr Martin Manuzi Director, ICAEW EU Office
2002 was the year of the European single currency. 2004 will be the year of enlargement and the European Constitution. 2007 will see the re-unification of the old continent - when Bulgaria and Romania bring the EU club up to 27 members. So where does that leave 2003? Simple: it will be the year of arguments over who pays, who receives and who decides in the European Union.
As is the norm in Brussels, everyone will fall out and inevitably then fall back into line. Take the euro: 2003 will see some EU countries rapped on the knuckles for failing to bring their deficits into line. But no one will withdraw from the eurozone. The sight of raw knuckles may even appeal to the UK as it sits its five question euro test.
The European accountancyprofession's own European 'timeline' is still to be mapped out, though the profession's already has its equivalent of the euro: harmonised accounting standards. And just like the EU, the profession's common currency is enough to set in train discussions over the role of existing national structures for years to come. The European Union chose former French president, Valéry Giscard d'Estaing, to write its new constitution. 2003 may see some prospective candidates emerging from the ranks of the European accountancy institutes to assume a similar constitutional role.Austin Mitchell MP
The big issue of 2003 is whether the Department of Trade and Industry will get up off its knees before the big bean counters and reform audit so that we don't get Enron/Worldcom/Andersen-type fiddles and disasters here. Up to now the DTI has given the big boys all they want. Limited liability? No problem. Don't want independent regulation? We'll certainly scrap our manifesto commitment to it in favour of the futile Foundation. Don't like a ban on the sale of other services to audit clients? We wouldn`t even dream of it.
Then came Enron, frantic action and Sarbanes-Oxley in the US. The DTI's immediate response was 'couldn't happen here', 'we've got higher standards','chaps regulating chaps is the best way'. The complacency exuded was so overwhelming I was surprised the Big Four didn't affiliate to the Labour Party. Or the boy scouts.
Gordon Brown stepped in and pushed Patricia Hewitt into a few words of concern, talking about things like rotation of auditors which the DTI has rejected so consistently in the past, and a 'review' of audit standards. Lord make us virtuous. But not yet, was the new approach.
It won't work. All the drivers and dodges which led to disaster in the US operate here. In Britain, scams and accountant creativity come to light in tougher trading conditions or a recession. Both are now with us. They'll reveal all the scams concealed by ever-escalating profits. So black holes appear in accounts, yesterday's wunderkind becomes today's fraudster and solid companies become new Marconis. Then the cry goes up from a few million shareholders 'where were the auditors?'
At that point government will have to take action by establishing a statutorily-based, independent regulator like the SEC, and banning the sale of other services to audit clients, which turns the audit into a loss leader to attract other business. It will have to stop shareholders being robbed by big share options and turn non-execs into a force for good, not a golf club reunion of the CEO's mates. All that will be difficult for New Labour which prefers being friends with big business. Yet as the black clouds gather it's an irresponsible government which doesn't look at the umbrella situation.Charles Tilley Chief Executive, CIMA
Ethics will continue to be at the top of our agenda in 2003. The accountancy profession must walk the talk and show itself to be robust, with an increased focus on integrity and transparency. This applies as much to accountants in business as to auditors.
Companies (and perhaps more importantly, investors) will realise that corporate governance is not just down to codes and the quality of people but also to the quality of management information and an effective decision-making process. At its core, this means improving the ability to deliver focused, timely and relevant management information to the right people in an open and transparent manner.
Higgs will echo CIMA's proposal for a principles-based code of practice for non-executive directors as an adjunct to the Combined Code. Share options will be charged to the profit and loss account even though there will be continuing debates about when and how they are charged. And companies will consider better designed options than the ones issued before.John McCuin Partner, AGN Shipleys
Like most accountancy practices in the South East, the majority of our clients are in the service sector. Although one or two areas have suffered, most have remained remarkably buoyant and avoided the difficulties faced by those in manufacturing. We are fortunate in that some of our niche areas, such as film and television, have stayed very positive throughout 2002.
Christmas could be a very good time for the high street but pretty bad for people in the banking and financial sectors with many redundancy programmes being announced. This, I fear, will permeate through to our service sector clients and 2003 will be more difficult. Having said that, our niche markets are looking good, we are investing in new business process technologies, and I also see a move of the larger SMEs from the Big Four to firms like ours for their compliance work.
I am confident that 2003 will be a positive year for our sector of the market.Mike Kiely Finance Director, UPS
With businesses across Europe likely to face increased media and shareholder scrutiny as they move into 2003, the need for more transparent accounting practices becomes more topical. According to the UPS Europe Business Monitor - an annual survey monitoring the insights of senior execs across Europe - issues of corporate governance, auditing and reputation have moved up the boardroom agenda and are here to stay. Our survey found that 58% of senior executives in Europe want to see the adoption of internationally harmonised accountancy regulations, with an equal number saying that auditing companies should be prevented from providing additional client services to the same company. Half said that auditing firms should be rotated, and just under half said that making senior managers accountable for accountancy errors would restore stakeholder confidence. Issues of corporate governance and reputation are not likely to disappear next year.Peter Mitchell Small Practitioners' Association
The primary concern dominating 2003 will be ensuring professionalism, integrity and ethics are practised by all qualified accountants in plcs, essential to improving public credibility following Enron and other US disasters plus worrying UK plc incidents recently reported of significant over-recorded sales and hidden costs.
Within ICAEW this improvement may be sought by refocusing proposals for Practice Assurance - currently directed towards general practitioners where the debate will rumble on - onto members in business where major failures occur damaging thousands of employees, pensioners and shareholders.
Managing economic conditions in 2003 - expected to remain gently deflationary with property prices stalling - will require downsizing in more plc businesses hence major accountancy firms; smaller accountancy practices will remain largely unaffected.
Availability weakens for professional indemnity insurance in a shrinking and hardening market - firms not protected by ring-fenced group schemes may anticipate further large premium increases.Mary Keegan Chairman, UK Accounting Standards Board
2003 will hopefully remove much uncertainty surrounding UK reporting: early in the year, a government decision on the use of EU-adopted International Accounting Standards other than for listed groups. The alternative is continued use of UK standards but for these to mirror the IASB's, except where strong reason dictates something different. The ASB has already started this 'convergence approach'. Using IAS-based standards requires legal changes. 2003 should see an early conclusion to European debates on modernising EU directives and then swift DTI action to update UK law. Hopefully, also, early action to modernise EU law on distributions: a solvency, rather than realised profit, test.
Most of all, we need to know what the accounting standards will be in 2005. This requires major effort by the IASB to complete its current agenda. It also needs action by European governments to demonstrate their support for the IASB, by EU adoption of all its new standards.Colin Reeves Director, Accountancy Foundation
I anticipate that 2003 will be a year when confidence in the profession begins to be restored in the eyes of the public. It is well to remember that the UK has not had an Enron and regulatory reforms will be announced soon to minimise this possibility. Improved corporate governance and greater clarity regarding auditor independence should help greatly.
However, I do have reservations about the UK economy over the coming months and the ability of some companies to withstand possible market pressures. If such a scenario occurs, I would be concerned if accountants and auditors were treated as scapegoats for those companies that are casualties of the trade cycle as opposed to any displaying accounting irregularities.
Accountancy is a global profession and in this regard I hope that the US acts sympathetically in dealing with foreign companies and accounting firms in respect of the Sarbanes Oxley Act and that the process of enlargement in the European Union does not hinder progress towards a single European capital market.Anthea Rose Chief Executive, ACCA
As ACCA approaches its centenary, what key issues face the profession? After a year of talking about regulation, government and the profession will face up to implementing solutions, with Sarbanes-Oxley setting the benchmark. I hope to see clear signals of convergence between US GAAP and IAS. Against a background of preparation for IAS in 2005, the expensing of share options may dominate the technical scene, as FRS17 did in 2002.
Draft UK company legislation will include a mandatory OFR and a new small companies regime. Small company issues may move up the agenda as business failures rise in response to interest rates. In the firms, restrictions on non-audit services and competition concerns will provide huge opportunities for the mid-tier.
ACCA's global reach, employer-friendly syllabus and innovative educational partnerships will enable it to go on attracting students in increasing numbers. For other bodies, financial pressures and falling student numbers may reawaken merger activity.Sir Andrew Likierman Head of Government Accounting Services
2003 will be an exciting time for accountancy in government. In April, control of government expenditure moves to an accruals basis. This follows the 2002 spending review which planned for 2003-5 and which was conducted for the first time on a full accruals basis. This marks the final stage of aligning accounting in government with the rest of the economy. Departments already produce accounts familiar to Accountancy readers - yes, they really do, complete with balance sheets, cash flow statements and much, much more. Indeed the UK is at the forefront of practice round the world. UK accountants can be proud of what their colleagues in government have achieved and we are striving for more. So, with this new information, I'm predicting an even more efficient and transparent central government in 2003. My wish - the full use of all the new information by departments, and informed use by those who, rightly, hold us to account.Francesca Lagerberg National Tax Director Smith and Williamson
As has been wisely said 'only predict things once they have happened' and we already know that National Insurance Contributions (NIC) will rise from April 2003. In particular there will be a 1% Class 1 NIC due from employees earning over £89 per week on all their earnings, in addition to the existing rates. This is the first time they will have had to pay some NIC on amounts above the upper earnings limit. Tax advisers will be kept busy considering various business and remuneration structures to lessen the tax pain.
Corporate tax reform and stamp duty modernisation are very much on the agenda but implementation may slip into 2004. Look out for some possible targeted inheritance tax measures in reaction to a recent case on inter-spousal transfers. The introduction of new tax credits with generous thresholds will grab a lot of headlines. Note that claims can only be backdated three months so delaying getting to grips with the new rules will cause financial loss.John Malthouse Chairman, ICAEW's General Practice Panel
The new Practice Society will get under way and will quickly climb to over 3,000 members. It will immediately tackle crucial issues affecting practitioners. There will be meaningful discussions with the professional indemnity insurers. Practice Assurance will come in and after a short while general practitioners will realise that it's a help and support, and the grumbling will die down.
Steps will come to fruition about removing unqualified competition for the very smallest firms.
There will be huge waves in the financial services industry and a steady movement of clients towards chartered accountancy practices. Regulation by government on business will be very significantly relaxed.
Tax and National Insurance rates will be eased. There will be a massive simplification of audit and accountancy standards, brought in by a government ever anxious to stimulate and support SMEs. All pigs will be kept watered and fed and ready to fly.Jeremy Newman Managing Partner, BDO Stoy Hayward
One of the key objectives for the accounting profession in 2003 must be the restoration of trust in the audit and the auditor. We hope that serious consideration will be given to the introduction of a new advanced qualification for auditors.
The Big Four will no doubt continue their pursuit of global clients. This will encourage ambitious growing businesses to seek auditors and advisers more suited to their needs.
Those firms that focus on meeting the needs of their clients and developing and recruiting quality people will be best placed to take advantage of market opportunities.
At BDO Stoy Hayward we will complete the creation of a single national firm, focused on delivering a full range of services to growing businesses from key financial centres and other strategic locations across the UK. The current financial year has started well, and we are confident that our continued investment in people and focus on clients will ensure we remain the firm of choice for growing businesses and ambitious individuals.Karel Van Hulle Head Of Company Law and Financial Information, European Commission
While 2002 produced an accounting revolution, with the adoption of the International Accounting Standards Regulation, 2003 is likely to become a year that will be dominated by audit regulatory issues. Will the EU be able to develop its own agenda and make it acceptable to the US? Will the regulatory dialogue that the Commission has started with the US authorities lead to an avoidance of conflicts and to real co-operation in the interest of all parties concerned? Will member states follow the EU's lead in this respect or will they prefer to develop their own agenda? 2003 will also see the IAS Regulation put into action through the official endorsement of existing IAS, with an increasingly important role to be played by EFRAG.
Corporate governance and company law will also figure highly on the EU's agenda.
Bringing back the confidence in capital markets will be a central feature of the EU's activities and initiatives in 2003.Prof. Geoffrey Whittington International Accounting Standards Board Member
The International Accounting Standards Board will substantially complete its set of standards for implementation in the group accounts of listed companies in the European Union from 2005 onwards.
The European Commission's regulatory process will complete its endorsement of the IASB's initial set of standards (I hope that the endorsement will be unqualified). The convergence process with the US Financial Accounting Standards Board (resulting from the Norwalk agreement of September 2002) will yield its first results, although much work will remain to be done before full convergence is achieved.
There will be a new chairman and a new chief accountant at the US Securities and Exchange Commission (I hope that they will be well disposed towards the use of international financial reporting standards by foreign registrants listing on US markets).
Finally, the public appetite for accounting standards will diminish, and the press will turn its attention to a new 'flavour of the month' (but I hope that the positive lessons to be learned from the accounting scandals of the last two years will not be forgotten).George Cox Director General, Institute of Directors
Our prediction for the 2003 economy (with a GDP growth target of 2.5%) has been constant for the last six months - and it's gratifying to see the Treasury at last falling into line with our view!
However, although there is broad consensus on the economic outlook, this is still predicted on events, of which conflict in Iraq currently overhangs everything. One event certain to take place is the Treasury's assessment of the 'five economic tests' for euro membership, due by June. The outcome however is less certain whether or not the government decides to call a referendum on the issue. It will obviously be of great interest to the business community. The balance between political will and economic reality will be interesting to see.
There is one final event that I can predict with confidence - the IoD's centenary, due to be celebrated in style with our convention at the Royal Albert Hall on 30 April. Speakers already lined up include Sir Richard Branson, Buzz Aldrin and Margaret Thatcher.
Join us there.