KEY ACCOUNTING INDUSTRY INSIGHTS AND UPDATES – MAY 2023
1. Canada Targets Banks for Billions With Dividend Tax Change
Finance Minister Chrystia Freeland is planning to raise billions of dollars from banks and insurance companies by changing the treatment of dividends received by financial institutions from holding domestic shares as business income. It's expected to bring in C$3.2 billion ($2.3 billion) over five years, starting in 2024.
The new tax will apply to shares that are held as mark-to-market assets — not to dividends paid from one subsidiary to another. The measure won't affect shares held by financial institutions on behalf of clients.
Freeland's new budget also proposed changes to an "alternative minimum tax" that will apply to some Canadians earning more than C$300,000 annually. The hike in the special tax rate to 20.5%, from 15% — which comes with a fourfold increase in the income level at which it begins to apply - is expected to generate C$3 billion over five years. Read More
2. PCAOB fines Friedman $100K for overuse of Chinese auditors
The Public Company Accounting Oversight Board levied a $100,000 fine and censured Friedman LLP, a former Top 100 Firm that's now part of Marcum LLP, for failing to reasonably supervise unregistered Chinese firms during audits of 12 different public companies that operate in China. The PCAOB also found that Friedman violated its standards relating to due professional care, audit planning and quality control in connection with the audits.
The PCAOB found that Friedman allowed two unregistered accounting firms based in China — Peking Certified Public Accountants and Beijing Baijielai Financial Consulting Co. Limited — to play a substantial role in 12 of Friedman's audits. The unregistered firms either performed more than 20% of the total audit hours or incurred over 20% of total audit fees — the threshold for substantial role participation requiring a firm to register with the PCAOB — or both, and in many cases, participation by the unregistered firm far exceeded 20%. Read More
3. Corporate Transparency Act: New beneficial ownership reporting requirements
As a result of the Corporate Transparency Act of 2021, corporations, LLCs and other entities formed under state law (domestic reporting companies) or similar entities formed under foreign law and registered to do business in the U.S. (foreign reporting companies) must report their beneficial ownership to FinCEN — the Treasury Department's Financial Crimes Enforcement Network.
Beginning Jan. 1, 2024, disclosure is required for a beneficial owner — that is, any individual who directly or indirectly exercises "substantial control" over the reporting company, or who directly or indirectly owns or controls 25% or more of the "ownership interests" of the reporting company. Under the new reporting rules, 32.6 million small businesses will be legally obligated to comply on Jan. 1. Five million more will be added every following year, while large companies will mostly be exempt. Failure to do so can result in civil or criminal penalties. Read More
4. UK NFT Dropped Over Lack of Demand, Finance Minister Hunt Says
In April 2023, the Royal Mint was tasked by then-Finance Minister, now Prime Minister Rishi Sunak to create a non-fungible token which was much more popular then, but now, the government announced that it decided to drop the highly anticipated project.
"I think it's a question of demand," Hunt said. "I think we always want to be at the cutting edge in the U.K., in terms of new technology, but the world has changed significantly since then and we're not convinced that the demand is going to be there in the same way."
The NFT sector, which attracted lots of attention from celebrities and the media, peaked in January 2022 with $5 billion in global sales on some days, according to blockchain data tracker CryptoSlam. The most recent 24-hour sales data is just $44.3 million. Read More
5. Billtrust Surpasses $100 Billion in Payments Volume in 2022
Billtrust, a B2B accounts receivable (AR) automation and digital payments market leader, surpassed $100 billion in payments volume in 2022, a 35% year-over-year increase and a first for the company. In addition, Billtrust’s client base grew to exceed 2,400 customers globally, as Billtrust enabled them to present over 423 million bills to 13 million buyers.
Billtrust acquired Netherlands-based Order2Cash, a leading B2B order-to-cash platform provider. The acquisition, completed in February 2022, followed by the October 2021 purchase of iController broadened the company’s European footprint and global presence.
American Express Company announced a collaboration with Billtrust to enable suppliers to streamline acceptance of American Express virtual cards. Read More
6. Dubai tightens crypto scrutiny
Dubai's Virtual Assets Regulatory Authority is tightening scrutiny of crypto license seekers in the wake of last year's bankruptcy of digital-asset exchange FTX, requesting additional information on its ownership structure, governance and auditing procedures from applicants like Binance and all international companies seeking permits.
In late March, the U.S. Commodity Futures Trading Commission sued Binance and Zhao for allegedly violating derivatives regulations and accused the firm of having "sham" compliance procedures.
The regulator's public virtual-asset service provider register shows four companies in addition to Binance that hold licenses: Komainu, Hex Trust, GC Exchange and Crypto.com. They have Preparatory Minimum Viable Product permits, meaning they can't yet offer locally regulated digital-asset services in Dubai. Read More
7. EY Germany handed two-year ban after audit failures
Ernst & Young GmbH breached its professional duty when auditing the payments firm, Wirecard AG’s annual reports for 2016, 2017 and 2018, Germany's audit watchdog APAS said in a statement. It levied a fine of €500,000 ($542,330) on EY and banned it from new audit work for companies of "public interest," though it exempted contract renewals. There have also been commercial repercussions including decisions by Commerzbank AG, KfW and DWS Group to move business away from the firm.
Wirecard went bankrupt after acknowledging that €1.9 billion it had listed as cash probably didn't exist. Although the collapse also exposed severe shortcomings at supervisors and banks, EY's repeated approvals of the firm's annual reports has attracted strong criticism. Read More
8. Canada partners with Germany's Heidelberg to support net-zero cement plant
François-Philippe Champagne, Minister of Innovation, Science and Industry, along with Randy Boissonnault, Minister of Tourism and Associate Minister of Finance, announced that the Government of Canada has signed a partnership with Heidelberg Materials. This partnership will help support the company’s $1.36 billion project to build a full-scale carbon capture, utilization and storage (CCUS) system and a combined heat and power (CHP) system at its Edmonton cement facility. This CCUS system, a first of its kind in North America, would enable the company to produce carbon-neutral cement through the capture and compression of carbon dioxide (CO2) for subsequent transportation and permanent storage, reducing greenhouse gas emissions by up to 1 million tonnes annually. This is the equivalent of removing more than 300,000 passenger vehicles from the road annually. Read More
9. UK govt offers to sweeten package for Tata Steel UK
The UK government has proposed to revise the offer made to Tata Steel UK in January, wherein the steel-making company has been seeking a financial package of 1.5 billion pounds to execute its decarbonisation plans for the Port Talbot plant replacing the two blast furnaces at its factory that are nearing the end of their operational life. The UK government had made a £600-million package proposal for incentivizing green steel for two steel-making companies that operate in the country to which Tata Steel feels that it is quite less than expected and has conveyed its stand to the UK that it cannot continue with its British growth plans based on the offer last made. Tata Steel owns the UK's largest steelworks at Port Talbot in South Wales and employs around 8,000 people across all its operations in the country. Read More
10. Form 8940 now available for e-filing
The Internal Revenue Service issued a revised Form 8940, allowing tax-exempt organizations, charities, and nonexempt charitable trusts to file requests for miscellaneous determinations with the IRS electronically, as well as private foundations seeking to terminate their status as part of efforts to make more of its forms available for e-filing and lighten the paper load on the agency as well as improve service for the tax-exempt community.
The IRS said it will provide a 90-day grace period during which it will continue to accept paper versions of Form 8940 (Rev. 6-2011), but after this grace period ends, the Form 8940 has to be submitted electronically. Read More
11. EY calls off splitting audit and consulting
Ernst & Young's top leaders called off a planned breakup of the firm's consulting and audit practices after the U.S. affiliate decided not to take part, disrupting a nearly year-long struggle to build consensus for the historic shakeup of the Big Four accounting firm. The plan known as Project Everest, suffered repeated setbacks as partners disagreed over compensation and the resources needed to staff the remaining audit practice — a key sticking point for leaders of EY's US affiliate.
The thorny logistics of divvying up assets and legal liabilities and shoring up pension payments added to the challenge of separating the $45 billion operation across 75 different jurisdictions.
EY's U.S. business will instead embark on a $500 million cost-saving program over the next 12 months focusing on freeing up capital for investment and pursue governance reforms that had been put on hold. Read More
12. Accounting class-action settlements get bigger
The total value of settlements in securities class-action lawsuits involving accounting allegations soared in 2022, to $1.4 billion resulting in a 67% increase from $817 million in 2021, according to Cornerstone Research's "Accounting Class Action Filings and Settlements — 2022 Review and Analysis."
Driving the increase were a jump in the average settlement amount — from $24.7 million to $31.7 million — and a 30% increase in the number of settled cases — from 33 to 43. The report also noted that the median settlement amount jumped 91%, to $15.5 million.
This is a function of both unusually large issuer defendants in accounting cases settled in 2022, as well as an increase in the proxy for potential shareholder losses. Reflecting that, last year there were three "mega" accounting cases — those worth $100 million or more — versus only one in 2021. Cornerstone's report pointed out that accounting cases took longer to settle in 2022, averaging 3.7 years, against 3.2 years in 2021. Read More
13. Canadian Audit Quality Is Deteriorating and CPAB Is Concerned
Problematic audits are on the rise at Canada’s accounting firms, according to the industry’s national regulator, which found issues in a third of the audits it examined last year, up from 28 per cent in 2021.
The Canadian Public Accountability Board, which oversees firms that audit publicly traded companies, said the increase came largely from problems at small firms with few listed clients, but there were issues all the way up the food chain. CPAB said one unnamed member of the Big Four accounting firms had issues with 29 percent of its inspected audits and has been directed to develop a “quality action plan.”
In 2022, 13 audit firms were operating under CPAB enforcement actions for most of the year, up from nine in 2021. Read More
14. PMG spins out AI security company & April Tax Solutions launches tax filing offering
Big Four firm KPMG said that its incubator, KPMG Studios, has successfully spun off its very first startup: an AI security firm called Cranium, which was developed in collaboration with AI security experts in the firm's advisory practice.
April Tax Solutions announced the launch of April, an AI-embedded tax program which can estimate taxes, file when the time is right, and optimise tax strategies year-round. It is integrated with financial institutions, payroll providers and fintechs, including Acorns, Mercury Financial, B9 and Moves. Backed by Treasury, QED, Nyca Partners, Team8, Euclidean Capital and Atento Capital. The program's infrastructure is built within its partners' platforms, allowing tax considerations to be taken into account for activities within them, which is how april intends to make filing season easier by having already kept track of all the necessary information. Read More
15. KPMG fined £1.25M for Luceco audit by U.K. watchdog
KPMG LLP was fined £1.25 million ($1.56 million) by the U.K. audit watchdog over errors it made in its work on Luceco Plc's books in 2016.
An-ex KPMG employee, Stuart Smith, who was audit engagement partner for the Luceco audit, was also fined £50,000.
At the time of the audit failures, Luceco was the parent of a group of companies producing lighting products and wiring accessories, including a production and manufacturing company in China and two distribution companies in the U.K. The audit itis were compounded by the fact that KPMG and Smith had been aware of failures in previous years concerning the accuracy of the cost of inventory — one of the eight breaches they admitted, the Financial Reporting Council said. Read More
16. TIGTA gives IRS mixed reviews on tech
The Treasury Inspector General for Tax Administration (TIGTA) gave the IRS mixed reviews on the service's information technology program, as part of mandated evaluations under the IRS Restructuring and Reform Act of 1998.
At the same time, the report also pointed out several major issues with the IRS's program. For instance, in its review of the assessment and implementation of the media protection controls applicable to the Secure Access Digital Identity system (SADI), only one (11%) of nine media protection controls was implemented.
Further, the IRS is not remediating vulnerabilities on a timely basis in accordance with the IRM's required time frames. TIGTA also faulted the IRS for documentation and authorization issues when it came to information technology as well as not adequately monitoring insider threats. Read More
17. Housing market downturn among top risks to Canada's financial system -regulator
A potential downturn in Canada's housing market and adjusting to rapid increases in interest rates are among the biggest risks to Canada's financial system this fiscal year, as conveyed by The Office of the Superintendent of Financial Institutions. OSFI said it was ensuring that federally regulated financial institutions were alert to changing market conditions in its first annual risk outlook report for the year ending March 31, 2024.
The Bank of Canada raised rates at a record pace over the past year to tame inflation that touched a four-decade high in June. The bank has left its key policy rate at the 15-year high of 4.50% in its last two policy meetings to allow the effects of policy tightening to sink in.
OSFI will issue draft guidance on debt management measures designed to better control risk from high levels of consumer indebtedness and examine ways to increase credit quality and mortgage underwriting at federally regulated financial institutions. Read More
18. ‘Transformational change’: Biden’s industrial policy begins to bear fruit
The US appears poised for a manufacturing boom as companies tap into Biden administration subsidies with pledges to spend tens of billions of dollars on new projects.
The Chips Act and the Inflation Reduction Act, passed within days of each other last August, together include more than $400bn in tax credits, grants and loans designed to foster a domestic semiconductor industry and clean-tech manufacturing base. The package was aimed at countering China’s dominance in strategic sectors such as electric vehicles and recapturing jobs from abroad.
Taiwan Semiconductor Manufacturing Company’s $28bn expansion in Phoenix marks the largest investment to date, bringing the company’s total investment in its Arizona fabrication plants to $40bn, the biggest foreign direct investment project in US history. Read More
19. Business insolvencies at post-pandemic high resulting from inflation pain
A 16% leap in the number of corporate insolvencies (highest level for more than three years in March) follows warnings from business groups that rising costs have become unbearable, with many firms choosing to throw in the towel across England and Wales.
Commentators blamed a combination of higher interest rates and energy costs resulting in wider inflation as well as creditors' voluntary liquidations.
Higher taxes and employment costs are other drags for businesses to bear - on top of weaker demand from consumers and other businesses due to high inflation.
But a growing number of firms have encountered intolerable difficulties since costs surged during the reopening of the economy, when associated government support programmes ended. Read More