Philippa Lamb: Hello and welcome to the ICAEW Insights podcasts with more news and analysis from the world of accountancy, business and finance. I’m Philippa Lamb. This time, we’re going to be hearing from the ICAEW technical and ethics support team on the year’s most challenging topics for finance professionals.
It is an uneasy time for business. Events at home and abroad are creating a turbulent trading background – and next year doesn’t look much brighter. Accountants are here to make sense of the noise and bring some much-needed stability. But who helps accountants when the answers aren’t clearcut? We’re joined by two members of the support team who do just that – David Stevens and Cerys Freemantle.
World events have moved quickly this year, not least after the invasion of Ukraine. The scramble to cut economic and financial ties with Russia is reshaping the global economic map and creating new responsibilities for financial professionals. ICAEW members have reported other challenges too, with activity spiking in some areas of financial services and questions jumping up about ethical obligations around conflicts of interest.
We’re eight months on now from the invasion of Ukraine; the situation and the implications for accountants and finance professionals continue to evolve. Can you give us an overview of the new rules, and the sanctions that have been introduced so far?
David Stevens: I’m going to go back to the beginning when this all started, in around February-March. The UK already had quite a well-developed sanctions regime in place, but the speed at which individuals and entities were then added to the various sanctions lists was incredibly challenging. And so we were already getting queries before a new primary legislation was announced that would change things even more.
Then in May, we had Liz Truss’s announcement that the UK was going to implement a ban on accounting services and business consulting services. And we were already getting questions then, literally within hours. It was very much, what’s this ban going to look like? Because a policy announcement is not the same as legislation. We had to wait until July to get the legislation that formulated this ban, which was effectively that persons mustn’t directly or indirectly provide accounting or business consulting services to a person connected with Russia. For individuals that meant ordinarily resident or located in [Russia], and for companies that meant incorporated or domiciled in [Russia]. There were questions then around what was meant by ‘accounting services’ and by ‘directly’ and ‘indirectly’.
Meanwhile, there are still more entities and more individuals being added to the sanctions list itself.
And then just a few days ago, 30 September, the government has announced a further ban which is going to include audit services, so the pace of change has been incredibly dramatic. Against this backdrop, you’ve had insurers and professional organisations like ICAEW, putting out their own guidance to be read alongside and in the context of the legislation. So it’s incredibly challenging.
PL: Obviously companies and individuals have had to divest from and cease dealings with Russia; that’s been easier for some than others. What are some of the key difficulties that you’ve been hearing about from members?
DS: Derisking is always a big challenge commercially and firms are having to use their judgement, in the absence perhaps of clear rules and clear guidance, and say, it’s easier for us to just avoid certain engagements and certain areas. That’s a challenge in itself. And of course, where firms of a certain size are deciding to walk away from certain engagements, that work then filters down to firms that might not unnecessarily have come across or be used to dealing with particular clients regularly.
So the challenge, in addition to concerns over the fast-moving legislative landscape and regulatory requirements, includes due diligence on new client approaches, and now ICAEW has an excellent screening service that can be used for that. But ultimately, firms that might not have had a well-developed understanding of the sanctions regime before now had to get on top of all the guidance coming out of government and all the guidance coming out of ICAEW.
We don’t generally crystal-ball gaze when we’re giving advice, except for when we do! And I think in this context we had to advise members – not just on the legislation, not just on the ethical considerations around reputation, but also on the direction of travel.
Cerys Freemantle: Something that’s jumped out at me is how quickly people have been having to make these decisions – whether it’s a decision to step away from the client, whether it’s a decision to take them on – our members are making these decisions very quickly and with a limited amount of information. They’re weighing up reputational risk, their professional indemnity insurance cover. And all of this is on top of everything that’s happened in the last couple of years already. So we’ve got very tired members having to make big decisions very quickly. I’ve had a lot of conversations about caba, who are there to offer support to members if they are struggling with distress – it just seems to go on and on from one horrible situation to the next.
PL: David, can you give us a sense of what your thought process is when this sort of query comes in?
DS: It’s a thought process that we have developed as a team through various discussions. Our starting point is whether the member is dealing with a sanctioned individual or a sanctioned entity, or whether the entity they are dealing with is owned or controlled by a sanctioned individual or entity, because that changes everything. OFSI, the Office of Financial Sanctions, has various guidance on this. There might be situations where a member has to report a sanctions breach, or consider going to OFSI for a licence. And as we’ve said, a lot of members have not necessarily been geared up to deal with this sort of thing before.
Assuming the member is not dealing with a sanctioned individual or entity, they need to consider whether the work they’re doing is covered by the ban on accounting services. And we know that tax has been and remains carved out of that. Everything’s changed. Audit was previously excluded from the ban, but we understand that it’s now the government’s intention that it will be banned as well; when that will become legislation, we don’t know. And considering whether the work is covered by the ban or not requires not only an understanding of the CPC code that dictates what comes within accounting services and what doesn’t (there’s guidance on the ICAEW website), but also the point around directly indirect services, which we still don’t have further guidance on.
Then there’s the insurance point, PII (professional indemnity insurance). Whether or not legislation allows you to do the work is irrelevant if your PII provider won’t insure you – because members can’t operate without ICAEW-compliant PII. A member can go through a long period of getting advice as to whether they can or can’t do something, only to find that their insurer won’t insure them anyway.
Members still have to consider their reputation – is the client they’re dealing with high profile, are they likely to get any media inquiries? On the vast majority of occasions we’re saying, to be absolutely certain, seek legal advice and keep your eye on the ICAEW Ukraine hub.
CF: I think one of the things that we can hopefully do here as well is share some links alongside the podcast to some of the key guidance that Dave’s referring to [see below]. There’s a set of guidance that we always work through when we’re on the phones with members, and we always end with reputational risk. The other thing that we can’t emphasise enough is speaking to professional indemnity insurers, because if you are making a fine judgement call as to whether this is a piece of work you can do or can’t do, should do or shouldn’t do, you want to make sure that you’re covered by your professional indemnity insurance – and there has been some nervousness in the market.
PL: In terms of insurers being reluctant to actually provide services?
CF: Reluctance in professional indemnity insurers to cover work where there’s a Russian individual or Russian company involved.
PL: Or the possibility presumably, as well?
CF: Yes, absolutely. The possibility is that it’s all a lot higher risk. So one of the key things we’ve been saying is that, if you do choose to take this work on, it is worth having that quick call to your insurer, just to make sure that the work you’re doing will be covered. Hopefully we’re never going to need our professional indemnity insurance, but we want to make sure that it’s there for us.
PL: I know the phones at the helpdesk have also been ringing with queries about mergers and acquisitions. That whole sector went really quiet during the pandemic but have you seen activity picking up there?
CF: On the lines our views are always a little bit delayed because we tend to be talking to the accountants and a lot of the people who phone us are in practice rather than in industry. So a lot of the time, they’re dealing with something that happened several months in advance. And often the first time they hear about it is when the statutory accounts are being prepared. So it may have happened a few months ago, then the stats accounts are needed. And that’s when they phone us to ask for help. So I think we can be a little bit delayed in seeing it. But we’re certainly seeing that uptick now. A lot has been going on. I think sometimes you see, or you get the feeling, that the commercial decision has been made and now we’re tidying up the statutory appearance later. A lot of accountants aren’t consulted about that. So they’re going back and unpicking transactions that are already done and dusted, and sometimes having to talk to clients about presentation in the statutory accounts, which may not be what the client was expecting, because they were making a commercial decision. So they haven’t necessarily gone there in terms of what it’s going to look like.
DS: There’s definitely a sense of accountants sometimes being dropped in it a little bit, because it’s the eleventh hour and the client comes along saying: “We’ve done this wonderful reorganisation during the year. And now can you tell us how we’re actually supposed to account for it?” But yes, it definitely seems to have picked up again. During the pandemic, and during lockdowns, a lot of questions were on all the life support stuff – the Bounce Back Loans and the COVID support schemes that were coming out of government; the Coronavirus Job Retention Scheme grants and so forth. So we’ve almost moved from one period of triage to another; it’s just the different events that have prompted that.
PL: Are there particular difficulties members have with M&A work?
CF: I think it’s just the sheer quantity of potential outcomes and unpicking what the transaction really looked like. You hear a lot of terms such as: “There was a transfer.” That’s one of those terms that covers a multitude of sins. So the first thing we’re having to do is ask: “When you say transfer, was it a gift? Was it a sale? If it was a sale, what was the consideration? Have we got a loan? And so a lot of our initial work with the member is often trying to get through to the nuts and bolts of what the transaction really looked like. Then from that flows out all the different ways that we could be seeing it presented.
PL: Perhaps, Cerys, you could tell us about a real-time example that you’ve dealt with?
CF: The example that jumps to my mind is where you have, say, a new holding company being introduced over the top of a group. Now that’s a group reconstruction, so you immediately jump to merger accounting, which is our way of doing the consolidation there. Then when you look at FRS 102, and the law around that, we need to have no change in control or ownership in broad terms. And in my example we had a small change in ownership. So it didn’t tick quite all the boxes for being able to use merger accounting. But when you look at some of the discussion and guidance in some of the guidance books, it’s generally accepted that a small change, an insignificant change, would still permit you to use merger accounting because to all intents and purposes you’re ticking all the boxes that you need to do that. But then that leads you to the question of when is insignificant, insignificant? Is a 1% change in ownership insignificant? Or 5%? What about 15? That’s where you see different opinions and different guidance books. We can lay out all of the different arguments to the members and sometimes it comes down to the exact situation and the judgement around why it was done in the first place. Because the why often informs the what. Ultimately, you end up with a judgement call. We sit there with the standard and the guidance books, saying: “Do you want to look at A or do you want to look at B? What fits your circumstances better?”
PL: How did that one play out?
CF: I think they had auditors involved as well, so they were forming their own opinion – an argument they were going to go back to the auditors with. Sometimes we are just the devil’s advocate, getting them ready for a conversation somewhere else. Those are the ones that we love and hate because you get to have a really interesting conversation with the member but ultimately, often it isn’t a binary answer – we can’t give them a black and white yes or no – we can only share our opinion.
PL: It sounds like a lot of the conversations you have with members are long, a lot of exploratory conversation before you get to the point of advising at all?
CF: It definitely depends on the topic. You get the odd call that is a quick yes or no, as long as you know where to look for it – a point of law or practice. But when you have things like we’ve been talking about today, they can be half-hour or 45-minute phone calls, and it can be more than one phone call if the first conversation raises more questions than it answers. Then the member can come back with more information so we can get to the final outcome.
DS: It’s a bit like a flowchart because you’ve got your various options as to how you prepare the acquirer’s accounts, and that has a knock-on to the consolidation process, which also has its own various options. So I think as Cerys was saying, we tend to have point A at the beginning and point B, at the end, and it’s unpicking everything that’s gone on in the middle that’s challenging for members. That’s where we can help. Sometimes we’ll get multiple phone calls; we’ll deal with a call, think it’s done and dusted, then the member will come back saying: “You’ll never guess what they’ve done now,” or: “This has just happened as well, on top of everything we spoke about. Does that change anything?” Sometimes the answer is yes, definitely.
CF: You get members saying: “I thought it was X, but now I’ve been back to the client and actually, Y happened. How does that change things?” It can be as simple as: “We thought they’d paid for it but actually, there’s a loan involved,” or “We thought they paid cash but actually, it was a share-for-share exchange.” With anything like that, you go back to the start and look at how it all flows through.
PL: You tend to come into M&A queries with a bit of a time lag. The UK economic forecast is not great right now, and it’s looking grey for next year. Are you expecting to see those M&A queries continuing?
CF: I think we could see it going on for a while, because we’ve got people looking at how to survive what’s going on at the moment. So we’re going to see some people planning exit strategies from their business or from their group – we’re going to see people having to divest – and that always leaves people an opportunity to invest; so I think it’s going to go on. One of the topics I’m expecting to start talking about a bit more is probably negative goodwill. Because even FRS 102 itself says if you think you’ve got goodwill, maybe go back and check you’ve done everything right. And you really do because it’s not expected. But it can come out of a genuine bargain purchase. And if we’re going to have people under duress, having to make a quick sale of a business, we could see some cheap deals going through, which then puts us in negative goodwill. It’s not a common thing. We often say, everybody else’s strange thing is our everyday. So that’s something I imagine we’ll probably be visiting more frequently in the future. Obviously, it’s not nice if people are selling because they’re in trouble.
PL: That takes us to insolvency. Presumably, you have an expectation that you’re going to be seeing a bit more of this?
DS: We get a number of queries from insolvency practitioners – normally on the ethics side. But the volume of queries around insolvency ethics is generally reflective of the volume of activity on insolvency, and are on a technical level, or on a legal level. For every sort of divestment, there’s usually an investment but that’s not always the case, of course, because of the challenging economic circumstances. I’ve certainly had some calls lately, where – usually – smaller companies just seem to be mothballed or just abandoned. A member has called in and said: “I’m supposed to be the registered office address for this company, but I can’t get hold of anyone. Everyone seems to have walked away from it and I’m not really sure what I need to do.”
PL: What advice can you give?
DS: I will ultimately say, it’s not our member’s place to change a company’s registered address. Certainly if they’re not getting anything from the company directors it can be difficult. Ultimately, the best thing they can do is get in touch with Companies House. If it’s clear that the client has disengaged from them but simply hasn’t provided a new registered office address, then I don’t think there’s any issue with the member going to Companies House and saying: “I am not the registered office any more. I can’t necessarily tell you who is, but it’s not me.” Because obviously members don’t want to remain on the Companies House registered office list for a company that isn’t their client any more.
PL: The responsibility of accountants to act ethically and in the public interest runs through everything we’ve been talking about. Right now, I imagine accountants may need to bring that professionalism to particularly difficult and emotionally charged situations?
DS: With some of the queries we’ve had lately, I’m reminded of that phrase: never work with children or animals – or family, apparently! You’ll get many queries around ethics and particular conflicts of interest where the member says: “I’ve got a company with two directors, husband and wife.” It’s a facepalm moment because I know what’s coming next. I think this is another impact of COVID-19 in many cases: I think that lockdown and so forth has perhaps put a strain on relationships. Then the member is in a situation where they have two directors – a husband on one side, a wife on the other – and we’ve got separation or divorce, usually not amicable; and we’re advising them on how best to navigate that situation.
CF: I think it’s hard enough being locked in your house with somebody when you’ve got completely separate jobs. If you’re locked in a house with somebody at all times, and your business is inextricably linked with the two of you as well, I can only imagine how hard that’s been. I think I have talked to more members recently who are dealing with that sort of situation. Generally our members want to help their clients – it’s another reason why they do what they do. So sometimes we have to point out where they can’t help and where they need to protect themselves. If you’ve got a dispute, a conflict, you often can’t help both parties, however much you’d like to. We have difficult conversations where you’ve got members that have been in business for a long time with clients they’ve had for a long time, and they’re having to draw a line and say, we need to step back from certain aspects here.
PL: It’s a particularly fraught environment, isn’t it, navigating interpersonal conflict, and there must be that potential for pressure to act unethically?
DS: You can wander across the line with nothing but good intentions, off the back of a long-term business relationship, because you’re used to dealing with the couple and the business when times were good and dometimes it’s very difficult to hit the reset switch. One of the first safeguards that we recommend is to sit down with them or send correspondence to both these parties saying: “I’m aware of what’s going on and this creates a very difficult situation. So this is the basis on which I’m comfortable doing business with you now that we know this is happening. Are you comfortable with that?” Ultimately the member then is drawing a line in the sand and saying: “This is how I want to do this going forward. If you’re not happy, then we can’t continue and unfortunately, I’m going to have to walk away.” And that might be the right answer.
I did have one case not that long ago with two directors, husband and wife, and they were splitting up; they were at loggerheads, the lawyers were involved. One of them was telling [our member] to give them all the information and not give the other person anything at all. Then they got the same thing from the other partner. But of course, directors are legally required to be able to access information about their company, so a member can’t legitimately restrict any director’s access to information about the company. This member was really struggling, getting bombarded daily with angry emails from each of these separating partners and their lawyers. Then one little nugget of information came out: the husband had resigned as a director and was now only a shareholder. All of a sudden, everything became much, much clearer because, of course, shareholders are not directly entitled to any information about the company – they have to go via the directors. What was quite a difficult conflict was then made much easier for the member because they were simply dealing with a single director and a single company. They could just go on dealing with the wife and bat away the rather aggressive requests for information coming from the husband’s lawyers, because he simply wasn’t entitled anymore, because he was no longer a director.
PL: So your advice to members is very much about making sure they protect themselves professionally in these situations, first and foremost.
CF: Sometimes you find it’s a conversation about a husband and wife, for instance, or brother and sister, who have fallen out. You do personal tax for both clients, so you could carry on doing both of those things and everyone’s happy for you to go forward. But you can’t unknow what you know, so if you learn something by working with one of these individuals which would impact on the advice that you’d give to the other individual, there’s a limit to how much you can put in a silo in your own head and not be influenced by that information. That’s where it can be easy to unwittingly wander into a situation where now you know that information, what can you do with it? That’s where we look at protecting the members because, sadly, even an amicable breakdown of a company or breakdown of a marriage can become less pleasant in the future. Sometimes – and this sounds awful – but we have to do the worst-case scenario: it could end up like this: where would you stand? How are you protecting yourself if that is the outcome?
PL: In these conflict situations, the advice presumably is much more nuanced – not binary? It’s a much more subtle conversation about possible scenarios and the way that things may play out. So the sort of guidance that you can offer must be particularly tricky?
DS: Yes, part of this is about explaining to the member that this might be the situation now, and there might be steps or safeguards that you can put in place now, that makes everything OK – now. But where is it going to end up? Are lawyers involved yet? That always adds an extra level of intensity, once you start getting angry letters from solicitors. But you’re absolutely right, you’re firmly in the grey area where the advice or safeguards depends entirely on the facts and circumstances and who’s involved. It might not necessarily be just a family conflict – there might be business partners in the background who have their own interests, and now they’re trying to get involved and push their agendas on the clients you’re dealing with who are already in conflict. It’s entirely bespoke advice based on the situation. Fortunately, many of our members don’t encounter these conflicts all the time, they might get them once in a blue moon. But for us, it’s almost daily.
CF: We are removed from the situation and free from the obvious stresses and, sometimes, upset in the situation. So we are that fresh pair of eyes; we’re a sounding board. Sometimes you have conversations with members where they know all the answers, they know exactly what they ought to be doing or could be doing. But having that sounding board, having that conversation, laying everything out in one place, can really help to give clarity and we can help to build a roadmap of what they are going to do going forward. Sometimes you just need that external perspective.
PL: Before we wrap this up, can you just remind people how they can get in touch with the help desk, and indeed access all the other resources that you produce?
CF: One of the easiest ways to reach us is the phone. The number is 01908 248 250. We’re also on web chat – there’s always somebody covering the web chat function, and that comes up on a lot of our help sheets, or you can visit ICAEW.com/webchat and that will automatically get you through to us.
PL: David, Cerys, thanks so much for telling us about all the advice on navigating those thorny topics. It sounds like a particularly challenging time to be an accountant so it’s great to know there is always support on offer.
You can catch the next Insights podcast in early November. The next Infocus podcast, where we’ll be focusing on cybercrime and accountancy, will air later this month.