Response 9 - SME Alliance Limited

TASK: Key aspects of IFRS 19 (May 2024) are to be identified and evaluated before possible adoption (2027)- "[Draft] Endorsement Criteria Assessment"

UK Endorsement Board says:

“The objective of this Invitation to Comment is to obtain input from stakeholders on the endorsement and adoption of IFRS 19 Subsidiaries without Public Accountability: Disclosures, published by the International Accounting Standards Board (IASB) in May 2024. IFRS 19 is a new voluntary reduced disclosure standard. It has an effective date of 1 January 2027 with earlier application permitted (subject to the UKEB's adoption for use in the UK). The information collected from this Invitation to Comment is intended to help with the endorsement assessment."

“UK endorsement and adoption process The requirements for UK adoption are set out in Statutory Instrument 2019/685. The powers to formally adopt international accounting standards for use in the UK were delegated to the UK Endorsement Board in May 2021."

UK Endorsement Board provides the following references as input materials to those replying:

“The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019: https://www.legislation.gov.uk/uksi/2019/685/made The International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021: https://www.legislation.gov.uk/uksi/2021/609/contents/made These policies can be accessed from the footer in the UKEB website: https://www.endorsement-board.uk "

UK Endorsement Board has attempted to answer the question by itself. It tentatively concludes:

Assessment against endorsement criteria

Our draft assessment [tentatively] concludes that:

• IFRS 19 meets the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management, as required by SI 2019/685 (see Regulation 7(1)(c));
• application of IFRS 19 is not contrary to the principle that an entity's accounts must give a true and fair view as required by SI 2019/685 (see Regulation 7(1)(a)); and

that IFRS 19 is likely to be conducive to the long term public good in the UK, as required by SI 2019/685 (see Regulation 7(1)(b)), having considered:

• whether it will generally improve the quality of financial reporting;
• the costs and benefits that are likely to result from its use; and
• whether it is likely to have an adverse effect on the economy of the UK, including on economic growth.

Our draft assessment also concludes that IFRS 19 is not likely to lead to a significant change in accounting practice and, therefore, does not meet the criteria for a post-implementation review under Regulation 11 in SI 2019/685. Our assessment is set out in Sections 2–5 of the [Draft] ECA. "[BOLD is that of SMEA]

SME Alliance Limited (SMEA) thanks the SoS and the UK Endorsement Board for the invitation to contribute and particularly thanks the latter for its valiant efforts in this extremely complex area of enforcement of domestic and international law. Our members typically have over thirty years experience of public accountability themselves and additionally experienced the difficulties of enforcing any form of accountability from critical suppliers who are, in name at least, themselves publicly accountable.

KEY POINTS:

1Public good includes the discharge of (public) duty. It includes operation of statutory duty (to prepare accounts and comply with the Companies Acts); to publish same; to appoint an auditor; to report to members. As those operating in the critical supply chain to achieve this have moved their focus into being transaction facilitators, the void that is left behind has not been publicly addressed.

2It is only after things have visibly and dramatically "gone wrong", such as the raiding of the Maxwell pensioners' funds or Northern Rock, that an explanation is sought from key witnesses in Parliament. Northern Rock relied on assurance letters from those who were already the auditor, to raise funds to lend, beyond the levels of deposits it held. That should have rendered the auditor statute-barred from reporting. It is Parliament which sets this law and which expects it to be enforced particularly by those registered to report and carry public and statutory duty. It is the Law Commissioners (with the Parliamentary draftsman) who deal with the specifics. Northern Rock was first examined in December 2007 (further below).

Royal Charter the Institute of Chartered Accountants in England & Wales

Royal Charter of the 11th May 1880

Victoria by the Grace of God of the United Kingdom of Great Britain and Ireland Queen Defender of the Faith TO ALL TO WHOM THESE PRESENTS SHALL COME GREETING!

That the Profession of Public Accountants in England and Wales is a numerous one and their functions are of great and increasing importance in respect of their employment in the capacities of Liquidators acting in the winding-up of companies and of Receivers under decrees and of Trustees in bankruptcies or arrangements with creditors and in various positions of trust under Courts of Justice as also in the auditing of the accounts of public companies and of partnerships and otherwise.

https://publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/7120401.htm

3The whole notion of "subsidiaries without public accountability" is alien to UK law and public protection, reflected in filing in Companies House. "Public" is loaded term. It means that anyone can access the information, without even revealing who they are. It means the public is free to make its own decisions on an informed basis. It means that the person who has made the filing cannot be criticised for withholding it. It means that those using the court perversely and pre-emptively for gain can be stopped in their track.

3.1.Public protection by such public reporting is guaranteed by the state through the Companies Acts and ultimately by Parliament as voted in by the electorate. It is comparable to notices published by the London Gazette. That freedom to elicit information and make choices based on it, means public can protect their livelihood and estate and suppliers or potential suppliers can evaluate their risk. When banks or insures have unilaterally taken steps to de-rail an enterprise, creditors are prone to panic and ceasing supply. Where the accounts are complete to the standard of the parent (or notional UK parent, where foreign owned) the supply chain can see the situation and align themselves with the enterprise to prevent the bank or insurer from its predatory disruption. "Our liabilities are booked in the consolidated accounts of the {foreign) parent" does not pass muster. There are human rights issues. There are political issues with Treasury pitching in over the years to delay or block damages or consequential loss, to protect the banks and insurers including those in which they have held stakes. (Newsnight report referenced below concerning interest rate swaps, sold as insurance backed instruments with no downside.)

3.2.The consequences are seen as politically driven. They are predictable in a transaction driven environment. By way of example, in June 2021, Royal and Sun Alliance (RSA), quoted stalwart of the UK insurance market, was taken out by a Canadian predator (and minority Dane). All were told "business as usual". Later, the brand name was dropped, newcomers without pedigree were brought in, a hatchet has been applied to experienced engineering staff including in cloud, infrastructure, governance, risk. Junior staff replace pedigree and RSA experience. No anti-trust enforcement blocked the transaction. This is a classic example of a "subsidiary without public accountability". It is apparent the foreign owner sought to consolidate the goodwill, and thereafter run the rump for cash. Staff loyalty and experience has not been ascribed a value. Managers rotate. There is no public record of unpaid insurance claims from 2013, logged both in Horsham and Glasgow and known to auditors Deloitte/KPMG from August 2013 at least.

3.3.There should be full financial statements recording the events; unpaid admitted claims (including book kept by brokers); and indemnity to offload run-off business. Certainly with limited exceptions, the accounts should be similar to how they were pre acquisition. A subsidiary registered in Companies House, cannot, by definition, be without public accountability, particularly where it has been quoted. The customer base, and those with claims, must know they are secure. Public accountability includes full access to statutory information. It is impossible to proceed with IFRS 19 without reverting to Parliament.

EXAMPLE: Public Accountability: Treasury Select examining Northern Rock crash

https://publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/7120401.htm

Session 2007-08 Publications on the internet Treasury Committee Publications

CONTENTS

Examination of Witnesses

Witnesses: Mr E Gerald Corrigan, Managing Director and co-Chair of the Firmwide Risk Management Committee, Goldman Sachs; Lord Charles Aldington, Chairman, Deutsche Bank, London Branch; Mr Jeremy Palmer, Chairman and CEO, Europe, Middle East and Africa, UBS; and Mr William Mills, Chairman and Chief Executive of City Markets and Banking, Europe, Middle East and Africa, Citigroup, gave evidence.

Question Number 1149-1159 1160-1179 1180-1199 1200-1219 1220-1239 1240-1259 1260-1276

Examination of Witnesses

Witnesses: Mr Richard Sexton, UK Head of Assurance, and Mr John Hitchins, UK Banking and Capital Markets Leader, PricewaterhouseCoopers, gave evidence.

Question Number 1277-1279 1280-1299 1300-1319 1320-1339 1340-1359 1360-1378

Examination of Witnesses

Witnesses: Mr Chris Hitchen, Chairman of the National Association of Pension Funds and Executive Chairman of the Railways Pension Trustee Company; Mr Peter Montagnon, Director of Investment Affairs, Association of British Insurers, Mr Guy Sears, Director, Wholesale, Investment Management Association, and Mr David Pitt-Watson, Chairman, Hermes Equity Ownership Service, gave evidence.

Question Number 1379-1399 1400-1419 1420-1423

https://publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/7120409.htm

Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1277 - 1279)

TUESDAY 4 DECEMBER 2007 MR RICHARD SEXTON AND MR JOHN HITCHINS

Q1277 Chairman: Good morning and welcome to the session. Please introduce yourselves for the record. Mr Sexton: I am Richard Sexton, head of the UK Assurance practice of PricewaterhouseCoopers which includes our audit practice. Mr Hitchins: I am John Hitchins, a banking audit partner of PricewaterhouseCoopers. Q1278 Chairman: What are the aims of an auditor when auditing a company? Mr Sexton: The audit is performed in accordance with standards and regulations in the UK now issued predominantly by international bodies. It seeks to provide comfort about historical financial information as embodied within the financial statements included in a company's annual report. That is the role of the statutory audit. In the UK we do perform other work at times at the request of companies predominantly in connection with interim announcements. That is also performed in connection with guidance issued by the Auditing Practices Board in the UK. Q1279 Chairman: Does auditing a bank present any additional problems compared with a non-financial company? Mr Hitchins: The only extra requirement placed on us when auditing a bank is our statutory duty to report to the FSA if we become aware of anything that is material to the exercise of the FSA's functions.

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Examination of Witnesses (Questions 1280 - 1299)

TUESDAY 4 DECEMBER 2007 MR RICHARD SEXTON AND MR JOHN HITCHINS

Q1280 Chairman: In the independent auditor's report on Northern Rock's 2006 accounts you state that "you are not required to consider whether the Board's statements on internal control cover all risks and controls". Given what has happened to Northern Rock, do you think this is a possible area of reform of auditing standards? Mr Sexton: That statement is derived specifically from the combined code which requires us to look at controls over financial information, not the operational risks. I suspect that it would be a matter therefore for those responsible for the combined codes and others to consider that issue. At the moment we are explicitly not required to look at those aspects. Q1281 Mr Fallon: You are required to look at the operating and business review, are you not? Mr Sexton: It is correct that we have a duty to consider the operating and business review to ensure that it is not inconsistent with information presented on which we express an opinion in the financial statements. Q1282 Mr Fallon: But the operating and business review of Northern Rock had three or four paragraphs on liquidity risks, so you reviewed those paragraphs presumably? Mr Sexton: They would have been reviewed by the audit team as part of its duty. Q1283 Mr Fallon: Why is there nothing in the 2006 report or interim report pointing out the risk of illiquidity? Mr Sexton: The audit opinion in both the annual report and interim review covers the financial statements. The financial statements set out in very detailed note disclosure, as required under IFRS, information on the liquidity profile of Northern Rock. Q1284 Mr Fallon: Were you content with the liquidity risk? Mr Sexton: Our opinion explicitly covers the disclosures required under international financial reporting standards in connection with the historical information. Q1285 Mr Fallon: That does not answer my question. Were you content with the liquidity risk that Northern Rock was running? Mr Sexton: Our job is to look at the presented historical information and whether it represents fairly the actions of management and the board in managing the assets and liabilities of Northern Rock in this case. That is what is presented in the notes to the account on which we have expressed an opinion. Q1286 Mr Fallon: Northern Rock told us that at 30 June, 73% of its total liabilities were in wholesale funds. Excluding the main banks, no other mortgage lender comes anywhere near that. The nearest would be Alliance & Leicester at 55% or Bradford at 53%. Were you aware of the extent to which there was such a liability? Mr Sexton: I should say that I am not directly involved in the audit of Northern Rock. I oversee that audit and I have therefore regular contact with all of our audit partners, so the answers I give are in that context. The information presented by Northern Rock clearly set out its portfolio of mortgages. Yes, it is different from others. The accounting standard on which we base our opinion requires that information to be disclosed. Q1287 Mr Fallon: Did it not occur to you that this was something of an extreme business model, as the FSA chairman described it? Mr Sexton: The information required to be audited was thoroughly audited and presented in the financial statements for all to see. Q1288 Mr Fallon: Why did you approve the peculiar trust status given to Granite Finance whereby 70% of Northern Rock's mortgages were placed off-balance sheet in a separate vehicles? Mr Hitchins: First, I should make one correction. They are not placed off-balance sheet. You will see that all of those mortgages and the related Granite funding are disclosed in the annual report on Northern Rock's balance sheet. Securitisation is a normal structure in the market whereby notes are issued to note-holders who have recourse only to the pool of mortgages that backs those notes. They are placed into a special purpose vehicle which effectively ring-fences the pool of mortgages for the benefit of the note-holders. They are not taken off balance sheet because accounting standards still require that vehicle to be consolidated as if it was a subsidiary of Northern Rock. Overarching that is the Granite master trust that owns those vehicles and that is itself also part of the special purpose vehicle structure. That has nothing in it other than a small amount of income to cover its expenses. At the end of a securitisation structure it is normal to have a small amount of residual profit left in the vehicle company and typically that money is given to charity effectively in the form of a legacy. Q1289 Mr Fallon: Are you aware that a charity had been nominated without its knowledge to be the beneficiary? Mr Hitchins: We were not aware that the charity did not know, but in securitisation it is quite normal for the residue to be given to charities. In some cases it is just left as a charitable trust with the charity to be decided at the time the money is available; in other cases it is specified just as a testator in his will directs that an amount of money is to be given to a charity. There is no requirement to notify the charity. Q1290 Mr Fallon: Do you not think it is somewhat improper not to notify the charity? Mr Sexton: Neither of us was involved in the detail of that review. As auditors we were interested in whether the structure was properly consolidated into the balance sheet of Northern Rock and the assets and liabilities of those structures were properly reflected in the liquidity analysis. The status of the trust from a legal perspective is not a matter that is relevant to the presentation of those assets and liabilities properly in the financial statements. Q1291 Mr Fallon: Did PricewaterhouseCoopers advise on the two securitisations in the current year? Mr Sexton: We did not advise on the securitisations. The work of PricewaterhouseCoopers has been to provide comfort letters on historical information included in the prospectus offerings, as is normal for any such offering in the United Kingdom market and around the world. Q1292 Mr Fallon: Therefore, you were an adviser? Mr Sexton: We provided comfort letters as auditors and reporting accountants on information in a prospectus, in the same way that as auditors we provide short form reports on IPOs. Q1293 Mr Fallon: Last year you charged Northern Rock an audit fee of £500,000 in addition to non-audit fees of over £1.3 million. Do you think that ratio is appropriate? Mr Sexton: I think we have to be very careful about understanding the disclosure in the statutory accounts of our fees to Northern Rock because the manner in which we disclose them in buckets is mandated. The numbers you quote include: work as statutory auditor, the first number, for Northern Rock group; work as the statutory auditor of the subsidiaries which has to be disclosed separately; work as the statutory auditor in connection with the regulatory responsibilities that my colleague mentioned; and work that we provide as auditors in an audit-related sense on the offering circulars for securitisation, that is, comfort letters on the financial information in those circulars. That is normal practice and is required by the banks.¹ Q1294 Mr Fallon: The problem is that you were earning in fees three times as much from consultancy advice which further securitised Northern Rock's borrowing as you were getting for checking whether or not that securitisation was placing the organisation at risk. There was a conflict, was there not? Mr Sexton: With respect, I do not believe that it was three times our audit fees as statutory auditors. I believe the number is £1,100,000 if you include the three relevant disclosures, and the other fees are in the nature of audit-related activity providing audit and comfort letters on offer circulars which amount to £700,000. Q1295 Mr Fallon: The non-audit fees are listed at £1.3 million. Mr Sexton: As I have explained, the non-audit fees are a categorisation under UK law which includes the statutory audit responsibilities around subsidiaries and regulatory reporting in the case of a bank. Q1296 Mr Fallon: Do you see nothing wrong in the same firm doing the audit and checking whether the bank is liquid and at the same time charging consultancy fees for arranging securitisation that increases the risk of illiquidity? Mr Sexton: We did not charge fees for consulting on the creation of further securitisation. Our fees were in connection with very specific comfort letters in relation to historical financial information that appears in those documents. Our audit covers the historical financial information in the annual report. Q1297 Mr Fallon: Altogether last year you took fees of £1.8 million and probably £1 million or so already this year. The taxpayer has now had to lend Northern Rock £19 billion. Do you not think you should repay your fees to the taxpayer? Mr Sexton: All I can say is that fees were charged in connection with the work we performed and the annual report and accounts and the presentation of the historical information therein and subsequently in providing comfort in connection with securitisation offerings and in relation to specific financial information. Q1298 Mr Fallon: You have audited and provided comfort to the biggest banking disaster for 150 years. Mr Sexton: We have provided audit services in connection with auditing standards and guidance from the UK Auditing Standards Board and the International Auditing Standards Board and performed the duties required of statutory auditors. Q1299 Mr Todd: Have subsequent events caused you to revisit your audit practice in this particular bank; in other words, do you think there is something to be learnt from your contribution to this disaster? Mr Sexton: Perhaps I may answer that on a general basis and then ask my colleague to pick it up specifically in relation to the banking sector. The auditor is always cognisant of market developments in order to understand all of the information available to it to give those opinions that it does give on that historical financial information. We are reviewing and thinking about the market information now available to us and how that might influence the level of audit evidence we might require and the nature of our procedures in today's circumstances. 4 Ev 339-40 Back

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Examination of Witnesses (Questions 1300 - 1319)

TUESDAY 4 DECEMBER 2007 MR RICHARD SEXTON AND MR JOHN HITCHINS

Q1300 Mr Todd: Do you think this episode has enhanced your ability to win audit business in this particular sector? Mr Sexton: I think our ability to win business is dictated by our ability to deliver a quality audit in whatever market. Q1301 Mr Todd: Therefore, you think it has done no reputational damage at all? Mr Sexton: I believe that the audit process as judged by reference to the specifics of Northern Rock in the annual and interim reports—our opinion on the latter was signed on 25 July—discloses very accurate information about liquidity and other structures within Northern Rock. Q1302 Mr Todd: Financial institutions do not have to get their audit from you; there is a competitive marketplace here. You think it has made no difference and the market believes that you have performed a technical task to the best of our ability and you are a good provider of these services in future? Mr Sexton: I believe that to be the case. Q1303 Mr Todd: Good! I am glad you are so confident. I turn to events in April when the bank chose to alter its lending pattern, at least so it told us, to reduce the level of new loan activity. Did you have any role in suggesting that it might need to do that to reduce the level of risk? Mr Sexton: I am not involved in the detailed delivery of audit services to Northern Rock, but to the best of my knowledge, no. Q1304 Mr Todd: Mr Hitchins, do you have anything useful to add to that? Were you closer to this? Mr Hitchins: No. Q1305 Mr Todd: Looking at Granite, you have said that it is a small vehicle. To what extent did you audit the function of Granite? Did you see that as a material part of your audit of Northern Rock? Mr Sexton: The assets and liabilities that sit within the so-called Granite structure appear on the balance sheet of the group accounts and, therefore, they were subject to audit. Q1306 Mr Todd: Did you examine the risk that obviously was faced in the end by Northern Rock that it would not be able to securitise through the vehicle it chose and obviously that was a material factor in the eventual collapse of the bank? Was the scenario that securitisation opportunities would effectively dry up one that you examined? Mr Sexton: A specific requirement of auditing standards is to consider the work that management and the board have done in connection with their ability to continue as a going concern. The primary reason for that work is to ensure that the assets and liabilities are properly valued, but as part of that work we look at all the information available. Q1307 Mr Todd: You have not quite answered the question. Bearing in mind that the vehicle of Granite and the securitisation of loans were absolutely critical steps in the ongoing operation of Northern Rock, did you examine a circumstance in which this would cease to be a functioning alternative? Mr Sexton: The audit team would have considered the availability of continuing funding based on historical trends. Q1308 Mr Todd: Do you imply that because it had not happened before they did not think it was a risk worth considering, because it is an historical function looking back? Mr Sexton: That is not what I am implying or saying. I am saying that they would have considered many, many scenarios but they would have regard to historical performance and the ability to raise funds. It was in February that we issued our report. Q1309 Mr Todd: When eventually the Bank of England found itself having to support this institution, not surprisingly people wanted a clear picture of the assets and liabilities of the bank. It appeared that that picture was not readily available to any of the tripartite partners. Was the preparation of an appropriate picture of the assets and liabilities of Northern Rock at that point something in which you played any role? Mr Sexton: For the purposes of discussion with the Bank of England in September? Q1310 Mr Todd: Yes. Mr Sexton: I do not know the answer to that question. Q1311 Mr Todd: Could you ask your team? I am slightly surprised that you have not had more detailed conversations with the team involved in Northern Rock before coming here, because you have qualified a number of your responses by saying that you were not directly involved and you are not too sure exactly what happened. Mr Sexton: I believe I have said that I oversee the audit. I have spoken to the audit team about the key elements of our reporting dates, both the annual and interim reports. I cannot answer your very specific question in relation to that matter. Q1312 Mr Todd: Presumably, a critical issue in valuing the assets and liabilities of Northern Rock because it is a mortgage institution is the assumption about the future housing market in the UK. Is that reasonable? Mr Sexton: I would imagine that to be the case. Q1313 Mr Todd: Therefore, what assumptions did you have in place when you gave Northern Rock advice on valuing its loan book? Mr Sexton: I am slightly confused. The implication of your question is that we gave them advice on valuing their loan book. Q1314 Mr Todd: Presumably, you tested whatever its assumptions were to see whether or not they were reasonable? Mr Sexton: That is correct. In February as part of the going concern review for the annual report we would have looked at its forward-looking assumptions for the purposes of the balance sheet presentation, and for the purposes of our 25 July opinion we would have updated those again basically by reference to management discussion as required by the APB guidance notes. Mr Hitchins: It is important to bear in mind that the mortgages are in the balance sheet of Northern Rock at cost with the amortisation of relevant fees and expenses. The work that the auditors have to do is to assess whether or not the bank has made sufficient provision for impairment of the mortgages. In that context as one element we look at what assumptions management has made as to the future trend in UK house prices. Another element is the percentage of cover—the loan to value ratio—that the mortgage has. All of those factors are looked into. It is not really a valuation, but we are responsible for auditing management's impairment allowance. Q1315 Mr Todd: What was your take on that at the time you conducted it? Obviously, one of the current speculations is that Northern Rock's loan book may not be quite as resilient as it might have appeared in the past because of the expectations in the UK housing market. Mr Hitchins: I cannot comment on the details of it because, obviously, I did not do that piece of work myself, but in principle we signed a clean opinion in February and so we would have had a look at it and satisfied ourselves. Q1316 Mr Todd: I have been a bit frustrated by the absence of much detailed knowledge of what PwC actually did for Northern Rock during this audit process. Can you provide us with a summary of how you worked with Northern Rock on the assumptions of impairment that they produced? Mr Sexton: What we will more than happily do is provide you with a commentary on the nature of the information we sought that the company had put together in January for the purpose of its review. ² Q1317 Mr Todd: The other aspect I am interested in is your role of the September process in trying to sort out the valuation of Northern Rock and its assets and liabilities at that particular time when, very understandably, public authorities were wondering quite what they were getting themselves into. You said you were not too sure what happened then. Mr Sexton: I said I was unaware of the precise work that we might or might not have done. Q1318 Mr Todd: Will you also provide a note on that? Mr Sexton: Yes. ³ Q1319 Mr Love: It has been reported that the big six accountancy firms, if I may call them that, have produced a report on valuing bank holdings. The getting together of the big six is unprecedented. Why is this being done? Mr Sexton: It is not unprecedented. From time to time the so-called big six do get together when there is a matter of public interest. We feel that we can be helpful to the markets in general in encouraging people to think about particular issues. A short paper has been produced which reiterates largely the existing accounting standards in connection with the calculation and presentation of value-based assets. That is the paper to which you are alluding and the one to which the Financial Times article referred. 5 Ev 336-7 Back 6 Ev 341 Back

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Examination of Witnesses (Questions 1320 - 1339) TUESDAY 4 DECEMBER 2007

MR RICHARD SEXTON AND MR JOHN HITCHINS

Q1320 Mr Love: As I understand it, as reported that takes a very tough line on the use of market prices for making that valuation. We have just heard from four of the large institutions. Do market prices exist for the particular vehicles we are talking about? Mr Sexton: We have not gone through the audit period of 31 December 2007 which will undoubtedly be a challenging period in relation to obtaining appropriate evidence. The market values would have been looked at as at 31 December 2006. That market did exist. The models to which you refer and the nature of the paper refer to the fact that the first port of call ought to be market value. When market value does not exist or there is no reasonable liquid market one needs to look to models to establish what if any value can be placed on the assets. Mr Hitchins: The paper was intended to be a companion to a similar paper produced in the US under USGAAP. Basically, it put together into one paper all the references in the accounting literature on how to prepare fair value accounts for financial instruments. It therefore goes through the fair value hierarchy. If you do not have a quoted market price what do you then do? What other sources of evidence do you obtain? Q1321 Mr Love: One of your colleagues, Pauline Wallace of PwC, who is leading the production of this report has said that it was there not to provide guidance but context. What does she mean by that? Mr Sexton: Pauline Wallis is one of our technical specialists in that area in PwC. The intent of her comment is that it is there to alert the market as a whole to this being a significant issue and to reinforce the need for people to consider the valuations very carefully. Mr Hitchins: It is not intended to provide new interpretations of accounting standards because that is not the job of the big accounting firms. If that is needed it should be done by those who set accounting standards. Q1322 Mr Love: I am interested in the view expressed about the so-called model-based calculations. If you were here earlier and listened to the discussion you would have heard that there are obviously very different models, assumptions and calculations. To what extent will this paper bring consistency to that? Mr Sexton: We cannot dictate to the market or those who prepare those models what assumptions they should make. Our job is to make sure they have gone through a very thorough process and that their assumptions are reasonable and based on supportable information wherever available. Q1323 Mr Love: The obvious question to arise from that is whether you can find yourself auditing two different large financial institutions with very similar vehicles which have used very different assumptions and models and therefore have arrived at very different valuations and you then agree with their decisions on these matters? Mr Sexton: Whether or not we would agree with them is a matter for the future, but we can certainly come across the circumstance where different institutions use different models, as they do. That is absolutely the case. Q1324 Mr Love: How confident are you that by the use of this report we will get more confidence and trust in the marketplace? There is a lot of concern that there is not just a lack of transparency about the valuations but where there are valuations they differ so much that nobody can have any confidence in them. Do you think this will make a contribution towards restoring confidence? Mr Sexton: I think that if financial institutions ensure they provide appropriate and detailed disclosures where they use those models it will provide greater transparency so everybody can understand exactly what is going on. Q1325 Mr Love: You mentioned earlier in response to Mr Fallon that a lot of the work you do is not concerned with just standard auditing procedures; you are brought in by companies for a whole variety of interim auditing purposes. Why has there not been a large-scale move among financial institutions to bring in auditors to look at the valuations? There is a great deal of talk among all of them about the need for transparency but a total lack of preparedness to be transparent themselves. Why is that happening? Mr Sexton: The only way I can answer that is to refer to the amount of disclosure that is mandated under international financial reporting standards IAS 39 and IFRS 7 as recently reissued which are required to be put into the financial statements. The banks of their own accord will go about their valuations and employ a lot of people to do them. Q1326 Mr Love: I am minded to ask you for a value judgment about international financial accounting standards because that seems to be the response to all of these questions but I shall not do so. Have you been advising your clients on the need for transparency and suggesting to them that they might wish to undertake some interim auditing procedure in order to get out into the marketplace the best estimated true valuation of some of their vehicles? Mr Sexton: We have encouraged all of our audit teams to talk to their clients over the period about the need to look at the valuations of their assets and liabilities, be that in the banking or corporate environment. Q1327 Mr Love: As I understand it, for most firms the accounting year will end either at the end of this year or early next year. That means you will not get fully audited accounts for some considerable period. Are you giving your firms any advice on bringing forward valuations in order to get them into the marketplace? Mr Sexton: Perhaps I may answer that in two parts. First, you are absolutely correct that the tradition in the financial services world is to have a 31 December year end. Typically, they would issue preliminary results reasonably early in January through the month of January. Indeed, if one uses Northern Rock as an example its interim announcement in relation to 2006 was on 24 January and for most financial institutions the audited financial statements followed approximately a month later. There are also continuing obligations under regulation in the UK for all listed institutions to keep the market informed of material developments. That is outside the scope of the work of auditors, but it is a continuing obligation on those companies. Q1328 Jim Cousins: How much do you charge for writing a comfort letter? Mr Sexton: That depends very much on the nature and volume of the information required. Q1329 Jim Cousins: You appear to have received fees of £500,000 for auditing Northern Rock and £700,000 for writing comfort letters. How much per comfort letter did you charge? Mr Sexton: As I have explained, that depends entirely on the scope of the specific comfort letter. Q1330 Jim Cousins: How many comfort letters did you write? Mr Sexton: There were a number of comfort letters in 2007. Q1331 Jim Cousins: How many? Mr Sexton: No more than 10. Q1332 Jim Cousins: You charged £70,000 for a comfort letter. Therefore, there is more money in writing comfort letters than in auditing the company? Mr Sexton: When we are requested and required to provide things like comfort letters we provide that service to our clients. I am not sure we would look at it on the basis that there is more money in providing comfort letters to the client. That depends entirely on their level of activity in relation to those particular matters. Q1333 Jim Cousins: You have to agree that in the wider world it would seem pretty extraordinary that your fee for auditing the company was £500,000 and your fee for writing 10 comfort letters was £700,000. Mr Sexton: As I have explained, the £500,000 is for a statutory disclosure in connection with the fee for auditing the company Northern Rock Plc. There are additional subsidiary companies within Northern Rock that are subject to audit and regulatory responsibilities that fall on the company that must be fulfilled. If you take those numbers together what you see is that we charged fees of £1.1 million as statutory auditors to Northern Rock and £700,000 in connection with comfort letters and securitisation. Q1334 Jim Cousins: In your discussions with the FSA about Northern Rock what did you tell them that was material to your function as auditor? Mr Sexton: I do not have a transcript of the precise comments made to the FSA by the audit partner at the tripartite meeting. Q1335 Jim Cousins: Just give us the general flavour. When you talked to the FSA what sorts of things did you tell them? Mr Hitchins: The first point here is that which I referred to earlier in terms of our duty to report when we become aware of something that is material to the FSA. I am not aware of when or how we had those discussions with the FSA. Q1336 Jim Cousins: Did you report anything to the FSA about Northern Rock? Mr Sexton: We would have had normal conversations as part of tripartite meetings with the FSA, with Northern Rock management and the regulator. Q1337 Jim Cousins: Could you charge £300,000 for that? Mr Sexton: The work that we provide to the regulator as statutory auditor is mandated by the FSA and subject to the very competitive marketplace to which you have referred. Q1338 Jim Cousins: In the tripartite discussions that you had with the FSA, about which you have not really been able to tell us anything, where did your duties lie? Mr Hitchins: I do not know whether there was a tripartite meeting. They do not happen every year but only at the FSA's request. Q1339 Jim Cousins: Did any happen? Mr Hitchins: I do not know.

https://publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/7120413.htm

Examination of Witnesses (Questions 1340 - 1359) TUESDAY 4 DECEMBER 2007

MR RICHARD SEXTON AND MR JOHN HITCHINS

Q1340 Jim Cousins: Can you tell the Committee whether they did happen about Northern Rock? Mr Sexton: Yes. ⁴ Q1341 Jim Cousins: In your relationship with the FSA where do your duties lie? Do they lie to Northern Rock who are paying you £300,000 or to the FSA and the wider markets? Mr Hitchins: The £300,000 referred to was to report on regulatory returns to the FSA where we have a duty of care to both the company and FSA. Q1342 Jim Cousins: Could you spell out what your duty of care is to the FSA? Mr Hitchins: In terms of regulatory reporting, our duty of care is to make sure the information in the regulatory returns is consistent with the information we have audited. Q1343 Jim Cousins: Did you ever draw to the FSA's attention that in terms of assets and liabilities over three months Northern Rock's liabilities were four times its assets? Mr Hitchins: I do not know whether we specifically did so. Mr Sexton: That information is included in the regulatory returns and therefore is brought to the attention of the FSA. Q1344 Jim Cousins: It is up to the FSA to spot it? Mr Sexton: The FSA has a very well developed procedure. Q1345 Jim Cousins: You are not under any duty to point it out? Mr Sexton: Not explicitly, no. Q1346 Jim Cousins: What is your duty as auditor to the depositors? Mr Sexton: Our duty as statutory auditors to any UK plc is primarily to the shareholders; it is they with whom we contract through their board. Q147 Jim Cousins: So, you do not have any duty of care to depositors? Mr Sexton: We have no duty of care to depositors. Q1348 Jim Cousins: What are your fees so far for preparing the documents for the sale of Northern Rock? Mr Sexton: I do not know that number. It is an ongoing process and as the bid process proceeds as auditors we will almost certainly be involved in providing opinions on historical financial information predominantly in relation to periods already reported. Q1349 Jim Cousins: Perhaps you could let the Committee know in due course what those fees are. Mr Sexton: Those fees will be thoroughly disclosed in the annual report and the prospectus. Q1350 Jim Cousins: Can you let the Committee know what the fees are so far? Mr Sexton: Those fees will be thoroughly disclosed under regulatory requirements. Q1351 Jim Cousins: In preparing those documents obviously your duty is to the board of Northern Rock. Mr Sexton: The duty in preparing a prospectus-related document will be to the shareholders of the company—we contract with the company—and to the purchaser to the extent we contract with the purchaser. It will depend entirely on with whom we contract. Q1352 Jim Cousins: One of your former colleagues, Rosemary Radcliffe, was a director of Northern Rock and served on the audit committee. Mr Sexton: That is correct. Q1353 Jim Cousins: Did you raise any issues about that? Mr Sexton: We did. That was why she stood down from the audit committee in December 2006 and only after we had obtained explicit clearance with the regulators that her independence was not impaired, she having left our partnership in 2001, did she go back onto the audit committee.⁵ Q1354 Jim Cousins: Therefore, you sought the assurance of the regulators that it was perfectly proper for her to be on the audit committee and she went back onto that committee? Mr Sexton: She did. The specific arrangement is that she steps out of any discussion involving PricewaterhouseCoopers and its appointment to Northern Rock. Q1355 Jim Cousins: What about her involvement with the regulatory returns that you prepared? Mr Sexton: I am afraid that is a matter for the company. I do not know the answer to that. Mr Hitchins: We do not prepare the regulatory returns and effectively we provide an assurance opinion on them. Q1356 Jim Cousins: In your reporting to Northern Rock shareholders in the annual report you say that you are not required to consider whether the board's statements on internal control cover all risks or form an opinion on risk and control procedures. Do you think you should be required? Mr Sexton: The requirements of the combined code which drive the work we do and do not do have been subject to repeated review involving all market participants—regulators, companies and standard-setters—and the conclusion they have reached is that the best use of auditors is to focus upon financial reporting controls, which is what we do, not provide an overall opinion on internal control in the way the American environment has moved. Q1357 Jim Cousins: I was asking you, not them. Do you think it would be right for you as auditor to report on the risk and control procedures of the bank? Do you think you should be required to check out the board's statements on its internal controls on risks? Mr Sexton: What I am saying to you is that the regulators dictate the work we do as statutory auditors, so if your question is directed to us as statutory auditor I can answer only as to the nature of what the regulators might require us to do. Q1358 Jim Cousins: This is dissembling. I am asking for your view about this. Do you think it would be sensible if you were required to report on these risks? Either you do or do not. Mr Sexton: I think that firms like my own can add value when they look at all kinds of control. It is one of our areas of expertise, so we could certainly add value to companies if they requested us to do that work. Q1359 Jim Cousins: To be very clear about what you are saying, that would be additional to your work as auditor and it would be a specific new task for which you would charge an additional fee, presumably. Mr Sexton: If it were requested by the company outside statutory regulation that would be the case. 7 Ev 341 Back 8 Note by witness: For completeness, the regulator I was referring to in my reply was the Securities and Exchange Commission. Back

https://publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/7120414.htm

Examination of Witnesses (Questions 1360 - 1378) TUESDAY 4 DECEMBER 2007

MR RICHARD SEXTON AND MR JOHN HITCHINS

Q1360 Mr Brady: You have been very particular in responding to one or two colleagues to make clear that the proportion of your fee income derived from audit-related activity is higher than has been suggested. Do you think there is an acceptable and unacceptable ratio between those two things? Mr Sexton: The purpose of the disclosures of fee ratios is to ensure that users of financial statements are aware of the amount of work we do. We take independence incredibly seriously and look at every piece of work, whether or not it approaches some sort of magical ratio, to see if it can possibly impair our independence. We decline to act where we feel that would be the case. I do not believe that a cap in itself is the right way to look at things. You have to look at each individual piece of work and be comfortable that it has no impact on independence. Q1361 Mr Brady: In the past accounting period what has been the ratio of fees as between audit-related services and other services? Mr Sexton: In all companies? Q1362 Mr Brady: In Northern Rock? Mr Sexton: In Northern Rock it is disclosed in the accounts. The ratio in terms of our role as statutory auditor and the work we have to do is less than one to one. Q1363 Mr Brady: What ratio would give you cause for concern? Mr Sexton: I merely observe what the market analysis as a whole shows. If one looks at the FTSE100 analysis in the 12 months broadly to 31 December—you will appreciate that year ends are different for different companies—the ratio is of the order of 1.1 to one. Q1364 Mr Brady: Looking at some of the fee income that you have received for assurance services in relation to securitisation transactions, it appears to me that a significant amount of it was dependent upon the particular business model being pursued by Northern Rock. Mr Sexton: It was a fee income reactive to the transactions that they performed. Q1365 Mr Brady: So, the more securitisation transactions were performed the more letters of assurance you would expect to provide? Mr Sexton: That is correct, but under our ethical standards we cannot provide any kind of management input to a company to encourage it to perform one transaction or another. That is completely forbidden under our ethical standards. We cannot create a transaction flow in order to charge fees; it is purely a reaction to the level of transactions that a company may or may not choose to undertake. Q1366 Mr Brady: When Northern Rock decided to pursue a business model which led to a great expansion of certain types of transactions clearly that provided an increased flow of fee income for PwC. Mr Sexton: Northern Rock's entry into those transactions has that consequence given market practice that typically requires the audit firm to provide comfort. Q1367 Mr Brady: There seem to be some parallels between what happened to Northern Rock and the German bank Sachsen LB which in some ways was pursuing similar business models, particularly through its Irish subsidiary. There was a report in the Financial Times on 23 November which commented that KPMG had undertaken a review of the activities of Sachsen's Dublin-based market business. The FT reported that as early as 2005 KPMG had cautioned, presciently, that the Dublin strategy was based on the premise that markets never malfunctioned and it warned that the bank could be forced to sell assets if investors stopped buying the bonds being used to finance the various funds. Was KPMG able to see something that PwC could not? Mr Sexton: I am afraid I do not know on what facts KPMG based that report. Presumably, it would have been a private report commissioned by the bank or other parties. I do not know the information behind it or on what they would have based that conclusion. Q1368 Mr Brady: But in your dealings with Northern Rock or your statutory audit function there was no point which would have caused you to raise concerns of a similar nature as to whether or not the model was sustainable. Mr Sexton: I think that what you describe is a specific piece of work that KPMG as consultants to the bank were engaged to do on behalf of that institution. We cannot act as consultants to our audit clients. Q1369 Mr Brady: I accept that, but during the course of the work that you undertook in terms of your assessment of the bank's practices as statutory auditor there was nothing that led you to have concerns of a similar nature. Mr Sexton: For the purposes of looking at the annual accounts, the interim report and preparation of our opinions thereon we would have looked at all pertinent information, including the liquidity in the markets at those points. Mr Hitchins: I think it is important to remember how liquid those markets were in the first half of 2007. In May, June and July there was over $30 billion of residential mortgage-backed security issues. Q1370 Mr Brady: I accept that. My point however is that albeit KPMG may have been acting in a different capacity for Sachsen LB two years ago when there was significant liquidity in those markets it was cautioning that the strategy was based on the premise that markets never malfunctioned. Mr Sexton: As auditors clearly we have been conscious of the fact that for a number of years valuations have been rising in respect of various asset classes. Therefore, part of our work has been to focus carefully on the values based on the information that we have available at the time we do our work. That encompasses a whole load of facts. Our opinions at that moment in time are based on the best information available to us, so we would have been cognisant of that kind of issue for the purpose of looking at annual financial reports. Q1371 Mr Brady: You would have been cognisant of that presumably not only for the purposes of the financial report but also in relation to letters of assurance relating to securitisation transactions? Mr Sexton: During the first half of 2007, yes. The last securities issue that Northern Rock entered into of which I am aware was in June. Q1372 John Thurso: First, is it right that neither of you was involved in the audit of Northern Rock and neither of you is a client partner or anything like that? Mr Sexton: We are both client partners but not of Northern Rock. Q1373 John Thurso: In other words, you are not in the direct client relationship chain? Mr Sexton: That is correct. Q1374 John Thurso: Clearly, I understand that an audit is really about establishing the veracity of what has happened in the past rather more than about the sagacity of the actions that have been taken. I want to turn to the questions that my two colleagues have been asking about the relationship between the audit committee and risk committee and the auditors. It seems to me that the core failure of Northern Rock was the fact that the risk committee failed to see the risk of an illiquid market. When they came before us they said that it was unforeseeable. From the conversations that have just been going on it seems that others, including KPMG, foresaw it, so maybe it was foreseeable. Asking you not as this company's auditors but as serious practitioners in this field, what can be done to improve the performance of a risk committee of a financial institution and the way in which it interacts with an audit committee? One of the points which struck me was that the chairman of the risk committee and audit committee was the same person and mostly the same independent executives were involved. Is there anything that you would like to see done in that part of the mix of corporate governance? Mr Hitchins: Banks tend to have risk committees at different levels. There is usually a management risk committee that manages the business day to day. Many banks have now established risk oversight committees as committees of the board. The reason for their establishment is that the workload of audit committees has become too great for the committee itself to handle both audit and risk oversight. What one needs is a clear link and common membership, not exactly the same. Having common members is an important way to ensure that the audit committee is aware of what the risk committee is doing. Q1375 John Thurso: Would you think it a wise precaution to say that the risk committee chairman should not be the same individual as the audit committee chairman? Mr Hitchins: I do not believe that would necessarily be a weakness. Mr Sexton: One of the challenges is that there are pros and cons. Obviously, on the positive side they are aware of both aspects of that part of the management of the business, but, frankly, the downside is the amount of work involved to do both jobs. Therefore, one has to balance the two. As with all committees of the board, they are acting on behalf of the board as a whole, so there is a role for it. Q1376 John Thurso: My worry is that the audit committee's job is basically for the independent directors to ensure the audit is being done correctly and you as client partners have been given the opportunity to meet with the audit committee without any members of management. All of that is designed to try to make things as robust as possible. But if you have exactly the same chairman and people on the audit committee as are on the risk committee the chances are that the same problems can occur as between the audit committee and the full board. Mr Sexton: Having variation in committees and different people looking at different aspects is a good thing, and we see that today in many of our client companies. They will select their independent non-executive directors for specific skills and deploy those in particular ways. Mr Hitchins: Today some banks still have combined audit and risk committees. Q1377 Chairman: From the questions put by a number of my colleagues it appears they are not particularly satisfied that you have adhered to general principles, for example the issue of regulatory returns raised by Mr Cousins. In light of those comments I shall be writing to you for further details and I hope you can reply as quickly as possible, say, within a couple of weeks. ⁶ Mr Sexton: We will certainly do that. We did come in the spirit of answering questions on financial stability rather than Northern Rock specifically, so I hope we have been able to help you. Q1378 Chairman: Northern Rock is the elephant in the room, is it not? Mr Sexton: I understand that as well. Chairman: Thank you very much. 9 Ev 342 Back

3.4.This democratic process and public accountability before Parliament by Chartered Accountants and others cannot be circumvented by UK Endorsement Board, including by concluding that this proposal is "minor". Therefore, as minor, it suggests that so no review is required, five years after starting at the suggested date (or earlier) of 1 January 2027. By then plainly it is far too late and, on public examination, it will be said "UKEB said it was fine, and no-one objected at the time, therefore what was done was lawful, and, regretfully, there is no compensation to those harmed." Moreover, even if a case could be made out, there is simply no apparatus in place to compensate those damaged, including loss of opportunity, loss of livelihood, loss of home, health or freedom to choose. Since the Companies Acts went through Parliament to reach the statute book, it requires an Act of Parliament to remove the public protection provisions.

4.We submit, there is no basis to say "minor” rather than "we do not know, and cannot guess". There is no basis to say "no review" (implicitly because "minor” change). There is no basis to say "simplification". Omitting a statutory report that was previously available is plainly adding complexity not simplifying: the public goes to Companies House to find the report, and finds it is not there (or with holes). The public needs the information, in order to make good decisions, eg to choose an auditor or sack or renew one. If the public find that disclosure is minimalist, uninformative, and drowned in impenetrable charts, strategic reports, and CVs of non executives who have not served at least a decade as an executive before putting themselves forward (a great source of risk), they will take a dim view of the auditor, who allowed the enterprise to believe this was advantageous, not that, in fact it has great downside, including uncertainty.

5.Disclosure makes it more likely that the parent company officers find out what business their group is writing. It also makes it more likely a consolidation is reliable. This is more important where a parent is UK listed, unregulated, with regulated subsidiaries, which claim their liabilities are in the consolidation not their own book. Once taken over by a foreign predator, those entitled have no chance. The predictable consequence is economic carnage. There is also similar when there is an overseas parent, say in Germany, with subsidiaries in the UK, some of which do little but interfere in the operations of the main trading companies, assuming liabilities, which get booked nowhere, covered by a statement, “liabilities are booked in the overseas parent" ie not included in the UK entities or consolidations. The public is exposed.

In July 2015, we, with others, gave evidence to the FRC, which it published under the title, "Providing Assurance on Client Assets to the Financial Conduct Authority". The considerations in our evidence apply equally well in addressing this current exercise, as they deal with safe-custody (stewardship) and major transactions such as change of control (economic stability). The content is not “dated” ie not out of date. We included a clip from Newsnight, when Andy Verity reported on the subject of Treasury applying leverage on the FCA to curtail compensation schemes because Treasury did not like the size of the damages bill ("consequential loss") that the banks were facing. Andy Verity Newsnight 24.7.15 https://www.youtube.com/watch?v=oIdqraQfXMU&feature=youtu.be The evidence can be searched on the FRC website under consultations and Client Assets. https://media.frc.org.uk/documents/Mira_Makar_-_SME_Alliance_response.pdf It is useful to refresh on it in the context of this current invitation, and therefore it is included. UKEB is encouraged to use examples in doing its work because these are concrete. It avoids its work being reduced to appearance: "if done like this, will look like everyone else." That may be the case, but accounts are those of an enterprise reporting on historic financial statements, transactions, events. They must reflect "true and fair" for the enterprise, ie a reflection of the enterprise. UKEB is familiar with banks shoe-horning financial instruments accounting into formal standards. The result is wholly impenetrable to those sturdy enough to try to read. If there is a compelling argument for adoption, "looking like everyone else" is not it.

6.How does a preparer approach the current question? The answer is simple. The officers are responsible for all the financial statements; vetting those of the supply chain; and those of the customer base. That is business as usual. The structures in the group can include UK branches; UK subsidiaries; foreign or UK parents, quoted or private; alternative structures; mixed models with virtual entities; plethora of forms of financial dependence; co-investing including in de-risking parts of a balance sheet with suppliers; the effect of insurers as AXA moving from insurance of a risk to participating in proactive risk mitigation ie a third party is participating in running the business. This all needs to be unscrambled. It is not good effort to think that something should be disclosed under the Companies Act but with a new standard it drops out, therefore the default is "do not disclose". Worse, if your supplier is not disclosing, what do you do? Chances are none are. The economic weakness is that the UK does not have anti trust laws and no appetite to enforce. The choice of going elsewhere simply goes. Unless there is a thriving supply chain, decisions are not efficient. No-one entity can baulk the trend: therefore the objection must be made now.

[1] Key aspects and accounting impact

Technical accounting criteria assessment

1.Do you agree that the technical accounting criteria assessment considers the main key aspects? (please select one option)

Yes ☐ No ☒ - Our "no" is unequivocal.

2.Please include any comments you may have in response to question 1:

1.The main key aspects have not as yet been considered.

1.1.Key omissions include (i) the fact UK EB should not be trying to do this by itself. When it says it has a statutory duty to do something, that must surely mean, seeing that the work is done properly. The starting point is working out whether the task is for Parliament or not. This proposal changes the law fundamentally, hence it appears to be one for Parliament (those elected). In considering the question, one has to also ask, "when it goes horribly wrong and harm is caused, does the repair route exist?" Not only should it exist, but it must be shown to be working. This work has not been started as yet.

1.2.Second, (ii) the fact that economic factors are being considered. This means that input from ONS is required, which needs itself to have classified the stats that are required for the exercise. The exercise involves reducing information that the public would currently be able to access. This means that decisions are made on an incomplete or wrong basis, which is not efficient or optimal. There will be subsequent decisions built on the inadequate or wrong information. If that becomes law, no-one is “to blame”. There is no discernible cause of action. The damages are borne by the public. Appropriations are made without any reserve for the damages caused. Some would say that is a good idea. Parliament would not.

1.3.Third (iii) the notion of “users” and UKEB wondering whether they have all been identified and captured, is ill-conceived. The correct concept is the public, which, regardless of who they are, should be able to get information. Rating agencies and others are hardly top of anybody's list of credible "users". Nobody has evaluated the damage they have done and the impossibility of getting them to fix their own errors (or even communicate). The public (electorate) is a more accurate description and non restrictive.

1.4.Public documents can be used in court and are important in deciding employment issues and vetting authenticity. It would be wise generally for UKEB not to attempt to carve up the world into pots since these are subjective and unsafe. Public documents are also used by those employed in the organisation, especially since many organisations as banks and insurers have long since moved to treating staff in a remote manner as well as frequently reducing them to adjuncts to their systems but not otherwise informed. Those responsible for consolidation and reporting must have the public information to ensure that crucial information does not simply disappear. The same applies to the auditor and the officers.

1.5.Compliance with the Companies Acts is a vital measure of public protection. Where standards differ, generally the more informative one should used at least as far as narrative and disclosure are concerned. The Companies Act 1985 is more reliable than what came later, which made a failed attempt to mix enforcement and regulation and failed at both. Quoted securities issued under the Companies Act 1985 must comply with it, otherwise that which is traded is not that which was in the initial offer. This is complex.

1.6."Subsidiaries without public accountability” is not a concept known in UK law. Filing in Companies House is public accountability. Being an officer is public accountability (have to explain, can receive a D-Notice). The possibility of being subject to compulsory winding-up in the public interest is public accountability. Facing the possibility of being shut down by the Office of Fair Trading (before OFT was shut by SoS) is public accountability or shut by the Food Inspectorate. Facing prosecution under POCA and disgorgement of illicit gains is public accountability.

1.7.Being consolidated into a quoted entity is public accountability. Subsidiaries may be fully integrated operationally with results pulled out for statutory subsidiary reporting only. Where either branches or subsidiaries transact with a parent in the UK or overseas (or each other), there are adverse consequence where the group has not ensured that price and terms are commercial. This becomes more technical. It is often the external auditor only who has the overview as internally operations have their own line reporting which cuts across the finer points of the legal entities deployed. Some groups have more than one external auditor and therefore carry greater risk of just missing fundamentals including where control resides. The external auditors are important sources of alerts (“letters to management"). They need the full statutory accounts to be fully effective. They have continuity of perspective and overview others do not have.

[2] Technical accounting criteria assessment

3.Do you agree with the draft assessment of IFRS 19 against the technical accounting criteria? (please select one option)

Yes ☐ No ☒

4.Please include any comments you may have in response to question 3:

UK Endorsement Board says:

“SI 2019/685 requires an assessment of whether IFRS 19 meets the following Criteria in regulation 7(1)(c):“...(c) the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

2.This proposition requires radical unbundling. “Financial information needed for making economic decisions" is not a concept that appears in the Companies Acts. Historic cost financial statements are highly defined and governed by the Acts and the Articles of the enterprise. It is unclear what an economic decision is (is an example to decide to accept a job offer?). It is unclear whose decision is in point.

2.1."Financial information needed for assessing the stewardship of management" is also not defined. When BNY Mellon was found not to have books and records at the parent company level (represented that they existed in two hundred or more subsidiary companies around the world), nothing very much happened to hold officers or auditor to account. The excuse was that it did not matter because no-one who was using the safe-custody services (mainly professional clients working retail) could demonstrate any loss. Moreover if that proved wrong and BNY Mellon went under, it would not matter, because “insolvency practitioners" were available, and those interested could tell them what deposits they had (presuming they kept records). FRC ran an extremely expensive tribunal (2019) but has not published the transcripts. It may not have done this, had the FCA not got in first. It charged KPMG a fine, after hearing from the KPMG barrister hired by Freshfields that KPMG has the retained earnings to pay a fine. Its auditor did not give evidence.

2.2.Until this is clarified, the objective is not defined. Performance appraisals of office-holders and "economic" decision-making by disparate members of the public, whoever they might be, cannot immediately be linked to understandability (quality of English?); relevance; reliability; of the draft standard. Comparability requires a comparison. This section does not work in current form. It appears tick-box.

[3] UK long term public good

UK long term public good assessment

5.Do you agree with the initial overall assessment of the costs likely to arise from the implementation of IFRS 19? (please select one option).

Yes ☐ No ☒

6.Please include any comments you may have in response to question 5 including, if applicable, any costs that may have been omitted from the analysis:

UK Endorsement Board says:

Approach for this assessment 3.4Regulation 7(2)(a) of Sl 2019/685 requires the UK long term public good assessment to consider whether the use of the IFRS 19 is likely to improve the quality of financial reporting. In conducting this assessment the UKEB adopts a relative approach. 3.5This assessment also considers whether IFRS 19 is likely to meet the IASB's stated objective for the Standard, of simplifying the preparation of subsidiaries' financial statements whilst maintaining their usefulness for users. Improvements introduced by IFRS 19 for eligible subsidiaries 3.6The IASB developed IFRS 19 in response to demand from stakeholders, particularly from preparers of financial statements. They requested that, given the main users of subsidiaries' financial statements (e.g. parent entities, bank lending departments, rating agencies) tend to be in a position to ask for additional information if necessary, such preparers should be permitted to apply IFRS Accounting Standards with reduced disclosure requirements.”

3.The key statements are the following: “IASB developed IFRS 19 in response to demand.... particularly from preparers of financial statements. given the main users of subsidiaries' financial statements (e.g. parent entities, bank lending departments, rating agencies) tend to be in a position to ask for additional information if necessary, Preparers [of financial statements] should be permitted to apply IFRS Accounting Standards with reduced disclosure requirements”. In other words, the standard has come about by lobbying by employees who do not wish to do the work for which they have been employed.

3.1.Margaret Hodge, whilst in Public Accounts Committee, told people this way inclined, "if you do not want to do your job, do not do it."

3.2.In the UK, it is Parliament which decides the law and changes to it, not junior bean counters who wish to cut down on their work-load. With mass unemployment at graduate and post graduate levels, the vacant positions would be filled overnight by those delighted to have these job and wishing to excel in them.

7.Do you agree with the initial overall assessment of the benefits likely to arise from the implementation of IFRS 19? (please select one option).

Yes ☐ No ☒

8.Please include any comments you may have in response to question 7 including, if applicable, any benefits that may have been omitted from the analysis:

3.3.No benefit has been identified by UKEB, that is not prefixed by “Lenders.....” UKEB should provide on Fol the identity of these "lenders” and work it has done to establish court proceedings in which they are involved. It should review the evidence they gave in 2012-2013, and improvements they have made as well as compensation paid out to SMEs. This industry was subjected to the Parliamentary Commission for banking standards with a slogan "changing banking for good." The conclusions were "the extent of corruption and collusion beggars belief." It is obscure why "Lenders" should be determining the accounting standards promoted and endorsed by UKEB. Surely these are driven by their own self interest (privileged access for themselves that no-one else can get)? Surely UKEB can identify this as partisan? Whether it can or it cannot, the self interest of unidentified lenders cannot usurp those elected to serve in Parliament.

3.4.If UKEB is interested in experience with lenders, it needs to inform itself on the subject of SME Finance. Below is the relevant scrutiny before the Treasury Committee together with the link to be able to watch. Witnesses led by Nikki Turner, CEO SME Alliance Limited, and included Keith Elliott, SMEA member. https://committees.parliament.uk/oralevidence/7954/html/ Treasury Committee Oral evidence: SME Finance, HC 805 Wednesday 9 May 2018 Ordered by the House of Commons to be published on 9 May 2018. Watch the meeting https://www.parliamentlive.tv/Event/Index/6c464ee7-685f-4f3b-9bef-dc36f32c2cf0 Members present: Nicky Morgan (Chair); Rushanara Ali; Charlie Elphicke; Mr Alister Jack; John Mann; Alison McGovern; Catherine McKinnell; Wes Streeting. Questions 68-158 Witnesses Examination of Witnesses: Nikki Turner, Keith Elliott, Craig Keech and Guy Stenhouse. 1: Nikki Turner, Director, SME Alliance; Keith Elliott, Former CEO, Premier Motor Auctions; Craig Keech, Director, Legacy Consulting; Guy Stenhouse, Managing Director, Shancastle Investments. II: Lawrence Tomlinson, Chairman, LNT Group. III: Keith Morgan, CEO, British Business Bank; Suren Thiru, Head of Economics and Business Finance, British Chambers of Commerce.

3.5.As no benefit has been identified, there is no case for adoption. Research should be carried out by ONS and not attempted by UKEB, which is not the UK Authority in this area. We declare an interest (ONS).

9.Do you agree with the draft assessment that IFRS 19 is likely to be conducive to the long term public good in the UK? (please select one option)

Yes ☐ No ☒

10.Please include any comments you may have in response to question 9 including, if applicable, any economic effects that have been omitted from the analysis:

3.6.“whether IFRS 19 is likely to meet the IASB's stated objective for the Standard, of simplifying the preparation of subsidiaries' financial statements whilst maintaining their usefulness for users." UKEB first has to decide whether the UK has a case for simplifying and what is meant by that. The tangles and complexity brought in by the Companies Act 2006 are such that they cannot readily be unscrambled. Accounting standards thankfully which existed before that time were coherent. If the UK decided it wanted to "simplify" it would go back to those standards and throw out the complexity the 2006 Act brought in.

3.7.The IASB's vocabulary of a "user" is not a concept that is known in the UK outside someone who uses a computer in their work. Public reporting in the prescribed form endorsed by those duly authority is UK statutory compliance and an offence in the event of non compliance. The question of "usefulness" is not in point: Parliament has determined what must be publicly available; the electorate and others are entitled to be able to find it.

3.8.These ill-conceived thoughts are a consequence of “preparers” not wanting to prepare proper reports because the "lenders" can secretly get what they need anyway, so no-one else needs to know. Simplify means here to exclude what Parliament legislated the public had entitlement to have, unfettered. This will have "winners” and “losers”. The case to legislators, through private members' bill or otherwise, has not been made out. The result can be predicted to be chaotic and not what Parliament envisaged in 1948 or 1985, the Acts that have withstood the test of time. One of Sir Wyn Bischoff's last public statements was his personal belief in the benefits / privilege of limited liability. It is a matter of sadness to see how this has been abused by those prioritizing self-interest of themselves and their networks at cost to the public and economy. Unless this is addressed, the numbers choosing to IPO in the UK will continue to plummet. Losing one's shirt, if not life, as a cost of investing in the UK, is not acceptable.

11.In our [Draft] ECA, we described a set of users who may use the financial statements of subsidiaries without public accountability. Do you agree that the UKEB has not overlooked any user category that could be substantially affected by the reduced disclosure requirements of IFRS 19? (please select one option).

Yes ☐ No ☒

12.Please include any comments you may have in response to question 11:

3.9.We do not accept the term nor do we find it very helpful. UKEB's approach of trying to find "user groups" and then wonder if they have found them all does not work. The “public” is the correct term. Statutory duty to make public also works as does "an offence (by omission) not to make public." City of Glasgow Bank directors were jailed in 1879. Clark LJ stated "...... the jury have found all of you guilty, not of fabricating and falsifying the balance sheets, but of uttering and publishing them, knowing them to be false.”

One has to ask whether the officers, agreeing their staff ("preparers") can lobby as they have done here, properly understand it is they, the officers, who will face the public consequences.

Company Law interaction

13.IFRS 19 provides a definition of “public accountability" to set the scope for a subsidiary's eligibility to voluntarily apply the Standard. The IFRS 19 definition differs from the definitions of "public interest entity" and "public interest company" set out in Part 16 of the Companies Act 2006, which relate to audit. As the definitions in the Act do not relate to reporting under UK-adopted international accounting standards, do you agree that this issue is not relevant to the UKEB's endorsement assessment of IFRS 19? Please see paras 19-21 of the [Draft] ECA Executive Summary for further detail.

Yes ☐ No ☒

14.If you disagree, please provide the rationale for your answer to question 13:

3.10.Public interest entity and public interest company are creations of the Companies Act 2006. In reality neither term makes any sense. There is a company (limited liability; incorporated by guarantee; incorporated by Royal Charter; limited liability partnership etc) and there are listed companies, subject to extra listing rules. Distinguishing some by calling them “public interest" makes little or no sense. Since many of these are commodity suppliers to those not in that category (SMEs straddle the two), it is important that those not in this category fully understand the significance of being in this category, so they (customers) can enforce the extra rigour on their supply chain. In practice, sadly, those in these categories refuse to communicate. No favours have been done to anyone by this arbitrary categorising of those in the market. At the least it has meant their customer base has not been able to hold them to account because all they care about is keeping a regulator at bay and a docile auditor. This is not economically efficient.

3.11.Being publicly accountable (officers and enterprise) means being register and obliged to report and file publicly and held to account when failing. This applies universally. “Volunteering" to exclude mandatory reporting, on grounds that some standard says it is OK, is tantamount to agreeing to contravene the law but not be curtailed and held to account. Again it is for Parliament to decide that it was wrong decades ago to require public reporting to protect the public and this can just go as it is wrong, particularly on acquisition of a listed UK entity. Such a scenario is quite unlikely and in fact has not been suggested.

[4] Law: obligation to produce and publish true and fair view of undertaking's assets, liabilities, financial position and profit or loss (entity and consolidated)

True and fair view assessment

15.Do you agree with the draft assessment that IFRS 19 is not contrary to the true and fair view requirement? (please select one option)

Yes ☐ No ☒

16.Please include any comments you may have in response to question 15:

UK Endorsement Board says:

Section 4:True and fair view assessment Introduction 4.1This section considers whether IFRS 19 is not contrary to the true and fair view principle for individual and consolidated accounts. Legislative basis and our approach to the assessment 4.2The UKEB is required to consider whether an international accounting standard being assessed for use in the UK meets certain legislative criteria set out in Regulation 7 (1) of SI 2019/685. The first criterion set out in that regulation requires that an international accounting standard can be adopted only if: "[....] the standard is not contrary to either of the following principles— a) an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss; b) consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [....]" 4.3In this section of the [Draft] ECA we consider whether IFRS 19 meets this endorsement criterion. For the sake of brevity, we refer to our assessment against this endorsement criterion as 'the true and fair view assessment' and to the principles set out in Regulation 7(1)(a) as the 'true and fair view principle'. However, these abbreviated expressions do not imply that our assessment has considered anything other than the full terms of the endorsement criterion set out above. 4.4The duty of the UKEB under Regulation 7(1)(a) is to determine generically, before a standard is applied to a set of accounts, whether that standard is 'not contrary' to the true and fair view principle. In other words, it is an ex-ante assessment. We have therefore considered whether IFRS 19 contains any requirement that would prevent accounts prepared using the standard from giving a true and fair view. 4.5Our approach is to determine whether IFRS 19 is not contrary to the true and fair view principle in respect of any of the items identified in Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. In carrying out our assessment of the impact of IFRS 19, we have also considered the disclosures required by the Standard and its interaction with other UK adopted international accounting standards. 4.6For the purposes of our assessment, we consider the requirement in paragraph 6A IAS 8 Basis of Preparation of Financial Statements to 'present fairly the financial position, financial performance and cash flows of an entity' to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view. 4.7Our assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking's or group's assets, liabilities, financial position and profit or loss.

4.UKEB's statement is not correct: “we consider the requirement in paragraph 6A IAS 8 Basis of Preparation of Financial Statements to 'present fairly the financial position, financial performance and cash flows of an entity' to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view". "True and fair" predates the Companies Act 2006. It has two component parts, "true" and "fair". True means truthful, complete and accurate. Fair accommodates estimates and judgments.

To "present fairly the financial position, financial performance, and cash flows" is not the same. Firstly a flow of funds statement is factual. There is no question of being "presented fairly". Second financial performance is wholly subjective. Whose view and interpretation? Historic cost financial statements can only be prepared in one way. They are not "presented”.

Evaluation of performance is down to an analyst, not the company. The analyst has to get to know the company and sometimes its customers. They receive factual information and do their work which is their own, all of which remains embargo'ed. Officers say nothing on the subject because it would be a forward statement that can land them in prison. This happened with the AIT directors in 2005, having been bullied into pre close statements they did not wish to make. Three secure lines of business got cold feet and reneged.

"Fair" is secondary to "true". The basic obligation is to comply with the Companies Acts, which themselves are prescriptive. The auditor must establish what has been happening; that this is entered into the books of prime records; that this flows into the financial statements; that capital is adequate and the enterprise is a going concern, with all statutory disclosures made. He continues the audit post balance sheet to the date of signature. The quote from the IAS does not capture all of this. However one must revert to basics each time and not drown in the complexity of, for example, intricate engineered cross border financial instruments.

4.1.UKEB goes on to refer to: "the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking's or group's assets, liabilities, financial position and profit or loss.” The language of the Act is not helpful. The directors severally have a duty to produce ledgers and accounts which meet the requirements of the Act. Since they produce the accounts which must meet the requirements (the auditor will tell them in a letter to management if they have got it wrong so they can repair), there can be no separate duty to "satisfy themselves" on their own work. Companies Act 2006 is not a useful starting point (because one has to go back to the genesis of the law to understand the duty).

4.2.Since the basic definitions are different, there is no mechanism to shoe-horn IFRS 19 into the UK law.

[5] Significant change in accounting practice

Is IFRS 19 likely to lead to a significant change in accounting practice?

17.Do you agree with the tentative assessment in the [Draft] ECA that IFRS 19 is not likely to lead to a significant change in accounting practice? (please select one option):

Yes ☐ No ☒

18.Please provide your rationale for the answer to Question 17—namely, the reasons for concluding whether or not IFRS 19 is likely to lead to a significant change in accounting practice:

Click or tap here to enter text.

UK Endorsement Board says:

Section 5: Is IFRS 19 likely to lead to a significant change in accounting practice? Introduction 5.1This section considers whether IFRS 19 is likely to lead to a significant change in accounting practice for the purposes of the statutory requirements set out below. UK statutory requirements 5.2Paragraphs 1 – 4 of Regulation 11 of SI 2019/685 require a review of the impact of the adoption of an international accounting standard when this standard is likely to lead to a significant change in accounting practice. These paragraphs are reproduced below (emphasis added): “(1) The Secretary of State must publish a statement setting out the Secretary of State's policy on what amounts to a significant change in accounting practice, and must keep this policy statement under review. (2) Paragraphs (3) and (4) apply in relation to the adoption of any standard by the Secretary of State under regulation 6 which the Secretary of State considers likely to lead to a significant change in accounting practice. (3) The Secretary of State must— a) carry out a review of the impact of the adoption of the standard; and b)publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used). (4) The Secretary of State may carry out subsequent reviews from time to time, and in the event of doing so the Secretary of State must publish a report setting out the conclusions of any review conducted."

5.The proposed standard requires changes in law and an explanation of how the public can be protected from the change. No reason has been made to change the law on public protection by complete accounts filed in Companies House available to the authorities; tax man (VATA 1 requires proper accounts); courts; suppliers; staff; customers; potential acquirors.

Other comments

19.Do you have any other comments on the [Draft] ECA you would like to add?

Thank-you for the opportunity to participate. In this particular case, we believe involvement at an earlier stage would have been helpful and efficient. To take this standard forward would require a herculean effort. Contributors who record reservations but say they nevertheless support going forward (without further explanation) do not give true assurance to UKEB that the approach is beneficial. Caution is recommended.

Large language model

Response generation

20.Did you/your organisation use a large language model (e.g. Chat GPT, Microsoft Copilot) to create any part of your/its response (response to this Invitation to Comment or a comment letter you are submitting as part of your response)?

Yes ☐ No ☒

21.If you answered yes to Question 20, please specify which model and what prompt(s) you used for the large language model.

N/A

SME Alliance Limited City of London London EC2Y 26 February 2026

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Footnotes