Missing Trader and AML

Missing Trader and AML

Practicing accountants are probably very well aware of the fraud known as MTIC (or Missing Trader Intra Community), but it’s good to be reminded of the scenario that can present itself when suspicions of MTIC fraud ought to be aroused.

The CCAB (Consultative Committee of Accountancy Bodies) has recently published some Case Studies on money laundering to make practitioners more alert to some of the tell-tale signs.

Today we are going to look at one of these cases where a firm becomes inadvertently involved in the MTIC fraud (slightly adapted for an audience in Ireland).

Smith & Jones provides compliance services for Acme Limited, a local business which trades in small personal electronics.

As part of their work, Smith & Jones prepares the VAT returns for Acme Ltd. Whilst inputting the VAT return figures, the partner notices that there were high levels of sales to Adder Ltd., a new customer for Acme Ltd.

When sending back the VAT return for approval and submission by the managing director of Acme Ltd., the partner asked about Adder Ltd. and was told it was a great new customer introduced to the company by another customer. The partner thought nothing more about it.

On preparation of the next VAT return, the sales to Adder Ltd. had increased. The partner thought it a bit odd that all the goods shipped to Adder Ltd. came through a different supplier and were sent using a different delivery company to that used by Acme for its other customers but was reassured by the client explanation that the delivery company was a group company of Adder Ltd. and that they preferred to use it.

This continued for the next VAT period. Acme Ltd. then had a VAT visit which the partner attended. At that meeting, the VAT compliance officer made some non-specific but pointed comments about Adder Ltd., asking what Acme knew about the company. This struck the partner as odd, but he was reassured by the client who said Adder Ltd. had been subject of a VAT enquiry and had had to pay a VAT penalty because they made an error when their tax adviser was ill, but it was all “sorted”.

In the follow up letter, the VAT officer made some general comment about being careful in dealings with Adder Ltd. He mentioned concerns about “missing VAT”. The VAT officer also attached a leaflet on missing trader intra-community (MTIC) fraud (also referred to as missing trader fraud), which explained how criminals create complex structures of linked companies (known as chains) to abuse VAT rules, whereby a company often at the beginning of the chain and only trading for a short period of time, charges VAT to a customer but does not pay this to the government and then effectively disappears. The partner found the leaflet quite informative.

After two further returns were filed, the Revenue wrote to Acme Ltd. and to Smith & Jones indicating that they were conducting an investigation into its VAT returns as they suspected VAT fraud. Smith and Jones were also asked for copies of all documents and correspondence supporting the VAT returns.

What red flags could Smith & Jones have picked up?

  1. Although not by itself suspicious, upon being informed that Adder Ltd. had been introduced to Acme Ltd. by another customer, the partner might have enquired as to the identity of the customer as additional background.
  2. Upon discovering the change of supplier and delivery company, the partner ought to have enquired whether any cost savings had been made. Moreover, the knowledge that the delivery company was a group company of Adder Ltd. should have prompted further enquiries about the arrangement.
  3. The information that Adder Ltd. had suffered a VAT penalty should have raised further concerns in the partner’s mind, especially as Adder had only recently become a customer of Acme Ltd. and the introduction had come through a third party.
  4. If the partner was not familiar with MTIC fraud, the mention of “missing VAT” should have alerted the partner that all may not be in order at Adder. Given that Smith & Jones prepared the VAT returns for Acme, the partner would not want either Acme Ltd. nor his own practice to fall under suspicion of involvement in VAT impropriety.

We will look at another case study in the series next week.

To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.

For our latest Audit Quality Control Manual (October 2021) (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control) click here. View the Table of Contents here.

We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents click here.

Derby County Football Club Accounts

Derby County Football Club Accounts

Continuing our soccer theme from last week, we look at a similar story about the topic of how intangible assets (football players) are treated.

Derby County Football Club (DCFC) entered Administration in September 2021 and suffered a points deduction at the hands of the English Football League (EFL), as a result. The club is managed by Wayne Rooney and currently features three Irish players Jason Knight, Festy Ebosele and Louie Watson.

In this blog we are concentrating on the financial statements of Derby County Football Club (DCFC) (also called the Rams) and at just one aspect of their somewhat questionable use of accounting rules. The Directors’ unusual treatment of the amortisation of their intangible assets (i.e., football players) which has led directly to the club being fined €100,000 by the EFL in June 2021.

Examining the accounting rules on the topic (Financial Reporting Council Standard FRS 102) we see that specifically FRS 102.18.23 states that the residual value of an intangible asset must be ‘Nil’, unless, either:

  • A third party has committed to purchase the asset at the end of its useful life, or
  • There is an active market for the asset from which the residual value can be determined, and which is probable that such a market will be in existence at the end of the asset’s useful life.

The last available filed accounts for the year to 30 June 2018 show the accounting policy wording for intangible assets costs/amortisation as: “The costs associated with acquiring players’ registrations, inclusive of EFL levies, or expanding their contracts, including agent fees, are capitalised and amortised over the period of the respective players’ contracts after consideration of their residual values.”

It is these last six words that drew the ire of the football regulator. With so much uncertainty surrounding the residual value of a player at the end of their contract/football career, many factors point to a ‘Nil’ residual value. Not least of these, is the possibility that a player may use the Bosman ruling (based on a 1995 legal case entitling a player to ask for a free transfer) which can cause the players transfer value to be lower than expected.

The net effect of the above accounting policy of course, is that the negative impact of amortisation on the club’s profits is reduced and according to one football analyst DCFC have by far the lowest amortisation percentage in their division for 2016/17.

In the Administrators’ latest statement filed at UK Companies House on 17 November, the value of the company’s intangible assets according to the latest 30 June 2018 accounts (the latest available at Companies house), are shown at almost £43 million, but appear on the Administrator’s Statement of Affairs as ‘uncertain’. Let’s hope the future for the club is brighter.

For our latest Audit Quality Control Manual (October 2021) (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control) click here. View the Table of Contents here.

We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents click here.

Messi should appear on balance sheet for the first time!

Messi should appear on balance sheet for the first time!

Who says accountancy is boring? I am no PSG or Barcelona fan, but you must admit, that even at age 34, Messi is probably one of the best players in the world today. My pub quiz question for you – is a football player like Messi an accounting asset or not?

The accounting profession has long debated the question – what is an ‘asset’?

FRS 102.2.27 states that an item is an ‘asset’ if:

  • it is probable that any future economic benefit associated with the item will flow to or from the entity; and
  • the item has a cost or value that can be measured reliably.

This was a much easier question to answer, in the manufacturing/industrial revolution when an asset was more often a tangible asset that was certain to generate future cash flows that could reliably be measured.

However, we now live in the era of ‘knowledge resources’, be that professional knowledge (in the knowledge economy) or personal skill and talent which is the focus of this blog i.e. ‘soccer intelligence’ – the skill to know how to make the best use of a football. This is the era of ‘intangible’ assets’. More on this debate and soccer related finance is contained in the latest Deloitte Football Money League Report 2021.

Based on the above principles, FRS 102.18.4 states that an intangible asset shall be recognised by an entity if, and only if:

  • it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
  • the cost or value of the asset can be measured reliably.

After 21 years with Barcelona, in August 2021, Messi signed a two-year contract with PSG. Messi cost PSG nothing, as it was a free transfer.

Unfortunately for Barcelona, using the same intangible asset standards in IFRS, used by most European clubs, (FRS 102 has similar rules), the club was never allowed to show Messi as an intangible asset on their balance sheet, as he joined them as a 13-year-old with no established cost. The fact that he generated much subsequent revenue for them could never justify him being on their balance sheet under IFRS/FRS 102 principles.

Meanwhile PSG are permitted to exploit the intangible asset measurement rules to place Messi on balance sheet by measuring the expected future economic benefits that will flow to PSG. The next financial statements for PSG for the year ended 30 June 2022 will make interesting reading. Meantime according to the Football Benchmark Report 2021 the KPMG estimate of Messi’s current value is €180 million.

The same happened in 1992 when David Beckham, then aged 17, was recruited by Manchester United and no one could estimate his future ‘value’. Developing superstar status quickly, Manchester United could not recognize his value in the club’s balance sheet and thus could not report this value to the Stock Exchange. Once he moved to LA Galaxy in 2007 (then aged 32) he was recognised in the Los Angeles’ club’s financials at the amount paid to acquire him – a staggering $250 million.

For more on football player valuations see the KPMG Football Benchmark Report 2021 and the Deloitte Annual Review of Football Finance 2021.

For our latest Audit Quality Control Manual (October 2021) (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control) click here. View the Table of Contents here.

We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents click here.

Six Key Habits of Good Audit Firms

Six Key Habits of Good Audit Firms

Executing a good audit is never easy as most auditors and their clients are under severe time and budgetary pressure. Covid has contributed to these pressures. If you would like to know how to do better and more efficient audits have a look at our summary of this recent report.

The UK Financial Reporting Council recently published a report called ‘What Makes a Good Audit?’ The report highlights the six key habits that progressive audit firms have developed to ensure that they carry out better-quality audits. These are:

  1. Assessing firm quality risks (careful risk assessment at the outset of the audit);
  2. Mindset, culture governance and leadership (avoid conflicts of interest or threats to independence);
  3. Performance monitoring and remediation (root cause analysis followed by decisive corrective action);
  4. Quality monitoring (cold file reviews and hot file reviews which act as a preventative control);
  5. Resources – investment in well-qualified people (staff and Partner appraisals and training);
  6. Information and communication (training scope is broadening to include soft skills and critical thinking training.

Among the key best examples of audit techniques identified in the report are the following:

  • “The journal entry testing across the group was thorough and well controlled; in particular the selection criteria used for journal entry testing and the communication of those detailed criteria as required procedures for the component teams. This ensured that the identified fraud risks associated with revenue recognition and management override of controls were appropriately considered across the group.”
  • “In those areas which required the exercise of significant judgement by management, the audit team structured its audit working papers in such a way to identify the key judgements, how they were challenged and how that challenge was concluded. The approach adopted was particularly effective and helped provide clear context to the audit and the conclusions reached.”
  • “The audit team obtained direct confirmations from customers to verify that revenue for major contracts for the first ten months of the year had been appropriately recognised.”
  • “The audit firm integrated the key audit behaviours into the performance evaluation forms for all audit staff”
  • “The firm achieves a very high completion rate for mandatory training and has clear consequences for individuals that do not attend, including a process for identifying repeat offenders.”

The report makes for very interesting reading and is available here.

For more details recently published Audit Quality Control Manual (October 2021) (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control). View the Table of Contents here.

We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents here.

Banned

Banned

Recent blogs have dealt with some of the changes to the Ethical Standard for Auditors and to ISQC1 some important changes have occurred. We wrote on:

  • This week we want to highlight two more important changes to Section 5 of the Ethical Standard dealing with certain Non-Audit Services which are banned from 15 July 2021. These changes apply to all audits, both private and listed entities. These changes came into effect from 15 July 2021. The words in bold are what’s new since the 2017 version
  1. Recruitment ban: Paragraphs 5.94 and 5.95 now state:

5.94 ‘The firm shall not provide recruitment services to an entity relevant to an engagement, that would involve the firm taking responsibility for, or advising on the appointment of any director or employee of the entity, or a significant affiliate of such an entity, where the firm is undertaking an engagement.

5.95 ‘The firm shall not provide advice on the remuneration package or the measurement criteria on which the remuneration is calculated, for any director or employee of the entity, or a significant affiliate of an entity relevant to an engagement.’

Prior to this ban, recruitment could have been carried out in certain limited circumstances and within certain safeguards being implemented.

  1. Internal audit ban: Paragraph 5.48 now states ‘The firm shall not provide internal audit services to an entity relevant to an engagement or a significant affiliate of such an entity, where the firm is undertaking an engagement’.

 Prior to this ban being introduced, the 2017 version of the Ethical Standard for Auditors, internal audit services were permitted in certain circumstances, while other internal audit services were not. Now the ban is across the board.

Prior to this ban being introduced, the 2017 version of the Ethical Standard for Auditors, internal audit services were permitted in certain circumstances, while other internal audit services were not. Now the ban is across the board.

For more details and implementation support on these changes, please refer to our just published Audit Quality Control Manual (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control). View the Table of Contents here.

We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents here.

The Auditor as Referee

The Auditor as Referee

As we mentioned in last week’s blog, we are writing a series of blogs on the recent changes to the Ethical Standard for Auditors that have been become effective since 15 July 2021 and some changes to the ISQC1 ‘Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and other Assurance and Related Services Engagements.

IES 8

There has also been a change in the scope and emphasis of the International Education Standard 8 (IES 8), which focuses on the reflection and planning of Audit Partner’s training requirements, under 14 competency headings. IES 8 is issued by the International Accounting Education Standards Board (IAESB) sets out the competencies that you are expected to have if you are a responsible individual (RI), which the standard refers to as an ‘engagement partner’. The 14 competencies are too numerous to mention here – but they can be accessed at this link.

In brief terms the Audit Partner must:

  • Reflect on what your CPD needs are
  • Act – carry out the CPD activity or activities you have planned
  • Impact – subsequently evaluate whether the plan was achieved and adjust if necessary
  • Declare – be able to demonstrate with appropriate records that the required CPD has been fulfilled.

The ICAEW actually calls this the ‘RAID’ acronym – to make it easier to remember.

Reporting Breaches

From 15 July 2021 the Ethical Standard for Auditors (paragraph 1.21) requires audit firms to file annual reports of breaches of the Ethical Standard on a calendar year basis:

Where no breaches have occurred, ‘Nil’ reports are not necessary. The first reports will be due for the period 15/7/2021 to 31 December 2021. At the time of going to press, ACCA and Chartered Accountants Ireland have issued guidance on the correct approach and format of the reports.

An example of such a reportable breach would be where an audit firm is obliged to have an Engagement Quality Control Review (EQCR or hot file review) carried out, and did not do so, this would be a reportable breach.

For more details and implementation support on these changes, please refer to our just published Audit Quality Control Manual (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control). View the Table of Contents here.

We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents here.