I caught up with world renowned economist Harry Dent, ahead of his latest visit to Australia next month, and we discussed the debt and housing bubbles and how this may play out.
As a valued-add, you can secure up to 2 complimentary tickets to Harry’s Australian events.
Melbourne:
November 17th-18th
Sydney:
November 19th-20th
Brisbane:
November 21st-22nd
Perth: November 24th-25th
That’s right. By clicking on the special link below you won’t have to pay anything.
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents:
0:23 Introduction
1:18 US
2:21 US Retail
3:15 US Markets
4:10 China’s Growth
5:10 Brexit and UK Markets
07:05 Germany
09:00 Australia
09:05 Latitude Failed Float
10:10 Bank of Queensland Result
10:42 Regionals Under Pressure
11:10 Unemployment
11:32 RBA Comments
12:40 Property Auctions and Prices
14:05 Mascot Tower defects
14:35 Local Market
Against seemingly all the odds, we have a new Brexit deal.
As an apparent vindication of UK prime minister Boris Johnson’s
strategy to ramp up the threat of a no-deal departure from the EU and to
force concessions from Brussels, one would imagine that Number 10 is
rather happy right now. But that happiness will be tempered with
caution, because some major issues lie ahead.
Negotiations in Brussels have produced legal texts on arrangements
for Northern Ireland and on the political declaration, which outlines
the broad outline of what the two sides want from their future
relationship. These are the product of months of planning by the British
government, so it’s reasonable to ask what has actually changed since
former prime minister Theresa May struck her original deal.
Reading the text, the first impression is that there’s much more that hasn’t changed than has.
Northern Ireland
The protocol on Northern Ireland and Ireland
has long been in the firing line. It proposes a backstop arrangement
that would keep Northern Ireland in close alignment with the EU unless
and until both UK and EU agreed to change that.
On that front, the introduction of a section on “democratic consent”
is an important shift on the EU side. This provides a mechanism for the
Northern Ireland Assembly to vote on whether to maintain the provisions
of the protocol, with a requirement to have cross-community support.
That means the UK is now no longer subject to the EU’s approval if it
wants to end the backstop arrangement.
That said, a voting requirement to have majorities from both unionist
and nationalist groupings makes it very hard to achieve – especially
since the Northern Ireland Executive broke down several years ago and is
still not in operation. While the Democratic Unionist Party (DUP) might
control unionist voting, it can only do the same with nationalists if
it creates a much more benign and cooperative environment. And even if
that does happen and arrangements are voted down by Stormont, there is
still a long phasing-out period, so things cannot move too quickly.
From the EU’s perspective, this arrangement provides a degree of
security, mainly because any decision to overturn the system is not
solely in the hands of the UK – which has not been the most reliable
partner of late.
Customs arrangements
The other big change is on customs arrangements. Instead of creating a
temporary customs area for the whole of the UK, the revised Protocol
makes Northern Ireland a part of the UK’s customs territory. Because
that would imply border controls, a rather convoluted system of custom
duty collection is set out.
In essence, the system collects duties from businesses, dependent
upon where goods are coming from and going to, with the possibility of
various exemptions that will be agreed down the line.
It’s a much more complex system than before, but it does allow
Johnson to argue that the entire UK is leaving the EU’s customs union,
allowing it to benefit from any new trade deals that might be concluded.
Meanwhile, the political declaration, the main change is that the UK now suggests it is looking for a much looser future relationship,
based on a free trade agreement, rather than anything that might
include participation in the EU’s single market or customs union.
Less is more?
While these are all noteworthy, they do represent only a very small
part of the totality of the withdrawal agreement, as agreed by May last
November. The Protocol still kicks into effect at the end of a
transition period and the effect is still that Northern Ireland is kept
very close to EU’s regulatory standards for many years. The future
relationship remains as aspirational as May’s plans – until such a
document is negotiated and ratified, by some future British government,
no one can be sure what it will look like.
Nor did this negotiation touch on citizens’ rights, financial liabilities, the power of the EU’s courts to issue definitive rulings
on matters of dispute (an important matter for hard Brexit supporters
in the Conservative Party) or the institutional arrangements for
managing all of this. Even as Number 10 goes into its selling mode,
those continuities from last year’s text will be present in many
people’s minds.
The plan still seems to be for the government to present this deal to
the UK parliament in a special Saturday sitting on October 19. We
already know that the DUP has issues
with the revised text because it places Northern Ireland in a different
legal position to the rest of the UK, so winning that vote looks even
harder than it already did. The government will hope that it can present
the deal to MPs as the last, best hope for a Brexit settlement – but,
with wobbles from the DUP, Johnson will struggle to get close to a
majority.
Even if he does, the potential to keep that majority together for the
subsequent passage of the Withdrawal Agreement Bill looks even less
likely. And remember that, as things stand today, this text isn’t even
signed off by the 27 EU member states – there’s now not really enough
time for them to digest and approve something that moves them off their
previous position.
In short, this might still fall apart for Johnson, just as it did for May.
Author: Simon Usherwood, Professor in Politics, University of Surrey
Here is a show about my submission to the Senate Inquiry into Audit in Australia, where I focus in on the key issues, show some of the gaps in the current system and suggest reform. Submission close on 28th October if you want to have your say!
Submissions close on 28 October 2019. DFA has made a submission.
Introduction.
We welcome the current inquiry and note the similar
initiatives underway in several other jurisdictions. This is an important
issue.
We believe there is a need to refocus the auditing practices
which are currently deployed by the “big four” firms in particular and the
industry more widely. We reach these conclusions, having analysed the financial
sector for more than 30 years, as a consultant, financial firm employee and a
partner within Arthur Andersen before its dissolution.
There are many threads to the argument, but, these large
audit firms are in our opinion too close to management of large companies, as
they both advise them on strategy and tax minimisation, and separately provide
audit services. In addition, these big four firms are responsible for the
evolution of accounting standards, including off-balance sheet minimisation, as
well as providing advisory services to companies and Government, and they also offer
auditing capabilities. Conflicts abound.
Whilst in theory audit practices should be separated from
other commercial and advisory operations of the big four, I have seen examples
when company account planning sessions have included cross discipline
discussions, from advisory, consulting, services AND audit, to craft strategies
to maximise the commercial benefits to the audit and consulting firm. This
happened regularly at AA.
In addition, the audit of large companies are executed in a
formulaic and superficial way, where the main test is the need to meet relevant
accounting standards, not separately confirming independently that the business
is functioning as advertised from a financial and compliance perspective. Who audits the auditors?
Remember that in 2008 several banks failed, despite having
been given an unqualified audit in the months prior. Others required
substantial Government bail-out or were absorbed by other industry players.
Nothing has changed (other than the quantum of debt and other exposures have
increased substantially) since then.
A Financial Services Example.
To illustrate the limitations of audit, I will highlight
four areas, where from my research and experience current banking sector audits
are deficient.
Financial Derivatives Exposure.
According to recent RBA data Australian banks have some $48
trillion of gross derivatives exposures. This will include services to client,
but also position taking on a trading basis within the bank’s treasury
operations. Recent BIS research highlighted that in a low interest rate
environment, banks will tend to lend less and trade more to try to bolster
profits[i]. Plus, some window-dress their books for
quarter end.[ii]
Derivatives gross exposures dwarf the capital and assets
held within banks. This gross exposure is not reported clearly within the
accounts, because most is held off balance sheet. Moreover, the true
net-exposure which a bank may face will be determined by market movements and
relative trading positions. But even net exposures are not adequately reported.
We only get a glimpse of the true positions (and risks) when capital is applied
under the Basel rules, but this does not tell the full story, yet are within
current accounting standards, and off-balance sheet rules. We see no evidence
of auditors picking through the derivatives book and validating or reporting
these gross exposures. In a crisis this may well hit the financial position of
an individual bank, and trigger the need for a restructure, bail-in or
bail-out. Current audit rules and
approaches are designed to minimise disclosure and obscure the true risks. APRA does not provide an alternative route to
disclose such risks.
Internal Risk Models
Major banks can use their own “internal risk models” to
estimate the amount of capital applied to the business, under the Basel rules.
These models are complex and “tuned” by the institutions to enables
institutions’ to maximise their use of capital. However, we are not convinced
these models are functioning as intended, and they are not subject to regular
audit, either by external auditors, or APRA. Thus, the data is taken as
accurate from the “black-box” and this may lead to higher risks in the business
than are disclosed. Again, the true
position will not be exposed until a crisis hits.
Property Portfolio Revaluations
Large financial companies hold significant portfolios of
mortgages backed by residential property. An initial valuation is used in the
underwriting process. However, unless there is a material refinancing event,
subsequent portfolio adjustments, (because for example property prices move
down) are applied only at an aggregate level (for example state level). As a result,
there is a significant risk the property portfolio is overstating the real
current value of the underlying security, and this may translate to bigger
risks in a downturn. In addition, the amount of capital held under Basel rules could
well be understated. There may be offsetting benefits in a rising market, but
the standard portfolio analysis is not very accurate. But once again external
auditors will be not examining the operation practices of portfolio valuations
yet will sign off on the accounts as true and accurate.
Household versus Loan Risks
Households often hold multiple loans across a lender or
lenders. APRA only considers the status of individual loans. Reporting for
audit purposes will be at a loan, not household level. Indeed, there are cases when loans are
deliberately split to reduce the overall loan to value results. Once again this
is an area where auditors will not tread, but the risks in the system are
higher than those reported in the accounts. Again, the true position will not
be exposed until a crisis hits.
These are just examples of pain points which the current
audit processes will not adequately examine. There are many others.
Final Observations
The role of an auditor should be more than just checking
with the accounting standards and signing off. They should be seeking out
material issues, independently from management. But in the four cases above the
results are wanting.
The solution would be to create an independent audit
function, perhaps within the Auditor General’s domain, to provide accurate and
independent analysis of large financial players. In addition, we believe that
the audit functions of major firms should operate as separate service businesses
and should NOT be also be allowed to offer creative accounting and off-balance
sheet techniques as part of their service suite. The conflicts and limitations
are obvious and concerning.
However, the true impact of such deficiencies would only be
revealed in a crisis, mirroring 2008, by which time it is too late. Changing
management and audit practices as suggested would place our important financial
sector companies on a firming footing. Such changes could well benefit other
industry sectors as well.
Changes to audit practice and structure are essential!
[iii]
Digital Finance Analytics is a boutique research and advisory firm. More
details are available via our Blog. https://digitalfinanceanalytics.com/blog/
We discuss recent development in the proposed cash transaction ban, with the help of a recent Saturday paper article and CBA’s systems failures today. Cash is king!
While the ATM and EFTPOS merchant services are working and debit and credit cards are working, some debit card payments may be affected.
But BPAY services including PAY-ID payments not available and Cardless Cash not available. In addition some in-branch service, some call centre services and business services on CommBiz were hit.
The CommBank app and NetBank are available with limited functionality.
A small number of branches have closed.
They said “We are experiencing higher than normal volume of calls to our contact centres which means there are longer wait times. Some of our contact centre services are also impacted limiting what services we can provide”.
Now, consider the situation where cash is less available. Sometime good old cash is still king!
