Accounting firms warned over substandard work by affiliates

Global accounting firms are being warned over their use of local affiliates, with the Washington, DC-based Public Company Accounting Oversight Board (PCAOB) emphasising that they will be held to the same standards as the US firms they are affiliated with.

The PCAOB is a non-profit organisation created in 2002 by the Sarbanes-Oxley Act to oversee the audits of public companies and other issuers and protect the interests of investors and improve the content and independence of audit reports.

Referring to global audit firms, PCAOB chairperson Erica Williams told the Financial Times: “They know that we are inspecting around the world and that we will hold any firms to account, including affiliates, that break our rules, and we recently enhanced our ‘other auditors’ rules to make that even more clear.

“If you are engaging other auditors to assist with your audits, you need to be able to hold them to the same quality-control standards that are required everywhere else in the world.”

Her comments come less than a week after the US Securities and Exchange Commission (SEC) fined Deloitte Touche Tohmatsu in China US$20 million for violating basic US audit requirements. The US regulator alleged that Deloitte China failed to perform even certain basic audit tasks.

“We find that Deloitte-China fell woefully short of professional auditing requirements in numerous component audits of Chinese operations of US issuers and audits of Chinese companies listed on U.S. exchanges,” said SEC Chair Gary Gensler in a statement.

According to reports, Deloitte China personnel asked clients to select their own samples for testing and to prepare audit documentation purporting to show that the firm had obtained and assessed the supporting evidence for certain clients’ accounting entries. This created the appearance that Deloitte China had conducted the required testing of clients’ financial statements and internal controls when there was no evidence in the audit file that it had in fact done so.

Deloitte subcontracted auditing work on the Chinese operations to its affiliate in China, but it was a US partner that signed off on the work in US regulatory filings.

The PCAOB only recently gained the ability to review audit work in China and inspectors have been there in the past two weeks inspecting the work of US-listed China-based companies.

While the deficiency rate at US audit firms has in many cases shown improvement over recent years, deficiencies at non-US affiliates have remained at around 33% for the past five years.

Shadow banking back under the spotlight

Following chaotic scenes in the UK bond markets following the negative reception to the government’s so-called “mini-budget” of 23 September, analysts have raised concerns over the country’s shadow banking sector.

Sterling’s sharp fall against the US dollar was coupled by heavy selling of UK government bonds, aka ‘gilts’, forcing the Bank of England to intervene in the long-dated bond market.

The turmoil centred on pension funds, which hold substantial amounts of gilts, while a sudden rise in UK interest rate expectations also created havoc in the mortgage market.

While the central bank’s intervention appears to have propped up sterling and the bond markets so far this month, analysts have flagged lingering stability risks to the UK’s shadow banking sector and its financial institutions acting as lenders or intermediaries outside the traditional banking sector.

Former UK chancellor Gordon Brown, who went on to become prime minister from 2007 to 2010 and whose administration launched a rescue package for UK banks during the financial crisis, said this week that Britain’s regulators would need to tighten their supervision of the shadow banks.

“I do fear that as inflation hits and interest rates rise, there will be a number of companies, a number of organisations that will be in grave difficulty, so I don’t think this crisis is over because the pension funds have been rescued last week,” Brown said.

“I do think there’s got to be eternal vigilance about what has happened to what is called the shadow banking sector, and I do fear that there could be further crises to come.”

Separately, defaults at three of Mexico’s lenders are undermining faith in the sector and creating concerns among citizens who rely on non-bank loans. Bloomberg reports that the collapse of shadow bank Crédito Real SAB de CV has wiped out US$5 billion for foreign bondholders.

While warnings about the stability of Crédito Real were raised back in April 2021, these were mostly ignored by hedge funds and big banks, which instead backed the company. It became a rising star of Mexico’s shadow banking industry, borrowing cash from foreign investors and cutting smaller loans to low-income individuals and businesses.

However, accounting irregularities at the company and two other lenders – AlphaCredit Capital SA de CV and Grupo Finmart – have discredited some financial statements as unreliable. All three used the same auditor: Deloitte Mexico, the Mexico City-based unit of Deloitte Touche Tohmatsu.

HSBC seeks buyer for Canadian business

HSBC is considering selling its business in Canada, worth billions of dollars and one of the country’s biggest international banking brands, as it looks to beef up returns as demanded by its largest shareholder.

The UK-based lender is working with JPMorgan Chase as it reviews its Canada business for a potential sale, a source told Reuters.

“We are currently reviewing our strategic options with respect to our wholly owned subsidiary in Canada,” a spokesperson for the bank confirmed. “Amongst the options being explored is a potential sale of HSBC Group’s 100% equity stake in HSBC Bank Canada. The review is at an early stage and no decisions have been made.”

Although it is far from HSBC’s biggest business line, the Canadian unit has been the third-largest contributor to commercial banking profits globally and Bloomberg News reported that it could be worth as much as US$10 billion.

Analysts called the potential sale a “rare opportunity” to acquire a large Canadian lending institution, and National Bank of Canada analyst Gabriel Dechaine said he expects every big bank to investigate although not all will follow up with a bid. Dechaine said that the Bank of Montral and Toronto Dominion Bank hope to close large US acquisitions later this year and are therefore unlikely to become contenders.

“Royal Bank of Canada (RBC) seems the most obvious given its large excess capital position, and the potential size of HSBC Canada relative to its market capitalisation is far from a ‘bet the farm’ situation,” he said.

In a note to clients, Dechaine argued that RBC’s C$12 billion in excess capital far exceeds the roughly C$2 billion that each of Bank of Nova Scotia, the Canadian Imperial Bank of Commerce and National Bank have on hand. However, RBC may face a higher regulatory hurdle than other banks due to competition concerns.

While domestic banks would be considered the frontrunners, Dechaine did not discount the potential for a foreign player to covet the assets, though many have already scaled back in Canada.

“We do not believe any European or US banks would be interested, as these players have more of a track record of exiting Canada,” Dechaine wrote. “If anything, we could see a large Chinese bank expressing interest.”

EU nations to tap CO2 permits to end reliance on Russian energy

European Union (EU) member states have backed a compromise plan to use permits from the region’s carbon market to help finance a shift away from Russian fossil fuels.

Finance ministers gathered in Luxembourg approved a compromise plan drawn up by the Czech government, which holds the EU’s rotating presidency, to free up €20 billion (US$19.8 billion) of carbon allowances. About 75% would come from the bloc’s innovation fund, with the rest made available from front-loaded auctions.

Ministers also opted to change the share of funds countries are eligible for, taking into account dependence on fossil fuels. Money from the emissions trading system will top up remaining loans from the region’s Covid Recovery Fund, which member states can now use to help boost renewables and the fossil fuel infrastructure needed to rid the EU of its dependence on Russia energy.

The EU has made finding alternatives to Russia energy supplies following the country’s invasion of Ukraine and Moscow responded by curbing natural gas shipments to the continent, sparking fears of fuel shortages and potential blackouts this winter.

In May the European Commission, the EU’s executive arm, floated the controversial idea of selling €20 billion worth of permits withdrawn from the market and kept in the Market Stability Reserve (MSR), but the idea attracted little support from countries. 

The original plan for the carbon market triggered a drop in permit prices as investors criticised the EU for a lack of political predictability and potentially weakening the MSR, a supply-control mechanism that helped drive emissions costs to record levels earlier this year. It also raised concerns among environmentalists that the measure could make the cost of polluting cheaper for industry.

The European Parliament’s environment committee voted this week to just front load permits, with the wider body set to take its stance in the coming weeks. Parliament and member states will then negotiate on the final shape of the proposal – which Paolo Gentiloni, European Commissioner for the Economy and a former prime minister of Italy, said he hoped to be in place early next year.

WTO says global trade to lose momentum in 2023

Interest rate hikes imposed by central banks around the world, a shrinking energy supply and high prices will contribute to global trade losing momentum next year, according to the World Trade Organisation (WTO).

The WTO now estimates that global merchandise trade will grow by 1% in 2023, against its 3.4% percent forecast last spring. The organisation said that trade will increase by 3.5% this year, slightly up from its previous 3% estimate, but noted that the change was mostly explained by statistical revisions. 

The forecast is another indicator that a slowing global economy. Earlier this week the United Nations accused the United States and other leading economies of taking an “imprudent gamble” to slow soaring inflation through interest rate hikes. The UN said that the impact on poorer nations threatened a global recession and “worse damage than the financial crisis of 2008 and the Covid-19 shock in 2020.”

WTO Director-General Ngozi Okonjo-Iweala told Wednesday that global trade could decrease next year if Russia’s invasion of Ukraine escalates. She also criticised efforts by some countries to limit exports of food, fertiliser and fuel. 

“While trade restrictions may be a tempting response to the supply vulnerabilities that have been exposed by the shocks of the past two years, a retrenchment of global supply chains would only deepen inflationary pressures, leading to slower economic growth and reduced living standards over time,” Okonjo-Iweala said in a statement.

Russia has limited fertiliser exports in response to Western sanctions, and its invasion has cut down on Ukraine’s wheat exports, actions that have led to decreased global food supply. In addition, the OPEC+ alliance of oil producers, which includes Saudi Arabia and Russia, has agreed to cut global oil production by two million barrels a day, a move that will further tighten supply and hike prices.

Egypt’s pound hits record low ahead of IMF deal

Egypt’s pound has weakened to touch a record low as the government seeks to finalise a crucial loan from the International Monetary Fund (IMF). On 4 October the EGP slipped to an exchange rate of 19.6736 against the US dollar, exceeding the currency’s previous record low exchange rate of 19.6725 in December 2016.

Other African currencies to have fallen against the US currency this year include the Nigerian currency, which recently hit a new record low of 735 naira (NGN) to the dollar and the gap between the Ethiopian birr’s official and parallel market exchange rate has recently grown to a new record high. The Ghanaian cedi and the South African rand have also depreciated significantly against the US dollar this year.

According to a Bloomberg report, the pound’s depreciation comes as Egypt gets closer to securing a loan from the IMF. The IMF loan, coupled with a sum of US$22 billion that has been pledged by rich Gulf states, is expected to help Egypt deal with the energy and food shocks stemming from the Ukraine-Russia military conflict.

However, before approving the loan the IMF is likely to ask Egypt to adjust the exchange rate just as it did in 2016. At that time, the Fund insisted that the pound had to be devalued before the Egyptian government could access a US$12 billion loan package.

India’s central bank warms to AI for regulatory supervision

The Reserve Bank of India (RBI) said that it plans to extensively use advanced analytics, artificial intelligence (AI) and machine learning to analyse its huge database and improve regulatory supervision on banks and non-bank financial companies (NBFCs). The initiative is likely to include hiring external experts.

The RBI already uses AI and machine learning (ML) in supervisory processes, and now intends to upscale it to ensure that the benefits of advanced analytics can accrue to the Department of Supervision in the central bank.

The department has been developing and using linear and a few machine-learnt models for supervisory examinations.

The RBI’s supervisory jurisdiction extends over banks, urban cooperative banks (UCB), NBFCs, payment banks, small finance banks, local area banks, credit information companies and select all India financial institutions. It undertakes continuous supervision of these entities, helped by on-site inspections and off-site monitoring.

The central bank has floated an expression of interest (EoI) for engaging consultants in the use of use of advanced analytics, AI and ML for generating supervisory inputs

“Taking note of the global supervisory applications of AI & ML applications, this Project has been conceived for use of advanced analytics and AI/ML to expand analysis of huge data repository with RBI and externally, through the engagement of external experts, which is expected to greatly enhance the effectiveness and sharpness of supervision,” the bank stated.

Citi launches seven-day sweeps

Citi has launched a new cash concentration capability designed to mobilise and concentrate liquidity seven days a week.

Citi 7-Day Sweeps is being rolled out in a phased approach, initially focusing on key treasury and cash concentration centres catering to real-time payments. The offering will initially be available for domestic cash concentration structures in the US and South Korea, with plans to expand to additional markets

Citi noted that changing consumer behaviour, the increased use of instant payments, and a proliferation of new e-business models are moving treasury management toward real-time and the offering brings this another step closer.

Cash concentration is a corporate treasury practice that involves the transfer and sweeping of funds from multiple accounts to a single account to help optimize the use of available funds for business expenses or investments. Institutional clients use sweeps to automatically transfer cash balances between accounts based on pre-standing parameters or instructions of periodicity, timing and amount.

“Cash concentration is a simple and efficient solution used by companies to help optimise interest income and reduce interest costs across accounts in their sweep structures,” said Michael Berkowitz, Global and North America Head of Product Management, Liquidity Management Services with Citi’s Treasury and Trade Solutions (TTS). “With a growing number of companies running their businesses 24X7, we’ve seen an increase in the demand for seven-day sweeps, particularly among fast-moving, high-growth technology and e-commerce companies.”

“For companies in these sectors, and others, the momentum toward real-time cash management is transforming the way liquidity is managed,” added Stephen Randall, Global Head of Liquidity Management Services for Citi’s TTS business.

“With instant payments and other seven-days-a-week operating activities driving ebbs and flows in liquidity levels, cash concentration structures must be able to respond quickly to those fluctuations. Our 7-Day Sweeps solution is designed to address this need by extending the automated funding of negative balances and centralisation of positive balances to non-business days, helping to reduce risks, increase efficiency and optimise liquidity all year round.”

UK fintech Railsr raises US$46.5 million after rebranding

London-based fintech company Railsr, previously known as Railsbank, announced that it has raised US$46 million (€46.5 million) in its Series C round of funding.

The investment includes US$26 million equity and US$20 million debt financing. The equity part was led by Anthos Capital, which led the Railsr Series B in July 2021, and includes existing investors Ventura, Outrun Ventures, CreditEase and Moneta. The debt amount came from a new investor, Mars Capital.

Railsr CEO and co-founder, Nigel Verdon, commented, “I am absolutely delighted that less than four months after Railsbank evolved to become Railsr, we have achieved another milestone and closed our Series C, a significant step on our route to profitability.”

Founded in 2016 by Verdon and Clive Mitchell, Railsr claims to be an innovator in the global Banking-as-a-Platform (BaaP) sector. Its platform allows marketers, product managers, and developers to prototype, launch, and scale their financial product vision using its open finance platform, financial operations, regulatory licensing, and application programming interfaces (APIs).

The platform also provides fintechs with a range of wholesale banking services, including international bank account numbers (IBANs), receiving money, sending money, converting money, direct debit, issuing cards, and managing credit through APIs.