8th Mar 2016 11:03
LONDON (Alliance News) - Foreign & Colonial Investment Trust PLC on Tuesday said that auditor PricewaterhouseCoopers LLP, which has served the trust since inception in 1868, is to be replaced by Ernst & Young LLP, due to new auditor independence rules.
The issue concerns non-audit services provided to the trust by PwC on a contingent fee arrangement basis, which the auditor said will be "impermissible" under new rules coming into force in June. The trust will ask shareholders to approve the change.
"There are no reasons for and no other matters connected with our ceasing to hold office as auditors of the company that we consider need to be brought to the attention of the company's members or creditors," PwC said in a letter published in the trust's annual report for 2015.
The previous year's annual report had noted that PwC had provided specialist tax services to the trust for several years, and continued to do so on a contingent fee basis in an effort to reclaim value-added tax from the UK government.
According to its annual report for 2015, the trust is one several claimants in a case brought against HM Revenue & Customs, the UK body responsible for collecting tax, to recover VAT paid on management fees between 1997 and 2000, together with compounded interest. PwC is assisting the claimants in the UK's Supreme Court, which will hear the case in May 2016. The outgoing auditor's fee depends on whether the outcome of the case is successful.
The appeal to the Supreme Court came from both HMRC and the claimants, according to the trust's latest annual report. The case was heard in the Court of Appeal in October 2014. "The court's decision passed down in 2015 was that the claimants are entitled to recover a proportion of the VAT paid in mistake of law," the trust said.
Foreign & Colonial Investment Trust had chosen PwC to continue as auditor following a tender in May 2014, in which EY came a "very close second", according to Jeffrey Hewitt, chairman of the trust's Audit Committee.
Hewitt said that both the Audit Committee and PwC took the view that the VAT case did not comprise the auditor's independence, "as the outcome of the case is not dependent on any audit judgment and the potential fee is not material to PwC".
"While PwC have confirmed to the committee and the board that they are independent of the company and have complied with relevant auditing standards, to which we have concurred, the board and PwC have nevertheless mutually decided that in view of the contingent fee arrangement PwC would be unable to continue as auditor whilst pursuing the VAT claim," Hewitt said.
While EY currently provides "limited" tax compliance advice to the trust on recovery and compliance with US tax on private equity investments and Indian tax on capital gains, the proposed new auditor has agreed to transfer that work to a new provider in light of the new rules coming into force, according to Hewitt.
In 2015, the trust's net asset value total return of 7.5% was above the 4.0% delivered by the FTSE All World Index over the year. The net asset value per share with debt at market value rose to 483.4p per share from 458.4p and the share price rose by 6.7% to 449.2p. The discount to net asset value per share narrowed to 7.0% from 8.1% over the course of 2015.
The trust increased its dividend for the forty-fifth consecutive year, lifting the payment for 2015 to 9.60p, an increase of 3.2%.
"We benefited from good stock selection across a broad number of our underlying strategies and strong performance from our private equity portfolio, with high levels of cashflow from this area also boosting returns," Chairman Simon Fraser said.
Fraser said the financial crisis of 2007-08 still "casts a shadow" on the global economy and financial markets, with interest rates remaining "extraordinarily" low despite the US Federal Reserve's rate hike in December 2015. Central banks such as the Bank of Japan and the European Central Bank have continued to ease monetary policy.
Meanwhile, the chairman noted "deflationary worries" from slowing economic growth in China and depressed commodity prices. The UK's upcoming referendum on whether to stay in the EU, scheduled for June, will likely add to market "uncertainty and nervousness" in the months ahead, the chairman added.
"With the global economy in an anaemic state and many emerging economies showing materially lower rates of growth the outlook for asset markets remains challenged. There are signs that corporate profits globally are struggling, even outside of the resources and energy sectors, and risk appetite from investors is at low levels," Fraser said.
Shares in Foreign & Colonial Investment Trust were down 0.4% at 429.00p on Tuesday morning.
By Samuel Agini; [email protected]; @samuelagini
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