Europhoria will not last

MARKETS often go over the top at year- end and, as 2003 draws to a close, it is the American dollar that is feeling grief. The once sickly euro briefly soared above $1.25 in latest trading and has now risen 20% against the greenback this year.

This is an amazing reversal of fortune for the single currency, which will celebrate its fifth birthday on Thursday. What is remarkable is that the dollar is so enfeebled at a time when Europe's economy is on its knees and the American business machine is spluttering back into life.

The switch is largely explained by concerns about the whopping US balance-of-payments deficit and the interest rate difference between New York and Frankfurt. Investors in Europe can earn 2% in the money markets, but only half that in the US. In Britain, the present return is a handsome 3.75%.

The pound has been enjoying one of its best runs against the dollar for more than a decade, touching an 11-year high at $1.777 yesterday. In Japan, the yen also took advantage of the US currency's weakness on the back of a strong performance in shares in Tokyo - one of the best performing equity markets in 2003.

The dollar is currently valued at 106.9 yen - close to its lowest level in three years despite frequent and expensive interventions by the Bank of Japan to limit the fall. Much of the tumble in the dollar is taking place in thin markets, with many of the heavyweight traders at investment banks spending the holiday break in the Caribbean, well away from the chill air of London and New York.

But the day of reckoning could be looming. It is widely expected that when central bankers and finance ministers from the Group of Seven richest nations meet late next month (or early February), they will seek to turn the tide.

Europe likes to believe that it can live with a strong exchange rate. But the main driver for EU recovery is seen as exports, as world trade bounces back.

So the European Central Bank may have to consider lowering interest rates if it wants to keep the euro competitive.

Audit questions

WHO would be an auditing firm? The Parmalat scandal has again put accountancy in the frame. Most of the fire has been directed at Grant Thornton, which was responsible for auditing the books of Bonlat, the offshore subsidary at the centre of Europe's biggest accounting foul-up.

But it also will be difficult for Deloitte - the main Parmalat auditor - to escape blame.

Post Enron and the implosion of Andersen, the energy group's auditors, the choices for directors selecting auditors have become ever more limited.

The big five firms have been reduced to four and now one of those four, Deloitte, and a leader of the chasing pack, Grant Thorton, find the finger of suspicion pointing in their direction - though both claim to have acted properly.

One of the ways that boards have been dealing with this issue is to cut audit firms out of non-audit services - such as tax and IT consulting - so that there is no potential conflict of interest.

This is seen in a survey by the magazine Financial Director which shows that for Britain's FTSE 100 companies, non-audit fees paid to the big four - Deloitte, Ernst & Young, KPMG and PriceWaterhouseCoopers - plunged 28.6% last year to £454m. Even so, they are still almost double the fees that the big four earn for audit work, which come to £238m.

The domination of the big four would not be a huge problem were there another cadre of audit firms coming up behind and considered capable of taking on FTSE 100 or for that matter FTSE 250 companies. But there is not.

Second-ranking firms such as Baker Tilly earn just £600,000 from auditing top 250 firms, against the £39.5m collected by PwC - the UK market leader.

There is considerable consternation among big battalion investors about the limited opportunities for audit rotation. They are pressing companies to end the conflict of interest between audit and non-audit work and they are also demanding greater transparency in non-audit fees.

Parmalat is only the latest in a series of auditing slip-ups, but one on a grand scale. In Britain, the accounts of MyTravel have been restated several times.

The Sarbanes-Oxley Act in the US and the DTI reforms here have so far done precious little to restore investors' confidence in published accounts.

The sooner auditors wean themselves off the consultancy fee milch cow and focus more closely on their core business - producing accounts that give a true and fair view - the more secure shareholders will feel.