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ab accounting and businesS 05/2012

AB

accounting and business international 05/2012

greek tragedy

accountants in the eye of the storm

advisory master view from kpmg’s jamil khatri stanford fallout film relief all round technical annual reports

INT_front_cover.indd 1

19/04/2012 11:06


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3

Editor’s choice

Just over three years ago, Jamil Khatri set up a dedicated accounting advisory service in India for KPMG. He explains how his decision to focus its work on IPOs, M&As and IFRS has made it one of the fastest-growing practices in India. See page 16

REAL-WORLD RECESSIONOMICS The eurozone’s woes won’t go away. As I write there is pain in Spain and Italy has provoked more concerns about its ability to reduce its high level of debts. The global economy is set at panic mode and there are few signs of permanent improvement. Greece, the eurozone’s Achilles heel, continues to cause anxiety; the declaration by International Monetary Fund chief Christine Lagarde a few weeks ago that ‘economic spring is in the air’ following agreement over the second Greek bailout now looks to be somewhat over-optimistic. A Greek election has been announced for this month, on 6 May, and this has inevitably led to more uncertainty. But what has it been like to be an accountant in Greece, in the eye of the storm? This month’s cover feature looks at the profession in Greece, where accountants and auditors are set to stay at the centre of the country’s debt crisis. With the country now in its fourth consecutive year of recession, Greek businesses are feeling the crunch. Many are winding down and no longer require auditing, while others are pressing for lower accountancy fees. Read our full report beginning on page 12. The backlash from the global financial crisis is one of the things that will radically alter the future role of accountants, as there will be growing regulatory requirements for accountants to act as public interest watchdogs. On page 60, ACCA’s Accountancy Futures Academy chairman Ng Boon Yew and futurist Rohit Talwar explore this and other factors that are shaping the future global business and accountancy landscape. In March, Allen Stanford, the former Texan banker and one-time billionaire, was convicted by a Houston-based jury of 13 out of 14 counts of fraud for his role in leading a US$7bn Ponzi scheme that escaped the attention of auditors in the Caribbean and the US for far too long. The story throws the spotlight on the adequacy of financial controls in small island jurisdictions and what can be done to stop future perpetrators. Our report starts on page 20. Lesley Bolton, lesley.bolton@accaglobal.com

E-UNDISCOVERED There is a worrying lack of awareness in Eastern Europe around e-discovery and how crucial it can be to audit in particular. Page 38

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TAX HAMMER Few in the financial sector have anything good to say about FATCA and the US taxman’s determination to crack the taxdodging nut. Page 42

EXPERT INSIGHTS Join ACCA and KPMG for a free, one-hour webinar as we explore how the finance transformation agenda is evolving through shared services and outsourcing. www.accaglobal.com/virtual

BIG AMBITIONS? For your next career move check out www. accacareers.com

19/04/2012 11:05


AB INTERNATIONAL EDITION CONTENTS MAY 2012 VOLUME 15 ISSUE 5 International editor Lesley Bolton lesley.bolton@accaglobal.com +44 (0)20 7059 5965 Editor-in-chief Chris Quick chris.quick@accaglobal.com +44 (0)20 7059 5966 Asia editor Colette Steckel colette.steckel@accaglobal.com +44 (0)20 7059 5896 Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar jackie.dollar@accaglobal.com +44 (0)20 7059 5620 Designers Robert Mills, Jane C Reid Production manager Anthony Kay anthony.kay@accaglobal.com Advertising Richard McEvoy rmcevoy@educate-direct.com +44 (0)20 7902 1221 Head of publishing Adam Williams adam.williams@accaglobal.com +44 (0)20 7059 5601 Printing Wyndeham Group Pictures Corbis ACCA President Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE

Features

ACCA Connect Tel +44 (0)141 582 2000 Fax +44 (0)141 582 2222 members@accaglobal.com students@accaglobal.com info@accaglobal.com

12 Building trust Greece’s accountants and auditors are central to restoring confidence

Accounting and Business is published by ACCA 10 times per year. All views expressed within the title are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. The publication of an advertisement does not imply endorsement by ACCA of a product or service. Copyright ACCA 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.

Accounting and Business is published by Certified Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certified Accountants. Accounting and Business ISSN: (1460-406X) is published monthly except July/August and November/December by Certified Accountant (Publications) Ltd, and distributed in the USA by DSW, 75 Aberdeen Road, Emigsville, PA 17318. Periodicals postage paid at Emigsville, PA. POSTMASTER: send address changes to Accounting and Business, PO Box 437, Emigsville PA 17318. 29 Lincoln’s Inn Fields London, WC2A 3EE, UK +44 (0) 20 7059 5000 www.accaglobal.com

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Audit period July 2009 to June 2010 138,255

16 Global vision KPMG in India’s Jamil Khatri has made it his business to understand multiple accounting languages 20 Fall from grace Allen Stanford’s fraud conviction highlights regulation concerns 24 Piece of the action UK tax credits for the film industry are extending to television 28 Positive outlook In his quarterly report, ACCA’s Manos Schizas sees a newfound optimism among accountants around the world 30 New horizons Corporate minnows are turning their back on the US to conduct IPOs in Asia

33 Growth market The Islamic finance sector is burgeoning, says KPMG’s Anita Menon

19/04/2012 11:59


Worldwide

There are six different versions of Accounting and Business: China, Ireland, International, Malaysia, Singapore and UK. See them all at www.accaglobal.com/ab

Regulars BRIEFING

TECHNICAL

06 News in pictures A different view of recent headlines

44 CPD: strategy The second part of our new series encourages you to explore the nature of your business

08 News in graphics We show a story as well as tell it using innovative graphs 10 News round-up A digest of all the latest news and developments

VIEWPOINT 35 Ramona Dzinkowski Environmental disclosure and reporting still falls short

47 Accounting solutions Our team of problem solvers at PwC look at joint ventures 48 CPD: annual reports Less clutter means that users can identify the key points about a business’s performance 51 Roving renminbi As China’s currency goes global, corporate accountants must increase their awareness 54 Update The latest from the standard-setters

37 PRACTICE 37 The view from Adithya Nedungadi of Moore Stephens, plus news in brief

36 Dean Westcott ACCA’s global forums have a vital role to play, says the ACCA president

38 Drilling for data E-discovery is gaining ground but it is not without problems

CAREERS 58 Speak up! Hone your public speaking skills with our expert’s advice

CPD

Accounting and Business is a rich source of CPD. If you read it to keep yourself up to date, it will contribute to your non-verifiable CPD. If you read an article, learn something new and apply that learning in some way, it will contribute to your verifiable CPD. Each month, we also publish an article or two with related questions to answer. If they are relevant to your development needs, they can also contribute to your verifiable CPD. One hour of learning equates to one unit of CPD. For more, go to www.accaglobal.com/members/cpd

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Your sector

41 CORPORATE 41 The view from Jawad Jamil of Gulf Healthcare International, plus news in brief 42 Long arm of the tax collector The US Foreign Account Tax Compliance Act has far-reaching powers

ACCA NEWS 59 CPD ACCA’s website now has a new, improved, CPD section 60 Global forums Introducing ACCA’s Accountancy Futures Academy 62 Community spirit ACCA Sri Lanka’s Sustainability Reporting Awards 2011 highlight the country’s rebirth after decades of civil war

64 News Election time is coming; India success 66 Council Highlights from the first meeting of 2012

19/04/2012 12:00


6

News in pictures

01

National League for Democracy (NLD) supporters celebrated Aung San Suu Kyi’s milestone election to political office in Myanmar. She was due to take her seat in parliament for the first time on 23 April

02

The Bahrain Grand Prix was set to go ahead despite ongoing violent protests against the ruling Al Khalifa family

03

Pope Benedict XVI criticised the 50-year-old trade embargo placed on Cuba by the US, during a threeday visit to the island

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7

04

Aid agencies appealed for funds to help the Sahel region, where 15 million children are suffering from malnutrition. The region, which includes parts of Niger (shown), has been hit by drought, high food prices and regional conflict

05

The EU and African Union hailed Senegal’s election as a victory for democracy in Africa after president Abdoulaye Wade conceded to Macky Sall peacefully

06

Demonstrators in Spain clashed with police after taking to the streets in protest against the government’s labour reforms. The country has the highest rate of unemployment in the EU and is under pressure to cut costs

07

Seizures of illegal ivory reached their highest level for two decades last year. Demand from Asia and China in particular is fuelling the trade and further endangering the African elephant

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News in graphics

8

INDIA: $8.2TR NIGERIA: $0.5TR

2050

UK: $3.6TR USA: $22.3TR PAKISTAN: $0.7TR JAPAN: $6.4TR CHINA: $25.3TR CANADA: $2.3TR

INDIA: $1.0TR

NIGERIA: $0.1TR

2010

UK: $1.7TR USA: $11.5TR PAKISTAN: $0.1TR

JAPAN: $5.0TR CHINA: $3.5TR CANADA: $0.9TR

THE RACE IS ON

According to a report by HSBC, the emerging economies led by China and India will power global growth over the next four decades. Demographics will play a crucial role, helping parts of Africa finally emerge from economic obscurity, according to The World in 2050, with five of the fast-growth countries coming from Sub-Saharan Africa.

2010

Economic league table dominated by the US,

ECONOMY Japan and some European countries

2050

West’s growth limited by high levels of income

ECONOMY per head and weak demographics

MEN STILL KEEP LION’S SHARE OF TOP JOBS

The latest Grant Thornton International Business Report shows that just 21% of senior management roles globally are held by women – little changed from the 2004 figure of 19%. Russia’s exemplary 46% may in part be a legacy of the Soviet Union’s equality ideology.

46%

27%

25%

SOUTH AFRICA

BRAZIL

CHINA

21%

20%

17%

15%

IRELAND

INT_B_graphics08.indd 8

28%

RUSSIA

UK

US

UAE

24%

FRANCE

13%

GERMANY

23%

SWEDEN

5%

JAPAN

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9

RANK 1 (4) MACRO ECONOMIC RISK

RANK 2 (2) CREDIT RISK

MIND YOUR STEP

The banana skins index, a measure of anxiety levels in the financial sector, is at its highest since it began 13 years ago. Survey respondents say that the greatest threat facing the sector is the fragility of the world economy. The Banking Banana Skins 2012 survey is produced by the Centre for the Study of Financial Innovation and PwC. Figures for 2010 are in brackets.

RANK 4 (6) CAPITAL AVAILABILITY

RANK 7 (–)

PROFITABILITY

27%

50%

POLITICAL INTERFERENCE

DERIVATIVES

1%

56%

22%

1%

53%

25%

1%

53%

26%

0%

26%

1%

Professional staffing

Finance IT

21%

Ability to respond to change from within

19%

54%

Ability to respond to change from outside

10%

41%

RANK 6 (3) REGULATION

RANK 8 (7) RANK 9 (12)

Organisational complexity

22%

LIQUIDITY

RANK 5 (1)

23%

22%

RANK 3 (5)

48%

1%

CORPORATE GOVERNANCE

RANK 10 (8)

QUALITY OF RISK MANAGEMENT

MOVING ON UP

The role of in-house finance teams is under the microscope again as CFOs look to expand their level of influence and encourage innovation and growth. Although the CFO’s role has developed in recent years, most believe that their focus over the next two years must revolve around day-to-day operations and greater engagement with external stakeholders. Respondents to KPMG’s survey From Keeping Score to Adding Value indicate that a number of challenges stand in the way of creating a more forward-looking and integrated finance department.

KEY:

High risk Moderate risk Little or no risk Don’t know

Relationship with other company groups

FEEL THE HEAT

Asian cities are challenging the top spots in the rankings for most competitive global city, in a survey by the Economist Intelligence Unit for Citigroup, Hot Spots: Benchmarking Global City Competitiveness. Singapore was the highest ranked Asian city out of a field of 120 global markets. US and European cities however remain the world’s most competitive, despite concerns over ageing, infrastructure and large budget deficits.

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9 8

1 10

2 =4

7 =4

6

3

1: NEW YORK 2: LONDON 3: SINGAPORE =4: PARIS =4: HONG KONG 6: TOKYO 7: ZURICH 8: WASHINGTON 9: CHICAGO 10: BOSTON

17/04/2012 12:58


10

News round-up

BIG FOUR WARNED ON LOBBYING The Big Four have been warned by European Commission officials to back off from ‘over lobbying’ against proposals to increase audit market competition. ‘The lobbying has been fierce and has been excessive in our view,’ Commission official Arvind Wadhera told a meeting of the European Parliament’s Legal Affairs Committee. But, he warned, ‘Our resolve is even firmer.’ Philip Johnson, chairman of the Federation of European Accountants (FEE), told the committee that it should amend its reform proposals. ‘Pure audit firms, mandatory rotation, restricting non-audit services will isolate EU on the global stage and reduce the level of expertise within audit firms and make the profession less attractive,’ he said.

INDIA UPSETS INVESTORS

India has angered foreign investors with proposals to introduce tax changes retrospectively covering several decades. Measures in March’s Budget include authorising the government to tax offshore transactions involving Indian assets dating back to 1962. This would effectively overturn the recent Supreme

BRICS TO USE OWN CURRENCIES

The BRICS nations – Brazil, Russia, India, China and South Africa – have agreed to use national currencies for their trade and loan transactions. The decision marks a further move away from dollar dependency by emerging nations, with China’s renminbi becoming increasingly powerful. The move could particularly benefit Africa, which trades extensively with China and for whom transaction costs will now be cut. Standard Bank predicts $100bn a year in Chinese-African trades will be settled in renminbi by 2015; China has announced that the renminbi will be fully internationally convertible by then. China’s trade with India grew by 25% last year and with Russia by 42%.

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Court judgment that ruled in favour of Vodafone in its offshore transaction with Hutchison relating to ownership of an Indian mobile network. Another measure in the Budget would levy a 10% tax on software imported into India since 1976.

ARAB SPRING CUTS INVESTMENT Foreign direct investment (FDI) in the Middle East collapsed because of the ‘Arab Spring’, HSBC’s Global Economic Forecast reports. FDI in the Middle East and North Africa stood at US$92bn in 2008, but this fell to a mere US$30bn last year and is predicted to reduce further to US$29bn this year.

FLYNN JOINS JPMORGAN

Former KPMG International chairman Timothy Flynn has been nominated by the board of JP Morgan Chase to become a director. The appointment will take effect after the shareholders’ annual meeting in May, assuming it is approved then. Flynn was elected chief executive of US KPMG in 2005 and became chairman of KPMG International in 2007. He joined the firm in 1979 and stepped down from his role at KPMG International in October last year.

CHINESE CENTRES LOSE GROUND Financial centres on the Chinese mainland – Shanghai, Beijing and Shenzhen – have lost favour compared to global market leaders London, New York and Hong Kong, according to the latest annual survey of 1,700 finance professionals conducted by the Z/Yen Group. Both Frankfurt and Paris rose up the rankings, reflecting their governments’ leadership in the eurozone crisis. Weaker eurozone cities – Dublin, Madrid and Milan – fell behind. Offshore financial centres have fallen back because of recent reputational damage.

KPMG EXPANDS IN MONGOLIA

KPMG’s network firm in Mongolia has merged with the local firm NIMM Audit to create the largest professional services provider in the country. The combined team brings together 50 audit, tax and advisory professionals. The move again emphasises the strategic importance of Mongolia, which has rich mineral deposits. Earlier this year, Deloitte opened a member firm in the country.

NEW CEO FOR CROWE HORWATH

Kevin McGrath is to become the new CEO at Crowe Horwath International from July. Current CEO Frank Arford is retiring. ‘Frank has done a wonderful job building Crowe Horwath International’s brand and preparing our network to compete for upmarket international business,’ said Mark Hildebrand, chairman of the board of directors of Crowe Horwath International. McGrath is currently the chief operating officer of the US firm, Crowe Horwath LLP, and has been with the firm for 35 years.

REPO LOOPHOLE ‘COULD CLOSE’

The US Financial Accounting Standards Board (FASB) will take action against the use of repurchase (‘repo’) agreements by corporations, Fitch Ratings predicts. Fitch argues that the need for urgent action by the FASB was illustrated by the use of these arrangements by the collapsed MF Global. ‘Some firms are known to have used repo-to-maturity (RTM)

19/04/2012 11:20


11

Analysis ISLAND STRIFE

Billionaire banker Allen Stanford bullied and bribed in order to protect his US$7bn Ponzi scheme, based in Antigua. His subsequent conviction has highlighted the regulation weaknesses of some small island jurisdictions

transactions to transfer assets and liabilities off balance sheets while retaining both credit and market risk,’ said Fitch. ‘This effectively masks the overall financial risk the firm is actually taking and could also set regulators off track.’ The FASB is currently reviewing repo accounting.

US HAS HIGHEST CT RATE

The US now has the highest corporation tax (CT) rate of any advanced economy, at 40%, following the decision of Japan to cut its rate to 38%. Several other countries have also cut their CT rates, with the UK bringing it down to 22% from 2014. KPMG reports that CT is charged at 33.33% in France, 30% in Australia, 29.37% in Germany and 28% in Canada. In Ireland it is just 12.5%.

P20

admitting breaking the firm’s rules by holding shares in audit clients. Meeter, who became Dutch CEO in January, was not personally involved in the companies’ audits. In a statement the firm said: ‘Given Meeter’s leadership position in the firm, he decided, in consultation with Deloitte’s supervisory board, that it was in the best interest of the firm to step down as CEO and as a member of the firm’s executive. On

ZAMBIA DEMANDS INCENTIVES

Zambia’s local firms should be eligible for the same financial incentives as multinationals, argues the Zambia Association of Manufacturers (ZAM). Multinationals can access the support by operating in multi-facility economic zones (MFEZs), but ZAM says that local firms cannot afford to locate in these and so face a competitive disadvantage. Incentives for operating in MFEZs include various tax exemptions and 0% import duty on raw materials, capital goods and machinery for five years.

DELOITTE DUTCH CEO STEPS DOWN Deloitte’s Netherlands CEO Piet Hein Meeter has stepped down after

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South African companies should review their policies on the payment of dividends, given the imposition of a new dividend withholding tax, suggests PwC. The new dividend tax system was introduced on 1 April, at 15%. The previous system of a secondary tax on companies was imposed at 10%. The impact of the higher rate will mostly be felt by South African resident

INSURANCE STANDARD A MUST

The International Accounting Standards Board (IASB) must prioritise the production of a new insurance standard, argues KPMG. The latest financial reports from global insurers show significant variations in the accountancy practices used, says the firm. ‘The current lack of consistency in the way insurers report their financial results makes it difficult for analysts and investors to analyse and compare insurers’ performance,’ said Mary Trussell, insurance partner at KPMG. ‘In an era where there is tough competition for capital, the complexity and lack of comparability of insurers’ financial reports puts the industry at a disadvantage to other sectors.’ The firm says that convergence ‘is urgently needed in 2013’.

DELOITTE QUITS CHINA AUDITS

Deloitte has resigned as auditor of two Chinese companies. It will no longer audit the accounts of Boshiwa International, which manufactures children’s clothes, or Daqing Dairy Holdings. The shares of both companies have been suspended from trading in Hong Kong. Muddy Waters – a research firm that analyses the real value of Chinese companies – warned investors about possible problems with reporting practices of more Chinese companies listed on the Hong Kong exchange.

CALL FOR DIVIDEND REVIEW

an interim basis, the position of CEO will be filled and served by deputy CEO, Peter Bommel.’

IFRS FOR NIGERIA’S MICRO BANKS Nigeria’s micro-finance banks have been told by the country’s Central Bank to adopt International Financial Reporting Standards (IFRS) by 2013 and are actively engaged in implementation, Olufemi Babajide, the chairman of the Lagos chapter of the National Association of Micro-finance Banks, has disclosed. Initially, micro-finance banks were to have partially implemented IFRS by 2010, with full implementation by the beginning of 2013. But delays were caused by some micro-finance banks assuming that only listed banks were required to comply, said Babajide.

shareholders; foreign nationals may be unaffected due to double taxation agreements, while resident companies and funds are exempt from the dividends tax.

CHINESE LEAD ONLINE SHIFT

Chinese consumers are the most frequent online shoppers, according to the first global survey of the internet retail sector conducted by PwC. Chinese online shoppers conduct an average of 8.4 internet transactions a month. By contrast, Swiss online shoppers carry out a mere 2.3 purchases per month. Chinese online consumers are also most likely to conduct transactions across a wide range of retail goods and services.

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12

IN THE EYE OF THE STORM

With the European Commission calling for a rewrite of Greece’s Code of Books and Records, accountants and auditors are set to stay at the centre of the country’s debt crisis

A

ccountants and auditors in Greece have found themselves at the centre of the country’s ongoing political and economic crisis, and it is a far from comfortable place to be. Depending on who one speaks to, Greek official data had been cooked either when the country entered the eurozone or when it asked for help; Greece was either saved by default or managed a controlled default; and the conditions for the bailout loans by the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF) are either putting Greece back on track or are deconstructing the labour and social framework of the country. Harilaos Alamanos, president of the Institute of Certified Public Accountants in Greece (ICPA), the body responsible for auditing public and private companies, says: ‘It is inevitable that the crisis is affecting both the accounting and auditing companies and their clients.’ With the country now in its fourth consecutive year of recession, Greek businesses are feeling the crunch. Hardly any new businesses are being formed or serious new investment made. Many businesses are winding down and no longer require auditing, while others are pressing for lower accountancy fees. Yet, despite the crisis, ‘Checks must be carried out

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in accordance with strict auditing standards which require documented audit work, use of advanced control programmes, expertise and skilled and experienced personnel,’ Alamanos says, noting that these are factors that ‘involve a high and inflexible cost’. Some might say that the accounting sector owes Greek citizens some payback. The trouble for Greece started with the loss of confidence in its financial data, with many arguing it should not even have been accepted in the eurozone in 2001, and that its government’s claims that Greece fully met the sound public finance

April 2011, October 2011), in contrast with previous periods,’ it says. The issue is far from resolved in Greece however, as there are allegations of political intervention and data doctoring in 2009, in order – ironically – to exaggerate the country’s deficit, helping bailout negotiations. Current and former heads of ELSTAT have been testifying to a parliamentary committee and the issue is expected to be resolved eventually in courts. Eurostat ‘refutes all allegations that the deficit of 2009 was overestimated’. Trust in the accuracy of accounts and financial data is as relevant to

‘AUDITORS WILL BE ASKED TO SHOULDER MORE TAX AUDITS, SOMETHING THAT REQUIRES BETTER TRAINING AND STRICT APPLICATION OF STANDARDS’ principles demanded of members were in fact bogus. Improvements have been made to the collection and analysis of Greece’s national finance statistics as a result, and the EU’s statistical agency, Eurostat, says that it has a good relationship with the Greek statistical office and is satisfied with the progress made since 2010. ‘Eurostat has published the data on government deficit and debt transmitted by ELSTAT (the Hellenic Statistical Authority) without any reservation for the last three notifications (November 2010,

Greek businesses. In times of financial crisis, ‘The financial information of businesses to third parties (such as banks, investors, creditors, public, etc) is particularly significant and therefore the audit of financial statements becomes of paramount importance,’ says the ICPA’s Alamanos. The auditors ‘place great emphasis on controlling the viability of the business (going concern) and the accounting practices used by firms in order to detect possible cases of “beautification” of their economic position’, he

17/04/2012 16:53


13

Protesters shout slogans against the upcoming austerity measures during a heavy rainfall in Athens in February 2012

adds, noting that the application of International Financial Reporting Standards (IFRS) in Greece has helped with listed companies, banks and other businesses implementing them on a mandatory or voluntary basis. An indication of how significant the issue of trust is can be drawn from PwC’s 15th Annual Global CEO Survey report for Greece. It is evident, it says, ‘That CEOs were disappointed and had lack of trust towards the government.’ Almost all CEOs in Greece (93%) expressed strong doubts in the government’s ability to handle the problems caused by the national debt and the global economic crisis effectively. ‘This percentage is even higher than the 85% of respondents who expressed their doubts in 2010,’ notes PwC. The Greek government is attempting to face these issues and especially the huge problem of tax evasion, assisted by the European Commission’s Task Force for Greece (TFGR) that provides technical assistance in various areas. In its latest report (March 2012), the TFGR identified a threefold challenge: to improve the organisation of the tax administration, to improve independence and to provide a streamlined and more independent

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tax administration with modern work methods (eg risk-based analysis, new audit techniques and new collection methods). According to the TFGR, there are inherent problems with Greece’s business and accounting rules, known as the Code of Books and Records. ‘The current requirements for business expense accounting are regarded as a major source of uncertainty and cost for Greek businesses,’ says the TFGR, noting that the code should ‘be repealed in its entirety and replaced by simpler legislation, not later than June 2012’. The TFGR has already arranged EU-funded workshops aiming to enhance audit strategy and planning within Greece and address specific issues linked to high-wealth individuals and large corporate taxpayers. Visits from Swedish and Dutch experts to help with debt collection, Danish and French experts to help on high-wealth individuals, audit planning and strategy and Spanish experts to help on large taxpayers are planned. Meanwhile, the recent bailout loan agreement creates more responsibilities for auditors, says Alamanos. ‘It seems they will be asked to shoulder more work in terms of tax audits, something that requires

IN NUMBERS *CRISIS€300BN

Greek government debt figures that first shocked the world in December 2009, which equated to…

113% OF GDP

...which was almost double the allowed amount.

€110BN

First EU/IMF bailout, agreed May 2010.

€130BN

Second Greek bailout, signed March 2012.

the better training of auditors and the strict application of auditing standards, but also the existence of a quality control system and the proper function of disciplinary bodies to impose penalties where appropriate,’ he says. In an effort to get the country back on track, the government has been introducing a series of bills, often following the Greek parliament’s express procedure. Professor

17/04/2012 16:53


14

Thousands of demonstrators clashed with police outside the Greek parliament as members prepared to vote on the latest EU/IMF austerity deal

George Venieris of the department of accounting and finance at the Athens University of Economics and Business says that although actual accounting and auditing practices have not changed as a result of the crisis, ‘businesses are affected as because of the many tax bills introduced, there have been changes in issues such as the calculation of taxable and nontaxable income or the categories of expenses that are recognised or not’. The ICPA’s Alamanos notes that a recent major innovation is the assignment of the tax audit for about 8,000 companies to chartered accountants, who are required to issue tax certificates for controlled companies. The new measure, which applies to financial statements from 30 June 2011, ‘is believed to be a great solution to the problem of tax audits in Greece’, he says. Chartered accountants are undertaking these audits in accordance with a predetermined programme prepared by the Ministry of Finance and the Greek Accounting and Auditing Oversight Board and will be subject to quality control to ensure the integrity of these tax audits. Despite these efforts however, the business environment in Greece is far from stable. According to PwC’s

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report, 90% of Greek CEOs are making changes to their corporate strategy and are reviewing risk management procedures, and are expecting more changes in the following 12 months, mainly concerning capital investment decisions and their capital structure. Almost all have reduced costs, including outsourcing of a business process or function. But, in one of the most worrying trends the survey brings to light, 54% of CEOs said they had implemented staff reductions in the past year, while 41% said they plan further decreases in the next 12 months.

other employees but need to up their game. The ICPA works with ACCA in the training and mutual recognition of its members ‘resulting in the enhancement of the training and professional examinations required to obtain the title of certified accountant’, says Alamanos, noting that in recent ACCA exams, ICPA members were among those who received distinctions, ‘showing that the auditing institution in Greece is comparable to those abroad in terms of training and attracting valuable new personnel’. There may be risks, but there are also opportunities as the

ICPA MEMBERS WERE AMONG THOSE WHO RECEIVED DISTINCTIONS, ‘SHOWING THAT THE INSTITUTION IS COMPARABLE TO THOSE ABROAD’ ‘According to the survey conducted in 2010, 60% of Greek CEOs had already decreased headcount in the previous 12 months and 36% were planning to do so in the coming year. These percentages are the highest in the eurozone – as well as globally – and are a clear reflection of the huge unemployment problem,’ notes PwC. In this context, accountants and auditors may face a lesser threat than

reconstruction effort progresses. ‘We believe,’ declares Alamanos, ‘that the auditing institution is overcoming the crisis and that its members with their experience and diverse knowledge will be able to assist businesses in their development efforts that will be launched soon.’ Michael Kosmides, journalist based in Athens

17/04/2012 16:53


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Interview

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ADVISORY MASTER Jamil Khatri has created one of the fastest-growing practices at KPMG in India – Accounting Advisory Services – by focusing on IFRS, training, IPOs and M&A

S

eventeen years ago Jamil Khatri, then all of 20 years old, joined KPMG as a trainee. He qualified as a chartered accountant a year after joining. Today, he heads one of the fastestgrowing practices of KPMG in India – Accounting Advisory Services (AAS). In October 2011, he was appointed the head of AAS for KPMG’s EMA (Europe, Middle East and Africa) region. And a few months later – in January – he became global head of AAS. The AAS practice in India is Khatri’s baby. He set it up with seven people in January 2009. Three years on, it has more than 150 employees. The AAS team works with KPMG clients to help them achieve compliance and advises them on organising their financial reporting processes. It also helps them ensure that their accounting operations match their business objectives. Right from the beginning of his career, Khatri knew the world would need professionals who understood multiple accounting languages. In 1996 he started specialising in US generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), and helped a number of large Indian companies convert their financial statements from Indian GAAP to US GAAP and IFRS. In 1997 he was seconded to KPMG UK under a shortterm rotation programme. Along the way, he found the right mentors – Albert Aboody and Bala Swaminathan – who guided him through several international projects, including those that involved the

INT_F_Jamil.indd 17

listing of securities in overseas capital markets. In 2006 he qualified as a US certified public accountant. Today, he is viewed within India as a leading practitioner in IFRS, US GAAP and overseas listings. ‘The first sensible move I made in my career was to focus on international reporting as an area of the future,’ says Khatri. He was inducted into the KPMG partnership in 2003. And soon after that, he was nominated as the head of the US GAAP and Securities and Exchange Commission (SEC) audit practice of KPMG in India.

High-growth business Until 2009, Khatri headed the US GAAP and SEC audit practice of KPMG in India. ‘Around 2008, I felt that KPMG India would do better if we had a dedicated accounting advisory service practice,’ he says. ‘The results have been very encouraging.’ Setting up AAS was one of the biggest risks of Khatri’s career. But it has paid off handsomely. The practice has been growing at a compound annual growth rate of more than 50% since its inception. AAS has a number of key service lines. The first deals with convergence with IFRS. In India, KPMG is a clear leader in this area. ‘Only 400 to 500 companies in India have seriously attempted IFRS compliance; and 200 of those have been our clients,’ Khatri says. The second is a learning solutions business. AAS provides a range of tailored training solutions in the areas

The tips * * *

‘Focus on the team. Always ensure you have the right people working with you.’ ‘Seek the right advice. It’s critical to have a network of partners who will guide you.’ ‘Align the finance function with what the organisation is doing. For instance, if the organisation is not focusing on mergers and acquisitions, the finance team can’t focus on M&A.’

*

‘While talent is important, hard work and commitment are more important. You can overcome your shortcomings through hard work and commitment.’

*

‘Identify your strengths early on. Identify areas where you can excel.’

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of IFRS, US GAAP, Indian GAAP, basic accounting and eXtensible Business Reporting Language (XBRL). ‘There is a lot of appetite for accounting knowledge,’ he adds. Recently, KPMG Learning Solutions (KLS) announced a programme structured to cover the DipIFR (Diploma in IFRS) syllabus. KLS also prepares participants for the latest accounting practices, providing them with an insight into Ind AS (IFRSconverged standards) and creating an awareness of the process flow for financial reporting using XBRL. ‘We are also in the process of tying up with universities to offer some relevant accounting courses,’ says Khatri. The KLS business has a dedicated team of 20 people. AAS provides capital market readiness services to address issues faced by clients on their journey towards an initial public offering (IPO) and their preparations for being a listed company. ‘IPOs are not a routine activity for companies. We have the people as well as the knowledge in this area,’ he says. With KPMG as an adviser, the client can focus on the strategic elements of the IPO process. AAS helps companies with post-deal reporting in order to make financial statements consistent between the buyer and the seller. It also provides financial reporting support. ‘We advise managements on technical accounting issues, such as the revised schedule VI of the Companies Act 1956. Our clients work with us, and then take that knowledge to their auditors to make the required changes,’ Khatri says.

An uncertain environment Today, there is a great deal of uncertainty in India over regulation. For instance, the New Companies Bill 2011 has yet to clear the Indian parliament. Once passed, the act will update Indian company law in line with

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The CV 2012

Appointed global head of AAS.

2011

Appointed AAS head for EMA region.

2009

AAS set up in India with seven staff.

2008

Worked with CEO and head of advisory of KPMG in India to set up AAS.

2006

Qualified as a US certified public accountant.

2003

Inducted into KPMG partnership. Head of US GAAP and SEC practice of KPMG in India.

1997

Seconded to KPMG UK.

1996

Qualified as chartered accountant.

1995

Joined KPMG India as a trainee.

the best global practices and introduce ideas such as corporate social responsibility (CSR), audit rotation, class action suits and a fixed term for independent directors. And then there is uncertainty over when tax regulations like the direct tax code (DTC) and the goods and services tax (GST) will come into effect. Uncertainty also shrouds India’s plan to adopt IFRS. The regulators – the Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA) – had decided

to converge accounting standards with IFRS for accounting periods commencing on or after 1 April 2011. On 25 February 2011, 35 Ind AS were issued by the ministry. However, the ministry has not specified their implementation date. The ICAI has suggested 1 April 2013, but the government has not indicated whether this suggestion will be accepted or not. ‘The big challenge is not the change, but the uncertainty about the change. It poses difficulties for companies to plan around these [proposed] changes,’ he says. Many KPMG clients, according to Khatri, are wondering if they have wasted time on convergence with IFRS. ‘Companies do not know where to invest their time. We are asking them to prioritise by keeping an eye on the developments. Priorities should be set on the basis of immediacy and impact,’ Khatri says. Asked when India will implement Ind AS, Khatri says: ‘Honestly, we don’t know where we are heading. While the standards have been issued, it is not known whether they will go through in the current form or not.’ The biggest issue is the number of carve-outs. ‘There is definitely a concern over these carve-outs. And in my view, while some carve-outs may be mandatory, some can be avoided.’ Khatri is part of a working group, set up by the Central Board of Direct Taxes (CBDT), to look into ways in which the implementation of IFRS-converged standards will affect taxation in India. This group has members from the Income Tax Department and the tax and accounting professions. Based on the recommendations of this group, the CBDT has issued a discussion paper on the matter. ‘Settling the taxation issues is a prerequisite to the implementation of the IFRS-converged standards,’ he says. According to Khatri, the transition

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The basics KPMG

* *

KPMG was established in India in September 1993. The firm operates from offices in Mumbai, Pune, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Kochi, Chandigarh and Ahmedabad.

‘ONLY 400 TO 500 COMPANIES IN INDIA HAVE SERIOUSLY ATTEMPTED IFRS COMPLIANCE; AND 200 OF THOSE HAVE BEEN OUR CLIENTS’ to IFRS will also require amendments to the Companies Act 1956 as well as alterations to the Reserve Bank of India’s guidelines. ‘There is complete lack of visibility on the intent of the government. And therefore, we have seen no progress on the transition to IFRS,’ he says.

Focus on learning High growth rates invariably raise talent issues and Khatri is concerned about the quality of talent he sees in the job market. ‘Our recruitment processes have become more robust. We have to sieve through more profiles. We also spend more time training people,’ he says, adding that this is despite AAS being a preferred employer in the industry. The same applies to clients. ‘They are worried about the depth of professionals coming into the job market every year.’ He quotes the example of one client, a large business process outsourcing (BPO) company that recruits a lot of graduates each year – it now needs eight weeks to recruit enough fresh graduates, as opposed to four weeks previously. This is because the

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company now trains its graduates and offers them a technical refresher course before taking them on. That’s why training is a huge opportunity for AAS. ‘We are seeing a lot of interest at both individual and organisation level on acquiring an additional degree or certification, particularly in areas like IFRS,’ he says. KPMG in India currently has fewer than 20 ACCA-certified accountants. ‘We are sending a lot of people from KGS [KPMG Global Services] for the ACCA certification in IFRS,’ Khatri says. KGS was set up as a global capability centre and provides professional services to KPMG member firms globally. ‘The knowledge of IFRS is critical for KGS,’ he adds. Khatri says that private initiatives in the area of training and education are bound to expand in the future. ‘We need to seriously look at our syllabus. The syllabus has not changed significantly, while the business environment has changed drastically.’ With the Indian economy growing rapidly, staff attrition has been a key problem for most companies in India. But for Khatri, sticking with the organisation has proved rewarding. Not

* *

It has a client base of more than 2,700 companies. It offers clients a full range of services, including financial and business advisory, tax and regulatory.

* *

It has more than 7,000 employees. The Accounting Advisory Services (AAS) practice has been growing at a compound annual growth rate of more than 50% since its inception in January 2009.

*

AAS provides accounting solutions and training strategies to companies on a wide range of topics such as XBRL, IFRS, US GAAP and Indian GAAP.

only did he find the right mentors, but also the right opportunities. ‘There were many temptations to leave KPMG. But the lesson for me has been that if your aspirations and that of your current organisation match, the best place to grow is your current organisation,’ he says. His recipe for professional success is hard work, commitment, the ability to take risks and a focus on the people around you. Swati Prasad, journalist

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STANFORD FALLOUT

The adequacy of financial controls in small island jurisdictions is in question following the trial and conviction of billionaire Allen Stanford for running a US$7bn Ponzi scheme

I

f it seems too good to be true, it probably is. The most recent example of this golden rule of investment being disregarded to the grief of those who paid it no heed is the high-profile case of R Allen Stanford, a Texan banker and one-time billionaire. In March the ex-financier was convicted by a Houston-based jury of 13 out of 14 counts of fraud for his role in leading a US$7bn Ponzi scheme that escaped the attention of the auditors in the Caribbean and the US for far too long. Following three years of postponements, Stanford’s six-week trial began in January on charges that included wire fraud and mail fraud. Once revered in Forbes magazine as one of the wealthiest Americans, the swindler bilked 30,000 investors out of money placed with his Antigua and Barbuda-based bank, using the funds to support an extravagant lifestyle. The trial unveiled Stanford’s fraud and the methods he used to bully and bribe regulators in Antigua to cover up the scandal; he now faces a prison term of 20 years. The evidence presented to jurors about Stanford and his fallen empire reveals latent weaknesses in small island countries, such as Antigua, and their capacity to maintain high standards within the accounting and auditing sectors to investigate and prevent fraud. According to John Coffee Jr, a professor at Columbia Law School who

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focuses on white-collar crime, countries are more susceptible to harbouring fraud under certain circumstances. ‘One of two factors may be present: that [the country] is a small, emerging market country or it is in the period right after privatisation, like in Russia or Eastern Europe,’ he explains. ‘Those countries weren’t small but there were a number of financial pirates who arose in a transitional and somewhat unsettled period when regulators and government did not really have established ways of spotting fraud.’

Coffee suggests that the Stanford fraud reveals a failure by some regulators to resist temptation rather than a failure of audit capacity. ‘I don’t think this is a case of negligence or ineptitude, I think this is a case of corruption. I think that [Stanford] was fast and loose with the money in that bank and he used a lot of it to support his hobby [cricket], which did generate some positive returns for Antigua.’ Stanford used his bank as a personal piggy bank. He skimmed hundreds of millions of dollars from investors and

Since Allen Stanford’s arrest and trial for a $7bn fraud, Antigua has moved to reform its financial regulatory system with technical assistance from the EU

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reinvested a significant portion of that money into his own personal ventures. He loaned himself more than US$2bn from his Stanford International Bank and by 2008 had blown US$711m on failed ventures and his own expenditure and personal possessions. He put US$333m into two startup airlines, US$20m into yachts and US$37m into promoting cricket tournaments. ‘Practically none of Mr Stanford’s companies were profitable,’ FBI agent Robert Martin told the court about the return from these investments.

However, while Stanford continued to consistently steal from his investors, much of the money was pumped back into the Antiguan economy through his own spending habits and poor investments. James Ratley, president and CEO of the US Association of Certified Fraud Examiners, said he believed it was this that led to the government and regulators’ failure to investigate him. ‘Nobody questions good news,’ said Ratley. ‘There was no one complaining. In all likelihood the fact that it was a

small country did play a role because Stanford probably had more money than the national budget and here he was bringing jobs to a small country [the Caribbean twin-island state has a population of approximately 87,900]. ‘He was making a lot of people’s lives a lot better in that small country. And if he goes away, what happens to these jobs? What happens to the wealth that he brings to that country?’ Besides the influx of money that Stanford’s lifestyle and side investments brought into the country, the defence’s star witness and Stanford’s former CFO James Davis testified that the fraudster maintained an unethical and bizarre relationship with both the government and former official bank regulator Leroy King.

Hush money ‘Mr Stanford said [he and King] actually cut themselves and had a blood oath,’ Davis told the court. He also confirmed that Stanford made regular hush money payments to King, then chairman of the Antigua & Barbuda’s Financial Services Regulatory Commission, through a secret Swiss bank account. ‘[The Swiss account] was a slush fund, just used for whatever the holder wanted to use it for,’ said Davis. ‘One purpose was to pull cash out to bribe the regulator in Antigua, Mr Leroy King.’ Not only did Stanford actively bribe the country’s regulator, the court

INT_F_Stanford.indd 21

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heard, but he also made a generous loan to the government of US$40m, a loan that, according to Davis, was never paid back. While the Stanford case demonstrates the failure of Antiguan regulators and government to ensure accountability in the financial sector, Glen Parmassar, a forensic expert in the Caribbean, says this issue is not specific to one country in the region. ‘One of the problems for the Caribbean is that there is a lack of internal control and oversight regulations in the operations of a lot of these companies,’ explains Parmassar, who works for the Caribbean Forensics & Financial Fraud Institute and is based in Trinidad and Tobago. ‘For every company to operate, there should be a number of things in place to allow the company to operate efficiently. That comes from proper management practices, good oversight and control.

Allen Stanford, here escorted into court in 2009, is due to be sentenced in June with the regulator in Antigua, but I think that is possible in a jurisdiction where there is an inadequate regulatory regime that requires independent audit,’ Travers says. ‘The common thread with Madoff and Stanford is this sort of one-manband audit function, which signed off on fraudulent accounts. Now if you had had an independent audit firm in there, providing independent review,

‘IT REMINDED ME OF A SAYING WE HAVE AT HOME. IT WAS A CLASSIC CASE OF THE RAT BEING PUT IN CHARGE OF THE CHEESE’ And then from the fraud perspective, [companies] should have an ethics committee and an audit committee at the board level so that any transgressions can be easily detected and corrected.’ Parmassar suggests the Caribbean lacks sufficient numbers of trained professionals qualified to detect fraud using forensic investigation techniques, which would prevent these scams from happening in the future. Other experts suggest the lack of independent auditors in Antigua enabled Stanford to continue his fraud for as long as he did. Anthony Travers, chairman of the Cayman Islands Stock Exchange, likens the case to one of the most notorious Ponzi schemes in history, Bernie Madoff’s US$40bn fraud in the US.

The Ponzi trail ‘Clearly it is right to say that Allen Stanford had an unusual relationship

INT_F_Stanford.indd 22

I don’t think you would get the cosy relationship with the local regulators having the same adverse effect.’

Bribery and bullying During the trial, it became clear that Stanford used bribery and bullying to establish cosy relationships with the government and top regulators. Marian Althea Crick, Antigua’s current Financial Services Regulatory Commission chairman, who replaced King in 2009 after he was indicted, testified against Stanford. She said: ‘It reminded me of a saying we have at home. It was a classic case of the rat being put in charge of the cheese.’ Crick was the former chairman at the regulatory commission but resigned from the position in 2002 following years of public and private disagreements with Stanford. And her probity shows that while weak controls in a small jurisdiction can allow corrupt plutocrats to bully

regulators and perpetrate financial fraud on a massive scale, it is far from inevitable that such criminals can succeed in these environments. Indeed, Clifford Johnson, a partner at PwC in the Bahamas, says that certain precautions can and should be taken to prevent regulators and accountants from experiencing pressure at the hands of their clients, even in small, emerging jurisdictions. ‘We are auditors and when we are performing the role of an auditor, we have to ensure that we do the work sufficient to issue the report,’ says Johnson. ‘I don’t think that causes us – or it shouldn’t cause us – to have any lapse or any standards that are watered down compared to the more developed territories. ‘I would readily admit that yes, you are likely to encounter someone at a client’s premises that you might have gone to university with or might have gone to high school with or might have worked with in a professional environment. I would believe that that does not colour our judgment any more than in any other jurisdiction.’ Since Stanford’s indictment in 2009, the Antiguan government has taken steps to reform its financial regulatory system, receiving technical assistance from the EU and is currently reviewing the financial commission for potential restructuring. Days after his conviction, the Houston court ordered Stanford to forfeit 29 of his accounts, which total an estimated US$330m, located in London, Zurich, Geneva and elsewhere. Leah Germain, journalist

18/04/2012 14:52


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PRODUCER’S CUT

Tax credits available to UK film producers and their international partners have boosted box office receipts. Now it will be extended to high-end TV dramas, reports Stewart Jell

A

ccording to a recent report issued by the British Film Institute (BFI), annual UK cinema admissions increased by 1.4% to 171.6 million in 2011, the third highest total of the last decade. The gross value of those ticket sales was £1,040m, up 5% on 2010. The strong performance of a number of independent British films, such as The King’s Speech and The Inbetweeners Movie was a major factor behind the growth in box office revenue and, in the UK, the aggregate spend of feature films that commenced principal photography in 2011 was £1,260m. One of the reasons for this large

investment in the UK film industry is the availability of funding from the UK’s tax relief system, known as the Producer’s Tax Credit (PTC). For films that qualify as a British film via the Cultural Test, a UK film production company is eligible to claim the PTC from the UK government. The PTC invariably forms part of the overall financing of the film, and how much of a film budget the government will ultimately assist in financing is dependent on the spend on qualifying costs by the production company. Only spend on production costs that are ‘used and consumed’ in the UK is eligible for consideration when

calculating the amount of PTC that can be claimed. But for a film where the vast majority of the production costs are ‘used and consumed’ within the UK, the PTC could be as much as 18% of the overall budget. The PTC is therefore of huge importance to the UK film industry and this has been recognised by the UK government’s decision to continue the film tax relief until the end of 2015. In January this year, prime minister David Cameron stated: ‘The UK film industry, the skills and crafts that support it, and our creative industries more widely, make a £4bn contribution to our economy and an incalculable

The UK film industry is set to continue enjoying tax relief until at least 2015, which will be welcomed by the Bond franchise and many other production companies

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HBO chose to film an episode of the new Game of Thrones series in Northern Ireland due to the tax incentives offered to TV productions in the country at the time

contribution to our culture.’ It is reassuring for the UK industry to know that there is a firm commitment from the UK government, but also a welcome message to the rest of the world that the UK is a leading country in which to develop and produce film.

International appeal The message has certainly been heard by a number of leading US studios. The market share of UK films produced with US studio backing in 2011 by the likes of Universal Pictures, Walt Disney and Warner Bros was 22.7%. The message has also been embraced by seven other countries, namely Australia, Canada, France, India, Jamaica, New Zealand and South Africa, with which the UK has official co-production bi-lateral treaties. Productions that qualify under one of the treaties are eligible to apply for the benefits of the UK’s tax relief system. While the UK film industry has already had the benefit of the PTC and knows it will continue for another three years, there has been no comparable incentive for the UK television industry, which has not benefited from tax incentives since the sale and leaseback tax breaks were abolished a decade ago. The message that this has put out to the UK, as well as the rest of

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the world, is in stark comparison to that of the film industry. It has not just been a case of failing to attract television to the UK. Partly through the lack of any incentive to produce in the UK, UK television producers have, on occasions, taken the decision to produce overseas. Recent dramas telling a British story but made overseas include Birdsong, Strike Back, The Tudors, Camelot, Parade’s End and the Julian Fellowes’ drama Titanic. Whereas the UK film industry has

Regional Development Fund. There is the potential that the programme could run for many series and, with such a lengthy level of investment, the impact on the immediate infrastructure of the region is considerable. US television networks actually formalised their concerns over the lack of any tax incentive by writing to the UK government stating that they are not likely to undertake UK-based television productions. The US studios have certainly

WHILE THE UK FILM INDUSTRY HAS ALREADY HAD THE BENEFIT OF THE PTC, THERE HAS BEEN NO COMPARABLE INCENTIVE FOR UK TELEVISION embraced large US studios, the UK television production community has only been able to watch as large networks, such as HBO, sought the tax incentives of Northern Ireland, which have not been available elsewhere in the UK.

Ripple effect HBO commissioned a third series of the award-winning Game of Thrones and the production continues to receive funding from Northern Ireland Screen, supported by Invest NI, as well as a contribution from the European

been lobbying for incentives for UK TV productions. Glenn Whitehead, executive vice president business and legal affairs at HBO, says: ‘The UK is one of the best places in the world to film and we would love to bring more productions there. We have found that the UK has highly skilled people and exactly the right infrastructure to make great television. However, without a television incentive in place, the UK is a more expensive option to shoot than other territories in the world. ‘In fact, 85% of our total production spend is currently focused on countries

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George Osborne has announced the introduction of incentives for British high-end television productions, such as Downton Abbey, partly filmed here at Bampton, Oxfordshire

with tax incentives. We were pleased to base Game of Thrones in Northern Ireland, where grant funding was made available. Our investment, which totals tens of millions of pounds, has had a major impact on job creation and the long-term infrastructure, benefiting the economy hugely,’ Whitehead says. Eric Shain, Disney ABC Cable Networks Group vice president, production finance lobbied culture minister Ed Vaizey, saying: ‘We do not currently have the UK on our upcoming production radar due to a lack of tax credits being offered to TV productions.’

High drama One report suggests that incentives could generate an influx of £350m into the drama industry alone, while another, focusing on the animation sector, concludes that any cost to the government would be recouped within three years. The Department for Culture, Media and Sport is understood to have urged the Treasury to introduce measures to safeguard the future for British animation and high-end drama. It was therefore with widespread relief that those in the UK TV production industry heard chancellor George Osborne announce the introduction of incentives for the production of British high-end television productions in his Budget

INT_F_film.indd 26

PRODUCER’S *THE TAX CREDIT speech on 21 March. The incentives will also cover video games and television animations. Consultation will take place over the summer with legislation planned to be introduced in next year’s Finance Bill, as state aid approval will be required from the European Union. Speaking after the Budget, HBO’s Whitehead commented: ‘Today’s news on a new tax incentive has turned the UK from one of the most expensive options into a competitive and affordable location. We would, therefore, love to bring more productions to the UK.’ Although the details have not been announced, it is expected that the scheme will operate in the same way as the PTC, with dramas with a budget in excess of £1m per hour benefiting from a 25% credit. While this proposal is aimed at the top end of television programming, it is an incentive that is desired and required. Once it has been established and its success is acknowledged and tangible, then it will hopefully allow the relief to filter down to programming with smaller budgets, thus embracing the whole television industry – as is the case in the film industry.

Films must score 16 out of 31 points to classify as British and access UK tax relief. Points are awarded for degrees of British content:

Stewart Jell is a principal at Shipleys LLP in London. Most of his clients are either in the entertainment and media industry or closely linked to it

Once classified as culturally British, the relief is calculated as 20% of qualifying expenditure used and consumed in the UK.

CULTURAL CONTENT 4 4 4 4

Film setting Lead characters Subject matter or material Language of original dialogue

CULTURAL CONTRIBUTION 4 Contribution to British culture

CULTURAL HUBS 2 Principal photography/visual effects/special effects/research and development/shooting/visual design/layout and storyboarding 1 Music recording/audio post production/picture post production/ voice recording for animation

CULTURAL PRACTITIONERS 1 1 1 1 1 1 1 1

Director Scriptwriter Producer Music composer Lead actors Majority of cast Key staff Majority of crew

17/04/2012 16:52


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09/01/2012

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Taking the pulse of the global economy In his regular quarterly report, ACCA’s Manos Schizas sees a newfound optimism among professional accountants around the world When the results for the third anniversary edition of the Global Economic Conditions Survey came in last week, I must admit I was sceptical. The share of respondents reporting confidence gains in their own organisations had nearly doubled from 16% to 29%, and while the majority (54%) still believed that the global economy was deteriorating or stagnating, that figure was down from 73% in the previous quarter. Fearing embarrassment, I started ticking off objections. Turns out that the rise in confidence was not due to biases in the sample. Nor was it skewed by one or two days of positive newsflow; it was based not only on perceptions but also on fundamental improvements in demand, business dynamism and access to finance. It was reflected in rising investment and employment. It was consistent across regions and industries, although the Americas and Western Europe seemed to have benefited the most, as did manufacturers and distributors, particularly in the high-tech sectors. Business dynamism has risen the most in the Americas and Asia Pacific,

*THE VIEW FROM THE MIDDLE EAST

The Middle East outperformed other regions in early 2012, with 32% of respondents reporting confidence gains, up from 26% in late 2011. However, this is a diverse region and it’s very difficult to draw conclusions in aggregate. Saudi Arabia and the UAE stand out. Business confidence in both countries is very high (42% and 38.5% of respondents respectively reported confidence gains), and both can rely on strong, sustainable government spending. Moreover, Saudi Arabia boasts the best performance of any major market in terms of new orders and investment. Egypt, on the other hand, is a negative outlier, and is still reeling from the last year’s transition despite successfully holding elections in January. This is the only major ACCA/IMA market to report a relative loss of confidence in early 2012. Only 24% of respondents reported a confidence gain, compared with 30% in late 2011.

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while Africa, still ahead of the rest on the confidence scoreboard, seems to be losing ground. Governments have helped too, even though members generally think that many major economies, including both the US and its straight man, China, are over-spending. On the other hand, policymakers hoping to deliver growth despite austerity in Western Europe and elsewhere have been frustrated in their efforts.

A NEW-FOUND DYNAMISM CAN BE SEEN IN MANY DEVELOPING AND TRANSITION ECONOMIES Much more encouraging is the fact that a new-found dynamism can be seen in many developing and transition economies, with businesses securing new orders where previously they would not have. In the Asia Pacific region and the Americas this has led to a bounce in investment and new hires. This is a very welcome trend; investment has been subdued since the end of the ‘green shoots’ stage of the global recovery, which lasted from mid-2009 to mid-2010. This investment is focusing on two kinds of opportunities in particular. Customer insights, namely the need to understand and benefit from spending decisions under new constraints, is one; the other is supply chain optimisation through deepening relationships and a stronger focus on quality. It’s as though iPad sales were driving the entire world economy. I’m not even sure they don’t any more. The dark side of this new-found dynamism, however, is rising input prices. If even this very timid recovery is accompanied by rising inflation, then a full-blown recovery is likely to provide a challenge for central banks and other policymakers. And when interest rates are forced up again, both business and sovereigns had better be ready.

19/04/2012 12:01


29 THE ACCA/IMA GLOBAL ECONOMIC CONDITIONS SURVEY – HOW TO TAKE PART The views of ACCA members are highly valued and receive widespread media coverage. The Q4 2011 survey was quoted in the press around the

world more than 500 times. So why not have your say when the next quarterly survey opens on 11 May? Everyone can participate – simply look for the link

WHAT INFLUENCES CONFIDENCE?

TAKING THE GLOBAL TEMPERATURE

GLOBAL -3 AFRICA 8 MAINLAND CHINA 4 MIDDLE EAST 0 PAKISTAN 0 IRELAND -7 EASTERN EUROPE -15 UK -17 MALAYSIA -22 HONG KONG -28 SINGAPORE -41 Q4 2009

Q1 2010

Q2 2010

Q3 2010

-13

THE DANGER DOWNPOINT The ACCA Confidence Index correlates strongly with economic growth globally. A reading of below -13 suggests the economies of the developed world are contracting and the global economy is slowing to a halt.

Q4 Q1 2010 2011

30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80

Q2 2011

1 REVENUES FALLING 2 GLOBAL ECONOMY SEEN AS MAKING PROGRESS 3 NEW ORDERS FALLING 4 VERY GOOD POLICIES 5 VALUE-ADDED BUSINESS OPPORTUNITIES 6 AUSTERITY 7 SECTOR-SPECIFIC FACTORS 8 POOR POLICIES 9 ACCESS TO GROWTH CAPITAL 10 BUSINESS SIZE 11 UNSTABLE CUSTOMERS Q1

More significant influence on confidence

Breaking down the ACCA Confidence Index geographically reveals some striking variations, with members in Africa still showing most confidence.

0 -10 -20 -30 -40 -50 -60 -70 -80

in AB Direct or watch out for the email invitation. The survey is carried out in association with the US-based Institute of Management Accountants (IMA).

Q3 2011

Q4 2011

2012

The ACCA/IMA Global Economic Conditions Survey follows 38 different indicators of trading conditions and firms’ responses to them, as well as two indices of business confidence and perceptions of the global economy. In the list of factors shown here, we’ve used statistics in order to tease out the effects of different aspects of the business environment, both positive and negative, on confidence.

Total Q1 2009–Q1 2012 sample: 20,881 responses from ACCA members around the world

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 Q1 2010 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

THE ACCA CONFIDENCE INDEX

Business confidence remains in negative territory. The graphics show the percentage of respondents saying they have gained business confidence, minus those who have lost it.

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19/04/2012 12:01


30

THE PROBLEM FOR MINNOWS

With increasing numbers of small firm IPOs swimming away from the US, it’s time to turn the tide

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A

merica’s stock market once teemed with corporate minnows. Young companies worth less than US$50m routinely accounted for 80% of initial public offerings (IPOs) in the 1990s. But in recent years this precious part of America’s corporate ecosystem has been badly depleted, with small companies now accounting for around a fifth of new listings. Instead, a growing number of dynamic US startups are choosing to list their shares overseas – especially on exchanges in Asia. Many of those that remain private are swallowed up by bigger companies. This has started to cause alarm in the US. Emerging growth companies – as these fledglings are sometimes called – are essential to the health of a modern economy. Often highly innovative, they are prolific job creators. A 2010 study by IHS Global Insight concluded that companies under five years old had accounted for all of the net job growth in the US between 1980 and 2005. Around 90% of this job creation occurred after a company’s IPO. This super-charged job growth is lost if small companies are merely swallowed up by bigger rivals. So it is worrying indeed that the decline in small company offerings no longer appears confined to the US. ‘Early signs of the same IPO disease are apparent in Europe too,’ says Colin Mason, professor of entrepreneurship at the University of Strathclyde and author of a report on the subject for the City of London Corporation. Yet while mature markets atrophy, emerging exchanges – particularly in China – are becoming more attractive to smaller companies. Experts believe that this contrast reflects more than merely the fast growth in Asia relative to the US and Europe. Instead, something deeper appears to be going on. At least in America this deterioration has finally captured the attention of politicians. The US Treasury assembled its IPO Task Force to get to the bottom of the problem, identify its causes and find solutions. The first mission was to confront the scale of the decline. The golden era

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for small company IPOs occurred as recently as the mid-1990s. According to the Task Force, in 1996 alone, 791 small companies listed for the first time on US exchanges. But between 2001 and 2008, such IPOs averaged just 157 a year. Overall there were 75% fewer such IPOs in the decade to 2010 than there had been in the 1990s. Instead, only larger and more mature companies appear to have been braving the public markets in recent years. In the late 1990s the average age of a company when it listed was five years old. Now newcomers are nine years old on average. Since young company IPOs have been proven to supercharge employment growth, the Treasury’s task force estimated that this malaise had cost as many as 22 million jobs through 2009. Explaining this trend is no simple matter, says Chuck Robel, a former partner at PwC and member of the Task Force. ‘There was no single factor that seems to be responsible but rather a cumulative toxic effect from various problems’, he says. One popular scapegoat, especially among American libertarians, is red

regulatory conditions required for a public offering these days,’ says Robel. ‘This is time and money that is not being devoted to the development of the business.’ Sarbanes-Oxley and other rules make listing on US exchanges rather pricey, at least relative to some less regulated exchanges. While the cost of listing on the Nasdaq is around 13% to 15% of the total capital raised, the cost on London’s Alternative Investment Market is only about 10% to 12%, according to AIM Advisors, which helps US companies list on the British exchange.

Ramp it up One popular solution is to phase in certain regulations for companies with revenues of less than US$1bn a year. This ‘on-ramp’ would give smaller companies up to five years to achieve full compliance. At present, the Treasury Task Force argues, emerging growth companies ‘must begin to build up a significant compliance infrastructure a year or two ahead of time’. Sarbanes-Oxley also forces them to rotate auditors regularly – to

OVERALL THERE WERE 75% FEWER SMALL COMPANY IPOS IN THE DECADE TO 2010 THAN THERE HAD BEEN IN THE 1990S tape. The Task Force estimated that the average cost of complying with pre-IPO regulations was around US$2.5m, followed by ongoing expenses of around US$1.5m a year once public. For a startup this can be a significant share of a company’s earnings and can lower the company’s market capitalisation by ‘tens of millions of dollars’, the Task Force concluded. One particular bugbear for Republicans is the 2002 SarbanesOxley Act, introduced after accounting fraud caused the collapse of energy company Enron. The act forces companies and their accountants to test internal controls – an activity that many regard as healthy but expensive. ‘We are talking about thousands of man hours for companies to meet the

prevent the sort of cosy relationship that developed between Enron and accountancy firm Arthur Andersen. The downside is that it is expensive for the smaller company since it can take several years to fully ‘educate its auditor fully about the company’s business model’, the Task Force says. This ‘on-ramp’ proposal is widely supported and may well become law in coming years. Still, there are nagging doubts as to whether regulation can be held fully responsible for the problem. ‘The impact of Sarbanes-Oxley has been blown out of proportion,’ says David Weild, a former vice chairman of Nasdaq and adviser to US accountancy firm Grant Thornton. Firstly, he argues, the rot started to set in well before the act was passed in 2002. In addition, even

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32

less regulated exchanges like AIM have been having problems. The downward trend in AIM listings is also clear; in 2011 just 90 companies launched on the exchange, less than a fifth of the level seen around the mid-2000s. Indeed, by the end of 2011 the number of companies listed on AIM was at its lowest level in seven years. So pinning the blame entirely on US over-regulation may be overly simplistic. Instead, Weild proposes a somewhat counter-intuitive alternative. He blames well-meaning efforts to bring down the price of trading shares. The rise of electronic trading in the late 1990s slashed the cost of dealing in shares. The public benefited from cheaper transactions but the flip-side of this was lower profit margins for brokers – who had traditionally helped draw investor attention to smaller shares.

Penny pinching Then in 2001 brokers suffered another blow with decimalisation in the US. Instead of pricing stocks in fractions of dollars they were now denominated in pennies. This double blow to profit margins radically reduced the incentive to deal in the stock of smaller companies. Since these profits had also funded research into emerging companies, this too declined sharply, making it harder for investors to understand them. Instead, it made more commercial sense for brokers to focus on megacapitalisation stocks, where huge trading volumes would compensate for meagre spreads. ‘I call this the stock market commission paradox,’ says Weild. ‘Lower cost trading looks great for consumers, but it

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‘LOWER COST TRADING LOOKS GREAT FOR CONSUMERS, BUT IT REDUCES THE INCENTIVE FOR BROKERS TO DEAL WITH SMALLER COMPANIES’ reduces the incentive for brokers to deal with smaller companies so the result is fewer such IPOs, which means lower growth in the economy and fewer jobs.’ Part of the answer, Weild suggests, is to allow companies to set their own spread size, choosing to allow shares to trade in 5 cent or 10 cent increments. ‘Bigger spreads would mean more profits for making markets on the shares and so attract more research and sales support,’ he says. This partly explains the mounting success of exchanges in China, he adds. The ChiNext – part of the Shenzhen Stock Exchange that caters for smaller companies – insists on wider spreads to ensure that brokers can make an adequate return and so

have an incentive to give attention to such companies. Of course, the decline in small company offerings may also be partly explained by an increase in alternative methods of raising money. Neil Dhar, a partner at PwC, believes that companies now have more low-cost choices. ‘It’s not just that debt is cheap at the moment,’ he says. ‘Over recent years we have seen a lot of growth in nonpublic stock exchanges.’ These include SecondMarket, an online marketplace created just eight years ago for trading illiquid assets. Several high-profile companies traded on the exchange, including Facebook and Twitter. Such alternatives make a public listing less urgent than it would have been a decade ago, since early investors have at least some way of selling their stake. Despite this upbeat observation, there is a widespread perception that the sharp fall off in small public offerings is economically damaging. When former Nasdaq executive Weild wants to underline the importance of small IPOs he tells the story of a tiny tech company that went public in 1971 with a value of US$8m – roughly US$44m in today’s money. ‘Such a minnow probably never would have made it to a public offering today,’ he says. That company was Intel, producer of the first commercially available microchip, which currently has a market value of US$135bn and employs 80,000 people. Christopher Alkan, journalist based in New York

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33

PILLAR OF STRENGTH

With the Islamic finance industry expected to continue to grow, KPMG’s Anita Menon sees the enforcement of standards and stringent banking reform as key challenges

U

ndaunted by events like the global financial crisis and the Arab Spring, Islamic finance looks poised to maintain its blistering growth this year. ‘The industry recorded double-digit growth last year as of end-2011, and the average compounded annual growth rate of the top 500 Islamic banks maintained double-digit growth, while conventional banks struggled,’ says Anita Menon, executive director of KPMG Business Advisory. According to a government report, Malaysia’s Islamic banking assets rose 15% to RM389.3bn (US$123bn) in the first seven months of 2011, strengthening the country’s position as the global hub for sharia-compliant financing. Analysts at Deutsche Bank predict that global Islamic banking assets could reach US$1.8 trillion by the end of 2016 – up 90% on the US$939bn of assets in 2010. The fascination with Islamic finance is expanding in step with its growth. ‘In different parts of the world, there is increasing interest,’ says Menon. Aside from Japan and South Korea, Menon cites the Central Bank of Nigeria introducing a framework for non-interest banking last year. Australia is also reviewing its tax laws to allow for a level playing field should Islamic financial products be introduced. In the comparatively mature Islamic

INT_AP_F_IFIs.indd 33

finance market of Malaysia, regulators are tightening governance and industry players are looking abroad to grow the Islamic finance pie. ‘We are recognised as a country that has the right framework and building blocks for the growth of Islamic finance,’ says Menon. ‘On top of this, Bank Negara Malaysia (BNM) has introduced the Shariah Governance Framework (SGF), aimed at improving governance standards in Islamic financial institutions [IFIs],’ she says.

Eyeing up Malaysian banks are also eyeing Indonesia’s retail banking market as the next frontier. ‘Everyone deems Indonesia as the sleeping giant and the next big market, just by virtue of the size of the population where 80% to 90% are Muslims,’ she adds. Islamic finance’s relative immunity from the meltdown of the banking sector in developed markets has also spurred interest in adopting the model, as stakeholders call for a return to sustainable and ethical banking. ‘Some feel that Islamic finance may have helped to avert some of the crisis because of the prohibition of riba (interest) and gharar (uncertainty). ‘In itself, the aspect of ensuring more transparency as far as contracts with customers are concerned would minimise some of the risks,

particularly excessive risks undertaken by conventional banks,’ says Menon. Despite an impressive track record, future progress in Islamic finance won’t be entirely smooth. Issues remain, such as the standardisation and enforcement of standards and contracts across jurisdictions, and the more stringent capital and liquidity requirements to be imposed by the upcoming Basel III framework. ‘There were issues around defaults, as far as sukuk was concerned,’ says Menon. ‘Perhaps this goes back to the issue of standardisation of contracts, and what happens particularly when you’re talking about cross-border transactions and there are disputes. Which laws would prevail?’ In terms of accounting standards,

The CV Anita Menon is a partner and executive director of KPMG Business Advisory, head of Financial Risk Management (FRM) services and heads the strategic management team within FRM. She is also a member of KPMG’s Global Islamic Banking and Investments Group, and leads KPMG Malaysia’s Islamic finance advisory practice.

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The tips Exposure is vital for young accountants keen on breaking into Islamic finance. ‘For those who don’t have the basics, it’s best to get attachments or internships with institutes that specialise in Islamic finance,’ Anita Menon advises. Examples would be Big Four firms like KPMG. The alternative would be to work in an Islamic bank or takaful (Islamic insurance) company. will there be convergence for IFIs? Or does it look like IFIs might be subject to a different set of standards, such as those championed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)? ‘Standardisation is always a challenge,’ says Menon, ‘but in Malaysia, as in many other markets where Islamic finance is practised, the general approach is to use International Financial Reporting Standards (IFRS) or local generally accepted accounting principles, and see how best we can work with those standards. In Malaysia we’re using IFRS, so it’s not an issue. ‘Predominantly, in the Gulf Cooperation Council (GCC) countries the AAOIFI has issued various sets of sharia and accounting standards. However, as the volume of transactions grows, I anticipate that the situation will be one where the International Accounting Standards Board tries to accommodate some of the specifics to Islamic finance within IFRS rather than [issuing a different set of standards]. ‘I don’t necessarily see AAOIFI standards being globally accepted to a point where it becomes an issue in markets where they use IFRS. So in terms of accounting standards for IFIs, I would see convergence to international accounting standards,’ says Menon.

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‘ISLAMIC FINANCE IS QUITE INCLUSIVE. YOU DON’T HAVE TO BE CAST IN THE TRADITIONAL MOULD TO BE A PROFESSIONAL IN THIS INDUSTRY’ Meanwhile, she singles out liquidity reforms as a significant challenge for Islamic finance institutions. ‘This is a key issue under Basel III, which is recognised by the Islamic Financial Services Board and BNM, as well as in other markets. The new Basel regulations are fairly stringent as far as liquidity standards are concerned, and they’ve introduced two new ratios that banks need to look into as far as liquidity is concerned.’ These are the short-term liquidity coverage ratio (LCR) and the long-term net stable funding ratio (NSFR), which will take effect in 2015. To meet the LCR means a bank’s ratio of highquality liquid assets to total net cash outflows over a 30-day period should be no lower than 100%.

Short-term liquidity ‘The LCR addresses short-term liquidity and requires the IFI to have a buffer for up to 30 days. The requirements are for banks and IFIs to have high-quality liquid assets,’ says Menon. ‘This is a problem because there are few shortterm assets and very few rated assets; the requirement is that they need to be either sovereign, sukuk – previously rated quite highly unless you’re holding Greek bonds and after Dubai – and AA+-rated papers. So how many of those AA+ papers are there, especially in Islamic finance?’ says Menon. In response, the industry set up the International Islamic Liquidity Management Corporation (IILM). ‘The IILM’s role would be to issue shortterm papers which banks can hold as liquid assets. If that is successful and there are enough papers, then BNM and other regulators may perhaps take the approach of implementing these [liquidity requirements],’ adds Menon. It will also be tough for Islamic banks

to meet the NSFR, where the ratio of the available amount of stable funding to the required amount of stable funding should exceed 100%. IFIs typically lack longer-term instruments, exacerbated by the lack of short-term liquid instruments, and the fact that depositors can withdraw their profitsharing investment accounts (the equivalent to term deposits) at short notice. To counter this, many IFIs require sizeable cash buffers which can be an expensive exercise and holding massive amounts of cash can adversely affect returns on investment. ‘Additionally, the question remains as to what should be the direction for IFIs to ensure greater internationalisation and assimilation in markets that hitherto may have had cultural sensitivities that work against Islamic finance,’ says Menon. Talent is another issue facing the Islamic finance sector. To optimise growth in Islamic finance services, the industry needs people with the right skillsets. While a knowledge of fiqh muamalat (Islamic rules on transactions) is desirable, accountants need not be sharia scholars. ‘What is required is a basic understanding of sharia. Essentially, what are the main pillars of Islamic finance, what do Islamic finance contracts look like specifically, and what types of structures are permissible?’ Menon herself does not speak Arabic, although she understands the principles of Islamic finance and has worked extensively with clients in the GCC and Malaysia. ‘The beauty of Islamic finance is that it’s quite inclusive. You don’t have to be cast in the traditional mould to be a professional in this industry,’ she concludes. Nazatul Izma Abdullah, journalist

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Comment

35

Accounting for the environment [

Environmental management and reporting should be viewed as a risk management function under the CFO’s watch and subject to the same sort of review and external audit, argues Ramona Dzinkowski

In 1998 I authored a report for the International Federation of Accountants (IFAC) entitled Environmental Management in Organisations, outlining the topic of environmental management, accounting and reporting. Since that time, a great deal of literature has emerged to forward the environmental accounting and reporting agenda, ultimately resulting in the emergence of broader sustainability reporting frameworks. While there is no arguing that we’ve come a long way since the early days of thinking about environmental reporting, recent criticisms over sustainability reporting point to its use as more of a ‘green marketing’ tool, rather than a tool for investors and other stakeholders in evaluating corporate performance. Concerns also remain over dissimilarities between information contained in the mandatory disclosures made to local securities regulators and that contained in sustainability reports. In Canada, while the quality of sustainability reporting has steadily risen over the past several years, the quality of mandatory environmental disclosures has fallen short. In their most recent assessment of environmental disclosures made by Canadian companies in 2008, the Ontario Securities Commission (OSC) found major inconsistencies between the extent and quality of disclosures across 22 listed companies. Specifically, they looked at the disclosure of environmental liabilities, asset retirement obligations, financial and operational effects of environmental protection

INT_COM_RD.indd 35

requirements, environmental policies fundamental to operations, and environmental risks. Their main conclusions were that companies were merely issuing boilerplate discussions with minimal or no analysis. Two years

later, the Commission issued new compulsory environmental disclosure rules for public companies, calling for CFOs to tighten up this reporting. I would agree that it’s time to reinforce that the accountability for environmental management, control and reporting is firmly in the hands of the CFO. Following the Canadian Securities Administrators (CSA) conclusions, I had the opportunity to discuss the potential for improving environmental/sustainability reporting and disclosure with CFOs across Canada. Several themes were repeated. First, environmental management and reporting should be viewed as a risk management function under the CFO’s watch and should be subject to the same sort of review and external audit. As such, companies need to establish a rigorous process subject to the scrutiny of disclosure committees. Second, there needs to be a formalised role for the board of directors and guidance should come from local accounting authorities. Ultimately, I learned that the call for uniform standards on environmental reporting and disclosure has remained consistent over time. In order to improve environmental disclosures and reporting, the consensus is that it is necessary to have a way to benchmark between companies in specific industries, preferably through the use of international, standardised and concise key performance indicators. This, as it was almost 15 years ago, is the main challenge with respect to environmental reporting and disclosure and remains uppermost in the minds of CFOs looking for guidance in this area. Ramona Dzinkowski is an economist and award-winning journalist

18/04/2012 15:16


36

Comment

Landscape painting

[

Divining the business landscape of the future is a tricky art, but ACCA’s global forums can help, says president Dean Westcott

Near the back of this edition you will find an article from ACCA’s new Accountancy Futures Academy, which looks at what will shape the professional landscape of the future and what we need to do to ensure we and our businesses are prepared. It is critical that an organisation like ACCA has a means of bringing together expert opinion to provide a long-range forecast of the business climate, and the academy, along with the other global forums, has a vital role to play in highlighting the key trends along with the driving forces and ideas that will shape our profession. We can make some educated guesses about the future. We know that there is a shift in economic influence from west to east and from north to south. Technological advances could result in core accounting functions being automated, meaning that accountants will need to be well placed to offer more analysis and judgment on the information which is produced. The first symposium for all global forum chairs, which took place in London recently, addressed the pressing challenges and opportunities facing us. Forum chairs said that the profession needs to restore public trust and confidence, as well as avoid being so overwhelmed by the need for regulatory compliance that it loses the ability to contribute to business performance. These challenges show the way to opportunities. In the corporate sector, for example, there is an opportunity to redefine the role of the finance professional, with accountants having the potential to take a lead role in areas such as risk management and corporate governance. By drawing on ACCA’s longstanding core values, the global forums will make major contributions to a number of debates and will not only reflect on but influence policy and remind the public, businesses and government of the enduring value that accounting professionals bring to the table. Articulating this value is not easy when the profession is under stress. It will mean challenging the forces which are pushing accountants towards over-emphasis on compliance. But I am sure that the forums will help us meet this challenge and will support us in setting out how much public value we bring to the table. Dean Westcott, ACCA president and interim CFO, West Essex Clinical Commissioning Group, UK

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13/04/2012 14:39


Practice

DELOITTE BUYS TECH FIRMS

Deloitte has further expanded its presence in technology markets in the US with its agreement to acquire Aggressor, an HR technology consultancy. Aggressor provides deployment services for Workday solutions and the deal gives Deloitte the leading position in the provision of Workday consulting solutions. Workday is a software-as-a-service enterprise solution for human resources, payroll and financial management. The system is widely used by global businesses to manage talent internationally, help acquire and retain top managers, improve financial and operational efficiencies and improve executive understanding of corporate operations. The deal is one of a series of strategic acquisitions made by Deloitte in the US recently. In January the firm bought Übermind, which provides mobile-based services.

KPMG UPS TECH PRESENCE

KPMG has formed a joint venture with Apptio, a leading provider of technology business management solutions. The new business alliance will help clients strengthen their IT organisations and processes by improving the management of the cost, quality and value of IT services. KPMG will offer Apptio’s enterprise softwareas-a-service platform, which will help clients to better understand the costs of their IT infrastructure. This will help clients make strategic decisions on applications rationalisation, platform standardisation, datacentre consolidation, service-level optimisation and storage optimisation.

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37

The view from: The UAE: Adithya Nedungadi ACCA, Moore Stephens, Dubai Q How has the global recession changed the way professional services firms do business? A It’s had a significant impact. My personal experience of working in a non-Big Four firm is that consultancy revenues have risen, with clients looking for more cost-effective options of doing business. Securing and retaining new audit clients has been challenging; it’s a more competitive market. Q What talent strategies should firms adopt? A Existing staff should be motivated by being given new challenges on top of fair pay. To attract new people, employers need a compelling offer, something which would be hard to refuse. It’s not just about an attractive salary – development and training are also important, as are growth opportunities within the firm if it’s expanding. Q What advice would you give newly qualified accountants considering their options? A If you feel there will be recognition of your qualification by your current employer, I’d recommend staying. After I qualified, my designation was raised and I was assigned to some of the firm’s major clients. Staying also gives you time to properly consider whether you want to remain in practice or explore options in industry.

37 Practice The view from Adithya Nedungadi of Moore Stephens; the legal issues surrounding e-discovery 41 Corporate The view from Jawad Jamil of Gulf Healthcare International; implications of the US Foreign Account Tax Compliance Act

Q How do you achieve a satisfactory work-life balance while holding down a demanding job? A Our peak audit season runs from October to May. It gets pretty intense during that period, but I make sure I hit the gym at least four times a week, regardless of how late I leave work – it always rejuvenates me after a tiring day.

FIRM FACTS

Moore Stephens’ global network: 301 independent firms, 636 offices, 100 countries Middle East firm locations: Bahrain, Egypt, Iran, Jordan, Kuwait, Lebanon, Oman, Pakistan, Saudi Arabia, UAE (Dubai, Sharjah, Abu Dhabi, Jebel Ali) Service lines: Audit and assurance, taxation, management consulting, risk management, corporate finance, accounting support, insolvency

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Practice

Digital dilemmas As more and more data is stored electronically rather than on paper, e-discovery is gaining significance in central and eastern Europe, but its practice raises complex legal issues For most companies today, digital technology is an integral part of their business, and more and more data is kept electronically, frequently without a paper version. Electronic discovery (often known as e-discovery, or e-disclosure in the UK) is therefore gaining huge significance as a tool used by auditors and internal auditors in audits and investigations, and by lawyers in litigations. But in practice, a globally unified approach to e-discovery, a universal concept of discovery that theoretically can be applied in any country with a sufficiently developed legal system and technological infrastructure, is hampered by a complex mix of legal, procedural and other factors. The countries of Central and Eastern Europe (CEE) are an interesting case study because they illustrate how these

such as the scope of a party’s obligation to maintain electronic evidence during litigation, and the lawyer’s duty to monitor that the client complies with data preservation. This case and other opinions formed have provided American lawyers with best practice. The growth in electronic data emphasises the importance of the case, and since then the volume of electronic data kept by firms has only increased. Companies everywhere are receiving, generating and storing substantial and increasing amounts of information, 93% of which, according to a 2001 study carried out by the University of California, Berkeley, is created electronically. ‘Without the use of e-discovery, 95% of an average company’s documents would be inaccessible,’ says Dyrda.

BEST PRACTICE GUIDELINES ARE FOLLOWED IN THE US , BUT IN OTHER COUNTRIES MUCH HAS STILL TO BE DONE AND GUIDELINES ARE LACKING factors interact, often with negative results. ‘When it comes to the technology used in e-discovery, there are not real differences between, say, Poland and the US, but different legal systems and data protection issues complicate standardised approaches to e-discovery,’ says Tomasz Dyrda, executive director and forensic team discovery services leader for central and southeast Europe at Ernst & Young. The Zubulake v UBS Warburg lawsuit, involving gender discrimination and heard between 2003 and 2005 in the US, is generally regarded as a key moment in the history of e-discovery. The lawsuit was the first definitive case on a full range of e-discovery issues

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E-discovery is used as a discovery instrument most frequently in Western countries, especially in the US and the UK, where demand for e-discovery services is the greatest. Both countries are leaders when it comes to developing new technology for e-discovery, and developing best practice for e-discovery. In terms of awareness of e-discovery among businesses, practitioners note clear differences between the ‘West’ and central European countries. In contrast, in central Europe the picture is more mixed. Regarding e-discovery technology, practitioners argue that there are no major differences between the CEE countries and elsewhere. ‘Poland, the

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39

*WHAT IS E-DISCOVERY?

E-discovery has been used since the beginning of the 21st century but, as a field, has developed rapidly to become a key feature of evidence-gathering in civil litigations. E-discovery starts on submission of an e-discovery request, which in a lawsuit marks the pre-trial phase of a case, where the parties obtain evidence from the counterparties. E-discovery is a subset of the discovery (disclosure) process because it specifically involves data in electronic format, known as electronically stored information (ESI), such as emails, word documents and audio and video files. Special e-discovery software designed to read such data is used in the process. Over the years, best practice in e-discovery has evolved, which should be followed by those involved in e-discovery procedures, including lawyers, auditors, internal auditors and information technology staff. A key feature of best practice is the Electronic Discovery Reference Model (EDRM), which comprises six stages, including sub-stages, starting at information management and finishing at presentation.

Czech Republic and Hungary have caught up,’ explains Dyrda. But Frederick Gyebi-Ababio, director of E-Discovery Europe, an e-discovery consultancy, states that processes in the Czech Republic lag behind those of the US and UK. ‘I recently met the state prosecutor of the Czech Republic, and he told me that he believes that the Electronic Discovery Reference Model (see box, above) has not been fully followed in some cases in the Czech Republic.’ Gyebi-Ababio notes that all aspects of the six stages in the model are adhered to, or that the stages are not followed in sequence. ‘This means that the procedure is not being carried out properly,’ he adds. Gyebi-Ababio believes that the lack of a unified approach to e-discovery on a global level underlies some of the current problems in central and eastern European practice. Detailed best practice guidelines are followed in the US, but in other countries much has still to be done and guidelines are lacking. Such ignorance is also reinforced by what Gyebi-Ababio believes is a lack of progress on promoting global best practice, which has a negative impact on companies. When e-discovery started to be used

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Practice

in the US and the UK, many firms had concerns about the extra costs imposed by e-discovery requests. Costs have been reduced in some ways through new technology ‘but unnecessary costs are generated elsewhere’, Gyebi-Ababio explains, because of uncertainty and confusion. In response, he is organising an international conference to be held later this year in Prague, which he hopes will be a forum to encourage debate on best practice as well as promoting greater understanding among e-discovery practitioners. The lack of awareness of e-discovery, even among some lawyers, prosecutors and judges, is cited by practitioners as another reason why e-discovery in CEE countries lags behind. In many cases, apart from those professionals working for global legal and accountancy firms, professionals such as auditors do not know enough about e-discovery and how crucial it can be in an audit or lawsuit. Pavel Jankech, senior manager of Forensic Technology Solutions at the Czech office of PwC, cites an example in the Czech Republic, where ‘many legally educated professionals have an inherent mistrust and suspicion of anything related to technology’. Strengthening legislation to combat ignorance of e-discovery could be one solution to this problem. ‘In the UK there is anti-bribery legislation, in the US, the Foreign Corrupt Practices Act and in Germany there are compliance laws, but in Poland there are no equivalent laws,’ says Dyrda.

The legal problem But the situation is not helped by a factor not within the control of the parties in a dispute: the legal systems governing e-discovery in particular countries. The US and UK use common law, but on the European continent civil law applies. ‘It appears that countries with a common law legal system are in a better position to adapt than countries with a civil law system because legislation under the latter needs to change appropriately,’ notes Jankech, explaining that civil law

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systems are more cumbersome and less flexible than those where a gradual development of precedents applies. Consequently, in the US and UK, changes to e-discovery practice can be introduced and developed more easily than in continental European countries. Another factor beyond the control of auditors or parties involved in lawsuits is the hugely complex issue of European Union (EU) legislation on personal data protection. For example, an international company has a branch in the US and a branch in an EU nation. A request for employee data or customer-related data can be made in both countries, but information from the Czech branch can be completely refused under Czech data protection legislation, enacted in compliance with EU data protection principles. ‘This is a pressing problem that

needs to be addressed because lawyers are caught in the middle,’ argues Gyebi-Ababio. ‘What’s more, the situation is even more complicated because although all countries must comply with European data protection principles, data protection laws vary from each EU country. And in France, Germany and Switzerland, blocking statutes apply in legislation, adds Dyrda. Jankech, however, sees some benefits of the EU data protection approach: ‘It will also harmonise the data protection rules within the EU and, as such, may increase transparency and crossborder applicability of practical solutions.’

Request confusion Practitioners also describe a general confusion about the type of data that can be requested, gathered and processed under data protection rules. This causes frequent problems because parties are unsure of how exactly the EU data protection laws should be applied. ‘We at PwC deal with multijurisdictional cases very often. It is not uncommon that an initial request for the discovery of electronic data, which come most often from the US, needs to be narrowed down or entirely cancelled, mainly due to personal data protection limitations,’ says Jankech. ‘So it is interesting to note that the European Commission proposed a major reform of the EU legal framework on the protection of personal data to integrate approach across the EU and further strengthen individual rights,’ he adds. When it comes to the future of e-discovery in CEE, analysts take a similar view, arguing that greater agreement on best practice is needed, as well as education. ‘We’re not at the stage where companies are involving internal auditors in formulating e-discovery policies or creating e-discovery teams,’ says Dyrda. Jankech also argues that much needs to be done. ‘I do not see a simple, straightforward solution. It is going to be a long-term process of educating all of the involved parties.’ David Creighton, journalist

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Corporate

FRAUD ‘ON RISE IN INDIA’

Fraud has increased significantly in India in the last year, according to the latest Ernst & Young India fraud survey. Typical perpetrators are middle managers in their 30s who are ambitious and highly IT literate. They are most likely to be located in the procurement or sales departments. Common frauds involve data or information theft and intellectual property infringement, says EY. Companies are reluctant to take action because of the fear of reputational damage. Despite this, foreign investors have been deterred from India because of the spate of recently reported fraud cases. Too often companies have been vulnerable because of out-ofdate fraud prevention systems. But Arpinder Singh, a partner with EY India, said: ‘Today, we see a rise in the number of companies wanting to incorporate proactive fraud risk management in their companies as compared to a year ago.’

GOOD LEADERSHIP ‘UPS VALUE’

Confidence in corporate leadership can affect companies’ share prices by as much as 36%, according to a Deloitte report, The Leadership Premium. The conclusions were based on a survey of leading market analysts in the UK, US, China, India, Japan and Brazil. They awarded an average premium of 15.7% for effective leadership and a discount of 19.8% for poor leadership. Margot Thom, managing director of Deloitte’s global talent and human capital consulting team, said: ‘This report uncovers a tangible metric that has a real impact on the long-term shareholder value of organisations.’

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The view from: The UAE: Jawad Jamil ACCA, head of finance, Gulf Healthcare International, Dubai Q What are your top priorities when you start work each day? A My working day starts even before I leave home – I’ll be responding to messages on my BlackBerry from colleagues already at their desks. Q How can businesses maximise their return on in-house finance expertise? A Being a business partner is about much more than just adding value. It’s vital that those in charge of frontline operations and other support functions understand that today’s accountants can help drive revenues and support growth. Q Your current employer is owned by a private equity firm. How does that shape the finance function’s objectives? A There are typically more stakeholders to consider; there’s also a much sharper focus on accelerated growth, and a greater imperative to provide a robust case for investment that will satisfy short-term and long-term objectives.

41 Corporate The view from Jawad Jamil of Gulf Healthcare International; implications of the US Foreign Account Tax Compliance Act 37 Practice The view from Adithya Nedungadi of Moore Stephens; the legal issues surrounding e-discovery

Q What’s the secret of being an employer of choice when finance talent is in high demand? A If managers make big demands of their workers, it must be accompanied by rewards for hard work, and objective measurement of individual performance. That means following through on commitments about training and development. Q If you hadn’t embarked on a career in finance, what would you have done? A I’d probably have started my own business, but I enjoy what I do.

FAST FACTS

Education: English Medium School, Dubai Career: Trainee auditor, Sajjad Haider & Co; senior auditor, Ernst & Young; group financial controller, Retailcorp World; head of finance (acting CFO), Gulf Healthcare International

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Something to declare The Foreign Account Tax Compliance Act extends the long arm of the US tax collector across borders, with draconian punishments for ‘recalcitrant’ financial companies

When critics accuse the US of wanting to run the world they are usually thinking of its soldiers rather than its tax collectors. But over the coming years US revenue officials will be spreading their influence across the globe. Financial institutions thousands of miles from the US will be forced to adjust to Uncle Sam’s tax rules and many governments will be compelled to change their laws. The reason for this is the Foreign Account Tax Compliance Act – more commonly known as FATCA. The controversial law, passed by Congress in 2010, aims to clamp down on Americans using foreign accounts to evade tax in the US. Part of the impetus for this assault on tax cheats came from a 2009 scandal in which Swiss bank UBS was fined $780m for helping Americans hide taxable money. While every nation wants to catch tax dodgers, the means employed by FATCA are considered

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extreme by many experts. The core of the act is its requirement that foreign financial firms disclose the details of any account worth more than $50,000 that is held by a US citizen. Firms that fail to comply will be labelled ‘recalcitrant’ and a 30% withholding tax slapped on all their income and asset disposal proceeds from the US. This would be enough to

to get stronger tax enforcement on somebody else’s dime.’ Complying with US dictates will not come cheap. Even after recent efforts by the US to make FATCA less onerous, accounting firm KPMG still expects the new rules to cost financial institutions between $20bn and $30bn globally over the coming five years. Meanwhile the US tax authorities are expecting a

‘THIS ACT ATTEMPTS TO TURN THE WORLD’S FINANCIAL INSTITUTIONS INTO US TAX AGENTS. IT’S TAX ENFORCEMENT ON SOMEBODY ELSE’S DIME’ bar any uncooperative financial firm from capital markets in the US – a draconian punishment indeed. ‘In essence this act attempts to turn the world’s financial institutions into US tax agents,’ says Steven Rosenthal, a tax lawyer and fellow at Washington’s Tax Policy Center. ‘America is trying

mere $800m a year in extra revenue from FATCA. This is scarcely a bonanza for the US tax take, which amounted to $1.9 trillion in 2010. Adrian Harkin, who heads KPMG’s division focused on FATCA, explains the task that will be faced by CFOs and accountants at financial firms.

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‘The sheer complexity of the rules is intimidating,’ he warns. ‘In several decades working in financial services I have never seen any regulation that requires such a broad skill set to handle. Non-US financial firms will need individuals with expertise in US tax law, the FATCA rules, data and IT systems as well as the full range of financial businesses.’ Even the first step of identifying US taxpayers will be no mean feat. ‘Current systems often don’t capture the citizenship of account holders,’ says Neil Bromberg, a principal at Ernst & Young in New York, who focuses on FATCA compliance. ‘On new accounts this can be changed but searching out Americans holding existing accounts may be harder.’

Manual intervention On some accounts, firms will be able to search digitally for ‘indicators’ of US citizenship, such as address, power of attorney, linked US bank accounts, or telephone prefixes. Occasionally, however, this work might have to be done manually. The Japanese Bankers Association, for example, has noted that its national banks will have to review more than 800 million accounts. The trouble may not stop there, adds Harkin. ‘Once you suspect someone might be American you have to contact them through mail or phone,’ he says. ‘They may not answer. If they don’t, the firm will have to start withholding tax from the account, which is another bureaucratic headache.’ To make matters harder still, one unlucky individual at each finance firm will have to sign a document personally attesting that their company is complying with FATCA. This is rather like the US Sarbanes-Oxley legislation, which requires a company’s chief executive to guarantee personally the reliability of its financial statements. ‘Not many are likely to volunteer for this task,’ says Harkin. ‘Most people

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want to be able to fly to Florida for their vacation without worrying about ending up in a jail in Alabama.’ It may also be relatively easy for genuine tax cheats to continue to evade detection. Since accounts worth less than $50,000 will not be reported, it should be possible to split large fortunes into numerous accounts at various institutions.

Potentially illegal Aside from the red tape, some nations make it illegal to hand over such information to foreign governments. Some nations have already tried to find a way around this. Under a recent deal struck with Britain, France, Germany, Italy and Spain, national governments will collect this data from their own financial institutions and only then pass it on to the US. Harkin says that this will reduce the hassle but not eliminate it. ‘Other nations might have to modify their information privacy rules or adopt versions of FATCA themselves to avoid having their financial institutions locked out of the US,’ he says. So FATCA is causing considerable resentment across the globe among governments and financial institutions, particularly as there are plenty of less intrusive ways for the US to cut down on tax evasion. Some say a good starting point would be to stop cutting the Internal Revenue Service’s budget. The budget of the tax collection agency was reduced by 2.5% for 2012, forcing it to cull some 5,400 staff. Republican lawmakers have been pushing for even bigger cuts. Such reductions make it harder for the agency to combat tax evasion, which costs the government up to $500bn a year, according to the Center for American Progress. Official estimates suggest that every extra dollar spent on the IRS can shrink the deficit by $3. In addition, the IRS could

devote more resources to auditing the tax affairs of the super rich, who may be the only group able to squirrel away large sums of money overseas. Few experts have anything good to say about FATCA. While it is sensible to try to ensure that Americans pay their proper share of tax, this law is an extremely onerous way of doing so. As a result the US is paying a heavy price in terms of international goodwill. Given the relatively modest sums US tax collectors are likely to recoup, it is arguably not a price worth paying. Christopher Alkan, journalist based in New York

** FATCA FACTS *

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The Foreign Account Tax Compliance Act was signed into US law in March 2010 and was intended to catch US tax cheats who conceal overseas investments. The act insists that financial firms around the world hand over information on accounts worth more than $50,000 that are held by Americans. Insurance policies worth over $250,000 also need to be reported. Companies that refuse to comply will be hit with a 30% withholding tax, deducted from any funds transferred to the company from a US bank. The tax will also apply to the proceeds from the sale of any US property. The law not only affects banks but also brokers, dealers, hedge funds, asset managers and insurance firms. The rules come into force on 1 January 2013. In January 2014 ‘recalcitrant’ financial institutions – those that refuse to hand over information – will start to be charged the 30% withholding tax.

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Unpeel your competitive onion In the second article in his series on strategy for accountants, Dr Tony Grundy unpacks the tools, identifies customer value and ends up in a hot yoga pose

This article focuses on the need to explore the nature of the business you are in. It also considers the uses and abuses of positioning tools such as SWOT and gap analysis, and PEST and Porter environmental analysis. Customer value, competitor positioning and intent, competitive advantage and the ‘competitive onion’ are all explored. And the article ends with an explanation of how it all links to financial returns, using the Bikram yoga system to illustrate the concepts. In strategy, you need a clear notion of what business it is that you are in. Pursuing an answer may uncover that you aren’t just in one business, but in many. The curse of this is that separate

Strategy tools are typically matrixes, boxes or other models rendered as pictures to give a better and shared understanding of the complexity of strategy. They are essential, but without sufficient empirical evidence, reflective thought and challenge they can also be highly dangerous. The risks will be highlighted here.

Positioning tools Now take the businesses you are in, one at a time, and look at positioning using SWOT and gap analysis. SWOT analysis typically divides a box into four quarters to separate out a business’s strengths, weaknesses, opportunities and threats.

SWOT ANALYSIS IS OFTEN SUPERFICIAL, CAN BE DANGEROUSLY BIASED, DOES NOT PRIORITISE, AND FAILS TO EXTRACT THE ‘SO WHATS?’ strategies/cunning plans will be required for each one. The best way of identifying the businesses you are in is to look at different types of customers, needs and ways of meeting those needs. These elements can be mapped out on charts – for example, customer types against types of need – as a matrix. Doing this can lead to the discovery of new possible businesses. You may also find that your organisation has many businesses, that some are marginal, and that some might be divested.

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The advantages of SWOT analysis are that it is easy to use, familiar to most managers, puts issues into categories, is evaluative (strengths and opportunities are positive, weaknesses and threats are negative), and offers a powerful visualisation. However, SWOT is often superficial (especially when used in isolation), can be dangerously incomplete and biased, may lack sufficient evidence, does not prioritise, fails to extract the ‘so whats?’, and is seldom explicitly used to develop options.

To get more out of SWOT, it should incorporate priorities – eg by asterisking the most important elements. Also, the implications (the ‘so whats?’) of SWOT need addressing: What patterns are there in the SWOT/broad themes? For example, has the company lost its way competitively? Is it too slow and unresponsive? Is it unbalanced in some way, or is there a fault line in its leadership, culture and mindset? Are some of the threats areas of major weakness, increasing the company’s vulnerability? Are there specific opportunities where it is particularly strong and which might be candidates for offensive strategies? Gap analysis is the difference between where you want to be and where you are likely to be given the business’s current strategies. It is an essential way of framing the degree of stretch the organisation wishes to set itself, before conducting any strategic option evaluation. It is typically framed in terms of performance metrics – typically, sales or profit, although the metric can be market share, unit costs or gaps with competitors. Gap analysis is a way of assessing either the difference between where you are and where you want to be (snapshot), or the difference between where you are likely to be on current plans and where you want to be (future gap) based on the business’s projected future performance.

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TO GET THE QUESTIONS GO TO www.accaglobal.com/onion

Gap analysis is probably more important than SWOT analysis, as you need to keep constant track of the value of your strategic options and their contribution to the assumed shifts in strategic performance if you are to meet strategic goals. Obviously, it is important that the strategic objectives set are not competitively unrealistic. But top managers frequently set an artificial stretch on these objectives for the managerial tiers below without giving them the support and coaching to come up with strategies that will actually bridge the gap. The result is that the business always delivers less than expected. This increases top-down pressure to deliver, reinforcing the negative cycle of behaviours. In short, if gap analysis is used in this way by the business it can be counterproductive.

PEST analysis In strategy the external environment is very significant. What business hasn’t been hit by the recession and now the euro crisis/government debt? Here, PEST analysis is helpful in picturing macro changes. The P stands for political (and regulatory) changes, E for economic, S for social (and demographic) and T for technological. As with SWOT, PEST analysis is often represented in a quartered box. PEST factors may be very big (the credit crunch is an obvious one) or slow-burners revealed through

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trends that are weak but which can still gather momentum – such trends need to be monitored and reflected on. It’s time now to home in on the more immediate industry/market you are in. Here, Porter’s five competitive forces (namely, buyer power, entry barriers, competitive barriers, substitutes, supplier power) have a huge influence on profitability. The accountant needs to know and differentiate them for each and every market the business is in, especially when planning and supporting key strategic decisions.

Five forces and a funeral Consider, for example, the funerals market in the light of Porter’s five competitive forces: customers haven’t got the time to shop around, the purchase is very emotional (low buyer power), there are psychological barriers to entry, there are no real substitutes, and rivalry is gentlemanly. The result? Superior returns! And if a funerals business had real competitive advantage, it would be an accountant’s dream. The definition of competitive advantage is: delivering better value to customers than your competitors can, or equivalent value at a lower cost. This definition is economic as well as financial. Strategy is also about customer value, cost and competitors. Understanding and focusing on latent customer value – which you satisfy but your competitors don’t or can’t – can

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also help spark ideas for ‘cunning plans’ and strategic options. By understanding your positioning relative to your rivals in terms of customer value added and cost, you can generate some exciting new strategies. For example, in the late 1990s Tesco looked at some simple future-looking strategies for convenience formats (Express and Metro), home shopping and non-food (CDs, books, clothes, etc). By imagining it was travelling to the future (see last month’s article), Tesco saw the potential of these strategies and rolled them all out. Successful strategies are often simple but incorporate cunning – here it lay in the combination of these strategies and in Tesco’s drive and agility. Now Tesco is a target for others and it should be thinking about their intent. Sainsbury, for example, positions itself as delivering superior service, while Tesco seems to have focused on range/ price and relentless productivity gains. Is Tesco vulnerable on service if the squeeze on incomes in the UK eases up? Markets change, and strategies may have to adapt with them. The strategy onion diagram on the next page brings all these models together with PEST factors and life-cycle effects. These all affect market growth, which in turn impacts the competitive forces toward the middle. Within the business itself consideration should also be given to the sustainability and renewal of competitive advantage: these have a

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huge impact on economic returns, including the way you continue to deliver superior customer value, and stay way ahead of competitors. Finally competitive advantage and change can be illustrated with a case study on ‘hot yoga’. Years ago Bikram Choudhury, an Indian yogi, formulated a series of yoga postures that take place in rooms heated to 105ºF. I became addicted to Bikram yoga in 2002 when there were four studios in London and few more in the UK; now there are over 20 in the capital and more than 500 worldwide in a franchised global brand. Bikram yoga is psychologically and physically challenging. It is also an attention-grabber, appealing to young, inner city professionals seeking a wonder body. Classes are packed out. Last Saturday there were 70 in mine, with water and towels generating perhaps £1,000 in a 90-minute session. It’s a competitively attractive market where Bikram has real advantage. But recently several hot yoga studios have opened up in London, which threaten Bikram yoga’s future growth, margins and returns. The Bikram formula has not changed substantially in 10 years: is now a good time for the business to seize the strategic initiative again with a strategy review? Dr Tony Grundy is an independent consultant and trainer and lectures at Henley Business School in the UK www.tonygrundy.com

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CPD

Technical

units on the web

The strategy onion Political factors

Economic factors Growth

Competitive

Industry

Customers

Life Cycle

Company and Competitors

Pressure

Drivers

Technological factors

Social factors

LAST MONTH THE ROAD FROM HERE TO THERE, THE SPICE GIRLS AND THE CUNNING PLAN

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Accounting solutions This month PwC authors answer two questions on accounting for joint ventures under IAS 31, IAS 38, SIC 13 interpretative guidance, and IFRS 11

Q

Entity A, a mid-size luxury goods manufacturing company, needs funding to market one of its key brands globally that it has been selling on the local market for many years. Entity A enters into a joint venture agreement with a multinational distribution company, Entity B. At the inception of the joint venture entity (Entity JV), Entity A contributes its key brand in exchange for 60% of Entity JV’s share capital, and Entity B contributes cash for 40%. An independent valuation arrived at a fair market value of C1,500 for Entity A’s brand. Entity B therefore contributed C1,000 to the joint venture. The shareholdings are unequal, but both Entity A and B need to agree strategic financial and operating decisions unanimously. Entity JV therefore qualifies as a joint venture – to be precise, a jointly controlled entity – under IAS 31, Interests in Joint Ventures. How should Entity A and Entity B account for the transaction, assuming that both entities apply the equity method of accounting for jointly controlled entities? The initial cost of investment in Entity B’s books is a straightforward C1,000. But the accounting in Entity A’s books is more complex. As the brand was developed internally, it is likely to have little or no carrying value on Entity A’s balance sheet. But when ownership of the brand passes from Entity A to Entity JV, it would meet the definition of an intangible asset under IAS 38, Intangible Assets, so it should be initially recorded

A

A

in the joint venture’s books at cost. In this case, ‘cost’ would be equivalent to the fair value of the shares issued by Entity JV – that is, C1,500.

Q

At inception, Entity JV therefore has net assets of C2,500. Applying the equity accounting method in its consolidated accounts, Entity A will recognise its

PwC’s practical guide to applying IAS 34, Interim Financial Reporting, is out this month, updated to reflect standards effective for 2012 year ends. It provides comprehensive guidance on IAS 34, an illustrative set of condensed interim financial information for a fictional existing IFRS preparer and a disclosure checklist. Copies of Manual of accounting – interim financial reporting 2012 are available to order from www.ifrspublicationsonline.co.uk

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share of net assets as being C1,500. But, as the brand Entity A contributed had no value on its balance sheet, would this simply result in a ‘gain’ of C1,500 by forming a joint venture? The answer is ‘not quite’. The interpretative guidance in SIC 13, Jointly Controlled Entities – Non-monetary Contributions by Venturers, only permits recognition of such gains up to the level of the equity interest held by other venturers – in other words, Entity A cannot recognise the unrealised gain on the 60% of the brand, which it effectively still owns through its stake in the joint venture. Under the equity method of accounting, the unrealised part of the gain is removed from the income statement and is instead eliminated against the investment in Entity JV. So at the inception of the joint venture, Entity A will recognise the investment at C600 – that is, C1,500 less the unrealised gain of C900 (C1,500 x 60%). IFRS 11, Joint Arrangements, applies to financial years beginning on or after 1 January 2013. Both entities A and B should re-assess under the new guidance whether their involvement in the joint arrangement would give them the right to Entity JV’s net assets or rights to individual assets and obligations to liabilities. Assuming they conclude that the joint arrangement gives them right to net assets, the accounting would be the same as described above. This is because both entities would continue to apply the equity method of accounting, and the recognition of the unrealised gain would still be prohibited. This month’s solutions were compiled by Imre Guba and Iain Selfridge of PwC’s Accounting Consulting Services

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Bin the clutter Clutter in annual reports obscures relevant information and makes it harder for users to identify the key points about a business’s performance, says Graham Holt

The effects of clutter have typically come in for little consideration by the preparers of annual reports, but the phenomenon is increasingly under discussion, with initiatives recently launched to combat it. The Financial Reporting Council (FRC) in the UK is one organisation that has called for a reduction in clutter in annual reports. And the International Accounting Standards Board (IASB) commissioned the Institute of Chartered Accountants in Scotland (ICAS) and the New Zealand Institute of Chartered Accountants (NZICA) to make cuts to the disclosures required by a group of International Financial Reporting Standards (IFRSs), and to produce a report. Clutter in annual reports can be a problem for users. It obscures relevant information and makes it more difficult for users to find the key points about the performance of the business and its prospects for long-term success. The main observations of a discussion paper, called Cutting Clutter, that was published by the FRC were: There is substantial scope for segregating standing data in a separate section of the annual report (an appendix) or putting it on the company’s website. Immaterial disclosures are unhelpful and should not be provided.

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barriers to reducing clutter are * The mainly behavioural. should be continued debate * There about what materiality means from a disclosure perspective. It is important for the efficient operation of the capital markets that annual reports do not contain unnecessary information. It is equally important that useful information is presented in a coherent way so that users can find what they are looking for and gain an understanding of the company’s business and the opportunities, risks and constraints that it faces. However, a company must treat all its shareholders equally in its provision of information. It is for each shareholder to decide whether to make use of that information. It is not for a company to pre-empt a shareholder’s rights by withholding information.

Too many rules? A significant cause of clutter in annual reports is the vast array of requirements imposed by laws, regulations and financial reporting standards. Regulators and standard setters have a key role to play in cutting clutter both by cutting the requirements they themselves already impose and by not imposing unnecessary new disclosures. A listed company may have

to comply with listing rules, company law, IFRS, the corporate governance codes and (if it has an overseas listing) any local requirements, such as those of the Securities and Exchange Commission (SEC) in the US. A major source of clutter is that different parties require differing disclosures for the same matter. For example, an international bank in the UK may have to disclose credit risk under IFRS 7, Financial Instruments: Disclosures, the Companies Acts, the Financial Services Authority’s disclosure and transparency rules, the SEC rules and Industry Guide 3 as well as the requirements of Basel II’s pillar 3. One problem is that different regulators have different audiences in mind for the requirements they impose. Their attempts to reach more actual or potential users can lead to a loss of focus and structure in reports. There may be a need for a proportionate approach to the disclosure requirements for small and mid-cap quoted companies that take account of the needs of their investors, as distinct from those of larger companies. This may be achieved by different means. For example, a principles-based approach to disclosures in IFRS, specific derogations from requirements in individual IFRSs or the creation of an

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TO GET THE QUESTIONS GO TO www.accaglobal.com/clutter

adapted local version of IFRS for SMEs. Time and cost pressures can lead to defensive reporting by smaller entities and to a preference for easy options, such as repeating material from a previous year, cutting and pasting from the annual reports of other companies and including disclosures that are of marginal importance only.

a tendency for companies to repeat disclosures simply because they were in the annual report last year. However, while explanatory information may not change from year to year its inclusion remains necessary to an understanding of aspects of the report. There is merit in a reader of an annual report being able to find all of

TIME AND COST PRESSURES CAN LEAD TO DEFENSIVE REPORTING AND A PREFERENCE FOR EASY OPTIONS, SUCH AS REPEATING MATERIAL Behavioural barriers There are behavioural barriers to reducing clutter. The threat of criticism or litigation is one. The risk of future litigation may outweigh any benefits from eliminating catch-all disclosures. As a result, preparers of annual reports are likely to err on the side of caution and include more detailed disclosures than strictly necessary to avoid challenge from auditors and regulators. Removing disclosures is seen as creating a risk of adverse comment and regulatory challenge. Disclosure is the safest option and therefore often the default position. Preparers and auditors may be reluctant to change this unless the risk of regulatory challenge is reduced. There is also

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this information in one place. If the reader of a hard copy report has to go to a website to gain a full understanding of a particular point, it heightens the risk of making the report less accessible. And even if the standing information is kept in the same document but relegated to an appendix, that may not be the best place to facilitate a quick understanding of a point. A new reader may be disadvantaged by having to hunt in the small print for what remains key to a full understanding of the report. Preparers wish to present balanced and sufficiently informative disclosures and may be unwilling to separate out relevant information in an arbitrary

49

manner. The suggestion of relegating all information to a website assumes that all users of annual reports have access to the internet, which may not be the case. A single report may best serve the investor, by putting all the information in one reference document rather than scattering it across a number of delivery points. Yet shareholders are increasingly unhappy with the substantial lengthening of reports in recent years. This has not resulted in more or better information but more confusion as to the reason for the disclosure. A review of companies’ published accounts will show that large sections such as the statement of directors’ responsibilities and the audit committee report are almost identical. Materiality should be seen as the driving force of disclosure, as its very definition is based on whether an omission or misstatement could influence the decisions made by users of the financial statements. The assessment of what is material can be highly judgmental and can vary from user to user. One problem may be that disclosures are being made because a disclosure checklist suggests they may need to be made, without assessing whether disclosure is necessary in a company’s particular circumstances. However, the whole point of such

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checklists is to include all possible disclosures that could be material. Most users of these tools will be aware that the disclosure requirements apply only to material items, but often this is not stated explicitly for users. One of the biggest challenges is the changing audience for the annual

make this problem worse but, in a wellorganised report, users will be able to bypass much of the information they consider unimportant especially if the report is online. It is not the length of the disclosure of accounting policies that is itself problematic, but the fact that new or amended policies can be

IN A WELL-ORGANISED REPORT, USERS WILL BE ABLE TO BYPASS MUCH OF THE INFORMATION THEY CONSIDER UNIMPORTANT report. Its original purpose was to report to shareholders, but preparers now have to consider many other stakeholders including employees, unions, environmentalists, suppliers, customers, etc. The disclosures required to meet the needs of this wider audience have contributed to the increased volume of disclosure. The growth of previous initiatives on going concern, sustainability, risk, the business model and others identified by regulators as key has also expanded the size of the annual report.

Big but perfectly formed It is not necessarily the length of the report that is the problem but the way in which it is organised. The inclusion of immaterial disclosures will usually

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obscured in a long note running over several pages. A further problem is that accounting policy disclosure is often boilerplate, and provides little detail of how companies apply their general policies to particular transactions. IFRS requires disclosure of ‘significant accounting policies’. In other words, it does not require disclosure of insignificant or immaterial accounting policies. Omissions in financial statements are material only if they could, individually or collectively, influence the economic decisions that users make. In many cases, they would not. Of far greater importance is the disclosure of the judgments made in selecting the accounting policies, especially where a choice is available.

CPD units on the web

A reassessment of the whole model will take time and may entail changes to law and other requirements. For example, clutter could be removed by not requiring the disclosure of IFRS in issue but not yet effective. Currently, disclosure seems to involve listing each new standard in existence and each amendment to a standard, including separately all those included in the annual improvements project, regardless of whether there is any impact on the entity. The note is then a list without any apparent relevance. The IASB has asked for comment on its forward agenda in which it acknowledges that stakeholders have said that disclosure requirements are too voluminous and not always focused in the right areas. However, the drive by the IASB has been to increase disclosure to address comparability between companies. Therefore, in the short to medium term, a reduction in the volume of accounting disclosures does not look feasible, although the IASB will be considering this area for its post-2012 agenda. Graham Holt is an examiner for ACCA, and associate dean and head of the accounting, finance and economics department at Manchester Metropolitan University Business School

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Technical

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Mastering offshore renminbi The internationalisation of the renminbi is an irreversible trend, but what effect will this have on accountants working in the corporate field? Bolivia Cheung FCCA investigates The influence of mainland China in worldwide economics has made the internationalisation of the renminbi (Chinese yuan) an irreversible trend. The Hong Kong Special Administrative Region (HKSAR) is one of the leading offshore renminbi centres. To people in the financial industry, allowing RQFIIs (Renminbi Qualified Foreign Institutional Investors) to invest in China’s stock exchanges from 2011 was a strategic move. So if you are an accountant working in the corporate field, how will such offshore renminbi affect you? We will illustrate the effect in relation to cases utilising offshore renminbi to achieve tax savings and assist in treasury management.

Case 1: using renminbi for trade settlement US company US-Textile has outsourced its production to third-party mainland China OEMs (original equipment manufacturers) for over 10 years. Such OEMs charge a fixed fee for production. Due to the fluctuation of the US$-RMB exchange rate from 2006, US-Textile has agreed to compensate Chinese OEMs for their corresponding exchange losses. China controls foreign exchange.

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Chinese entities cannot receive foreign currency unless genuine and valid transactions take place. For OEMs, compensation for exchange losses in relation to goods exported from China translates into an increase in export price. In order for OEMs to receive such compensation, they need to amend all their export documentation, including contract, proforma invoice, shipping document, bill of lading, etc, so that all the Chinese legal documents, such as the Customs Export Goods Declaration Certificate and VAT Export Invoice, state the amended amounts. Such amendments impose a heavy burden on both Chinese OEMs and US-Textile. From 2009 onwards, China started its pilot run of allowing Chinese exporters to use renminbi for trade settlements. In the above case, the simplest method is to use renminbi as the settlement currency between OEMs and US-Textile. Prior to February 2012, OEMs needed to obtain approval from the local State Tax Bureau to receive renminbi for export trade, since the normal procedures for applying for an export VAT refund required verification of the receipt of foreign currency upon exportation. This approval procedure

has been relaxed based on notice Yin Fa (2012) No. 23 issued by the People’s Bank of China jointly with five other ministries and commissions. Chinese exporters can use renminbi for trading settlements unless they have records of non-compliance with certain provisions in the previous two years.

Case 1(a): trading with Chinese subsidiaries You may ask whether, if the above case instead of being with third-party OEMs is with the subsidiaries of your company, there will be any differences. At first glance, Chinese subsidiaries do not necessarily receive compensation from the overseas parent/related companies. However, the Chinese transfer pricing rules require that a Chinese OEM should make a reasonable profit. If due to an exchange fluctuation, the Chinese subsidiaries cannot make a reasonable profit or even make a loss, this can result in transfer pricing challenges.

Case 1(b): can trading of services be settled in renminbi? In addition to trading of goods, trading of services can be settled in renminbi. An example is Chinese subsidiaries which function as back-office or

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Technical

China has been allowing Chinese exporters to use renminbi for trade settlements since 2009. With the increasing influence and internationalisation of the Chinese yuan, this is a market that no one should ignore

regional headquarters. Similar to OEMs, the China tax authorities expect such Chinese companies always to make a profit and, hence, exchange losses should be compensated. After reading the cases above, you may have some questions to raise. For example: How common is it to use renminbi for trade settlements? The People’s Bank of China announced that 6.6% of trading of goods in 2011 was settled in renminbi. Can I get renminbi from Chinese customers when they import? When China introduced the renminbi trade settlement policy, due to renminbi appreciation, the amount of renminbi paid from China to overseas arising from imports significantly outweighed that from exports. (See scenario 1)

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Case 2: offshore renminbi bonds and stocks There are a few golden rules in treasury management. A typical example relates to matching the currency of funding and usage. As such, the best currency to finance Chinese operations is renminbi. CFOs know how difficult it is to obtain local renminbi loans from banks in China when bankers advise that there are no remaining quotas since the State Council announced the policy of controlling the property market. Since the introduction of the settlement of trade items in renminbi, the amount involved has reached

INT_T_chinese.indd 4

RMB2600,000,000,000. There is a huge market for businesses to raise renminbi funds overseas at an interest rate lower than that of borrowing in China. Offshore renminbi bonds are referred to as Dim Sum Bonds. The first foreign non-financial company offering renminbidenominated bonds was McDonald’s. It sold RMB200m of 3% notes in Hong Kong in 2010. The bonds are due in September 2013. In 2007, when Dim Sum Bonds were introduced, the issued volume was around RMB10bn. It grew to RMB16bn in 2009, over RMB41bn in 2010 and to over RMB166bn in 2011. The first real estate investment trust

(REIT) raised RMB10.48bn in its initial public offering in April 2011 in Hong Kong. The most important consideration is how to channel offshore renminbi back into China in a proper manner. When using offshore renminbi for capital and loans, in addition to lower interest rates and funding costs of obtaining offshore renminbi and lower foreign exchange risk, what are the other advantages? We illustrate via the example below. Assume that a Hong Kong shareholder needs to raise US$10m to finance an operation in China and the amount will be injected into China as a shareholder’s loan.

Scenario 1: amount denominated in US$ When amount was borrowed: US$1=RMB6.5 On repayment, US$1 = RMB6.0 Corporate Income Tax @25%

PRC Co US$10m loan, equivalent to RMB65m Repay US$10m, equivalent to RMB60m Gain RMB5m RMB1.25m

In this example, you can see that the group needs to pay Corporate Income Tax in China at 25% because of the exchange gain arising from the shareholder’s loan. Based on the existing Corporate Income Tax law, the PRC company needs to pay tax on unrealised exchange gains.

Shareholder Borrow: US$10m Lend: US$10m Same

N/A

Borrow US$10m Hong Kong shareholder Shareholder’s loan US$10m

PRC company

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Scenario 2: amount denominated in renminbi

In this example, the Hong Kong shareholder can either borrow US$ and convert them into renminbi overseas or directly borrow renminbi offshore (eg the Dim Sum Bonds).

Borrow US$10m and convert to RMB65m Hong Kong shareholder

Shareholder’s loan RMB65m PRC Company

When amount was borrowed: US$1 = RMB6.5

PRC Co RMB65m loan

On repayment, US$1 = RMB6.0 Corporate Income Tax

The tax position will depend on the tax jurisdiction of the shareholder. In this example, as the shareholder is a Hong Kong tax resident, the exchange gain in this transaction, if any, is considered as offshore-sourced and not taxable in Hong Kong. The simple illustration above can demonstrate that using renminbi for a shareholder’s loan can help save tax. There are always concerns whether approval can be obtained to implement the idea above – ie using offshore renminbi for capital contribution and loans. The policy was not clear until

INT_T_chinese.indd 5

RMB65m N/A N/A

Shareholder Borrow: US$10m; convert to RMB65m Lend: RMB65m Repay US$10m Possible ??

October 2011. The Ministry of Commerce issued notice Shang Zi Han (2011) No. 889 clarifying the approval procedures in relation to renminbi being used for foreign direct investment (FDI), including capital and loans. The People’s Bank of China issued Notice No. 23 in the same month with regard to the settlement procedures. After clarifications were made by the government, there was exponential growth in the number of approved cases. The vice minister of commerce Wang Chao mentioned during a public speech on 14

December 2011 that, from October to early December 2011, there were 74 approved cases involving an amount of RMB16.53bn and, of these, 13 cases were approved by the central Ministry of Commerce due to approval restrictions, and the rest were approved by local branches of the Ministry of Commerce. However, there are still ambiguities in the policy. For example: Will offshore renminbi loans count towards the foreign exchange loan quota of foreign investment enterprises? If possible, Chinese companies can be highly geared and increase the interest deduction for tax purposes in China (subject to the transfer pricing rules). Can offshore renminbi loans be used to repay local renminbi loans? If possible, Chinese companies can re-finance higher-cost local loans with lower-cost offshore loans in the same currency. The ambiguities result in local differences in implementation. As usual when there are more similar cases, clarification will be possible in relation to such issues. China is a market that no one can ignore. Renminbi FDI is relatively new and has been evolving together with the renminbi globalisation. Accountants should also watch out for changes in order to take advantage of the planning opportunities.

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Bolivia Cheung is a member of the steering teams of both ACCA Southern China and ACCA Shanghai

17/04/2012 17:31


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Technical update

A monthly round-up of the latest developments in financial reporting, audit, tax and law FINANCIAL REPORTING IFRS 1 AMENDMENTS The International Accounting Standards Board (IASB) has issued amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards, addressing the treatment of loans from governments at below-market rates of interest. The amendments are mandatory for periods beginning on or after 1 January 2013 and provide first-time adopters with relief from full retrospective application of IFRS in respect of such loans. Earlier application is permitted.

AUDITING REVISED ISA 610 The International Auditing and Assurance Standards Board (IAASB) has issued a revised version of ISA 610, Using the Work of Internal Auditors. The standard addresses the responsibilities of external auditors when they are using the work of internal auditors. Revisions have also been made to ISA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment, to explain how the internal audit function and its findings can assist in making risk assessments. The revised standards are effective for audits of periods ending on or after 15 December 2013. In revising ISA 610, the IAASB has also agreed requirements and guidance on the responsibilities of external auditors where they intend to use internal auditors to assist them during the audit. The IAASB has been liaising closely with the International Ethics Standards Board for Accountants (IESBA) and will only incorporate the further changes into ISA 610 when the IESBA has completed its deliberations on proposals to change the definition of engagement team.

INT_T_update.indd 54

The change in definition will address a perceived inconsistency in respect of the ability of external auditors to use a client’s internal auditors.

confiscation of assets * allow associated with a suspect who is

FINANCIAL STATEMENTS Many entities rely on their accountants to assist them in preparing their financial statements. The IAASB has issued a revised version of International Standard on Related Services (ISRS) 4410, Compilation Engagements, which addresses the practitioner’s role and responsibilities, including the considerations prior to accepting an engagement and the importance of quality control. The wording of the compilation report is also expanded to clarify the role of the practitioner and explain the key features of a compilation engagement. The revised standard is effective for compilation reports dated on or after 1 July 2013.

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Yvonne Lang, director, Smith & Williamson

EUROPEAN UNION CRIMINAL PROCEEDS CONFISCATION LAW Accountants whose clients are involved in criminal proceedings may have to take account of a European Commission move to fill loopholes in the laws of the 27 EU member states regarding the confiscation of the proceeds of crime. Brussels has proposed a directive that would – if approved – insist that member states: allow ‘extended confiscation’ through clearer and more efficient rules for seizing assets from convicted criminals, even if courts cannot prove which offences generated this money or property; strengthen rules allowing the confiscation of assets transferred from a suspect to someone who should have realised they were handling dirty money or property – namely ‘third-party confiscation’;

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dead, permanently ill or has fled a jurisdiction – ‘limited non-conviction based confiscation’; ensure prosecutors can temporarily freeze assets they think could be linked to crime and might be moved by criminals, subject to confirmation by a court – ‘precautionary freezing’; and require member states to manage frozen assets so they do not lose economic value.

IFRS CHANGES WRITTEN INTO EU LAW The European Union Council of Ministers has written recent reforms to International Financial Reporting Standards (IFRS) into EU accounting regulation 1126/2008. Supporting amendments that had been drafted by the European Commission, the ministers backed making recent IFRS changes on the presentation of financial statements regarding other comprehensive income and on employee benefits that are compulsory for companies covered by the EU regulation. The changes will now be made, unless the European Parliament objects, which is unlikely. The Council’s press release can be downloaded at http://tinyurl.com/ d9zsf25 DOUBLE NON-TAXATION CONSULTATION The European Commission has asked financial specialists whether legislative reforms are required to tackle the double non-taxation of companies operating in more than one European Union country. Brussels is worried about aggressive tax planning allowing ‘cross-border companies [to] escape paying taxes due to mismatches between national tax systems’. It is staging a public consultation until 30 May. Details of the consultation are at http://tinyurl.com/d57o7u4

19/04/2012 12:09


In Morocco reforms of state-owned firms have helped boost their performance Meanwhile, the Organisation for Economic Cooperation and Development (OECD) has raised concerns about such practices in a report Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues. It illustrates how companies exploit national differences in taxing instruments, entities or transfers to ‘deduct the same expense in several different countries… make income “disappear” between countries or to artificially generate several tax credits for the same foreign tax’. The report can be downloaded at http://tinyurl.com/cn4vk6q NEW ECO-COST ACCOUNTING STANDARD The International Organization for Standardization (ISO) has released a new material flow cost accounting standard that is designed to help companies improve the environmental management of their businesses. The idea, said ISO, was to ‘trace and quantify material input and output flows and stocks within an organisation… identify material and energy use practices, and understand these in costs and physical terms. The information can then be applied to reduce losses and increase gains.’ The standard can be downloaded at http://tinyurl.com/cmfzbok

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EU DEBATES ‘SHADOW BANKING’ A green paper has been released by the European Commission debating whether prudential regulatory controls involving greater accounting transparency should be imposed on the so-called ‘shadow banking’ credit sector. This includes money market funds, exchange-traded funds, hedge funds, insurance and reinsurance undertakings, securitisation, securities lending and repurchase agreement (repo) transactions, among others. The green paper is available at http://tinyurl.com/c6u9e2h

MENA OECD CALLS FOR REFORMS The OECD has released a detailed report calling for improvements to accounting and audit practice at stateowned firms in the Middle East and North Africa (MENA). ‘Strengthening the governance of firms and increasing transparency and accountability is essential,’ it says, noting that state-owned enterprises control 50% of economic output in some MENA countries. The report can be downloaded at http://tinyurl.com/d9bo6rw Keith Nuthall, journalist

19/04/2012 15:12


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Careers LOOKING FOR A NEW JOB? www.accacareers.com/international

Speaking of which… [

Raising your profile can boost your career and one way to do this is to seek opportunities to speak in public – but first you want to hone your presentation skills

When next deciding to do some public speaking, make sure you don’t stand out for all the wrong reasons. Barbara Moynihan (pictured), a trainer in communications skills, offers her top 10 tips to help counteract what she believes are the main reasons presentations fail: 1 Decide your key message As you prepare your presentation it’s vital that you decide on your key message or messages – try to keep to a maximum of three. Many presenters put too much content together and end up over-loading their listeners leaving them totally bamboozled. 2 Know your audience Finding out as much as you can about your audience can really help you tailor your message and make that all important connection. Most of all you need to know what they are expecting from your presentation so that you can not only get your key message across but address their needs too. 3 Use a good structure Have a pre-planned opening and a pre-planned closing in addition to the main body of your speech. It’s a good idea to know your opening and closing almost verbatim, so no matter how the presentation has gone in the middle, you will have given a good first impression and left with a positive lasting impression. 4 Put meat in the middle In order to keep their attention throughout your presentation it is important to have a wellstructured main body.

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Here the key is to divide this part of the presentation into three ideally, but up to a maximum of five, main topics. For each of the topics or themes be conscious of varying the content between facts, figures, anecdotes, use of slides and/or props.

6 Practice, practice, practice Practising will certainly make you more familiar and comfortable with your material. Practising out loud is by far the best way to practice effectively – if you can get a colleague or even a family member to listen, even better.

5 Bring your figures to life A common question from accountants is ‘how can I make a presentation full of figures interesting?’. Make the figures relevant to something your audience can relate to. Let’s pick the figure of 250,000 – if you know your audience has an interest in rugby or there’s just been an International at the weekend, why not say ‘this is the equivalent of filling Twickenham three times’?

7 Slice and dice the PowerPoint If you want to guarantee getting and holding your audience’s attention keep the content on each of your PowerPoint slides to a minimum. Your audience did not come to see you reading. For the slides that contain figures, they came to hear you expand on the numbers. It’s not necessary to put every single figure on every single slide. 8 The SOS (sound of silence) – the best tool your voice can use When we write we use punctuation to break up our content. Punctuate your presentation. Silence allows you time to let your mouth catch up with your brain and your audience digest what you have just said. 9 Watch your default face Your default face is the face you have when you’re not conscious of your expression. You might be surprised at how serious yours is. When presenting, having a pleasant face and smiling occasionally can really help an audience warm to you. 10 Start on time and finish early How many presenters run over time? Wouldn’t it be nice to stand out from the crowd for finishing on time – or even early? Barbara Moynihan is past president of Toastmasters International and founder of On Your Feet www. onyourfeet.ie

19/04/2012 11:20


ACCA

59

Website revamp showcases CPD Looking for skills development opportunities on the ACCA website has been made even easier, as Ros Leah, ACCA’s head of professional development, explains All professionals recognise the importance of developing their skills and keeping abreast of developments. CPD helps you not only to maintain competence but also demonstrate to employers your ability to progress and take on new responsibilities. ACCA wants members to maintain the highest professional standards because their skills, judgment and integrity can add value to organisations, economies and society at large. When ACCA made CPD mandatory in 2005 there were many misconceptions, in particular that it meant attending face-to-face courses. This has changed as members have gained CPD through e-learning, acting as workplace mentors or learning at work – undertaking tasks for the first time, consulting an expert about a workplace or client issue, etc. There is still a place for attending seminars and conferences and reading articles, but it is now widely recognised that individuals are looking for greater variety and blended learning solutions. In an age when information is immediately accessible, everyone wants access to learning at a time and place that is convenient for them. The revamped CPD section of the ACCA website at www.accaglobal.com/ cpd offers one-stop access to articles, e-learning, podcasts, online seminars, research and qualifications from partner organisations, and contains over 160 e-learning modules. You will find details of face-to-face courses on your local ACCA office site. Learning opportunities have been put under subject headings to make it easy to view the range of information available. You will also find details of how to meet your CPD requirements. We hope the new resource will meet the demand for more accessible CPD. This is just the first step in improving

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Learning opportunities have been brought together within each CPD subject heading members’ experience of the website when looking for CPD and further improvements will appear this year. The demand for e-learning has increased as professionals have become time-poor but also because the quality of e-learning has improved. ACCA’s research has confirmed there is no decrease in quality with technology-enhanced learning and assessment compared with physical, classroom and paper-based learning and assessment. Interviewees for the research included Richard Pollard, PwC’s global development leader, who said: ‘On an average day there might be facts I need to know and skills or techniques of which I need a reminder. I want that now. I don’t want it three months ago when I was at a training centre, and I can’t remember what I was learning.

I certainly don’t want it in six months’ time when I’ve been booked to go on a classroom session.’ Online learning and assessment technologies offer sophisticated ways to interact with learning content. You can fast-forward to more demanding modules, and pinpoint and address areas of weakness much more quickly. Remember, learning will be considered verifiable if it is: relevant to your career you can demonstrate how you have applied it you can prove it took place – eg copies of course materials, notes from learning, contact details of a third party who can substantiate activity completion, a certificate of course/assessment completion. For more information, go to www.accaglobal.com/cpd

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ACCA global forums

Tomorrow’s world ACCA’s Accountancy Futures Academy is exploring the future role of accountants. It will be radically different, say academy chairman Ng Boon Yew and futurist Rohit Talwar The world is undergoing a period of profound transformation driven by global political, economic and technological shifts. Taken together, these forces suggest that the role and expectations of the accountant of tomorrow and the industry they inhabit could be radically different from the profession today. So how can the profession prepare for an uncertain future when we all feel there is already a full agenda dealing with today’s challenges? Recognising the need to help accountants explore these long-term drivers of change, ACCA has started the Accountancy Futures Academy. Its mission is to provide a radar to highlight the trends, driving forces and ideas that could shape the future global business and accountancy landscape. The first output from the academy is a consultation with members of ACCA’s global forums. The objective is to identify the drivers of change that accountants should be thinking about to prepare them for future challenges. This article looks at some of the emerging findings from the study being coordinated by Fast Future Research. The changing economic landscape is seen as central to any exploration of the future of business. We are in the middle of a period of deep economic uncertainty. For accountants, this puts the spotlight on our risk and resilience plans – how are we factoring in the potential collapse of key parts of the economic infrastructure in individual markets or globally?

Increasing influence While mature economies focus on surviving and navigating the current turbulence, emerging economies are growing, particularly the BRIC nations. It is clear that the BRICs will have an increasingly influential say in how

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global economic systems are shaped and governed. These countries are presenting global accountancy firms with opportunities, in terms of markets to expand into, but also challenges as a potential source of future rivals. Could we see multinationals transferring their accounting business to firms from the BRIC economies? Political power can be expected to follow financial power, with both China and India having more of a say on the evolution of the key institutions of global governance. This could give both countries the platform to set the rules and agenda for the new so-called Asian century. This could have far-reaching implications for how the global accountancy profession evolves in future, especially with regards to the definition and adoption of uniform global accounting standards. Could these standards come to reflect Eastern rather than Western practices?

Population shifts Demographic shifts are reshaping the make-up of the global population. By 2050, the Asia Pacific region will have grown by more than the populations of Europe and North America combined, with Europe itself expected to shrink by around the size of Germany. Global life expectancy is projected to continue increasing and enforced retirement ages abandoned. This raises questions about how we effectively manage and provide career opportunities for multiple generations in the workforce. The business of business is also undergoing fundamental change – with new business models offering the potential to transform our notions of risk and value. Firms are increasingly opting to switch from ownership of fixed assets to renting the services provided by those assets – cloud computing is one such example. The

risks of new product development and new venture creation are also being transformed by crowd-sourcing models such as Kickstarter.com, which enable entrepreneurs and innovators to raise the necessary financial commitments from the customer before embarking on the project. Sales approaches such as aggregated buying and the auction model are increasingly being used by businesses to sell their offerings. How will accounting practices and risk assessments need to change to take account of a rapidly changing set of business models with often unpredictable revenue streams? The financial crisis has highlighted the need for businesses to construct ‘living wills’ to facilitate an orderly unravelling of their affairs in case of insolvency. Accountants can play a key role here, but how deeply will the finance function need to be embedded

*FORUM SYMPOSIUM

Chairs of ACCA’s 10 global forums met for a Global Forums Symposium in March in London to discuss the issues that will be confronting the accountancy profession over the coming months and years. A presentation based on the research described in this article provided a basis for lively discussions on a wide range of topics including global economic uncertainty, audit, complexity, regulation, adding value, principles, sustainability, investors and reporting, the public sector and fraud. The forums aim to further thinking on current and future issues in a number of specific areas, as well look at the challenges and opportunities facing the accountancy profession generally.

19/04/2012 17:48


FOR MORE ON THE ACCOUNTANCY FUTURES ACADEMY GO TO

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www.accaglobal.com/globalforums

*GOING IN FOR THE SKILL

Accountants must learn to plan for and think in terms of multiple possible scenarios. An emerging competence is developing the agility and processes to cope with ever-shorter business cycles. Accountants also need to become adept at navigating and tackling operational and regulatory complexity and the rising number of non-financial indices used to measure value. The need to play a bigger role in business decision-making and the globalised nature of work mean accountants seeking international opportunities will have to expand their strategic, language and cultural skillsets. The backlash from the financial crisis, combined with greater moves towards environmental sustainability, will also result in growing regulatory requirements for accountants to act as public interest watchdogs.

in the transactions, products and pricing models of the organisation to appreciate the scale and detail of what needs to be unravelled? The growing complexity of business and the need for integration are placing greater demands on information technology. IT has revolutionised the

INT_A_future.indd 61

workplace – digitising workflows and assets, and creating new opportunities with people generating real-world fortunes from buying and selling virtual assets in online environments such as Second Life. Advances in artificial intelligence could lead to further automation of accounting functions.

Further down the road, technological advances could mean we download core accounting data directly into our brains. The core question is whether the roadmap for accounting systems development will be flexible enough to cope with a range of possible business scenarios. Taken collectively, all these drivers suggest we are now entering a period of fundamental change for the global economy, for the general world of business and, as a result, for the accountancy profession. Ng Boon Yew FCCA is chairman of ACCA’s Accountancy Futures Academy and executive chairman of Raffles Campus. Rohit Talwar is a global futurist and founder and CEO of Fast Future Research

19/04/2012 17:49


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ACCA news

EDUCATION FIRST

Entrants to ACCA Sri Lanka’s Sustainability Reporting Awards 2011 demonstrated a commitment to nation building, with reconciliation a critical aim in a post-conflict era

Emerging from a 30-year civil war, Sri Lanka is looking to reap the dividends that come from lasting peace. It was evident that many corporates believe that education is a vital area for securing lasting peace, as all entrants in ACCA Sri Lanka’s Sustainability Reporting Awards 2011 had community projects supporting education at all levels. The winner of the Large Scale Category clearly stated that they are ‘committed to providing educational opportunities to disadvantaged groups in the community as we believe that education is the foundation for an enlightened and civilised society’. The projects varied from establishing vocational training schools in areas earmarked for infrastructure development coupled with access to finance to simple English language programmes to enhance access to knowledge and social mobility. Many of the sustainability reports demonstrated a nation-building agenda

INT_A_SriLanka.indd 62

where there was a common vision of economic growth and prosperity where all the people can aspire to well-being and prosperity with national unity and reconciliation as a critical aim. Many of the reports in the competition provided evidence of education projects in the areas affected by the conflict in the north and east of the country. ACCA Sri Lanka Sustainability Reporting Awards has been promoting sustainability for more than eight years in the country and it is encouraging to see more corporates voluntarily integrating the principles of sustainability into their business strategy. That sustainability plays a vital role in nation building in Sri Lanka’s post-conflict era and that key employers are setting an example with a long-term vision is evident when reviewing the sustainability reports submitted for the awards programme. The chief guest at the awards ceremony was Diarietou Gaye, county director for Sri Lanka and the Maldives

Schoolchildren celebrate the Sinhala and Tamil new year. All the entrants in ACCA Sri Lanka’s Sustainability Reporting Awards felt it was crucial to support education to secure lasting peace. for the World Bank, and the guest of honour was Lucia Real Martin, director, emerging markets Asia. Gaye commented in her message that this programme ‘highlights the positive role of the business sector in resolving sustainability issues, as they can lead the way in making the seismic shift that is required to make a long-term positive impact’. The winner of the Large Scale Category was John Keells Holdings with Aitken Spence Hotel Holdings and HDFC Bank as the Medium Scale and Small Scale Category winners, respectively. The runner-up in the Large Category, Diesel & Motor Engineering, produced the first integrated report in the competition and is also part of the IIRC pilot project for integrated reporting.

19/04/2012 11:05


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64

ACCA news

Elections to Council ACCA’s governing body, Council plays a pivotal role in ACCA affairs. It ensures that ACCA operates in the public interest and delivers the objectives stated in its Royal Charter. Council sets ACCA’s overall direction through regular approval of strategy. It acts as a link between members and the professional body, and leads the organisation in the interests of both. It is accountable both to members and the public interest. It acts for all members and future members (today’s students). It provides leadership of ACCA and stewardship of its resources. Council develops policy for ACCA as a whole and Council members are volunteer custodians acting for the well-being of the whole organisation. Whatever their geographical or sectoral bases, Council members do not represent particular areas or functions and are elected by the membership as a whole.

* * * * * *

ACCA members of all ages and backgrounds are encouraged to stand for election to Council. Long-term or technical experience is valuable, but so is the proven ability to participate actively in strategic decision-making. Council experience as such is not necessary. However, an understanding of good governance is essential, and personal and professional integrity must be of the highest order. Specifically, ACCA expects members to bring the following skills and attributes to Council: an ability to take a strategic and analytical approach to issues and to see the big picture; an understanding of the business and the marketplace; communication and networking skills; an ability to interact with peers and respect the views of others; decision-making abilities; an ability to act as ambassadors in

* * * * * *

many different environments; planning and time management; and a willingness to learn and develop. Nominations are now invited for election to Council at the 2012 AGM. Candidates must be nominated by at least 10 other members in good standing. Candidates should supply a head and shoulders photo and an election statement of up to 180 words, which should not include references to email addresses or websites. Candidates are also required to sign declarations of their willingness to comply with, and be bound by, the code of practice for Council members. Further information on the Council election process, including pro forma of nomination forms, may be obtained by writing to the Secretary at 29 Lincoln’s Inn Fields, London WC2A 3EE, faxing +44 (0)20 7059 5561, or emailing michael.sleigh@accaglobal.com (put ‘Council Elections’ in the subject box).

* *

INDIA SUCCESS On 15 April, ACCA hosted a dinner and felicitation ceremony to celebrate the growing success of the ACCAbased training programme at Ernst & Young Global Shared Services (EY GSS) for India-based assurance teams. The dinner also applauded four EY GSS trainees who passed their December 2011 ACCA exams and have moved on to the Professional stage of the ACCA Qualification. Their success is particularly notable as the ACCA initiative at EY GSS has been a pioneering programme in India. It began in 2009, with an initial batch of 12 trainees, all based in Gurgaon, and the celebrated trainees represent the first batch of EY employees to move to the Professional stage. Thanks to encouragement from senior management across EY GSS, as well as the ambassadorial role played by the trainees themselves, the programme has grown in popularity

INT_A_Council.indd 64

ACCA’s Aziz Tayyebi (back row, fifth from left) and EY’s Peter-Paul Vester (front row, third from left), Sarvesh Mathur and Vishal Dhingra (back row, sixth and seventh from left, respectively) with successful candidates from EY GSS’s India-based assurance teams across EY GSS. Nearly 40 trainees are now pursuing the ACCA Qualification in the June 2012 exam sessions. Aziz Tayyebi, head of international development at ACCA, hosted the event. A former manager at EY in the UK, Tayyebi noted how ‘fortunate those on the programme were, both in terms of building the basis for a strong career through the ACCA Qualification,

as well as the experiences they were getting from EY’. In a keynote speech, Peter-Paul Vester, global talent hub assurance leader at EY GSS, praised the efforts of the trainees and welcomed the strong partnership between EY and ACCA and the important role that ACCA-qualified professionals would play in the future of EY GSS.

19/04/2012 11:04


Global support at times convenient for you Contact us by phone or email 24 hours a day 7 days a week 365 days of the year

ACCA – The global body for professional accountants +44 (0)141 582 2000 members@accaglobal.com www.accaglobal.com


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ACCA news

Council highlights

Inside ACCA 64 Council Election time is coming; and EY pioneers ACCA training programme for India-based teams 62 Education first ACCA Sri Lanka’s Sustainability Reporting Awards 2011 60 Global forums Introducing ACCA’s Accountancy Futures Academy 59 CPD The ACCA website now has a new, improved, CPD section

INT_A_backpage.indd 66

Council’s first scheduled meeting of 2012 took place on Saturday 10 March. The guest presenter was Katrina Wingfield, chairman of the ACCA Regulatory Board, who presented its annual report for 2011. The Regulatory Board was established after the AGM in May 2008 and brings together all of ACCA’s arrangements for regulation and discipline in a single entity. It stands at arm’s length from Council and the majority of its members are lay individuals. The report of the Board for 2011 covered the third full calendar year of its operation. It focused on a successful regulatory event organised in October 2011, at which Sir Ian Kennedy was guest speaker, and the establishment by the Board of an Overview of Regulatory Procedures Working Party. Council was pleased to note that the report overall underscored the Board’s commitment to continuous improvement in regulation and was reassured that, going forward, the Board would continue to provide proactive oversight of ACCA’s disciplinary and regulatory processes. A number of other issues were considered in Council’s formal sessions: Council met in discussion groups to debate the competitive landscape in the global profession and ACCA’s response to it. Council considered the regular report of chief executive Helen Brand. This covered ACCA’s performance, as well as a review of its strategic development and developments in the wider profession. On a recommendation from the Resource Oversight Committee, Council approved the

* * *

Nairobi: next meeting

*

*

* *

proposed budget for the organisation for 2012–13. Following a recommendation from a group of standing committee chairmen, Council also approved achievement measure targets put in place to track ACCA’s strategic performance in 2012–13. At the request of the Regulatory Board, Council considered its policy with regard to ACCA students who hold AAT practising certificates. Council agreed to maintain its current policy to recognise only professional-level, IFAC member bodyissued practising certificates and not to introduce any dispensation for AAT practising certificate holders. Under the terms of membership regulation 3(f), Council agreed to invite into ACCA membership four senior accountants from Indonesia – Rosita Uli Sinaga, Ahmadi Hadibroto, Irhoan Tanudiredja and Langgeng Subur. Council was pleased to approve the signing of a renewed Mutual Recognition Agreement with the Malaysian Institute of Certified Public Accountants. Council confirmed Anthony Harbinson as its preferred nominee for vice president 2012–13. (The formal elections for ACCA’s officers will take place at the annual Council meeting immediately following the AGM on 20 September 2012.)

Council’s next meeting will be in June 2012, when it will meet in Nairobi, Kenya as part of the biennial series of meetings held in ACCA’s key international markets.

TRAINEE CHANGES

The trainee development matrix (TDM) for ACCA students has been overhauled. The tool, used by trainees to plan and record their achievement of Practical Experience Requirements (PER), has been renamed My Experience. It will remain accessible via myACCA, and a reminder pop-up will prompt trainees to update their own experience status regularly. They no longer have to provide an annual PER return. TDM exemptions have been renamed Performance Objectives Exemptions, and the former HKICPA TDM exemption for trainees in Hong Kong is now the HKICPA Performance Objective Exemption. Trainees are still required to use My Experience to claim the exemption and record the number of months’ work experience gained. It remains important that employers support trainees to achieve their PER, as well as their exams and ethics module, by arranging a workplace mentor. ACCA-approved employers who have approved exemptions for their trainees must remind them they are still required to use My Experience to track their progress. Acting as a workplace mentor can be included towards Continuing Professional Development. More at www.accaglobal.com/en/student/experience.html

19/04/2012 13:27


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The May 2012 edition of Accounting and Business magazine

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