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ab accounting and businesS 11/2012


accounting and business international 11/2012

Auditing south africa Interview: Terence NomBembe, auditor general

bite-sized banking time to shrink the banks?

IFRS US adoption debate 2013 economic challenges technical hedge accounting

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17/10/2012 14:49

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12/10/2012 08:34


Editor’s choice

With corruption in local authority finance rife, Terence Nombembe, South Africa’s auditorgeneral, has his work cut out. And, as he focuses on a major overhaul at grassroots level, he is also helping to develop the country’s accountancy profession. See page 12


South Africa has had its fair share of global headlines recently, in particular the industrial unrest that led to deaths at the Marikana platinum mine. There are understandable fears that unrest could even spread as far as the country’s vital public services sectors. When the Congress of South African Trade Unions (COSATU) met for its 11th National Congress on 17 September (featured on the cover of this edition), president Jacob Zuma said: ‘Violence cannot become a culture of our labour relations. Workers and employers need to use the laws of the land.’ At the sharp end of auditing South Africa’s coffers, auditor-general Terence Nombembe and his staff have a tough job. Nombembe loves his job and in our cover feature this month explains his hopes for improvements to the parlous state of local government finances. He is beginning with getting the country’s municipalities to comply with basic accounting principles – things that are second nature in the private sector. He believes it is crucial to instil a culture of accountability and transparency in the country. That, he says, is what is going to help the most vulnerable South Africans who need to be assured that the little resources the country has are improving the quality of their lives. And in this work he sees a lot of room for growth in the country for a professional body like ACCA. Kicking out corruption is also the theme of our feature on the growth of whistleblowing services in India (page 40). Ernst & Young, among others, have set up these services for forward-looking companies that are seeking to stamp out corruption, fraud and financial malpractice. We also take a look at the big banks (page 15). Ironically, rather than getting smaller, many of them have actually got bigger since the financial crisis. Breaking them up has been a popular rallying cry of the Occupy protesters – but how is this actually playing out in practice? Lesley Bolton,

ROUND THE TABLE A roundtable cohosted by ACCA at the European Parliament highlighted the wide range of perspectives on the EU’s audit reform proposals. Page 18

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TOP FOR TAX Plans for the Trinidad and Tobago Revenue Authority may have been shelved, but the rationale behind its introduction is still sound. Page 53

TECHNICALLY BRILLIANT? There are over a hundred technical articles with multiple-choice questions on the ACCA website – demonstrate your understanding and get verifiable CPD


For your next move, check out www.accacareers. com/international

17/10/2012 10:57

AB INTERNATIONAL EDITION CONTENTS NOVEMBER/DECEMBER 2012 VOLUME 15 ISSUE 10 International editor Lesley Bolton +44 (0)20 7059 5965 Editor-in-chief Chris Quick +44 (0)20 7059 5966 Asia editor Colette Steckel +44 (0)20 7059 5896 Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar +44 (0)20 7059 5620 Designers Robert Mills, Zack Starkey Production manager Anthony Kay Advertising Richard McEvoy +44 (0)20 7902 1221 Head of publishing Adam Williams +44 (0)20 7059 5601 Printing Wyndeham Group Pictures Corbis ACCA President Barry Cooper FCCA Deputy president Martin Turner FCCA Vice president Anthony Harbinson FCCA Chief executive Helen Brand OBE ACCA Connect Tel +44 (0)141 582 2000 Fax +44 (0)141 582 2222 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

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Features 12 Interview: Terence Nombembe We meet South Africa’s auditor-general 15 Shrink to fit? There are growing calls for banks to reduce their size 18 Audit shake up A roundtable at the European Parliament examined the future of audit 22 Waiting game US adoption of IFRS appears to be as distant as ever

Audit period July 2011 to June 2012 148,106

17/10/2012 12:16


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

Regulars BRIEFING 06 News in pictures A different view of recent headlines 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

45 Accounting solutions PwC experts answer questions on share purchase agreements and accounting for insurance policies


46 A guide for the perplexed The first of a two-part series looks at recent innovations in corporate reporting

29 Ramona Dzinkowski Accountants face challenges in 2013 30 Barry Cooper Accounting for the Future was a valuable event for members, says the ACCA president

Your sector

48 Driving the business forward The second in our series on economic value added examines the seven value drivers for business


50 CPD: hedge accounting A look at the rationale for hedging and its impact on financial statements

32 A vision for Vietnam Accountants in the burgeoning economy have their work cut out

53 Culture change How a new revenue agency could transform tax collection in Trinidad and Tobago


56 Update The latest from the standard-setters

CAREERS 59 Location, location, location The pros and cons of post-graduate studies at home and abroad

31 The view from Joanne Freeman of Hall Chadwick, plus news in brief

35 The view from Judy Giordano of Endress+Hauser, plus news in brief 36 A passion for learning FSTEP’s Lee Khee Joo is helping to nurture Malaysia’s future accountants 39 Capital communication Tips to help your annual report speak to capital markets 40 Time to talk Whistle-blowing services are being offered by India’s accountancy firms


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

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ACCA NEWS 26 Compact considerations ACCA has signed up to the new UN Global Compact 64 CPD Annual CPD declarations are now due for submission 65 AGM ACCA holds its 107th meeting in London 66 News Barry Cooper formally elected as ACCA president; call for public sector leadership input; video explores public value

18/10/2012 11:23


News in pictures


Members of the West Indies cricket team celebrate after winning the final of the World Twenty20 tournament against Sri Lanka


An inflatable model of Brazil’s mascot for the 2014 World Cup was punctured by vandals during demonstrations in Porto Alegre


Sony CEO Kazuo Hirai (left) and Olympus president Hiroyuki Sasa pose for the press following the announcement of a tie-up between the two companies

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Greek premier Antonis Samaras welcomed German chancellor Angela Merkel to Greece, unlike some rowdy protesters


Barack Obama and presidential candidate Mitt Romney gear up for the US election on 6 November


Supporters of Venezuelan president Hugo Chavez celebrate his re-election


Drought hit grain crops in the US Midwest, Europe and central Asia, fuelling fears of a decline in global cereal production

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17/10/2012 11:01

News in graphics


2 So uth 6 Afr ica


In the latest Freedom on the Net (FOTN) report from thinktank Freedom House, which measures internet freedom in 47 countries, South Africa is the highest ranked of the seven sub-Saharan nations covered. South Africa’s score of 26 puts it in the same ‘free’ league as the UK (8th), the US (2nd) and Kenya (13th) – 14 countries are categorised as free, with a score of 30 or under. Elsewhere in sub-Saharan Africa, Nigeria ranks 15th and Uganda 17th while back-marker Ethiopia comes in in 42nd position.


Free (0-30)

Partly free (31-60)

Ni 33 ge ria


a Keny


5 abwe b m Zi


Ug 4 an da


5 nda Rwa

75 pia

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Not free (61-100)





EBT before goodwill impairment EBT









Hong Kong


KEY 2010









European goodwill impairments in 2011 were at their highest levels since 2007, according to Houlihan Lokey’s annual European goodwill impairment study. Earnings before taxes and goodwill impairment charges at the Stoxx Europe 600 Index companies remained robust, indicating they may be taking advantage of higher profitability to perform goodwill impairments.




South Korea



Singapore came out ahead of Hong Kong again in a corporate governance survey by the Asian Corporate Governance Association and CLSA Asia-Pacific Markets that examined 11 markets and more than 800 listed companies. Singapore ranked 69th (67th in 2010) and Hong Kong came 66th (65th in 2010).

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16/10/2012 17:43


CFOs are investing more in videoconferencing equipment, datacentre efficiency kit and electric vehicles, according to Deloitte’s 2012 Sustainability and the CFO Study. Some 250 CFOs took part, from companies with more than US$1bn in revenue each.



56% Videoconfere




21% Datacentre efficien cy kit Elect


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2011 2012











KEY 1 Hong Kong 2 Singapore 3 New Zealand 4 Switzerland 5 Australia 5 Canada 8 Mauritius 12 Ireland 12 UK

The UK has been overtaken in the latest economic freedom table published by Canadian thinktank the Fraser Institute. The key ingredients of economic freedom are: personal choice; voluntary exchange coordinated by markets; freedom to enter and compete in markets; and protection of persons and their property from aggression by others.










Emerging markets offer some of the lowest tax costs as well as growth potential, according to KPMG’s Competitive Alternatives 2012: Focus on Tax. Companies in India pay about 50% less in tax costs than their peers in the US.

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12/10/2012 17:09


News round-up


EU banks would be forced to separate their proprietary trading and other high-risk trading activities under proposals to the European Commission from its high-level expert group on banking reform. The group was chaired by Erkki Liikanen, governor of the Bank of Finland and a former European Commissioner. The report also recommends strengthening bank governance arrangements and reviewing capital requirements related to trading assets and real estate-based lending. In addition, it calls for further consideration of the use of bail-in instruments – non-equity capital that can be written off or converted to equity where a bank hits problems. See also feature, page 15.


Ernst & Young reported revenue growth of 7.6% to US$24.4bn in the year ending 30 June. Performance was strongest in emerging markets, with India reporting increased turnover of 19.8%; Brazil of 17.5%; the CIS up by 15.6%; China rising 11.8%; and Africa up 10.2%. Across all emerging

markets, revenues rose 15.5%. The firm said the results reflected its strategy of investment in emerging markets, with US$1.8bn invested in growth markets in six years. Advisory revenues rose by 16.2%; transactions advice by 9.4%; tax by 7% and assurance by 4.1%. ‘We are committed to maintaining our investment in the emerging markets,’ said John Ferraro, EY’s global chief operating officer.


Ireland has €4bn in outstanding public private partnership (PPP) commitments, which will rise to €6.4bn from currently contracted schemes, the government’s auditor has stated. Significant additional spending went into PPP projects that were abandoned and did not deliver any benefit. The Irish government should maintain and publish a list of major PPP schemes that are in place or in development, along with expected state financial commitments, recommended the report.


Deloitte grew its global revenues by 8.6% in the year ending May to


Sir David Tweedie is the new chairman of the International Valuation Standards Council’s (IVSC) Board of Trustees, the standard setter of asset valuations used in financial reports. It brings together valuers, regulators, legislators and investors to obtain a more standardised approach to valuations. ‘The global financial crisis has highlighted the crucial role of valuation and its impact on financial markets,’ said Tweedie. ‘Standardised valuation practice, across all business sectors, is now vital in order to provide a consistent approach to portfolio and asset valuation and to improve the confidence of both investors and users of valuation services.’ Tweedie was chairman of the IASB until June last year and replaces Michel Prada who stepped down to become chairman of the IFRS Trustees.

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US$31.3bn, representing its highest revenue growth in four years. Strongest growth was recorded in Asia Pacific and the Americas. The firm also restated its intention to increase its workforce by over 25% in the next three years, to 250,000. The firm’s financial advisory practices grew revenues by 15%, consulting grew by 13.5%; audit by 6%; and tax by 4%.


The International Accounting Standards Board will re-expose proposals for the reform of insurance accounting following substantial changes made since the original exposure draft was published. Feedback will be sought on a limited range of questions on the proposals, with the prompt finalisation of the standard regarded as a priority. Reform may substantially affect insurers, particularly mutual insurers.


Finance function talent management needs to improve in outsourced shared service providers and in the retained finance function, according to an ACCA report. Talent management in a shared services world found that 72% of 1,200 organisations surveyed do not implement talent management programmes across the entire function, or are not aware of programmes. Only a third of those with talent management programmes regard them as effective.


Sir David Tweedie, new IVSC chairman

Mitsuhiro Takemura has been appointed as the IFRS Foundation’s office director for the Asia-Oceania region in Tokyo. He has been a technical fellow at the International Accounting Standards Board and a member of the technical staff of the Accounting Standards Board in Japan. Takemura leaves his position as a partner at Deloitte to take up the role. Michel Prada, chairman of the IFRS Foundation Trustees, commented: ‘Because of Mr Takemura’s standardsetting and auditing background he understands the issues and challenges involved in the standardsetting process.’

17/10/2012 11:19



With a Securities and Exchanges Commission report on IFRS offering no new insights, a timetable for US adoption seems as distant as ever. Is the US in danger of becoming increasingly isolated from the rest of the world?


Investment decisions are strongly influenced by audit opinions, according to a PwC survey of investment professionals. However, investors want the audit function to evolve to ensure it remains reliable, relevant and valued. Investors stressed that it is the quality of disclosures that is important to them and they seek assurance on industry-specific metrics and other key figures that are not disclosed in financial reports. Some 46% of investors surveyed agreed that auditors are sufficiently independent of management, while 25% disagreed.


by Greece’s financial police force, the SDOE, has been published. One socialist former minister on the list subsequently committed suicide. Other names include a former city mayor, a former finance minister and the leader of a political party. However, a list of wealthy Greeks who have large deposits in Swiss bank accounts has apparently ‘disappeared’ from the SDOE offices.

Carol Sawdye has been appointed as PwC’s CFO and vice chair of its US firm. Sawdye rejoins PwC from the National Basketball Association, where she was executive vice president and CFO for two years. She previously spent 17 years with PwC, including six as a partner, having started her career with the firm. Immediately prior to working for the NBA she was with the Skadden, Arps, Slate, Meagher & Flom accountancy firm, where she was CFO and then chief operating officer.

Russian banks may be required by regulators to increase their provisions for bad debts because of the scale of consumer borrowing, the Central Bank first deputy chairman Alexey Simanovsky has warned. A Central Bank stress test revealed that in an extreme scenario of falls in oil prices damaging the economy, banks would be vulnerable. The number of domestic banks facing capital shortfalls in these circumstances has risen by a factor of two and a half in the course of 2012, following a rise of over 25% in consumer lending this year.


The Greek government has pledged to adopt a ‘zero-tolerance’ policy towards political corruption. A list of 30 senior political figures being investigated

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Hans Hoogervoorst, chairman of the International Accounting Standards Board (IASB), has made an implied rebuke of the US Financial Accounting Standards Board (FASB).




a process leading to a set of practices that could be harmonised or mutually agreed upon.’

Sanaa, Yemen

SHARIA STANDARDS SCRUTINISED There needs to be stronger oversight, greater transparency and more robust disclosure requirements in Islamic capital markets as they expand, insists the Islamic Financial Services Board (IFSB). The IFSB is working with the International Organisation of Securities Commissions (IOSCO), the body representing securities regulators, to develop stronger sharia standards. Jaseem Ahmed, secretary general of the IFSB, said: ‘This will require the adoption of robust regulatory and disclosure practices that give confidence to investors and consumers alike. IFSB hopes that this collaboration with IOSCO will facilitate

Yemen has received pledges of hundreds of millions of dollars of financial support to boost its economy, helping it to rebuild its political and social structures and overcome a serious food crisis. Kuwait will provide US$500m for regeneration projects, while Qatar is to gift US$500m for humanitarian support. The UAE is to give US$150m, the International Monetary Fund US$120m and the Netherlands US$100m. Yemen has a million children who are severely malnourished, 12 million people are without reliable sources of food and drinking water and 500,000 have been displaced by conflict. The Yemeni government is grappling with a rising threat from anti-West insurgencies. It says it requires an additional $15bn to complete its planned investment programme to improve government capacity.

In a speech to the Federation of European Accountants he said: ‘After the outbreak of the financial crisis, our current impairment model, which was based on incurred losses, was criticised for being too little, too late... In the past 18 months we have worked hard to come to a converged solution. As you know, the FASB recently developed second thoughts about the model we had jointly developed and a converged solution now seems unlikely.’ But he added that both boards remain likely to adopt standards based on expected losses. Compiled by Paul Gosling, journalist

17/10/2012 11:19




South Africa’s auditor-general, Terence Nombembe, wants municipalities to comply with basic accounting principles before tackling the next big problem – value for money

T The CV In addition to his role as auditorgeneral, Terence Nombembe is also chairman of the International Organisation of Supreme Audit Institutions (INTOSAI). He hails from the former Transkei, a so-called black ‘homeland’ created by South Africa’s former apartheid government. He received his BComm degree from the University of Transkei in 1982, and his honours in accounting from the University of South Africa (Unisa) four years later. He qualified as an accountant in 1990. Nombembe worked as an external auditor and an internal auditor in the private sector, for various companies including KPMG, Unilever, and then BP Southern Africa, where he joined as a senior internal auditor. Nombembe went on to help establish the auditing firm Gobodo Incorporated where he was a managing partner. In 2000, he embarked on his public accounting career, joining the office of the Auditor-General of South Africa as deputy auditor-general and CEO. Nombembe was subsequently the first black African to be appointed to the position of auditor-general in the office’s 95-year history.

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he men and women tasked with auditing South Africa’s coffers have a tough job. It’s not a pretty picture. A report released in July by the ACCA-affiliated office of the AuditorGeneral South Africa, into the state of local government finances in the country, revealed that almost half of the lucrative contracts dished out by its 284 municipalities were given to their employees, local politicians or their families. Two-thirds of municipal councils awarded tenders uncompetitively, almost £300m worth of contracts could not be audited at all because documentation was missing, and 70% of municipalities couldn’t prove that what they had promised had in fact been delivered. Others simply failed to hand over their books for auditing. Add to this the fact that some of the municipalities’ CFOs own no more than a school leaver’s certificate, and the enormity of the task becomes clear. It is up to those who work for the office – and its head Terence Nombembe – to untangle the mess. Only 13 of the country’s local councils received clean audits. A few others were so determined to stop proof of their failures emerging that they threatened the auditors and instructed them to cover up evidence of corruption, according to the Internal Audit Association of South Africa. Stories of flagrant fraud and looting of council coffers abound, but Nombembe finds the simplest of failures the hardest to accept. ‘What is shocking is that we can’t get to institutionalise the most basic

accounting principles. For me it’s the inability to do the obvious. Why can’t we just employ the right people?’ he asks. ‘I can’t understand why you can’t get the right reporting and accounting systems in place in government, things like keeping documents and filing properly… It is something that is almost second nature in the private sector.’

No consequences Nombembe, who is also chairman of the International Organisation of Supreme Audit Institutions (INTOSAI), blames the politicians who are not ‘taking ownership despite the fact that they have accepted that they can’. There are also no consequences for those who fail to do their jobs. ‘There is no action taken on the ongoing reporting of undesirable results. Our report says that bad habits have just become the norm. Because of that, many layers of leadership do nothing about it because nothing will happen to them anyway,’ he says. The result is a significant impact on the lives of residents in the cashstrapped country where unemployment hovers over 25% and poverty is rife. Uncompetitive practices mean that goods and services are not procured at a reasonable and fair value, and


16/10/2012 12:26


The basics AGSA

The office of the Auditor-General of South Africa compiles close to 1,000 reports a year, following audits of every municipality, municipal-owned entity, provincial and national government department and parastatal. To do so, the office has around 1,000 trainee auditors on top of its 1,000 permanent staff. The number of trainees has increased from about 20 a decade ago. ‘Our trainees are primarily recruited from the universities, mainly in accounting and auditing disciplines… We do the best we can to support them to do their work and studying. Of late we are quite happy with the growth in the number of trainees who qualify,’ says Terence Nombembe. The number of ACCA trainees has increased, but Nombembe says he would like to see more. ‘We are having discussions with ACCA, mainly on the support which the trainees get given, so that studying part-time and working becomes less of a burden,’ he says. Nombembe adds that there is a lot of room for growth in the country for a professional body like ACCA, ‘and we would like to see that happening because that is one of the ways in which we could expand on the auditing and accounting skills in South Africa’. ‘If you look at the shortage of 20,000-plus accountants and auditing professionals in the country, you need a lot more innovative programmes to increase the pipeline of those professionals,’ he says.

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The ANC Youth League marched to the Western Cape government in Cape Town earlier this year to demand better service delivery

tenders awarded to family and friends means there is no comeback if workmanship is shoddy. ‘There is an argument that there may be bad financial reporting but service delivery is happening. We are arguing against that,’ says Nombembe. ‘We have got many instances – 70% of cases where service delivery is said to have happened, where we have found no concrete evidence for that…And sometimes, what has been stated in their annual report hasn’t been done.’

Wasting resources A line item in the auditor-general’s report, which is always seized on by the local media, is that of fruitless and wasteful expenditure. For example, the case of the poor, rural municipality which leased a house in the nearest town, but then left it empty for months, incurring a hefty rental. ‘There are countless instances like that. But fruitless and wasteful expenditure is not the biggest number that we have reported on. I think it is in the region of R200m or so, but it’s not a big number,’ Nombembe says. ‘The bigger ones are irregular expenditure and unauthorised expenditure.’ There, Nombembe says, is where the corruption lies. The first component is where tenders are given to a single supplier without a competitive bidding process. ‘That includes 70% of the instances of all tenders that are given,’ he says.

‘The second biggest line for that, at close to 50% of all instances, is where the tenders are given to people who either work for the municipality, or any other government department, or councillors that are within the same councils, or the families of those people who are within the municipalities. I think the figure of close to 50% is very high.’ Nombembe says his office is often criticised for focusing exclusively on compliance, and not on value-formoney issues. ‘Our argument is simple – let us perfect compliance first. And then we can start to have the time to look at instances where we now dig deeper into scrutinising the value that is received for what is awarded,’ he says. ‘But when everything is wrong at an elementary level of compliance, it makes no sense for us to even look at value for money… But we will get there eventually.’ Despite the difficulties, Nombembe is very hopeful that the parlous state of local government finances will improve. He also loves his job. ‘I cannot trade it for anything else. If you speak to a mayor and municipal councillors and then walk out of that meeting with the highest degree of optimism and commitment; that has been one of the things that has kept me going,’ he says. ‘That education and empowerment role is what keeps me going.

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The tips

Residents line up for a meal at a relocation camp: Nombembe wants South Africa’s ‘most vulnerable’ to be assured that the country’s resources will help them

Normally you hear us talk about the municipalities which have not as yet met the standards and are a cause for pessimism. But people do not understand what is happening behind the scenes to encourage and empower those who should respond to guidance to be able to do it on their own.’

Ongoing dialogue What has happened behind the scenes for the past three years is Nombembe’s ‘door-to-door’ programme which ended in July. He has personally visited the leaders of each of the country’s 284 municipalities to inform them of what is required. Staff responsible for auditing those municipalities now pay them quarterly visits to follow up on areas of concern. ‘When speaking to all 13 of the mayors who received clean reports, you get a story of good news and hope for South Africa. But I’m also hopeful about the fact that there is another group of about 157 or so who received unqualified reports with errors which have been picked up by auditors, and who need minor improvements to join the top ranks,’ he says. ‘There are a lot of municipalities that are willing to do well; they are just working on a few pieces that they need to tighten up. So there are lots who are listening but also lots who are not.’ Nombembe believes it is crucial to instil a culture of accountability and transparency in the country.

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‘That is what is going to help the most vulnerable South Africans who need to be assured that the little resources that the country has are improving the quality of their lives,’ he says. This is a concern across Africa. Nombembe meets regularly with his counterparts across the continent, and together they have ‘isolated’ the problem they all face as one of ‘political will’. ‘There are many interventions that we have in mind as a union of auditor-generals, which need to be endorsed at the level of the African Union and by the political leadership,’ he says. ‘Already last December the United Nations unanimously endorsed the importance of auditor-generals throughout the world as agents of good governance, and resolved that these institutions should be given the autonomy that they need to build democracy in their countries.’ Nombembe says that it is only when this is firmly established that a change in the landscape of government on the continent will be visible. ‘The first thing people speak about when they speak about Africa is corruption. We need to change that perception and it can only be changed if the political leaders within Africa make that part of their language,’ he says. Nicki Gules, features editor of City Press, South Africa

‘There is nothing as important as understanding your client if you are to be a professional of note,’ says Terence Nombembe. And although this aspect is part of auditing theory, it is imperative to put it into practice. His door-to-door campaign conducted over the last three years is proof that it works. ‘It’s about not sitting at my desk here in Pretoria and reading these reports. The programme has given me an amazing amount of insight about what is going on there, and I can speak with confidence about any municipality in the country. I know my stuff,’ he says. ‘You’ve got to understand the nuts and bolts of your client. Because auditing is about insight, it’s about professional judgment. You can’t exercise professional judgment without understanding what you are dealing with.’ Besides this, Nombembe says, is a thorough knowledge of the legislation affecting the area in which you work. ‘Obviously you need to know the rules of the game. You can’t afford not to understand those,’ he says. Being visible to your client is of utmost importance. ‘There are two things that we do as an institution that we have identified: simplicity, clarity and relevance of reporting, and the visibility of our people to the institution,’ he says. ‘That makes a good auditor. And I’m emphasising this because in this day and age, auditing is done in a highly sophisticated, technological manner. But we need to rise above the technology and have physical understanding, and understand the heartbeat of the institution that we are talking about. ‘We can’t sacrifice the physical contact.’

16/10/2012 12:28



BANKING Rather than getting smaller, many of the big banks have actually got bigger since the financial crisis. Now even banking insiders are joining the calls to shrink them down


reaking up the big banks has long been a popular rallying cry of Occupy protesters. But recently a more dangerous type of critic has emerged. Earlier this summer, Sandy Weill, the retired executive who turned Citigroup into a global behemoth, suggested that the mega banks should be split up into

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smaller units that are ‘not going to risk the taxpayer dollars’ and are ‘not too big to fail’. And Weill is not the only financial godfather to turn against his former paymaster. David Komansky, ex chief executive of Merrill Lynch and Phil Purcell, once chief executive of Morgan Stanley, have also called for financial titans to be cut down to size.

‘Most of the giant banks have actually got bigger since the 2008 financial crisis,’ says Andrew Smithers, a banking analyst in London. The sheer scale of the world’s largest banks is intimidating. America’s largest bank, JP Morgan Chase, now has around US$2.2 trillion in assets. That’s equivalent to around 15% of

15/10/2012 14:37


US national income. And if American banks are too big, the problem is even graver in Europe. Deutsche Bank’s US$2.8 trillion asset portfolio makes it the world’s largest bank. Its balance sheet is about 80% of German gross domestic product (GDP). Meanwhile, Britain’s HSBC, Barclays and Royal Bank of Scotland each have assets that are roughly equivalent to a full year’s national output. Such gigantism is extremely dangerous for societies, says Simon Johnson, former chief economist at the International Monetary Fund. ‘When such monsters mess up the taxpayer has to come to the rescue,’ he says. ‘And as they get bigger, so does the potential bill.’ In addition, the growing complexity of such institutions makes them extremely hard for executives to manage and control. This was graphically illustrated earlier this year when JP Morgan admitted that a breakdown of risk management had resulted in a multi-billion dollar loss. The latest estimate suggests that the blunder may have cost close to US$6bn. Up until this point JP Morgan had been viewed as one of the best-run Wall Street institutions and had survived the 2008 financial crisis largely unscathed. ‘The fact that this paragon of competence could mess up so badly was a blow to the whole industry,’ said Mark Calabria, a former senior congressional aide and now fellow at the Cato Institute in Washington DC. ‘Critics can make the case that even the best bank executive can’t possibly supervise so many

The first approach would be to focus first on the complexity of banks. Many top institutions are so-called ‘universal banks’ with retail arms along with an investment bank that provides services to business, makes markets in assets and bets with its own money. In addition, they typically offer a range of other financial services, such as insurance. ‘Stopping banks from doing so many things, some people argue, makes them both simpler and smaller,’ says Calabria.

Glass-Steagall Act Proponents of this approach look back to the success of the famous GlassSteagall Act in the US. This 1932 act forbade the union of investment and retail banks, which some say helped to preserve the US banking system from a major crisis for half a century. Some variation of this approach has been considered both in Britain and America. The massive 800-page Dodd-Frank Act – the omnibus financial reform following the 2008 crisis – contains rules that prevent investment banks from gambling with their own money, the so-called Volcker rule. Meanwhile, a British commission led by Sir John Vickers recommended measures that would keep investment and retail banks at arm’s length. However, no rich nation has yet taken decisive steps towards outlawing ‘universal banks’. ‘If anti-bank sentiment continues to mount, then such draconian rules are not out of the question,’ says Bill Frenzel, a former congressman and now a fellow at the Brookings Institution. ‘A few more

‘WE’VE SEEN TIME AND TIME AGAIN THAT TRILLION DOLLAR, WALL STREET MEGA BANKS DEEMED “TOO BIG TO FAIL” ARE ALSO TOO BIG TO MANAGE’ different businesses and keep an eye on the risks that are being taken.’ All this has led to a revival of interest in Washington breaking up these huge conglomerates or limiting their size. This could be done in one of several ways.

INT_F_banking.indd 16

banking snafus and this will be back to the top of the agenda again.’ A second way to get to smaller banks would be more direct caps on size. This approach was backed by a third of America’s senators in 2010, when memories of the financial crisis were

fresh. The plan was also revived earlier this year by senator Sherrod Brown. ‘We’ve seen time and time again that trillion-dollar, Wall Street mega banks deemed “too big to fail” are also too big to manage,’ Brown argues. Under his bill, no bank would be able to hold more than a tenth of the nation’s total insured deposits, or total bank liabilities. A firm’s liabilities – excluding deposits – would also be capped at 2% of GDP. At present that would mean a size limit of US$1.3 trillion, Brown says. This would force each of America’s three largest banks

15/10/2012 14:38


Protesters in downtown Seattle celebrated the first anniversary of the Occupy movement with dollar bills over their mouths and a silent march less profitable for big banks, in the hope that they would start to split up voluntarily. At present banks get several valuable advantages from being huge, says Smithers. ‘Since it is widely assumed that they would be rescued by the government if they got into trouble, they are seen as a safer credit and so people are willing to lend to them at a cheaper rate,’ he says. ‘Secondly, banks that trade in financial markets gain from being bigger since they witness more deals first hand and so have a clearer sense of where prices are heading.’

Ending perks of size

– JP Morgan, Bank of America and Citigroup – to slim down considerably. Simon Johnson, and other anti-bank campaigners, believe this would be a step in the right direction. It would go some way to ensuring that the demise of such a bank would not cause a wider financial collapse, they argue, without impairing their ability to compete with other large global banks. Goldman Sachs, for example, has only US$920bn in assets and is viewed as one of the most powerful banks in the world. Finally, policymakers could simply make life more unpleasant and

INT_F_banking.indd 17

The goal for politicians, says Smithers, should be to adopt policies that cancel out these perks of size. There are various possible ways of doing this. Senator Brown’s plan deployed one element of this approach. In his bill the top tier of US banks would be forced to keep at least 10% equity relative to total assets – far stricter standards than would apply to their smaller brethren. Mark Calabria, who helped shape legislation as an aide in Congress, believes this could be done in other ways too. He proposes limiting the access any individual bank could have to the Federal Deposit Insurance fund, which protects the money held by customers when a bank fails. ‘If bank clients are aware not all their deposits are guaranteed, they are likely to put extra cash with smaller lenders or demand higher interest rates from their big bank,’ he says. ‘Either way it provides a more natural incentive for huge banks to shrink.’ The difficulty with this policy too, is that it may require politicians to set arbitrary cut-off points for size. A superior strategy, Smithers says, is to have gradually higher penalties the larger banks become. ‘The best idea is that banks should be forced to hold ever-larger amounts of capital

proportionately the bigger they get,’ he argues. The real barrier to downsizing the banks, however, is not technical but political. In the last US election cycle financial institutions – including investment and securities firms along with commercial banks – handed over about US$40m to members of Congress. Add in US$20m from the insurance industry, and financial services firms were by far the most generous donors to lawmakers. Such lavish giving helps explain why the banks were not treated more harshly in the wake of the 2008 financial crisis. America’s banks in particular have also wielded influence through a flow of individuals from Wall Street to Washington, as Simon Johnson has described in his book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Robert Rubin, who helped dismantle restrictions on banks as Treasury secretary in the 1990s, had been co-chairman of Goldman Sachs and worked for Citigroup after he left government. Henry Paulson, George W Bush’s last Treasury secretary, had been chief executive of Goldman. A long list of public officials in recent decades have been offered lucrative jobs in finance following a stint in government. ‘A lively expectation of future favours has always ensured that bankers get great access to politicians in America and Britain,’ Smithers argues. Meanwhile, many European politicians are also reluctant to attack big banks. ‘The French politicians feel they can tell their banks what to do, something they can’t do with financial markets.’ Despite the formidable barriers, the political power of the banks may be on the wane. Not since the 1930s has public mistrust of the banks been so widespread. More worrying for financial firms, however, is that many insiders are turning against them. The conversion of the legendary Sandy Weill to the cause of shrinking the banks suggests that the industry is losing friends fast. Christopher Alkan, journalist

15/10/2012 14:38



As negotiations to reform audit in the European Union enter a critical stage, we report on discussions over key issues at a recent ACCA event at the European Parliament


here is a general consensus that any reform of audit needs to improve transparency and quality. It must help resolve the gap that exists between what auditors are asked to do and what stakeholders and citizens believe the audit process should involve. There are, however, diverging perspectives on the appropriate tools for making audit more effective and relevant in the 21st century, especially in the area of auditor independence and market structure. These were discussed at a joint ACCA-ecoDa (European Confederation of Directors’ Associations) roundtable recently at the European Parliament in Brussels. The European Commission believes that promoting independence and healthy competition, and enforcing compliance in the audit sector, are key to restoring trust. Audit plays a pivotal role in business by promoting the causes of transparency, accountability and sound financial management. The EU executive believes that the confidence of stakeholders in the audits of financial statements is an essential ingredient for business growth and competitiveness. With this in mind, and to clarify and reinforce the role of audit, the EU executive published a legislative package in November 2011. It incorporated a new regulation with specific requirements for the audit of public interest entities (PIEs) and an updated statutory audit directive. The European Parliament and Council are

INT_UK_F_Euraudit.indd 18

currently preparing their positions on the package. It was against this background that Sajjad Karim MEP, rapporteur on the audit package for the Legal Affairs Committee of the European Parliament, hosted the roundtable. The event was entitled The Future of Audit: towards more transparency, quality and independence. The panel of experts included representatives from the investor, shareholder, business and director communities, as well as from the

more competition in the market. ‘By combining greater information and availability of insight into the audit market with a reinforced opportunity to engage, I also expect to see a much stronger attitude of involvement from shareholders and investors when it comes to a company’s auditor engagement, as they find themselves much better placed to critically assess and comment on what they want to see from their auditors.’ Nathalie Berger, head of the audit unit at the European Commission,

‘QUALITY, TRANSPARENCY AND INDEPENDENCE SHOULD BE THE FOREMOST CONSIDERATIONS WHEN DESIGNING AN AUDIT REGULATORY REGIME’ European Parliament, the European Commission, the International Auditing and Assurance Standards Board (IAASB) and the European Securities and Markets Authority (ESMA). Audit professionals were also among over 200 participants at the event.

The three principles of reform Addressing the roundtable, Karim said: ‘My report follows a clear philosophy: audit quality, transparency and independence should be foremost when designing an audit regulatory regime. After the 2008 financial crisis the finance sector needs to win back the confidence of investors, who are looking for higher-quality auditing, improved value of statutory audits, and

said: ‘The European Commission very much appreciates MEP Karim’s efforts to bring the audit reform forward. He rightly highlighted that the status quo is not an option. From today’s debate, we all seem to agree on the objectives of clarifying the role of auditors and strengthening auditors’ independence. Auditors play a societal role. Improved audit quality will enhance the single market; it will be key to strengthen auditors’ confidence in order to ultimately enhance financial stability.’ Investors and shareholders deplored a lack of transparency and said they felt excluded from the audit process and findings. Most of the panellists agreed with the rapporteur proposals to improve auditor communication

17/10/2012 12:27



EU AUDIT: THE TIMETABLE 15 October 2012 Presentation of the draft report of the opinion rapporteur on audit for the Economic and Monetary Affairs Committee (ECON). 7 November 2012 Deadline for MEPs to send amendments to the report of audit rapporteur Sajjad Karim. 18 December 2012 Vote expected on MEP Karim’s report (which will include amendments proposed by ECON) and the start of negotiations with the Council under the EU’s co-decision procedure. Political agreement is expected for the first quarter of 2013, under the Irish presidency of the EU.

* *

INT_UK_F_Euraudit.indd 19



These are the initial proposals, which will be subject to change by the European Parliament and Council. Mandatory rotation of audit firms, with a maximum engagement period of six years (with some exceptions) for the same client; joint audits permitted for nine years. PIEs must have transparent and open tender procedures when selecting a new auditor, with the audit committee closely involved. Audit firms prohibited from providing nonaudit services to their audit clients. European supervision of the audit sector. Small and medium-sized businesses allowed to apply standards proportionately.


* * * *

The proposals would be introduced by a new regulation and the amendment of the current statutory audit directive. The regulation – containing specific requirements for the audit of public interest entities – would be binding immediately and across the whole of Europe if made law. Changes to the directive would affect smaller firms and would be implemented by member states individually, and therefore allow for more flexibility.

17/10/2012 12:28


Sue Almond, ACCA

and auditor reporting. They welcomed the IAASB Auditor Reporting Project, robust supervision and a strengthening of the audit committee’s role. However, ecoDa’s Per Levkall warned: ‘Expanding the role of the audit committee should be consistent with the diverse functioning of corporate governance in the various member states – notably in Nordic countries – and should not create an unjustifiable disruption of existing corporate governance practices.’ The audience was also reminded that it is essential that professional bodies continue to be involved in the activities of the profession under the supervision and oversight of member states’ competent authorities, which are best placed and sufficiently competent to judge about the level of delegation to professional bodies. The debate was particularly animated on market structure and independence issues. Karim proposed keeping the principle of mandatory rotation, seen as a cornerstone of the EU executive’s audit proposals. Rotation is intended to discourage overfamiliarity between auditor and audited company, but the rapporteur suggested an engagement limit of 25 years instead of the six proposed by the commission, in order to avoid disruption and high costs.

Shareholder involvement For Karim, mandatory rotation is merely a backstop, and shareholders should become much more involved in the audit process through the work of each company’s audit committee in the form of an annual review and the appointment of the statutory auditor by shareholders. Many participants at the event supported the MEP’s view that robust international standards and

INT_UK_F_Euraudit.indd 20

‘THERE IS CONSENSUS OVER THE CRITICAL ROLE OF THE AUDIT COMMITTEE IN AUDITOR APPOINTMENT AND INDEPENDENCE’ international convergence make sense as many companies classified as PIEs operate beyond EU borders. On controversial non-audit services, a majority agreed that, looking beyond the ‘blacklist’ of services, the involvement of the audit committee in the approval of all other non-audit services was essential. Karim shares shadow rapporteur Sebastian Bodu’s willingness to open up competition in non-audit services to allow smaller firms to gain a foothold in the upper tiers of the market. The issue of joint audit, deleted in Karim’s draft report, was also addressed, with representatives of mid-tier firms arguing in favour of the commission’s proposal to incentivise the system. Businesses indicated that they were not opposed to voluntary joint audit, but did not want a mandatory system; they warned against increasing costs in areas of little significance to audit users, as it would draw resources away from the key focus points. They stressed that the huge variety of domestic companies throughout the EU and the markets they operate

in made a one-size-fits-all solution a ‘bad fit for all’. Some participants said they would prefer an approach based on corporate governance codes and comply or explain rather than a legally binding mandatory instrument. The Legal Affairs Committee will now consider input from other committees and MEPs’ amendments. The deadline for these has been deferred until 7 November. The Legal Affairs vote is expected in December so that negotiations can start with the council, probably under the Irish presidency.

With immediate effect The regulation would affect audits conducted for banks, financial undertakings and listed companies generally (the so-called public interest entities). If made law, it would come into effect immediately and across the whole of Europe. Changes to the directive would affect smaller firms and would be implemented by member states individually, and therefore allow for more flexibility. Sue Almond, technical director at ACCA, concluded: ‘We were delighted with the quality of speakers, delegates and debate at such a critical stage of the audit reform process. Although there remain, understandably, areas of difference, it was interesting to see a number of areas of consensus – for example, in the critical role of the audit committee in auditor appointment and independence, and in the need for more informative and transparent auditor reporting. We look forward to working with MEP Karim and the broad range of stakeholders as the debate enters the key negotiating stage with a view to achieving change that will genuinely contribute to audit quality and enhance public confidence in audit.’ Cecile Bonino, ACCA

17/10/2012 12:29

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15/10/2012 14:39


Despite the SEC’s issuance of a ‘final’ report, the waiting standard-setting community is no clearer about when, or if, the US will adopt IFRS. Ramona Dzinkowski reports


n 13 July 2012, staff from the Office of the Chief Accountant of the US Securities and Exchange Commission (SEC) released their final report on its 2010 work plan that was intended to provide direction on if, how and when to incorporate International Financial Reporting Standards (IFRS) into US generally accepted accounting principles (GAAP). However, the final report didn’t really provide any guidance to the waiting corporate/audit and standardsetting community on when the SEC might make a final decision. It would appear that the SEC, after two years of consultation and information gathering, has not yet been able to complete its analysis. The introductory note to the final report states: ‘Although the staff report is constructive and an important contribution, the work plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interest of the US securities markets generally and US investors specifically.’ It also said: ‘Additional analysis and consideration of this threshold policy question is necessary before any decision by the commission concerning the incorporation of IFRS into the financial reporting system for US issuers can occur.’ So with 2012 coming to a close, observers are wondering whether this final report, the last of a long to-do list on the part of the SEC staff, has really forwarded the IFRS agenda much at all. The Chartered Financial Analyst (CFA) Institute suggests that while the final paper is comprehensive, much of it is redundant. More specifically, it says that ‘there is really nothing within the document which is new or not already known to those who closely monitor these issues’. Furthermore, with respect to the list of challenges

INT_F_IFRS.indd 23

the staff have identified in adopting IFRS in the US, they ‘as identified are not new per se’, and not ‘substantially different than those of any developed economy which has converted to IFRS’. And, ultimately, the report fails to discuss ‘how the challenges identified can, or should be addressed and over what time horizon…’ The trustees of the IFRS Foundation echo these sentiments. According to chairman Michel Prada: ‘While recognising the right of the SEC to determine the method and timing for incorporation of IFRS in the US,

‘The IASB has started working on a new agenda,’ he says. ‘The era of convergence is coming to an end. We are revamping our institutional structure to provide for a more inclusive approach to international standard-setting. This is the right timing to come on board and participate in shaping the future of global accounting.’ Others see the lack of SEC guidance as rather risky business on the part of the US regulators, lest they think that the US still has the clout it used to have in the global capital markets.

‘THE MOVE TO IFRS IS IRREVOCABLE, TWO-THIRDS OF THE G20 USE IT. HALF OF THE WORLD’S TOP 500 COMPANIES USE IT. THEY’RE NOT GOING BACK’ we regret that the staff report is not accompanied by a recommended action plan. Given the achievements of the convergence programme inspired by repeated calls of the G20 for global accounting standards, a clear action plan would be welcome.’ Moreover, he says: ‘For the benefit of US and international stakeholders, the trustees look forward to the SEC resolving the continued uncertainty regarding the US’s commitment to global accounting standards.’

Programme has moved on As for Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), he cautions the US that the days of developing IFRS in concert with US GAAP are over, that new interested standardsetting bodies are coming on board, and if it doesn’t get with the IFRS programme soon, the US Financial Accounting Standards Board will get left behind in the global standardsetting process.

Sir David Tweedie, president of the Institute of Chartered Accountants of Scotland (ICAS) and primary driver of IFRS as past chairman of the IASB, comments: ‘The Asian markets are growing. The US is in relative decline compared to them, and I suspect that’s going to continue for several years yet. And in terms of capitalisation, they’ve already passed the US. So as all these markets start to grow, the US share of capitalisation is going to continue to fall. And therefore, I suspect the importance of the market – it’s still very important, still the biggest in the world, but in regional terms it’s not. ‘So I think we have to be blunt about it. The move to IFRS is now irrevocable, two-thirds of the G20 use it. Half of the world’s top 500 companies use it. They’re not going to go back. It’s not going to be US GAAP. It’s too complicated, too big and the rest of the world doesn’t want 17,500 pages of US GAAP, compared to 3,000 of IFRS. That’s where the difference will be. The rest of the world will be happy

15/10/2012 14:40


Sir David Tweedie (left) and Hans Hoogervorst say that the progression of International Financial Reporting Standards will continue with or without the US to say, okay America you sit there, and when you’re ready you think about it and let us know, and then if you’re not ready… we’ll just crack on.’ Across the pond, the reviews are mixed. In response to the SEC report, Barry C Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), says: ‘The AICPA has long supported the goal of a single set of high-quality, global financial reporting standards to be used by public companies in the preparation of transparent and comparable financial reports throughout the world. The AICPA believes that IFRS is best positioned to become those global standards.’ Therefore, he encourages the SEC to let US companies have a choice and to do it soon. More specifically: ‘We urge the commissioners to consider the staff report with expedience,’ and ‘also urge the commissioners to allow US public companies the option to adopt IFRS.’ On the other side of the fence, as the final SEC staff paper points out, there are many American companies that don’t want IFRS in America at all. They point out that there are also many concerns about IFRS, and perhaps most significantly is that ‘pursuing the designation of the standards of the IASB as authoritative was, among other things, not supported by the vast majority of participants in the US capital markets’. Financial Executives International

INT_F_IFRS.indd 24

(FEI) has repeatedly called for caution in the adoption of IFRS. More specifically, it supports continued analysis of the situation. In its 16 July press release, it comments: ‘We do not feel the SEC should feel compelled to act on the matter of whether, and if so how, to incorporate IFRS standards into US GAAP, until such time as the commissioners feel they have conducted sufficient outreach and study to make a well-informed decision that will stand the test of time.’

Deadline concerns FEI further expressed its reluctance to bring this to a final conclusion in its response to a G20 Communiqué that called for the US FASB and the IASB to ‘meet their target of issuing standards on key convergence projects by mid2013, at the latest’. More specifically, it says: ‘While we do feel it is helpful and desirable to have goals and timetables for the projects, we believe that such well-intended encouragement can be construed as setting a deadline.’ One has to question first what the difference between a set timetable and a deadline is, and, second, why a deadline is necessarily a bad thing? As for how things will proceed from here, it’s likely to be another year before we hear anything one way or another from the SEC. As Tweedie points out, the final report ‘wasn’t a no decision but rather was no decision, so there’s a very good prospect that they

The goal of the IFRS Foundation and the International Accounting Standards Board (IASB) is to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based on clearly articulated principles. In pursuit of this goal, the IASB works in close cooperation with stakeholders around the world, including investors, national standard-setters, regulators, auditors, academics, and others who have an interest in the development of high-quality global standards. Progress towards this goal has been steady. All major economies have established timelines to converge with or adopt IFRS in the near future. The international convergence efforts of the organisation are also supported by the G20 which, at its September 2009 meeting in the US, called on international accounting bodies to redouble their efforts to achieve this objective within the context of their independent standard-setting processes. In particular, it asked the IASB and the US Financial Accounting Standards Board to complete their convergence project. Source: IFRS Foundation and IASB website

will proceed down this road’. However, he also notes that the chances of a decision forthcoming in the next 12 months are fairly small. ‘You’ve got the election coming up and obviously you don’t want to go into a law-making mode before that. Then if you have changes in the composition of the SEC commissioners, they’ll take six months at least to get up to speed. And there will still be massive legislation to work their way through.’ We’ll be keeping a close watch on any future developments. Ramona Dzinkowski is an economist and business journalist

15/10/2012 14:41

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ACCA recently signed up to the UN Global Compact. ACCA’s Roger Adams and Gordon Hewitt explain why, and look at whether it could be right for your organisation


n July 2012, following the Rio+20 United Nations Conference on Sustainable Development, ACCA announced that it has become a member of the United Nations Global Compact (UNGC). What is the Global Compact and what are its objectives? The UNGC was launched in July 2000 with the aim of promoting the development, implementation and disclosure of responsible and sustainable corporate policies and practices. It is defined as ‘a strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labour, environment and anti-corruption’. The 10 principles are summarised in the box opposite. Signatories make a commitment to incorporate the 10 principles into their operations. Business participants are required to communicate the steps taken to do this via an annual Communication on Progress (COP), a public disclosure to stakeholders (eg investors, consumers, civil society and governments). As a non-business participant, ACCA is not required to issue a COP but is encouraged to do so by UNGC as the requirement serves a number of important purposes, including advancing transparency and accountability; driving continuous performance improvement; safeguarding the integrity of the UNGC and the UN; and helping to build a growing repository of

INT_A_compact.indd 26

‘THE OBJECTIVES OF THE GLOBAL COMPACT CLOSELY MATCH OUR OWN CORPORATE VALUES’ HELEN BRAND, ACCA CHIEF EXECUTIVE corporate practices to promote dialogue and learning. Who are the other members? Currently there is a formidable array of more than 8,700 corporate participants and other stakeholders from more than 130 countries, making it the largest voluntary corporate responsibility initiative in the world. Participants include leading international companies, service providers, partnerships and professional bodies, including many key ACCA partners. Why has ACCA decided to become a member? By signing up, ACCA is demonstrating an active commitment to upholding its core values, as well as underlining our longstanding support for sustainable business. It brings ACCA into line with many leading companies and organisations, and increases the opportunities for more partnerships with both private and public sector organisations. Membership fits well with our historical support for initiatives such as the Global Reporting Initiative, the UNCTAD/UNGC Sustainable Stock Exchanges programmes and the agenda of the International Integrated Reporting Council. ACCA chief executive Helen Brand

says: ‘Becoming a member of the UN Global Compact is a logical step for ACCA. The objectives of the Global Compact closely match our own corporate values. Our commitment to ethics and professionalism, married to our long-term support for the wider sustainability agenda and our numerous partnerships in the corporate responsibility arena, together demonstrate our willingness to both serve the public interest and contribute to the continuous improvement of the way in which business is conducted in all sectors of the global economy.’ What does membership mean for ACCA in terms of governance, monitoring and reporting? In terms of a corporate commitment, ACCA will be expected to: 1 make the Global Compact and its principles an integral part of business strategy, day-to-day operations and organisational culture 2 incorporate the Global Compact and its principles into the decision-making processes of the highest-level governance body (ie Council and the executive team) 3 contribute to broad development objectives (including the Millennium Development Goals) through partnerships and 4 advance the Global Compact and the

17/10/2012 15:10




1 Businesses should support and respect the protection of internationally proclaimed human rights and 2 make sure that they are not complicit in human rights abuses

Labour 3 Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining, 4 the elimination of all forms of forced and compulsory labour, 5 the effective abolition of child labour and 6 the elimination of discrimination in respect of employment and occupation

Environment 7 Businesses should support a precautionary approach to environmental challenges, 8 undertake initiatives to promote greater environmental responsibility and 9 encourage the development and diffusion of environmentally friendly technologies

Anti-corruption 10 Businesses should work against corruption in all its forms, including extortion and bribery

case for responsible business practices through advocacy and active outreach to peers, partners, clients, consumers and the public. Why should other organisations consider joining? Private sector organisations and public sector bodies will have different motivations for subscribing to the objectives of the Global Compact. These will include: direct association with the UN from a pure brand perspective demonstration of a corporate responsibility leadership position at the sector/national level accessing a UN-driven enabler of closer relationships with governments and non-governmental organisations enhanced feed-through to users of sustainability/integrated reporting exercises

* * * *

INT_A_compact.indd 27

a strong commitment to * evidencing corporate governance – reassurance for the growing body of environmental, social and governance (ESG)-driven investors. The benefits also include: adopting an established and globally recognised policy framework for the development, implementation and disclosure of ESG policies and practices sharing best and emerging practices to advance practical solutions and strategies to common challenges advancing sustainability solutions in partnership with a range of stakeholders, including UN agencies, governments, civil society, labour and other non-business interests linking business units and subsidiaries across the value chain with the Global Compact’s Local Networks around the world – many in developing and emerging markets

* * * *


accessing the UN’s extensive knowledge of and experience with sustainability and development issues utilising UNGC management tools and resources, and the opportunity to engage in specialised workstreams in the ESG realms.

What impact has the compact had and where is it heading next? NGC membership hit 8,700 in 2012 and executive director George Kell has ambitions to reach 20,000 by 2020. Impressive as these numbers seem, it is worth bearing in mind the conclusions of the UNGC Corporate Sustainability Forum, held in Rio directly before the Rio+20 conference, that ‘despite progress, corporate sustainability has not penetrated the majority of companies around the world, nor have we seen the depth of action needed to address the most pressing challenges. To reach scale, economic incentive structures must be realigned so that sustainability is valued and profitable.’ ACCA believes that, via the embedding of our corporate values, through our investment in a wide-ranging corporate social responsibility programme and through our programmes designed to allow employees and others to ‘speak up’, we are well placed to play our part in taking the UNGC agenda forward. ACCA believes that the basic premise of the UNGC is sound and looks forward to playing a full role in assisting in the achievement of its core objectives. At the same time we also hope to benefit from the shared learning and development resources and possibilities which lie at the heart of the UNGC process. Roger Adams is director – special assignments and Gordon Hewitt is sustainability adviser, ACCA

17/10/2012 15:11

28 YOUR ANNUAL SUBSCRIPTION NOTICE AND CPD DECLARATION HAVE BEEN POSTED TO YOU... But you don’t have to wait to receive them. The quickest and simplest way to pay fees and submit a CPD declaration is through your online account at myACCA. Remember annual subscription fees and CPD declarations must be received by ACCA on or before 1 January 2013.

ACCA – the global body for professional accountants

Your professional development is important to us. To help you maintain your competitive edge we are proud to introduce ACCA’s new learning hub – My Development. It is designed to be the central access point for all your learning and help you meet your CPD requirement as well as progress in your career. You can find local faceto-face events, technical articles, e-learning and lots more.

Visit My Development today at

28_(left)-INT.indd 64

11/10/2012 15:59



Another rocky ride in store [

There are many challenges for accountants in 2013, says Ramona Dzinkowski. While a slow recovery is on the cards, international companies have a lot to lose from the eurozone crisis and uncertainty in the US

With 2012 coming to a close, companies around the world are bracing themselves for what could be another bumpy ride in 2013. In terms of growth, equity market stability, fiscal policy and political change and unrest, the messages are mixed. For bullish observers, increases in consumer spending, industrial production, and export growth in the US – driven in part by unexpectedly strong automotive sales – is enough, while the bears remind us to keep focused on risk. According to recent International Monetary Fund (IMF) forecasts, the economy in 2013 is in a slow, but potentially stable recovery mode. Global growth is expected to land at 3.5% this year and 3.9% the next overall – pulled down by advanced economies and propped up by emerging markets. This compares with more normal levels of about 5%. Although below more recent levels, China will power on in 2013, and India remains on relatively solid ground. Europe, in comparison, will continue to struggle to pull itself out of negative territory. International companies specifically, which depend on the European Union (EU) for a large portion of their sales, are cringing at the region’s prospects for the remainder of 2012 and well into 2013. US companies with the largest exposure to the downturn in the EU are chemical manufacturers and makers of transportation equipment, computer and electronic products, and machinery. Government austerity measures in Europe and elsewhere will also

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be felt in varying degrees. World government spending is predicted to decline by 0.09% of gross domestic product (GDP) in 2012 and 2013, most likely dampening global demand, with the most significant cutbacks to

occur in advanced economies where deficits will fall from 5.2% this year to 4% in 2013. Fiscal tightening during periods of weak consumer demand, high unemployment and tight credit markets will endanger economic recovery in 2013. Emerging market growth is less at risk, where deficits are expected to run in the neighbourhood of 1.7% of GDP in 2012 and 1.4% in 2013 and government cutbacks are less aggressive. Finance executives are also keeping a close eye on the political uncertainty in the US. More specifically, whether or not the US can keep from falling off the fiscal cliff at the end of 2012. The gist of the ‘cliff’ problem is that the changes to fiscal policy that are due to come about early in 2013, and are due to shave an estimated US$560bn off the government deficit, just aren’t going to be manageable in the current economic climate. Fears persist that due to the current impasse between political parties, nothing will be done to change the current laws, many of which were designed a decade ago. The resulting forecast is that the US will be thrown back into recession early in the year, potentially reducing GDP growth to 0% for 2013 and pushing unemployment beyond 9%. Finally, companies are concerned about the geo-political forces at work in the Persian Gulf that could trigger an oil price shock. How has all this affected the dayto-day management of companies around the world? In the January edition, I will ask risk managers of some of the world’s largest companies exactly that question. Ramona Dzinkowski is an economist and business journalist

16/10/2012 12:28



Stepping towards sustainability


ACCA president Barry Cooper reflects on the Accounting for the Future event and why accountants are key to a strong economy

As someone whose day job is to help prepare future generations of finance professionals, a constant challenge for me is to frequently scan the economic horizon. What will accountants need to know in 10 and 20 years’ time – what will the profession look like? How do we prepare students? Alongside that is the obligation to ensure that today’s professionals help not only the accountants of the future, but everyone in generations to come, have the opportunities to enjoy career and life opportunities in an ever-changing environment. This is why I was delighted to see that more than 10,000 ACCA members have participated in the Accounting for the Future online event. The event, comprising live and pre-recorded webcasts, presentations and workshops, which went live in early October and which is available on demand until the end of this year, explores the role that finance professionals will play in building a stronger and sustainable global economy. The subjects covered included: the emerging issues related to risk management; the issue of valuation and how trends and developments in social and environmental accounting may lead to changes in the methods used by accountants to evaluate assets and liabilities; global trends and developments in corporate disclosure; the importance of investor engagement; the influence which investors can have on corporations and organisations; and lastly the green economy. Thus this online event covered some contentious and challenging issues. Having such a large number of participants from around the world not only demonstrates our global strength, but enabled delegates to share experiences and highlight the issues they are facing in meeting the sustainability challenge. Importantly, those views will help ACCA develop member initiatives well into the future. I want to thank everyone who took part in what I am sure will prove to be an extremely influential milestone in our thinking on sustainability issues. Visit the event at accountingforthefuture Professor Barry J Cooper is head of the School of Accounting, Economics and Finance at Deakin University, Australia

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12/10/2012 12:01



KPMG is opening its ninth Russian office, and 19th in the CIS, with a new base in Perm. This makes it the first Big Four firm to have two offices in the Urals region. Oleg Goshchansky, senior partner of KPMG in Russia and the CIS, said: ‘The Urals is one of the largest centres of Russia’s economy and the opening of a second office in this strategically important region will enable KPMG on the one hand to work more effectively with existing clients and on the other hand to satisfy growing demand for audit and advisory services of an international level in the region. Through our presence here we will have an opportunity to be closer to our clients and to react promptly to business demand. In addition, Perm is home to a number of strong professionals and it is our hope that they will form the core of our team in this city.’


PwC has increased its presence in the social media sector in the US through its acquisition of Ant’s Eye View, a social media strategy consultancy firm. Ant’s Eye View’s consultants will join PwC’s existing social and digital professional team. Ant’s Eye founders, CEO Sean O’Driscoll and chief innovation officer Jake McKee, have joined PwC as principals. Dana Mcilwain, PwC vice chairman and US advisory leader, said: ‘The acquisition reflects PwC’s commitment to building depth in areas that meet the needs of its clients, addressing their most complex business challenges, from strategy to execution.’ Financial terms of the transaction were not disclosed.

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The view from: Australia: Joanne Freeman ACCA, senior manager, Hall Chadwick, Sydney Q What are the main challenges of your job? A To gather, sift, verify and analyse a huge amount of information, not all of it readily available. You have to be technically sound and tenacious, especially if there are complex historical transactions and only patchy record-keeping to rely on. Q How do you handle personal reactions to business insolvency work? A The nature of our work means we often have to deliver unwelcome news and advice. Some owners experience an overwhelming sense of relief, especially if they’ve been procrastinating, or struggling to find a way out on their own. Employees are typically anxious about their futures, or resentful at ‘paying the price’ for events outside their control. But if the company is to be traded on as a going concern, how those staff think and act could be vital. Guided and supported by us, a renewed sense of purpose can actually provide a catalyst for greater resourcefulness.

31 Practice The view from Joanne Freeman of Hall Chadwick; exciting times for Vietnam as it seeks developed nation status 35 Corporate The view from Judy Giordano of Endress+Hauser; the nurturing of Malaysia’s next generation of finance professionals; PwC’s tips for the reporting season; the rise in whistleblowing services in India

Q How has the global financial crisis impacted your work? A Australia has largely weathered the storm, although the economy is experiencing knock-on effects from downturns elsewhere. The government is chasing businesses more vigorously; for many firms, outstanding tax bills relate to profits generated in more affluent times, fuelling demand for insolvency advice. Q What does work/life balance mean for you? A I moved here from the UK four years ago, and still very much enjoy the lifestyle. I live close to the beach, which is great for relaxing with friends, especially if I’ve been putting in the hours at work.


International reach: Part of AGN International Locations: New South Wales, Victoria and Queensland Client-facing workforce: Over 40 people

17/10/2012 11:07



Bright lights in view These are exciting times for Vietnam, which plans to become a developed nation by 2020. But the country’s fledgling accountancy profession must also keep up With one of South-East Asia’s fastestgrowing economies and ambitious plans to join the ranks of the developed nations by 2020, Vietnam is looking forward to a bright future. At the same time, the accountancy profession is racing to keep up with the pace of demand from the country’s growing industries, and changing as fast as the landscape of its economic hub, Ho Chi Minh City. Emerging from decades of war and post-reunification challenges, the Communist state introduced market forces and legalised private enterprise in the late 1980s, with Ho Chi Minh Stock Exchange opening as recently as 2000. Foreign investment has grown, and following the full normalisation of diplomatic relations in 1995, the US is the country’s main trading partner. With more local companies setting up shop, and increasing interest from international businesses and joint ventures to enter the market, competition within the accountancy sector in Vietnam is fierce. The government continues to work on improving and simplifying the country’s complex tax laws for businesses. At the

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same time, it is challenging accountancy firms in Vietnam to constantly alter the way they work. Along with these changes is another, and perhaps bigger, obstacle – a relatively inexperienced workforce and very high demand for skilled labour. Nguyen Phan Xuan Thuy is co-founder and managing director of Gia Cat Consulting and Auditing, and co-founder and chairman of TS24 Corporation. TS24 was founded in 2008 by four partners, including Nguyen, and has its headquarters in California in the US. With a career spanning 18 years, Nguyen has not only personally witnessed the changes within the accountancy sector in Vietnam but has also had a hand in those changes. TS24 is one of the country’s pioneers of user-friendly and efficient tax technologies. Its site is an online tax declaration tool that, according to Nguyen, is used by over 30,000 companies in Vietnam. TaxOnline mirrors the intentions of the Ministry of Finance’s General Department of Taxation (GDT) as it continues to reform the tax system.

GDT is in the final stage of the process, which will run to 2020. Its aim is to have at least 90% of all enterprises using e-tax services, to have 65% of enterprises carrying out tax registration and declaration via the internet, and perhaps the most difficult task of all – to have 80% of taxpayers satisfied with services provided by the country’s tax offices.

A fledgling tax system Vietnam’s tax system is still in its infancy and changing every year. For example, value added tax (VAT) was introduced in 1999 and was initially levied at four different rates; zero, 5%, 10% and 20%, with many discretionary exemptions. It has since undergone minor plastic surgery, with the government abolishing the 20% tax rate and cutting the number of discretionary exemptions. Accounting and auditing standards in Vietnam have been developed based on international standards with some simplifications. However, according to Nguyen, they ‘have not been updated to keep up with the changes of international standards’.

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turnover in accountancy firms – even in Big Four firms – is high,’ he says. From 2009 to 2011 significant movements in gross domestic product and inflation triggered a double-digit increase in salaries. The minimum wage was increased by 27% in May, in an attempt to shield the population from rising inflation. According to Towers Watson Vietnam, more than 60% of companies are planning to increase their overall HR development this year. Towers Watson points out that a focus on external talent – a growing trend in Vietnam, with companies overpaying to attract outside talent to fill skill gaps – drives up costs. With Vietnamese workers highly motivated by financial incentives that are increasing pressure on budgets, companies are slowly turning their focus to retention through other means such as performance-related awards, training, employment value

‘MY ADVICE TO ANYONE WANTING TO SET UP A FIRM IN VIETNAM – BE PATIENT. YOU MUST UNDERSTAND THE VIETNAMESE ENVIRONMENT’ Accountants still find the system overly complicated, making it difficult for firms to establish themselves in the market and stay afloat. ‘My advice to anyone wanting to set up an accounting firm in Vietnam – be very patient,’ says Nguyen. ‘You must understand the Vietnamese business environment profoundly.’

Desperately seeking skills While the system itself is often a challenge for companies, the greater issue is in human resources. There’s a war for talent currently being fought by all kinds of industries in Vietnam, thanks to a large gap between the demand and supply of skilled and qualified workers. According to Nguyen, the biggest challenges for accountancy firms in Vietnam are finding and training staff. ‘Vietnam has a lack of qualified accountants, especially accountants with fluency in English, and labour

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propositions and talent management programmes. Anh Thai, a partner and branch director at KTC Assurance and Business Advisors – set up in 2006 by four former Ernst & Young professionals – says that ACCA’s training programme assists with internal training and upskilling workers. However, often staff subsequently ‘move to other firms to get higher salary and promotion in a short time’. And that’s true across every industry in Vietnam today. More than half the population is under 30, and as Vietnamese employees get a taste for wealth and find cities a playground to spend money in, they are demanding more disposable income from their employers well before they have the experience to do so. Lang Trinh Mai Huong, who cofounded Vietsourcing Group six years ago, says that it is ‘really hard to

recruit and retain good staff since we must compete with the Big Four and many large firms, even when we offer a high salary, position and power’. Most accountancy firms hire students directly from university during their final year, as part-time employees. That allows the firms to give students a lengthy trial period and provide suitable training before they are accepted full-time.

ACCA Vietnam ACCA has two offices in Vietnam, in Hanoi and Ho Chi Minh City, and enjoys a close relationship with the national accountancy body, the Vietnam Association of Accountants and Auditors (VAA), and the Vietnam Association of Certified Public Accountants. ACCA Vietnam currently has more than 5,500 students and 500 members. Vietsourcing makes use of ACCA training in-house and has developed a strong relationship with the organisation, which has proved a strong selling point when recruiting – offering internationally recognised training programmes is one way to keep staff happy. ‘As training is one of our key services, we of course provide training to all of our staff, including ACCA and other training,’ says Huong. ‘For junior positions, we recruit CAT [Certified Accounting Technician] and FIA [Foundations in Accountancy] students. We also organise many contests and workshops at universities to attract high-performing students.’ When it comes to hiring management staff, firms headhunt ACCA members and final-stage ACCA students. They use recruitment agencies less frequently – they’re not a popular route for recruiting to professional positions. In certain circumstances, expatriates are hired to fill management positions.

Local investment According to the VAA, people holding accountancy or auditing certificates from foreign countries recognised by the Ministry of Finance still have to pass exams in the tax, finance and

11/10/2012 11:09



accounting laws of Vietnam and be granted certificates by the ministry. This, along with the high salary and package demands of foreigners, encourages firms to hire and invest locally. The Vietnam tax authorities say they intend to improve the disclosure, transparency and information reporting in their announced tax reform roadmap, which is due to be completed in 2020. The tax reporting procedures are being slowly simplified and their frequency will be reduced. So while things could get simpler for both foreign and local firms in terms of tax laws, the rate of growth of skilled workers is arguably slower, with accountancy firms forced to be patient, invest in their workers through training and then find new forms of rewarding staff to retain them. Nguyen Thanh Trung FCCA, managing partner at Ecovis Vietnam, says the big challenges now are high salaries and operating costs and ‘severe competition due to a large number of newly set up firms with low service fees’.

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When ACCA opened an office in Vietnam in 2002 with 100 students and 11 members, it was the first international professional accountancy organisation to do so. A decade of prodigious growth later and ACCA Vietnam’s complement now totals 5,500 students and 500 members. The expansion has had a marked effect on the accounting and finance sector. The 450 members awarded their chartered status in those 10 years account for a substantial chunk of the country’s 2,000 professional auditors. And at the branch’s 10th birthday celebrations earlier this year in Hanoi, Vietnam finance minister Vuong Dinh Hue congratulated ACCA for its help in developing the legal framework and professional standards in the country. ACCA has worked with Vietnamese universities, professional organisations and employers in providing training, knowledge updates and enriching experiences. As Le Thi Hong Fen, head of ACCA Vietnam, told guests at the celebrations, the training programme’s inclusion of country-specific tax and law modules imparted uniquely practical and applicable knowledge as well as international standards. ACCA chief executive Helen Brand added: ‘The past 10-year journey has been a successful one that could only have been achieved by working in partnership with the Ministry of Finance, employers and training providers. They have come on the journey with us and enabled ACCA to grow in strength.’

With strong competition for staff, salaries are rising fast. That, along with inflation and a tough economic environment, has seen accountancy firms suffer. TS24’s Nguyen says: ‘2012 is a very tough time for Vietnam, with

very high inflation, high interest rates and the Vietnam Index plummeting. The professional accounting fee is quite low now and will stay down.’ Asha Phillips, journalist

11/10/2012 11:09



Financial services firms that stripped out unnecessary costs after the 2008 crisis have allowed many of them to creep back in, says a KPMG report. According to Embedding Productivity Disciplines, financial services executives need to adopt a new approach to cost efficiency. They should drive higher productivity through continuous improvement and boost revenues by focusing on higher margins and reduced capital intensity. Martin Blake, partner and New South Wales chairman of KPMG in Australia, said: ‘There is no realistic alternative. To succeed, those organisations that do not have a system for doing more with less will have to deliver much higher revenue growth than those that do – and such growth may be unachievable. In a low-growth, capital-constrained business environment, continuous improvement in productivity is not an option, it is a necessity.’



Multinationals doing business in Africa need to negotiate with tax authorities, says a PwC report. ‘Africa offers great potential in terms of investment, but multinationals need to strategise business deals carefully in order to reduce their tax burden,’ said Cor Kraamwinkel, an associate director in PwC’s Corporate International Tax Division. Kraamwinkel argues that African jurisdictions are known for inconsistent tax rates. ‘There is no harmony in tax rates across the continent,’ he said. ‘This places significant challenges on multinationals wanting to do business in Africa.’

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The view from: Canada: Judy Giordano ACCA, director of finance, Endress+Hauser, Ontario Q How does your finance function support the company’s objectives? A I work closely with the CEO of the company’s Canadian business, with input into corporate strategy, investment decisions, budgeting and planning. I don’t just consider finance issues; how we manage risk, operational efficiency and performance are among a range of other factors which might influence the bottom line, and therefore need my focus. Q What effect has the global financial crisis had on the challenges you face? A I have to keep an even closer eye on economic developments elsewhere, not just in Canada. As a business, we have to understand how certain ‘whatif’ scenarios might affect us, especially as we’re diversifying into new activities that might reflect external factors differently. Energy prices, foreign inward investment and exchange-rate fluctuations, left unchecked, could pose major challenges; we have to anticipate those as much as is possible, and be ready to respond.

35 Corporate The view from Judy Giordano of Endress+Hauser; the nurturing of Malaysia’s next generation of finance professionals; PwC’s tips for the reporting season; the rise in whistleblowing services in India 31 Practice The view from Joanne Freeman of Hall Chadwick; exciting times for Vietnam as it seeks developed nation status

Q What qualities should employers look for when hiring finance talent? A The biggest challenge is finding people with the right cultural fit and commercial instincts. You can teach finance skills – but it’s those well-rounded personal characteristics which, carefully nurtured, can have the biggest impact. When I talk to students about what employers are looking for, soft skills are top of the list to impress on them. Of course, the match must work in the other direction too; if people identify with their employer’s values, they’re usually far more motivated and effective.


Business: Endress+Hauser provides measurement instrumentation, services and solutions for industrial process engineering. Global HQ: Reinach, Switzerland. Customer sectors: Oil and gas, renewable energy, power, chemicals, life sciences.

17/10/2012 11:05



Stepping to the fore Having a strong belief in the need to keep pushing oneself, Lee Khee Joo is well placed to spearhead a programme aimed at nurturing the nation’s next generation of bankers In appointing a leader to champion talent development, it’s crucial to choose an individual with a passion for learning. With this in mind, Malaysia’s central bank tapped career banker Lee Khee Joo, whose experience spans 38 years in banking and finance, to run the Financial Sector Talent Enrichment Programme (FSTEP), which seeks to nurture entry-level professionals for the financial services industry. Lee is definitely an advocate of lifelong learning, with an array of qualifications under his belt, including an economics degree, a post-graduate accountancy diploma, an MBA and a professional accountancy qualification. Yet, the current head of FSTEP downplays the fruits of his paper chase. ‘My diverse qualifications in economics, accounting and business administration are nothing magical or extraordinary,’ he says. ‘Looking back, I must say that the lifelong learning philosophy is the main contributing factor in achieving most, if not all, of these qualifications.’ Lee is proud that he is a home-grown and pioneering accountant from the 1970s. ‘When I graduated from the University of Malaya with an economics degree in 1974, I joined the Central Bank of Malaysia (Bank Negara Malaysia) as a young bank examiner (loosely termed by bankers as Bank Negara auditors). At that time, there was no accountancy degree offered in any of the Malaysian universities. At best, what I had was an economics degree majoring in accounting.’ Nevertheless, the demands of his job in audit and assurance inspired Lee to strive to become a qualified accountant. Lee says that he owes a great deal to his then boss, Tan Sri Mohamed Basir Ahmad, who encouraged him to return to the University of Malaya to pursue a part-time post-graduate diploma in

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The CV Career banker and FCCA Lee Khee Joo was seconded as head of the Financial Sector Talent Enrichment Programme (FSTEP) by Bank Negara Malaysia (BNM), effective 9 July 2008. Lee holds an economics degree and a post-graduate accountancy diploma from the University of Malaya and an MBA from the University of Queensland, Australia. He has more than 38 years of experience in the banking and finance industry. Starting out as a bank auditor, Lee was attached to BNM for 23 years, holding various positions in bank examination and finance and culminating in the post of chief internal auditor. He subsequently held various senior positions in the former Pacific Bank, Malayan Banking and Hong Leong Bank, among others. accountancy. ‘Upon the completion of the programme, I qualified as a “home-grown” accountant,’ he says. Subsequently, Lee says he was blessed with ‘full pay plus scholarship’ by Bank

Negara Malaysia (BNM) to pursue an MBA degree at the University of Queensland, Australia, in 1981. But Lee wasn’t done. His vision was to pursue a global accountancy qualification and ‘ACCA was a natural choice’. Lee believes that ACCA was instrumental to his banking career, both in the regulatory and private sectors. ‘I sat the ACCA examinations on a part-time basis while being promoted to various levels of bank supervision at the central bank,’ he recalls. ‘The acquired knowledge from sitting the ACCA examinations helped tremendously in my career progression at Bank Negara Malaysia. ‘By sheer hard work and perseverance, I passed as an ACCA graduate in 1993. I can safely say that by achieving this, I was promoted to become the deputy manager in the Finance Department of Bank Negara Malaysia. After a few years, BNM identified me as the CEO to oversee the management of a problematic merchant bank in Kuala Lumpur. Years later, I moved from the Central Bank to the private sector, working with the former Pacific Bank, Malayan Banking and Hong Leong Bank to gain more commercial banking experience.’ Although Lee is no longer directly involved in the management of financial institutions, he still plays a critical part in the industry. Eager to share his knowledge and backed by a passion for lifelong learning, he’s helping to nurture the nation’s young banking prospects through the Financial Sector Talent Enrichment Programme (FSTEP).

Blue-ocean thinking Established in 2007, FSTEP is an initiative under the auspices of the Institute of Bankers Malaysia (IBBM) to develop and nurture entry-level

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The tips *

Lee believes that the ACCA Qualification was pivotal to his career progression as a central bank auditor and, later on, a commercial banker. He passed his ACCA at 43 on a part-time basis, when many younger candidates struggle even on a full-time basis. ‘Without any doubt, the ACCA examination is difficult, but the attainment of the qualification is useful and essential to move up the corporate ladder.’


Take failures in your stride, leverage your strengths and navigate according to your vision to achieve your desired results, advises Lee. ‘Learn from failures but keep focused on results-driven goals to achieve significance in life.’


He advocates generous sharing of knowledge and is the author of two books: So You Want to be an Accountant? and Credit Facilities for Small and Medium Industries.

professionals for banks, and insurance and takaful (Islamic insurance) companies – collectively termed as the financial services industry – in Malaysia. IBBM is the professional and educational body for the banking and financial services industry in Malaysia. FSTEP is the brainchild of Tan Sri Dr Zeti Akhtar Aziz, the governor of BNM. It recruits diverse talents from

INT_AP_YCORP_Lee.indd 37

‘I SEE THERE ARE AMPLE OPPORTUNITIES FOR ACCA GRADUATES TO JOIN THE FINANCIAL SERVICES INDUSTRY THROUGH FSTEP’ multiple disciplines. ‘Apart from accountants, FSTEP uses “blue-ocean thinking” to tap into the non-traditional pool of talents from various disciplines. Graduates and those with not more than three years of working experience who are keen to pursue a career in the financial industry are encouraged to apply,’ explains Lee. Thanks to this non-traditional strategy, Lee reckons that ‘to date, FSTEP has trained more than 1,000 graduates from different disciplines, including engineers, architects, accountants, mathematicians, biotech scientists, actuaries, lawyers, psychologists and even a doctor!’ But getting a place in FSTEP is hardly easy; competition is stiff. Lee estimates that FSTEP receives more than 1,000 applications per intake for 100-120 places, and there are two intakes every year. Candidates must not be over 30; must achieve a minimum CGPA of 3.25 or its equivalent; must possess a fluent command of English; and must pass an interview by the sponsoring institution. All the selected participants must also

to pursue a global qualification [to improve themselves]. As part of our effort in talent enhancement, ACCA can be a roadmap for professional growth and development for all our graduates in career advancement,’ says Lee. Currently, the numbers of ACCA graduates enrolling in FSTEP remain negligible, although employment prospects are excellent. Lee estimates that ‘there are not more than 10 ACCA graduates joining the FSTEP training programme. Upon completion of training, all of them were subsequently employed by financial institutions in Malaysia. On the demand side, I see there are ample opportunities for ACCA graduates to join the financial services industry through FSTEP.’ In terms of skillsets, ‘I think all ACCA accountants possess the basic skillsets to work in the finance sector. What accountants require is to supplement their knowledge,” says Lee. To gain the requisite entry-level knowledge to work in banking and finance, the FSTEP training programme incorporates the core and technical competencies required of financial

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secure a sponsor; FSTEP does assist candidates to find sponsors, says Lee. Since the idea is to produce work-ready graduates, FSTEP’s one-year intensive training programme complements the initial six-month classroom training with a structured six-month internship under a mentormentee arrangement with the sponsoring financial institutions. The comprehensive classroom training includes the transfer of technical knowledge using simulations, workshops and case studies. Since English is extensively used in global banking circles, the six-month classroom training includes an intensive one-month English-language course which is facilitated by trainers from the British Council. And to develop well-rounded individuals, all participants undergo personal development courses, industrial visits, e-learning and outward-bound school experiences at Lumut, Perak, as well as community service projects. Given that FSTEP is a fairly nascent programme, the long-term performance of its graduates is yet to be assessed. However, this industryled programme enjoys overwhelming support from the Malaysian financial services industry, says Lee. Of course, in the long run, it’s up to the individual to make the most of FSTEP training, he adds. ‘The success of the entire programme will depend on the commitment of the participants.’

ACCA and FSTEP In future, ACCA graduates are poised to benefit from a recent memorandum of understanding (MoU) signed between ACCA Malaysia and FSTEP. Lee describes the MoU as a ‘win-win which will expand the talent pool for the banking sector while providing ACCA graduates with a unique route to joining the Malaysian financial services industry via FSTEP’. The MoU also enables ACCA to recognise FSTEP’s credentials as a stepping stone to achieving professional accountancy qualifications. ‘All FSTEP graduates or participants will be given the chance

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services practitioners in line with the Banking and Finance Industry Competency Framework Model, which is benchmarked against international standards, he adds. ACCA graduates can expect enormous opportunities once they complete FSTEP training, Lee enthuses. Treasury operations, risk management, product development and wealth management are challenging areas that will always require strong financial and banking skills, says Lee. ‘In addition, there are new development and growth areas in Islamic banking, investment banking as well as insurance and takaful companies waiting to be explored. The potential markets of Islamic banking and takaful remain largely undertapped compared to conventional markets,’ he adds.

Islamic bonds In particular, Lee sees enormous potential in sukuk (Islamic bonds) and takaful as Malaysia jockeys for leadership in the Islamic finance race. Currently, Malaysia’s sukuk market is the world’s largest, and Malaysia continues to dominate the global sukuk market. Malaysia remains a top investment destination for Islamic funds, with sukuk issued in Malaysia accounting for 73.2% of global sukuk issuances in 2011 compared to 72.5% in 2010. Takaful also has lots of room to grow, according to Lee. According to Bank Negara figures, as at end-2011, total assets of takaful funds increased by 15.8% to RM17bn, while total takaful contribution accounted for just 13% of total premiums and contributions in the insurance and takaful industry.

The basics: FSTEP

Established in 2007, FSTEP is an initiative to expand the talent pool for the financial industry. The FSTEP training programme syllabus comprises four core streams: conventional banking, Islamic banking, investment banking and insurance and takaful. Besides providing technical training in banking and insurance, the syllabus is oriented towards the practical and operational aspects of banks and insurance companies. FSTEP training also includes simulations, workshops, case studies and on-the-job-training through structured internships with financial institutions.

Bearing these prospects in mind, young ACCA graduates might want to think out of the box and consider a non-traditional career in the relatively blue ocean of Islamic finance and takaful. Nazatul Izma Abdullah, journalist

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Top tips for this reporting season As reporting season fast approaches, PwC director Alison Thomas gives us her top tips for making your annual report more effective in communicating with the capital markets How can you improve your communications with the capital markets through your corporate reporting? Our 12 practical reporting tips – based on what investors tell us they would like to see in reporting – are a great place to start.

Have a backbone Use your objectives and strategy to underpin your reporting and provide the context for your activities and performance. Strategic statements set in isolation from the rest of your reporting can appear hollow.

Back to basics Explain your key capabilities and the key resources and relationships you depend on to create and sustain value. Consider both your key inputs/outputs as well as your own activities, and demonstrate how your business model interacts with other reporting elements.

The big picture Put your results in the context of market trends. Provide management’s perspective on the competitive landscape and macro environment to allow the reader to evaluate your strategic choices and actions.

Tell the whole tax story Provide clear information for stakeholders on the sustainability of current tax rates and how tax impacts your business, looking more broadly at tax strategy, risk management and the wider impact of tax as well as detailed tax performance in the tax note. .

Cash is still king

Explain how you make money, generate cash and are funded. Competition for capital is fiercer than ever before, so consider including detailed disclosure about your operating cashflow strategy and performance and consolidating

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your debt disclosure. Provide details of your debt maturity schedule and reconciliation of free cashflow to movements in net debt.

Survival of the fittest Demonstrate an understanding of the material sustainability risks and opportunities relevant to you and your key stakeholders and how they’re integrated into your core corporate strategy. Consider the impact of your business across your entire value chain when considering materiality.

Bottom up! Challenge whether the segment analysis is not just compliant but also makes visible the dynamics inherent within the business. Consider including a few additional line items such as working capital, operating cashflow and capital employed for each segment.

Flash in the pan? Explain what is driving financial performance – is growth sustainable? Consider using bridge charts to help investors understand what is driving revenue profit and growth. Ensure non-GAAP measures to support your messaging are clearly identifiable, consistently defined and reconciled to your GAAP numbers.

What gets measured gets done Identify key financial and operational KPIs used to assess progress against strategic priorities. Explain clearly how management are incentivised, highlighting the link between strategy, KPIs and the remuneration package.

Crack the code Go beyond compliance and bring governance reporting to life by demonstrating the activities of the board, the skills and experiences each board member brings to the table and how they interact.

Join the dots Avoid silos and present a clear, coherent and integrated picture of how your strategy, governance, performance and prospects lead to long-term value creation. Alison Thomas is a corporate reporting specialist at PwC. For further details on the tips, go to www.

Not the kitchen sink Highlight principal risks, not all risks. How might they derail your strategy? How are they managed? How has the risk profile changed during the year and what is the sensitivity of underlying performance to changes in these risks?

16/10/2012 13:11



Tip-offs: no longer taboo Anti-corruption campaigns are encouraging more transparent business dealings in India, making whistleblowing services offered by accounting firms all the more popular

Corporate whistleblowing in India is on the rise, and now foreign accounting and advisory firms are offering whistleblowing services to forward-looking companies seeking to stamp out corruption, fraud and financial malpractice. Arpinder Singh, partner and national director for fraud investigation and dispute services at Ernst & Young India, underlines how common whistleblowing is becoming. ‘Eighty per cent of our [fraud-related] investigations start from whistleblower complaints,’ he says. Since 2011, EY has been providing outsourced whistleblower services to its clients in India and is upbeat about its increasing demand. ‘Many Indian companies are going global and want to demonstrate good business practices,’ Singh told Accounting and Business. To set up a whistleblower system, EY carries out a series of tasks starting from advising its clients on the required policies, procedures and protocols. After putting in place a basic tip-off structure, it develops a fraud response plan, which includes a system

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to categorise and prioritise complaints. However, EY does not operate its own receiving and processing system for clients. Rather it works with three international call centre agencies (which Singh prefers to remain anonymous). EY recommends them to its clients, which make their choice on the basis of price, commercial need or other relevant factors. The companies and the agencies deal directly with each other in routine matters without involving EY. These agencies receive complaints through website posts, email, voicemails and manned hotlines. Singh says that their hotline operators are specially trained to make callers comfortable and to source comprehensive and complete information. However, despite this progress, there are doubts about the relevance of call centres for whistleblowing services. Amit Paul, who founded

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Corporate Whistleblower Initiative (CWI) in 2010 and provides comprehensive whistleblowing services to various Indian companies, rejects a phone call-based system as ‘people fear that their voices may be recorded’. As a result, CWI receives complaints only through its website. Indeed, the fear of reprisals if a whistleblower’s identity is revealed is considered to be the single biggest deterrent for tip-offs. And this is a volume game. According to Singh, numbers of calls are critical to judge the success of a service; as a rule, 80% of complaints do not require any action, so the more calls received, the more real scams are uncovered, he says.

Coded complaints It is also important that complaintsmaking procedures are kept simple. On CWI’s website, whistleblowers use their respective companyidentifying codes, which have already been circulated among the whole staff. The whistleblower then creates a password, keys in his complaint and receives a unique identification key.

This key is used during relogin to check for a response. Shailesh Haribhakti, chairman of Mumbai-based public accounting firm BDO India, says companies are increasingly more concerned about stopping fraud than being embarrassed about being fraud victims: ‘It is no longer a taboo,’ he says, noting that ‘more frauds are getting reported’. Haribhakti, who is also an independent director on the boards of 15 publicly listed Indian companies, says that many of these corporations are thinking of outsourcing the receipt and processing of complaints. ‘Whistleblowing outsourcing is phenomenally attractive and getting more and more popular’, he says. In the Indian banking sector for example, criminal cases involving US$720m were registered by the country’s Central Bureau of Investigation (CBI) in 2011. However, in the first seven months of 2012 this figure had already topped US$450m, the CBI’s director, Amar Pratap Singh, said at the recent Annual Conference of Chief Vigilance Officers of Public Sector Banks and Financial Institutions.


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Singh attributes this to a shift of attitude among Indian employees, especially in the past year, who are now less likely to tolerate fraud. He says that until recently people were ‘less agitated’ on noticing corrupt practices, but a recent mass anti-corruption political campaign in India had prompted a sea-change in opinion towards honesty in business and government dealings. Kiran Bedi, a former police officer and a leading figure in the nationwide anti-corruption movement, agrees that whistleblower systems can be an important way of tackling private sector corruption. However, she says that most corporate corruption is ‘related to dealings with government’, such as securing official permissions, contracts, licences, assessments, applications of discretion and receiving the due payments. This public corruption is likely to be more resistant to corporate whistleblower mechanisms as corruption and bribes to officials are still generally perceived as a necessary evil for doing business in India. Still, whistleblower complaints are capable

of busting big frauds, especially those perpetrated by senior corporate executives. This is because top management is not involved in complaint evaluation, in theory at least. In most cases companies have an ethics committee assessing complaints, operated by human resources, internal audit and legal compliance executives, who decide on the necessary response. Some companies of course establish their own systems: Procter & Gamble India said in its annual report in July 2011 that its independent Alertline receives concerns about violations of its Worldwide Business Conduct Standards. These calls are reported to its corporate security and legal personnel for appropriate investigation and follow-up action. Meanwhile, EY is reporting success with its corporate fraud investigation services in India. Singh recalls a case involving a long-serving and well trusted senior sales manager, working in a local office of a multinational company. A junior female employee sharing a cubicle with the fraudster reported


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overhearing frequent suspicious telephonic conversations. The phone calls were always made after office hours and the fraudster used to discuss orders from companies which were not clients of the multinational. Before questioning the suspect, EY conducted a forensic analysis of the accused’s office phone records and the hard disk of his office laptop. It was found that not only was he diverting company orders to its competitors but had also set up his own private company to act as an agent for some of the clients. The multinational sacked the employee but did not lodge a criminal complaint with police.

Failure to press charges Despite the increase of reporting fraud within company systems, companies are still resistant to criminal prosecutions, as they wish to avoid lengthy public legal procedures which may not secure a conviction. Also, while there is growth in the whistleblowing sector, Paul notes it is not easy to enlist more clients for his service: ‘There is no peer pressure or any compulsion on the companies to

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earn brownie points by subscribing [to independent] whistleblower services.’ He said the basic problem is that most Indian business executives do not trust outsiders. ‘It is very difficult to change the traditional mindset that dictates, “my information should be closeted only with me”.’ Furthermore, Paul says that for many companies it is just not possible to deal with legitimate complaints because of inherent flaws in their own businesses. ‘In most family owned proprietor-driven companies there are no set procedures,’ he says, which makes it virtually impossible to pinpoint a violation. Singh also admits that about 70% of Indian companies are still managing whistleblowing through an in-house system, which rarely attracts meaningful complaints. But he predicts that sooner or later the situation is bound to change: ‘I don’t think companies have options… external whistleblowing services will practically become a requirement in India.’ Raghavendra Verma, journalist based in New Delhi

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11/10/2012 16:55



Accounting solutions In this month’s column, PwC authors answer technical questions on share purchase agreements, and on accounting for insurance policies


Entity A purchased 80% of entity B in 20x0. Under the share purchase agreement, entity A also has an option to acquire the residual 20% shareholding in 20x2 at fair value of entity B. How should entity A account for the option in 20x0 and the subsequent acquisition of the non-controlling interest? Entity A has a call option over the remaining 20% at the date of acquisition; it should therefore assess whether the risks and rewards in relation to this non-controlling interest in entity B have, in substance, also transferred to the group. If that is the case, entity A should account for the entire 100% as an acquisition. Options priced at fair value usually result in transfer of risks and rewards to the holder at the point of exercise only. There are no other relevant circumstances to consider in this case. As a result, the risks and rewards associated with the non-controlling shareholding are not deemed to be transferred to the group on acquisition of entity B, and entity A should account for the 20% as a noncontrolling interest in its consolidated financial statements. The call option does not meet the definition of a financial liability under IAS 32, Financial Instruments: Presentation, as it is within the control of the entity A. Although there is minimal initial investment and the contract will be settled at a future date, the value of the option does not change in response to an underlying financial variable; it does not therefore qualify as a derivative under IAS 39, Financial Instruments: Recognition and Measurement, para 9. In 20x2, if the option exercised, any difference between the consideration – that is, the fair value of the shares paid – and the carrying amount of the non-


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of the insurance policy is greater than the present value of the defined benefit obligation it will reimburse. The policy does not meet the definition of a qualifying insurance policy and therefore cannot be treated as a plan asset. However, the criteria for recognising the reimbursement right as an asset have been satisfied. How should the cost of the insurance policy and the difference in value from the related obligation be accounted for? As a reimbursement right, the insurance policy is recognised as a separate asset, rather than being deducted from the pension obligation to which it relates. In all other respects, this asset and any related income should be accounted for in the same way as plan assets (in accordance with IAS 19, Employee Benefits, para 104C and D). However, because the right to reimbursement exactly matches payments of a portion of the defined benefit obligation, the fair value of the reimbursement right is deemed to be the present value of that portion of the defined benefit obligation. Any difference between the cost of the insurance policy and the present value of the defined benefit obligation it is designed to reimburse should therefore be treated as an actuarial loss. This is independent of whether the insurance policy is purchased by the pension fund or by XYZ Ltd itself, because the policy meets the definition of a reimbursement right.


controlling interest is adjusted to entity A’s equity under IAS 27, Consolidated and Separate Financial Statements, para 31. The resulting cash outflow should be classified as a financing activity, as it represents a transaction with equity owners under IAS 7, Statement of Cashflows, para 42B.


XYZ Ltd buys an insurance policy to reimburse payments of a portion of its defined benefit pension obligation. Reimbursement under the insurance policy will exactly match the amount and timing of the benefits payable under the plan. The cost to the company

This month’s solutions were compiled by Imre Guba, Michelle Millar and Iain Selfridge of PwC’s Accounting Consulting Services


IFRS and US GAAP: Similarities and differences includes insight on recent and proposed guidance; detailed analysis of differences including an assessment of the impact; and a report on the US GAAP codification project. Visit

11/10/2012 11:10



A guide for the perplexed In the first of two articles, ACCA’s Roger Adams looks at recent innovations in the relentlessly expanding field of corporate reporting

The corporate reporting space has grown immensely more complex in recent years. Not only has the volume and complexity of financial reporting standards increased, but the way in which large organisations are reporting has itself changed and expanded. Corporate social responsibility (CSR) or sustainability reporting, narrative reporting and integrated reporting are just three of the new forms that accountants (and users of accounts) have to contend with and make sense of.

Bigger and bigger Over the past 20 or so years the scope and content of the legally required annual corporate reporting package has mushroomed. A listed company’s annual report and accounts package will now contain most, if not all, of the following elements: performance highlights (key performance indicators) chairman and CEO’s reports or statements a description of the company’s business model together with an explanation as to how it creates value a management commentary (or business review, management discussion and analysis or operating and financial review) an executive remuneration report corporate governance and risk disclosures the audited financials including the directors’ report (often merged into the management commentary or business review), the income statement, balance sheet, cashflow statement and notes to the accounts the auditors’ report.

* * * * * * *


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Many annual reports also contain a separate section dealing with corporate responsibility or sustainability.


A new era? As one might expect, the mandatory annual report and account package has traditionally been targeted at an investor or shareholder audience, and by and large this continues to be the case. Integrated reporting, which is discussed in more detail in the second part of this feature (to appear next month), continues to prioritise the investor as the key audience for the annual report and accounts. However, a feature of large company reporting since 1990 has been greater standalone voluntary non-financial reporting to a wider stakeholder circle. Pressure for companies to become more transparent about their relationships with their employees, the communities where they operate and their impact on the natural environment and society at large has come from a variety of sources: Regulation. Increasing levels of regulation cover aspects of the sustainability universe such as carbon emissions, health and safety performance and employee welfare. Regulation, however, tends to prompt specific disclosure rather than wide spectrum disclosure. Reputation and competition. Guarding against reputational risk is now recognised as a core issue in supporting brand value. Nongovernmental organisations, consumers and the media have been instrumental in turning the publicity spotlight on poor practices in areas as diverse as human rights, supply chain labour practices, environmental damage, lack of



* *

workforce diversity and, most recently, business ethics. Operational efficiency and cost savings. The regular publication of targets for improvement – in workforce relations and in resource use, for example – can act as a stimulant to continuous improvement. The benefits of cost reduction and improved operational efficiency programmes are often easier to capture with non-financial measures (such as eco-efficiency ratios) than in purely financial terms. Values and ethics. An increasing number of organisations seek to link their corporate value set to their long-term corporate strategy and business model. Macro trends. Governments, regulators, economists and environmentalists alike are concerned about the negative effects of ‘short termism’. The focus is increasingly on creating sustainable value for the future. Both business models and report content are changing to reflect this shift.

CSR and sustainability reporting From a zero base in 1990, the related practices of environmental, social and sustainability reporting – also known as CSR reporting or corporate responsibility reporting – have now established a firm foothold as mainstream reporting tools. According to KPMG’s International Survey of Corporate Responsibility Reporting 2011, reputational considerations continue to drive corporate responsibility reporting. Additionally, the benefits that can be

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The growing scope of reporting Since mid-1800s

Annual report and accounts

Since 1990


Since mid-1990s


Since 2000

Sustainability, CSR

Since 2010

Integrated reporting

derived from innovation and learning are rapidly gaining appreciation. Not only do 95% of the Global 250 now issue corporate responsibility reports (up from 83% in 2008 and 64% in 2005), but almost half report gaining financial value from their corporate responsibility programmes. A third of national top 100 companies report the same benefits. As the perceived importance of sustainability issues (such as climate change, water usage, diversity and so on) has grown, so too has the range of stakeholders to whom companies now feel obliged to report. And as the number of interested stakeholders increases, so too does the scope of non-financial corporate reporting (see table). As the bigger of the two tables on this page demonstrates, even non-financial reporting has its own subdivisions. The KPMG report declares: ‘Clearly, corporate responsibility reporting is now an essential requirement for any company hoping to be seen as a responsible corporate citizen. Innovation and learning, in particular, has consistently ranked highly as a driver for corporate responsibility

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The subdivisions within non-financial reporting

Social and environmental performance highlights

Annual report and accounts

Separate standalone report

Yes – along with financial highlights


Yes – highly truncated version of the CSR/ sustainability report Full CSR/sustainability report



People reporting

Yes – highlights from CSR/sustainability report

Yes – with detailed performance data

Climate change disclosures including greenhouse gas emissions statement



Water footprint statement

Yes – in time

Yes – in time

reporting over the past decade. This is indicative of the large number of companies that see corporate responsibility as a means to drive greater innovation through their businesses and products in order to create a discernible competitive advantage in the market.’ And a 2010 Accenture study, A New Era of Sustainability, found: 72% of CEOs cite ‘brand, trust and reputation’ as one of the top three factors pushing them on sustainability. Revenue growth and cost reduction is second with 44%. 86% of CEOs see ‘accurate valuation by investors of sustainability in long-term

investments’ as important in reaching a tipping point in sustainability. The second of these two findings is particularly important in ensuring that the investment community buys into the need to move to a longer time horizon for gauging the performance of their investments.


Roger Adams is ACCA’s director of special assignments


Next month: how to identify best practice in the new corporate reporting and whether the future of reporting lies in more fragmentation or some form of integration

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Answer questions about this article online Studying this article and answering the questions can count towards your verifiable CPD if you are following the unit route and the content is relevant to your development needs. One hour of learning equates to one unit of CPD

Driving the business forward In the second in his series on economic value added, Dr Tony Grundy looks at the seven strategic value drivers on the value of a business and looks at the example of Tesco In this article we now dive into the seven strategic value drivers that drive the value of a business. These are the: 1 Sales growth rate (SGR). 2 Operating profit margin (OPM). 3 Incremental working capital investment (IWCI). 4 Fixed capital investment: the replacement fixed capital investment (RFCI) and the incremental fixed capital investment (IFCI). 5 Corporate tax rate. 6 Cost of capital. 7 Competitive advantage period (CAP). So what are the competitive drivers behind these? For the SGR we can represent the main ones as being: SGR = a function of (macroeconomic growth + market-specific growth + shift in relative market share). So there are a number of layers in what is a kind of an ‘onion’ of external demand for a company’s products which are interdependent. In addition we can go behind ‘shift in relative market share’ to get: Shift in relative market share = a function of (the shift in our competitive position relative to that of competitors and the relative fit of our products to customer needs). So from the latter equation one needs to think about the way in which sales volumes are influenced by one’s own relative competitive position over time. (my earlier series of five strategy articles: Strategy without the guff; Unpeel your competitive onion; Weighing up your options; Managing

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strategy and; Making strategic options fly, can be found at www.accaglobal. com/cpd/strategy). In addition to sales volume effects, there are other secondary impacts that might need to be thought through, eg where there is a strong competitive position based on superior customer

Where even one or two of these are unfavourable this can have the effect of dampening OPM. Where three or more are strongly negative this can destroy OPM: one has to have a very cunning plan indeed to cope with a bad margin environment. Having an excellent relative

NOT ONLY WAS MARKET SHARE SQUEEZING SGR BUT PRICE GIVEAWAYS WERE HURTING OPM TOO. THE RESULT: A SHARE PRICE UNDER PRESSURE value, then this can enhance sales values through: price premia discounting avoided: through generally lowering prices and promotions.

* *

OPM Turning now to OPM, we meet a slightly different set of competitive drivers. These can be even more volatile in mature markets than fluctuations in SGR: sometimes called ‘price wars’. OPM is a function of (changes in the level of ‘competitive pressure’ in a market + shifts in relative competitive position). Here ‘competitive pressure’ is my more everyday term for Porter’s ‘five competitive forces’ or: buyer (customer) bargaining power threat of entrants rivalry between existing competitors substitutes bargaining power of suppliers.

* * * * *

competitive position will mitigate that – and in a situation of low competitive pressure this will usually provide superior economic value added (EVA). All of this is liable to change over time and thus one needs to understand the future in terms of the future curve of ‘competitive pressure over time’, and ‘competitive advantage over time’. One needs to understand the ‘competitive advantage period’ – see the seventh strategic value driver – not as a fixed duration but one of a curve of decline – unless there are new and revitalising strategies being brought in over the period. So there is quite a lot to think about economically before plunging into making naive assumptions about the SGR and OPM, especially through simplistic extrapolation. Turning next to the capital assumptions, these have the following competitive determinants: Incremental working capital


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investment can be affected by the relative bargaining power that you have with your customers and suppliers. Replacement fixed capital may be affected by the extent to which your capital base has been eroded in quality – and putting it crudely you might have been milking the business to death – so that this is non-linear and is increasing disproportionately. Incremental fixed capital is very much going to be determined by the strategies for growth and change that you are embarking on: here there is a see-saw effect: the more ambitious and expensive these are the more cashflow in the medium term will be held back, and the more the long-term cashflow will be leveraged. The corporate tax rate is something that is largely outside one’s control other than through tax planning. The cost of capital is partly within your control and partly outside of it. Broadly it is set as the ‘weighted average cost of capital’ (WACC) as being: The cost of equity X its proportion of total capital + the cost of debt (1 – the tax rate) X its proportion of total capital. An example helps here of; Cost of equity = 10% Cost of debt = 8% Tax rate = 25% Equity is 60% of capital; debt is 40%: WACC = 10% x 60% + 8% x 40% x (1-25%) = 6% +2.4% = 8.4%



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Debt is thus cheaper as it is lower risk and also has a tax shield. Once the seven value drivers have been set – bearing in mind their competitive drivers – we now calculate as in September’s article, All about EVA, the net cashflows and the terminal values discounted to present values. To arrive at a final valuation of the business, one also needs to add in any cash that is on the balance sheet and also deduct the outstanding debt. Where the numbers of shares are known, one can easily then calculate the value per share. One of the most important things to do here is to prioritise the seven value drivers – particularly for risk and sensitivity analysis. In the final part we now look at the case of Tesco plc in terms of trends in performance and the impact of competitive drivers of economic value.

Tesco case study In 1993 I ran a case study on the UK supermarket industry with my MBA students and out of that I did some scenarios of the industry anticipating the price war of 1994 – using Porter’s five forces. I gave one of my books, Breakthrough Strategies For Growth, with the case study in to Sir Terry Leahy (then CEO of Tesco). Tesco’s amazing and profitable growth from then on was staggering – it breached the £1bn and the £2bn profit barrier and became a global retailer. This was based on some clever sub-branding of outlets, aggressive


investment and related diversification, enormous drive, commitment and championing the customer and – for a period, better service. Over more recent years it seems as if the pressure to drive productivity may have weakened service levels at a time when competitors were getting much better. Also Tesco’s dominance in the UK was resented by some customers. Perhaps too the success was a little taken for granted. In the UK in 2011 there was slippage and Tesco responded by even more price discounting and £5 rebates for a £40 shop – more than their actual margins. Not only was market share in a tightening market squeezing SGR but price giveaways were hurting OPM too. The result: a share price under pressure and a drop off in the competitive advantage curve. Here the SGR and OPM were the most important value drivers – and are competitively determined. A profit warning was made in January 2012 and there was a 19% slump in share price in the six months to end April 2012 (underperforming the market by 25%). Tesco then announced a strategic plan for the UK of £1bn to turn it around. In the next article I look at how EVA is generated as part of an overall business value system. Dr Tony Grundy is an independent consultant and trainer, and lectures at Henley Business School in the UK

15/10/2012 17:30



Answer questions about this article online Studying this article and answering the questions can count towards your verifiable CPD if you are following the unit route and the content is relevant to your development needs. One hour of learning equates to one unit of CPD

Hedge accounting: draft alert The IASB wants better links between an entity’s risk management activities, the rationale for hedging and the impact of hedging on the financial statements, says Graham Holt

IAS 39, Financial Instruments: Recognition and Measurement, sets out the requirements for recognising and measuring financial assets, and financial liabilities. Many users of financial statements felt that the requirements in IAS 39 were difficult to understand, apply and interpret. Thus, the International Accounting Standards Board (IASB) is developing a new standard for the financial reporting of financial instruments that is principle-based and less complex. The three main phases of the IASB’s project to replace IAS 39 are: A Phase 1: Classification and measurement of financial assets and financial liabilities. In November 2009, the IASB issued the chapters of IFRS 9, Financial Instruments, relating to the classification and measurement of financial assets followed by the requirements related to the classification and measurement of financial liabilities in October 2010. B Phase 2: Impairment methodology. The IASB is redeliberating the proposals issued in an exposure draft and the supplement to that draft to address the comments received from respondents. C Phase 3: Hedge accounting. On 7 September 2012, the IASB issued a draft of the general hedge accounting requirements that will be added to IFRS 9. In addition to the three phases above, in June 2010 the IASB decided to retain

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the existing requirements in IAS 39 for the derecognition of financial assets and financial liabilities but to finalise improved disclosure requirements, which were issued in October 2010 as an amendment to IFRS 7, Disclosures. The current rules on hedge accounting in IAS 39 have frustrated many preparers, as the requirements are not really linked to common risk management practices. The detailed rules have at times made achieving hedge accounting impossible or very costly, even when the hedge was an economically rational risk management strategy. The IASB wishes to provide better links between an entity’s risk management activities, the rationale for hedging and the impact of hedging on the financial statements.

Principle-based approach The requirements also establish a more principle-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. However, the IASB has made some significant changes to certain aspects of the proposals contained in the draft that was issued in December 2010. The proposals do not fundamentally change the current types of hedging relationships, or the current requirement to measure and recognise ineffectiveness; however, the proposals mean that more hedging strategies used for risk management would qualify for hedge accounting.

The draft relaxes the requirements for hedge effectiveness assessment and consequently the eligibility for hedge accounting. Under IAS 39, a hedge must be expected to be highly effective both at inception and on an ongoing basis. Subsequently, the entity must demonstrate that the hedge has been highly effective. ‘Highly effective’ is defined as a quantitative test of 80% to 125% under IAS 39. Under the draft, more judgment is needed to assess the effectiveness of the hedging relationship. A hedging relationship would need to be effective at inception and on an ongoing basis, and would be subject to a qualitative or quantitative, forward-looking effectiveness assessment. The following requirements need to be met: 1 an economic relationship must exist between the hedging instrument and the hedged item 2 the effect of credit risk must not dominate the value changes that result from that economic relationship 3 a hedge ratio must reflect the relationship between the quantities of the hedged item and hedging instrument used by the entity for its risk management purposes 4 an entity cannot intentionally weight the hedging instrument or hedged item to achieve an accounting outcome inconsistent with the purpose of hedge accounting. The first requirement means that the

16/10/2012 13:01

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hedging instrument and the hedged item must be expected to move in opposite directions because of a change in the hedged risk such that there is causality and not just correlation between the items. Perfect correlation between the hedged item and the hedging instrument is not required and is not sufficient, as there must be an economic relationship. For example, there are different prices quoted for oil. These include the prices of West Texas Intermediate (WTI) crude oil and Brent crude. The former reflects the price at Cushing, Oklahoma, and nexus for the delivery of American and Canadian crudes and the latter reflects the price of North Sea oil. Therefore, it would be possible to hedge a Brent crude exposure with a WTI derivative. The second requirement means that the impact of changes in credit risk should not be of a magnitude such that it dominates the value changes, even if there is an economic relationship between the hedged item and hedging derivative, and the third requirement indicates that the actual hedge ratio used for accounting should be the same as that used for risk management purposes, unless the ratio is inconsistent with the purpose of hedge accounting. The IASB appears to be specifically concerned with deliberate under-hedging, which either minimises the recognition of ineffectiveness in cashflow hedges or creates additional fair value

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adjustments to the hedged item in fair value hedges. The draft includes a number of changes to the definition of a hedged item. Risk components of non-financial items can be designated as a hedged item provided the risk component is separately identifiable and reliably measurable. The draft retains the principle for financial and non-financial risk components to be separately identifiable and reliably measurable and this must be assessed within the context of the particular ‘market structure’. However, ‘market structure’ is not defined. It does not follow that, if there is a derivative instrument on aluminium and aluminium components are used in manufacturing cars, that aluminium is an eligible risk component in a hedge of car component purchases. There is probably a need to see how aluminium car components are priced in the market and how this relates to the price of aluminium. The draft now includes a rebuttable presumption that non-contractually specified inflation risk will not usually be an eligible component of a financial instrument. Two scenarios are set out in the draft, one of which indicates that an inflation risk component is eligible for hedge accounting and another in which it is not. Entities can hedge non-financial items for a price risk, for example, a commodity price risk that is only a

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component of the overall price risk of the item. This is currently prohibited under IAS 39. The draft also makes the hedging of certain groups of items more flexible. A group of items, including a group of items that constitute a net position, may be a hedged item under the proposals if: 1 it consists of items that are eligible hedged items 2 the items in the group are managed

An entity is not allowed to voluntarily terminate a hedging relationship that continues to meet its risk management objective and all other qualifying criteria. However, the draft has retained the requirement for rebalancing to be undertaken if the risk management objective remains the same, but the hedge effectiveness requirements are no longer met. Normally, accounting rebalancing will only be undertaken when adjustments

THE DRAFT HAS RETAINED THE REQUIREMENT FOR REBALANCING TO BE UNDERTAKEN IF THE RISK MANAGEMENT OBJECTIVE REMAINS THE SAME together on a group basis for risk management purposes. The draft makes the hedging of groups of items more flexible, although it does not cover macro hedging which will be the subject of a separate document. Entities commonly group similar risk exposures and hedge only the net position, which could be the net of forecast purchases and sales of foreign currency. Under IAS 39, a net position cannot be designated as the hedged item. The draft permits such hedging strategies if the entity hedges on a net basis for risk management purposes. However, if the hedged net position consists of forecasted transactions in a cashflow hedge, hedge accounting on a net basis is only available for foreign currency hedges.

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are made to the actual quantities used for risk management purposes unless deliberate and inappropriate action is undertaken to achieve an accounting result that is inconsistent with the purpose of hedge accounting. The proposals on discontinuation have not changed but further guidance is given on how to distinguish between an entity’s risk management strategy and its risk management objective. Risk management strategy is established at the highest level and could include some flexibility to react to changes in circumstances without requiring a new strategy. The risk management objective is applied at the particular hedge relationship level. The draft retains the current IAS 39 requirements for fair value hedge

CPD units on the web

accounting. However, the fair value option in IFRS 9 is extended to contracts that can be settled net in cash and meet the exception whereby applying fair value accounting eliminates or significantly reduces an accounting mismatch. Additionally, the draft would permit certain credit exposures to be designated at fair value through profit or loss if a credit derivative that is measured at fair value through profit or loss is used to manage the credit risk of all, or a part of, the exposure on a fair value basis. Some industries, such as banking and insurance, may see the proposals as of less importance than the IASB’s forthcoming macro-hedging paper, but sectors with substantial commodityrelated risk such as airlines and manufacturers will welcome the opportunities provided. The new proposals are likely to benefit nonfinancial services entities which can hedge clearly defined individual risk items. However, the guidance remains complex in some areas and to comply companies may need to apply a greater degree of judgment. A principle-based approach requires additional disclosures to users of how a company is managing risk. 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

16/10/2012 13:04



Christine Sahadeo FCCA discusses how the introduction of a revenue authority in Trinidad and Tobago could optimise tax collection and develop a culture of customer service

Building resilience through innovation The Trinidad and Tobago Revenue Authority (TTRA) was well on the way to being implemented, but plans were abandoned after the former government lost an early and unscheduled election in 2010. This article is not a political debate about the TTRA’s establishment, but an analysis to evaluate the rationale for its implementation and the role a revenue authority could play in building resilience in the tax administration through innovation. Over the last four years Trinidad and Tobago has presented deficit budgets. With escalating recurrent expenditure (transfers and subsidies) and falling tax revenues, it is even more critical that tax policy and institutional arrangements optimise collection of tax revenues. A tax policy should aim to raise sufficient revenue for the funding of public services and macroeconomic stability; control compliance and administration costs; achieve a fair burden between taxpayers; encourage enterprise and productive economic activity; and promote efficiency by addressing market failures (as stated in the 2004 O’Donnell review of the revenue departments, Financing Britain’s Future). The idea behind the TTRA was to promote these aims and, more importantly, remedy the existing inefficiencies in the Inland Revenue (IR) and Customs and Excise Division (C&ED). The Trinidad and Tobago model proposed the removal of the IR

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and C&ED from the civil service and the establishment of a corporate legal entity. A company was established; the Trinidad and Tobago Revenue Authority Management Company Limited (TTRAMCoL) and a board and chairman appointed in 2009. The model planned to adopt best practice of revenue authorities in other countries. As evidenced by international experience, the TTRA would be a catalyst for reform and would promote and foster an improved

component of the total tax gap – the difference between actual and potential tax revenues. Although the terms leakage and the shadow economy are interchangeable, I prefer to use the term leakage when referring to when registered businesses conceal transactions to avoid paying taxes and the ‘shadow economy’ to describe the situation where businesses operate outside the tax system. The size of the shadow economy is difficult to measure. It is incumbent on

IT IS INCUMBENT ON REVENUE AGENCIES TO IMPLEMENT MEASURES TO MANAGE THE LOSS OF TAX REVENUES FROM THE SHADOW ECONOMY business environment in Trinidad and Tobago based on transparent performance management and reporting systems. The overarching goals of the TTRA were to increase efficiency in revenue collection, encourage voluntary compliance among all taxpayer groups and introduce integrated management information systems. These measures were designed to ensure a highly visible and credible detection and enforcement capability, thereby reducing the incidence of leakage.

Shadow economy In most countries, tax revenue lost as a result of the ‘shadow economy’ or leakage represents a very significant

revenue agencies to implement measures to manage the loss of tax revenues from the shadow economy. The challenge of reducing the shadow economy, and the potential revenue gain from doing so, is the implementation of proper controls and systems, more particularly, integrated information systems with their own checks and balances.

Rationale for establishment The integration of Revenue and Customs in the UK gave the rationale for establishing a single revenue authority. In 2004 the former UK chancellor, Gordon Brown, said: ‘At present, the UK effectively has two separate

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Trinidad and Tobago is popular with tourists for its carnivals (previous page), bustling street life and beautiful coastline (right), but its economy is stagnating business tax systems. I am convinced that by removing departmental barriers and focusing on the customer, the departments can make a step change in performance and efficiency. ‘In announcing today the creation of a new department, integrating the work of Customs and Revenue, my aim is to ensure that we are best placed to deliver the benefits of customer service, and of effective and efficient operations, to the country.’ Since 1993, the government of Trinidad and Tobago has recognised the inherent problems and weaknesses of the IR and C&ED. Technical assistance was sought in 1997 and 1998 when a team of experts from the US Internal Revenue Service was assigned to help restructure the revenue arms. In 2002, the government of Trinidad and Tobago appointed a committee to investigate the feasibility of establishing a revenue authority to ensure the best organisational arrangements for achieving the government’s tax objectives. The committee identified 13 deficiencies in the existing institutional framework. The first five of these related to human resource management issues, due to the lack of an overarching, modern policy on human resource management for the public service. Vacancies remain unfilled, not because of a lack of qualified personnel, but rather the unacceptable low salaries offered. Promotions are

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based on seniority rather than performance and the reward system does not support a modern performance management system where performance can be measured. It was therefore recommended that the revenue authority be operationalised within a state-enterprise model. The divestment of government departments however has been heavily criticised as circumventing the public service by creating state-owned enterprises. It is a fact that inefficiencies in the civil service resulted in the establishment of ‘special purpose state enterprises’. However, given that over 90% of the country’s revenue is collected by the IR and C&ED, greater effort must be made to provide the best institutional arrangements to optimise revenue collection.

Information systems Information and communications technology (ICT) in tax administration is emerging as one of the most effective tools in tax reform. In 2003 the Ministry of Public Administration developed an e-Government Portal as part of its vision to move government online and simplify access and delivery of public services. Incidentally, as acting minister of public administration I launched the e-Government initiative, FastForward Trinidad and Tobago, Accelerating Into the Digital Future. It was envisioned that ICT would kick-start the e-Economy. The Vision of the FastForward Agenda reads: ‘Trinidad

and Tobago is in a prominent position in the global information society through real and lasting improvements in social, economic and cultural development caused by deployment and usage of information and communication technology.’ Therefore, the launch of FastForward set the stage for the use of ICT in all government institutions. The creation of a TTRA represents an opportunity to make better use and improve sharing of information across the tax system, to the benefit of revenue collection and its customers. Good quality data also underpin coherent and evidence-based policymaking decisions.

Human capital management The IR and the C&ED fall under the Ministry of Finance and are governed by the rules and regulations of the central public service. For the most part, these units can only deal with routine personnel administration issues. Inherently therefore lies the difficulty in establishing a robust strategic human capital management function in these departments. The civil service is in dire need of reform. However this is a large and complex exercise which will take time, effort, patience and will. In the meantime the government cannot sit idly by and wait. Reform of the civil service must be considered with regard to the intention of the Constitution of the Republic of Trinidad and Tobago, which was to

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insulate members of the civil service from political influence exercised directly on them by the government in power. The civil service commission has the autonomy to make appointments, promotions and transfers within the service. It also has the power to remove and exercise disciplinary control over its members. However this model contravenes the modern concepts of human resource management. Given that both of these entities operate within the civil service it was imperative that a model be developed that allowed for effective recruitment, reward, promotion and retention policies. The current civil service cannot remedy the deficiencies identified. A year after becoming British prime minister, Tony Blair observed: ‘Many parts of the civil service culture are still too hierarchical and inward looking... We need to think also about the structures in which we make people work. Often they frustrate more than they enable ... Reinventing government to remedy these failures is a key part of our constitutional reform.’ The UK recognised the problem and took positive steps to eradicate problems in the civil service which resulted in substantial savings.

Customer service The IR and C&ED provide important services for the government, the public, and business. These units collect most of the country’s revenue. Closer

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working between these departments would reduce costs to compliant taxpayers and businesses, encourage enterprise, and improve compliance. This would also pave the path for more coherent use of information, enhance effectiveness and improve customer service. It would also reduce leakage. The payment of taxes is not normally embraced and every effort must be made to make the experience painless and efficient. With the proper human resource infrastructure a total quality system can be introduced thereby

must ensure that all tax revenues are collected to fund its capital programme and expenditure. It is therefore even more critical that systems are implemented to optimise collection of taxes, reduce the incidence of leakage and at the same time develop a culture of customer service. The present inadequacies in the civil service would compromise the success of these proposed measures in the optimisation of the collection of tax revenues. In light of a stagnating economy and reduced revenues, the government may

‘PROMOTIONS ARE BASED ON SENIORITY RATHER THAN PERFORMANCE AND THE REWARD SYSTEM DOES NOT SUPPORT A MODERN SYSTEM’ focusing on the customer experience. Potential benefits from a revenue authority include access to more complete information which would improve risk management across the tax system, potentially reducing the burden on the honest, and making life more difficult for the dishonest. There would be improved benefits in developing a ‘whole customer’ view of business customers, and in integrating compliance activity, using real-time information.

Conclusion With dwindling energy resources and substantial reduction in prices for energy-based products, government

be forced to take drastic measures to curtail leakage. Deficit budgets and the resultant increasing debt may provide the impetus for this change. I remain optimistic that in delivering on election promises of a fair and transparent tax the revenue authority model would be adopted in the near future. The ground work has already been done. It is now time for implementation. I remain optimistic that good sense and responsible governance will prevail. Christine Sahadeo FCCA is a senior lecturer and deputy dean (planning and programming) at The University of the West Indies, St Augustine and a former cabinet minister

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Technical update

A monthly round-up of the latest developments in financial reporting, audit, tax and law FINANCIAL REPORTING IFRS FOR SMES International changes and updates on the IFRS for SMEs, including guidance for different-sized entities, information on country adoption and small and medium-sized enterprise resources are available at Pages/Update.aspx

AUDIT ISAS ON SMALLER AUDITS The International Auditing and Assurance Standards Board (IAASB) is finalising its survey on ISAs and how they have been applied to smaller audits and it is collating feedback. Its current work indicates that there are some benefits in terms of audit quality and the cost impact has been relatively small. Views differ as to whether changes need to be made to the standards to make them more suitable for smaller audits. The IAASB will be aggregating the UK results with those of other countries in the next few months. The findings from the survey will be combined with the input that is expected to be received on ISA implementation from firms, regulators, standard-setters and others and will be discussed by the IAASB in June 2013. REVIEW ENGAGEMENTS International Standard on Review Engagements (ISRE) 2400 (Revised): Engagements to Review

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Historical Financial Statements, has been revised. The revised standard applies for periods ending on or after 31 December 2013. The standard deals with the practitioner’s responsibilities when engaged to perform a review of historical financial statements, when the practitioner is not the auditor of the entity’s financial statements, and the form and content of the practitioner’s report on the financial statements. The standard contains useful illustrative information within the appendices – Appendix 1: Illustrative Engagement Letter for an Engagement to Review Historical Financial Statements and Appendix 2: Illustrative Practitioners’ Review Reports. The standard can be found at http:// Glenn Collins, head of technical advisory, ACCA UK

EUROPEAN UNION GERMAN TAXATION LAW Accountants advising on German taxation rules will be monitoring two European Court of Justice (ECJ) cases brought by the European Commission, alleging that two taxes break European Union (EU) laws on the freedom of movement of capital within the EU. Brussels argues that investments and inheritances get illegally better treatment under German tax law if the money

stays in Germany, rather than being moved to other EU member states. This applies to rules on inherited property, where nonresidents are taxed at a higher rate than German residents, and the reinvestment of hidden assets, which is taxed if the money is moved to another EU member state, but not taxed if it stays in Germany. The commission said the ‘discriminatory nature’ of these taxes ‘is contrary to EU rules’ preventing such unfair treatment of EU citizens living outside Germany. More at http:// OTC DERIVATIVES RULES The European Securities and Markets Authority (ESMA) has published technical standards saying how OTC (over-the counter) derivatives should be logged and accounted for within the European Union (EU). EMSA has defined what details of derivatives transactions need to be reported to trade repositories and also what it should receive, so it can properly regulate these repositories. The standards include that ESMA will allow the reporting of collateral on a portfolio basis and that reporting of mark-to-market values should be undertaken only by counterparties who have to calculate these every day. The standards have to be (and are expected to be) authorised by the European Commission. More information at http://tinyurl. com/bnq5xzz

CROSSBORDER LOSS RELIEF The European Commission is trying to force the UK to liberalise its tax legislation on crossborder loss relief, claiming Britain has failed to implement a European Court of Justice (ECJ) order on the matter. In 2005, the ECJ ruled that a parent company should not be prevented from deducting from its tax bill losses of subsidiaries established in another member state, if all other possibilities have been exhausted. The commission said while the UK has allowed this to happen in principle, in practice it is made ‘very difficult to benefit from’. More at ENERGY WORK SET TO BOOM Financial reporters specialising in energy costs will see their work boom cross the European Union (EU), with the approval by the European Parliament of a new proposed energy efficiency directive. It insists that all large businesses and large public organisations must undergo an energy audit. These will be carried out within three years of the directive’s entry into force (expected at the end of 2013) and henceforth every four years by qualified and accredited experts. Small and medium-sized enterprises (SMEs) are exempt. More at http:// LIMITS TO ULTRA-FAST TRADES The European Parliament’s economic and monetary affairs committee has now

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57 GOT ROLES TO FILL? voted to back a European Union (EU) minimum break of 500 milliseconds between ultra-fast computerised trades to limit speculation and limit price volatility on commodity markets. The change would be introduced via a new EU directive on markets in financial instruments. More at http:// ACCOUNTS REJECTED The accounts for 2010 of the European Union’s (EU) most powerful legislative body – the Council of Ministers – have not been accepted by the European Parliament’s budgetary control committee. MEPs cited ‘the Council’s complete lack of cooperation’ regarding questions over the financing of premises and setting up the EU’s new diplomatic corps, the European External Action Service. More at http://tinyurl. com/78mkyws ACCOUNTING PROBE POWERS The European Central Bank (ECB) will acquire significant powers to probe the accounts of eurozone banks under proposals to create a more unified banking regulatory system for countries using the euro. Under a regulation proposed by the European Commission, the ECB would have ‘the power to request all necessary information, to conduct all necessary investigations of credit institutions and the persons involved in the activities of the respective institutions as

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well as to carry out onsite inspections’. More at http:// Keith Nuthall, journalist

AUSTRALIA AASB 9 DATE DEFERRED The Australian Accounting Standards Board (AASB) has approved AASB 2012-6, Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures September 2012, to amend the mandatory effective date of AASB 9, Financial Instruments, so that AASB 9 is required to be applied for annual reporting periods beginning on or after 1 January 2015 instead of 1 January 2013. AASB 2012-6 also modifies the relief from restating prior periods by amending AASB 7, Financial Instruments: Disclosures, to require additional disclosures on transition from AASB 139, Financial Instruments: Recognition and Measurement, to AASB 9 in some circumstances. A new, compiled version of AASB 9 as applicable from 1 January 2015 is being prepared and will be published on the AASB website shortly. NEW GUIDE PROVIDES CLARITY The Australian Auditing and Assurance Standards Board (AUASB), the Australian Institute of Company Directors (AICD) and the Institute of Internal Auditors (IIA) have published the

Frankfurt, Germany

second edition of Audit Committees: A Guide to Good Practice, to provide boards and audit committees with essential guidance for financial reporting, corporate governance, risk management and internal control. The guide is available through the AICD resource centre at http://tinyurl. com/8vp72nl GOING CONCERN STANDARDS The AUASB has issued a new Auditing Standard, ASA 2012-1, Amendments to ASA 570 Going Concern, operative for financial reporting periods commencing on or after 1 July 2012. The amendments have been incorporated into the ASA 570, Going Concern, auditing standard and the resultant ASA 570, Going Concern (Compiled) auditing standard is found under the Australian Auditing Standards section on the AUASB website. Although the amendments do not have an impact on the requirements of ASA 570, practitioners should refer to the compiled version when conducting audits.

NEW ZEALAND FINANCIAL INSTRUMENTS The New Zealand Auditing and Assurance Standards Board (NZAuASB) has issued a new type of Pronouncement, the International Auditing Practice Note (New Zealand) (IAPN (NZ)) 1000, Special Considerations in Auditing Financial Instruments. This provides guidance about financial instruments and guidance to auditors on audit considerations relating to financial instruments and is available for immediate use. IAPN (NZ) 1000 assists the auditor in complying with the International Standards on Auditing (New Zealand) relevant to auditing financial instruments. It is relevant to entities of all sizes. The guidance on valuation is relevant for financial instruments measured or disclosed at fair value, while the guidance on other areas applies equally to all financial instruments. Lei Xu, technical manager, ACCA Australia and New Zealand

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Taking a postgraduate qualification can definitely give you the leading edge in the jobs market and help boost your earning power, but where should you choose to study – home or away?

The reasons for having an MBA or MSc on top of your other professional qualifications are just as pertinent today as they have ever been. With many countries suffering from doubledip recessions and global economies facing strict fiscal cutbacks, businesses everywhere need to make sure they are recruiting and paying the most talented individuals available. A postgraduate qualification may just put you ahead of the field. ‘Organisations looking to hire employees for positions of increasing responsibility consider postgraduate qualifications as a critical professional development tool,’ says Erin O’Brien, associate dean, TRIUM and Global Programs, NYU Stern School of Business. ‘The results are more capable employees who, in the short term, can immediately apply what they are learning to the day-to-day job and, in the longer term, are equipped with the understanding, skillset and contacts necessary to navigate today’s global economy.’ Christophe Coutat, CEO of the Advent Group and founder of, agrees: ‘Young professionals who commit to doing a master’s in

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business or an MBA invest in their development and thus considerably increase their potential for career growth and business success.’ But with more than 3,000 MBA and 7,000 master’s programmes in existence worldwide and many different types of programmes tailored to meet a diverse range of student needs, as well as pricing and quality considerations, potential students can sometimes uncomfortably straddle the line between being spoilt for choice or having too much of it.

Difficult choice One decision they have to make is about location and, with prestigious programmes offered in every corner of the globe, this is no easy task. ‘Studying abroad is a major investment in time and money, and for many students it’s the biggest educational expense they will make in their lives,’ says Coutat. The potential benefits of going further afield, though, are clear. ‘Business and management in today’s global world are more and more about understanding and accepting cultural differences and diversity,’ says

Coutat, ‘Doing an MBA abroad helps managers encounter different cultures and their organisational aspects.’ With over 100,000 alumni in over 100 countries, NYU Stern offers one of the largest, most successful alumni bodies of any business school in the world, with 500 CEOs. ‘Our powerful alumni network opens doors for you in virtually any industry, almost anywhere in the world,’ says O’Brien. ‘Their varied backgrounds, perspectives and expertise make the educational experience one of the richest and most rewarding.’ So how should you go about choosing the right course and location for you? ‘Candidates should evaluate a programme by three different criteria: the quality of its academic specialisation, its educational environment, and its career placement programme,’ advises Coutat. He adds: ‘A school’s alumni network is another important factor, not only because it gives an idea of the level of the programme, but it is also a vital source of contacts for future employment. Another reliable method is to look at school accreditations; Equis, AMBA and AACSB have the best reputation internationally.’ ‘It is important for potential students to identify their drivers for seeking out a programme and think about what they anticipate their return on investment will be on completing the programme,’ adds O’Brien. ‘The community and culture of the programme is also an important consideration, especially as it relates to executive-level students who are often seeking a lifelong network and thrive on the varied backgrounds, perspectives and areas of

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expertise that will add to their educational experience.’ Cost, of course, may be a deciding factor, especially if you are thinking of studying abroad. At NYU Stern, financial aid is available for the programmes, but to qualify for them you must be a US citizen or US permanent resident. Scholarships are available for the TRIUM Global Executive MBA programme, usually intended for people working in emerging markets or economies or the public sector where the pay scales are not equivalent to the role they provide for their organisation. Of course, you can get an MBA from

an international business school without ever setting foot in the country it comes from. ‘Online programmes have a number of advantages in terms of time management, saving on travel and living expenses in another country,’ says Coutat. ‘However, some candidates may well prefer the traditional classroom contact programmes because of the different style of interaction with faculty and other MBA students.’ Ensuring that the course is respected is absolutely crucial if you go down the distance learning route. One doesn’t have to look too far to find high-profile examples of well-known individuals

purporting to hold professional qualifications before being exposed as having bought them over the internet from an educational establishment of questionable credibility. ‘Candidates should look for proof, such as an accreditation, and that certain quality standards are met,’ says Coutat. Once you are completely sure of the credibility of the business school and the course, the return on your financial and time investment will soon become clear because, as Coutat concludes, ‘an MBA has become key to business success, ambition and leadership’. Beth Holmes, journalist


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Submit your CPD declaration By submitting your CPD declaration as part of your membership, you are demonstrating your commitment to professional development to your peers and employers Your annual CPD declaration for 2012 is due for submission to ACCA by 1 January 2013. Submit it online now or at any point until the end of the year by logging into myACCA. As a professional body, our members define who we are – you represent ACCA to the world. We’re proud to have you among us and that you carry the ACCA designatory letters. It is these letters that distinguish you and show your commitment to professional development and ethics to your peers and employers.

podcasts, online seminars, research and qualifications from our partners.

More CPD than you think You might think you haven’t completed enough CPD for the year, but each year we find that members are doing

Do I need to prove it? You do not need to send in supporting evidence with your annual CPD declaration – this process is just to confirm that you have maintained your professional development. However, you should keep your CPD evidence for three years in case you are selected for a CPD review.

Calling all members To maintain this high value of ACCA membership, each year we ask all members to declare their commitment to professional development, regardless of their particular development route. The declaration process is very simple and takes no more than five minutes to complete.

What if I haven’t done any learning? The annual CPD declaration has two options: select Option A to show that you have completed your CPD or Option B if you have not. CPD is a membership requirement, so if you indicate that you have not met the requirements we will contact you with further advice on how to do so.

How to declare? The easiest way to declare is online by logging into myACCA via the ACCA website at www.accaglobal. com – 77% of members are already using this method.

For further information

Last-minute learning? There are still plenty of learning opportunities available if you need to complete your CPD requirement for 2012. My Development is a dedicated CPD area of the ACCA website where you can source relevant learning for your CPD. My Development provides a one-stop shop for articles, e-learning,

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learned is relevant to your career and you can explain how you have applied the learning, you can claim it as verifiable CPD. For further information and to check the requirements of each route go to:

more CPD than they realise. Think about what you have learned this year that is relevant to your role – did you undergo training on a new software or research a topic area specifically for a new client? There are many ways to learn and as long as what you’ve

We have published detailed instructions on our CPD policy at If you are facing difficulties with CPD please contact ACCA as soon as possible, as you may have completed the requirement – or be eligible for a different route or a waiver – without realising it.

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107th AGM: 20 September 2012 The AGM was held at 29 Lincoln’s Inn Fields, London, W2, and 48 members were present 1 NOTICE AND AUDITOR’S REPORT The notice of meeting and the auditor’s report on the accounts for the period 1 April 2011 to 31 March 2012 were taken as read. 2 THE MINUTES The minutes of the AGM held on 15 September 2011 and published in the November 2011 issue of Accounting and Business were taken as read, and signed as correct. 3 RESOLUTION 1 Adoption of the report of the Council and the accounts for the period 1 April 2011 to 31 March 2012. Chairman Dean Westcott (ACCA president) gave his presidential address and asked chief executive Helen Brand to give a presentation. He then invited questions and comments on the Report and Accounts. He drew members’ attention to the statement which had been circulated and which showed that valid proxy votes had been cast in respect of Resolution 1 as follows: for 3,411, against 44. The president then put the resolution to the meeting and,

on a show of hands, declared it carried, the votes being cast as follows: for 36, against 0. 4 RESULT OF THE BALLOT FOR THE ELECTION OF MEMBERS TO COUNCIL The scrutineer’s report and the number of votes received by each candidate in the ballot for the election of members of Council were reported, as follows: Orla Collins 3,394; Dean Westcott 3,280; Brian McEnery 3,045; Julie Holderness 2,893; Robert Stenhouse 2,875; Jenny Gu 2,678; Leo Lee 2,592; James Lee 2,525; Gustaw Duda 2,423; Belinda Young 2,377; Raphael Joseph 2,375; Andi Lonnen 2,145; Ronan Carrig 1,763; Frankie Ho 1,368; Azza Raslan 1,168; Shamreen Ashraf 1,084; Kwame Antwi-Boasiako 1,042; Aamer Allauddin 975; Billy Kang 924; Mubashir Dagia 891; Saad Maniar 815; Faisal Siddiqui 813; Jacques Fakhoury 786; Sham Mathura 725. The president, therefore, declared the

following members elected or reelected to Council: Orla Collins, Gustaw Duda, Jenny Gu, Julie Holderness, Raphael Joseph, James Lee, Leo Lee, Brian McEnery, Robert Stenhouse, Dean Westcott and Belinda Young. 5 RESOLUTION 3 Appointment of auditor The president reported that Council recommended that BDO LLP, chartered accountant and registered auditor, be reappointed as the association’s auditor. He then invited questions on Resolution 3. He drew members’ attention to the statement which had been circulated and which showed that valid proxy votes had been cast in respect of Resolution 3 as follows: for 3,281, against 175. He then put the resolution to the meeting and, on a show of hands, declared it carried, the votes being cast as follows: for 33, against 1. The president thanked members for their attendance and declared the meeting closed at 2.15pm.


Pakistan and Sri Lanka. Council agreed to appoint Frances Walker and Rosalind Wright as lay members of the ACCA Regulatory Board with effect from September 2012 and to appoint David Thomas as a lay member in September 2013. The Regulatory Board comprises a majority of lay members and is chaired by a qualified lawyer. Council then held its Annual Meeting on the afternoon of Thursday 20 September, following ACCA’s 107th AGM. Members voting at the AGM gave overwhelming support to the various resolutions before the meeting. The minutes are shown above. At the Annual Council Meeting, Council chose ACCA’s officers for the coming year. ACCA’s new president is Barry Cooper and he will be supported by Martin Turner (deputy president) and Anthony Harbinson (vice president).

Council also welcomed one new member whose election was declared at the AGM – Orla Collins, who is based in Ireland. There are 16 different nationalities represented on ACCA’s 36-member Council, over one-third of whom are female, thus continuing to reflect the increasing diversity of the organisation as a whole. Council took a number of other decisions at its Annual Meeting: It approved Council standing orders for 2012–13, in accordance with the bye-laws. It chose three Council members to serve on Nominating Committee in 2012–13, along with the officers. It agreed a Council work plan and a set of objectives for the Council year 2012–13. The next meeting of Council is on 24 November, immediately after the 2012 meeting of the International Assembly.

Council held a meeting on the morning of 20 September at which it considered some important issues. It received the regular report from the chief executive on ACCA strategic developments, organisational performance, key market developments and research and insights and technical developments. It considered a paper providing feedback on the Council meeting in Nairobi and noted that the event was successful in reinforcing ACCA’s position as a key supporter of the profession in Kenya and in Africa as a whole. Council agreed to reaffirm its policy of holding an international Council meeting every two years. It also agreed in principle that the international meeting in 2014 should be held in Dubai with associated regional visits to Bangladesh, Oman,



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ACCA news


Inside ACCA 65 AGM ACCA holds its 107th meeting in London 64 CPD Annual CPD declarations are now due for submission

From left: Martin Turner, Barry Cooper and Anthony Harbinson

New president Barry Cooper takes the helm as ACCA president for 2012/13 Leading accountancy academic Professor Barry J Cooper from Australia was formally elected ACCA president in September. Professor Cooper is head of the School of Accounting, Economics and Finance at Deakin University in Melbourne. Previously, he was head of accounting schools at the Hong Kong Polytechnic and RMIT University, Melbourne, and played a key role in establishing the ACCA Qualification in China. In his spare time he is an organic olive oil grower and processor. During his term on ACCA’s Council, Professor Cooper has chaired a number of ACCA committees. He wrote his inaugural president’s column in Accounting and Business last month. He said: ‘I look forward to playing my part in ensuring that ACCA continues to work closely with employers, and that we meet their needs in an increasingly global economy.’ ACCA’s Council also elected management consultant Martin Turner as deputy president; he has been chief executive of Hywel Dda Health Board and chief executive of the Central Northern Adelaide Health Service, and a Council member since 2004. Vice president for 2012/13 is Anthony Harbinson, who is director of justice delivery at the Department of Justice in Northern Ireland.


ACCA has commissioned Nottingham Business School to research the roles, features and personal attributes which public sector financial managers should aim to display, highlighting good practices. To find out more or contribute contact Professor Malcolm Prowle at

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Arnold Schilder (pictured), International Auditing and Assurance Standards Board (IAASB) chairman, was among leading figures in the auditing world who attended a New York cocktail reception hosted by ACCA USA. Guests included other senior IAASB representatives, staff of the International Federation of Accountants (IFAC) and ACCA New York chapter members. ACCA was also represented by technical director Sue Almond and ACCA USA head Warner Johnston.


Brendan Murtagh, past president of ACCA and International Auditing and Assurance Standards Board (IAASB) board member, has been appointed to the taskforce responsible for the redrafting of ISA 700, the auditor reporting standard, which will begin work once the responses to the IAASB’s Invitation to Comment have been collated. Murtagh has also been appointed to IAASB’s ISA Implementation Monitoring taskforce – a longer term project looking at the impact of the Clarity ISAs. Feedback is welcome; please email Sue Almond, IAASB technical adviser for Brendan Murtagh (sue.almond@

VIDEO EXPLORES PUBLIC VALUE Delivering value to business and society is a critical role for ACCA. A short video has been produced exploring what is meant by public value in the context of accountancy, and how ACCA as a professional body delivers that. Visit http://youtu. be/2U97GUWXE0k

17/10/2012 12:26

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get verifiable cpd units by reading technical articles

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17/10/2012 11:02

AB INT (International edition) – November/December 2012  

AB INT (International edition) – November/December 2012 of Accounting and Business magazine (ACCA)

AB INT (International edition) – November/December 2012  

AB INT (International edition) – November/December 2012 of Accounting and Business magazine (ACCA)