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Editor’s choice

In this month’s issue, Irish prime minister Enda Kenny, pictured on the cover with US president Barack Obama, tells Accounting and Business about bringing Ireland back from the brink – and the lessons of the Celtic Tiger’s tribulations for finance professionals. See page 12

SUMMERTIME BLUES With the ongoing financial crisis the ‘silly season’ – the UK’s traditional summer lull in meaty news stories – has had a prolonged absence. In addition, London’s hosting of the 2012 Olympic and Paralympic Games has provided no shortage of serious headlines across the globe. The season has also been marked by a rainstorm of corporate calamities, ranging from the Libor saga engulfing Barclays, security company G4S’s eleventh-hour admission that it hadn’t hired enough guards for London 2012, and HSBC’s money-laundering scandal. In our cover story this month, Irish prime minister Enda Kenny reflects on the causes of the Celtic Tiger’s economic problems. There are many themes in common with one or other of the organisational own-goals mentioned above, including a focus on profit to the exclusion of all else, and the failure of some key staff to act in an ethically appropriate manner. Kenny outlines many of the initiatives being put in place to address such issues and boost Ireland’s economy and reputation. One problem facing the US as it approaches the congressional and presidential elections in November is the appropriately named fiscal cliff. Our feature beginning on page 16 explains how, at the stroke of midnight on New Year’s Eve, a series of tax cuts dating back more than a decade is due to expire. And this will be combined with the kicking in of a series of prearranged spending reductions, sucking money out of the economy at the worse possible time. The knock-on effect on the global economy could be profound if action isn’t taken. As we went to press, moves were underway to extend the current tax rates. We also cast our eyes over Central Asia: Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan and Kyrgyzstan – the five former Soviet states that straddle this region. All are, to varying degrees, struggling to develop internationally recognised financial reporting standards, business ethics and commercial regulation. Our report begins on page 24. Lesley Bolton,

RESPONSE TO RIO The corporate world will play a pivotal role in enabling Rio+20’s sustainability reporting visions to become a reality. Page 20

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FIT FOR PURPOSE As the value of the auditor’s report comes under the spotlight, it’s vital that investors are clear about what they really want. Page 30

RESEARCH AND INSIGHTS APP Our free iPad app explores crucial trends and issues for business. Download it via or search for ‘ACCA Insights’ in the iTunes App Store. See page 66 for more information.


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

03/08/2012 11:18

AB INTERNATIONAL EDITION CONTENTS SEPTEMBER 2012 VOLUME 15 ISSUE 8 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, Jane C Reid 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 Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE


ACCA Connect Tel +44 (0)141 582 2000 Fax +44 (0)141 582 2222

12 Q&A: Enda Kenny Ireland’s prime minister describes how the new administration is repairing the economy

Accounting and Business is published by ACCA 10 times per year. All views expressed within the title are those of the contributors.

16 A long way down The US is set for a fiscal cliff dive

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.

20 After Rio Businesses hold the key to bringing Rio+20’s sustainability reporting pledges to fruition

Copyright ACCA 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.

24 Central Asia gets set Building solid financial structures is top of the agenda for five former Soviet states

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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28 Fiscal fragility In his regular quarterly report, ACCA’s Manos Schizas finds weakening confidence

Audit period July 2009 to June 2010 138,255

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



06 News in pictures A different view of recent headlines

46 The fraud fighters Practitioners have an enhanced role thanks to revised global recommendations

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

51 Accounting solutions PwC experts answer questions on recharge payments and supplier finance arrangements

VIEWPOINT 30 Robert Bruce Enter the brave new world of the auditor’s report 32 Ramona Dzinkowski IFRS is still some way off for the US 34 Dean Westcott As his term draws to a close, the ACCA president applauds members’ commitment


Comment ndwagon


rumbles on

a Dzinkowski. says Ramon from the SEC, attention year this much any time this es Oxley got n of IFRS will occur that of Sarban ble to think section 404 that US adoptio it be reasona been one of Not even wouldn’t s confidence should have and US the analysis It hardly inspire this indeed generally es of all


markets securities specifically.’ but With the investors if I’m wrong, end is near! staff Correct me Finally, an of the final l ional Financia 13 July release the Internat Plan, the report on ds Work g Standar ions around Reportin its conclus or US has reachedoutright in America IFRS fashion adopting them in some what incorporating – or at least that’s into US GAAP for. hoping Securities many were the final Unfortunately, tee (SEC) e Commit and Exchang really provide any corporate/ report didn’t ity to the waiting direction setting commun standard say anything audit and nor did it on the subject; was already what more than in the many rounds reports documented tions, interim of consulta debates. and public , it was the granted While ‘things to long list of Plan, last of a SEC’s Work as do’ on the intended and not initially position policy an official majority think the per se, I rs out d observe of intereste g myself, there, includinfor something were looking a summary just more than In fact, at of the debate. hoping for many were ement least an announc we could around when might make SEC the of expect statement will be its final policy when IFRS if, how and into US GAAP. incorporated , I think I’m not ed In addition a little concern the alone in being of wording about the the Final y Note to Introductory the SEC states e Report where h the Staff Staf Report Althoug important that: ‘Althoug ve and an tive did not is construc the W Work Plan fundamental contribution, to answer the set out to transitioning US of whether the question interest of inter the best IFRS is in

48 CPD: strategy How the finance function can achieve a more strategic and influential role

objectiv the prime two years? to concern over the past even more the What’s of want to see us who just or another those of one way a decision ) is that the US make al of reasons (for a variety foresees that: ‘Addition this Commission consideration of ry and is necessa analysis sion policy question threshold by the Commis decision of IFRS ation before any the incorpor g system for concerning l reportin into the financiaoccur.’ can who don’t there US issuers t voices out I represen For those e ear, may kidding have a collectivYou’ve got to be much saying: this in got you 404 even SOX opinion. me! Not SEC in my from the of the final attention the tone So what does for the US moving report suggest decision in the this it forward on I’m sorry to say, for near future? much room doesn’t present the US will get that gon optimism IFRS bandwa the generally on board soon. While any time a very positive there is again one set value of spin on the accounting lity of high-qua worldwide, there s used about IFRS. standard concerns are also many poignant of these the most tion of Perhaps g the designa ional ‘pursuin that is s of the Internat (IASB) Board the standard Standards among other Accounting ative was, by the vast as authorit supported US things, not ants in the of particip majority ’. for capital markets of you waiting ding the So, for those ement surroun 2013 an announc IFRS in America, of year. y adoption be your lucky just might

52 CPD: IFRS for SMEs The release of non-mandatory guidance is not without its critics 55 No nasty surprises Carrying out due diligence on potential investments in China is crucial 57 Update The latest from the standard-setters

Your sector 35 PRACTICE 35 The view from Olga Nikitina FCCA of Ernst & Young Academy of Business, plus news in brief 36 Integrity is everything We talk to FEE chief Olivier Boutellis-Taft 38 Under pressure Proposals for a revised framework on internal control have been met with scepticism

ist is an econom Dzink ski st amona Dzinkow Ramona s journali and busines

41 CORPORATE 41 The view from Miroslav Cino of Polytec, plus news in brief 42 Everyone’s a winner Corporate social responsibility makes good business sense 45 Beyond compliance A guide to issuing investor-friendly statements


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 59 CPD Allow yourself time to reflect 62 Keeping New York in check State comptroller Thomas P DiNapoli talks about the challenges at an ACCA USA Newsmakers Breakfast 64 Open for business The ACCA Council meeting in Kenya heard positive messages about the profession’s development in Africa 66 News ACCA and the Malta Institute of Accountants extend agreement; worldwide online event to highlight sustainability

03/08/2012 15:06


News in pictures


After spending £9bn to host the 2012 Olympics, the UK hopes to recoup £2bn in extra tourism and £10bn over four years in more inward investment


John Atta Mills, president of Ghana since 2009 and a champion of democracy, pictured shortly before he died in July


Manchester United’s Ryan Giggs poses during a promotional event for Chevrolet, which has signed a seven-year deal as the team’s shirt sponsor from the 2014/15 season

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After two years spent combining ACCA studies with kayak competitions, Ed McKeever’s summer culminated in his attempt to land an Olympic gold in the 200m kayak sprint


Romanian president Traian Basescu waves after addressing parliament during impeachment proceedings against him. A July plebiscite to unseat him failed


A market labourer in Kolkata, India, loads a sack of potatoes into the boot of a taxi for a customer. The price of vegetables in West Bengal has risen up to 50% in a fortnight on the back of delayed rains


Food prices are also expected to rise in the US, where the midwestern ‘corn belt’ states are suffering their worst drought for half a century. Sunflowers, one of the most droughtresistant crops around, are still holding on in most areas

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News in graphics


32% 29% CHINA


The number of people hit by power cuts in India at the end of July


Companies in China, Hong Kong and Taiwan now on the Fortune Global 500 list for 2012


Month in figures

The number of respondents who said they wanted the US to abandon US GAAP in favour of IFRS, according to a Deloitte/ EIU survey of insurers

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Pre-acquisition due diligence

09% 08%


Post-acquisition due diligence

33% 11%

56% 51%



09% 08%

84% 59%




Bribery and corruption are widespread, with 39% of respondents in Ernst & Young’s 12th Global Fraud Survey reporting that such practices occur frequently in their countries. With much enforcement activity relating to acquired entities, US companies lead in consistently performing pre-acquisition due diligence.


Companies in Asia have ‘strikingly’ few women in senior jobs, missing out on a vital pool of talent to fuel the region’s growth, consultancy firm McKinsey reveals in its survey Women Matter: An Asian Perspective. Despite the high percentages of female graduates, only a small number are making it to the top level.

EXECUTIVE COMMITTEES (%) 15 12 11 9 9 5 5 3 2 1

Singapore Australia Hong Kong China Taiwan Malaysia Indonesia India South Korea Japan





6% 6% 7%

9% 8%


LOSSES ALONG THE CORPORATE PIPELINE % WOMEN 60 55 50 45 40 35 30 25 20 15 10 5 0

KEY: China Singapore Malaysia Hong Kong




Entry-level professionals

Mid-to-senior management

Executive committee



03/08/2012 12:45


With risk, control and compliance becoming increasingly important in today’s global marketplace, Ernst & Young’s survey of 695 chief audit executives and C-suite executives in The Future of Internal Audit is Now reveals that 80% of organisations acknowledge that their internal audit function has room for improvement.












Regulatory Strategic







For the second year running, Switzerland, Sweden and Singapore are leading the way in overall innovation performance, according to the Global Innovation Index 2012 (GII). Published by INSEAD and the World Intellectual Property Organization, the index ranks 141 countries and economies based on their innovation capabilities and results.

% 5 6

Centralised: in one location

% 16

Decentralised: by business unit Hybrid structure


The survey suggests that internal audit will continue to focus on a mix of business and IT reviews, with an increased emphasis on strategic and operational risks. Internal audit risk assessments, regulatory requirements and enterprise risk assessments remain the top three drivers of the audit plan.

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There is no one-size-fits-all structure for internal audit, the survey also found. While almost half of respondents described functions that were centralised, the remainder worked under other models. Ultimately, says the report, structure must reflect organisational needs.


Almost two-thirds (65%) of mining companies surveyed by Mazars are working towards compliance with the UN’s 31 Guiding Principles on Business and Human Rights, adopted last year. Further, 94% of respondents agreed that mining firms should be responsible for compliance within both their own organisations and among contractors.

02/08/2012 10:59


News round-up


A serious rift has opened between the International Accounting Standards Board and the US Securities and Exchange Commission following the publication of the SEC’s staff report on implementation of International Financial Reporting Standards (IFRS). The report argued in favour of the continued reliance on national standard-setting. It pointed out that there remain gaps in coverage with IFRS. The report added that most participants in US capital markets did not support the outright adoption of IFRS. Michel Prada, chairman of the Trustees of the IFRS Foundation, said he regretted the absence in the report of an action plan for IFRS adoption.

AFRICA URGED TO EMBRACE PPPs Public-private partnerships (PPPs) should be at the forefront of economic development in Africa, former African Development Bank (ADB) president John Agyekum Kufuor has argued. ‘The opportunities that would issue from the institutionalisation and practice of the concept of public-private partnerships as the cornerstone of

Africa’s development will be legendary,’ he said. ‘The continent abounds in practically all the raw materials required for the sustained industrial, agrarian and economic transformation of its peoples.’ He called on the ADB to work with the private sector to enable PPPs to develop, having in the past worked almost exclusively with governments and public bodies.


US state governments have manipulated their accounts to mask the size of their fiscal deficits, according to an independent analysis of California, New York, New Jersey, Texas, Illinois and Virginia conducted by former Federal Reserve chairman Paul Volcker and former New York lieutenant governor Richard Ravitch. States entered into contracts designed to misrepresent their financial position, held back pension fund contributions, and allowed infrastructure to decay, claimed the report. Accounting standards just adopted by the US Government Accounting Standards Board are expected to increase states’ pension deficits.


The outline framework for integrated reporting has been published by the International Integrated Reporting Council. A prototype framework will be released before the end of 2012, with a draft framework circulated for comment by the middle of next year. Paul Druckman, IIRC chief executive officer, said: ‘Integrated reporting is a market-led initiative, driven by business and investor needs to gain greater insights into how a company’s strategy creates and preserves value over the short, medium and long term. “Integration”, embedding valuerelevant financial and non-financial information into strategic decisionmaking and a company’s reporting cycle, is gaining momentum corporate reporting globally.’ It is intended to elicit from organisations information relating to their strategies, governance and performance and prospects.

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EURO GUARANTEES ‘TOO COSTLY’ The Dutch government has been warned by the country’s audit office that its financial guarantees stand at €465bn – much of it issued on the debt of other eurozone states. Guarantees have also been issued on credit arrangements for the country’s exporters, on homeowners’ mortgages and for savings accounts. The auditors argue there is a risk to state finances as guarantees represent over 75% of national income, up from 42% five years ago. The audit office said the Dutch parliament was not being given regular updates on the risk exposure.

CHINA PLEDGES $20BN TO AFRICA China is to lend African governments US$20bn over the next three years to invest in infrastructure and agriculture, President Hu Jintao has announced. This represents a doubling of previous offers of China’s support to Africa. South Africa’s president Jacob Zuma said: ‘We are pleased that in our relationship with China, we are equals and that agreements entered into are for mutual gain.’ But he added that the experience of European engagement with Africa demonstrated that China’s support was not sustainable in its current form, based on Africa’s supply of minerals and commodities to China.


Nearly half of insurers are keen to see global convergence of accounting rules for insurance contracts based on the International Accounting Standards Board standards, according to a survey conducted for Deloitte by the Economist Intelligence Unit. The Financial Accounting Standards Board has promised radical reform of US GAAP relating to insurance accounting since 2008. Respondents complained about the uncertainty regarding the timing of any globally accepted standard, which is affecting investment in IT systems and investors’ perceptions of insurers’ profitability. Rio+20: corporate reporting moves, page 20


The European Commission has failed to produce evidence to justify its

03/08/2012 15:33




Ramona Dzinkowski can’t believe the SEC wants to conduct ‘additional analysis…concerning the incorporation of IFRS into the financial reporting system for US issuers’. Not even SOX 404 got this much attention!


for the external auditor relationship. ‘At this anniversary, it is important to acknowledge one of the greatest successes of Sarbanes-Oxley: the alignment of the interests of shareholders with independent audit committees, audit oversight authorities and auditors,’ said Steve Howe, EY’s Americas managing partner.


The Sarbanes-Oxley Act dramatically improved audit quality, financial reporting and corporate governance, said Ernst & Young in a review of the first 10 years of Sarbox. The act put in place the Public Company Accounting Oversight Board (PCAOB) and required public companies to appoint audit committees responsible

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global revenues last year by 10% and 8% respectively. According to the Accountancy Age Top 35 league table, PwC’s revenues in the year ending June 2011 grew to $29.2bn, whereas Deloitte’s rose to $28.8bn. Ernst & Young was third, with revenues of $22.9bn, with KPMG just behind at $22.7bn.

The singer Rihanna and her tour agency business Tourihanna are suing US accounting firm Berdon LLP for losses of tens of millions of pounds. Rihanna claims the firm took 22% of her tour earnings under a contract that exploited her youth and naivety. She claims that arrangements such as the firm taking a percentage of tour earnings were not standard practice and earned them more than three times her own share. The lawsuit claims that Tourihanna ‘suffered significant losses due to the defendants’ financial mismanagement and other acts and omissions’. It also claims that the firm mishandled her tax liabilities and failed to properly monitor her song royalties. Ronald Storch, a partner at the New York and Long Island-based Berdon firm, said: ‘This lawsuit is meritless and we will staunchly defend ourselves against it.’

The US Financial Accounting Standards Board has proposed enhancements to increase the transparency of an entity’s exposure to interest rate risk relating to financial instruments. The proposals relate to concerns expressed about existing disclosures. Proposed standards changes relate specifically to liquidity risk, as well as interest rate risk, including whether an entity will encounter difficulty in meeting its financial obligations. The FASB said these risks were highlighted prominently during the financial crisis and continue to be relevant.


into ing them ht in s US GAAP Amer around many in some ica or – or were hopin at least fashion Unfor g that’s tunat and ely, thefor. what Excha repor nge Comm final t direc didn’t really ittee Securities tion to the provid (SEC) audit and e any waitin on the stand g corpo rate/ more subject; ard settin g comm nor did documthan what it say unity was ented anyth of consu alrea in ing ltatio the many dy and ns, interi publi round While c debat m repor s es. grant last ts ed, it of a long was do’ on list of the the SEC’s and ‘thing not an officiainitially Work Plan,s to per se, l policy intended as posit I of intere think ion sted the majo there rity obser , vers were including lookin myse out more g for lf, of the than just something a summ many debate. ary In least were hopin fact, an anno g for aroun uncem at d expec when we ent t its final the SEC could if, how policy might make state ment incor and when porat of IFRS In addit ed into will US GAAP be alone ion, I abou in being think I’m . a t not Introd the wordi little conce ng uctor rned Repo y Note of the rt where to that: the SECthe Final ‘Altho is const ugh the Staffstates contr ructive Repo ibutio and an impo rt set out n, the quest to answ Work Plan rtant er ion of IFRS wheth the funda did not is in the best er trans mental intere itioning to st of the US



The US Securities and Exchange Commission’s chief accountant, James L Kroeker, has left to work in the private sector. Kroeker had been responsible for the SEC’s project examining US GAAP convergence with International Financial Reporting Standards and wrote a recent paper underlining the outstanding difficulties in convergence. Paul Beswick, a former Ernst & Young partner, has been appointed acting chief accountant.

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proposals for audit reform, according to the European Parliament’s impact assessment unit. It said adequate arguments had not been presented for the mandatory rotation of auditors or the separation of audit and non-audit services to public interest entities, and proof had not been provided that restricted audit competition had led to impaired audit quality or higher costs. The Commission may now need to present a stronger case if Parliament’s legal affairs committee is to endorse the proposal.

Com ment



Dubai’s Security and Commodities Authority has continued with its reform of capital markets by liberalising the regulation of investment funds. ‘It is part of the SCA’s endeavour to issue new investment products and diversify the investment tools available to traders in the markets,’ said its chief executive Abdullah Al Turifi. ‘It will boost the investment climate in the local markets and help attract new investments and liquidity.’


PwC is again the world’s largest audit firm, taking the top spot from Deloitte after the two firms grew


KPMG in the US has appointed David Turner as chief financial officer, succeeding Larry Laughman. Turner has spent most of his career at Thomson Reuters and its predecessor companies, Thomson Corporation and Reuters. He was executive vice president at Thomson Reuters, having also been its CFO. ‘David is a proven leader with a consistent track record of driving business and financial operations, and building organic and inorganic revenue growth, while simultaneously driving significant margin improvement,’ said John Veihmeyer, KPMG chairman and CEO. Compiled by Paul Gosling, journalist

03/08/2012 15:35



Irish prime minister Enda Kenny talks to Accounting and Business about reputation, regulation and Ireland’s return to the financial markets – as well as the need for ethics in business


Ireland went from being the successful poster boy of Europe to being one of its most troubled economies. How have you gone about repairing Ireland’s reputation? A Last year, when my government came into office, I made it one of our top priorities to restore the good name of Ireland as a place of business and of investment. In this regard, the progress already made by Ireland in repairing our damaged economy is well recognised internationally. Visits to and from US president Barack Obama and Chinese vice president Xi Jinping have highlighted world leaders’ renewed faith in Ireland. This is reflected in significant progress in returning our economy to growth and in reforming our banking system. Step by step, we are bringing our public finances under control through our fiscal consolidation programme. At the same time, my government has brought a strong and determined focus to the agenda for growth and jobs. As a result, Ireland’s recent performance has separated us from many other European economies. We’re expecting a second year of economic growth, driven by exports. Our balance of payments is now positive. Employment grew during the last quarter in 2011, the first quarterly growth since 2007. Since my election, I have been conveying a clear message in all my international engagements: that now is the time to invest in – and benefit from – Ireland’s recovery. The commitment from the European heads of state and government

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Read my lips: in 2011, Kenny led his party to a decisive victory in the Irish general election, having promised that a Fine Gael government would not raise income tax at June’s EU Summit to break the negative link between the sovereign and the banks is having a positive impact on the market’s perception of Ireland. While the recent bond auction is an important step, the true indicator of Ireland’s success will be our full emergence from the bailout programme and the return to the international markets at sustainable rates. It is clear from that auction that investors are reacting favourably to the commitment by the heads of state and government to break the

negative link, to examine the Irish programme and that similar cases will be treated equally. The Irish economy is growing again, our public finances are under control and the government is using its strong political mandate to build upon this to deliver long-term, sustainable growth. Q Much of the collapse of the Irish economy can be traced to poor banking decisions and poor regulation. How has your government addressed these related issues?

03/08/2012 12:09


Seen here during his visit to China with the country’s premier Wen Jiaobao, Kenny promoted Ireland as a supplier of worldclass products and services and a viable location for Chinese investment

‘AN ETHICAL APPROACH TO DOING BUSINESS… IS NOT LIMITED TO FINANCIAL SERVICES, BUT SHOULD BE THE NORM ACROSS THE CORPORATE WORLD’ A The regulatory failures of the financial crisis have been the subject of extensive and objective analysis. A number of reports and investigations point out the problems to be addressed. Poor supervision, an overly deferential attitude by regulators, poor assessment of risks and a lack of follow-through on enforcement – all played a part in the financial crisis. New proposed legislation draws on the lessons from that experience. A new Central Bank Bill involves a careful overhaul of the statutory basis for the Central Bank’s regulatory powers. The bill brings clarity to the Central Bank’s ability to set requirements. It provides for good information flows and objective analysis to support regulatory supervision. Where things go off course, there is provision for prudential intervention and corrective action. Where the law is broken, there are effective and dissuasive, yet proportionate, sanctions. There are also provisions dealing with restitution and costs after the fact. There is a public consultation process currently open on further proposals for inclusion in the bill. Of course, legislation alone will not be enough to address the failures of the past. In recent years, the level of regulatory activity has intensified with

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increases in staff numbers and skill levels at the Central Bank. On-site inspections and review meetings have also increased. Q What lessons do you think finance professionals need to learn from the current economic difficulties in Ireland and beyond? A Everyone involved in financial services needs to consider how best to enhance its risk management function – there is a real need to monitor and plan for the worst-case scenario. The crisis made clear that, without contingency planning, organisations – both government and private sector – are not in a position to act quickly and effectively to address problems. An important change – which is being looked at, for example, in the context of remuneration – is to ensure that the time-horizon for decisions is sufficiently long. The crisis has shown us that short-term results can be deceiving in terms of an organisation’s actual financial position. A final point to consider is how company accounts can provide the best information to investors and regulators. The Central Bank here has published guidelines for the covered banks to follow in the development and application of their impairment provisioning frameworks.

Q Is there a need for greater attention to professional ethics, especially in the financial services arena? A It is important that all professionals act in an ethically appropriate manner. It is clear that a focus on profit to the exclusion of all else has not led to positive results for either individual companies or for the economy as a whole. The fitness and probity regime being rolled out by the Central Bank for the financial sector will seek to address some of these issues. A broader focus is required, which should of course include an ethical approach to doing business. This is not just limited to financial services, but should be the norm across the corporate world. Q Poor financial planning and excessively optimistic outlooks by major financial institutions played a part in the country’s current difficulties. How can that be prevented from happening again? A We can certainly point to a combination of factors that were responsible. First, it is now very apparent to all that the long period of financial prosperity enjoyed by Ireland lulled bank management into a false sense of security. This was not just a failing seen in Ireland of course – managers of large financial institutions all over the world generally forgot how to price risk effectively. Second, banks placed overreliance on their complex financial models and drew excessive comfort from what these were saying

03/08/2012 12:10


while common sense took a back seat. Third, we now know that there were mistakes made in the accounting and regulatory areas which prompted and enabled banks to hold in reserve less in the way of provisions and capital. Significant changes in the way banks are run and regulated have been implemented both in Ireland and across Europe and more are on the way to ensure that these failings are not repeated. For instance, more conservative provisioning guidelines

Q Some European countries are now starting to reduce their corporation tax rate to bring it closer to the Irish rate. Do you see this trend as a threat to foreign direct investment (FDI) in Ireland in the future? A We have found that the one thing the business community prizes above all is certainty. Ireland’s long-term commitment to the 12.5% rate, which has broad political consensus in Ireland as well as general public support, means that this rate is now

‘IRELAND’S LONG-TERM COMMITMENT TO THE 12.5% RATE… MEANS IT IS NOW SEEN AS PART OF “BRAND IRELAND” ACROSS THE BUSINESS WORLD’ have been implemented by our Central Bank while, at a European level, banks will no longer be able to ‘game’ their capital requirements through manipulating the value of their riskweighted assets as a new simpler leverage metric is in prospect. Q Has your government taken any significant initiatives to make the Irish economy more competitive? A It’s been one of our top priorities since taking office. There have been some recent improvements in competitiveness worth pointing out. For example, our unit labour costs have reduced, the productivity of the Irish labour force is over one-third higher than the EU average, our consumer prices fell in 2009–10 and have only grown at a comparatively low rate in 2011–12, and we have seen our energy costs coming more in line with EU average costs. As part of the Action Plan for Jobs 2012, the government is looking at the costs it can influence, either directly in charges imposed on businesses, or indirectly in dealing with bureaucracy and other administrative burdens. This includes legislating to reform our wage-setting mechanisms; freezing or reducing charges levied by government on business; and promoting supports to business for energy-efficiency and cost-reduction measures.

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regarded as part of ‘brand Ireland’ throughout the business world. The competitive rate is underpinned by transparent and easy-to-use corporation tax rules. However, the 12.5% rate is only one part of a wider policy mix in the taxation area, such as a rapidly expanding tax treaty network, R&D supports, an intellectual property tax regime, a preferential personal tax regime for foreign executives temporarily seconded to Ireland as part of an FDI venture, a holding company regime, and an efficient tax administration system. Q Despite Ireland’s economic difficulties, the pipeline of new FDI projects seems to be strong. How do you account for this success? A Last year saw a strong performance in the levels of FDI won by Ireland, with over 13,000 new jobs created across the 148 investments secured. Government policy is to build on the strength of our existing markets and diversify into new ones. Minister-led trade missions are an integral part of this process and work to expand Ireland’s exports to existing and new markets abroad. In all, 19 minister-led trade missions are planned this year to destinations such as China, the US, India, the UK, Russia and France. On a global scale, Ireland scores extremely well in many of the key

areas of importance to investors. For example, the IMD World Competitiveness Yearbook 2011 ranks Ireland first in the world for corporate taxes, first for business legislation for foreign investors and first for the availability of skilled labour. Q Earlier this year, the vice president of China, Xi Jinping, visited Ireland. Are you confident this evolving relationship will yield economic benefits for Ireland? A My visit to China in March, coming so soon after the successful visit to Ireland of Xi Jinping, was a great opportunity to take our relationship with China to a new level. My key aim was to develop stronger relations with China at the highest political level and to promote Ireland both as a source of world-class products and services and as a location for Chinese investment. I highlighted Ireland’s potential as a gateway to the European market of over 500 million people and our many strengths, such as our young, well-educated workforce and our strong capacity for entrepreneurship and innovation. I also stressed the potential for investment and economic cooperation in key sectors such as education, financial services, culture, tourism, life sciences, cleantech and agri food. A number of significant memorandums of understanding were signed during both visits and I witnessed the signing of more than €35m worth of contracts and commitments while in China. The culmination of my visit was the conclusion of a strategic partnership agreement, which sets out a framework to ensure mutually beneficial cooperation between Ireland and China in a number of important trade and investment areas. Q You recently launched a scheme called Succeed in Ireland aimed at attracting smaller and emerging firms to Ireland. How will it work? A Succeed in Ireland is a programme which provides direct incentives to members of the Irish diaspora and others across the world to create jobs in Ireland. The aim is to

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British prime minister David Cameron (left) greets Kenny as the leaders held talks on trade and investment links

target international companies and businesspeople, who would otherwise not be reached by the state enterprise agencies, to consider locating economic activity in Ireland, thereby creating new employment opportunities. The initiative will incentivise people around the world to be our eyes and ears on the global stage and help deliver new jobs and investment. This is an innovative scheme that offers a new channel to reach thousands of small-to-medium enterprises and spread the word about Ireland’s strong reputation as a location for business. You can read more about it at www. Q Has the government any specific plans for the shared services sector, which is seen by many as a major success story for Ireland? A In July 2011, I launched the strategy for the international financial services industry in Ireland 2011–16. The strategy recognises that the future growth of the International Financial Services Centre (IFSC) will depend to a significant extent on non-balance-sheet sources, and envisages that Ireland will prioritise its growth as a global provider of vital shared services for international firms. Across areas including technical, legal, accounting, advisory,

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The longest-serving member of the Irish parliament, the Dáil, since being elected in 1975 at the age of 24, Enda Kenny has led his party, Fine Gael, since 2002. An Irish Gaelic speaker from the west of the country, he became prime minister, or taoiseach, in 2011. He renegotiated the country’s EU bailout in 2011, describing it as ‘a bad deal for Ireland and a bad deal for Europe’, reducing the interest rate by 2% and extending the repayment period.

administration and asset management, firms can build on existing expertise in the servicing of both external clients and parent groups to promote Ireland as a centre of excellence in this arena. Ireland consistently ranks among the world’s leading locations for shared services for a number of reasons: the availability of highly skilled, multilingual employees across a range of disciplines, such as accounting, technology and healthcare; the competitive operating environment that exists in Ireland; the mature infrastructure that Ireland offers in technology, roads, air access and utilities; low corporate tax, which naturally

* * * *


supports the development of strategic centralised activities in Ireland; and the track record of major multinationals in Ireland that have, over the past 20 years, built a cluster of multifunctional, multijurisdictional and multilingual activities, providing comfort that a new shared services activity has a high probability of success.

Q Next year, Ireland takes on the presidency of the European Union. What will be your priorities for this period? A Growth, jobs and enterprise is what Ireland and Europe need to focus on. This will be the seventh occasion that Ireland has held the presidency, which will coincide with the 40th anniversary of Ireland’s accession to the European Union in 1973. The Irish government wishes to focus its presidency on advancing issues that will benefit all citizens of the EU. In this, our main objective will be to ensure that the presidency contributes to addressing the key challenge facing the EU today, by promoting sustainable and inclusive growth and jobs. Issues relating to economic governance, fiscal consolidation and financial regulation are also likely to figure prominently on the Irish EU agenda.

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CLIFF DIVING Cliff diving is a pastime usually reserved for daredevils. But the US, the world’s largest economy, is on track to do the fiscal equivalent as it braces itself for next year’s tax hike


t the stroke of midnight this coming New Year’s Eve, as Americans toast the new year, a whole series of tax cuts dating back over a decade will expire. Unless Congress changes course beforehand, this will mean a stomachchurning plunge in take-home wages. An American family with an income of $70,000 a year, for example, will see an additional $4,000 disappear from their pay cheques – it will have the same effect on the family’s earnings as a 6% salary cut would. And that’s not all. A series of pre-arranged spending reductions will also kick in, sucking money out of the economy at the worse possible moment. Combine the tax hike and spending cuts and you get a roughly $600bn drop in the nation’s federal deficit for 2013. Small wonder that many Americans are feeling a sense of vertigo as they contemplate next year. Although it is unlikely that careerminded lawmakers will allow the US to jump over this ‘fiscal cliff’, the unfortunate coincidence is a highly dangerous moment. If politicians postpone action to reduce the country’s $1 trillion national deficit, markets and rating agencies may conclude that the US is incapable of controlling its borrowing. If confidence does falter, that may eventually lead to higher borrowing costs – the curse that is blighting so many European countries. Only a sweeping fiscal deal that curbs the long-

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term rise of debt without harming the fragile economy in the short term can ensure that the US lands safely on its feet. Sadly, most Washington insiders consider the chances of this desirable outcome vanishingly small. To judge from the US Treasury bond market, the US has no fiscal problem at all. Investors are willing to lend Uncle Sam money for 10 years for just 1.5% as of mid-July – that’s the lowest rate in about 60 years. This, however, gives a slightly misleading impression of the level of international confidence in the country’s fiscal strength. A large share of US government bonds are sold to foreign central banks whose main reason for buying them is to prevent a rise in their own national currencies from hurting exporters. The turmoil in the eurozone has also been driving investors to the relative safety of US Treasuries. ‘Still, the very low yield on US Treasuries should not be seen as a positive verdict by the market on America’s fiscal situation,’ says Marc Chandler, a market strategist at Brown Brothers in New York. ‘In fact, there are very serious reasons to worry.’ In aggregate, the country’s fiscal plight actually looks slightly worse than that of the eurozone. Net government debt is 80% of national income, according to the latest data from the International Monetary Fund. That’s up by half over the past four years and is larger than the 68% of gross domestic

product (GDP) debt load owed by the euro nations (although the main problem for the eurozone is that the debt is not evenly distributed between nations). What’s more, the US is digging itself into a hole faster than Europe. The International Monetary Fund believes that the US government will borrow a thundering 8% of national income this year. That makes the euro nations look positively thrifty, with their borrowing rate of just 3.2%. And that is not all that is going wrong. Even before the 2008 meltdown economists were worried about the long-term fiscal outlook for the US. The share of the population that is over 65 is on track to climb from 13% to almost 20% over the coming two decades. ‘The ageing population is already starting to take a fiscal toll as fewer Americans pay taxes and work while more draw benefits,’ says Roberton Williams, a fiscal expert at Washington’s Tax Policy Center. ‘This was always going to be a huge struggle. But we are entering this fiscal battle in truly awful condition.’ Given this backdrop, a burst of higher taxes and lower spending – exactly what the fiscal cliff entails – might be just what is needed. The problem is that the changes would be far too much, far too soon, says Diane Rogers, chief economist at the Concord Coalition, a thinktank founded by several US senators to promote fiscal responsibility. ‘This dive in the

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government’s contribution to the economy would very likely plunge the US back into recession,’ she says. She is not alone in thinking so. The Congressional Budget Office, a nonpartisan research body that supports lawmakers, has estimated that if fiscal policy is allowed to go on auto-pilot the US economy will contract by 1.3% in the first six months of 2013, rather caption than growing style modestly.

‘TAXES WILL EVENTUALLY NEED TO RISE. WE NEED TO GET USED TO THE IDEA THAT, UNLIKE DIAMONDS, TAX CUTS ARE NOT FOREVER’ No compromise on campaign So what are US politicians likely to do to avoid the fiscal cliff? Most experts have given up on any action ahead of November’s presidential and Congressional elections. ‘Neither party will want to compromise at all until they are safely back in office,’ says Chris Edwards, head of fiscal research at the libertarian Cato Institute in Washington. Several months of fiscal limbo are expected. What follows will partly depend on the outcome of the elections. But the deadlock may persist even after the race is decided. Whether Barack Obama or Mitt Romney take the White House, neither is likely to secure the

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super majority in Congress that would prevent the opposition blocking serious action to tackle the deficit. But further procrastination will merely put off the day of reckoning by another year or two as the debt keeps piling up. The Congressional Budget Office believes that another decade of procrastination will increase net federal debt by 25%.

The downsides of inaction Even in the short term, there would be big risks in doing nothing. ‘America’s credibility in the markets and its rating could be under threat,’ says Edwards. Back in August 2011 when credit umpire Standard & Poor’s stripped the US of its coveted triple-A rating, it complained that ‘political brinkmanship’ over tax and spending had made the nation’s ability to manage its finances ‘less stable, less effective and less predictable’. These criticisms would surely be underlined if the US government once again failed to take decisive steps, although it’s worth remembering that the US did not suffer too greatly from the last downgrade and its borrowing costs actually fell. Sebastian Mallaby, a fellow at the Council on Foreign Relations in New York and author of More Money Than God: Hedge Funds and the Making of a New Elite, believes this time it could be different. Following this downgrade or possibly the next one, bondholders may start to insist on higher interest rates on Treasuries, he warns. That would make servicing the debt even more onerous for future generations. Ultimately the US fiscal problem is a political one. The country has grown accustomed to an extremely low level of taxation; federal tax revenues have been around 15% of GDP over recent years, the lowest level since the 1950s. That’s partly due to economic weakness but also the culmination of a decade of tax cuts. ‘Taxes will eventually need to rise,’ says Williams. ‘We need to get used to

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Tax and mend: President Obama’s new healthcare tax could raise $22bn in 2013

1 The biggest single rock in the fiscal cliff is the expiring Bush tax cuts. Introduced in 2001 and 2003 at the urging of the then president, George W Bush, these were supposed to expire in 2010 but were given a two-year stay of execution. This lifeline runs out at the end of this year. Letting the cuts expire should raise tax revenue by $166bn in 2013. 2 The second largest element is the payroll tax cut proposed by President Obama. This reduced contributions to the state pension fund from 6.2% of pay to 4.2%. The measure was intended to be temporary. Allowing the tax to revert to its original level will bring in $124bn next year. 3 The alternative minimum tax was originally put in place in 1969 to ensure that the tax-savvy ultra-rich paid at least some income tax. It has generally been ineffective at doing so, but since the level at which the tax kicks in was not linked to inflation it has snared ever more middle-income Americans. If the tax remains as it is, it will raise an extra $118bn in 2013. 4 The odd man out is Obama’s healthcare tax because it is a new tax rather than an old one about to expire. The president lobbied for a 3.8% extra tax on the investment income of high earners – those bringing in over $200,000 a year. The move should raise an estimated $22bn in 2013 – a fraction of what the other changes will rake in. 5 In an effort to create pressure for fiscal prudence, in 2011 Congress enacted a series of mandatory government spending cuts. These were to come into effect if lawmakers failed to reach a broader accord on the budget. Since no budget deal was reached, the spending cuts will start to bite in 2013 unless action comes soon. The cuts would amount to $135bn in 2013. This is not a fully comprehensive list but it accounts for the main items of the tax increases of $494bn and the spending cuts of $135bn.

the idea that, unlike diamonds, tax cuts are not forever.’ In the near term, the US could radically reduce the risk of a fiscal crisis by hammering out a deal on pension and health spending. ‘If bond investors could be reassured that the longer-term problems were being tackled, there would be less danger they would object to a bit more short-term procrastination on taxes,’ says Rogers. This is the solution that most commentators, including the

International Monetary Fund and the Organization for Economic Cooperation and Development, recommend. Sadly, striking a deal on these lines would demand a spirit of political compromise that seems lacking. But unless a compromise can be reached, there will be a mounting risk that the next great shock to the world economy will be a US fiscal crisis. Christopher Alkan, journalist based in New York

01/08/2012 10:52

ACCA’s Accounting for the future is a worldwide event exploring the role finance professionals will play in building a stronger and sustainable global economy. ACCA champions the connected accountant and over five days we will harness the latest technology to bring together finance professionals from around the world to share and learn from their peers. Our experts will share with you the latest insights on how businesses and the corporate sector need to adapt to meet the future needs of stakeholders, regulators, the economy and the environment.



With the implementation of Rio+20’s goals on sustainability reporting being left largely to individual governments, the corporate world is rising to the challenge


he goal of making sustainability reporting a norm for companies worldwide was boosted by an agreement forged at the United Nations Conference on Sustainable Development (Rio+20) in June. But ultimately, national governments will remain responsible for this key policy area. The investor-led Corporate Sustainability Reporting Coalition (CSRC) led the charge for a deal at the Rio de Janeiro meeting that included solid international commitments on expanding sustainability reporting, and some green activists will doubtless have been disappointed by the result. That was encapsulated in paragraph 47 of the final political outcome document of the conference, called ‘The Future We Want’. Written in what UN officials in Rio called ‘consensus language’, the paragraph states: ‘We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information

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into their reporting cycle. We encourage industry, interested governments as well as relevant stakeholders with the support of the UN system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account the experiences of already existing frameworks, and paying particular attention to the needs of developing countries, including for capacity building.’ It is worth quoting in full, because even though it’s a call for action, the paragraph does not commit UN member states to anything specific, much less a convention that could include binding commitments under international law to impose ‘report-orexplain’ sustainability reporting as an annual requirement for all public and large global corporations. And while this was exactly what the CSRC asked from the world government delegations meeting in Rio, supporters of the idea think that even getting ‘sustainability reporting’ written into the agreement in this way was a success, especially as its inclusion was subject to tough negotiations.

Prime paragraph ‘Who would have thought, a few years ago, that a paragraph about reporting would be one of the most debated paragraphs in such an important summit on the future of our planet and of our societies?’ said Ernst Ligteringen, chief executive of the Global Reporting Initiative (GRI), during a side event of the main political conference in Rio. According to Ligteringen, paragraph 47 was the most debated clause after the issue of Sustainable Development Goals (SDG), which will replace the current Millennium Development Goals (MDG) in 2015. ‘These issues do come together: issues about environmental impact, social impact, economic impact, the role of business, the role of governments and how this all affects our future,’ explained Ligteringen. Rachel Jackson, ACCA’s head of sustainability, comments: ‘While the announcement does not go as far as ACCA would have liked, we are encouraged that Rio+20 has endorsed the need for big business to integrate sustainability into their reporting cycles.’

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‘The distinct and credible reporting of ESGs – environmental, social and governance disclosures – have an important part to play in encouraging a positive approach to sustainable development by business and the adoption of long-term and socially responsible investment strategies by investors,’ said Martin Turner, ACCA’s vice president, at the Sustainable Stock Exchanges Event in Rio on 18 June. Turner’s comments were aired at a session which ACCA co-sponsored with Aviva Investors, organised ahead of the full Rio+20 conference. ‘ACCA believes there is a positive and vital role for accountants to play in ensuring that ESGs provide meaningful information to stakeholders, with the aim of encouraging a more holistic approach to risk management by reporting companies,’ he said. ACCA recently published a paper which looks at the possible changes to the ‘zero draft’. The paper also includes a series of expert views from its Global Forum for Sustainability members. The forum was established in 2011 to bring together leading thinking on sustainability and the role of accountants. View Making a Difference at Rio+20 at

Shortly after the final political outcome document was known in Rio, the governments of Denmark, France, South Africa and Brazil coopted the GRI and the United Nations Environment Programme (UNEP) into a group, ‘Friends of Paragraph 47’. The group, which promised to be inclusive and to invite more governments and experts to join in, will look into best policy and practice for sustainability reporting with the aim of building a roadmap of actions to be taken as a result of its text. The ‘Friends’ promised to present a plan to the international community in the next

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few months following Rio+20. ‘I am delighted that Denmark and France and the others have decided to form the “Friends” to take forward governmental support for corporate sustainability reporting,’ said UK Labour Party MEP Richard Howitt, who, as a member of the European Parliament, has dealt with corporate sustainability legislation in Brussels. He was speaking during a side event organised by the CSRC in Rio, where he noted that the European Commission is expected later this year to propose legislation on non-financial reporting by companies in the European Union.

Sink or swim? Activists used a range of means to get their messages across at Rio+20, including (from far left) creating giant fish made from plastic bottles, campaigning on agriculture and marching against ‘life commodification’ Although he recognised the limits of paragraph 47, Howitt underlined its importance in involving governments and businesses and committing the UN to a process to take sustainability reporting further based on currently existing agreements. ‘We need effective public policy on this,’ said GRI’s Ligteringen. ‘We need to see how we are going to convince policymakers to make corporate sustainability reporting a common practice.’ The idea does have some powerful backers. In February the UK’s environment secretary Caroline Spelman supported the CSRC’s call as one of the priorities of the British government at Rio+20. At Rio she noted the need for good dialogue on what governments can do to follow up on paragraph 47. ‘We can talk to other governments and ask them how they want to approach it and then try to create a norm,’ she stated. ‘You have to very carefully consider what kind of norm you want; it’s all too easy to jump to a standard that is too low or too

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high. Governments make the mistake all the time, thinking they got it right, and not actually testing waters with the law and regulations,’ she explained.

Corporate action Launched during the Private Sector Forum of the UN General Assembly in September 2011, the CSRC’s specific purpose was to obtain an agreement in Rio for a clear process to be put in place under the UN General Assembly that would commit governments to ask companies registered in their countries to include sustainability reporting in their annual reports or to explain why they would not. Led by the institutional fund management group Aviva Investors, part of Aviva plc, the CSRC united about 70 organisations representing investors with assets under management of approximately US$2 trillion, but also financial institutions such as index FTSE, professional accountancy bodies such as ACCA, non-governmental organisations (NGOs) including the GRI, the Stakeholder Forum and the Worldwide Fund for Nature (WWF) and UN bodies such as the UN Environment Programme (UNEP) Finance Initiative and the UN Conference on Trade and Development (UNCTAD). ‘We all know the benefits (of corporate sustainability reporting): empowering investors and consumers with the information they need to make the right choices, putting sustainability at the heart of business decisions and looking after the bottom line, with financial, social and environmental increasingly intertwined, rather like DNA,’ said Spelman during the CSRC side event in Rio. According to a document circulated at the Rio+20 conference, Aviva Investors made the bold move of asking for corporate sustainability reporting at global level. Robust corporate sustainability reporting would, said the report, help the capital markets go beyond shortterm decisions based on thin information. ‘To include sustainability in our investment decisions, we need

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information about the sustainability of companies in which we invest. Today, while investors know about a company’s profits and cashflows, they know little about a company’s sustainability,’ read the document. ‘Paragraph 47 recognises that corporate sustainability reporting is a policy to be advanced, that it needs to come to scale and that we need pace behind it,’ Ligteringen told Accounting and Business. He believes that a standard in sustainability reporting is fairly near, since a global move towards this kind of voluntary reporting started at the UN sustainable development conference in Johannesburg in 2002. GRI’s fourth generation of reporting guidelines is expected to be released in May 2013. According to Ligteringen, they are being made more robust so they come as close as possible to a standard in sustainability reporting. However, from Ligteringen’s standpoint, sustainability reporting is not enough to inform investors on the main value drivers of a company. ‘Sustainability reporting talks about the licence to operate, about the effects a company has on the environment and on the society; it helps a company to integrate this; but it is not an instrument that helps a company make an assessment on the main value drivers that informs investors,’ explained Ligteringen. For that to happen, ‘sustainability information needs to interface with other information flows that companies have, to come to an integrated thinking to be able to tell how the company is going to generate value in a different, sustainable economy’. That is where ‘integrated reporting’ comes in which, according to Ligteringen, takes holistic company

Future focus: (Above) Brazilian President Dilma Rousseff delivers a speech during Rio+20’s closing ceremony reporting a step further. Sustainability reporting is just a chapter of an integrated corporate report. But according to the International Integrated Reporting Council’s (IIRC) CEO Paul Druckman, who spoke to Accounting and Business in Rio, integrated reporting uses existing systems, such as greenhouse gas emissions reporting schemes and the GRI guidelines, to describe the strategy of a company. ‘We are sitting over the top of that to understand what the business is trying to do over the short, medium and long term,’ said Druckman. ‘And all of that is absolutely useless if all you get is just a good story.’ While at present there is no global standard for integrated reporting, the IIRC is working on a globally accepted integrated reporting standard bringing together financial, environmental, social and governance information in a clear, concise, consistent and comparable format to be released in late 2013. Druckman considers accountants to be central in the move towards integrated reporting. But to deliver, accountants must, he says, go beyond reporting on financial and manufactured capital, which has been their traditional role, and report on the other elements: natural, social, human and intellectual capital. ‘Accountants are in the prime position,’ he explained. ‘They need to have the breadth of mind to understand it.’ Carmen Paun, journalist based in Rio de Janeiro

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Twenty years after the first Earth Summit in Rio de Janeiro asked businesses to recognise environmental management among the highest corporate priorities, and 10 years after the second Earth Summit in Johannesburg committed governments to enhance corporate environmental and social responsibility and accountability, it is clear that voluntary commitments to sustainability reporting have not delivered the goods. When Bloomberg introduced environmental, social and corporate governance (ESG) issues in 2009 within its financial data, 75% of the companies surveyed did not publish any of that information. London-based Aviva Investors concluded that this was simply not good enough and convened the Corporate Sustainability Reporting Coalition aimed at pressurising governments meeting at the third Earth Summit in Rio to agree to a ‘report or explain standard’ on sustainability data for companies registered in their territories. ‘Our coalition is collectively asking participants at Rio+20 to commit to develop a United Nations (UN) Agreement on sustainability reporting so that we, as investors, can help guide the world towards a sustainable future,’ said a document circulated by Aviva Investors in Rio. The agreement would include two elements: the first was a commitment by UN member states to develop regulations, codes or listing rules encouraging the integration of sustainability issues in the annual reports of all listed and large private companies. The second was an opt-out alternative for companies that do not want to prepare such a report, provided that they explain their decision to opt out. ‘Companies will never voluntarily internalise external costs,’ explained Paul Abberley, interim CEO of Aviva Investors, who convened the coalition. Therefore we have to structure markets in a way that forces the internalisation of externalities. You can’t do that until you can measure them and understand what they are. Only then, you can have sufficient reporting; you can understand the scale of the problem and come up with market mechanisms

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to price them right. And that is one of the benefits of reporting.’ The coalition was hoping that a process would be put in place in Rio to create a convention on corporate sustainability reporting. While that did not happen, the final outcome document of the Rio+20, ‘The Future We Want,’ encouraged large companies to include sustainability reporting in their reports and called for governments and industries to develop models for integrating sustainability reporting into the corporate reporting practice. ‘Two years ago, I wasn’t confident that we would achieve anything in Rio,’ says Abberley, but the goal was so important, ‘it was all worth all the effort.’ Even though the coalition did not get exactly what it wanted, there was a sense that the need for corporate sustainability reporting has gained momentum at the global level. ‘The thing that concerns me now is how on earth do we keep the momentum going and avoid frittering the momentum that’s been built?’ he told an audience of coalition members and supporters in Rio. ‘From Monday, it all gets a bit messier.’ It is now exploring getting involved in the UN process of defining the sustainable development goals (SDGs), which should be ready by 2015. The SDGs are expected to take over from the current Millennium Development Goals (MDGs) and be the defining UN framework until 2030. ‘It would be entirely appropriate, I suggested to the coalition, to target 2015 as the next stage,’ said Derek Osborn in Rio, board member of the Stakeholder Forum, a branch of the coalition working to advance sustainable development. With the new proposed regulation on non-financial disclosure expected to be published by the European Commission this autumn, there seems to be a momentum to advance corporate sustainability reporting in the European Union (EU), said Abberley: ‘It might well be that in coming months, we try to make some real progress in Europe, and that may well provide an example and a template of how this can work for bodies more generally.’

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Kazakhstan may be blazing a trail in central Asia, but international business has a vested interest in ensuring all of the ‘stans’ establish solid financial structures and regulations


he Arab world may be liberalising, amidst sometimes violent struggle, but the world still awaits a Central Asia spring. Five former Soviet states straddle this region – Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan and Kyrgyzstan – and all, to varying degrees, are struggling to develop internationally recognised financial reporting standards, business ethics and commercial regulation. And it would be a mistake to characterise the five so-called ‘stans’ as flyblown, distant countries of little strategic interest. All are either important sources of hydrocarbons and minerals or control territory potentially vital to delivering energy to China, Russia and the European Union. International business and government has an interest in ensuring these countries’ economies and governments operate in a legal and transparent way, yet all five have been heavily criticised by human rights

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groups, which have catalogued a lengthy list of violations. And given it is hard to ensure business probity when human rights are abused, it is maybe no surprise these countries have been criticised by international dirty money watchdogs, such as the Financial Action Task Force (FATF) and its regional counterpart, the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG).

Uphill task All of which would seem to make the business of establishing financial structures, corporate governance and raising overall standards of everyday accountancy work, such as audits and filing of accounts, something of an uphill task. Yet plenty of firms and international agencies have risen to the task, and interest in the region was highlighted this spring when the World Bank private sector arm, International Finance Corporation (IFC), began to

advise central Asian companies and banks on improving their corporate governance, strengthening operations and easing access to finance. When it comes to economic activity and the place where the West wants to do business, there is a clear front-runner: Kazakhstan, which is of sufficient strategic interest for it to secure the advisory and facilitating services of the former UK prime minister Tony Blair, who has even appeared in a state-television video praising the government’s efforts. ‘The country is the shining light of central Asia,’ says Mark Smith, managing partner of Deloitte’s regional Caspian office, based in the commercial capital Almaty. Smith believes Kazakhstan is in the process of creating a 21stcentury silk road, pointing to the construction of a rail link with western China, a special economic zone on the border with China, and the increasing transit of minerals and goods along the route. ‘Kazakhstan is essentially

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the bridge between Europe and China,’ says Smith. ‘You have large areas of industry outside oil and gas – the country is one of the few in the world to have a majority of elements in the Periodic Table. The ability for western companies to come and set up subsidiary companies here is massive.’

Educated abroad The country’s prospects were boosted by a decision 20 years ago to send many students abroad for their university education. ‘The result is that you have 20,000-30,000 bright and motivated people in their 30s who have been to half-decent universities in the West,’ says Alun Bowen, managing partner for KPMG in Kazakhstan and Central Asia. ‘They’ve been exposed to a different way of thinking.’

The country has used International Financial Reporting Standards (IFRS) for seven years, though the Soviet legacy of rubber-stamping paperwork lives on and is regarded as a daily plague for foreign and domestic businesses. ‘Chief accountants are invariably forty-something single mothers, and you can’t be sure whether they are working for you or for the government,’ says Bowen. ‘Everyone is very keen to get badges for corporate governance. Any company with a turnover of more than US$100m will be doing a decent job of their accounts and audits – they’re arguably even more compliant than in the UK, as they haven’t yet learned to push back.’ Below the surface, though, the waters can appear rather murky. An ‘attractiveness survey’ of business Above: The Soyuz TMA-05M rocket launches in July from Kazakhstan carrying passengers bound for the International Space Station Left (from left to right): National Flag Day is celebrated in Kyrgyzstan; China National Petroleum Corporation agrees to buy 10 billion cubic meters of natural gas from Uzbekistan annually; students march in Tajikistan’s independence parade; soldier stands in front of the Presidential Palace in Ashgabat, Turkmenistan

INT_F_Central_Asia.indd 25

professionals operating in the country by Ernst & Young, which employs 600 staff – 580 of them Kazakh citizens across its offices in Almaty, Astana and Atyrau – found that 50% of respondents felt the level of legal and regulatory transparency and predictability was insufficient. This was particularly so relating to inconsistency of interpretation of law and its selective application, overregulation and onerous local content requirements, perceived corruption and an insufficiently independent court system. And while 43% felt Kazakhstan’s business environment remained stable, 14% felt it was deteriorating, citing government intervention in business processes, resource protectionism, and a perceived deterioration of the rule of law and concern over the security of investments. Bowen acknowledges that corruption remains an issue, but points to measures to tackle this, such as raising civil servants’ salaries and, he says, ‘metaphorical’ public floggings. ‘It’s still a problem – Kazakhstan has big borders and corruption is mainly found in facilitation. They’re trying hard to crack down, but it’s endemic,’ says Bowen, who calculates he personally has been stopped while driving and

02/08/2012 15:11





invited – and refused – to pay CASPIAN SEA bribes on 16 occasions. Another headache is that company structures tend to be dominated by one person. ‘You have individuals running large corporations, unlike in the West where there is more shareholder involvement and far more transparency,’ says Deloitte’s Smith. ‘The motivation is slightly different, more about reaping profits. To some extent the corporate governance mentality you see in Western companies does not exist.’ However, Smith believes this environment is changing. ‘There’s an appetite to improve the corporate governance framework. Among entities of public interest we’re seeing the appointment of non-executive directors, board meetings and more corporate government oversight.’ Turkmenistan, meanwhile, has delighted headline writers around the world – if not its citizens – for many years. Its late president, Saparmurat Niyazov, constructed an extraordinary cult of personality, with days of the week, months and even meteorites named after him and his family. KPMG’s Bowen says that this surreal demagogic behaviour has now been ditched, but others remain unconvinced. ‘After the death of Niyazov, many observers placed some hope on the political succession,’ says Michael Laubsch, executive director of the analysts Eurasian Transition Group. ‘It’s clear enough now that the system hasn’t changed at all. The president is even developing the cult of personality that went with Niyazov.’ Turkmenistan is the only country in central Asia where the IFC has no presence, but it does appear to have taken some small steps to address corruption. In 2010, the FATF moved Turkmenistan from a high-risk designation to the ‘improving’ category. That said, KPMG put on hold the idea of setting up at an office in the capital Ashgabat, while PwC has also sought to obtain a licence to operate there. ‘The level of understanding of financial

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IRAN KAZAKHSTAN: President: Nursultan Nazarbayev (since independence in 1991) Capital: Astana Population: 16.5 million Corruption index: 120 (out of 182 countries, according to Transparency International) Number of listed companies: 108 GDP per capita: US$11,258 Key industries: the International Energy Agency reckons the country has around 30 billion barrels of crude oil reserves (11th on the world oil league table), 2.5 trillion cubic metres of proven gas reserves, natural resources, oil and oil products, and ferrous and non-ferrous metals, machinery, chemicals, grain, wool, meat and coal.

KYRGYZSTAN: President: Almazbek Atambaev (since 2011) Capital: Bishkek Population: 5.5 million Corruption index: 164 Number of listed companies: 11 Key industries: gold, cotton, textiles, mercury, uranium and rare earth metals. GDP per capita: US$2,400. The private sector accounts for 75% of GDP and 80% of employment. structures among the ministries and civil servants is pretty low,’ says Bowen. Kyrgyzstan, meanwhile, has undergone two revolutions since 2005 and been struck by horrific ethnic

violence. The IFC has operated an Investment Climate Advisory Services Project in Kyrgyzstan since 2008, and describes the business environment in the country as characterised by ‘excessive and often haphazard government regulation, complicated administrative procedures, and contradictory legal provisions’.

Fair treatment A key plank of the IFC’s project is to streamline tax inspections and administration, involving the development of a risk-based audit system to ensure fair treatment for all taxpayers, and reducing the burden on small and medium-sized enterprises (SMEs). Inspection checklists have been introduced to raise awareness among entrepreneurs of inspection requirements and increase transparency. ‘Kyrgyzstan represents an experiment in democracy,’ says Bowen. ‘The previous regime was fantastically corrupt, but with 2.5 million people, it’s never going to be that big in attracting interest.’ Uzbekistan, with its appalling human rights record – in 2005, hundreds of protesters were killed in the city of Andijan – presents the gloomiest picture. Just a handful of international companies, including Nestlé and British American Tobacco (BAT) persevere in what observers believe is, after North Korea, the most closed economy in the world. But with oil, gas and agricultural resources and a large population – 27 million – the country is recognised as having a huge potential that remains almost wholly untapped. ‘The CEOs of companies there pull their hair out,’ says one regular UK-based business traveller to the country, who asked not to be named. ‘The ruling elite genuinely don’t care

02/08/2012 15:12


what the outside world thinks of them – but oddly that means that they are not even maximising their own opportunities for graft. If they had even rudimentary financial structures in place, they’d be able to siphon off revenue streams for themselves much more efficiently.’ The indefatigable IFC is trying to make inroads: developing legislation to establish an effective credit information sharing system, which is viewed as critical if the SME sector is to grow. To this end, the IFC, according to regional spokeswoman Kymbat Ybyshova, is assisting the banking sector to channel finance to small businesses in the hope of diversifying the economy. ‘There are plenty of people and companies waiting to go in if they didn’t make it so hard for you,’ says Bowen. ‘Any companies that apply IFRS are effectively doing so in a vacuum. There’s no stock exchange, the structures are just not in place.’ First impressions suggest a similar picture in Tajikistan, where KMPG recently conducted an audit of the National Bank of Tajikistan and found that staff could not say how many notes had been printed or were in circulation. However, according to incountry IFC staff, Tajikistan has been quietly making tangible improvements. Corporate governance reforms lifted the country from 151st to 73rd on the World Bank’s ‘doing business index’ between 2009 and 2010. ‘We had to start from scratch when we arrived in 2007,’ admits Tahmina Nurova, the IFC’s banking/financial disclosure expert in the capital Dushanbe. ‘We had to explain what corporate governance is all about.’ The driving force behind the changes, according to Nurova, is the national bank, notwithstanding its poor KPMG survey performance. ‘The government’s appetite for reform is very strong,’ she says. ‘There are only 15 banks, but they are well managed – the government wants to focus on quality. There’s no question the banking sector is way ahead of the financial sector.’ A banking law in 2009 and a microfinance law in 2012 strengthened

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TAJIKISTAN: President: Emomali Rahmon (since 1994) Capital: Dushanbe Population: 7.7 million GDP per capita: US$2,000 Number of listed companies: n/a Corruption Index: 152 Key industries: Silver, gold, uranium and tungsten. Industry consists only of a large aluminium plant, hydropower and small obsolete factories, mostly in light industry and food processing.

TURKMENISTAN: President: Gurbanguly Berdymukhamedov (since 2007) Capital: Ashgabat Population: 5.1 million GDP per capita: US$7,500 Number of listed companies: n/a The CIA notes that: ‘the majority of Turkmenistan’s economic statistics are state secrets’. Corruption Index: 177 Key industries: The world’s fourthlargest reserves of natural gas and substantial oil resources.

UZBEKISTAN: President: Islam Karimov (since independence in 1991) Capital: Tashkent Population: 29.3 million GDP per capita: US$3,300 Number of listed companies: 114 Corruption Index: 177 Key industries: Natural gas, cotton and gold. this framework, requiring all financial institutions to conduct internal audits and submit to external audits. This has been underpinned by the creation of AccessBank Tajikistan, which has 16 planned branch offices outside the capital Dushanbe. A central focus of this bank’s remit is to improve the

recording of remittance flows. The IFC is also working with the government’s Tajik Tax Committee to implement riskbased audits. Also, external audits are carried out by some big Western names, such as Deloitte and Baker Tilly International, as well as by national auditors and companies with a strong regional presence, such as BDO International. But only recently did a presidential decree demand that any company with assets above TJS100m (US$20.09m) and 1,000 staff comply with these auditing procedures. According to Nurova, most corporate government structures are now in place, but she admits ‘enforcement is still lagging behind. We’re pretty good at establishing corporate governance structures, but companies are used to working in different ways, especially when it comes to transparency and disclosure. This is where our emphasis needs to be in the future.’ But the country faces much darker problems than its embryonic financial structures: drug running and Chinese smuggling further undermine the country that has no real natural resources or advantages, apart from a handful of gold mines and aluminium. ‘The country has more organised crime than it can cope with,’ says Bowen. ‘It’s unlikely to be allowed to be in control of its own destiny – there are too many big interests to stand up to.’ More optimistically, a striking feature of the region is the plethora of international agencies involved, including the Asian Development Bank, the United States Agency for International Development, and the United Nations Development Programme. ‘Credit where credit is due – these agencies are very active and throwing substantial sums at the region,’ says Bowen. ‘There’s a lot of goodwill to help move these countries forward. In four of these countries it’s the classic case of four steps forward, one back, but the regime in Uzbekistan is going to have change radically before anything happens.’ Mark Rowe, journalist

02/08/2012 15:12


Taking the pulse of the global economy With business confidence now collapsing in Asia Pacific too, ACCA’s Manos Schizas reports on the gloomy mood of financial professionals Over 2,700 finance professionals took our Global Economic Conditions Survey for the second quarter of 2012. The news was definitely not good. As we had warned at the time, some of the apparent recovery in early 2012 was down to very transient sentiment that has since dissipated. But as much of the gain in confidence was down to improved fundamentals, optimism has not completely vanished. Then again, the global fundamentals have also deteriorated: liquidity and demand have tightened around the world, investment has taken a hit and, despite excess capacity, inflation has not fallen. More businesses failed in the second quarter of 2012 than in the first, although employment was reasonably resilient. Overall, the global economy is about as fragile as it’s ever been since the ‘green shoots’ of early 2009, with the developed OECD economies probably shrinking. The Americas, the Middle East and Africa continue to lead global recovery, as they have for the last nine months. The US is in fact looking decidedly healthy, with investment still growing and both demand and liquidity remaining relatively strong. However,


In terms of business confidence and optimism, the US appears to be pulling its weight in the global recovery, registering only marginal losses in the last quarter, although regional divisions are becoming evident. Part of the reversal since early 2012 appears to have been down to respondents in the public sector, previously worried by mounting job losses. There was much to celebrate in the second quarter, with improved financing conditions, a thaw in unemployment, stable capital spending and more profitable business opportunities arising. However, new orders appear to be falling, which could prove to be a problem if it persists. There was a small but significant shift in favour of austerity, with 81% of respondents saying that government spending needs to fall over the next five years, as part of a general trend of US respondents expressing concerns about fiscal policies.

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there is a worrying slowdown in China, where both confidence and investment are falling despite an expansion in business opportunities. China’s slowdown, while not yet the ‘hard landing’ many fear, is very bad news not only for ACCA members in the country but also for China’s truly global supply chain, mainly suppliers in Africa and South Asia. Nor are regions that run a persistent trade deficit with China going to benefit. The EU, for example, has about

THE GLOBAL ECONOMY IS AS FRAGILE AS IT’S BEEN SINCE THE ‘GREEN SHOOTS’ OF EARLY 2009 €120bn of exports to China at stake, and since a lot of that is made up of high-tech industrial inputs, Europe’s exports to China are more incomeelastic than China’s exports to Europe. Encouragingly, though, accountants around the world continue to see opportunities for their businesses – more of them, in fact, even in troubled regions such as Europe. Fiscal policy remains a conundrum. Attitudes have continued to move against austerity as global growth continues to disappoint, yet, in the opinion of local accountants, some of the governments the world is counting on for stimulus may already be living beyond their means. US-based accountants are particularly hawkish, warning of a dangerous level of overspending; then again, so are their colleagues in China. In short, the global economy is still weak and could yet endure many more false starts. The most important lesson from the reversal may well be that relief should not be mistaken for recovery: finance professionals should trust the evidence of their own eyes above the hype. More at

03/08/2012 12:26

29 THE ACCA/IMA GLOBAL ECONOMIC CONDITIONS SURVEY – HOW TO TAKE PART The views of ACCA members receive widespread media coverage. The Q1 2012 survey was quoted in the press around the world more than 200 times.

So why not have your say in our next quarterly survey? Simply look for the link in AB Direct or watch out for the email invitation.

The survey is undertaken by ACCA in association with IMA (the Institute of Management Accountants), with respondents coming from both bodies.



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

In China, business confidence is plunging and capital spending is heading still lower.

75 50 25 0


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

Q4 2009

Q1 2010

Q2 2010

Q3 2010


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

Q4 Q1 2010 2011

Q2 2011

-25 -50 -75 Confidence

KEY: =Q1 2012

Capital spending

=Q2 2012

30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 Q2 2011 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012


Business confidence has gone futher into decline. The graphics show the percentage of respondents saying they have gained business confidence, minus those who have lost it.

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03/08/2012 12:27



Beyond the boilerplate [

Moves to improve the effectiveness and value of auditors’ reports have come up against some traditional challenges, including the all-important question, what are they for? says Robert Bruce

So far the auditors have had a relatively good post-global financial crisis. But there is a growing mood globally that the value they provide is not as clear or as obvious as it should be. ‘The issue of how you get some colour into financial statements is coming up all around the world,’ says Steve Maslin, chair of Grant Thornton’s Partnership Oversight Board and a member of ACCA’s Accountants for Business Global Forum. Auditors’ reports are seen as boilerplate, formal, and less than informative. ‘We need to make sure you have something which allows users to understand the risk areas and the judgment areas,’ adds Maslin. The slogan should be something like ‘beyond the boilerplate’. As a young journalist, one of my first interviews was with the finance director of a Scottish supermarket group. I asked about the value of the auditor’s report. ‘Well,’ he responded, ‘I give them a

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full page in the accounts every year and hope that one day they will take up the challenge.’ And that is at the heart of the problem. These days even the boilerplate takes several pages. The fundamental reassurance is there. But the detail, and the value it could provide, is not. It is these worries that underpin the consultation paper which has been issued by the International Auditing and Assurance Standards Board (IAASB), Improving the Auditor’s Report. It sets out a global agenda for change and wants comments on the ideas by early October this year. It makes clear the need to leave the boilerplate behind, but also recognises the problems. ‘It is notable that the

call for change initially came primarily from institutional investors and financial analysts looking to auditors to help in navigating increasingly complex financial statements and point out the areas on which the auditor’s work was focused – particularly on the most subjective matters within the financial statements,’ it says. And it is that word ‘subjective’ which has auditors reaching for their stomach settlers. The difficulty with subjective information is where it comes from and whose responsibility it is. ‘The big challenge,’ suggests Richard Sexton, deputy global assurance leader at PwC, is: ‘What is it for? Is it to allow auditors to comment on what they have done, or what has come out of the audit, or what has come out of the company?’ All these different information streams muddy the waters, and the responsibilities. And Sexton is firm on the idea that ‘we should not be the original source of information about the company’. The IAASB suggests that this problem can be overcome by changing the emphasis of the information the auditors could provide. ‘Some users have indicated,’ the consultation document says, ‘that there would be considerable value in the auditor highlighting disclosures about the areas in the financial statements the auditor believes are the most important.’ ‘This,’ it continues, ‘would provide a “roadmap” to help users better navigate complex financial reports and focus them on matters likely to be important to help their decision-making.’ One fundamental area, highlighted by events during the financial crisis, is that of going concern, the auditor’s judgment on the ability of a company to keep afloat over the next year or so. The IAASB paper provides great detail on this and the influential

03/08/2012 16:51


*ALL SORTS OF INFORMATION: THE IAASB’S ARGUMENT FOR REFORM The statement by IAASB chairman Arnold Schilder, which opens the consultation paper on improving the auditor’s report, makes the issues clear. ‘A cornerstone of the auditor’s report is the auditor’s opinion, which is either a “clean” (unmodified), or modified opinion with an explanation of the basis for such. This model has many virtues and has been long-standing in many jurisdictions, in some cases for decades,’ he says. But then comes the caveat. ‘More than ever before,’ he says, ‘users of audited financial statements are calling

report produced for the UK’s Financial Reporting Council by one-time KPMG global chairman, Lord Sharman, showed how it could be done. It would certainly cheer the investment community. ‘There is a greater interest in matters of emphasis, as evidenced by the Sharman report on going concern, says Guy Jubb, global head of governance and stewardship at Standard Life Investments. ‘For example, it would be helpful to investors to have the benefit of knowing about matters where the auditors believe the assumptions made, while reasonable, proved difficult to verify. It is about providing signposts to help shareholders understand the accounts.’ And while the IAASB paper suggests there would be problems over auditors ‘disclosing entity-specific information that has not been disclosed by management’, the recommendations about going concern have already gained support. Some of the IAASB proposals could, suggests Maslin, ‘be brought in quickly’, and in particular the going concern proposals. ‘It would,’ says Sue Almond, technical director at

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for more pertinent information for their decision-making in today’s global business environment with increasingly complex financial reporting requirements. The global financial crisis has also spurred users to want to know more about individual audits and to gain further insights into the audited entity and its financial statements. And, while the auditor’s opinion is valued, many perceive that the auditor’s report could be more informative.’ Schilder’s conclusion is inescapable. ‘Change, therefore, is essential,’ he says. (See IAASB update on page 61.)

ACCA, ‘make explicit what is implicit.’ But the wider shores of explaining judgment are more complex. ‘The market struggles with anything other than a clean audit report,’ says Sexton. ‘If we are going to draw attention to things, they need to be seen as signposts, not criticism.’ This is a difficulty with the culture of auditor relationships with the investment community. Traditionally if auditors tell you something out of the ordinary, it will be perceived as a bad thing they are trying to warn you about. We are in the world of unintended consequences. ‘People will interpret things as a problem rather than thinking we are just drawing attention to important things,’ says Sexton. A way needs to be found to let the auditors, as my Scottish FD wished, provide more. But when people ask where the auditors are, the auditors tend to pull up the drawbridge of their statutory duties, shelter behind it, and provide no further information. The reasoning behind the IAASB thinking is that around the world the public doesn’t understand this. The

expectation gap is just as wide as it ever was. Hugh Shields, who has worked in these areas for many years, says that ‘by broadening out the auditor’s report it requires the auditors to have more skin in the game. And that’s a good thing.’ Almond adds: ‘Investor roundtables are very clear that the audit report is not hitting what people are looking for. The next step is consultation. The real challenge is finding out what the users want. Auditors will be all over it, but investors are harder to pin down and get views from. The challenge is to engage with the right people’ The task ahead is for those negotiating the progress of the IAASB paper to try and steer it towards something which enables auditors to provide much more information, both in quantity and in value, without the whole initiative levelling down into something which is no better than the current boilerplate. Investors and auditors have a huge amount of work to do. Robert Bruce is a commentator and journalist

03/08/2012 16:52



US/IFRS bandwagon rumbles on [

Not even section 404 of Sarbanes Oxley got this much attention from the SEC, says Ramona Dzinkowski. It hardly inspires confidence that US adoption of IFRS will occur any time this year

Finally, an end is near! With the 13 July release of the final staff report on the International Financial Reporting Standards Work Plan, the US has reached its conclusions around adopting IFRS outright in America or incorporating them in some fashion into US GAAP – or at least that’s what many were hoping for. Unfortunately, the final Securities and Exchange Commission (SEC) report didn’t really provide any direction to the waiting corporate/ audit and standard setting community on the subject; nor did it say anything more than what was already documented in the many rounds of consultations, interim reports and public debates. While granted, it was the last of a long list of ‘things to do’ on the SEC’s Work Plan, and not initially intended as an official policy position per se, I think the majority of interested observers out there, including myself, were looking for something more than just a summary of the debate. In fact, many were hoping for at least an announcement around when we could expect the SEC to make its final policy statement of if, how and when IFRS will be incorporated into US GAAP. In addition, I think I’m not alone in being a little concerned about the wording of the introductory note to the final report where the SEC states that: ‘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

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securities markets generally and US investors specifically.’ Correct me if I’m wrong, but

wouldn’t it be reasonable to think that this indeed should have been one of the prime objectives of all the analysis over the past two years? What’s of even more concern to those of us who just want to see the US make a decision one way or another (for a variety of reasons) is that the Commission foresees that: ‘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.’ For those voices out there who don’t have a collective ear, may I represent you in saying: You’ve got to be kidding me! Not even SOX 404 got this much attention from the SEC in my opinion. So what does the tone of the final report suggest for the US moving forward on this decision in the near future? I’m sorry to say, it doesn’t present much room for optimism that the US will get on board the IFRS bandwagon any time soon. While generally there is again a very positive spin on the value of one set of high-quality accounting standards used worldwide, there are also many concerns about IFRS. Perhaps the most poignant of these is that ‘pursuing the designation of the standards of the International Accounting Standards Board (IASB) as authoritative was, among other things, not supported by the vast majority of participants in the US capital markets’. So, for those of you waiting for an announcement surrounding the adoption of IFRS in America, 2013 just might be your lucky year. Ramona Dzinkowski is an economist and business journalist

02/08/2012 17:08

33 Join us at the

CFO European Summit 24 October 2012 • Hotel Intercontinental, Warsaw

and take inspiration from the insights of some of Europe’s outstanding finance leaders Register now to attend in person or online


57_(right)-UK.indd 61

03/08/2012 15:22



You are our lifeblood


In his final column, ACCA president Dean Westcott reflects on his year in office and applauds the commitment of members

As this is my last column as president, l wanted to take this opportunity to say what an absolute privilege it has been to serve in ACCA’s highest elected office. It has given me an outstanding opportunity to see at first hand what a truly global organisation ACCA is. It is also clear, from the meetings and events in which I have taken part around the world, that ACCA has a great deal of influence in the global accountancy and financial community. What has also been striking is the number of ACCA members who are working in the most senior positions in organisations in all sectors. I have been fortunate to have met with chief executives of leading organisations, as well as government ministers, all of whom are ACCA members and – at the pinnacle of their careers – still recognise the value of membership. The year has clearly demonstrated to me that ACCA is nothing without its membership. I recently spoke in Malaysia about my journey to ACCA’s presidency, and a point that I made then, and that I want to reiterate now, is that members are the lifeblood of our organisation. The work you do, in providing excellent services and advice to the public, to corporate business, to small and medium-sized enterprises and to organisations in the public sector, helps to build our reputation. But it is also critical to have a membership that is engaged and involved in ACCA’s work. My own involvement began with local networks and I want to urge you to think about how you might devote some time to helping our great organisation go from strength to strength. I have been asked what the highlight of my presidential year has been. While that’s a tough question to answer, I would have to put the recent Council meeting in Kenya at the top of the list. This enabled me and my Council colleagues to see the outstanding work that is being undertaken by ACCA and its members in East Africa, and also allowed us to engage with a wide range of stakeholders in this very important region for ACCA. I want to thank everyone who made this event such a great success, along with the countless colleagues and members of ACCA’s staff team who have made the past 12 months so memorable for me. Dean Westcott is CFO of West Essex Clinical Commissioning Group, UK

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02/08/2012 16:19



Deloitte & Touche in the US has reappointed Gregory G Weaver as its chairman and chief executive. Weaver was also chairman and CEO from 2001 to 2005. He succeeds Stephen C Van Arsdell, who has held the post since 2010. ‘Greg is a natural choice to lead our audit and advisory subsidiary,’ said Joseph Echevarria, chief executive of the global parent Deloitte. ‘His prior experience in this position, in particular, gives him a deep understanding of the most critical aspects of its business and the unique role of the auditor in building trust and protecting the investing public and capital markets. Moreover, Greg’s relentless focus on quality, combined with his technical expertise and unwavering integrity, has earned him the respect of his peers inside and outside Deloitte.’

The view from: Russia: Olga Nikitina FCCA, senior manager, Ernst & Young Academy of Business, Novosibirsk Q Has the global financial crisis changed how companies and finance teams approach training and development? A It has become clearer that it’s worth investing in education. New knowledge and skills always give competitive advantages, regardless of the economic climate. Many people are now registering for ACCA’s DipIFR (Rus) programme, which is likely to pay dividends in the near future, especially as Russia adopted IFRS last year. Q Any advice for newly qualified accountants? A First, I’d congratulate them – they did a good job to pass tough exams, and ACCA membership will open a lot of doors for their future. But standing on that doorstep, they should pause and think about their long-term goals first. Postqualification opportunities include progression to a higher position, switching sector or even continuing studies. The best advice is never to stop developing professionally: our environment requires us to learn, constantly and quickly.


PwC has stressed the importance of the state of Tamil Nadu and its capital Chennai to India’s economy by increasing its headcount there by a quarter in the last year. The firm said it would meet growing demand, particularly in the automobile and other manufacturing sectors. Deepak Kapoor, chairman of PwC India, said: ‘As one of the fastest-growing firms in the PwC global network, we are increasingly focused on providing professional services to multinational as well as local companies. Expanding our Chennai office is a well-timed move for us.’ The national government aims to grow Tamil Nadu as a retail and financial services hub.

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35 Practice The view from Olga Nikitina of Ernst & Young Academy of Business; proposed new internal risk controls run into criticism 41 Corporate The view from Miroslav Cino of Polytec; making commercial sense of CSR; how to issue investorfriendly statements

Q Which business leader do you most admire? A Steve Jobs, who was much more than just a successful businessman; he was also a great presenter and, most importantly, an incredibly talented innovator. As he said: ‘Innovation distinguishes between a leader and a follower.’ Q What have you learned from taking on educational responsibilities? A That psychology is an incredibly interesting field for research, with such concepts as motivation and group dynamics.


Business: Provider of education and training services in Russia and throughout the CIS Locations: Russia (Moscow, St Petersburg, Novosibirsk, Ekaterinburg); Ukraine (Kiev, Donetsk); Kazakhstan (Almaty) Accreditations: ACCA Platinum Approved Learning Partner and ACCA Registered CPD Provider

03/08/2012 15:08



A matter of ethics While reporting frameworks and independent assurance are vital, integrity must be at the heart of the accountancy and audit professions, says FEE chief Olivier Boutellis-Taft Olivier Boutellis-Taft has a difficult – and, he says, exciting – job. Not only is he the CEO of a federation that represents more than 700,000 accountants and auditors across 33 countries, but he is also helping to steer the profession through an unprecedented change. The financial crisis has propelled accountants into the public eye, forcing a rethink on how to handle new risks and a more introspective focus on the wider role of the profession. Auditors, meanwhile, have been caught in the regulatory drive of the European Commission (EC), with internal market chief Michel Barnier announcing a major shake-up of the sector. ‘Professional ethics is one of the bedrocks of the profession,’ Boutellis-

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Taft explains. ‘We have very strong standards and practices in the audit profession, but also in the accountancy profession, and that’s important,’ he adds. As head of the Fédération des Experts Comptables Européens (FEE, or the Federation of European Accountants), Boutellis-Taft and his team of 15 staff in Brussels, bolstered by experts from FEE’s 45 member bodies across Europe, including ACCA, are drawing up papers, guidance notes and commentaries on subjects from financial reporting and company law to ethics, corruption and sustainability. Boutellis-Taft embraces the ethics debate with gusto, pointing out that it is not accountants who have been willing to waive or tweak standards to suit themselves. ‘In the financial sector,

when things started going wrong, there were voices out there saying, “Oh, we need to change the rules, it’s all about fair value, it’s all about IFRS 9.” The real issue we have is systemic: we all tend to move with the wind – investors, bankers, corporates, regulators and governments alike,’ he says. ‘One of the messages that the profession needs to send is that it is not a good idea to change the rules of the game when the outcome is unpleasant.’ Some rules will have to change, he admits, particularly to make sure governments and banks better reflect the new risks to their balance sheets posed by sovereign debt. Once seen as the safest asset in town, government bonds are being fundamentally revalued, with European banks facing

01/08/2012 11:00


The CV Olivier Boutellis-Taft is CEO of the Fédération des Experts Comptables Européens. He was previously governing board member of the European Policy Centre thinktank and has held various roles at PwC.

emergency and longer-term capital requirements to make sure they can handle future crises, particularly in the wake of Greece’s debt restructuring. But auditors and accountants have been ahead of the curve for a while, Boutellis-Taft says, going on watch as early as 2007, when the subprime bubble started bursting. ‘Everybody was really on the ball quite early on, issuing guidance notes, alerts and drawing the attention of people in practice on new risk, what the current circumstances meant regarding the application of standards,’ he says.

Complete picture One of FEE’s latest policy papers points to the areas where accountants and auditors need to focus during the crisis, including the recognition and measurement of assets, impairment, credit and liquidity risk, going concern issues and proper disclosure. The application of high-quality global standards in these areas is even more important for government accounts,

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Boutellis-Taft says, to make sure that we have the ‘full picture’ on what is being reported. ‘We’re taking more risk, but the amount of this risk, the magnitude of this risk, may depend on future events,’ he says. ‘It is about having more certainty that what needs to be disclosed is being disclosed and a perspective that is not limited to cash movements.’ The best way to ensure transparency, he says, is to bring in accruals-based International Public Sector Accounting Standards (IPSAS). ‘If we move to a better reporting framework in the public sector, we’ll have more visibility on the quality of sovereign debt,’ Boutellis-Taft says. ‘You can’t drive blindfolded and avoid accidents.’ In 2009, only 22% of governments were using accruals-based accounting, according to a survey by the International Organisation of Supreme Audit Institutions. Some 24% were still using cash-based accounts, while 36% were using bespoke national standards. ‘In cash accounting, even if you don’t misreport, you don’t report the full

picture,’ Boutellis-Taft explains. ‘That’s why it’s important that governments adopt robust financial reporting standards so there is transparency, not only on the situation but on how it may evolve.’ Just as important is to have ‘independent assurance’ on the figures, which can be provided by the profession, Boutellis-Taft says. However, he warns that the EC’s November 2011 proposal on audit – split into a regulation and a directive – could turn auditing into a ‘tick-box’ exercise by depriving auditors and, in particular, smaller firms from the support they get from professional institutes. ‘If you want more choice on the audit market, if you want to improve auditors’ independence, if you want to improve the quality of audit, you can’t do away with the added value that professional bodies bring – that’s actually what the directive is doing by limiting the role of professional bodies to the registration of auditors,’ he says. ‘All these things are what make accountancy and audit a profession and not a regulated industry.’ The ‘professional judgment’ that auditors and accountants bring is also indispensable in the public sector, he says, where a ‘behavioural deficit’ in government – apparent in the widespread flouting of the spending and borrowing limits set out in the EU’s Stability and Growth Pact – has led to an actual deficit in public finances. ‘We have not been very good at complying with our commitments at a political level,’ he says. ‘We should reflect on how ethical principles apply to accountants in business and in the public sector because they too have a key role to play.’ But that debate, he muses, might better be left for another day. ‘At the end of the day, the most fundamental issue is personal integrity. You need a rule to compensate in reality for a behavioural deficit. That raises a more fundamental question – but that’s probably not for accountants or for politicians, it’s probably more for philosophers. Maybe they are the missing part in these discussions.’ Sarah Collins, journalist

01/08/2012 11:01



Time to bend to pressure? The exposure document for a proposed new framework for internal control has not met with universal praise from key commentators. Ramona Dzinkowski reports In December 2011, COSO – the Committee of Sponsoring Organizations of the Treadway Commission, one of the world’s leading contributors to thought leadership in risk and internal control – released its revised framework, Internal Control – Integrated Framework. The newly proposed framework is intended to improve and build on its earlier framework to reflect the changes in the operating and risk environments that have occurred over the past 20 years. More specifically, it aims to make the ‘existing Framework and related evaluation tools more relevant in the increasingly complex business environment’ so that organisations worldwide can better design, implement and assess internal control. The initial document and subsequent frameworks and guidance, such as the 2004 Enterprise Risk Management – Integrated Framework, are recommended by regulatory/ industry bodies for Sarbanes-Oxley compliance purposes. 31 March 2012 marked the close of the public review period on the revised model; COSO hopes to have a final version ready for early 2013. While there has been much applause for the efforts of the committee in revising the original model, many sceptics abound and the criticisms demonstrate a wide range of concerns, from a lack of global relevance to conceptual flaws suggesting that the document seems to ignore 20 years of development in the risk management paradigm. International observers are quick to point out that while the framework claims to be globally relevant, in reality it mainly pertains to large US filers, and that the composition of COSO itself doesn’t represent international views; its five sponsoring organisations are the American Accounting


Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), the Institute of Internal Auditors (IIA), and the Institute of Management Accountants (IMA). In its response to the draft, the Federation of European Accountants (FEE) identifies the lack of international input, pointing to concurrent efforts of the International Federation of Accountants (IFAC) to develop and improve on control models. It notes that IFAC ‘is currently working on the same topic and international cooperation is therefore encouraged’. Furthermore, the COSO framework should ‘be developed with a global view in mind which is broader than merely focusing on the applicability in accordance with the Sarbanes-Oxley Act section 404’. FEE calls for broader diversity, including geographical representation and representation by user groups on the COSO board. This would, it suggests, ‘balance public interest considerations with the technical expertise needed in the development process of the framework which will also strengthen the global political and technical accountability’. IFAC’s Professional Accountants in Business Committee further points out that the revised COSO framework tends to ignore international governance models. More specifically it refers to one of COSO’s main principles – that ‘the board of directors demonstrates independence of management and exercises oversight for the development and performance of internal control’. While in some jurisdictions where there is one board (typical in Anglo-Saxon countries), the principle is understandable. However, when used outside that context, for example in a two-tier management structure, it does

not apply. Many organisations across the globe, large and small, use a two-tier governance model (for example, the Rhineland model) where a separate ‘supervisory’ board of independent non-executives performs an oversight role over the management board. In these situations, actions reserved for management cannot be transferred to the supervisory board, or vice versa.

Too complex Others caution that the increased complexity and length of the new document will deter key stakeholders, particularly in smaller firms. The Canadian Institute of Chartered Accountants notes that ‘the document is too long for the intended audience of board members and senior management’. It also points to the lack of resources in smaller firms as a deterrent: ‘the length and content of the full document may not be scalable and useful to small enterprises who do not have the knowledge/resources to implement … The target audience will not have the time nor, possibly, the inclination to read such a tome.’ The Canadian audit standard setting community has similar concerns, with the Auditing and Assurance Standards Board (AASB) suggesting that the updated framework is predominantly written for large, public, profit-oriented enterprises. It says that ‘the overall tone of the updated Framework seems to focus primarily on large, public companies. Language and examples that are not directed toward complex or public entities are scarce and buried within the details of the Framework. It is our belief that the updated Framework may not significantly help smaller, less complex entities to apply, update, or implement a system of internal control.’ The updated Framework is 461 paragraphs (or 134 pages) in length

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and includes 81 attributes to support the 17 fundamental principles of internal control. ‘These statistics alone’, suggests the AASB, ‘may result in the smaller, less complex entities shying away from the Framework, especially when time and funds are limited.’ Corporate preparers tend to agree that the framework moves away from a principlesbased to a more prescriptive ‘checklist’ document. According to Patrick T Mulva, vice president and controller, Exxon Mobile Corporation, by including 81 attributes and 17 principles in the framework ‘there is a clear risk that they may be interpreted as


requirements’. This, he says, has the effect of moving towards a rulesbased framework that could result in a ‘checklist mentality’ and provide for little management judgment, particularly in a dynamic and everchanging business environment.

Fit for purpose? Other comments question the conceptual underpinnings of the risk framework, suggesting that it has seemingly ignored much of the risk management thinking that has evolved over the past two decades. FEE questions the relevance of the original COSO model in today’s risk and business environment. COSO should consider, it says, whether the 1992 approach is ‘fit for purpose for new and innovative business models in the new economy’. Such business models, it says, differ from those of the early 1990s, with IT technologies ‘much more widespread today for all companies, regardless of their size, structure and business model’. In particular, FEE notes, ‘new IT technologies will have an impact on the structure of internal control within the entity and the COSO Framework (all volumes) should be sufficiently flexible to allow for such new business models and internal control systems to develop.’

Ultimately, the question remains as to whether a newly updated framework would be incorporated into companies’ internal control environments, given that there is no binding legislation or regulation for firms to do so. While COSO is a widely recognised framework, most companies typically use a combination of internal control frameworks from a variety of different sources. More specifically, a 2006 US poll conducted by CFO magazine showed that three-quarters of the respondents said they relied on various frameworks in addition to, or other than, COSO when mapping internal controls. About a third of the surveyed executives cited the use of COBIT (Control Objectives for Information and Related Technology), a technologygovernance model now published by the IT Governance Institute. In addition, 28% indicated that, in the US, they have based their section 404 programmes, at least in part, on Auditing Standard No 2 – a US guideline for external auditors put out by the Public Company Accounting Oversight Board (PCAOB). Given that these frameworks are already considered sufficient for risk management and control, it begs the question: why would a company change the status quo if its risk environment hadn’t changed, particularly if it could mean increased documentation and potentially higher audit fees? By the end of the comment period only six companies had responded to the exposure document. The remaining comment letters came from representative bodies, associations, auditors, academics and private individuals. The extent to which the concerns of those who wrote to the committee can be addressed remains to be seen. Ramona Dzinkowski is an economist and business journalist

02/08/2012 15:32

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27/07/2012 30/07/2012 11:02 11:28


HSBC ‘LAUNDERED DRUG MONEY’ HSBC has said it faces substantial financial penalties for money laundering. It first admitted in 2010 that it had failed to provide adequate controls to prevent criminals using its international network to transfer funds to the US and elsewhere. At a US Senate hearing into money laundering, HSBC’s head of compliance, David Bagley, dramatically resigned, saying it was ‘the appropriate time’ for him to leave. In a statement the bank said: ‘In the past, we have sometimes failed to meet the standards that regulators and customers expect.’ Investigators believe a Mexican subsidiary of HSBC moved billions of dollars of proceeds from drug trafficking into the US. HSBC says it now has a stronger global structure to ensure compliance control and risk management at subsidiary operations.

The view from: Slovakia: Miroslav Cino ACCA, head of finance and control, Polytec, Sládkovicovo v

Q How has ACCA prepared you for the job you do? A It gave me a strong grasp of finance and accounting issues to take a strategic overview of a business’s financial and commercial position. My training also allows me to compare our customer value proposition with competitors. Q What’s been the lasting impact of the global financial crisis on European finance teams? A Many organisations have implemented major changes, everything from management and governance to systems and financial control. Finance teams have had to support decisionmaking around those changes, and become more proactive in identifying productive activities and preparing for an economic upturn. Q How do you wind down after the office? A I enjoy manual work, anything from gardening to fixing things around the house. It uses a different part of my brain and it’s relaxing. My company wants people to have a good work-life balance.

RISK MONITORING INADEQUATE Both Deloitte and KPMG have separately called on corporates to increase their focus on risk management and improve their systems for monitoring risk. KPMG research revealed that 64% of corporates use manual approaches to enterprise risk management, with what the firm called ‘surprisingly low’ use of available automated systems. And a Deloitte/Forbes Insights survey found that less than a quarter of organisations continuously monitor risk. Nine out of 10 executives surveyed said that reorganisation of risk management was a priority over the next three years.

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41 Corporate The view from Miroslav Cino of Polytec; making commercial sense of CSR; how to issue investorfriendly statements 35 Practice The view from Olga Nikitina of Ernst & Young Academy of Business; proposed new internal risk controls run into criticism

Q If you could swap jobs with anyone for a week, who would it be? A The Slovakian national ice hockey team won the silver medal at the World Championships in May, and became national heroes. It would have been cool to be any one of them during that week! Q If you hadn’t gone into finance… A I always thought I’d be an aircraft mechanic or technician – as my father insisted. But my brother studied economics and accounting before training at PwC; I saw the tremendous possibilities opening up for him, so I chose a similar path.


Business: Polytec makes plastic components for the automotive industry, and has 4,663 employees at 21 locations (Austria, Belgium, Czech Republic, Germany and Slovakia) 2011 financial performance: €657.4m sales, €35.3m net profit, 45.6% equity ratio

03/08/2012 13:08



Do good and prosper Saad Maniar FCCA explains why corporate social responsibility makes commercial sense and how businesses should go about deciding and implementing a CSR strategy The debate between the responsibility of a company to make a profit for its shareholders and its responsibility to engage in socially beneficial activities has been an ongoing one. The crucial difference today, compared to the situation that existed 20 to 30 years ago, is that there is now an increased burden on the company to model itself as a socially responsible entity. Also, with the huge increase in competition in the market, businesses are finding it more and more difficult to differentiate their products and services from those of their competitors and create a market and name for themselves with consumers. Strategic corporate social responsibility (CSR) contains a solution to these issues. The concept requires a company to invest time and thought in analysing activities and deciding which are in line with its competencies, which would also help in improving its business prospects. Corporate social responsibility can be achieved in a number of ways, such as engaging in activities at no extra cost to the company (restaurants, for example, could donate leftover food to the poor), engaging in activities that save the company money (for example, by restricting the organisation’s use of paper for printing or by investing in energy-saving products), or engaging in activities that could create a niche market and yield revenue (such as dealing in organic food products). This article discusses some of the aspects of strategic corporate social responsibility where companies can invest in activities that improve their market share and brand reputation. By doing this CSR can drive growth to the advantage of all stakeholders of a company, rather than just its shareholders. Figure 1 illustrates the benefits of strategic CSR.






Improve market share and drive profits by turning the business into a cause CSR can be used as a tool to create new markets for companies. This aspect can be viewed from two angles: 1) Entering new markets in terms of products/services offered By investing sufficient time and resources in identifying strategic CSR initiatives, a company can enter into new markets, in line with its competencies and capabilities. These could include niche areas where the returns to the company could be higher than it has hitherto enjoyed. For instance, Toyota has created a special market and name for itself with its line of ‘hybrid cars’. Example: Whole Foods Market’s foray into the organic products market. Whole Foods Market is the world’s largest retailer of natural




and organic foods and the first nationally certified organic grocer in the US. The company has created a ‘declaration of interdependence’, which emphasises a stakeholder philosophy. One of the senior executives at Whole Foods Market has said: ‘We believe business should meet the needs of all the stakeholders, as opposed to operating it for shareholders.’ 2) Penetrating unexplored/developing markets in developing countries/ economies There is strong evidence to indicate that sincere and meaningful CSR initiatives do, in the long run, improve the market share of the companies that engage in them. Example: Gap’s CSR initiatives. One of the clothing retailer’s projects involves partnering with vendors and organisations in the developing


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Gap, Aravind Eye Hospitals, Starbucks and Levi Strauss (clockwise from top left) are some of the best-known exponents of CSR world to improve conditions of women workers in factories. As working conditions improve, the initiative also garners more support and encouragement, which in turn results in benefits to all parties involved, including the company that invested in the project. Good CSR is also about effectively communicating the endeavours of the company to its stakeholders. Ultimately, the society in which the company operates needs to know what the company is doing in terms of CSR, and how it is doing it, in order to be able to fully appreciate and respond to the efforts being made.

Helping the needy Companies that engage in sincere and valuable strategic CSR initiatives help tackle the worldwide menace of poverty, and at the same time create


a new and better market for their products and services. Example: Aravind Eye Hospitals in India. Another stellar example of corporate social initiatives would be the endeavours of Aravind Eye Hospitals in India in the field of providing cheap and quality medical care to the poor. Between April 2009 and March 2010, the hospital has performed over 300,000 surgeries for poor Indians. The venture is also a profitable one. Aravind keeps its surgical equipment in operation 24 hours a day, which reduces the cost per surgical procedure. Also, doctors focus on performing surgery while the nurses handle pre-op and post-op care, which increases doctor productivity. This allows the company to offer free surgery to the poor while still earning a profit.


Building corporate brands Many corporates are as well known for their CSR initiatives as they are for their products and services. Examples would include: Levi Strauss, for its efforts in alleviating child labour; Whole Foods Market, for promoting organic and local produce; Timberland, for its efforts in the sphere of environment protection and regular reporting of its CSR activities; and Starbucks, for its CSR efforts in the field of education and support for local farmers. CSR initiatives would definitely contribute to the following aspects of a business, which would in turn assist in building the brand: They improve the trustworthiness of the organisation. Socially responsible organisations

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are favoured by investors. Job-seekers are attracted by companies engaging in sincere CSR initiatives. Employees improve their various skills and team spirit, thereby creating a more collaborative work environment. They improve employee loyalty. They create a positive opinion about the company among stakeholders. They contribute towards building a brand image, which brings about tangible benefits.

Figure 2: The five pillars of good CSR implementation




Harness innovation to create social value More often than not, a company has inherent capabilities, which, if properly identified, can form the basis for its CSR initiatives. For instance, Cognizant Technology Solutions launched a project to improve the quality of education with the help of its own volunteering employees and the financial and administrative support of the company. This has led to successful partnerships between the company and various schools and educational institutions in places such as the US, the UK, India and China. Almost all companies can contribute to the environment by taking steps to reduce their consumption of paper and to improve recycling. For instance, many companies have in place campaigns to reduce paper consumption. Employees can be requested to print out their documents on both sides of the paper, and to recycle pages printed on one side only for rough copies, which will save the company money, while also endearing its efforts to environmentalists.

Practical challenges in managing strategic CSR Thanks to the internet and the constant vigilance of an ever alert media, the general public is in a position to keep track of and keenly analyse every action and inaction by a company. There is a real possibility of adverse inference being drawn about companies that are not seen to be socially conscious and active as well as about those that appear to engage in




activities detrimental to society and the environment. Consumers today are definitely more aware and want transparency from businesses. A company that can meet these expectations is sure to reap benefits. It is therefore important for them to arrive at clear and beneficial CSR ideas. Recommendations in implementing CSR include the following (see Figure 2): The company should have a clear understanding of exactly what it is trying to achieve with its CSR strategies. Identifying its objectives will assist in determining what CSR initiatives it should seek to implement and what benefits it may achieve by doing so. The company should align its CSR strategies with its competencies. It should aim at developing CSR strategies that would benefit its own business objectives. Leading pharma company GlaxoSmithKline (GSK) has taken steps to improve access to medications and vaccines around the world. This has helped draw leading scientific talent to work for GSK. The company should integrate CSR as one of its business strategies.







CSR must be treated as a business strategy, just like any other aspect of the company, such as sales or research or marketing. There must be a balance between social responsibilities and profitmaking initiatives. It is imperative for companies to arrive at the junction where CSR strategies contribute to both the business and the company’s reputation. Strategic CSR is all about companies engaging in activities that are in line with their fields of expertise and which ultimately augment their business. The company should communicate the activities it is undertaking. Employees need to be aware of the intentions of their employer in taking up a particular activity, how it proposes to continue performing those actions and what contribution it expects from its employees in that regard. It is equally important that every person who engages in such activities is recognised, rewarded and encouraged to continue their good work.

Saad Maniar FCCA is a managing partner of Crowe Horwath, Dubai

01/08/2012 10:58



Beyond compliance PwC’s Alison Thomas continues her series on how to improve corporate reporting by mapping out the first steps you can take towards issuing investor-friendly statements The journey from mere compliance to fully integrated financial reporting is complex and likely to be different for every company. There are a number of areas to consider: Do your financial statements communicate effectively with the capital markets or are they compliance-focused? Could your financial reviews be better linked to strategy and become an integral part of communicating performance? Could your annual reports, investor presentations and other corporate communications become better integrated and converted into an interactive information source for investors? So how can you take action today? Perhaps the easiest first step is to focus on ensuring your financial statements communicate your key messages effectively by taking some simple actions to improve the quality of your communications with the capital markets. Why the easiest step? Because most of these practical steps require very little management time and often virtually no incremental cost.

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Quality not quantity Investors often tell us they don’t want simply more information in annual reports but more effective information. They want to see pertinent, material information that helps them make their investment decisions. Investors tell us there are several notes in the financial statements that can leave them unable to see the wood for the trees. Share-based payments, pensions, financial instruments and hedging notes are the most commonly cited examples. So have a think about what information investors actually need about your company, including in the notes to the financial statements. For


example, hedging notes could be made more useful through simple disclosures that focus more clearly on what has been hedged and how. Investors need to understand what exposure you are hedging, at what price, in which currency and for how long. They are trying to understand to what extent gains and losses were affected by derivative profits or losses, and how much profit came from maturing hedges versus marked-to-market gains and losses.

Clear communication We are seeing an increasing number of companies making great strides in improving the commentary in their financial statements. There is, for example, a growing trend towards integrating the financial review into the financial statements, bringing key information and analysis together. In a similar vein, we have noted a number of entities experimenting with the way they present their accounting policies – both by making it easier to understand how the policy relates to their business and by placing the policies alongside the relevant notes. Companies are becoming more inventive with their financial statements structures – for example, grouping notes into ‘core’ and ‘other’ – which is another way of signalling management’s focus to the investor that can be very valuable. These are just a few ideas. When I look at company accounts, I start with my checklist of items that investors commonly cite as being

frustrating. However, this is an area where common sense goes a long way. If an investor can’t work out the economic reality from the accounting disclosures, then it’s time to revisit your disclosure.

Where are you on your journey? All companies should think about how they can improve their communications with the capital markets. Whether you are taking the first steps along your journey, have specific areas in your financial statements or narrative to improve, or are ready to move to a more integrated approach across all your financial communications, you can make improvements. Alison Thomas is a corporate reporting specialist at PwC. To receive ‘Investor views’ highlighting the financial reporting areas of most interest to investors and how to improve those disclosures, email ‘Subscribe to Investor views’ to

01/08/2012 10:59



Accountants in crime-fight frontline Revised global recommendations give practitioners an increased role in the crackdown on money laundering, terrorism financing and tax evasion, says ACCA’s John Davies One of the very tangible ways in which practising accountants serve the public interest is as gatekeepers in relation to financial crime. Many accountants have by now come to accept that the regulatory obligations they have in this area are not only unavoidable but even helpful; first because they reinforce the status of accountants within society as responsible and trusted intermediaries, and second because the obligations act as an active deterrent to clients or prospective clients who might otherwise try to involve their professional advisers in their own criminal activities.

the economic downturn affecting Europe and North America, KPMG found a steady rise in the incidence of fraud and concluded that 80% of business fraud is committed by employees and managers, often taking advantage of weak controls and defective processes of detection. Bribery and corruption is another area of crime thought to be exacerbated by a harsh economic climate. Despite the well-publicised case of Siemens, which was forced to pay a record $1.34bn in fines by courts in Germany and the US for a series of bribery offences, a survey published in May 2012 by Ernst & Young found that

issued by the Financial Action Task Force (FATF), the global body charged with monitoring trends in financial crime and with developing anti-money laundering and counter-terrorism financing (AML/CTF) measures. The latest set of recommendations, only the third revision since they first appeared, in 1990, imposes significant new expectations on governments to address emerging macro factors, including countering the proliferation of weapons of mass destruction and carrying out national risk assessment procedures to lay the foundation for focused remedial measures. The revised recommendations incorporate a number of changes which stand to have a direct effect on practitioners and their work, as follows.


Client due diligence

The world at the moment is a dangerous and unstable place on many fronts. The international community still faces serious threats from terrorism and the spread of weapons of mass destruction. The depressed state of the global economy is also imposing highly competitive pressures on individuals and businesses alike, and very often the pressures on both are liable to interact. KPMG’s latest UK fraud survey suggests that recorded fraud in 2011 exceeded £3.5bn in total, with fraud by company management up by 74%. Even in Australia, which has escaped

There is only a minor change made to what for most practitioners is the key area of client due diligence (CDD) – namely, the standard range of circumstances in which CDD procedures must be performed and the steps that need to be carried out in those circumstances. Formerly, parties were required by FATF only to obtain information on the purpose and intended nature of a business relationship. The new wording commits regulated parties expressly to understand its purpose and intended nature. The revised wording makes it more explicit that the point of the exercise is

INT_T_fraud.indd 46

a staggering 54% of UK executives would not rule out engaging in unscrupulous or illegal behaviour, such as misstating financial statements or providing personal gifts or cash to secure business; the number of respondents prepared to offer bribes had almost doubled in two years. This is despite the introduction in the UK of legislation that exposes companies to criminal penalties if any of their employees, subsidiaries or intermediaries offer or pay bribes. This developing context has now been reflected in the latest version of the authoritative recommendations

06/08/2012 12:02


not solely to ask for information about the client’s intentions but also to understand those intentions; it also implies that the amount of information to be asked for should be in proportion to what the nature and purpose of the relationship is understood to be.

Politically exposed persons The recommendations already cover politically exposed persons (PEPs) to the extent that they come from a different jurisdiction than the one in which the practitioner operates. So, for example, a senior politician or military figure from a foreign country (who is a prospective customer or a beneficial owner) should be regarded as a PEP and so subject to ‘enhanced’ due diligence (EDD). The revised recommendations strengthen the PEP provisions with a new reference to domestic PEPs. Practitioners must now take ‘reasonable measures’ to determine whether a prospective domestic customer or beneficial owner is a domestic PEP (or a person entrusted with a prominent function by an international organisation). Where the prospective relationship is considered higher risk, practitioners are required to apply the EDD measures. Revised recommendation 12 provides that the measures to be taken for both foreign and domestic PEPs should be extended to family members and close associates of the PEP concerned. This includes gaining senior management approval for dealing with

INT_T_fraud.indd 47

them, carrying out reasonable inquiries to establish the source of their wealth, and undertaking enhanced ongoing monitoring of the relationship.

Groups Networks of professional firms are covered by a new recommendation to implement group-wide programmes against money laundering and terrorist financing. These should include policies and procedures for sharing information within the group for AML/CFT purposes. Group-wide arrangements could prove particularly advantageous in terms of placing reliance on CDD information acquired by third parties. Where a group as a whole adopts policies which follow the FATF recommendations, and where compliance with them is supervised at the group level by a competent authority, group companies should be allowed to rely on information provided by other group companies. Where such arrangements are put in place, national authorities may also decide that no special weight should be placed on the risk associated with the country in which the provider of information is based (another new element of the revised recommendations).

Extension of scope of the recommendations Some countries, such as the UK, already apply AML/CTF controls to tax offences but this has not until now been required under the FATF

War on two fronts: the soldier at this checkpoint in Sana’a, Yemen, provides a very visible anti-terrorist measure, but accountants will also play an important role as gatekeepers of FATF’s system to create a hostile environment for terrorist financing recommendations. The revised recommendations require individual countries to extend the scope of their AML/CTF measures to cover tax offences in respect of both direct and indirect taxes. It will be up to each country to decide whether to apply a threshold of materiality to this but, essentially, it means that whenever a practitioner suspects that a party has consciously committed a tax crime, then that will become, prima facie, a reportable matter. In those countries where tax offences do not currently form part of the national AML/CTF regime, this change is likely to have a significant impact on accountants. The FATF recommendations do not have regulatory force automatically, but need to be adopted formally by national authorities and regulatory bodies. The process of doing this is already well underway. In Europe a fourth directive on money laundering is currently being drafted as a priority measure, so members in public practice should be prepared for changes to their gate-keeping responsibilities in the near future. John Davies, head of technical, ACCA

03/08/2012 16:55




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

Making strategic options fly In the last article of this series, Dr Tony Grundy examines how the finance function – and the accountant within it – can play a much more strategic and influential role

So far this series has highlighted that the competitive environment has a very profound impact on financial returns. For an example of the effect, let’s take a brief look at the case of Marks & Spencer. In the very late 1990s M&S was Britain’s most profitable retailer. It was making profits of more than £1bn on sales of just £8bn. In economic terms, given the general competitive state of the retail industry, the company was making abnormally high returns. This was partly a reflection of its previous competitive advantage – brand, reputation, products and so on – but also in part because it was milking its position, underinvesting (lower depreciation), and skimping on customer service. Newer, nimbler and more aggressive competitors from niche retailers right up to Tesco and Asda were poised to attack its clothing business. And Waitrose, Tesco Finest and Sainsbury’s were attacking its premium foods business. Using various strategy matrices at that time and through the early 2000s I monitored M&S’s strategic position as shown in the table on this page. M&S’s clothing business was undermined by complacency, and by the early 2000s was really suffering against the competition. During this period, margins and profits at the company collapsed as a result of this weakening competitive position and the rise in rivalry. Its food business didn’t show much innovation throughout the very late 1990s and into the early 2000s. Although that improved greatly post-2005 under Stuart Rose, competition sharpened as its rivals improved their offerings.

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Marks & Spencer: strategic position Late 1990s

Very early 2000s

After 2005

After 2010

Market attractiveness





Competitive strength


Very low



Market attractiveness





Competitive strength







Value tree for new supermarket trolleys New trolleys

Customer value (by segment)

Company value

Operating cost saved Ease of use

Contributed to capturing new customers?

Irritation avoided

Contribution to brand image

Investment cost saved

Switching to competitor avoided?

In short, M&S’s profits collapse and its faltering recovery record very much mirrors, with some lags, the changing strategic position of its individual business streams. The company’s

profits look unlikely to return to the levels of the last century for the foreseeable future because those elevated returns have returned to a ‘normal’ level. What was cunning and

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unique in those halcyon days of bumper profits is no longer so. So profits and financial returns are closely correlated with external changes, with shifts in relative competitive position and with the extent to which the organisation is cunning or complacent. So when accountants look

much more effective in * be influencing key players in the organisation spend less time on more pure number-crunching and backwardlooking work. Returning to the issue of shareholder value, there are said to be seven key



the value to the business of new strategic options and decisions. The first two of the seven value drivers are called ‘business value drivers’; they are generally the most important in determining the share price and business value. If we look first at the more generic business value drivers, we can trace the links as shown below between competitive strategy (boldfaced) and the value drivers a strategically astute accountant should be looking for.

Sales growth rate to the profit and loss (P&L) account as the key performance indicator of the business they are often looking at symptoms rather than causes; the P&L figures don’t uncover the real drivers of corporate performance. By becoming strategically astute, accountants and the finance department as a whole can begin to fulfil their true role as the guardians of shareholder value, rather than being primarily the score-keepers who look after accounting profit. To turn this role into a reality, financial professionals need to: become much more involved in the planning process, by co-ordinating and project-managing it apply the strategic option grid (as described in the third article of this series) to help operational managers carry through the ‘challenge-andbuild’ process of refining and testing their options champion the role of shareholder value in the business (as described below), not just in business cases but more generally

* *


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value drivers that propel the net present value of future cash streams of the business: sales growth rate, operating profit margin, three drivers concerned with fixed and working capital, the tax rate, and the cost of capital. These seven drivers all have an impact on the share price. This impact can be modelled on a relatively simple spreadsheet which discounts forecast cashflows and the ‘terminal value’ at the end of the planning period to a present value. If all this is a foreign language to you, then as an accountant there is something that you aren’t doing but which you should be: keeping a close track on the value of your business, seeing whether this value is going up year on year (the ‘economic profit’), and understanding what is really behind that. This is a quite different way of looking at finance. It is forward-looking and not confined to just a year at a time. It is also based on a more honest metric: cashflow. It all helps you, in your role as an accountant, to assess

(political, economic, social * PEST and technical) factors: lower

* *

economic growth reduces the sales growth rate Life-cycle effects: maturity dampens price increases, may cause price deflation and lower sales volumes Relative competitive advantage: impacts on relative market share and supports premium prices.

Operating profit margin

five forces: squeezes prices, * Porter’s pushes up costs and reduces margins competitive advantage: * Relative protects against discounting, and


lowers costs of acquiring new customers and reducing the cost of replacement Variables: economies of scale and lower costs.

These are merely high level, but it is precisely this kind of analysis that accountants with a strategic role should be undertaking. The two business value drivers of sales growth rate and operating profit margin are a very good

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CPD units on the web


start but very generic. An accountant can make them far more specific. So first, a business value driver is defined as anything that generates – directly or indirectly – the cash inflows of a business, now or in the future. A cost driver can be defined in a very similar way as anything which generates – directly or indirectly – the cash outflows of a business, now or in the future. In the earlier article on the option grid, at ‘strategic attractiveness’ we were implicitly asking about cashflows, so we should look too at value and cost drivers, but now specifically. To operationalise these, it is best to try to sketch out a tree of value (and cost) drivers which underpin a particular strategic option. An example is in the value tree graphic shown on the first page of this article. This examines the value drivers for a new form of supermarket trolley which goes in a guaranteed straight line. The graphic shows an example of value segmentation – that is, economic value which accrues either to different people or in different ways/activities. This process allows indirect and less tangible sources of value to be captured – and ultimately for some ‘what if?’ approximate valuation to be done. This allows the accountant to capture softer value in business cases. In strategic planning softer value is very common. Such value trees not only help to cast the net of quantification wider but also, as we drill down to the bottom of that page, in more detail and depth. This methodology has helped me to put an economic value on culture change at BP and on learning and development at a police force, demonstrating the high ratios of value over cost resulting.

INT_UK_T_strategy5.indd 50

The cost driver tree I created had the investment and running costs broken down into losses and damage (big) and trolley retrieval costs (enormous). Drilling down here has begun the process of convincing UK supermarkets to reconsider coin locks. Using these kinds of pictures can enable accountants to perform a combined strategic and financial analysis of strategic options, project cost breakthroughs and generate far better business cases generally. Let’s now look at how a finance department might develop a strategy for itself.

Current position What businesses are we in? Transactional Technical Reporting Budgeting and financial planning Strategic, advisory, influencing Process development Special projects (for example, cost management) What is the current value added and what are the costs? Internal customer analysis/costs.

* * * * * * * * *

Value outsourcing Options/breakthroughs: Shift resources from traditional activities to strategic. Adapt structure and adopt more fluid roles. Mindset more commercial, forwardlooking, advisory.

* * *


be regarded as more of a * To business unit than a functional overhead, a voice championing shareholder value.

Not rocket science Creating a strategy for a finance department isn’t rocket science. It is a very similar process to developing one for any other business or function. In the future it would be wise to capitalise on your learning. Sadly the provision of short courses on strategy has dried up. In terms of further reading, Wikipedia is excellent and cuts through the terminology, although it is still rather conceptual. MBA courses can help broaden you conceptually and give you far more confidence. They put a lot of emphasis on strategic thinking – contact me via my website if you have serious interest. Strategic projects are another excellent way to develop further – for example, major change programmes, secondments, acquisition work and so on. Do trial techniques such as the option grid on these projects. Let me finish with a story. A group of turkeys were having a day out in London’s Hyde Park. While they were having their lunch (chicken sandwiches), a man came up to them and said, ‘Would you like to fly? I can show you how.’ They agreed and he took them on a flight around the park, over Buckingham Palace and Big Ben. When they landed, they thanked him and said what a great time they had had, then walked home happily. What is the one big thing that the turkeys forgot to do? Dr Tony Grundy is an independent consultant and trainer and lectures at Henley Business School in the UK

In the next issue we begin a new series of articles by Dr Grundy, this time on economic value.

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Accounting solutions In this month’s column, PwC authors answer technical questions on accounting for recharge payments, and supplier finance arrangements



ABC plc has granted rights over its listed shares directly to employees of its subsidiaries in exchange for employee services. ABC plc received a recharge payment from the subsidiaries, which is based on the IFRS 2 grant date fair value. How should ABC plc entity and the subsidiaries account for the recharge? IFRS 2, Share-based Payments, makes it clear that the accounting requirements for group share-based payment schemes apply regardless of whether a recharge arrangement is in place or not. So, initially you need to consider the accounting for the share-based payment award and then subsequently consider the recharge. In the individual subsidiary accounts, the share-based payment arrangement is accounted for as an equity-settled award, as the parent company (ABC plc) has the obligation to settle the award. The related credit to equity reflects the capital contribution received from the parent. In ABC plc’s individual entity accounts, there is an increase to the investment in the subsidiary to reflect the capital contribution and a credit to equity. IFRS 2 does not address the accounting for recharges; however, an illustrative example included in the IFRIC exposure draft D17 did consider the issue. In our view, because the recharge is directly linked to the sharebased payment charge, the recharge should follow the capital contribution in the individual financial statements of the subsidiaries’ and of ABC plc’s individual entity accounts. Any excess recharge above the value of the capital contribution is treated as a distribution. Accounting for the capital contribution and for the recharge are two separate transactions and should be disclosed


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gross in the financial statements, rather than offset. Accounting for a payment that is not directly linked to the award would result in an expense being recognised in the income statement for the amount recharged, in addition to the expense for the share-based payment.


ABC Ltd and its suppliers enter a finance arrangement with a bank. ABC’s existing payment terms policy is to pay invoices after 90 days. The bank will pay ABC’s suppliers the invoice amount less a fee before the due date. ABC will pay the bank the full amount of the invoices on the original due date. Does ABC need to derecognise its original liability and recognise a liability for an amount owed to the bank?

IAS 39, Financial Instruments: Recognition and Measurement, states that a liability should be derecognised if it is extinguished (that is, the obligation is discharged, cancelled or expired) or when its terms are substantially modified. If ABC has been legally released from its obligation to pay its suppliers, this would lead to an extinguishment. In other cases, quantitative and qualitative factors should be considered. Although IAS 39 paragraph AG62 prescribes the use of a quantitative 10% test (the discounted present value of the new and the old liability differs by more than 10%), this threshold is not usually met. Qualitative factors could include (but are not limited to): What was the purpose of entering into the arrangement? Will the arrangement affect the timing of ABC’s cashflows? Does ABC make additional interest payments? Indicators of extinguishment could be: the arrangement is to improve ABC’s working capital; ABC selects which suppliers should be part of the scheme; ABC agrees to pay interest to the bank for any late payments. If the trade payable is derecognised, a new liability to the bank should be presented as bank financing or another suitable heading. If the liability continues to be recognised, ABC may consider presenting the trade payables, subject to supplier finance arrangements, in a separate line item in order to faithfully represent the effect of the transaction. This month’s solutions were compiled by Michelle Millar, Harivadan Patel and Iain Selfridge of PwC’s Accounting Consulting Services

PwC’s Illustrative IFRS corporate consolidated financial statements for 2012 year ends is due out this month. Copies are available to order from

02/08/2012 15:23



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

More questions than answers The publication of non-binding Q&A guidance for users of the International Financial Reporting Standard for SMEs has raised eyebrows in some quarters, says Graham Holt

The SME Implementation Group (SMEIG) is a forum that considers implementation questions raised by users of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). It has published implementation guidance as a series of questions and answers. This article will detail the final published questions and answers to date.

Parent entities In some countries, parent entities prepare separate financial statements as well as consolidated financial statements. The first SMEIG Q&A was whether a parent entity, which is required to present consolidated financial statements in accordance with full International Financial Reporting Standards (IFRS), can present its separate financial statements in accordance with the IFRS for SMEs. The IFRS for SMEs is intended for non-publicly accountable entities that publish general-purpose financial statements for external users. If a parent entity does not itself have public accountability, it can present its separate financial statements in accordance with the IFRS for SMEs even if it presents its consolidated financial statements in accordance with full IFRS. The parent may use the IFRS for SMEs in its separate financial statements on the basis of its own public accountability without considering other group entities.

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A parent entity has public accountability where its own debt or equity instruments are traded in a public market (or it is in the process of issuing such instruments for trading in a public market) or it holds assets in a fiduciary capacity for a ‘broad group of outsiders’ as part of its main business. If a publicly accountable entity applies the IFRS for SMEs in its financial statements, it cannot describe those financial statements as complying with the IFRS for SMEs. However, a subsidiary that is part of a group that uses full IFRS is not prevented from using the IFRS for SMEs in its own financial statements as long as it does not have public accountability.

Public accountability The IFRS for SMEs identifies banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks as examples of the type of entity that ‘typically’ holds assets in a fiduciary capacity for ‘a broad group of outsiders’ as part of its main business. The second SMEIG Q&A was whether all those types of entities could automatically be assumed to have public accountability. There is no simple answer here, as judgment will be required to assess whether entities have public accountability. Part of the definition of public accountability relates to the ability of external parties that make economic decisions to demand reports

tailored for their particular information needs. Typically, depositors in banks, holders of shares in mutual funds, etc, are not in a position to demand such reports, so the entity is presumed to have public accountability even if it holds the assets for only a short time. ‘Broad group’ implies that the involvement of only a few individuals would mean that the entity would not be considered publicly accountable. However, there is no simple rule on what constitutes a broad group and so judgment will again be necessary.

Trading in a public market The third SMEIG Q&A continued with the theme of public accountability by considering how broadly ‘traded in a public market’ should be interpreted. Did it refer only to regulated markets or did it also cover other markets such as growth share markets and overthe-counter markets? ‘Public market’ is defined in the IFRS for SMEs as ‘a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets’. The definition includes all markets that bring together those capitalseeking investors that are not involved in managing the entity. The market must be accessible by a ‘broad group’ of investors. If the exchange is simply between parties involved in managing the entity, the market is not public. Advertising by a shareholder does not, by itself, create a public market; neither does the availability of a

02/08/2012 15:39

TO GET THE QUESTIONS GO TO financialreporting

Helen Brand Chief executive ACCA

A PARENT ENTITY MAY USE THE IFRS FOR SMEs IN ITS SEPARATE FINANCIAL STATEMENTS ON THE BASIS OF ITS OWN PUBLIC ACCOUNTABILITY published price mean that an entity’s debt or equity instruments are traded in a public market. There is no definition of ‘public’ in the IFRS for SMEs but it is usually considered to mean affecting a community as a whole; as set out above, it could be open to a broad group of outsiders, even if trading is infrequent.

Exemptions There are a number of exemptions in the IFRS for SMEs on the basis of ‘undue cost or effort’ or because the requirement is ‘impracticable’. The ‘impracticable’ exemption applies where an entity cannot apply it after making every reasonable effort to do so. However, ‘undue cost or effort’ is not defined and SMEIG was asked to explain the term. It involves a consideration of how users’ economic decisions could be affected by the non-availability of information and so requires judgment. ‘Undue cost or effort’ is specifically applied for some requirements but not all. Where ‘undue cost or effort’ is used in conjunction with ‘impracticable’, the application of the standard should be as if ‘undue cost or effort’ had been used on its own. The definition of ‘impracticable’ in

INT_T_HoltCPD.indd 53

the IFRS for SMEs is the same as under full IFRS and refers to effort and not cost. The inclusion of ‘undue cost or effort’ for certain requirements in the IFRS for SMEs is intended to point out that cost is a consideration. The International Accounting Standards Board (IASB) feels that a requirement would result in ‘undue cost or effort’ where the cost or the employee effort would be excessive in comparison with the benefits gained by users of the SME’s financial statements from having that information.

Which IFRS? Often a jurisdiction will require that a certain recognition and measurement policy is followed that is dealt with in full IFRS and not specifically covered by the IFRS for SMEs.The question then arises as to whether the SME in that jurisdiction can state compliance with the IFRS for SMEs. In the absence of specific requirements in the IFRS for SMEs, management must use its judgment in adopting a reliable and relevant accounting policy. The IFRS for SMEs sets out the following hierarchy to help decide the appropriate accounting policy to use: A) the requirements and guidance in the IFRS for SMEs dealing with

Dean Westcott President ACCA

Register and watch Helen and Dean answer your questions ACCA Engage 10 September 2012

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SOME BELIEVE NON-BINDING GUIDANCE IS INCONSISTENT WITH THE OBJECTIVE OF A SINGLE, STABLE, STANDALONE STANDARD FOR SMEs similar and related issues; and B) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in the standard. The IFRS for SMEs also states that management may also consider the requirements and guidance in full IFRS that deal with similar issues providing that they do not conflict. This requirement does not allow a free choice to apply full IFRS requirements when there is a specific requirement existing in the IFRS for SMEs. If the IFRS for SMEs contains different guidance to full IFRS, the entity will not be able to state compliance with the IFRS for SMEs unless the effect is immaterial.

IAS 39 vs IFRS 9 A related question has arisen with IAS 39, Financial Instruments: Recognition and Measurement. The IFRS for SMEs gives an entity the option of applying the recognition and measurement provisions of IAS 39 to all of its financial instruments instead of following the SME standard. The question arises as to whether an entity can choose to apply the provisions of IFRS 9, Financial Instruments. The IFRS for SMEs refers specifically to IAS 39

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and thus SMEs are not permitted to apply IFRS 9. The reason for this is that the use of IFRS 9 by SMEs would require a change to the IFRS for SMEs. The IASB intends to undertake a thorough review of the IFRS for SMEs and at that time it will also consider new and amended IFRSs that have been issued since the IFRS for SMEs was published, including the requirements of IFRS 9. The review is expected to be completed in 2014, so changes to the IFRS for SMEs would most probably be effective at a similar time to the effective date of IFRS 9. If an SME follows the recognition and measurement principles of IAS 39, there is a requirement that exchange differences arising on translation of a monetary item that forms part of a reporting entity’s net investment in a subsidiary should be recognised initially in other comprehensive income and be reported as a component of equity. The standard prohibits those cumulative exchange differences from being recognised in profit or loss on disposal of that net investment. Similarly, exchange differences arising on translation of a foreign subsidiary should be recognised in other comprehensive income but the standard does not mention recycling to

profit or loss on disposal. The question arose as to whether the cumulative exchange differences arising on translation are prohibited from being recognised in profit or loss on disposal of the subsidiary. The IASB has decided to prohibit all cumulative exchange differences recognised in other comprehensive income from being reclassified to profit or loss on disposal of the subsidiary. This requirement is a difference from full IFRS, and was drafted in order to eliminate the burden for SMEs of tracking the exchange differences after initial recognition.

Inconsistency The provision of non-mandatory implementation guidance by the IASB on the IFRS for SMEs has not been without critics. Some believe it is inconsistent with the objective of having a single, stable, standalone standard for SMEs. The IASB has recognised that providing less guidance than for full IFRS makes for greater diversity in practice on issues that were not addressed. By trying to remedy this, with non-binding questions and answers, it could be seen as calling into question the basic design of the standard and diluting the power of a single standard. 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

02/08/2012 15:41



No nasty surprises Before investing in a Chinese business, make sure that you carry out comprehensive due diligence on your target. Stephane J Grand offers a guide on what to consider When considering an investment in a venture operating in China, whether as a partnership, acquisition, shareholding stake, securities purchase or other, it is important to minimise risk, assess competitive advantages and identify growth opportunities by conducting due diligence. Corporate fraud is an international problem but recent cases in emerging markets have shown the considerable difficulty in obtaining and assessing company financial information and operations. Accounting irregularities have appeared in US-listed overseas companies, with the ripple effects reaching investors all over the world. Despite the perceived emergingmarket risks, China remains a highgrowth economy and is largely outperforming ailing European and US markets. Shrewd investors will continue to seek choice opportunities in the Chinese market as long as this growth continues. It is, however, prudent to take a multifaceted approach to due diligence to ensure that you gain a clear and well-rounded picture of a target investment. This article discusses some of the main types of due diligence that should be conducted in this environment. It will help investors avoid common pitfalls and adjust their approach strategy to take into account the unique nature of the Chinese business environment.

Basic checklist The following documents should all be covered to ensure that a foreign invested entity in China is operating legally and has the appropriate permits and approvals. Note the different requirements for representative offices (ROs), a wholly foreign-owned enterprise (WFOE) and joint ventures (JVs): articles of association (WFOE, JV) organisation certificate (RO, WFOE, JV)

* *

INT_T_duedilligence.indd 55

licence (WFOE, JV) * business registration certificate of foreign * enterprises’ permanent office in

* * * * * * * * * * * *

China (RO, WFOE, JV) capital verification report (WFOE, JV) national and local tax certificates (RO, WFOE, JV) tax documents for any preference or exemption (RO, WFOE, JV) approval notice for bank account (RO, WFOE, JV) signature card for bank account (RO, WFOE, JV) office rent contract or certificate of real estate ownership (RO, WFOE, JV) contact details of financial department or cashier (RO, WFOE, JV) accounting policies (RO, WFOE, JV) customs documents (RO, WFOE, JV) copies of passport of the investor(s) or business licence of the parent company (RO) photocopies of ID card or passport of the chief of the board (RO) certificate of the chief representative salary (RO).

Financial Thorough financial due diligence is an important basis for understanding a company’s business operations and identifying potential accounting irregularities. It is particularly important to be alert to the practice of keeping multiple accounting books. Other important accounting considerations when operating in the Chinese business environment include: Analyse the fixed assets. Do they reflect the reality of the company’s operations? Are they accurately accounted for? Is asset depreciation accurate? Ensure that the company is the true contractual owner of the fixed assets. Check accounts receivables. Confirmation with clients is essential in order to double-check the target



company’s explanations of total billing. This should also apply extra scrutiny to a company’s aged receivables balance. Where applicable, suppliers should also be verified. The cash position should be confirmed through a letter from the banks; sending it to the regional headquarters may be preferred. Check other payables and liabilities. Analysis should be done on salaries, social insurance payments or liabilities such as pension payments for former employees. Has the business been accurately calculating its social insurance obligations? Look at business expenses and check the authenticity of invoices. Beyond accounting issues, China’s complex taxation system and regulatory environment require a close examination of a company’s overall situation and liabilities. The various possible corporate and legal structures each have different tax issues and risks to address. The tax environment is constantly evolving, and new national regulations may have different levels of implementation or amendments in various localities. Companies may be following legacy tax policies and may not have updated their payments to current policies and regulations. These legacy policies may contradict national regulations or be legally unenforceable. Unpaid tax obligations can significantly change a company’s profits and losses if it plans on coming into full compliance with tax regulations. It is also important to keep in mind the following questions when conducting due diligence on tax issues: How do China’s generally accepted accounting principles (GAAP) differ from the standards normally used by the investor? Could these issues create confusion about the overall

* *



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financial position of the target investment? Do transfer pricing issues or exposure to transfer pricing apply to the company in question? What are the applicable preferential tax rates based on the company’s industry or operational scope, and what is the extent and time length of these preferential rates? Is the company in compliance with all foreign exchange regulations? Is the company fulfilling its withholding tax responsibilities? If applicable, are all customs regulations being followed?

Operational and investigative Even if an investor conducts thorough financial due diligence on a potential target, investigative and operational due diligence can help verify a company’s provided documentation by means of first-hand inspections and assessments. Taking into account the potential difficulty in accurately assessing a company’s financial position in emerging markets such as China creates an even greater need for comprehensive operational and investigatory due diligence. Confining due diligence primarily to reviewing financial statements and other company documents is unlikely to provide all vital information for a potential investor, and is inadequate to provide a complete picture of a company’s operations. In addition to face-to-face meetings it can be useful to conduct independent investigations into a company’s suppliers and customers. Can you randomly choose some suppliers and customers to contact? Can you independently verify their volumes of sales or purchases from suppliers? Can you secure interviews with lower-level staff or security guards at factories or facilities? Sometimes interviewing lower-level personnel who have not been coached in what to say to investors can help in getting a truer picture of the target in question. An effective strategy to get the most out of site visits and investigative due diligence is to have a multifunction team consisting of operational, legal, environmental, financial and human resources experts. If you assemble a

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team with complementary specialities the combined intelligence can help reveal more information than may be gathered by individual analysis. A legal team can be crucial in investigating due diligence, but it is also necessary to do a thorough examination of a variety of important issues, including business structure and scope, intellectual property (IP) and land use.


Legal Legal due diligence can help determine a target’s attractiveness and ensure that all contractual agreements are solid and

unenforceable informal arrangements between companies and local officials, land improperly zoned for current use, and mortgaged land and buildings detracting from the target company’s overall value. Check its intellectual property. Systems for IP protection have been strengthened in recent years but there is still progress to be made. Companies can underestimate the value of their own IP and so may not take the necessary legal steps to protect it. An investor should confirm

CONFINING DUE DILIGENCE PRIMARILY TO REVIEWING FINANCIAL STATEMENTS IS UNLIKELY TO PROVIDE ALL VITAL INFORMATION in order. Special focus should be given to the following issues while taking into account China’s young legal system: Check the company’s target structure/industry classification. Confirm that the company possesses all necessary business licences and permits. The ownership structure should be verified to determine if there are any hidden owners or partial shareholders. Special attention should be paid to this as verbal agreements can be legally enforceable in China. The Chinese government also has various classifications for industries: encouraged, neutral, discouraged and forbidden. Determining the classification of your target will help you determine if and with what stipulations an investment can be made, and help you identify any possible tax benefits that the target may be entitled to. Check land use rights. While land in China technically cannot be owned by an individual, the right to use land and own any property on that land can be purchased. Confirm that the company in question owns the land use rights itself and that the rights are not owned by third parties or parents/affiliates of your target. Common problems include

that its target has proprietary rights to any technology when applicable and check all corresponding trademarks and patents.



Environmental Given China’s strict environmental standards and the focus in the 12th fiveyear plan, environmental due diligence should be conducted where applicable. Some important issues to consider in China include: ensuring that the company holds all appropriate environmental permits; examining any potential outstanding liabilities or costs due to environmental contamination or degradation ensuring that land included as part of any deal is not contaminated (soil sampling can determine this) clarifying what environmental management systems a company has in place in the case of land containing factories, examining wastewater management and waste disposal capabilities and procedures investigating any existing arrangements with a locality’s governing environmental body.

* * * * * *

Stephane J Grand is president, SJ Grand Financial & Tax Advisory

02/08/2012 15:34

Technical update


A monthly round-up of the latest developments in financial reporting, audit, tax and law FINANCIAL REPORTING IFRS FOR CHIEF EXECUTIVES The IFRS Foundation has made the following available: IFRS: A Briefing for Chief Executives, Audit Committees and Boards of Directors 2012. The briefing, written in non-technical language, aims to help chief executives, members of audit committees, boards of directors and others who want a broad overview of International Financial Reporting Standards (IFRS). It summarises all IFRS issued at 1 January 2012 including those with an effective date after 1 January 2012, and highlights the significant changes in 2011 to IFRSs 10, 11, 12 and 13, together with the revisions to IAS 19, 27 and 28. IFRSs 10, 11 AND 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (amendments to IFRSs 10, 11 and 12) has an effective date of 1 January 2013. In its commentary the International Accounting Standards Board (IASB) states that the ‘amendments also provide additional transition relief in IFRSs 10, IFRS 11, Joint Arrangements and IFRS 12, Disclosure of Interests in Other Entities, limiting the requirement to provide adjusted comparative information to only the preceding comparative period’. It has also published online revised

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unaccompanied standards for IFRSs 10, 11 and 12. For more, go to www2. members/technical Glenn Collins, head of technical advisory, ACCA UK

AUDIT IAASB MEETING UPDATE The main topic of the recent International Auditing and Assurance Standards Board (IAASB) meeting in Edinburgh was auditor reporting. A great deal of work had been undertaken by IAASB’s task force and working groups to agree key principles on the structure and content of the proposed auditor’s report in advance of the June meeting. As a result, the IAASB was able to debate and approve a wide-ranging invitation to comment (ITC) document which was issued shortly after the meeting. Much of the ITC discussion focused on the proposals for: Additional auditor commentary on key areas – specifically the types of matters that might be included and what the auditor might actually say. The ITC contains a range of options, with a discussion of the relative value and potential impediments of each, to prompt feedback. Conclusion and/or commentary on going concern and a statement in the auditor’s report of whether any material uncertainties have been identified. This is an area




where the IAASB is keen to respond to concerns raised following the global financial crisis. Flexibility within the illustrative auditor’s report to accommodate requirements within different jurisdictions, while retaining the consistency needed from a global standard. The IAASB plans a range of awareness and outreach activities in advance of the response date of 8 October to yield stakeholder input. The IAASB also approved the final version of ISRE 2400 on review engagements, which will become effective for periods ending on, or after, 31 December 2013. The final standard will be released in late September 2012, following Public Interest Oversight Board approval. This standard is timely given the many jurisdictions introducing, or increasing, the audit threshold and so considering alternative assurance products. The IAASB plans to monitor global adoption of ISRE 2400 and potentially review it in future in the light of practical feedback.


Sue Almond, technical director, ACCA

EUROPEAN UNION EC TO HARMONISE FRAUD LAWS The European Commission has made an ambitious political move to secure agreement from EU member states to harmonise their anti-fraud laws, potentially

03/08/2012 12:28


Technical update

criminalising financial malpractice in many EU member states. This could flow from a proposed directive insisting laws on all fraudulent attacks on EU spending and revenue collection programmes be harmonised, including levying similar punishments. Under the directive, revenue collection would not only include duty paid on imports into the EU, but also VAT, because its level affects member states’ European funding transfers. If approved, it would shake-up EU anti-fraud laws. Currently, not only do punishments vary widely (from no mandatory sentences to 12 years’ jail), but the criminalisation of various offences does too; for instance, obstructions of public procurement or grant procedures are not always crimes in all member states. National governments may also have to choose whether to leave their existing anti-fraud laws in place for non-EU frauds, while changing them for EU-linked crimes. More at http:// ANTI-TAX EVASION MEASURES The European Commission has issued a comprehensive policy document (a ‘communication’) proposing initiatives to fight tax fraud and evasion. It says it will investigate creating a crossborder EU tax identification number, with member states giving greater mutual access to their tax databases. Another initiative under consideration is the

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creation of a ‘quick reaction mechanism for VAT fraud’, including teams of auditors dedicated to detecting cross-border tax fraud. Brussels also wants to improve the supply of information for taxpayers living in different EU member states, including a single EU tax web portal with information on all EU taxes and more efforts – at national and EU levels – to encourage tax compliance by peripatetic EU citizens. For more information, visit RETAIL INVESTMENT RULE The European Commission has proposed an EU regulation that all packaged retail investment products are issued with a ‘key information document’ (KID) to inform consumers and their financial representatives. It would outline the product’s main features, plus associated risks and costs; ‘information on risks will be as straightforward and

comparable as possible…’ More at mqczuv DERIVATIVES INFORMATION RULES APPROVED The EU Council of Ministers has approved a new regulation requiring the reporting of all over-thecounter (OTC) derivatives contracts to central data centres, which will be monitored by the European Securities and Markets Authority (EMSA). These centres will have to publish aggregated information on classes of derivatives. The rule says contracts must be cleared through adequately financed central counterparties. More at PROSPECTUS REFORM The European Commission has reformed the EU’s Prospectus Directive 2003/71/EC, clarifying its rules to such an extent that compliant financial information need not in future be accompanied by

an auditor’s or independent accountant’s report. The Commission has also clarified rules for stating profit forecasts and estimates. And it has added a requirement to describe underlying proprietary indices when the index’s composer is commercially linked to the issuer. For more information visit http://

OECD DATA REQUESTS ON TAXPAYER GROUPS ALLOWED The OECD has updated its Model Tax Convention rules on tax authorities exchanging information to allow requests for data on groups of taxpayers, where inspectors have demonstrable concerns about potential tax evasion. Requests cannot be a ‘fishing expedition’, said the OECD, hailing the reform as ‘a step forward towards more transparency’. Keith Nuthall, journalist


UNICEF TO PUBLISH ITS INTERNAL AUDITS The United Nations children’s agency UNICEF has made a ground-breaking decision on international organisation audit transparency, becoming the first UN agency to publish all its internal audits. UNICEF will create a special ‘accountability and transparency’ section at its website for these reports. A UNICEF note hinted that the move was partly prompted by pressure from US legislators.

03/08/2012 12:28



The secret to getting the best CPD Make sure you leave enough time to reflect on the learning you’ve done and fit it into a bigger development plan. Here are some tips We all know CPD is about learning and how that learning supports your career. But over the years we’ve noticed that not enough of our members reflect on the learning that they’ve done or try to fit it into a bigger development plan. Understandably, it is difficult to reflect on your CPD if you only think about learning towards the end of the year with the aim to gain the verifiable CPD units you need for your declaration. Courses are sold out in minutes and e-learning opportunities relevant to your career might not be available just at that time – not the best experience when all you’re trying to do is develop professionally. So why not use the summer months to learn – work tends to slow down and there are still plenty of opportunities for development.

Relevance, relevance, relevance If you’re an accountant and you want to develop in that role in the future, doing an evening course in oil painting will sadly not count towards your CPD. It might be a great experience, but unless you can prove it has contributed towards your career, you will not be able to use it towards your CPD. An online refresher in managing people can be very useful if you’re involved in managing teams or you manage your own practice; however, it’s hard to prove relevance if, for example, you’re just at the start of your career and your role does not involve any management. Relevance is the cornerstone of ACCA’s CPD policy, yet many members experience delays in their CPD review because they fail to demonstrate the relevance of their CPD activities to their current job or future career. If you work in a relevant role, your CPD will probably be mostly about

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maintaining technical ability and keeping abreast of industry developments. However, don’t forget your other professional skills. A course in presentation skills is just as relevant as a Microsoft Excel course if you have to deliver presentations for work. If you are not currently working in a relevant role and have moved away from accounting and finance, you can still gain CPD if you can demonstrate relevance to your current role. It’s important to note that members in practice continue to maintain competence in their areas of technical specialism and obtain an appropriate proportion of CPD in those areas.

Opportunities to learn Once you fully understand that it is relevance that counts, you can begin to think more imaginatively about how to obtain CPD as there’s a good chance that you are already doing much learning in your day-to-day work.

Day-to-day CPD Let’s take for example report writing. Was the subject matter new? Did you conduct any type of research (speak

with colleagues, business experts or do internet research) to do the report. All this can count towards your CPD as it is in essence new learning that is relevant to your career. Evidence can be provided – the report itself is evidence; additionally, the research notes can be produced, a diary printout or copy showing the time for research blocked off, or a colleague can corroborate that the learning took place. Check the examples of CPD evidence at

What’s the secret of great CPD? Plan in advance! Where do you want to be this time next year in your career? What is the relevant learning that can get you there? To determine relevance, ask yourself: 1 Was the learning activity relevant to your career? 2 Can you explain how you will apply the learning in the workplace? 3 Can you provide evidence that you undertook the learning activity? If you can answer with yes to all three questions, then one hour of learning equals one verifiable unit of CPD.

01/08/2012 10:50

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ACCA news

COMPTROLLING NEW YORK New York State comptroller Thomas P DiNapoli discussed the economy and his office at a recent Newsmakers Breakfast, co-hosted by ACCA USA. In a discussion with City & State media, DiNapoli offered an optimistic take on the state’s fiscal health, countered challenges to his office’s oversight power, and emphasised the importance of maintaining the public’s trust. DiNapoli sat down with City & State editor Morgan Pehme for an interview in midtown Manhattan at the event, attended by more than 100 people, including representatives from New York State Assembly, Michael Page, the Canadian Consulate, PwC, Bloomberg, Greenberg Traurig, STV Incorporated, Milano School of International Affairs, Management and Urban Policy, Time Equities Inc and Baruch College.


DiNapoli defended the importance of his office’s oversight powers in the wake of Governor Andrew Cuomo’s usurping earlier this year the comptroller’s authority to preaudit some state contracts. DiNapoli said that the changes to the review process ‘made no sense’ because they

‘THE ARGUMENT THAT THE COMPTROLLER’S REVIEW SLOWS DOWN THE PROCESS IS NOT REALLY BASED ON THE TRACK RECORD OF THE OFFICE’ rendered it more readily subject to abuse, as there would be fewer eyes vetting the contracts in question. He also disputed the idea that preauditing only adds to government bureaucracy. ‘I think that the argument that the comptroller’s review slows down the process is really not based on the track record of the office,’ DiNapoli said, noting that in many cases the review of contracts takes two weeks, and sometimes a matter of days.

State comptroller Thomas P DiNapoli was elected to a full four-year term as New York State comptroller in November 2010. Since first taking the position in February 2007, he has transformed the way his office does business, instilling reforms to make government more effective, efficient and ethical. He has pushed for increased transparency and accountability, identifying billions of dollars in waste, fraud, abuse and mismanagement. As New York’s chief fiscal officer, DiNapoli is responsible for auditing the operations of all state agencies and local governments, managing the state’s pension fund, overseeing the New York State and Local Retirement System, reviewing the state and New York City budgets, approving state contracts, and administering the state’s payroll and central accounting system. As sole trustee for the estimated $150.3bn (as of 31 March 2012) state pension fund, one of the largest institutional investors in the world, DiNapoli has: safeguarded the interests of more than one million members, retirees and beneficiaries imposed tough new rules to prevent improper influence on investment decisions, and enhanced public disclosure

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DiNapoli added that the comptroller’s staff frequently work with state agencies to resolve potential areas of concern in a contract instead of blocking it completely. Without preauditing authority, he said, his office can only identify a problem after the fact.

The comptroller also weighed in on a new report co-written by former lieutenant governor Richard Ravitch and former chairman of the Federal Reserve Paul Volcker, saying that he agreed with those findings projecting significant financial problems for states that did not adjust their spending. It’s no surprise that states continue to struggle with the uncertain status of their federal funding and the ballooning costs of funding healthcare and other

millions of dollars in New York companies to * invested grow the state’s economy for changes in Iran and Sudan, promoting * fought responsible investing opportunities for minority and women fund * created managers. As the state’s fiscal watchdog, DiNapoli has emphasised that ‘every dime counts’. He has been an outspoken critic of fiscal gimmicks and other poor budget practices. Accomplishments and initiatives include: overseeing nearly 550 audits in 2009, and identifying over $1.5bn in savings and revenue enhancements for state and local governments completing a five-year school accountability project conducting regular audits of the state’s $45bn Medicaid programme, which identified $182m in overpayments and savings in 2009 giving the public unprecedented access to financial data on government revenues and expenditures through his Open Book New York website proposing reforms to make the state budget process

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02/08/2012 15:00


benefits, he said. But he also noted that New York has fared the best of the six states studied in the report. ‘The Ravitch report pointed out that we’re going to start to see a levelling off of the pension hit that we’ve had over past few years, and [it] pointed out that New York is in the best shape,’ DiNapoli said. ‘We were the only one of the states studied that had a fully funded state pension plan.’ Reflecting on the fact that his immediate predecessor, Alan Hevesi, is now in prison for abusing his position, DiNapoli stressed the need to earn the public’s trust. ‘It is a bit sobering, the notion – especially when you’re in a public office – [that] you reflect on the fact that the person who was there before you is sitting in a jail cell,’ DiNapoli said. ‘It’s a stark reminder of how fragile notions of trust and perception are, and how important it is to safeguard them.’ Sam Levine, journalist

more responsible and open, and correct the chronic imbalance between income and spending proposing reforms to bring state borrowing under control. DiNapoli is committed to making state government serve the people of New York better. His reforms include: new regulations to prevent ineligible individuals from collecting pensions enabling the public to track how the state is spending federal stimulus dollars, and stopping questionable stimulus contracts a financial education initiative, Your Money New York, to help ordinary citizens make smart decisions an ambitious Green Initiative to promote cost-effective, environmentally sustainable practices improvements to the state contracting process to encourage competition and ensure vendor responsibility, prompt contracting and equal opportunity new ethics rules to ensure that all employees in the Office of the State Comptroller conduct themselves according to the highest standards of integrity.

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Previously, DiNapoli represented northwestern Nassau County in the State Assembly for 20 years. During his legislative career, he fought to restore fiscal responsibility in the county, prevent fraud and mismanagement in school districts, and clean up the state’s water supply. In 1972 he was elected to the Mineola Board of Education at the age of 18, becoming the youngest person in New York State to hold public office. He holds a bachelor’s degree in history from Hofstra University and a master’s degree in management and urban policy from The New School University. Prior to his election to the assembly, DiNapoli was a manager in the telecommunications industry and served as an adjunct professor.

02/08/2012 15:01


ACCA news

SEEING AFRICA IN A NEW LIGHT At the biennial ACCA Council meeting held this year in Kenya, members discovered a continent that is open for business and ready to usher in a golden era ACCA’s 36-strong Council came to East Africa in June to discuss opportunities and challenges for the accountancy profession. The biennial meeting in Nairobi, Kenya, followed by separate visits to meetings in Ethiopia, Tanzania and Uganda, reflected Council’s desire for a clearer understanding of the rapid economic and business developments in Africa. ‘The only way to do this is to be here and to be here now,’ said ACCA president Dean Westcott at the gala dinner in Nairobi. ‘This way we can see first-hand how professional accountants working here create public value. And by public value, we mean working in the public interest, promoting responsible and ethical business, and supporting enhanced global economic performance.’ ACCA chief executive Helen Brand said: ‘As our governing body, Council is elected and consists of voluntary members who possess a global outlook that can only benefit further by meeting together in Kenya.’ The chief guest at the gala dinner was Dr James Mwangi, chief executive of Equity Bank in Nairobi. Mwangi made headlines recently when he was awarded the title of Ernst & Young World Entrepreneur of the Year 2012. As finance director and then chief

IEBC commissioner Albert Bwire, ACCA president Dean Westcott, ACCA deputy president Barry Cooper, and Uchumi Supermarkets CEO Jonathan Ciano (left to right) executive of Equity Bank, Mwangi grew the business from a small microfinance house that was ‘technically insolvent’ into Kenya’s largest bank. It is now a listed company and responsible for more than half of all bank accounts in Kenya.

Jamil Ampomah, ACCA director of sub-Saharan Africa


To mark the Council meeting in Africa, ACCA’s monthly magazine Accounting and Business published an Africa Special Edition. It is packed with interesting articles, which were highlighted by ACCA president Dean Westcott in his speech at the gala dinner. ‘It is a riveting read that’s challenged my thinking on a number of issues,’ he said. The editors include Alvin Chikamba, head of policy for sub-Saharan Africa at ACCA. It also includes a view from Japheth Katto FCCA, CEO of the Ugandan Capital Markets Authority and board member of the International Federation of Accountants. You can read the Special Edition at

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Also among the gala dinner guests were Rosemary Gituma and Abdulwahid Aboo, council members of the Institute of Certified Public Accounts of Kenya (ICPAK), as well as Vickson Ncube, CEO of the Pan African Federation of Accountants. ACCA has a long history of working in partnership in Africa, said Westcott, with learning providers, ICPAK, KCA University and Strathmore University. With the opening of new offices and a growing number of members, ACCA’s presence has increased rapidly in Africa. Member numbers stand at nearly 10,000 for sub-Saharan Africa, and some 82,000 students. ‘This growth could not have been achieved without the partnerships and alliances we have forged here,’ Westcott added. Members across Africa are supported by a team of full-time staff based in 11 African countries, from Botswana to Zimbabwe, and ACCA’s many partners. Africa’s businesses are becoming increasingly important international trade partners and its markets are increasingly attractive as an international trade proposition, said Westcott. ‘This is why professional accountants have a significant role to play in capacity building in Africa.’

02/08/2012 18:14


Referring to the report Making Capital Markets Work in Emerging and Frontier Economies (see box), Westcott drew guests’ attention to the Uganda Capital Markets Authority’s financial literacy work. The body is running a programme to train journalists in financial issues and how to report on capital markets without jeopardising or compromising their professional standards or journalistic independence, he said. ‘As ACCA members have told me, it is time for ACCA and the business world globally to see Africa in a new light. The continent’s economy is growing strongly and its prospects are bright, but it also faces significant challenges.’ As well as new member ceremonies, an employers’ roundtable was held in Ethiopia on the theme of ‘the role of finance professionals in an emerging economy’. There was also an event in Tanzania to launch the two reports on capital markets, while Uganda was the location for an event to discuss the issues relating to effective financial management and transparency. Jamil Ampomah, ACCA director of sub-Saharan Africa, said: ‘It is important Council members from all over the world come to Africa and understand the issues their Council colleagues face here on this continent.’ ‘We will be taking our learning, our understanding and the expertise gained while we have been here back to our own countries,’ said Westcott, ‘to spread the word that Africa is open for business and this is a golden era for Africa.’ Lesley Bolton, international editor

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Above: James Mwangi, Equity Bank chief executive Above right: Westcott on set with NTV host Dan Mwangi Right: Helen Brand, ACCA chief executive Far right: Alvin Chikamba, ACCA head of policy for sub-Saharan Africa


Two reports – The Rise of Capital Markets in Emerging and Frontier Economies and Making Capital Markets Work in Emerging and Frontier Economies – were launched during ACCA Council’s visit to East Africa. The Rise of Capital Markets reviews the academic literature on the development of capital markets, while Making Capital Markets Work is a collection of first-hand accounts and case studies from senior managers and professionals who are spearheading market development. Speaking at the press conference in Uganda, ACCA president Dean Westcott said: ‘Capital markets play an important role in promoting robust economic activity. Emerging capital markets are clearly an increasingly important source of finance to business. Broadening participation in company ownership, especially where the needs of minority shareholders are concerned, requires clear corporate governance, a responsiveness to the many needs of investors, consideration of independent representation on the company board, and transparency of decisionmaking in the interests of all investors and wider stakeholders.’ ACCA believes that capacity building around financial systems is essential. It allows capital markets to enable the most promising businesses – both large and small – to source funds more cheaply and reliably than would otherwise be possible. But in order to do this, these businesses need access to reliable financial information, which in turn depends on the skills and competences of professional accountants. Westcott concluded: ‘Our reports show that the perceived strength of accounting and auditing standards is a leading indicator of the health of capital markets and a strong predictor of their ability to drive economic growth.’ Both reports can be viewed at

02/08/2012 18:15


ACCA and the Malta Institute Inside ACCA 64 Africa is open for business was the message coming from this year’s ACCA Council meeting in Kenya 62 New York The city’s comptroller discusses the state’s fiscal health






I EDITION 05 I 2012


you via live webinars d you can participate d the world. ormation, visit tingforthefuture

ACCA and the Malta Institute of Accountants (MIA) signed a new agreement on 20 June extending the existing Joint Examination Scheme (JES) to incorporate ACCA’s Foundations in Accountancy suite of entry-level awards. This agreement signals the continuation of a successful history of partnership between the two accountancy bodies. Roger Acton, director-Europe at ACCA, joined MIA’s president Anthony Doublet to sign the FIA JES and renew the ACCA Qualification Professional Level JES. Acton said: ‘Working with other bodies is a vital part of ACCA’s strategy and also encompasses one of our core values, that of innovation. Working together, we can ensure we are training and developing accountants for the future.’ The new agreement will take effect from 24 September and any new students registering to study FIA after this date will do so under the JES. The first exam session will be held in December 2012. Existing ACCA FIA students in Malta will all be notified directly by ACCA. For more information, visit

59 CPD Make sure your CPD learning fits into an overall development plan


future is a worldwide ance professionals ger and sustainable ampions the connected ays we will harness ng together finance he world to share Our experts will share usinesses and the apt to meet the future ators, the economy

ACCA news






I EDITION 05 I 2012







St Paul’s Pro Cathedral, Malta, Europe




ACCA’s Research and Insights iPad app gives you access to the findings of the risk management survey of our members and explores what integrated risk management looks like in practice. You can download our iPad app for free via, or just search for ‘ACCA Insights’ in the iTunes App Store.

ds London WC2A 3EE United Kingdom +44 (0)20 7059 5000 www.accaglobal.c om


11/06/2012 11:48

The latest edition of ACCA’s Accountancy Futures journal, looking at current and future issues affecting business and the accountancy profession, is now available at www. futuresjournal

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ACCA is holding a worldwide event next month exploring the role finance professionals will play in developing a more sustainable global economy. Members joining the online interactive event, to be held from 8 to 12 October, will be given access to the latest research in accounting and finance. They will also be able to watch, hear and question experts who will be sharing the latest insights on how businesses need to adapt to meet the future needs of stakeholders, regulators, the economy and the environment. Registration is straightforward and will allow access to a variety of sessions that will develop knowledge and contribute towards CPD.


ACCA has launched an iPad app that explores crucial trends and issues for business, economies and the accountancy profession. You can find it at www.accaglobal. com/insightsapp or by searching for ‘ACCA Insights’ in the iTunes App Store. It includes video interviews and podcasts from leading experts, interactive infographics and ACCA research findings. The first edition of the app also looks at how accountants in a wide range of roles contribute to managing risk. ACCA has also introduced a new Student Planner app, available free at the iTunes App Store.


ACCA deputy president Professor Barry Cooper FCCA has been awarded life membership of the Accounting and Finance Association of Australia and New Zealand (AFAANZ), the organisation that represents all accounting and finance academics in Australia and New Zealand. The prestigious award was made for his outstanding and exceptional contribution to AFAANZ, of which he has been both treasurer and Australian president. His work included the re-engineering of the body’s finances. Cooper is head of the School of Accounting, Economics and Finance at Deakin University in Geelong, Australia.


ACCA’s 107th annual general meeting (AGM) will take place on Thursday 20 September at 13.00 BST (12.00 GMT). The annual report and AGM papers can be accessed online at www. As usual, all members have the option of voting online. You will have been provided with your voting codes electronically or with the AGM papers posted to you. Visit to cast your vote.

03/08/2012 12:49

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02/08/2012 18:12

AB International edition – September 2012  

AB International edition – September 2012 – Accounting and Business magazine

AB International edition – September 2012  

AB International edition – September 2012 – Accounting and Business magazine