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Force of nature making business continuity plans a priority
AirAsiaâ€™s Tony Fernandes Sarbox A decade in law Skills Approving Tech spend Interview Banyan Tree CEO
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We talk to accountant-turned-entrepreneur Tony Fernandes on his aspirations for budget airline AirAsia and his recent forays into football and manufacturing as an investor in British club Queens Park Rangers and in sports car company Caterham. Page 16
PREPPING FOR DISASTER Sometimes, disaster strikes when you least expect it. Other times, there may be sufficient warning. Either way, the repercussions will be severe if you are caught in the path of nature’s wrath. The massive flooding in Thailand last year was a major blow to our northern neighbour, both in terms of the human cost, with hundreds of lives lost, and the hit on its economy. And, like the double disaster that hit Japan a year ago, the impact was felt not only in the affected locations, but around the world, as global supply chains were disrupted. The Thailand floods, the worst in 50 years, have particular resonance for Malaysia. For those of us old enough to remember, downtown Kuala Lumpur in January 1971 could only be accessed by boats. The question remains whether businesses today can cope with a disaster the magnitude of the Great KL Flood – or even worse? The Thailand floods have made companies realise the importance of preparing business continuity plans as these events have a far wider impact than ‘standalone’ disasters like IT systems failure or fires. The key to business sustainability in the face of a natural disaster lies in being prepared in advance. Malaysian organisations need to revisit their business continuity plans and get up to speed in areas such as insurance coverage and holistic disaster management. For example, statistics show that organisations across Asia insure their property assets for approximately 40% to 60% less than their true current replacement value. The consequences can be severe, significantly reducing the ability of businesses to recover. CFOs and accountants will have a key role to play in identifying organisational risks and drawing up or improving business continuity plans. Having a workable business continuity plan will not only minimise losses; being among the first to get back on track may well put you strategically ahead of your competitors. For a detailed discussion on the lessons from the Thailand floods, see our cover story on page 12. Lee Min Keong, email@example.com
NEW TELEPHONE NUMBER ACCA has implemented a single phone number, 1 800 88 5051, for customers in Malaysia. Now general queries will be handled
by ACCA’s global contact centre, ACCA Connect, which operates 24 hours a day, 365 days a year, at no charge to customers. All previous numbers are now obsolete.
VIRTUAL BRIEFING CENTRE Attend live and on-demand audio and video webinars in the virtual theatre, chat with fellow delegates in the networking centre, and access the digital library. www2.accaglobal.com/ab_vbc
ACCA CAREERS Check out thousands of jobs and expert careers advice at www. accacareers.com
AB MALAYSIA EDITION CONTENTS MARCH 2012 VOLUME 15 ISSUE 3 Asia editor Colette Steckel firstname.lastname@example.org +44 (0)20 7059 5896 Editor-in-chief Chris Quick email@example.com +44 (0)20 7059 5966 International editor Lesley Bolton firstname.lastname@example.org +44 (0)20 7059 5965 Malaysia editor Lee Min Keong email@example.com Chief sub-editor Eva Peaty Sub-editors Dean Gurden, Peter Kernan, Vivienne Riddoch Design manager Jackie Dollar Designers Robert Mills, Jane C Reid Production manager Anthony Kay Advertising James Fraser firstname.lastname@example.org +44 (0)20 7902 1210 Head of publishing Adam Williams Printing Times Printers Pictures Corbis ACCA President Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE ACCA Connect email@example.com +44 (0)141 582 2000
ACCA Malaysia ACCA Malaysia Sdn Bhd (473007P) 27th Floor, Sunway Tower 86 Jalan Ampang 50450 Kuala Lumpur 1 800 88 5051 firstname.lastname@example.org
ACCA Malaysia Kuching branch Unit #8.01 8th Floor Gateway Kuching No 9 Jalan Bukit Mata 93100 Kuching Sarawak 1 800 88 5051 email@example.com
Accounting and Business is published 10 times per year. All views expressed within the title are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2012 Accounting and Business. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA.
Accounting and Business is published by Certified Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certified Accountants. 29 Lincolnâ€™s Inn Fields London, WC2A 3EE, UK +44 (0) 20 7059 5000 www.accaglobal.com
Features 12 Sink or swim After last yearâ€™s devastating floods in Thailand, what lessons can Malaysia learn? 16 Driving ambition Tony Fernandes FCCA is living a British sporting dream
20 SOX celebrates? The Sarbanes-Oxley Act has reached its 10th birthday, but the occasion is marked by mixed feelings 24 Lines of communication CFOs should collaborate with their IT counterparts, says a new report 28 Global concern What ACCA members think about economic conditions 30 Changing times Vietnam has embarked on a major overhaul of its VAT regime
Audit period July 2009 to June 2010 138,255
There are six different versions of Accounting and Business: China, Ireland, International, Malaysia, Singapore and UK. See them all at www.accaglobal.com/ab
06 News in pictures A different view of recent headlines
46 Update The latest from the standard-setters
08 News in graphics We show a story as well as tell it using innovative graphs
48 CPD: current or non-current liability? Understanding the impact of apparently simple rules is vital
10 News round-up A digest of all the latest news and developments
51 Good governance for NPOs A sound structure is just as vital for non-profit organisations
54 Understanding GST Despite delays in its implementation, an awareness of what the goods and services tax will mean for business is crucial
33 Errol Oh Amid talk of economic reforms, businesses must not lose sight of the bigger picture
Your sector 35 CORPORATE 35 The view from David Tam of China Railway Group, plus news in brief
34 Jane Fuller A proposed IASB revenue standard will not suit everyone
36 Sharing the burden There are many challenges on the outsourcing journey, an ACCA survey finds 38 Tree of prosperity Former journalist Ho Kwon Ping now heads one of Asiaâ€™s top hospitality brands
41 PRACTICE 41 The view from Irving Low of KPMG Singapore, plus news in brief
42 Emissions omissions Questions remain over a common accounting basis for carbon markets
57 Novel idea Former high-flying corporate finance partner Penny Avis is now embarking on a writing career
Accounting and Business is a rich source of CPD. If you read it to keep yourself up to date, it will contribute to your non-verifiable CPD. If you read an article, learn something new and apply that learning in some way, it will contribute to your verifiable CPD. Each month, we also publish an article or two with related questions to answer. If they are relevant to your development needs, they can also contribute to your verifiable CPD. One hour of learning equates to one unit of CPD. For more, go to www.accaglobal.com/members/cpd
60 Mind the banana skins! How to maintain staff morale
ACCA NEWS 61 Devanesan Evanson Shared services and outsourcing offer exciting opportunities, says ACCA Malaysiaâ€™s president 62 CPD: coaching and mentoring How you support your colleagues can count towards your continuing professional development requirements 63 Dean Westcott The annual report has reached a crossroads, says the ACCA president 64 News Integrated reporting under the spotlight at ACCA session; nominations open for the election to Council to be held at the 2012 AGM
News in pictures
Four-hundredand eighty-five underprivileged children set a new world record for the largest gathering of people dressed as Mahatma Gandhi, in Kolkata, India
A model shows off a Qi Gang creation during Hong Kong Fashion Week A/W 2012
Bodyguards and riot police pull Australian PM Julia Gillard away from a mob of angry indigenous rights protesters. They had swarmed an awards ceremony in Canberra she was officiating
A striking advertising campaign for ART Hong Kong 2012, which runs from 17-20 May, has already kicked off on the city’s tram system. In just four years ART HK (shown in 2011) has become the leading art fair in Asia
Thailand’s first female PM, Yingluck Shinawatra, inspects the guard of honour during a ceremonial welcome at the Indian president’s residence in New Delhi. Shinawatra was in India on a two-day official visit
German chancellor Angela Merkel visited Nanluoguxiang in Beijing, famous for its hutong (alleyways) and siheyuan (courtyards), as part of her state visit to China
Thousands gathered to catch a glimpse of Nobel peace prizewinner and pro-democracy leader Aung San Suu Kyi on the campaign trail in Dawei, Myanmar. By-elections will be held on 1 April
News in graphics
CURSE OF THE SKYSCRAPERS
There is an ‘unhealthy correlation’ between skyscraper construction and financial crashes, according to Barclays Capital. Investors should pay special attention to China, which is building 53% of all skyscrapers planned in the world over the next six years.
The number of Asian executives making plans to invest in European businesses in 2012 despite the eurozone crisis.
US$7.7BN US$11.6BN US$19.7BN US$34BN US$41BN
The number of people handled at Hong Kong immigrant checkpoints in 2010.
China Hong Kong Singapore India Indonesia Malaysia Thailand
Value of China’s 2011 GDP.
8.1% 13.8% 6.1% 37.9% 48.2% 27.6% 33.1%
Growth of global FDI since 2010
GLOBALISATION PICKS UP SPEED
Foreign direct investment (FDI) to developing Asia (excluding West Asia) rose 11% in 2011, despite a slowdown in the latter part of the year, according to the UN. East Asia, South-East Asia and South Asia received inflows of around US$209bn, US$92bn and US$43bn respectively. With a 16% increase in FDI, South-East Asia continued to outperform East Asia, while South Asia saw its inflows rise by onethird after a slide in 2010. The good performance of South-East Asia was driven by particularly sharp increases of FDI inflow in Indonesia, Malaysia and Thailand.
Month in figures
EMPIRE STATE BUILDING
The proportion of global CEOs expecting to raise headcount in 2012, according to PwC’s annual global CEO survey.
DECLINE IN TRUST
The public’s faith in government has dropped sharply around the world in the past year, according to the Edelman Trust Barometer. In Japan public trust reduced, but China topped the trust barometer while Singapore came third with 73%.
MN 3 2 2 $29, 1
0MN 0 8 , $28
GLOBAL FIRMS BACK IN GROWTH MODE
Despite continued widespread fee pressure and intense competition, global accounting firms are reporting growth across the industry and are planning to recruit in 2012. According to the latest global survey of global accounting firms by International Accounting Bulletin, PwC takes back the top spot as the largest global network from Deloitte, which had pipped PwC to the post for the first time in 2010.
Combined revenue of leading global accountancy firms in 2011.
0MN 8 8 , $22
ERNST & YOUNG
Combined revenue of global accountancy firms in 2010.
10MN 7 , 2 $2
Global workforce of PwC, the firm with biggest fee income.
2MN 7 6 , $5
Proportion of firms posting revenue growth in 2011.
99MN 8 , 3 $ 6
21MN $2,6 10
95MN $2,8 9
www.InternationalAccountingBulletin.com The survey shows that 22 out of the 23 global accounting networks surveyed grew their revenue in 2011, a complete turnaround from 2010. Growth was reported by 86% of the participating networks and associations, while accounting associations grew by 8% – a strong performance compared with last year’s 2% drop. In the survey’s first regional ranking, firms in India (24%), Brazil (16%), Turkey (14%) and China (10%) enjoyed the
strongest average growth in the past year as the networks invest heavily in these key emerging economies. Firms in the Netherlands (-6%), Germany (-4%) and the US (-2%) found it difficult to generate growth in the market. The top 10 networks grew their audit revenues by an average of 5% and their advisory services by 14%. Tax services also performed strongly, with an increase in demand for internal tax and transfer pricing.
TNB CEO TO QUIT
INDIA STILL A HOT SPOT FOR FDI
NEC TO SLASH 10,000 JOBS
IMF PRAISES MYANMAR REFORMS
Tenaga Nasional (TNB) CEO Datuk Seri Che Khalib Mohd Noh will be calling it quits when his contract expires in June this year after heading the national utility for the past seven years. ‘In any organisation, you need new faces,’ he told The Star daily. The board has accepted Che Khalib’s request for his contract not to be renewed and has begun finding a replacement. However, he said that leaving TNB did not mean he was ready for retirement. ‘I am still young. I can work for other people or other companies,’ said the 47-year-old.
Japan’s NEC Corp said it will slash 10,000 jobs, almost one in 10 of its workers, in a bid to cut costs as competition from foreign rivals, including Apple, pushes it deep into the red. NEC blamed its poor performance on weak demand for its smartphones amid the popularity of Apple’s iPhone in Japan, as well as on inroads by foreign rivals into the domestic IT infrastructure business and difficulty in expanding overseas. It warned it would post a net loss of 100 billion yen for the year to 31 March.
Foreign direct investment (FDI) in India is set to swell in coming years as investors stomach a lack of transparency, poor infrastructure and policy paralysis in their search for growth, Ernst & Young said in a recent report. Overseas investment in Asia’s third-largest economy rose for the first time in three years in 2011, the report noted, as global investors put their faith in rising salaries, an expanding middle class and a large and cheap labour force. FDI in India rose 13% to US$50.81bn in the first 11 months of 2011 from a year earlier.
The International Monetary Fund has applauded recent reforms in Myanmar but stressed the need to move to stabilise the economy. It said Myanmar’s economy, coming out of a long period of stifled activity under an autocratic military regime, would grow about 5.5% this fiscal year, ending in March, and 6% the next. But it said that reforming the ‘complex’ exchange rate system is a top priority, and that will need to come with other broad adjustments and management reforms to maintain macroeconomic stability.
‘HEADWINDS’ GATHER PACE
Malaysia’s economy appears to be heading towards a slower growth momentum, according to the latest reading of the country’s Leading Index. The index, which gauges the country’s economic activity and direction in the months ahead, registered its slowest growth rate in eight months at 0.7% year on year for November 2011, after a growth of 2.4% year on year in the preceding month. ‘We foresee external headwinds gathering pace, given the eurozone debt crisis, that could have far-reaching ripple effects on the rest of the world,’ CIMB Research said in a report. ‘Both the current and leading global indicators flag a weakening of global demand.’
HONG KONG TOP FOR IPOS
Hong Kong remained the number-one listing hub in 2011, capping a decade of dominance among global initial public offering (IPO) markets, and PwC expects that trend to continue in 2012. The firm said that even though the 2011 result was 40% less than a year earlier, the nine foreign IPOs recorded is testament to Hong Kong’s increasing importance as the listing destination of choice for multinational corporations. ‘Global companies and luxury brands are increasingly looking to expand in the Asia-Pacific region, especially China,’ said Edmond Chan, PwC Capital Market Services Group partner. ‘To do so, these companies would need additional funds.’
COMPANIES TO TOP 1 MILLION
The Companies Commission of Malaysia (CCM) expects new registrations of 40,000 this year, taking the total number of registered companies to 1.01 million despite an expected slowdown in gross domestic product, said CEO Mohd Naim Daruwish. He also said CCM would also begin introducing the limited liability partnership business model by June this year. This combines the characteristics of a company and a partnership firm, which gives the protection of limited liability for its partners and the flexibility of a partnership arrangement for the internal management of the business.
JOBLESS RATE AT 14-YEAR LOW
Events in Greece and elsewhere in Europe could have a knock-on effect
Supported by strong employment creation, Singapore’s unemployment rate declined to a 14-year low in 2011, according to the Employment Situation 2011 report. It said the median income of Singaporeans has increased, amid the tight labour market. The Ministry of Manpower’s Research and Statistics Department said preliminary estimates show that total employment grew by 36,300 in the fourth quarter of 2011, bringing growth for 2011 to 121,300, slightly higher than the gains of 115,900 in 2010. The bulk of the gains continued to come from services, which added 95,100 workers in 2011.
Analysis UNHAPPY CELEBRATION
As Sarbanes-Oxley heads towards its 10th birthday, it continues to divide financial experts. Despite being onerous, it does not appear to have been more effective than Europe’s rules or put an end to accounting irregularities.
LENDING AGREEMENT DISCUSSED Malaysia and Singapore are considering a reciprocal agreement that will allow lenders like Singapore’s DBS Group to expand into Malaysia. ‘There is talk that a quid pro quo arrangement is being looked into by the two governments – and this will enable DBS to enter Malaysia,’ a source was quoted as saying in The Edge. In return, Malaysian banks may be allowed to upgrade their ‘limited licence’ to operate in Singapore. Maybank is the only Malaysian bank to hold a QFB (qualifying full bank) licence to operate in Singapore.
capital spending and public private partnership (PPP) project financing.
SHANGHAI SET TO BE MONEY HUB China laid out more specific plans to turn Shanghai into a global financial centre by 2020, listing a series of targets for the next three years to make the city a hub for yuan trading. The plan for Shanghai’s financial innovations through to 2015 included
JAPAN IN DANGER OF CRISIS
Japanese finance minister Jun Azumi has warned that Japan could be facing a eurozone-style sovereign debt crisis if its fiscal goals are not met and its ballooning public debt not reined in. With public debt now at more than double the size of the nation’s US$5 trillion economy and parliament deadlocked over a plan to double the 5% sales tax by 2015 to boost public finances and fund social security, Azumi said the nation’s worsening finances pose a huge risk to Japan’s economic future. He also said that issues of tax and social security reforms need to be addressed immediately, in the best interests of the nation’s growth prospects. ‘As we can see in the government debt problems in Europe, leaving deteriorating finances as they are would pose significant risks for stable economic growth,’ Azumi said in Tokyo.
STRICT AUDITS FOR CHARITIES
The Chinese government believes its newly introduced auditing protocol for domestic foundations may help the country’s charity organisations regain public trust through enhanced transparency. Donors and the public have experienced increasing anxiety over the transparency of charity foundations in recent years, according to a press release posted on the central government’s official website. The previous rule was unclear on several issues, including the scope of auditing, publication of reports, qualification of auditing agencies and the payment of auditing fees. A series of embezzlement scandals hit the country’s charity sector last year, leading to a decline in public donations.
MALAYSIA TO SELL BONDS
Malaysia is expected to sell RM88bn to RM90bn in bonds this year to help refinance maturing securities and to fund the federal deficit, says the Malaysian Rating Corporation (MARC) in its 2012 Bond Market outlook report. It said that Malaysia is looking at a deficit of RM43bn and RM45.6bn in MGS (Malaysian Government Securities) and GII (Government Investment Issue) that are expected to mature this year. It estimated that gross corporate bond issuance for 2012 will hit RM45bn to RM55bn, to be sustained by corporate
after the Malaysian Institute of Economic Research said it would be better for the government to hold the election as soon as possible, since lingering uncertainty over the nation’s political future will hurt the economy. In an interview with the Wall Street Journal, the influential banker alluded that the reform process could be delayed as people turn to politics.
establishing the central bank’s daily yuan fixing and the governmentbacked money rate as benchmarks in onshore and offshore markets. It also aims to more than double the non-forex financial annual market trading volume to 1,000 trillion yuan by 2015.
POLLS FEVER DISTRACTS
Top banker Datuk Seri Nazir Razak says economic reforms are not moving as fast as was hoped for, apparently due to distractions from a general election which has to be held by early next year. The CIMB Group CEO’s comments come
LYNAS WARNS OF OPPOSITION
Australia’s Lynas Corporation warned against any move by Malaysia’s political opposition to shut the company’s US$200m rare earths processing plant, saying such action would deter other foreign investment in the country. Fuziah Salleh, opposition MP for Kuantan – where the controversial plant is being built – told Reuters the opposition would stop the plant if it won elections expected to be called within months. Lynas executive chairman Nicholas Curtis dismissed her view as only one within what would make up the political coalition against the government.
SINK OR SWIM
The devastating floods in Thailand last year were a reminder of the power of nature. How do businesses cope in such difficult times and what can Malaysia, due a major flood, learn?
he unprecedented flooding in Thailand last year may yet have a silver lining for countries in the region, especially Malaysia, if they can learn key lessons from the disaster and prepare for such an eventuality. While 2011 was marked with disasters including the devastating earthquake and tsunami in Japan, closer to home Thailand experienced its worst floods in 50 years. The massive flooding left more than 800 dead and affected large swaths of the country, leaving numerous manufacturing facilities flooded and forcing the closure of many industrial parks. Apart from the human toll and direct hit on the Thai economy, the flooding also disrupted the global supply chain, especially in the automobile and computer industries, impacting the bottom lines of companies around the world. Malaysia is no stranger to this form of natural disaster, with incidences of floods occurring on a yearly basis in different states. Kuala Lumpur experienced one of its worst floods in 1971. It has been suggested that, based on a 40 to 50-year cycle, the next massive deluge may be on the horizon. So what lessons can Malaysia learn from the Thailand floods, and how can its companies prepare? Experts say that the key to business sustainability in the face
of disaster lies in being prepared in advance. While Malaysian companies are looking at disaster management with renewed vigour, the momentum needs to quicken and organisations must get up to speed in areas such as insurance coverage and holistic disaster management.
Be prepared – always Natural disaster often strikes with little warning and the ability of a business to bounce back will depend solely on how prepared they are to manage the situations. The Bangkok floods, for example, rendered many companies unable to operate, with equipment destroyed and supply chains disrupted. ‘If there is one crucial realisation that companies have to come to terms with, it is that no matter how prepared we think we are, the unforeseen can still happen,’ says Edwin Yeap, finance director of public-listed logistics
provider Century Logistics Holdings, which was affected by the Bangkok floods and is en route to recovery (see box, overleaf). ‘What’s important is that we are always prepared for as many eventualities as possible, including putting in place the necessary insurance policies and a realistic disaster recovery plan,’ he says. Wang Jack Jong, general manager for global technology services at IBM Malaysia, believes that events such as the Bangkok floods remind organisations of the importance of their business resiliency strategy and indicate areas that need strengthening. ‘In these situations, it is clear that those who have moved from the old model of “experience and react” to a new one of “anticipate and adjust” will fare much better.’ Additionally, given the likely prospects of associated power outages and network failure that disrupt the flow of information, organisations and individuals should also be assessing their business and disaster recovery plans before it is too late, says Wang. Ong Ai Lin, senior executive director for risk assurance services at PwC Malaysia, concurs. ‘The Bangkok floods and other recent natural disasters have made organisations realise the importance of preparing business continuity plans in view of the big
picture, as these instances have a far wider impact than standalone disasters like a fire or IT systems failure,’ she says. ‘The need to address your supply chain in your business continuity management programme cannot be over emphasised. Every organisation needs to identify alternative sources of supplies.’
Public-private cooperation Ong stresses that one of the most important lessons to emerge from the Bangkok floods experience is
the local authorities should also have an emergency response plan that includes effective communication mechanisms which, when done properly, can help companies be more prepared to face the oncoming challenges. Wang agrees on the need for the government to also be involved in preparation for such disasters. ‘In preparing themselves for risks related to a natural disaster, most people in high-risk areas would rush to buy emergency supplies,’ he notes. ‘But
‘THOSE WHO HAVE MOVED FROM THE OLD MODEL OF “EXPERIENCE AND REACT” TO “ANTICIPATE AND ADJUST” WILL FARE MUCH BETTER’ how crucial private and public sector preparedness is. ‘In preparing for potential natural disasters, companies should also engage with the relevant authorities,’ she says. ‘After all, there’s only so much an organisation can do on its own – the government and local authorities too must play a part.’ Apart from a business continuity management (BCM) plan, Ong adds,
it is important to also consider the preparedness of businesses and government agencies.’
Insurance is crucial Providing an insurer’s perspective, CB Lim, CEO of Marsh Insurance Brokers (Malaysia), says that natural catastrophes serve as an important reminder for clients to check their insurance programme and work with
brokers to determine the level of coverage needed. He says that it is important to ensure that companies have the right cover in terms of their particular business operations, have correctly valued assets and insured them accordingly and selected an adequate business interruption sum and indemnity period. While noting that Asia is a region with markets at different levels of sophistication and development, and Malaysia and Singapore tend to be more mature markets in terms of insurance adoption, Lim believes there is still a gap in terms of optimal insurance coverage among Asian corporate players, Malaysia included. ‘Malaysia and Singapore would be considered mature markets, but even so, there is a long way to go in some respects, especially in terms of underinsurance,’ Lim says. ‘Too often businesses find themselves with not enough cover, opting for short-term cost savings on insurance spend.’ In Malaysia, with myriad infrastructure projects already under way and more in the pipeline, the economic viability of many of the businesses involved may be at risk due to inadequate levels of insurance.
‘Statistics show that organisations across Asia insure their property assets for approximately 40% to 60% less than their true current replacement value,’ he says. ‘The consequences can be unexpected and severe, significantly reducing the ability of businesses to recover in the event of a large loss. ‘Flood cover in particular is a common extension with most property insurance policies. Normally a general “fire and allied perils” or an “asset all-risk” insurance policy will cover clients’ assets against normal risks such as fire, lightning and explosion and natural perils such as storm, wind, water and flood. Generally large multinational policies will give full flood cover or it may be a sub-limit in the global policy,’ adds Lim. It is always critical for companies to work with their insurance broker to understand the details of their cover, specifically what is included or excluded, and what extensions need to be purchased, Lim suggests. However, he adds that, in general, the region is maturing – good news, as insurance is critical to the smooth functioning of any industrialised economy.
Generating awareness PwC’s Ong believes that disasters such as the Thailand floods and even the
Japanese earthquake and tsunami last year have generated greater awareness in terms of the preventative measures and preparedness. The primary focus of Malaysian companies, she says, has been on disasters that affect only their own premises rather than natural disasters. In the last few months of 2011, however, PwC had many requests for assistance in the latter area. IBM’s Wang shares findings from the 2011 IBM Global Business Resilience and
a business continuity plan of some sort and a robust 58% have dedicated contingency plans for dealing with a variety of risks,’ says the report. Wang believes that the local landscape and sentiment is aligned with the findings of the study and the mindset towards risk management is there. ‘In today’s complex economic environment, the need for business continuity is becoming more critical. Natural disasters such as flood, hurricanes, and earthquakes that have
‘IT IS ABOUT MAINTAINING MARKET SHARE AND BEING THE FIRST TO GET BACK ON TRACK AFTER A DISASTER, AHEAD OF COMPETITION’ Risk Study, which indicate that more businesses will adopt a more holistic approach to risk management in the next three years as they deal with growing uncertainty and the increasing interconnectedness of the varied risks they face. The survey of 391 senior executives found that only 37% of companies have implemented an organisationwide business resilience strategy, while 42% of respondents say they are likely to do so within the next three years. ‘Almost two-thirds (64%) say they have
occurred across the world in recent years, and its aftermath, have grown to be the top risk concerns,’ he says. ‘It is only a matter of level or different stages of implementation in different companies that vary. Larger organisations are more likely than smaller ones to have an integrated strategy,’ Wang says.
CFO’s role Today’s CFO is seen as an important partner or team member in the development of business resiliency
strategies, business impact analyses and business continuity plans, and to ensure that companies are compliant with required standards, says Wang. ‘As business continuity and financial performances are closely related, executives often turn to the CFO for guidance in addressing shareholders’ and the financial market’s expectations/requirements of transparent data and financial reporting in times of crisis,’ he offers. Ong believes that BCM can only be successfully implemented in an organisation if senior management recognises its importance. ‘CFOs and accountants who control an organisation’s budget must recognise the importance of BCM and allocate sufficient resources to their organisation’s BCM programme. Making sure that your organisation’s BCM programme is in order will at least give you an edge over your competitors,’ she advises. ‘As you see from the Bangkok floods, it is about maintaining market share and being the first to get back on track after a disaster, ahead of your competition.’ It is clear, says Century Logistics’ Yeap, that the CFO has to identify and plan for organisational risks as the CEO concentrates on ‘deriving the rewards of the organisation.’ ‘In addressing the risks, it is quite common that financial costs are involved,’ he says. ‘It is a fallacy that all risks must be addressed as some risks may be high, but they may be too remote and too costly to address, so should resources be allocated to address the risk? It is based on this-cost benefit analysis that a decision should be made.’ Malaysian companies may do well to recognise that the old adage, ‘Prepare your umbrella before it
Thailand’s devastation (left from previous spread): A young vendor sells food in a flooded street in Ramintra, Bangkok; Thai Buddhist monks build barriers with sandbags in an effort to protect their temple; workers make their way through an inundated rice warehouse in Chinatown, Bangkok; and a boy swims across the inundated inner court of the temple in Chinatown rains,’ is especially relevant to all businesses in view of the general unpredictability of when natural disasters would occur. While attempting to be globally competitive, companies cannot overlook disaster readiness. Organisations and public sector players must, if they haven’t already started, examine their preparedness for disasters and formulate comprehensive disaster management and recovery plans to maintain business continuity at all times. Asha Gopalan, journalist
*THE CENTURY LOGISTICS EXPERIENCE
Malaysia-based Century Logistics Holdings’ distribution centre, Century Resources (Thailand), is located in Rojana Industrial Park, Ayutthaya, Thailand, where the worst of the Bangkok floods happened. Century Logistics’s finance director Edwin Yeap says one of the most important elements for the company in managing the situation concerned the risk identification process and measures to address the risks of a natural disaster. ‘When we insure our buildings, we extend the cover to include all ‘risks of direct physical loss or damage to the property insured from any external causes such as fire, lightning, explosion, windstorm, hail, aircraft, vehicle, smoke, earthquake, flood, water damage, riot and strike, and vandalism and malicious acts. ‘In the case of the Bangkok floods, we are in the midst of preparing the documentation for the insurance claims. When the risks are identified and measured, suitable steps are taken to address the risks, subject to cost benefit analysis,’ he says. In risk identification, the cut-off point concerns risks that are too remote and costly to address, he adds. The flood water subsided in December 2011 and currently the company has completed the cleaning works for the three-storey office building complex and perimeter open space.
LIVING THE DREAM
Having turned a loss-making airline into a runaway success and flourished in a wide range of ventures, Tony Fernandes FCCA is as big a celebrity businessman as they come
ony Fernandes is a force of nature. He is the man behind Malaysian entertainment and leisure conglomerate Tune Group, which is the parent business of AirAsia, the owner of English Premiership football team Queens Park Rangers (QPR) and principal of the Caterham (formerly Lotus) Formula 1 racing team, for starters. His success hasn’t gone unnoticed. In South-East Asia he commands virtual rock star status, but despite being held in such lofty regard he
remains approachable and unaffected, sitting at a simple desk in an open-plan office alongside his staff at AirAsia. But life would have been very different if Fernandes had followed his father’s wishes and opted for a career in medicine as he himself had done, rather than train with ACCA. ‘My father wanted me to follow in his footsteps and become a doctor. But I decided to do accountancy instead,’ he says. Fernandes is perhaps best known for buying AirAsia in 2001 for a token
sum – the day after the 9/11 disaster. Back then it was a loss-making airline company complete with debts of £8m, but Fernandes has turned it into one of the world’s most successful budget airlines. In doing so, he has revolutionised the aviation industry in South-East Asia by making flying affordable for everyone. He remains group CEO of AirAsia. The idea behind the acquisition was hatched at an early age, through his own experiences of travelling back and forth to his native Malaysia.
He explains: ‘I was sent away to study in London [Epsom College and the London School of Economics] at a very young age and it was very expensive to travel home then. I thought to myself, why should air travel be so expensive? Everyone should be able to fly home to their loved ones any time they want. ‘Then along came an opportunity to live my dream of democratising air
Malaysian ringgit.’ Despite the tough climate and fears surrounding aviation travel after the Twin Towers attack in 2001, the AirAsia debt was paid back inside two years. ‘People did not believe it was something that was achievable,’ says Fernandes. ‘But it feels good that since we took over we have successfully turned the airline from a two-aircraft outfit plying six routes in Malaysia to a business covering 80 destinations in 24 countries, with more than 10,000 staff and a market capitalisation of over £1.4bn [as of December 2011].’ The turnaround and expansion of the company aside, there are plenty of big challenges to keep him on his toes. ‘The main challenge is always to keep costs low, as nothing is certain in terms of fuel prices, rising costs and the global economic uncertainty. But AirAsia will continue to stay focused on our strategy of containing or driving down costs, raising yields and further expanding network reach.’ For now the outlook remains good for AirAsia, especially with the launch of AirAsia Philippines, AirAsia Japan and its recent firm order for 200 Airbus A320neos. The Airbus deal is seen by a number of analysts as key to securing the company’s future by vastly improving its ability to meet the potential growth in the market. ‘The decision to be one of the first launch customers for the A320neo will ensure we remain ahead of the pack, with one of the world’s youngest and
‘IT’S A THRILL TO BE AT THE APPRENTICE ASIA HELM AND SEE PROMISING BUSINESS TALENTS BATTLE IT OUT FROM THE STREET TO THE BOARDROOM’ travel. Together with my partners Dato’ Pahamin Ab. Rajab, Dato’ Kamarudin Meranun and Dato’ Aziz Bakar [none of whom had any real aviation industry experience], we bought out AirAsia from Hicom Holdings (now DRB-Hicom) for the token sum of one
most modern fleet. The A320neo is expected to deliver approximately a 15% reduction in fuel consumption per aircraft, which will help us to focus on maintaining or even lowering our already leading cost per available seat kilometre [CASK].’
Results to date for 2011 show a 20% year-on-year increase in revenue for Q1 and 15% for Q2. Affiliates in Indonesia and Thailand performed well in both quarters, with AirAsia Thailand posting a growth of 44% year on year and AirAsia Indonesia a 37% rise in year-onyear revenue. Meanwhile, AirAsia Indonesia will be operating a 100% Airbus fleet for 2012. This will help improve operating costs and contribute to further growth. ‘We are trying to maintain tight control of costs even as we grow revenues,’ he says. ‘Fuel prices are volatile and beyond our control, so our response is to continue to innovate in the way we operate. Based on the results of both quarters, we are well on track to achieve our goal – building on our already strong foundation to enhance growth.’ At the nub of that strategy is a ‘load active, yield passive’ outlook, which is paying off through lower average fares. That attracts more passengers, who in turn contribute to a higher take-up rate of ancillary services such as baggage supersize, pick-a-seat, cargo and courier, in-flight merchandise and meals and refreshments. ‘Instead of raising fares for higher yields – and running the risk of dampening air travel – we’d rather keep fares at reasonable levels to attract higher passenger loads and boost revenue through ancillary services.’ Despite his clear love of AirAsia, it was never going to be enough for a man who is constantly on the lookout for new opportunities. Fernandes has also turned his hand to another business venture in the form of Tune Hotels, a no-frills low-cost hotel chain. Tune offers ‘five-star bedding at one-star prices’, with room rates from 20p. It currently operates eight hotels and is working to develop dozens more across AirAsia destinations. And there’s more, including an opportunity with Caterham in Formula 1. Having already brought AirAsia into F1 with AT&T Williams as a team partner, Fernandes was approached about sponsoring a new team. A motorsport fan since childhood, he saw
Group CEO, Tune/AirAsia.
Believe the unbelievable, dream the impossible and never take no for an answer.
Vice president, ASEAN, Warner Music South-East Asia.
Go with your gut and give it your best shot – you may fail, but don’t give up.
Regional MD, ASEAN, Warner Music South-East Asia.
MD, Warner Music Malaysia.
Senior financial analyst, Warner Music International, London.
Financial controller, Virgin Records, London.
the chance to bring the much-loved Lotus name back into F1, and with a consortium of Malaysian business interests he led the creation and launch of the team in 2009 and its entry into the 2010 FIA Formula 1 World Championship. During 2011, Fernandes also pulled off two more eye-catching sports-related deals in the UK. First he purchased British sports car company Caterham. The acquisition is an opportunity for Fernandes to enter the automotive industry but was a move made more difficult at the time by an
ongoing row with the Lotus-branded Renault F1 team over the use of the rights to the Lotus brand name. Team Lotus won the case, so Fernandes and his team are the rightful owners of the Team Lotus name. If he had lost, he would probably have lost the use of the Team Lotus name. Caterham was born out of Lotus, initially as a dealer of the iconic Lotus Seven and subsequently as the purchaser of the rights to continue manufacturing the Seven when Lotus ceased production in 1973. Caterham’s only car at present is the Caterham 7, an evolution of the Lotus. Later in 2011, he snapped up newly promoted Premier League side QPR, following talks with the club’s previous owners, F1 moguls Bernie Ecclestone and Flavio Briatore. ‘Negotiations were not that long,’ he says. ‘The opportunity to get involved in QPR came up via the previous owners and I jumped at it. Now that I am part of it, I hope to make this raw diamond shine as much as it can. I want the fans to be proud of what we are doing as they are stakeholders.’
There is speculation that Fernandes would like to relocate the club to a bigger stadium with the possibility of increasing revenues. ‘Let’s focus on staying up and building a good structure and a solid foundation to grow for the future at the moment,’ he responds. ‘Let’s see how the season goes and we will plan from there.’ And as if he hasn’t enough on his plate, he has also found the time to front the Asian edition of TV series The Apprentice. ‘It’s a thrill to be at the helm of The Apprentice Asia and to see some of the most promising business talents in the region battle it out from the street to the boardroom,’ he says. ‘It’s great to be able to throw some really interesting challenges their way, so they can show the world what the new generation of Asian business executives are made of.’ If they turn out anything like Fernandes, there will be plenty to admire. In the meantime, 2012 looks like being another formidable year for one of ACCA’s highest-profile members. Alex Miller, journalist
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UNHAPPY 10TH BIRTHDAY
It’s hard to credit now, but 10 years ago the Sarbanes-Oxley Act introduced a financial reporting regime that met with near-universal approval in the US
f America’s businesses had to vote on their least favourite lawmakers of recent years two names would spring immediately to mind: Paul Sarbanes and Michael Oxley. A decade ago this July these politicians gave their name to the Sarbanes-Oxley Act. The 2002 law was intended to restore public faith in the trustworthiness of US firms’ financial reporting, which had been shaken by high-profile accounting scandals at Enron, Tyco International and WorldCom. But many executives have lambasted Sarbox, as it has become known, as an overreaction that has saddled US businesses with unnecessary costs. Several leading Republican presidential candidates have vowed to roll back some of the provisions of the act, at least for smaller businesses. Meanwhile, the Securities and Exchange Commission (SEC), which polices the US securities market, has seemed reluctant to use the law to punish chief executives whose accounts don’t come up to scratch. More damaging still, the accounting failures that contributed to the 2008 financial meltdown are seen by many as a sign that Sarbox has failed even to fulfil its main aims. So 10 years on, Americans are still hotly debating one key question: did the introduction of the controversial act protect investors without harming
businesses? Many argue that reforms to accounting rules in Europe, which was also shaken by the Enron collapse, provided investors with the same level of security but inflicted less damage on companies than Sarbox did. Given how controversial Sarbox has become, it is easy to forget how popular it was in 2002. Lawmakers approved the measure with virtual unanimity. Only three members of the US Congress voted against the bill, with 423 in favour, while just one of the 99 senators refused to support it. President George W Bush, who prided himself on being a defender of entrepreneurs, declared: ‘The era of low standards and false profits is over; no boardroom in America is above or beyond the law.’
The buck stops at the top The law was framed to achieve its objectives in several ways. For example, top executives had to attest personally to the reliability of financial reports. As well as being legally liable for failures, chief executives could have years of pay clawed back if profits turned out to have been illusory. Since accounting firm Arthur Andersen had turned a blind eye to accounting irregularities at Enron, lawmakers moved to break up the cosy relationship between management and auditors. A new public body was set up to keep an eye on auditors – the Public Company Accounting Oversight Board
– and firms would have to rotate the accounting firms they used. Most controversially of all, both companies and their accountants were forced to test internal controls to ensure their rigour – the notorious section 404. Around the same time Europe was experimenting with a lighter version of similar policies. Enron had caused concern among regulators worldwide but it was only after the €13bn bankruptcy of Italian food and dairy firm Parmalat in 2003 that European regulators acted decisively. The Statutory Audit Directive of March 2004 was Europe’s answer to Sarbanes-Oxley; it upgraded audit committees and made it harder for executives to sway accountants. Company chiefs were also subjected to a (less onerous) legal standard in terms of certifying the accuracy of the corporate accounts, and Europe’s new rules on testing internal controls were likewise less burdensome. Peter Montagnon, senior investment adviser to the UK’s Financial Reporting Council, says: ‘There was a sense that Sarbox was too rigid and expensive and that the cost-benefit equation did not work. Europe opted for a more flexible code-based approach.’ With a decade of hindsight, this cost-benefit calculation is easier to make. Defenders of Sarbox point to several benefits from its tighter rules. For example, Carl Rosen, executive
SUN MICROSYSTEMS FOUNDER SCOTT MCNEALY ONCE DESCRIBED SARBOX AS ‘BUCKETS OF SAND IN THE GEARS OF THE MARKET ECONOMY’
Enron’s massaging of its financial figures to deceive investors triggered a wave of public outrage that fed anti-capitalism sentiment, such as this protest against the World Economic Forum
director of the International Corporate Governance Network, says: ‘There is little doubt that accounts are more reliable than before. Firms have beefed up their financial expertise, especially on audit committees, so problems are more likely to come to the attention of shareholders earlier.’ The rules have even had a spin-off benefit for companies, according to Paul Hodgson, senior researcher at the Corporate Library, which studies governance issues. Upgrading internal controls has given executives a better understanding of what is going on in their business, which should improve decision-making. Even more importantly, an MIT study suggested that complying with the rules appeared to have lowered the cost of capital for businesses by as much as 150 basis points, mainly by giving bond investors greater confidence. Of course, the rules have been far from watertight. Although the 2008 financial meltdown in the US was not primarily caused by weak accounting,
Despite such failures, US watchdog the SEC has a poor record of clawing back undeserved pay from executives. Over the past decade it has filed cases against just 31 senior managers at 20 companies, recouping only trivial sums.
such abuses did contribute to the collapse. A few cases of egregious bookkeeping stand out, says Mark Calabria, a fellow at the Cato Institute in Washington. Insurance company AIG, which had to be rescued by the US government after making huge derivative losses, turned out to have extremely weak internal controls, Calabria says. The woes of mega-banks like Citigroup were also exacerbated by accounting flaws. Sarbox was intended to put an end to the kind of off-balance sheet accounting that allowed Enron to hide losses or debts, but in 2004 financial regulators exempted banks from that rule. This allowed Citigroup to set up special investment vehicles into which it loaded mortgage assets. ‘If the banks hadn’t been allowed to do this they would probably have had an extra US$60bn to US$100bn in capital during the financial crisis,’ Calabria says. The demise of stockbroker MF Global has provided a more recent example of failed internal controls.
The burden of compliance Then there is the cost to businesses. Scott McNealy, founder of IT giant Sun Microsystems, once described Sarbox as ‘buckets of sand in the gears of the market economy’. A host of studies have made clear the substantial costs of compliance. A 2009 SEC study estimated the average company’s cost of compliance at US$2.3m a year. More recent studies have produced a lower figure. In 2011 risk and business consultancy Protiviti calculated that after four years of compliance few companies were spending more than $1m a year on Sarbox compliance. But even this is far from small change. Assume a price-earnings ratio of 20 times, says Bob Litan, a fellow at the
Dennis Kozlowski collected US$81m in unauthorised bonuses from Tyco
A massive accounting fraud by Bernie Ebbers brought WorldCom down
Kaufman Foundation for enterprise in Washington, and Sarbox lops US$20m off a company’s market capitalisation. Critics say such costs help explain why fewer start-ups are raising money on the stock exchange. During much of the 1990s around 80% of businesses listing in the US had market values of less than US$50m. Now such small businesses account for 20% or less of public offerings in most years. For this reason many US politicians – including most Republican presidential hopefuls – want to modify or repeal Sarbox. Outright repeal still seems extremely unlikely but a watering down of the act’s provisions is possible.
SURVEYS OF BUSINESS EXECUTIVES SUGGEST A GRUDGING ACCCEPTANCE THAT TODAY’S CORPORATE ACCOUNTS ARE MORE RELIABLE At present any public company with a market value above US$75m has to comply. Republican senators Jim DeMint and John Barrosso want to allow companies smaller than $1bn to opt out provided they clearly disclose this to investors. ‘It would be good to give firms more flexibility,’ says Alex Pollock, a fellow at the American Enterprise Institute. Many opponents of Sarbox believe
Jeff Skilling kept Enron’s failing financial health secret from shareholders
that European regulations – with which Britain complies – provide a similar level of investor protection at lower cost. Montagnon also believes that the US could relax Sarbox if it enhanced the rights of shareholders, which are much weaker than in Europe. As Sarbanes-Oxley heads towards its 10th birthday it continues to divide politicians and financial experts. The act does not appear to have been notably more effective than the less onerous rules that apply in Europe. There is also reasonable evidence that it has discouraged young businesses from seeking money through a stock market listing. Even the act’s most ardent defenders do not claim it has put an end to accounting trickery or abuse. The 2008 financial crisis uncovered gaps that Sarbox failed to fully close, along with patchy compliance. Yet the act has not been a total failure. Surveys of business executives suggest a grudging acceptance that today’s corporate accounts are more reliable, although most believe this could have been achieved at lower cost. Perhaps the greatest compliment for the act, says Rosen, is that it has made life harder for corporate crooks. ‘There will always be people who can manipulate the system,’ he points out, ‘but it is much tougher now.’
The US telecoms giant admitted a US$11bn accounting fraud in July 2002. Bernie Ebbers, former CEO, was convicted of fraud and conspiracy and given a 25-year prison sentence. The company filed the largest ever bankruptcy.
Christopher Alkan, journalist based in New York
The high-profile corporate scandals that set Sarbox in motion:
Enron A string of court cases led to the conviction of the energy company’s former CEO Jeff Skilling, who is currently serving a 24-year jail sentence for fraud and insider dealing; he still asserts his innocence. Ken Lay, former Enron CEO and chairman, was convicted of fraud and conspiracy but, following his death from a heart attack in 2006, had his guilty verdict wiped out as he hadn’t been able to challenge the conviction. Former Enron CFO Andrew Fastow was released after serving a six-year jail sentence for his part in the scandal. The scandal, which was revealed in 2001, also resulted in the demise of Enron’s auditor, Arthur Andersen, one of the Big Five accountancy firms.
Tyco International Two former executives of Tyco International, former CEO Dennis Kozlowski and his second in command, Mark Swartz, were both sentenced in 2005 to between eight and 25 years in prison for stealing hundreds of millions of dollars from the manufacturing company. The scandal came to light in 2002.
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HEAD TO HEAD?
A recent Gartner survey suggests that CFOs have more clout than CIOs in making IT spending decisions, but collaboration is the key to success, say commentators
riven by business productivity and efficiency gains, information technology (IT) has secured a foothold in organisations, both large and small, and so have the executives that run these departments. Over the past decade, IT heads or chief information
officers (CIOs) have become more influential and taken a central role in decision-making, with some even having been elevated to the C-level suite. However, the CIOâ€™s clout in making IT-related investment decisions appears to have been increasingly clipped by
CFOs, according to the findings of a recent report by technology research and analyst firm Gartner. The report suggests that close to half of IT organisations report directly to CFOs, with 33% reporting directly to the CEO. The report, CFO Update: The Top 10 Technology Priorities, notes that
26% of IT investments in the past year have been authorised by CFOs alone, up from 18% in the previous year. And in 51% of cases, the decision is being made either by the CFO alone, or by the CFO in a collaboration with the CIO, up from 45% in the previous year. The study also shows that the CIO makes the investment call alone only 5% of the time, down from 11% in 2010. Ng Wai Heng, executive director of PwC Advisory Services, says CFOs will continue to make IT decisions in areas that are directly under their sphere of influence, notably, in the finance function of the company. ‘In such cases, finance also equates to the business and as a user, the
Ng notes that IT investments are often made by a forum comprising IT, business and finance executives, typically in an IT steering committee. The CFO may have the final sign-off authority but the decisions are made by consensus, backed by a robust business case, he adds. Susanna Lim, partner at Ernst & Young Advisory Services, concurs but adds that the reporting structure between the CIO and CFO is not as important as how the two work together. ‘To me, the more important factor is the team dynamics and whether the two C-level executives are connected and can work together. In the final analysis, it’s about managing the IT agenda at the C-level for the company.
‘THE IMPORTANT FACTOR IS THE TEAM DYNAMICS AND WHETHER THE TWO C-LEVEL EXECUTIVES ARE CONNECTED AND CAN WORK TOGETHER’ CFO will have a strong influence over the type of solutions [obtained] and how these are to be implemented,’ he explains. Ng says some examples of these solutions include enterprise resource planning (ERP), management reporting and financial analytics, as well as specific IT software solutions designed to meet accounting standards such as International Financial Reporting Standard (IFRS) 139. However, Ng points out that it’s ‘not good practice’ for CFOs to be unilaterally making IT investments. Ng also says the survey results must be put into context as organisations may dictate that the IT investment decision, or any investment decision, lies with the CFO as the authority overseeing an organisation’s finances. ‘The key question here is whether the investment decisions were made with guidance and input from both the business and IT [departments]. If a CFO acted unilaterally in making IT investment decisions, then this trend is not in keeping with good practice.’ From PwC’s advisory experience,
Lim says the goal of IT is to create value, be able to manage risk and rationalise cost. These factors are what makes an organisation successful, and not so much the kind of reporting structure it has, she adds. She points out that the way an organisation is set up also influences the reporting structure; in this case, whether a CIO reports to a CFO or not. ‘Where investments involve applications which are business-driven, such as that of ERP, a CFO will drive the project together with the business process owners,’ she explains. ‘On the network and infrastructure side, CIOs tend to drive these areas as they are more technical in nature,’ adding that in her experience, CFOs tend to leave it to the experts and will only get involved when it comes to final approvals.
Working together Finance professionals acknowledge that while there may be a rising trend in CIOs reporting to CFOs, the situation doesn’t have to lead to conflict, as the two roles may
complement one another. Noorliza Abu Bakar, CFO of IBM Malaysia, believes that in practice, there are no hard and fast rules as to whether a CIO should report to a CFO, or to other C-level executives within a company. ‘Whether a CIO/ IT organisation head should report to the CFO depends on a company’s organisation structure, business objective and strategy,’ she says. Noorliza says that when IBM is doing its annual planning, the CFO and CIO will meet and look at business objectives, issues, challenges and opportunities together. ‘We will discuss what is the best approach or solution to adopt, in helping to improve operational and business performance,’ she explains. ‘We have open communications and involve the CEO/MD and the management/ leadership team as well.’
Crucial expertise Noorliza says CFOs may understand that technology can help advance the company or propel the company to the next level – whether in terms of cost savings, improved productivity or efficiency – but they may not have a deep understanding of IT and the actual value it offers. Therefore, CIOs still have their vital role and scope, and will remain crucial for the next few years, she says. Ravi Navaratnam, executive vicepresident of corporate finance at engineering and project management company Mind Consult, says one should not read too much into the Garter survey. He believes how the two roles are organised is down to how each company prefers to draw their reporting lines and splits the running of the company. He notes that CFOs are likely to authorise normal operational and capital investments, such as core IT platforms, by way of renewal or replacement or hardware and software, which are required to keep a company running. ‘As for the case of new technology or IT infrastructure, these are likely to be
identified by the CIO in collaboration with the CEO/CFO in order to meet the future needs of the company, and keep them ahead of the game.’ Siva Prakash, finance manager at Eversendai (see box), says that the two roles may appear to be at odds because typically, business and IT priorities have always been considered by management to be vastly different from one another. ‘It is rare for executives outside of the CFO office to focus on the strategic management of IT,’ he says. So, creating a strategic and long-term connection between the corporation’s business needs and IT returns can be firmly established by the active involvement of the CFO in the IT governance process, he adds.
Business-IT alignment CFOs can still play an active role in an organisation by helping it achieve greater business-IT alignment and bring the IT function to the mainstream by personally assisting with the definition of the IT vision, Siva says. PwC’s Ng believes that, ultimately, for an organisation to function in today’s competitive world, the CFO should work in collaboration with the CIO for the sake of organisational alignment. ‘We expect there will constantly be friction, not just between the CFO and the CIO, but also with [other] business leaders as balancing business needs and priorities against ever-present financial constraints will always be difficult,’ he explains. To manage this, Ng suggests that a collaborative working relationship be built through frequent, honest, and open communication. ‘An important mechanism to achieve alignment, collaboration and communication is through a forum such as an IT steering committee – it brings together management, IT, finance and business functions to deliberate IT issues and investment decisions.’ Edwin Yapp, journalist
*CASE STUDY: EVERSENDAI
According to Siva Prakash, finance manager at Eversendai, the company needed to review the requirement of an enterprise resource planning (ERP) system to replace the current one. The CFO took the lead to review the company’s requirements and developed a requirements plan that best matched the overall organisation’s strategic business objectives. Once developed, Eversendai called several tier-1 ERP system vendors to present their proposals. The final recommendation on the selected ERP solution was made by the CFO to executive management for approval. It was eventually awarded to the vendor which was able to match the requirements of Eversendai, a leading Malaysian construction and engineering company. The involvement of the CFO did not stop at this stage. He was involved in the project in its entirety including the development, prototyping, training, implementation, user acceptance, data cut-over, reporting and postimplementation maintenance and support. While the CFO was part of the executive management, Eversendai did not ignore the IT heads and had a very close working relationship with them. By making the right investments in IT, with measurable outcomes, Eversendai was able to stand out in a crowded and competitive marketplace, balancing this with strong near-term financial management and governance that created an unbeatable business-IT alignment over time.
‘WE EXPECT THERE WILL CONSTANTLY BE FRICTION, NOT JUST BETWEEN THE CFO AND THE CIO, BUT ALSO WITH [OTHER] BUSINESS LEADERS’
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Taking the pulse of the global economy In his regular quarterly report, ACCA’s Manos Schizas looks at what ACCA members around the world are saying about the global economy – and it doesn’t make for happy reading For a year and a half, ACCA’s Global Economic Conditions Survey (GECS), now carried out in association with the Institute of Management Accountants, has recorded the slowdown in the global economic recovery. However, over the last half of 2011, the global economy has taken a marked turn for the worse, led by a substantial fall in international trade. While the negative trend in global business confidence eased in late 2011 compared to the third quarter, and there are encouraging signs from resilient new orders, the damage done to global demand over the last year has been substantial. As a result, small and very open economies have been hit hard, recording levels of business confidence usually seen in the troubled economies of western Europe. The cumulative effect of three consecutive quarters of weakening demand is beginning to take its toll on business. A detailed analysis of the GECS findings suggests that falling revenues are the strongest contributor to falling business confidence, followed by the deteriorating global economic outlook and continuing weakness in new orders. Once these, as well as the
*THE VIEW FROM ASIA PACIFIC
The findings of the survey suggest that the trend in business confidence has actually improved slightly in Asia Pacific. Eleven per cent of respondents said they were more confident in the prospects of their organisations than they had been three months earlier, against 53% who reported a loss of confidence. In mainland China and Australia, 15% and 13% of respective respondents were more confident, while 49% and 50% were less confident. The greatest losses of confidence were in Singapore (67%) and Hong Kong (65%). Just 9% and 6% respectively were more confident. In Malaysia, 50% were less confident and 8% were more confident. As with previous quarters, inflationary pressures have remained high on repondents’ list of concerns, especially in Malaysia and Hong Kong, two of the worst-affected countries in Asia Pacific.
rising incidence of late payment and business failures are taken into account, the effect of tightening credit is only negligible. Still, with banks facing an uphill climb towards capital adequacy, tightening finance must soon add to the challenge of a flagging recovery. The result is a deteriorating outlook for business cashflow around the world which may be driving a rise in business failures. Consequently inflationary pressures, which built up steadily over the past two years, are now easing.
THE CUMULATIVE EFFECT OF THREE CONSECUTIVE QUARTERS OF WEAKENING DEMAND IS BEGINNING TO TAKE ITS TOLL ON BUSINESS. FALLING REVENUES ARE THE STRONGEST CONTRIBUTOR TO FALLING BUSINESS CONFIDENCE In line with this deteriorating outlook, our findings point to weakening trends in employment and investment globally. This is particularly worrying as these two indicators have remained weak throughout the last three years and are crucial to any kind of sustainable recovery. Finally, our findings suggest that governments have to perform a tough balancing act in coming years if they are to support a flagging economic recovery. Sustainable fiscal stimulus is a luxury that not all governments can afford, especially among developed nations, while austerity is proving hard to reconcile with sustained growth, unless perhaps as a response to exogenous shocks. As a result, government approval levels are at a record low, just when they are most likely to influence business confidence. Manos Schizas is ACCA’s senior policy adviser
READ THE FULL REPORT AT: www.accaglobal.com/en/press/gecs-2011q4.html THE ACCA GLOBAL ECONOMIC CONDITIONS SURVEY – HOW TO TAKE PART world more than 300 times. So why not have your say when the next quarterly survey opens on 17 February? Everyone can participate – simply look for the
TAKING THE GLOBAL TEMPERATURE
GLOBAL -30 AFRICA -13 MIDDLE EAST -17 PAKISTAN -25 MAINLAND CHINA -34 UK -40 IRELAND -40 MALAYSIA -42 EASTERN EUROPE -47 SINGAPORE -58 HONG KONG -59
30 Breaking down the ACCA Confidence Index 20 geographically reveals some striking variations, with members in Africa showing most confidence. 10 0 -10 -20 -30 -40 -50 -60 -70 -80 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2009 2010 2010 2010 2010 2011 2011
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.
link in AB Direct. If you have a story to tell, you can also join our panel of commentators by emailing emmanouil. email@example.com
100 BALANCING 75 50 25 0 -25 -50 -75 -100
SAUDI ARABIA 68.8 -9.3 MAINLAND 52.8 CHINA 29.1 HONG KONG 52.4 -31.3 UAE 14.8 -39 USA 11.3 58.5 AUSTRALIA -25 -40.4 UK -38.3 -17.5 IRELAND -90.6 -27.1
The views of ACCA members are highly valued and receive widespread media coverage. The Q4 2011 survey was quoted in the press around the
The towers show how members think public spending will change in the medium term (increases shown in black), while the cakes show whether members see this level of public spending as excessive (above the line) or insufficient.
30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80
Sample: 2,186 ACCA members around the world
Q3 Q4 2010 2010
THE ACCA CONFIDENCE INDEX
Business confidence remains in negative territory. The graphics show the percentage of respondents saying they have gained business confidence, minus those who have lost it.
RELIEF IN SIGHT? Vietnam has reached a crucial stage in reducing government bureaucracy, according to the OECD, but it remains to be seen whether simplification of its VAT system will follow
s Vietnam goes through a rapid period of social and economic change, so do the nation’s laws. Tax governance and policy reform are crucial for the development of the tax sector as well as the economy, and they are a rising priority for both local and foreign businesses in the country. But, as lawmakers have set and amended tax law in the country, it has become more complex, particularly for corporates. Vietnam is the second fastest growing economy in Asia, and over the past two decades Vietnam’s tax framework has had to work fast to keep pace with development, while also maintaining budget revenue for the state. Currently, Vietnam relies
heavily on indirect tax as a key source of revenue. Vietnam’s value-added tax (VAT) system is one of the most complicated, if not the most, in the region. Unlike New Zealand’s goods and services tax (GST), which is considered one of the simplest in the world, Vietnam’s has two methods of declaration: a tax credit method applied to corporates; and a direct method applied to individuals and households. ‘VAT is applied either to actual or presumed turnover. This has a cascading effect as VAT is not able to be claimed as an input,’ according to Tom McClelland, partner and tax leader at Deloitte Vietnam. McClelland has been heavily involved in tax policy
since he arrived in the country in 1998 and contributes to the development of Vietnam’s tax regime.
Traditional trading Around 76.5% of Vietnam’s 90 million people live in rural Vietnam; and 62.5% of the country’s entire gross domestic product comes from rural areas. Until now, the biggest Vietnamese and foreign companies have been in the biggest six cities: Ho Chi Minh, Hanoi, Nha Trang, Da Nang, Hai Phong and Can Tho. Types of industry and business vary but there are countless family run stores and small businesses both in cities and rural areas. In the big six cities there are around 90,000
Uniform change: Vietnam’s General Department of Taxation wants 90% of enterprises to use e-tax services
because they have to – it isn’t possible to pay for fresh food from a street stall or market with a debit card. Hoang Vu is a tax consultant with Ernst & Young in Hanoi. He says one of the reasons for the complicated system is the vast use of cash, together with the underdeveloped banking system. ‘Cash is still the most popular means of payment, which means it is easy for suppliers to under-declare VAT-taxable revenue by not issuing invoices to consumers,’ he explains. ‘This causes a lot of difficulties for the government in trying to collect taxes, with complicated mechanisms aimed at controlling and monitoring the output and input invoices.’ The direct method of VAT is complicated and has caused issues for banks and businesses alike, but there was a reason it was introduced. ‘The direct method was no doubt introduced to accommodate the large number of individual, and particularly household businesses, in Vietnam,’ says McClelland. ‘The Vietnam VAT system has been adapted to the local business environment and structure, for example the various VAT rates and the unique
‘A HARMONISATION OF THE VAT RATES TO ONE RATE SHOULD ALSO BE AN OBJECTIVE AND THE GOVERNMENT IS WORKING TOWARDS THIS’ traditional grocery stores, according to Nielsen Vietnam’s 2010 census. Despite rapid changes in the retail landscape with the introduction of modern trade and supermarkets, traditional trade is still predominant. And while the use of debit and credits cards has increased significantly over the past five years (8% of bank account holders had a debit card in 2006 v 43% in 2010 according to Nielsen), Vietnamese people still use cash for purchases. That’s often
direct VAT method.’ VAT was introduced in 1999 and initially levied at four different rates: 0%, 5%, 10% and 20%, with many discretionary exemptions. It has undergone minor surgery since then, with the government reducing the number of tax rates to three (0%, 5% and 10%) and decreasing the number of discretionary exemptions. But accountants still find the system overly complicated and call for further simplification.
Loc Huu Phan, chief accountant for shipbuilding company Strategic Marine Vietnam, thinks Vietnam’s VAT system must be simplified further: ‘Vietnamese law changes so often, we are very confused about how to apply VAT law. The government tried to overhaul it, but even now the VAT regime is still complicated.’ It’s commonly agreed that complicated tax systems impact the economy negatively. But are there any benefits? ‘There are no advantages in complexity, however there are advantages in more detailed tax legislation where it gives taxpayers more certainty,’ say McClelland. ‘A harmonisation of the VAT rates to one rate (other than 0%) should also be an objective and the government is working towards this. Moving to a threshold system where only taxpayers having turnover over a certain threshold are required to register for VAT as in several other countries, eg Singapore, may be preferable. The New Zealand GST system is probably the purest in the world with one rate and minimal exceptions.’
Less reliance on cash Hoang also agrees more needs to be done. He says a more effective solution would be to encourage the use of electronic payment in transactions and from there, more effectively control transactions in the economy, reducing the complexity in the VAT system. ‘The introduction of the 20 million dong limit for cash settlement with one supplier in one day is the first step,
*VAT AT A GLANCE
VAT applies to goods and services consumed in Vietnam. The standard VAT rate is 10% and a lower rate of 5% is applicable to provision of essential goods and services. For exported goods and services, the rate is 0%.
Activities exempt from VAT include: The transfer of land use right. Certain credit services, loans, finance leasing, investment fund, capital assignment and securities trading. Medical examination and treatment services. Public passenger transportation by bus. Teaching and training. Life insurance, student insurance, livestock insurance, and types of non-commercial insurance activities. Certain agricultural production. Imports for humanitarian and non-refundable aid. Transfer of technology and computer software. Post, telecommunication and internet services under government programmes. Machinery and equipment and special means of transport which are not yet produced in Vietnam and which are imported by a foreign-invested enterprise (FIE) or business cooperation contract (BCC) parties as fixed assets of the enterprises (see below). Construction materials not yet domestically produced and imported to form fixed assets of a FIE or to carry out a BCC. Goods and services of business with income below a certain threshold. Materials of a FIE or BCC imported to produce products to supply to an enterprise which directly produces products for export.
* * * * * * * * * * *
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Untraceable: while the use of debit cards has risen, cash is a must to buy from markets but this needs much further progress,’ he adds. Australia’s Monash University recently took up the challenge of trying to simplify the system. James Giesecke and Tran Hoang Nhi of the Centre of Policy Studies managed to create a model which kept tax revenues for the
lack of efficiency in the public service sectors, including in taxation. But since the end of the war in 1975, Vietnam has overhauled its centrally planned economy to a mixed one. More recently, it has instituted radical simplification of the entire public sector along with tax reform. In 2007, the government
‘ONE OF THE KEYS TO SUCCESS IS HAVING A STRONG COORDINATING AND AUTHORITARIAN UNIT AT THE CENTRE OF GOVERNMENT’ government at the same level, but with reduced tax collection costs. It was based on a core VAT simplification that removed all discretionary exemptions and all VAT rates on non-exports equalised at a single revenue-neutral rate – 8.3%.
Leading the way Meanwhile, the General Department of Taxation (GDT) is in the process of reforming the tax system, and is slated to finish in 2020. Ultimately, it aims to improve administrative procedures to the point where Vietnam is a leading South-East Asian country in terms of its tax system. The GDT hopes to have at least 90% of all enterprises using e-tax services; 65% carrying out tax registration and declaration via the internet; and perhaps the most difficult task – 80% of taxpayers satisfied with services provided by tax offices. Vietnam is often criticised for its
launched Project 30, which planned to cut administrative bureaucracy by 30%. As of December 2011 that goal had not been reached, but it has reached what the Organisation for Economic Co-operation and Development (OECD) calls a ‘crucial stage’ in attempting to implement its radical cuts. The OECD believes that one of the keys to Vietnam’s success is having a strong coordinating unit at the centre of government, with backing from senior politicians. Nguyen Xuan Phuc, the minister who led the reforms, is now deputy prime minister. Whether Vietnam will succeed in reducing red tape or further simplify its VAT is yet to be seen. Whether it’s ready to undergo further changes at this pace is another issue altogether. Asha Phillips, journalist
Keep the bigger picture in mind [
Business might feel a natural resistance to economic policies such as introducing a minimum wage or raising the retirement age. But we should not lose sight of the potential benefits, says Errol Oh
Whether as individuals, businesses or special interest groups, we often miss the big picture when reacting to proposed changes in economic policies. It is only human nature to first focus on the immediate and obvious impact on us, but it is also human folly to overlook their intended long-range effects on the overall economy. This is especially true when the policy changes are likely to inflict short-term pain on certain parties. For example, the idea of setting minimum wages in Malaysia naturally did not go down well with employers when it was first floated by the unions in 2000. The main arguments against such a move were that it would create inflationary pressure and erode the country’s competitiveness. Similarly, when workers began lobbying for the retirement age to be raised in the private sector, the business community quickly countered that this would increase labour costs. Of course, the concerns expressed tend to be one-sided. After all, the businesses are protecting their interests. However, it would be wrong to ignore the potential of the minimum wage as a way to reduce poverty, improve productivity and spur economic growth. And is it wise for an ageing society with a weakening talent pool to compel people to retire when they still have a lot more to contribute? In any case, the objections are now moot. One of the
Malaysian Government’s six Strategic Reform Initiatives (part of the Economic Transformation Programme or ETP) centres on human capital development. The Performance Management & Delivery Unit (Pemandu), the government body that drives the ETP, says on its website: ‘Extending the retirement age, adopting a minimum wage as well as the introduction of unemployment insurance are some of the steps that the government will take to guide Malaysia in the direction of maintaining a highincome economy that is sustainable and inclusive.’
Businesses are not the only ones guilty of myopia and self-centredness when evaluating the country’s economic manoeuvres. It is almost automatic for people all over the world to protest when governments roll back subsidies and impose new taxes, even when such actions are well-justified. Although perfectly understandable, this mindset impedes economic progress. Subsidies, particularly those that are scattershot, only lead to inefficiency and an unhealthy dependence. As much as we all dislike taxes, they are meant to redistribute wealth. A broad-based consumption tax like the proposed (but deferred) goods and services tax addresses the need to narrow the deficit and to plug leakages in the tax system. It is the government’s responsibility to ensure that there is adequate and earnest dissemination of information ahead of major changes in economic policies. At the same time, people should have at least a basic grasp of why such changes are necessary. Otherwise, the country will be held back by short-termism and self-interest. A high-income economy operates on a reasonable level of trust in the system and a belief in the greater good. But there is a proviso: this has to be matched with competent and clean leadership across all parts of society. Errol Oh is executive editor ofThe Star
The awkward wad [
The IASB’s proposed principles-based standard for revenue recognition has no truck with special sector cases, but, as Jane Fuller points out, cash receipts aren’t always the most accurate measure of sales
It feels like a breath of fresh air for the new year: an accounting standard for all sectors, not just banks, and one that deals with the income statement rather than the balance sheet. Not only that, the final Revenue from Contracts with Customers exposure draft from the International Accounting Standards Board (IASB) represents an increasingly rare success for the project to converge International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP). The proposals are principles-based – the transfer of goods/ services to the customer marks a sale – and replace industry-specific guidelines. A top-down answer never suits all, however. The construction industry and other long-term contractors have kicked up a fuss over the proposed switch away from a percentageof-completion approach. And the telecoms sector, that home of product packages, dislikes the idea of unbundling handset sales from provision of the network service. Companies always prefer producerled approaches, while users prefer economic reality and transparency. The concerns of mobile phone companies throw up some key issues. The first is that recognising revenue from selling a handset at the start of a contract does not match the pattern of receiving a monthly cash payment over the following, say, 24 months. The idea that the income statement should better reflect cashflows is a seductive one but cash receipts can be a poor measure of sales that are longer term and more complicated than the ker-ching of a checkout till. In contracting, the problem for users of accounts is the opposite of the mobile phone giveaway issue. Money is received in advance, which temporarily looks good on the balance sheet,
but booking it as revenue before the company has performed would not be right. So why apply the cash principle when the divergence goes the other way, when a good has been supplied but payment is delayed? Telcos might also feel self-righteous because existing US-based standards that cap ‘contingent revenue’ counter an abuse thrown up in the technology bubble: recording too much revenue too soon. Indeed, they may regard
themselves as being conservative in booking a day-one loss because of giving away the handset, but accounting is supposed to be neutral. For users, unbundling different business activities is always helpful. The trend for companies to classify as much business as possible as a service has aggregated too many lines. The telcos have so far been overruled, but they might take heart from the compromises made by the standard setters to assist construction companies. These include allowing the bundling of ‘highly inter-related’ goods and services, the recognition of revenue on a straight-line basis if the effort is expended evenly, and the use of costs incurred as a measure of revenue. All this still sounds rather producer-led. Indeed, Thomas J Linsmeier, of the Financial Accounting Standards Board (FASB), in an alternative view says that ‘the proposed model has introduced exceptions that permit revenue to be recognised in a manner that is inconsistent with the core principle’. A key safeguard is the testing for onerous performance obligations – when does the company confess that the costs exceed the price? Again, the latest exposure draft modifies earlier proposals, but let’s hope that what remains is tighter than the old rules. The ‘onerous’ issue is a reminder that there is only so much that can be achieved by one standard. Companies whose transactions are anything other than short term run all sorts of cashflow and balance sheet risks. Even with non-financial companies, there is no substitute for looking well beyond the top line of the income statement. Jane Fuller is former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank
Singapore manufacturers remain downcast about business prospects for the first half of 2012, given the continued uncertainty over the global economy. According to a survey by the Economic Development Board, only 7% of manufacturers expect business conditions to improve by the end of the first half, while 18% say things will get worse. Overall, compared with the fourth quarter of 2011, a net weighted balance of 11% of manufacturers expects a less favourable business situation from now until June. Electronics and precision engineering manufacturers were the most pessimistic, with a net weighted balance of 22% forecasting less favourable business conditions. A net weighted balance of 7% of manufacturers surveyed expected output to fall in the first quarter.
CHINA OPENS UP LISTINGS
China will allow smaller Chinese companies to list in Hong Kong by reducing the regulated threshold, according to Yao Gang, vice chairman of the China Securities Regulatory Commission (CSRC). Speaking at the Asian Financial Forum in Hong Kong, Yao added the CSRC will allow qualified foreign institutional investors greater access to renminbi to invest in Chinese companies on the domestic market. He also reiterated promises that China will consider introducing Hong Konglisted exchange-traded fund products to track the domestic A-shares index and allow more renminbi-denominated bonds and shares in Hong Kong.
The view from: Hong Kong: David Tam, joint company secretary, China Railway Group Q What is currently at the top of your to-do list? A Corporate governance, for sure. We are fully aware of the increasing importance of corporate governance to investors, governing bodies and the company. Good practices can increase operational efficiency and profitability in the long run. Q China Railway Group is one of the largest construction companies in the world. How do you keep track? A The group has a sophisticated and comprehensive reporting system. Apart from a monthly overview on operational and financial data, urgent matters are communicated as need arises.
35 Corporate The view from David Tam of China Railway Group; the challenges of shared services and outsourcing; Ho Kwon Ping, the accidental businessman
Q What corporate governance initiatives are you working on at the moment? A In order to keep pace with recent developments in the economy and the industry, the company is conducting a thorough review of internal control policies and procedures. It will review and revise practices to comply with the updated requirements of the Hong Kong and Shanghai stock exchanges.
41 Practice The view from Irving Low of KPMG Singapore; how to account for carbon markets
Q How does your accounting background assist your work as a company secretary? A My accounting knowledge not only helps assure that the financial data disclosed complies with accounting standards, but more importantly, helps me to analyse and present the data that is meaningful and useful to stakeholders. Q What do you like to do away from work? A I like to play football with friends and watch my favourite team.
Company headquarters: Beijing, China Number of employees (30 June 2011): 283,006 Revenue (2010): 456.1 billion yuan Favourite book or movie: Liverpool FC is more important than any book or movie
Getting into gear In the second part of his series, ACCA’s Jamie Lyon says that more ambition and better change management are needed to fulfil the potential of shared services and outsourcing Shared finance services and outsourcing have been a significant success, driving down the cost of finance operations through labour arbitrage, stimulating processing efficiency and ticking the finance standardisation box. They have also helped to ensure consistency and to leverage IT to deliver benefits. But, according to professionals working in the field, finance transformation through shared services and outsourcing has not yet had a significant impact on broader business performance, and there is much untapped potential. These are some of the findings in ACCA’s recent report, Finance Transformation: Expert Insights on Shared Services and Outsourcing, which features commentary from 20 world-leading experts in the shared services and outsourcing space. It considers fundamental questions about how CFOs and finance leaders are evolving the finance function to drive down its cost and improve efficiencies, and, critically, how they are seeking to raise the effectiveness of finance as a partner to the business. Other advantages of shared services and outsourcing cited in the report include better governance and control as improved standardisation has delivered greater levels of transparency over finance operations. Our experts agreed that headway had also been made in getting better information
across the business to help decisionmaking and performance measurement. In many respects, the tactical aspects of finance shared services and outsourcing are now well established
THE ISSUE OF CAPABILITY IS AT THE HEART OF THIS PROBLEM. THE NEW ROLE FOR THE RETAINED TEAM DRIVES A COMPLETELY NEW SKILL REQUIREMENT
and delivered. The model has continued to evolve with the emergence of centres of excellence to house typically specialist finance responsibilities such as tax and treasury, complemented by an overarching governance-type function which brings together the constituent parts of the finance model to make it all tick along nicely – in theory. So far, so good, but the conclusion from the report is that much more can be done. Much more value could be added by evolving the finance function further and optimising its structure to unleash new levels of business benefits and make an impact on broader business performance. So why is it that transformation initiatives to date have not always delivered on their promises? First, the report suggests that it is about the ambition of finance leaders and the capability of organisations to successfully deliver on the enormous change programme that is required. Levels of transformation ambition vary. Some finance leaders see finance transformation as a means to transform the business too, rather than simply stopping at a better finance function. Other finance leaders take a slightly different perspective, seeing transformation through shared finance services or outsourcing primarily as a ‘functional finance’ fix. To this end clients differentiate between the capability of providers, seeing some as well placed to help drive business and not just finance solutions. At the heart of transformation success, however, is change management. The so-called ‘softer stuff’ continues to be the greatest impediment to achieving the goals of finance transformation through shared services and outsourcing.
TO READ ACCA’S REPORT ON HOW ORGANISATIONS ARE TRANSFORMING THE FINANCE FUNCTION, VISIT
VIEW FROM EY: *JAMES MEADER, PARTNER Graham Russell, director of business process outsourcing at WPP Group, says: ‘In all these finance transformation journeys, the hardest part is always change management. People don’t know what they don’t know. And it’s never easy to take people on this journey when they don’t know where they are going, and they are not quite convinced because the function works today and has worked for a long time. There’s a natural pushback to change.’ Many of the experts contributing to the report acknowledged concerns about the capability of organisations to manage the change process effectively. Another key problem with transformation programmes to date has not, perversely, been to do with optimising the remote delivery operations, whether through shared services or outsourcing, at all. Rather, it is that too little attention has been paid to the role and purpose of the retained finance function. This is ironic, because a key driver behind finance transformation is to free valuable finance staff at the centre or embedded in the business units from finance processing so they can concentrate on higher value insight to support commercial decision-making. Logically this means that many businesses are not tapping into and exploiting as much value as they could be. The retained finance function has been underutilised and its purpose lacks articulation. Anoop Sagoo, senior executive for business process outsourcing at Accenture, summarises the problem: ‘It’s difficult to conceive when you’re designing a shared service model that you can get a finance and accounting operation to the right level of efficiency and effectiveness without considering the retained finance function.’
In ACCA’s report, both leaders and providers cite the lack of focus on the retained team as a major obstacle to transformation success when adopting shared services and outsourcing. Often the retained team’s roles and responsibilities are not well articulated in the haste to implement, resulting in overstaffing and the formation of a shadow organisation. A key impetus for shared service and outsourcing implementations is that the transaction processing activities are removed from the business, leaving the high-value business partnering activities at its heart. However, many businesses struggle to define business partnering roles clearly and to communicate the transition properly. The result of this can be accountability confusion, skill gaps in the retained team, loss of trust by the business and unclear career paths. To address these challenges, businesses need to define clearly what is expected of the retained organisation, to conduct a skills assessment and train the team, as well as to ensure that career paths are developed and transparent.
Learning curve Once more, it is the issue of capability that is fundamentally at the heart of this problem. The new role for the retained finance team drives a completely new skill requirement. It moves responsibility away from delivering many traditional finance responsibilities and towards sometimes managing governance and service delivery, or becoming a much more valued partner to the business. Commerciality, depth of business understanding, communication and influencing skills are now key. It also calls into play new behaviours. John Ashworth, global head of business process outsourcing at Pearson, says: ‘It requires a certain sort of behaviour, which is to embrace the change and look for opportunities to push deeper and create purpose for the retained function.’ To get this right is a big call. Great change management capability is key to success. Mastering the ability to effectively make the change to the new model will be a critical skill.
LAST MONTH HOW SHARED SERVICES AND OUTSOURCING INCREASINGLY DRIVE PERFORMANCE Jamie Lyon is head of employer services at ACCA you are a CFO or FD interested in * Iffinance transformation, shared services or outsourcing and want to contribute to ACCA’s programme, contact firstname.lastname@example.org, +44 (0)20 7059 5513
Tree of prosperity Former journalist Ho Kwon Ping ended up in business by accident. But now he leads one of Asia’s top hospitality brands, which now has hotels, resorts and spas in 27 countries Ho Kwon Ping, now the executive chairman and CEO of Banyan Tree Holdings, did not intend to become a businessman. But while he was working as a journalist in Hong Kong, his father, head of the Wah Chang Group, suffered several strokes. As the eldest son, Ho decided he should join the family firm, giving up plans to move to France to pursue research studies at INSEAD. Ho recalls being thrown in at the deep end of life at the diversified conglomerate, which his grandfather founded. His father had further developed the company with various contract manufacturing operations in South-East Asia, producing products such as TV sets for Samsung and Panasonic and shoes for Nike. ‘There was no time for a learning curve,’ Ho explains. ‘Though, when I first joined in 1981, my father was still able to walk and talk. He was very Chinese, saying: “OK, here you are, do whatever you want to do.” So I did,’ Ho recalls. Back in the 1980s, Asia’s young tiger economies, which offered cheap contract labour to Western companies, were developing very quickly. ‘My father’s business was broadly divided into two types: the ones he had set up at the end of the second world war, dealing in agricultural processing and food stuff manufacturing in Thailand, and then various contract manufacturing and trading companies in Singapore, Malaysian and Taiwan. This was the model for growth, but I gradually came to realise that contract manufacturing was not sustainable.
You get squeezed out because the next guy will always start producing cheaper than you,’ Ho explains.
Lessons in business
The tips *
Every industry, no matter how mature or sluggish, will have its high-growth star performers, often those who use innovation and technology as strategic advantages.
Game-changing innovations are not just pie-in-the-sky ideas; they are responses to real problems. All of us can turn our problems into game-changing innovations.
Even the most radical innovation becomes obsolete over time, so we need to inculcate a culture of continual innovation in a company.
There is the opportunity and challenge for any company located in Asia to be high-growth, and this is something which every entrepreneur must seize.
I THOUGHT I WAS THIS HOT-SHOT BUSINESS GUY AND MY FATHER WASN’T. BUT HE WAS BETTER THAN ME BECAUSE HE KNEW WHEN TO GET OUT’
Free to move the company in any direction he wished, Ho made some early mistakes. ‘I was this impudent young man wanting to do his own business,’ he recalls. Ho set up an offshore drilling rig building business in China, but the business floundered after a deal with the Chinese authorities went sour and the rig, which the Chinese was supposed to buy, had no buyer in a suddenly over-supplied rig market. ‘It almost bankrupted us,’ he says. ‘I thought I was this hot-shot business guy and my father wasn’t. But my father basically was a lot better than me because he knew when to cut losses and get out, while I just wanted to hang in there. I learnt two lessons, which have nothing to do with business school: First, you very often need to know when to cut your losses, never indulge in self-deception and never have this gambler kind of attitude. My father knew that because he had been trading in commodities his whole life and he’d lost a lot and made a lot. ‘The second lesson is that you should never calculate how much you might make. Instead you should calculate how much you might lose and whether it can bring you down or not,’ he adds. In the early 1990s, after he had to close down a contract manufacturing business in Thailand within a year because it was facing too strong competition from a cheaper manufacturer in Indonesia, Ho realised he needed to find a proprietary advantage for his company. ‘A proprietary advantage is something you own. A cost advantage
is when you happen to be cheaper than the next guy. But when the next guy is cheaper than you, he’s got that advantage. A proprietary advantage can be technology, like a patent, or if you have a brand. And that’s what led me to set up Banyan Tree. The hotel was a vehicle to building a brand,’ he says. Ho had already built four hotels in Phuket on land he had bought with his brother, an architect. The 600 or so acres of land they were slowly developing were within an abandoned tin mine on the island’s west coast. The four hotels were managed by established brands like Sheraton and Thai group Dusit, but no one was interested in taking up the contract to manage the fifth hotel plot because it had no access to the beach. Undeterred, Ho decided to set up a new company to operate a hotel on this ‘unappealing’ site.
Unique concepts To compensate for the lack of beach access, Ho dreamt up two hotel concepts that were very innovative at the time: the pool villa and the tropical garden spa. The Banyan Tree brand was born. While the innovations came out of necessity, their development underscored Ho’s business belief that innovation should play a strategic
role in any business development by helping to set the ‘terms of engagement’ with competitors. He points to his decision to ignore spa consultants who urged him to create a European-styled, airconditioned environment, and how he instead decided to embrace the tropical greenery and humidity. The lesson learnt, he says, is never try to copy or be a poorer version of what others have, but instead turn a weakness or constraint in your favour. The gamble paid off. Since the launch of its first resort in Phuket in 1994, Banyan Tree has become synonymous with luxurious pool villas and the hotel management company has steadily built a strong brand firmly associated with ‘the romance of travel’, with 30 hotels and resorts, more than 60 spas, three golf courses and 80 retail galleries. After a slow start, the group has in recent years started to quickly expand and spread its roots around the globe. Banyan Tree now has resorts in China, Mexico, the Maldives, and even operates a one-of-a kind luxurious desert resort in Ras Al Khaimah in the United Arab Emirates. And Ho continues to have big ambitions, with an impressive pipeline of new properties due to open in the next two
years in India, Vietnam, Morocco and Greece. ‘Now that we have built the brand and it can continue in the hospitality space on its own, my next big task is to extend the Banyan Tree brand in other areas, while somebody takes over from me to manage the hospitality business,’ Ho says. Ho says he is especially interested in moving into brand-related property development. ‘We’ve started but we could do a lot more in it,’ he says.
Family owned, professionally run Though his family still controls 50% of the company and several of his family members work for the company, such as his brother, his wife and his 29-year old-son (who works in China), Ho doesn’t consider Banyan Tree to be a family business. ‘Neither my brother nor my wife are key managers. Banyan Tree is run by professional managers: it’s not a family running a business, but you do have one dominant shareholder who cares more for the long-term interest of the company and its stakeholders than the immediate short-term earnings. We are a dominant-shareholder driven company,’ he says. Ho wants his family to remain a dominant shareholder in the company.
The CV 1977
Detained for two months under Singapore’s Internal Security Act while working as a journalist for the Far Eastern Economic Review, for writing pro-communist articles. Placed in solitary confinement.
Joins the family’s Wah Chang Group.
Buys around 600 acres of land within an abandoned tin mine and develops the Laguna Phuket. ‘If the whole industry changes so that the company’s future is better if it is sold, then of course we would consider that. If we were in the electronics business where scalability is everything, then we would have sold or it would have started to go down. By remaining independent, we’re able to scale up faster,’ he notes. Ho is also thinking about succession and says steps are under way. Without revealing details which will be announced in April, he says the plan is that ‘where before I was the CEO of an integrated company, I may well become now the CEO and chairman of a holding company, which have subsidiaries that are headed by their own CEOs.’ The restructuring, he says, will free him up to concentrate on new projects. Ho also acknowledges that his company will slowly have to move towards a separation of powers between the CEO and the executive chairman positions. ‘When it’s a founder-entrepreneur’s company there needs to be a period of time where a company goes through a single founder with his vision, then at some point in
time the company should make that transition. I do not see that after me the next position should be joined, and I would hope to move into that direction within my own period of time,’ he says.
Cash-rich business With banks around the world weakened by the worsening of the sovereign debt crisis in the eurozone, credit liquidity has significantly tightened in recent months, posing headaches for many companies in Asia, which are doing well but still need to refinance ongoing projects. Credit is becoming scarcer and more expensive, as it did in 2008 after the collapse of Lehman Brothers. Having been nearly caught in the post-Lehman liquidity crunch, Ho has readied his company in recent years by, for example, divesting some of its properties. Today, the Banyan Tree is cash rich. ‘Even if we were to look at a liquidity crisis several times worse, we don’t even have to think about financing for a few years,’ Ho says. As he’s weathered several other crises, from the Asian financial crisis in 1997 to the aftermath of the 2004 tsunami, Ho says he has become very
Founds Banyan Tree Hotels and Resorts and launches its first property, Banyan Tree Phuket.
Lists Banyan Tree on the Singapore Exchange.
Banyan Tree completes its first renminbi-denominated private equity fund in China, the Banyan Tree China Hospitality Fund, with a total capital commitment of 1.07 billion yen.
cognisant of global macro trends. ‘Right now, fortunately, I’ve learned enough lessons from the previous financial crises. Maybe the downside is that I’m too cautious, but if 2012–13 is worse than 2008–09, we would feel it of course in our profits, but we wouldn’t feel it significantly in terms of our survivability, because we’re in a relatively comfortable position.’ Sonia Kolesnikov-Jessop, journalist
FIRMS’ HEADCOUNT UP ON UK China’s headcount at the top accountancy firms is about to overtake the UK for second place in the world behind the US, according to a recent report by the Financial Times. At KPMG, for instance, the firm now has about 9,000 staff in mainland China and Hong Kong and 11,000 in the UK. Alan Buckle, the firm’s global deputy chairman, predicts the UK will be overtaken by the end of 2013. At Ernst & Young, after quadrupling its workforce in mainland China and Hong Kong over the last 10 years, it now employs 10,000 there compared with 11,200 in the UK. At PwC and Deloitte, the British headcount is larger but the gaps may also be eaten away during the coming years at those firms, the report speculates.
The view from: Singapore: Irving Low, head of Risk Consulting, KPMG Singapore Q How is 2012 shaping up so far? A 2012 will be a challenging year. Due to the uncertainty facing the business community ahead, many are preparing for the worst. Q What’s the one blind spot companies tend to have? A Not knowing what their blind spots are. This is a situation of ‘you don’t know what you don’t know’. Most companies will tell you that they have been in business for many years and have survived, and they have seen everything there is to see. But the world in which we live today is very different from the world of 10 or even five years ago. Complexity coupled with technology has transformed the way we transact and conduct business. Q Do you see your job getting harder? A Our job will invariably get harder. The complexity in the business environment will require that we, as service providers, stay ahead of the knowledge curve. Clients are a lot more sophisticated and naturally demand more from their service providers. We have to continuously embrace new ideas and knowledge to innovate better solutions.
KPMG AND EY IN THE CLEAR
Accounting firms KPMG and Ernst & Young have been cleared of responsibility for a US$1.7bn accountancy fraud at camera-maker Olympus by an unofficial panel of experts. However, the firms’ roles still remain under review by Japan’s financial regulator and accountancy body. The two audit firms’ roles came under scrutiny after signing off on Olympus’s accounts before the 13– year fraud was discovered in October 2011. A panel of lawyers set up by Olympus said neither of the two firms violated their legal duties. However, they said five individual auditors were responsible for 8.4 billion yen (US$109m) in damages. Olympus later said it is suing the five individuals for one billion yen.
41 Practice The view from Irving Low of KPMG Singapore; how to account for carbon markets 35 Corporate The view from David Tam of China Railway Group; the challenges of shared services and outsourcing; Ho Kwon Ping, the accidental businessman
Q What do you like best about your work? A Everything! My job allows me to make a difference for our clients, our staff and our organisation. I believe we are entrusted with a role and responsibility which allows us to influence others in a positive manner. From a personal perspective, job satisfaction is beyond the monetary benefits derived.
Firm structure: Partnership Employees: Eighty partners and 2,257 staff (as of 31 Dec) Job description: Anything and everything – within my authority, of course
Accounting for emission omissions The marathon UN climate talks in South Africa last December achieved a last-minute deal, but big questions remain over a common accounting basis for carbon markets The marathon United Nations climate talks in Durban, South Africa, resulted in agreement to start a fresh round of negotiations to secure a new treaty on global carbon emissions and will spark a host of critical accounting and auditing questions. Delegates said the new treaty would replace the Kyoto Protocol and come into effect by 2020 at the latest. However, despite the renewed political will, serious question marks remain over how emissions can be properly monitored and accounted for and how that will affect the health of carbon markets. Under the existing UN clean development mechanism (CDM), emission reduction projects in developing countries can earn certified emission reduction (CER) credits. These saleable credits can be bought by industrialised countries to help meet their emission reduction targets under the Kyoto Protocol, which will now be extended until at least 2017 under the Durban pact. But the accounting basis of the CDM and CER framework remains unclear or at best ambiguous in parts. The UN’s climate governing body in Durban agreed only to review the basis of CDM and CER at its next meeting in Qatar in November 2012. Still outstanding is the finalisation of the design of the extended Kyoto emissions commitments to ensure effective operation of emissions trading, ‘taking into account relevant rules, modalities, guidelines and procedures for measuring, reporting, verification and compliance of the CDM process’. The CDM’s executive board has also asked market participants to suggest draft data quality guidelines to use in standardised baselines for emission calculation models. The current lack of a common accounting system to monitor emissions under the UN
climate convention could further complicate efforts to achieve accurate monitoring – which is a necessary underpinning for carbon markets. Niklas Höhne, director of energy and climate policy at Germany-based energy consultancy Ecofys, says: ‘The fragmentation of emission accounting rules will make it very difficult for scientific comparison of pledges and decrease the transparency of government actions. Pledges [of emissions cuts] are based on different assumptions, conditions and implied rules. This complexity is increasing
The complexities inherent in the system have been highlighted by Australia’s emissions policy. Australia pledged to cut emissions by 5% from the levels it produced in 2000 but the industrial sector levels incorporated into the Kyoto Protocol would in theory allow Australia to increase its emissions by as much as 26% over 1990 levels. These apparent contradictions emerge because Australia calculated its emission reduction target for 2020 on the basis of the sectors listed in the Annex A of the Kyoto Protocol – namely, energy, industrial
Riding the revolution: cyclists power lights on an installation depicting a baobab tree on Durban’s beachfront
since some parties are using Kyoto Protocol rules for counting their pledge and others aren’t. This, in turn, will increase the level of uncertainty in evaluating the global emissions we really have now and where they are headed.’
and agricultural emissions – plus the emissions from afforestation, reforestation and deforestation, based on another Kyoto clause. As emissions from afforestation, reforestation and deforestation are projected to be much lower in 2020 than in 1990,
Feel the heat: supporters of southern African grouping the Rural Women’s Assembly raise awareness at Durban of the impact of climate change on ordinary people
emissions of all other sectors can be higher, according to environmental consultancy Climate Analytics. ‘A set of common rules would ensure a higher level of transparency, ensure comparability and build confidence,’ Höhne says. The European Union, long Kyoto’s most significant supporter, reaffirmed in November 2011 that timely and accurate figures on emissions are vital and has proposed legislation to boost monitoring and reporting of emissions, especially for the period 2013 to 2020. The legislation also aims to cover reported emissions from land use, land use change and forestry, aviation and maritime transport among other sectors. Its main objectives include measures to improve the quality of data reported and to ensure that EU states comply with current and future international monitoring and reporting obligations and commitments. The UN climate body is also trying to iron out problems but negotiations will take at least a year. A decision over establishing a CDM appeals process was deferred to the Qatar meeting after delegates in Durban failed to agree on how appeals would operate.
Materiality threshold A separate provision for a ‘materiality threshold’ under the CDM was agreed in Durban, and emissions reporting errors too small to have any significant impact will in future be disregarded. Information relating to a CDM project will be considered material if its omission, misstatement or noncompliance with a requirement results in an overestimation – above a certain allowable level – of total emission reductions achieved. Large projects are allowed a smaller margin of error than small ones. In the case of projects that offset more than 500,000 tonnes of carbon dioxide equivalent (CO2e) a year, total emission reductions may not be overestimated by more than 0.5%. Meanwhile, the deal reached in Durban should be a boost for the EU’s own emissions trading scheme (ETS) carbon market. Without Kyoto and its commitments from mainly EU countries to cap their greenhouse gas emissions, the ETS would have been under threat. The EU pledged in Durban to cut its emissions by 30% by 2020 compared with 1990 levels. The EU ETS covers some 11,000 power stations and industrial plants in 30
countries and will extend to the civil aviation sector from January 2012. But the ETS has not had an easy ride since its inception in 2005. Carbon prices have slumped to around €7 a tonne CO2e, far below record highs of around €30/t CO2e and well below the minimum of €20/t CO2e seen as needed to attract investment in new clean technologies. The euro crisis, the grim global economic outlook and an oversupply of allowances issued by polluters that expect their power stations and other facilities to pump less in the downturn have pulled down allowance prices on the ETS. Banking group UBS has been highly critical of ETS, arguing it has cost EU consumers almost US$290bn for ‘almost zero impact’ in cutting emissions. UBS has also warned that ETS prices will crash in 2012. The ETS is trying to recover its reputation after a series of high-profile theft and fraud scandals which has knocked confidence in the scheme. ‘Clearly, the market is in a dark place, being awash with supply and facing big European macroeconomic risks,’ a spokesman for British banking group Barclays said.
US investment bank Goldman Sachs has even warned that EU politicians may be tempted to intervene in the ETS to prevent allowance prices falling even more. ‘We see a potential catalyst for carbon prices from political intervention, either through a tightening of the scheme or from a carbon floor price,’ said a Goldman Sachs spokesperson. ‘We believe the significant influence of green party agendas across Europe, combined with the potential revenue for cashstrapped governments, is the basis for risks of intervention in the carbon markets.’
EU ready to act Denmark, which took over the EU presidency for six months starting in January 2012, is seen as sympathetic to EU action in the market. In a further sign of EU intervention in the carbon market, there are plans to ensure EU spot carbon permits are regulated by the European Commission under the Markets in Financial Instruments Directive (MiFID). MiFID may ensure that future carbon registry account holders in the ETS will be restricted to prevent fraud. At the start of 2011, a total of 4m tonnes CO2e of EU ETS allowances (EUAs) was stolen by hackers who accessed online registry systems of the ETS. ‘While it is impossible to fully legislate against theft, the question remains as to why we continue to facilitate access to our market to the criminal element by allowing almost anyone to open up a registry account,’ said a carbon market analyst at Deutsche Bank. With Europe in a funk, the biggest potential boost to carbon markets may come with its development in China and Australia. China, the world’s biggest emitter of greenhouse gases used the UN climate talks in Durban to confirm it was aiming to launch a working carbon market which would act as a market-based mechanism to incentivise its main polluters to reduce emissions. ‘We will actively develop the market mechanism of carbon trading pilot projects to
A KEY ROLE
Delegates at the UN Climate Change Conference in Durban
A new report from ACCA, COP 17 and Accountants: Where Next?, makes it clear that business and climate change experts believe accountants have the technical skills and expertise to make a real difference to climate change mitigation activities. However, the experts also believe that the profession needs to develop its knowledge and mechanisms to meet new demands, and to reshape its training and skills courses to provide the necessary confidence and trust in accountants’ capabilities and integrity. Rachel Jackson, ACCA’s head of sustainability, says: ‘The profession has work to do to get to where it needs to be on sustainability accounting, but it has been flexible in the past and should rise to this new challenge. The fight against climate change is going to be a collaborative effort. Accountants, countries, and private enterprise and finance will all have a role to play.’ View the report at www2.accaglobal.com/cop_17
explore the establishment of carbon trading markets,’ China’s top climate negotiator Xie Zhenhua said in Durban. China’s Industrial Bank and the Shanghai Environment Energy Exchange in November signed an agreement to test an emissions trading scheme in Shanghai. China’s economic planners want similar exchanges in Beijing, Guangdong, Tianjin, Hubei and Chongqing by 2015. Like China, Australia has plans to bring in a carbon market in 2015. The proposed Australian carbon market would be linked to the EU’s ETS system. Talks between senior Australian and EU officials will focus
on how Australia and the EU can work together to promote deep, liquid and integrated carbon markets. The talks ‘will also examine the mechanics of linking Australia’s carbon pricing mechanism with the EU’s ETS’, according to the EU and Australia. The negotiations could be a sign of the times: the Asia Pacific region will increasingly take the lead in developing carbon pricing and market mechanisms as part of global climate change mitigation efforts, according to the International Emissions Trading Association (IETA). George Stone, journalist
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A monthly round-up of the latest from the standard-setters INTERNATIONAL IFRS 9 CHANGES The International Accounting Standards Board (IASB) issued IFRS 9, Financial Instruments, in November 2009. At that time it also said that it might be necessary to make further changes as a consequence of the ongoing project to develop an IFRS for insurance contracts. The IASB has now announced that it will undertake a project to make limitedscope changes to IFRS 9. At the same time, the IASB and US Financial Accounting Standards Board (FASB) will work together to try and reduce the differences that currently exist in their respective models for classification and measurement. The IASB has also stated that in making any amendments, it will be mindful of the fact that many preparers will have already invested time in planning for the implementation of IFRS 9 in 2015. While it has been a slow start to the year as new pronouncements and exposure drafts are concerned, this is unlikely to remain the case as 2012 progresses. A review of the IASB’s work plan shows that there are a number of very important exposure drafts and standards due in the first half of the year. These are listed below. Leases – a revised exposure draft is anticipated which will continue with a
model that will require the majority of lease contracts to be recorded ‘on balance sheet’, but will simplify the way in which those leases are measured compared with the original proposals, particularly for lessors. Financial instruments – a new IFRS for general hedge accounting, which the IASB considers will reduce complexity and allow entities to more closely align their accounting to the hedging models they apply in running their businesses. An exposure draft in respect of macro hedging will follow in the second half of the year. There are also plans to re-expose the proposals addressing the impairment of financial instruments. Insurance contracts – originally exposed in 2010, the proposed standard has been subject to substantial reworking in many key areas and will therefore also be re-exposed.
Yvonne Lang, director, Smith & Williamson
MALAYSIA PN13/2011 ISSUED On 23 December 2011, the Companies Commission of Malaysia (SSM) issued Practice Note No. 13/2011 (PN13), Circumstances and Procedures for Rectification of Documents Lodged and Registered with the Companies Commission
of Malaysia. This note clarifies the circumstances and procedures in which documents that have been lodged and registered with the SSM may be rectified. It also reiterates the importance of ensuring that companies lodge documents which contain adequate and accurate information. The full PN13 is available from www.ssm.com.my BANK NEGARA MEASURES On 31 January 2012, Bank Negara Malaysia announced the following liberalisation measures as part of continuous efforts to enhance competitiveness in the economy and to develop the domestic financial markets: Licensed onshore banks are permitted to trade foreign currency against another foreign currency with a resident. A licensed onshore bank is allowed to offer ringgitdenominated interest rate derivatives to a non-bank non-resident. Flexibility is permitted for a resident to convert their existing ringgit or foreign currency debt obligation into a debt obligation of another foreign currency. For more information, contact Bank Negara Malaysia toll free on 1 300 88 5465 (BNMTELELINK), email email@example.com. my or log in to www.bnm. gov.my/fxadmin
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PUBLIC RULINGS ISSUED On 20 December 2011, the Inland Revenue Board issued Public Ruling No. 11/2011
(PR11), Bilateral Credit and Unilateral Credit and Public Ruling No. 12/2011 (PR12), Tax Exemption on Employment Income of Non-Citizen Individuals Working for Certain Companies in Malaysia. PR11 provides an explanation on bilateral credit and unilateral credit that may be claimed by a person who has been charged tax on the same income in Malaysia and in another country. PR12 provides an explanation on the tax treatment of employment income derived by non-citizen individuals working for an operational headquarters company, regional office, international procurement centre company or regional distribution centre company in Malaysia. Both are effective from year of assessment 2011 and subsequent years of assessment. They can be downloaded from www. hasil.gov.my/pdf/pdfam/ PR11_2011.pdf and www. hasil.gov.my/pdf/pdfam/ PR12_2011.pdf, respectively. Vilashini Ganespathy, head – technical and professional development, ACCA Malaysia
SINGAPORE 2012 BUDGET STATEMENT The 2012 Budget Statement was delivered by deputy prime minister and minister for finance, Tharman Shanmugaratnam, in parliament on 17 February. More details can be found at www.mof.gov.sg
ACRA ISSUES DIRECTIONS The Accounting and Corporate Regulatory Authority (ACRA) has issued Financial Reporting Practice Direction No. 1 of 2012. This direction urges company directors to focus their attention on those Singapore Financial Reporting Standards which require significant management judgments and estimations in this uncertain economic environment. ACRA has also issued Practice Direction No. 1 of 2012, Applications for Exemptions under Sections 373(5) and 373(7) of the Companies Act, Cap. 50. This direction serves to identify: a) The legal requirements relating to financial reporting imposed on foreign companies. b) Policies supporting these requirements. c) The criteria and conditions imposed by ACRA for applications under section 373(5) of the Companies Act, Cap. 50 for waiver from filing of local branch accounts, and section 373(7) of the act for relief from the requirements relating to the form and content of accounts or reports lodged. ACRA has also issued an article, Discussion of Past Disciplinary Cases against Public Accountants and Public Accounting Entities. This sets out the decisions or rulings extracted from past disciplinary cases against public accountants and public accounting entities. Its purpose is to raise
awareness of appropriate and acceptable professional conduct, and to make known actions taken by ACRA to uphold professional conduct. The documents can be downloaded from www.acra. gov.sg LICENSING FOR CRAS The Monetary Authority of Singapore (MAS) has implemented the regulatory framework for Credit Rating Agencies (CRA), with effect from 17 January 2012. Under the new CRA regulatory framework, the provision of credit rating services will be regulated under the Securities and Futures Act (SFA). CRAs will consequently have to be licensed under the Capital Markets Services (CMS) licensing regime under the SFA and be subject to licensing obligations. CRAs will be required to comply with existing regulations, guidelines and notices under the SFA that apply to all CMS licensees. In addition, CRAs will also have to comply with a new code of conduct for CRAs that MAS will introduce in conjunction with the establishing of a regulatory regime for CRAs. MAS will also require CMS licensees providing credit rating services to appoint and register under the Representative Notification Framework any individual who acts as their representative in providing credit rating services. Representatives providing credit rating services will be required to hold, as
a minimum, a Bachelors degree in a relevant discipline that will allow them to perform the job function effectively. Existing CRAs will be given a transition period of six months to apply for the required licence. For more, go to http:// tinyurl.com/7unk4bd CONVEYANCING WORKFLOW The Ministry of Law implemented new measures on 1 August 2011 to protect conveyancing money, by regulating how lawyers can receive and hold conveyancing money. These measures include requiring lawyers to hold conveyancing money in conveyancing accounts with specially appointed banks, namely: Bank of China, Bank of East Asia, CIMB Bank, DBS Bank, Far Eastern Bank, OCBC and UOB. Alternatively, lawyers can hold such money through the Singapore Academy of Lawâ€™s conveyancing money service, or via escrow arrangements. The withdrawal of money from such accounts requires joint authorisation by lawyers acting for different parties. As a further enhancement, from 1 January 2012, the Singapore Land Authorityâ€™s Electronic Payment Instruction (ePI) service will allow lawyers to electronically notify banks of the details of conveyancing money paid into conveyancing accounts, instead of using hard copy forms. The Inland Revenue Authority of Singapore will
also accept electronic stamp duty payments via the ePI service, which will reduce processing time and further streamline conveyancing transactions. For more, go to www. conveyancing.sg Joseph Alfred, policy and technical adviser, ACCA Singapore
HONG KONG ANTI-MONEY LAUNDERING The Securities and Futures Commission has released a new set of guidelines on anti-money laundering and counter-terrorist financing, which will come into effect on 1 April 2012. These provide guidance to licensed corporations relating to the operation of the provisions of schedule 2 to the AntiMoney Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO). Schedule 2 of the AMLO aims to bring customer due diligence and recordkeeping requirements in line with the latest international standards. The guidelines assist corporations to design and implement appropriate and effective policies, procedures and controls so as to comply with the AMLO, and include examples of industry-specific suspicious transactions that may warrant reporting to the Joint Financial Intelligence Unit. Sonia Khao, head of technical services, ACCA Hong Kong
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Current or non-current liability? Accounting for liabilities may appear to be straightforward but simple rules can have significant effects on corporate financial statements, explains Graham Holt
There have recently been some major breaches of debt covenants reported by companies, but the issue then arises as to how this liability is reported. The question is whether the liability is a current or non-current liability and how to present the liability in the statement of financial position. IAS 1, Presentation of Financial Statements, paragraph 60 stipulates that an entity should present current and non-current liabilities as separate classifications in its statement of financial position, except when a presentation based on liquidity provides more relevant and reliable information. Whatever the method of presentation, an entity should disclose the amount expected to be settled after more than 12 months and less than 12 months. When an entity supplies goods and services with an identifiable operating
Financial liabilities include trade and other payables. If a liability category combines amounts that will be settled after 12 months with liabilities that will be settled within 12 months, note disclosure is required which separates the longer-term amounts from the 12-month amounts. Paragraph 69a窶電 of IAS 1 states that liabilities are to be classified as current if any one of four specified conditions is met. The conditions are: A It expects to settle the liability in its current operating cycle B It holds the liability primarily for trading C The liability is due to be settled within 12 months D It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. All other liabilities are to be
SOME CURRENT LIABILITIES SUCH AS TRADE PAYABLES AND EMPLOYEE COSTS ARE PART OF THE NORMAL WORKING CAPITAL cycle, separate classification of current and non-current liabilities highlight liabilities due for settlement in the period. Information regarding the realisation of liabilities is useful in assessing the solvency of an entity as IFRS 7, Financial Instruments: Disclosures, requires disclosure of the maturity dates of financial liabilities.
classified as non-current. IFRS 7 does not deal with the classification of financial liabilities but the disclosure of information that enables users to evaluate the nature and extent of risks arising from financial liabilities to which the entity is exposed. IFRS 9, Financial Instruments, deals with the classification and
measurement of financial liabilities. In October 2010, the International Accounting Standards Board (IASB) published additions to the first part of IFRS 9 on classification and measurement of financial liabilities. The requirements in IAS 39 regarding the classification and measurement of financial liabilities have been retained, including the related application and implementation guidance. This means that there are two measurement categories for financial liabilities, which are fair value through profit or loss (FVTPL) and amortised cost. The criteria for designating a financial liability at FVTPL also remain unchanged. Some current liabilities such as trade payables and employee costs are part of the normal working capital of the entity and the entity classifies the amounts as current even if they are to be settled outside of the 12-month period. There are some current liabilities that are not part of the working capital cycle but are due for settlement within 12 months or are held for trading. Financial liabilities are an example of this fact. Financial liabilities are classified as current when they are due for settlement within 12 months, even if the original term was for a longer period than 12 months and an agreement to refinance on a long-term basis is completed after the reporting date but before the financial statements are authorised for issue.
TO GET THE QUESTIONS GO TO www.accaglobal.com/ab_tech
Case study 1 An entity operates in the oil industry. It is constructing and operating an oil rig, which is financed partly by a loan raised in 2010 and the entity classified the loan correctly as a non-current liability in accordance with paragraph 69 of IAS 1. In the statement of financial position at 31 December 2011, the entity reclassified the loan as a current liability. In the 2011 financial statements, the entity disclosed, as an event after the reporting period, that the loan had been settled with cash received under an oil production agreement. The entity also disclosed that a letter of intent in connection with the agreement had been signed by the end of the 2011 financial year. In the directors’ report for the year, the entity stated that the loan was classified as a current liability due to the fact that the loan had been settled in February 2012 when the oil production agreement became legally binding. The original settlement date was 31 December 2015. The entity stated that it had reclassified the loan in accordance with IFRS 7, Financial Instruments: Disclosures.
Solution IFRS 7 applies only to information disclosed in the financial statements and not to the classification of liabilities. Therefore, the standard is not relevant. The classification of the loan as a current liability does not comply with paragraph 69 of IAS
1. In respect of the 2011 financial statements, the oil production agreement, effective in February 2012, was a non-adjusting event after the reporting period as determined in accordance with IAS 10, Events After the Reporting Period. It can be concluded that the loan should have been classified as a non-current liability in the 2011 statement of financial position because the entity did not meet any of the conditions set out in paragraph 69a–d of IAS 1: A The project loan is not a liability which would be settled in the issuer’s normal operating cycle (paragraph 69a). The loan is a financial liability providing financing on a long-term basis. It is not part of the working capital used in the entity’s normal operating cycle. B The issuer did not hold the loan primarily for the purpose of trading but for the purpose of financing the construction of the oilrig (paragraph 69b). C The loan was not due to be settled within 12 months after the reporting period (paragraph 69c). D The entity had an unconditional right to defer settlement of the liability for at least 12 months after the reporting period, because the loan was not due to be settled within 12 months after the reporting period (paragraph 69d). Paragraphs 74–76 of the standard address the consequences of a breach
FINANCIAL LIABILITIES ARE CURRENT WHEN THEY ARE DUE FOR SETTLEMENT WITHIN 12 MONTHS, EVEN IF THE ORIGINAL TERM WAS FOR A LONGER PERIOD AND AN AGREEMENT TO REFINANCE IS COMPLETED AFTER THE REPORTING DATE BUT BEFORE THE FINANCIAL STATEMENTS ARE AUTHORISED FOR ISSUE of a provision of a long-term loan agreement on or before the end of the reporting period with the effect that the liability becomes payable on demand. In this case, the liability is classified as current, even if the lender has agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. Under IAS 1, a liability is classified as current as the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.
Case study 2 In December 2010, an entity agreed a 10-year leasing agreement
with a leasing company and undertook to comply with certain covenants during the term of the lease agreement. The agreement stipulated that, in the event of a failure by the entity to fulfil any of the contractual obligations, or having failed to rectify any such breach within a one-month period, the lessor had the right to terminate the leasing agreement. In such a case, the entity would have to pay all unpaid amounts due before the termination of the agreements. As at 31 December 2011, the entity was not in compliance with the covenants stipulated in the leasing agreement. It was additionally established that on 31 January 2012, the entity was still not in compliance with the specified leasing covenants. In the 2011 consolidated financial statements, the debt relating to the leasing company was classified as non-current in accordance with the payment schedules included in the original agreement. The entity had received, from the lessor, a notification confirming the failure to comply with
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the covenants as of 31 December 2011. Thus, as at 31 December 2011, having failed to fulfil the contractual obligations and being in breach of relevant covenant, the leasing company was entitled to require the entity to repay the debts immediately.
Solution The entityâ€™s presentation of the debt as a non-current liability is not in accordance with IAS 1, paragraph 60 that specifies the circumstances in which liabilities are to be classified as current. The amounts outstanding in respect of this arrangement at 31 December 2011 should have been disclosed as a current liability. IAS 1 stipulates that a liability shall be classified as current where it is due to be settled within 12 months after the reporting date, and the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
Conclusion Accounting for liabilities may appear to some to be relatively straightforward but simple rules can have significant effects on corporate financial statements. 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
Good governance for NPOs In an era of increased scrutiny, it is crucial for non-profit organisations to have a governance structure that supports leadership and decision-making, says Ramesh Ruben Louis Awareness of the need for organisation governance, especially among non-profit organisations (NPOs), has been growing in recent years, fuelled by heightened performance scrutiny by the public and other stakeholders, including the governments and corporations that provide funding. To manage and respond to these changes, it is imperative that nonprofit organisations, like their profit-oriented counterparts, advocate strengthening structures that support good leadership and decision-making and ensure sound and effective governance. Corporate governance is the system by which an organisation is controlled. It is about how an organisation can better manage its resources to good effect for both members and stakeholders. Effective governance requires leadership, integrity and good judgment. Additionally, effective governance will ensure more effective decision-making, with the organisation demonstrating transparency, accountability and responsibility in the activities undertaken and resources expended.
Clear roles It is common that different organisations operate under different governance structures. However, while not advocating the adoption of any single model, each structure should be clearly documented with a clear delineation of powers and responsibilities of each body involved.
Further, there should be no overlap in the powers of any two bodies or individuals in a governance structure. The governance structure should feature a clear separation of powers and responsibilities between the board of governors/directors (‘mind’ of the organisation) and the CEO and his/her staff (‘hands’ of the organisation). This clarity of powers and responsibilities must also apply to the various board and management committees. The governance structure should also recognise that individual directors, the CEO (or similar), his/her staff, board committees and management hold no
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directors. The number should reflect the size and level of activity of the organisation. Have a sufficient blend of expertise and skills necessary to effectively carry out its governance role, rather than a representative board. Have the ability to make a limited number of external appointments to fill skills gaps. Institute a staggered rotation system for board members with a maximum term in office to encourage board renewal while retaining organisational memory. Be broadly reflective of the organisation’s key stakeholders,
THE GOVERNANCE STRUCTURE SHOULD FEATURE A CLEAR SEPARATION OF POWERS BETWEEN THE ‘MIND’ AND THE ‘HANDS’ OF THE ORGANISATION authority to act on behalf of the organisation by virtue of their position alone. All authority should rest with the board, which may delegate authority to any person or committee. Each delegation should be clearly documented in a delegation manual or similar. The board plays a pivotal role in the whole governance structure of the organisation. Each board should be structured to reflect both the constituency it represents and the operating environment facing the organisation. Normally, it is envisaged that a board will: Comprise between five and nine
but not at the expense of board skills mix. Key responsibilities of the board include the following: Setting the broad strategic direction of the organisation through consultation with stakeholders. This includes determining the organisation’s purpose and core values, as well as key objectives and performance measures. Appointing, directing, supporting professional development, evaluating the performance and determining the remuneration of the CEO. Where necessary, dismissing the CEO.
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Monitoring the financial and non-financial performance of the organisation. Ensuring financial and non-financial risks are appropriately managed. Ensuring the organisation complies with all relevant laws, codes of conduct and appropriate standards of behaviour. Providing an avenue for key stakeholder input into the strategic direction of the organisation.
Effective processes Each organisation should agree to and document a clear set of governance policies and processes to facilitate effective governance. These processes should reflect best practice and be subject to regular review. Board meetings should have appropriate documentation. This means issues
submitted should be in an appropriate and agreed form (a board paper) and be circulated sufficiently in advance of the meeting. The board should similarly maintain a clear record of decisions made through an appropriate and agreed minuting process. Where committee or taskforces are set up to undertake certain activities or projects, they should be established by a board and have terms of reference. These terms of reference should include, at a minimum: Committee purpose. Authority delegated. Committee composition, including the appointment of a chair. Reporting requirements. Delineation of the roles of the committee and management. Just like any other organisation, finance is critical to an NPO as well. The board should ensure the
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Good corporate governance encompasses five key elements: Clear roles Member responsiveness Governance improvement
Effective processes Effective controls
consistency of corporate expenditures with grant/donor/contribution conditions and restrictions. To this effect, the board should ensure that: A An appropriate limitation (consistent with industry standards) is placed on the amount of administrative/overhead expenses spent in connection with charitable mission-related activities. B An appropriate limitation (consistent with industry standards) is placed on the amount of contributions spent on fundraising activities. C The accumulation of funds that are not used for current programme activities is no more than the board, in consultation with management and advisers, determines to be prudent given the organisationâ€™s financial condition, short- and long-term needs, and industry trends. D Financial information concerning the organisation, prepared in accordance with generally accepted accounting principles, should be available to the public on request. Such information should accurately reflect the organisationâ€™s expenses related to fundraising activities, among other expenses.
Effective controls The board should put in place an effective and efficient monitoring and evaluation system. This includes financial and non-financial monitoring. The board must also have in place an effective risk management strategy and process. This will require it to
take actions to identify key risks facing the organisation and ensure that risk management strategies are developed and actioned. The board should also implement an effective compliance system, so that, at a minimum: The organisation complies with all relevant statutes, regulations and other requirements placed on it by external bodies. Effective internal controls exist
and updated and should be the subject of a formal board resolution.
Governance improvement Each board should ensure that there is regular assessment of performance and an effective board and individual director development programme in place, including mechanisms to respond to nonperforming directors. Besides that, it is
THE BOARD SHOULD EXERCISE LEADERSHIP, INTEGRITY AND GOOD JUDGMENT, ALWAYS ACTING IN THE ORGANISATION’S BEST INTEREST and there is full and accurate reporting to the board in all areas of compliance. The organisation is financially secure and able to meet all its financial obligations when they fall due, in the normal process of business. The board must ensure an effective audit process is in place. The audit may involve internal and external auditors and, for large organisations, an audit committee of the board may be appropriate. An audit committee will only comprise persons who are not directly involved in the management of the organisation. Since most decision-making power rests with the board, each board member clearly documents all delegations of authority to the CEO and other individuals, committees or groups. This document, or ‘delegations register’, should be regularly reviewed
strongly advisable that new directors undergo an appropriate induction process. The board should also ensure that a director’s access to information is appropriately protected with a deed of access or similar.
Member responsiveness The board should ensure that it exercises leadership, integrity and good judgment, always acting in the best interest of the organisation as a whole, demonstrating transparency, accountability and responsibility to members: The board should strive to ascertain the interests, aspirations and requirements of members, and create responses to these in the form of an overall strategic plan and align this with member plans. Members of an organisation should have the ability to remove board
members (or a board as a whole) and change the constitution should they see fit. Board members have no voting rights beyond those of regular members or by virtue of their position. Where the membership of an organisation comprises other organisations, board members should not be eligible to vote at general meetings. The board should provide members with a comprehensive annual report outlining how they fulfilled the organisation’s governance roles, achievements and aspirations, and sufficient financial information so that members can make a judgment as to how effectively the board is fulfilling its role.
Conclusion Clearly, the hallmarks of good governance in non-profit corporations are strong internal controls, external accountability, transparent financial management, regular and effective communications, effective and ethical fundraising and development, and a management structure that uses its resources to pursue and fulfil the objective and purpose of the organisation. These characteristics provide a culture of checks and balances among trustees and staff, and ultimately increase public confidence. Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate advisory
GST is coming, so be prepared Despite there being no clear implementation timetable in sight, Malaysian businesses should get to grips with what GST will – eventually – entail, says Renuka Bhupalan
The goods and services tax (GST) is a consumption tax which operates along the lines of value added tax (VAT), introduced in Europe in the 1950s. First mooted in Malaysia close to 20 years ago, GST has yet to be enacted into law. In the 1993 Budget, the then finance minister announced the impending introduction of a sales and service tax (SST), to operate as a GST. However, the SST idea fizzled out until it made a reappearance in the 2005 Budget proposals in the form of GST. This time, it looked as if there was a firm commitment, with a proposed introduction date of 1 January 2007. But this was not to be and again GST was put on the back-burner. The last few years have seen the resurfacing of GST, with the government going so far as to release the GST Bill, tabled for the first reading in parliament in March 2010. However, its legal passage has been delayed, with the government announcing that the public needs to be educated further before the tax can be introduced. In the meantime, the customs authorities, who will be responsible for its implementation and administration, have been running educational roadshows and have started to release GST industry guides and to populate a ‘GST portal’ on its website. While the customs authorities profess to being GST-ready, most taxpayers are arguably not. The general consensus is that GST will be
introduced, but it is a waiting game. In the interim, it is important to assess its impact on Malaysian businesses so that they are prepared when this tax is eventually introduced.
When and why? It is widely speculated that GST will be introduced after the next general election, tipped to take place in 2012. The introduction will provide the government with a much-needed sustainable alternative tax base which will contribute to reducing the fiscal deficit without over-reliance on the gradually depleting petroleum revenues. For 2012, petroleum income tax is expected to contribute to 27.6% of the government’s direct tax base, with corporate taxes accounting for 50% and personal income taxes for 22.4% of this tax base. In uncertain economic climates, these taxes are prone to fluctuations, against which GST arguably offers a long-term and wider revenue base. Although the proposed rate of 4% is relatively low (particularly as this is intended to replace service tax which is currently imposed at 6% and sales tax which is mostly imposed at 10%), this is likely to creep up. In Singapore, GST was introduced in 1994 at the rate of 3% and is currently 7%. The UK’s VAT rate has risen gradually from 10% in the 1970s to the current 20%. It is hoped that, once implementation becomes settled and GST generates
the expected revenue, corporate and personal tax rates will gradually be scaled down.
The proposed GST regime GST in Malaysia will operate in the same manner as GST and VAT systems in other jurisdictions. The proposed rate of Malaysian GST is 4% and the concept of standard-rated, zerorated and exempt supplies will apply. While most supplies will be standard rated, it is nonetheless important for businesses to be clear as to the GST category of their supplies. The types of supplies that are expected to be zero-rated include the export of goods, the provision of international services, and the supply of essential agriculture and food products such as meat and poultry. Suppliers of zero-rated supplies will generally expect to be in a GST refund position. In this regard, export manufacturers have expressed concerns over the refunds timeframe. As a net exporting nation, this is an important factor, and export manufacturers in particular would want to ensure that refunds are received on a timely basis. The government has committed to processing GST refunds within 14 working days for claims submitted online and within 28 working days for claims submitted manually. The challenge for the government will be to honour this commitment, particularly in the early
days. Delays will be critical as these could severely impact cashflow for export-manufacturers and indeed others in the same position. The government has announced that private education services, private health services, toll highways, some financial services, residential accommodation and public transportation will be classified as exempt supplies on the premise that they are fundamental to the population at large. While exempt supplies may give the impression that consumers will pay less as the supplies are not subject to GST, in reality the cost of input GST will be embedded in the cost of the
The path to implementation
As a starting point, businesses need to be clear as to which GST category their supplies would fall into – taxable, exempt or even mixed. Businesses will fall within the GST net when their turnover exceeds the prescribed threshold, expected to be RM500,000. Where this threshold is not met, voluntary GST registration will be permitted, which would clearly be beneficial in the case of businesses which make zero-rated supplies, subject to the compliance costs involved in meeting accounting and reporting requirements. Businesses should then undertake a
Aside from having an understanding of the general mechanics of GST, the following are some key issues which businesses should be aware of: Imported services – these will be subject to reverse GST (ie a deemed GST charge), meaning that the person importing the service must account for and pay GST on the imported service (used in the business). The input GST will be creditable against output GST on taxable supplies made. Scope of taxable supplies – aside from supplies made in the ordinary course of business, there are other supplies deemed to be taxable supplies, including disposal of business assets, appropriation of business assets for non-business purposes, provision of business gifts exceeding RM500 and provision of certain employee benefits. Blocked input tax credits – input tax incurred on certain supplies will be blocked, including on passenger cars, employee family benefits and club subscription fees. Accordingly, businesses may wish to review their policies on employee benefits. De minimis rule – this rule will allow for input tax credits in respect of exempt supplies where the total value of the exempt supply is less than a prescribed amount. Transitional provisions – the GST legislation will have transitional
GST WILL PROVIDE THE GOVERNMENT WITH A SUSTAINABLE ALTERNATIVE TAX BASE WITHOUT OVER-RELIANCE ON PETROLEUM REVENUES taxable supply. From the consumer’s perspective, it would be more beneficial if these were zero-rated supplies. However, it is understood that the government may provide some relief in respect of supplies made to certain exempt suppliers – for example, the private healthcare industry. It is possible that relief orders will be enacted to grant suppliers relief from GST on certain key supplies made to private medical facilities, thereby reducing costs for the latter, which should be reflected in their pricing.
review of their entire supply chain to identify the incidence and impact of GST. This would involve a detailed analysis of all the costs involved in generating the relevant income streams, including capital goods and employees. It is then essential to ensure that the systems are able to capture information accurately and generate appropriate documentation to facilitate GST compliance. This would also necessitate a review of trading terms, pricing, contracts, employee benefits and so on.
provisions to cater for various circumstances, including: ‘contracts with no opportunity for review’ – these are contracts entered into prior to the implementation of GST where the services straddle the period preand post-implementation – typically, these will be contracts where there is no opportunity for a review of the pricing terms. construction agreements that are entered into prior to the introduction of GST and are completed after implementation. ‘special refunds’ (subject to conditions) of sales tax paid in relation to stocks on hand held by a person who is required to register for GST. It should be noted, however, that such refunds will not be given in respect of capital goods, non-trading stocks, etc. The availability of special schemes for ‘approved traders’, ‘approved toll manufacturers’, ‘approved jewellers’, ‘warehousing’, ‘second-hand goods’, ‘tourist refunds’, etc. As GST affects every aspect of business, it is important that employees are familiar with its principles and impact. This is also important to facilitate the accurate collection of information and data entry along the supply chain to ensure compliance. The initial GST implementation exercise for
businesses will inevitably involve investment in time and additional compliance costs. Costs would typically arise from consultants’ services as well as costs associated with the IT systems and software. Businesses need to undertake an assessment of their accountancy software to assess if this is GST compatible and, if not, whether existing systems can be adapted. Those businesses whose systems are not GST compliant will inevitably incur additional costs. From an income tax perspective, these costs will not be tax deductible as they would be viewed as capital in nature. To the extent that the
of the Anti-Profiteering Act 2011 to curb arbitrary price hikes). Aside from the inflationary concerns, as Malaysia is a net exporter, a significant percentage of manufacturers would be entitled to a refund of input GST. There is scepticism as to whether the authorities will be able to process and pay the refunds promptly. On the premise that GST is announced later this year or in 2013, a 12- to 18-month transition period is expected to be provided before actual implementation. For large entities with complex transactions, this will be a challenge, if initial preparatory steps have not already been taken. However,
AS GST AFFECTS EVERY ASPECT OF BUSINESS, IT IS IMPORTANT THAT EMPLOYEES ARE FAMILIAR WITH ITS PRINCIPLES AND IMPACT costs can be capitalised as software costs, capital allowances (ie the equivalent of tax depreciation) should be available.
Conclusion From a federal economic perspective, GST is an efficient tax which will provide a sound alternative tax base. However, there are concerns and challenges to be faced, including inflation, as the cost of goods and services will inevitably increase (notwithstanding the introduction
as implementation will potentially be a costly exercise, and given the government’s frequent decision reversals in relation to this issue, many may not be willing to invest in an implementation exercise until is it certain that GST will actually be introduced. When? 2013? 2014? Meanwhile, the waiting game continues… Renuka Bhupalan is the managing director of Taxand Malaysia. She can be contacted at firstname.lastname@example.org
A novel idea Meet Penny Avis – the high-flying ex-corporate finance partner who, having smashed glass ceilings and weathered corporate storms, is now embarking on a writing career Ex-Deloitte corporate-finance partnerturned-author Penny Avis is already making plans for her 50th birthday, even though she is only 43. ‘I’ll either be making a speech saying: “I gave up the best job in the world that I worked so hard for to write a book that nobody read,” or it’ll all pay off and be a bestseller. Who knows? Either way it’s been fun.’ But what makes someone at the height of their professional career, who has seemingly smashed through any glass ceilings quicker than neutrinos in the Large Hadron Collider, give it all up to write a novel? The clues are in Avis’s determination in the world of corporate finance and how she has successfully managed her career with being a mother of two. Avis’s career is even more surprising given that she didn’t have an early vocation for accountancy, instead
reading law at Sheffield University. ‘I couldn’t decide what I wanted to be and when I spoke to careers people they said to do a good degree. I thought I wanted to be a management consultant but I didn’t know what that was.’ Luckily, an innate numerical streak meant that at the university milk rounds Avis’s head was turned by Price Waterhouse and she applied to train with the then Big Six firm, moving to its Manchester office. ‘I got my ACA qualification and became an audit manager. What you get from audit is the ability to look at new businesses all the time and learn what’s good and what’s bad about them; the ability to walk into a business and say, look, I can understand why this business is doing well, or not so well, and where it sits in its competitive
environment by looking at the bigger picture.’ Having graduated in 1989, by 1994 Avis had decided to move to London, a decision driven by friends and the desire to have a change of scene. The only secondment available at the time was in the technical department answering a hotline on accounting queries. ‘I wasn’t renowned for my deep technical expertise, but it was available immediately.’ The job involved giving ‘the ultimate view’ on any queries from teams and partners in the UK who were after technical sign off. ‘I had to be interviewed and crammed about standards that were coming out. Amazingly enough I got the job.’ It was, she says, ‘the best thing I ever did, for two reasons. Firstly, it gave me utter confidence in the field. I knew that they could throw anything at
me and I knew how to get the answer. It taught me the route to finding the answer.’ The second benefit was that it was the perfect springboard for what turned out to be the rest of Avis’s career in professional services. ‘Another job came up, in transaction services, and the candidate had to be available immediately. I’d just done a stint for four weeks to help with a crisis in transaction services. Although they were only taking 10 people, they liked my technical background plus the work I’d done on the project, so I got one of the 10 jobs in the fledgling transaction services in 1993, when I was 25.’ The move took her career in a new direction and led to her going through the transaction services director panel while pregnant with her first daughter, Charlie, in 2000.
Simple decision It’s at this point that many women in the City face a sometimes difficult decision: when, and how, to pick up, continue or advance their career post children. For Avis, it was surprisingly simple: ‘I never thought I might give up,’ she says. ‘I took three-and-a-half months off and went back full time.’ Avis appreciates that she was in a financial position to afford the help that made this possible. ‘I had a maternity nurse when Charlie was first born, then recruited a full-time nanny a month before I went back to work so there was a proper handover.’ She did suffer first-day guilt, though not perhaps for the expected reason. ‘I got in, briefcase down and someone said: “You’re back, can you come to this meeting?” So I was straight back in there with no time to think, and when I got home I thought: “Oh God, I’m the worst mother, I didn’t even ring!”’ From then
on, she arranged that the nanny would send regular texts – ‘my fix’ – so that she knew what was happening at home. While Avis’s advice for women in the workplace isn’t that they should pretend to be men, she admits that super-sensitive HR departments might erroneously read that message into it. ‘My philosophy is that you should be a swan at work, however hard anything else is. Sometimes people think I’m saying women shouldn’t be who they are but I’m not, I simply believe they should think carefully about how much of their home life they should bring into the office. ‘I think it’s a matter of giving the impression that sometimes you’re a little bit more in control than you are. Don’t go in sobbing when you’re in the middle of a crisis.’ Avis’s own role model is her mother who has always worked. And with a childhood that at one stage involved five sisters in one household, she hasn’t been short of watching women work and interact. She currently mentors partner-track women at Deloitte on a pilot scheme, with two-hour sessions helping them prepare personally and professionally.
Avis credits her friendship network and ‘a husband who completely supports me’ as being crucial to her own success. She was also a founding member of the City Women’s Club, a network of senior women working in financial services. ‘I do think networks – formal or informal – are incredibly important,’ she says. And while her hard work gave her the financial stability to fund comprehensive childcare, Avis is quick to point out that ‘if you’re going to work at your career you have to invest in it and it will get easier. We didn’t have loads of money; I was a director and so with that first nanny, [finances were] almost neutral, but I knew I had to do it to get partnership.’ With her sights set on being a partner, Avis faced another crossroads when Price Waterhouse and Coopers merged. ‘I was going through partner promotion but I felt I was going to be partner 26 of 26 and have a tiny role.’ She ended up undergoing the partner process at competitor Arthur Andersen at the same time and, when the firm offered her a meaty role plus partner, she jumped at the chance. She was, she says, ‘very proud of myself’. It was March 2001. Little did Avis know that just a year later she would be forced to vote for her survival after the Enron scandal, which brought down Andersen and rocked the accountancy world.
‘Baptism of fire’ ‘My abiding memory of the Enron crisis is calamity, shock, how the place falls apart, when the US freeze money and you can’t pay payroll and bizarre messages from South American partners. I had some of the hardest meetings of my career; it was a
baptism of fire for a new partner.’ She was offered a job at Ernst & Young. ‘I didn’t feel I had any loyalties anywhere but we were encouraged to stay with the marching army.’ So she held on to wait and see what deal was being made behind the scenes. In the end, the deal was announced in the less-than-glamorous location of a hotel near Heathrow airport, although the cloak-and-dagger nature of it, plus the doubtless bordering on hysterical Andersen partners, made for an exciting afternoon. ‘We had messages from our partners who were flying down with Deloitte partners, so we knew it was Deloitte [taking over]. Once the deal was presented to the 350-odd Andersen partners, we had to go to the back of the room and vote in favour or not of the rescue transaction. ‘There were 350 partners and 240 places in the deal. What we voted on was the process to agree who those 240 partners should be, not the names, so at the time you didn’t know whether you were a turkey voting for Christmas or not.’ As practically last in, Avis assumed she’d be offered a directorship, but her interview notes with Andersen – ‘the only paperwork they had on me!’ –
were so good that she walked in, as partner, to an enlarged transaction services department. The culture difference between Andersen and Deloitte was, says Avis, immediately obvious. ‘Andersen partners were more outspoken and entrepreneurial – perhaps Deloitte would say more dangerous – while Deloitte was incredibly well run and very risk-focused.’ Avis went on to have a second child, Cole, in 2003, again taking short maternity leave and going back full time, and her star continued in its ascendancy – with highlights including becoming lead client service partner for Unilever and joining the Deloitte board.
Never Mind the Botox is a series about four professional women all working on the sale of a high profile cosmetic surgery business. Each book reveals how the women cope with one of the most glamorous but challenging deals of their careers, and the dramatic impact it has on their personal lives. Alex Fisher is a high-flying lawyer close to making partner and busy planning her perfect wedding to Elliott. In the latest book, just published, Rachel Altman is a corporate financier with a prestigious accounting firm who’s desperately trying to keep on the straight and narrow. Hopelessly led astray by her bar-diving boyfriend, she gets the chance to turn things round when her boss gives her the break she’s been waiting for. ‘Rachel is closest to my career,’ admits Avis, ‘though the stories in it are made up. Our risk management brains worked out that it would not be great to have clients ringing up having recognised themselves!’ Cosmetic surgeon Stella Webb and senior banker Meredith Romaine are the main characters in the final two books, both to be published later this year.
enterprise she could set up easily. A chat with Joanna Berry – friend, mother, lawyer and ex-Eversheds partner – clarified things. ‘We started texting ideas and we realised very quickly we could do a four-women series. They are popular – things like Desperate Housewives, Mistresses, Sex and the City – all based around four women with different personalities.’ And so the idea for Never Mind the Botox was born: a series about four professional women – a corporate financier, a lawyer, a banker and a doctor – all working on the sale of a high-profile cosmetic surgery business. With two manuscripts complete, Avis and Berry started looking at the traditional publishing process but in parallel began to explore self-publishing, which is where they decided to invest. ‘If I was advising someone with my business hat on I’d tell them not to do it, but if you self-publish you own the copyright,’ says Avis. ‘We decided to do everything to retail standard plus a little bit more. We hired our own PR, got independent cover designers to pitch, used a freelance editor and set up a professional website.’ Perhaps going back to her audit training, Avis was already looking at the bigger picture. ‘We knew the real success was film or TV and we could see what other books had made the move, like Bridget Jones or The Devil wears Prada.’ Prada Having written a proposal, Avis and Berry toured the trade shows and caught the attention of Future Films, signing a deal in 2011. It may be that Avis is on her way to become the new Helen Fielding or Candice Bushnell, but it seems that although you can take the girl out of accountancy... ‘I’ll always see myself as a corporate finance partner at Deloitte,’ she laughs, ‘I resigned, I have no legal right to even say it, but I can’t not say it!’
Visit www.avisberry.com for more information.
Beth Holmes, journalist
Wake-up call But things changed after the Lehman Brothers collapse in 2008. ‘The work just stopped,’ she recalls. ‘I’d been busy for five years and it was a horrid environment, ringing around for work. I started thinking I would take a sabbatical. I thought, if I don’t take a break now, when the market is rubbish, I’ll be doing this when I’m 50.’ So in 2009 Avis resigned from Deloitte. The idea for a book came while she was driving and musing about what
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Watch your management steps [
Managers have many banana skins to avoid in their roles as leaders, such as openly critising staff and playing favourites. Robert Half’s Pallavi Anand gives six tips for boosting team morale
We all have worked with or heard stories of bad managers – those who make blatant mistakes when overseeing employees, such as criticising people in front of other staff, playing favourites or other behaviour that harm morale, motivation and productivity for the entire team. As the job market improves, these mistakes can also affect turnover, so it’s especially critical to make sure you’re not inadvertently alienating your staff. Here are some common mistakes that may be deflating morale in your group. 1 Keeping staff in the dark It is always a wise move to be upfront about company developments, so employees feel they are in the loop. Otherwise, they may listen to the rumour mill and believe something is being hidden, such as financial trouble. The more connected people are to the organisation and its future, the more motivated they will be. While emails, memos and information on the company intranet provide updates, try to hold group face-to-face discussions whenever feasible, particularly if company events will affect employees directly. 2 Being too involved on the front lines You may pride yourself on being a hands-on manager. In fact, you may be aware of precisely what stage every project is at because you sign off or receive updates during the process. While it may seem like you’re showing an interest in your staff and ensuring you’re always there as a
resource, what you’re really doing is micromanaging. Employees prefer being given the freedom to do their jobs the way they deem best. Try to empower people to make decisions and problem-solve. Not only will you boost morale, but you’ll also be better able to focus on higher priority initiatives. 3 Being too removed from the front line At the same time, be careful about being so involved in your own work that you are unavailable to your employees. Try to respond to emails and calls from staff in a timely manner, otherwise your team may believe they’ve been left to ‘sink or swim’. That feeling is hardly confidence-building. Try to keep a routine of ongoing staff meetings and impromptu discussions with individuals in your group about their projects. If you’re particularly busy, tell people the best way to reach you if needed. Consider designating someone as your backup, so staff have support if they have questions about their assignments. 4 Avoiding risk When business conditions are uncertain, it’s particularly tempting to go with the status quo. However, by avoiding innovation and risk, you may be implying that you don’t value your staff’s suggestions, which can cause people to lose respect for you. Even if you don’t openly tell employees not to offer new ideas, consider whether your actions are sending the same message. Are you critical when suggestions fail? The way you handle
ideas can greatly affect whether staff feel confident enough to make them in the first place. 5 Overlooking burnout If your employees have been asked to do more with less for an extended period, they are at risk of physical or mental distress. Odds are that staff won’t tell you they’ve reached their limits, out of fear of being perceived as incompetent. So, watch for the warning signs that include starting to miss deadlines, having greater conflict with co-workers, customer or internal complaints about job performance, or frequent attendance problems. Even if you can’t afford to hire more full-time staff, look at ways to redistribute assignments. You might also consider bringing in temporary or project professionals to assist with peak workloads. Simply making sure employees use their vacation time can also go a long way towards renewing energy and motivation. 6 Forgetting the power of praise Finally, don’t underestimate the value of showing appreciation to your employees. Even if your budget doesn’t allow you to give expensive rewards, acknowledge the contributions of those on your team. Praise during a meeting or an afternoon off are just a couple ways of offering meaningful thanks for a job well done. People who feel their managers notice their efforts are more likely to give their best to future assignments and maintain high morale. Pallavi Anand is director of Robert Half Hong Kong
Transformative function [
While shared services and outsourcing are now well-established, says Devanesan Evanson, there are many more opportunities to be realised
A recently published ACCA report, Finance Transformation: Expert Insights on Shared Services and Outsourcing, states there is ‘no turning back’ from finance shared services and outsourcing as a future delivery model for the finance function. Many gains have already been made in reducing costs and improving processes. In the US, more than 70% of Fortune 500 companies now use shared services or outsourcing models for their finance and accounting operations, according to Everest Group research (2011). Finance professionals have begun examining the delivery models, asking how transforming operations via finance shared services and outsourcing can release more cash, develop better insights to support decision-making, and provide a better service to the business. The experts quoted in the ACCA report, from 20 leading global organisations such as Coca-Cola, IBM, PwC, Ernst & Young, KPMG, Deloitte, Shell, Unilever and WPP, rightly point out that finance shared services is not merely a means to improve finance operations per se, but more importantly attains finance transformation which unlocks value, improves shareholders’ return and creates competitive advantage. The report findings suggest that while significant benefits from shared services and outsourcing have been realised, there remain greater opportunities to drive business performance in the future. The experts see a number of specific challenges to current transformation approaches. At the heart of all these challenges is the question of the capability and aspiration of businesses, finance leaders and provider organisations to work together in an aligned partnership to drive the level of transformation change required. Notably, the so-called ‘softer stuff’ continues to be the number one impediment to achieving transformation success. Finance leaders and outsource providers alike name change management as the biggest barrier, and in particular cite the organisation’s inability to assimilate new ways of working as a key challenge. The increasing use of shared services and outsourcing has significant implications for the profession and ACCA. As finance models evolve, so too will the career opportunities for ACCA students and members. As new finance roles evolve, new career paths will emerge and new skills and capabilities will be required. Are we in tune with these changes and can we, as accountancy professionals, adapt and capitalise on these changes? Undoubtedly, these developments represent an ideal opportunity for finance professionals, and especially ACCA members, to drive future organisational success. I believe ACCA will be at the forefront of supporting organisations in these initiatives, as our qualification is uniquely positioned to deliver the new finance and business capabilities required. As such, ACCA Malaysia will be deliberating on the significance of this report and its implications for corporate Malaysia at the ACCA Accountants for Business Forums, which will be held in Penang on 22 March and in Kuala Lumpur on 15 May. We hope you’ll join us. Devanesan Evanson is president of the ACCA Malaysia Advisory Committee
CPD: coaching and mentoring If you coach or mentor staff, the activity can count as work-based learning and so help to satisfy your continuing professional development requirement What is work-based learning?
The workplace can be a rich source of learning and many of the activities you carry out can contribute to your continuing professional development (CPD) if they help you develop your knowledge or skills. Members following the unit route can gain both verifiable and non-verifiable CPD from a range of work-based activities. Another way of achieving your CPD requirement is to work for an ACCA Approved Employer – professional development. ACCA will recognise any learning activity you undertake, provided that it is relevant to your role or career and contributes to your individual learning and development needs.
What is coaching and mentoring? Coaching and mentoring is generally undertaken as part of a people management role. It usually involves helping an individual to develop specific skills and knowledge around their job. Coaching is a key part of helping others to develop, but it can also help you to develop new skills. By acting as a coach or mentor, not only will you reap the benefits of working with junior colleagues, who will become more able, enthusiastic and ambitious as a result, but you’ll also develop the characteristics and behaviours required of today’s rounded business professional.
How can coaching and mentoring contribute to CPD? Learning certain techniques can not only help you be an effective coach or mentor, but can also be a valuable contribution towards your CPD. For example, these can contribute if
you are learning new skills through coaching and mentoring a colleague. Examples of how you can gain CPD from coaching and mentoring include: researching for or preparing for a coaching session conducting a coaching session, if this is new to you or if you are attempting new techniques.
How can I calculate verifiable CPD? It is important to consider whether you learned something through the coaching and mentoring session’s
research, preparation or delivery. If you did, it will contribute to your CPD. Keep notes of your research and the session; the person being coached or another colleague can confirm the learning took place. Remember the learning can be counted as verifiable CPD if you can answer yes to the following questions: 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?
What are the other benefits of coaching and mentoring? preparing for coaching or * From mentoring, through the session
itself to your post-session review, you’ll improve your self-awareness and your ability to identify your own areas for development. By being a workplace mentor to an ACCA trainee, you will be key to them completing their practical experience requirement (PER) and achieving ACCA membership. The achievements and leaps forward of those you coach or mentor will reflect well on your own leadership ability and potential.
Do you want to give something back? The skills described above are also applicable to the role of the ACCA Workplace Mentor, another way of gaining CPD in the workplace. You can learn new skills in a coaching and mentoring role, and also contribute to the development of the profession, helping to ensure that new ACCA members have the skills, attitudes and behaviours required to be a qualified accountant.
What they really want
In an age of information, the annual report remains a key tool for investors. So letâ€™s make it better, says ACCA president Dean Westcott
After all the effort that accountants put into preparing and validating annual reports, there is sometimes a feeling that the intended audiences do not read them carefully and in some cases never even open them. Yet a recent ACCA survey of 500 investors, capital providers, suppliers, customers and report preparers in the UK, the US and Canada found that stakeholders do value the annual report. Half cited it as their primary source of information about a company, and over a third saw it as an easy way to assess information on a company. It all suggests that the annual report has become more important since the financial crisis, with users reviewing reports more carefully than at any time. But that closer scrutiny has brought with it some key issues for all finance professionals who prepare reports. The report, Re-assessing the Value of Corporate Reporting, suggests that for all their usefulness, annual reports are being held back by confusion over their different audiences, their complexity and their lack of timeliness. Respondents say there is a need for a greater focus on forward-facing plans, risk management and the effective integration of these and other issues into the report in a more coherent way, with investors positioned as the single most important audience. Nearly half also said too much â€˜promotional materialâ€™ had crept into reports; 47% added that reports were too long, 40% too general purpose, 35% too backwardlooking and 35% too complex (68% of whom blamed reporting standards and 61% legal requirements). Even more important is what users actually wanted to see in reports. More than two-thirds wanted more on risks that could affect company performance, and how the business planned to manage or mitigate key risks. And while many respondents noted a drop in interest in social and environmental information, they also welcomed a move to integrated reporting as a way of reviving the value of this data to them. There are challenges here: respondents say that reports need to be simplified, written with investors in mind, and more forward-looking and risk-aware. But these challenges also present huge opportunities for us to ensure that report users not only engage with the reports we produce, but get the answers they really want. Dean Westcott FCCA is finance director of Hinchingbrooke Hospital in Cambridgeshire, England
TECHNICAL INTEGRATED REPORTING Integrated reporting came under the spotlight at the recent ACCA session entitled The Age of Integration: A New Dawn for Corporate Reporting, held as part of the Securities Commission Malaysia/Bursa Malaysia Corporate Governance Week 2011. ‘Integrated reporting is touted as the future of corporate reporting and we are right here at the beginning of this model,’ said Chiew Chun Wee, ACCA head of policy for Asia Pacific, who moderated the session. ‘The current corporate reporting model, which determines measurement and the impact of decision-making, has not kept pace with issues and challenges.’ These include sustainability and the valuation of finite natural resources.
In order to optimise integrated reporting, panellists emphasised that companies must be able to link sustainability and business. Ng Kean Kok, deputy dean of Universiti Tunku Abdul Rahman, pointed out that Malaysia enjoys the perception of being a leader in corporate social responsibility (CSR) and sustainability reporting. ‘But some of the companies still cannot see the link between CSR and financial reporting,’ said Ng. Could integrated reporting boost transparency? ‘As the saying goes, a fish rots from the head,’ said Audit Oversight Board executive chairman Nik Mohd Hasyudeen Yusoff. ‘If the organisation’s leadership is not clear on their objectives and not bothered about their impacts, then integrated reporting will flush these issues out.’ There was keen interest in whether integrated reporting would be made
mandatory. ‘Where Bursa Malaysia is concerned, the approach is selfdiscipline, followed by market discipline, and then regulatory discipline,’ said Nik. ‘I would like to see integrated reporting start at the level of the companies, supplemented by the market, and, hopefully, there’ll be nothing left for the regulator to intervene [over]. That would be the ideal situation.’ In the final analysis, said Ng, South Africa’s example, whereby the stock exchange has mandated integrated reporting, demonstrates that it is possible, although there will be challenges. And, said Dr Yap Kim Len, technical director of Deloitte, in order for integrated reporting to progress, all players in the business and financial reporting chain must be educated on the importance of sustainability and responsible stewardship.
ACCA news Elections to Council As ACCA’s governing body, Council plays a pivotal role in ACCA affairs. It ensures that ACCA operates in the public interest and delivers the objectives stated in its Royal Charter. It sets ACCA’s overall direction through regular approval of strategy. It acts as a link between members and the professional body, and leads the organisation in the interests of both. It is accountable both to members and the public interest. It acts for all members and future members (today’s students). It provides leadership of ACCA and stewardship of its resources. Council develops policy for ACCA as a whole and Council members are volunteer custodians acting for the well-being of the whole organisation. Whatever their geographical or sectoral bases, Council members do not represent particular areas or functions and are elected by the membership as a whole. ACCA members of all ages and backgrounds are encouraged to stand for election to Council. Long-term or technical experience is valuable, but so is proven ability to participate actively in strategic decision-making. Council experience as such is not necessary. However, an understanding of good governance is essential, and personal and professional integrity must be of the highest order. Specifically ACCA expects members to bring the following skills and attributes to Council: an ability to take a strategic and analytical approach to issues and to see the big picture an understanding of the business and the marketplace communication and networking skills an ability to interact with peers and respect the views of others decision-making abilities an ability to act as ambassadors in many different environments planning and time management a willingness to learn and develop. Nominations are now invited for election to Council at the 2012 AGM. Candidates must be nominated by at least 10 other members in good standing. Candidates should supply a head and shoulders photo and an election statement of up to 180 words, which should not include references to email addresses or websites. Candidates are also required to sign declarations of their willingness to comply with, and be bound by, the code of practice for Council members. Further information on the Council election process, including pro forma of nomination forms, may be obtained by writing to the Secretary at 29 Lincoln’s Inn Fields, London WC2A 3EE, by faxing +44 (0)20 7059 5561, or by emailing email@example.com (please put ‘Council Elections’ in the subject box).
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Inside ACCA 64 News Integrated reporting under the spotlight at ACCA session 63 Dean Westcott The annual report has reached a crossroads, says the ACCA president 62 CPD: coaching and mentoring How you support your colleagues can count towards your continuing professional development requirements 61 Devanesan Evanson Shared services and outsourcing offer exciting opportunities, says ACCA Malaysia’s president
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IMA BOOST FOR ACCA SURVEY ACCA has joined forces with the US-based Institute of Management Acccountants (IMA) to make its Global Economic Conditions Survey an even more robust and powerful record of the state of the world’s economy. The latest edition of the quarterly survey shows that with international trade continuing to dry up at the end of last year, finance professionals expect the global economic downturn to return with full force during 2012. Turn to page 28 for more.
ACCA NOW HOME TO IIRC
The International Integrated Reporting Council (IIRC) has moved into ACCA’s offices in London. The body’s CEO, Paul Druckman, and its UK-located team (around 10 people) will be based at ACCA’s offices for two years. Druckman said: ‘ACCA has been involved for so long in corporate responsibility and sustainability that its deep connection to integrated reporting is only reinforced by this generous gesture.’
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