Page 1





Editor Chris Quick +44 (0)20 7059 5966 Sub editors Jamie Ambler, Donatella Montrone, Eva Peaty, Rhian Lewis Design manager Jackie Dollar +44 (0)20 7059 5620 Production manager Anthony Kay Head of publishing Adam Williams +44 (0)20 7059 5601 Pictures Corbis ACCA President Brendan Murtagh FCCA Deputy president Mark Gold FCCA Vice-president Dean Westcott FCCA Chief executive Helen Brand ACCA Connect Tel +44 (0)141 582 2000 Fax +44 (0)141 582 2222 A list of ACCA global offices can be found inside the back cover of this magazine.

ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management. ACCA has 131,500 members and 362,000 students, who it supports throughout their careers, providing services through a network of 82 offices and centres around the world. All views expressed in Accountancy Futures 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 2009 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountant (Publications) Ltd, a subsidiary of the Association of Chartered Certified Accountants. 29 Lincoln’s Inn Fields London, WC2A 3EE United Kingdom +44 (0)20 7059 5000



Welcome to this launch edition of Accountancy

Futures, a journal from ACCA looking at the challenges presented to the accountancy profession by the changing business environment. There are immediate challenges, like access to finance, and others that might seem more distant, such as carbon accounting. Along with narrative reporting and audit, these themes form the basis of a new ACCA programme of research, events and discussion, all under the Accountancy Futures banner. We also tackle a wide range of other topics, including financial reporting, tax and regulation, with contributions from leading figures in the profession including senior ACCA members, leading commentators and experts, business leaders and academics. If there is one message that shines through, it is that the profession’s future will be shaped not only by changes in the business environment, but by its response to those changes. In many ways, the future of the profession is in its own hands. Chris Quick, editor, November 2009 You can find out more about ACCA’s Accountancy Futures programme at

Editorial board Jennifer Lopez head of ACCA Malaysia +60 (0)3271 35051

Dr Steve Priddy director, technical policy and research +44 (0)20 7059 5971

Dr Afra Sajjad head of education and policy development, ACCA Pakistan +92 (0)42 575 9129

Aziz Tayyebi financial reporting officer +44 (0)20 7059 5934



ACCA’s technical director Dr Steve Priddy FCCA takes us through the life cycle of a business to explain why accountants’ skills have never been more important.


With the global economic recession forcing companies to re-evaluate financial fundamentals, ACCA research shows how vital the CFO has become for both a company’s success and, more importantly, its very survival. How boards need to look at climate change issues, the case for a carbon standard, a potential guestlist of carbon catalysts for a fantasy dinner party, and why the UK renewables industry needs to work harder.

‘These days regulators and

non-executive directors are too far from the banking industry’ PG90




















































Five financial experts talk about how CFOs in Asia develop relations with banks, the importance of protecting intellectual property, nourishing tomorrow’s Microsofts, and a call for more government support for practices to help SMEs. The future evolution of audit The future of narrative reporting, the case for environmental, social and sustainability reporting, plus how China is leading the XBRL revolution.

made in education, measurement deserves a rigorous approach’ PG94

‘Considering the investment




















































Looking ahead We preview some forthcoming research and events

01 INSIDE STORY ON ECONOMY ACCA is getting the inside story on global economic conditions through a quarterly survey of members across the world. As Accountancy Futures went to press, the third quarter survey of 1,200 members in 92 countries showed that while more members believed that the economy had ‘bottomed out’ than in previous quarters, they also believed reliable recovery was unlikely before late 2010. ‘It will be interesting to see how these views change over the next quarter,’ said ACCA president Brendan Murtagh. Surveys will appear at

02 ACCA TEAMS UP ON ACCESS TO FINANCE ACCA has joined up with two other leading international accountancy bodies – CPA Australia


Moscow’s Millionaire Fair at the end of 2008 attracted many visitors despite the downturn.

and CGA-Canada – to jointly sponsor a study by the Economist Intelligence Unit looking at a range of issues related to access to finance for SMEs. These include the impact of credit shortages, constraints which businesses expect to face in the coming years and their assessment of government intervention. Based on the research, due to be published as Accountancy Futures went to press, the bodies will then make recommendations to policymakers and employers about the initiatives which should be taken to ease the situation for this crucial sector and highlighting the important contribution which finance professionals can make to the issue. The three accountancy bodies together represent almost 700,000 finance professionals. The report will appear at




ACCA has warned national governments against using carbon taxes as a panacea to boost falling tax revenues without prior, broad-based consultation. Unless environmental taxes are internationally coordinated there will be little impact on global pollution levels because companies will simply relocate, ACCA warned as it published its position paper, Green taxation in a recession. Chas Roy-Chowdhury, global head of taxation at ACCA, said: ‘We’re not advocating tax hypothecation – where a tax is explicitly raised to fund the development of a specific service. Green taxes need to be unambiguous so the public and business understand the benefits. Public trust in green tax systems is vital; government and policy experts need to strike a balance between the need to raise revenues and the environmental objective underpinning the policy. The trouble is, they’ll hurt.’ The report can found at www.accaglobal. com/green_tax.pdf

Pension fund trustees ignore the impact of climate change on their pension funds at their peril, says a new two-part report from ACCA and the ESRC (Economic Social Research Council). Pension Fund Trustees and Climate Change is the first study to address pension fund trustees’ attitudes to climate change and its impact on pension fund investment. It comes at a time when the latest scientific evidence shows that the speed and impact of climate change is now far greater than previously anticipated and requires a global response. The report’s author, Professor Jill Solomon from King’s College London, UK, says: ‘Trustees are in a unique position, with significant power to affect corporate behaviour through the strategy they implement in their pension funds, as pension funds own the largest proportion of shares in UK-listed companies. Climate change is a critical issue which requires immediate attention from the pension fund community.’ The report can be found at www.accaglobal. com/rr_106

04 ACCA FUNDING HEALTH PROJECT Research into the issue of health expenditure versus health outcomes has been commissioned by ACCA following a series of three international roundtable meetings. Among other issues, the research will look at how to improve healthcare systems within tight budgets and where accountants can play a role in these improvements. A major question that will be considered is what explains the differences in health outcomes at different levels of national income. Healthcare spending for OECD countries is expected to more than triple by 2020 to $10 trillion. The project will complete in 2010.


People gather during a Service Employees International Union rally demonstrating against healthcare costs and states budget cuts in New York.

Value creation, the accountant’s role, sustainable development, Islamic finance and the impact of the G20 initiatives are among the issues to be debated at the World Congress of Accountants 2010. More than 6,000 finance professionals from around the world are expected to converge in Kuala Lumpur, Malaysia, for the event in November 2010. It is being organised by the Malaysian Institute of Accountants, along with International Federation of Accountants (IFAC). ACCA is one of three gold sponsors for the event, the theme of which is ‘Accountants: Sustaining value creation’. More information is available at

07 DO ANALYSTS USE NARRATIVE REPORTING? Many large companies produce lengthy and detailed annual reports with narrative sections extending to hundreds of pages in some cases. Yet findings from ACCA’s research suggest that much of the narrative detail that is reported voluntarily is ignored by perhaps the single most important and influential user group of corporate reporting: the analysts. The launch of Narrative Reporting: Analysts’ Perceptions of its Value and Relevance, drew contributions from HSBC, the FSA and AXA investment managers. You can watch the presentations, take part in the online discussion board and download the research at



The golden age of accounting ACCA’s Dr Steve Priddy FCCA takes us through the lifecycle of a business to explain why accountants’ skills have never been more important

stable finance function is vital to a strong and stable business. And this applies to organisations of all shapes and sizes, whether small start-up companies, the largest multinationals, public or private sector, privately owned or listed businesses. But financial know-how isn’t the only factor. The ability to communicate successfully, to share the importance of the organisation’s numbers, and to show how the accountant can add value, is needed to ensure the golden opportunity is not squandered.


here is little doubt that the profession is experiencing a golden age, where accountants and their skills have never been more in demand. This is not just because of the economic crisis, as the roles that accountants have been playing in business are increasing, both in terms of importance and variety. Accountants now are leading businesses from the front, showing that a sound grasp of financial know-how is vital to the success of any organisation. This applies not just in the higher echelons – the chief financial office has long been held in high regard – but throughout the whole organisation. An effective finance function will embed itself into the body’s DNA, as a strong and


VALUE IS KEY During these times of economic uncertainty, it is clear that an accountant’s skill in controlling costs is vital. But it is their ability also to demonstrate where they can add value and identify value drivers that will place them at an organisation’s heart. The CFO has become more important in recent years as a guardian of financial performance and a key player in creating long-term value. The CFO has a deep understanding of the business, its strategy and its performance. Such knowledge places him or her at the centre of the company, and perhaps it is no accident that professional accountants are found as chief executives on the boards of listed companies. Being in this central position means that accountants are no longer just reporting to the shareholders and complying with regulation. They are now playing their part in maintaining and building the reputation of the company. They are managing the risks, they are ensuring the sustainability of the business, and they are the custodians of good corporate governance and ethical standards. They are scrutinising the supply chain, the environmental record and the company’s corporate social responsibility. In short, they have become the complete finance professional.




They strive to ensure a consistency of approach to management accounting and financial reporting so that what is being measured and analysed within the company is consistent with what is reported to external stakeholders. They act in the interests of the business by measuring and reporting the right thing. TRUSTED ADVISER So how do accountants become complete finance professionals? Looking at the role of accountants through the lifecycle of a business gives us a clue. Surveys time and again show that the accountant is the most trusted business adviser, especially for small and growing businesses. In the past, the bank manager might have taken on this role of key adviser, but that is not so today. Studies have shown a progressive erosion of trust between entrepreneurs and their banks. And with trust in banks arguably at an all-time low, the importance of the accountant as trusted adviser is growing. A small business begins as the germ of an idea, when an entrepreneur spots a gap in the market. The entrepreneur exploits that gap, the orders come in, the products and services go out, and cash comes back. Soon the entrepreneur faces a range of decisions in areas such as company structure, investment and tax. But time becomes a precious commodity – where once the accounts were either in the entrepreneur’s head, or the hands of friends or relatives, now there is the need for expert help. The annual accounts need to be compiled; the tax returns need to be filed. In short, the entrepreneur needs an accountant.

Dr Steve Priddy is ACCA’s technical policy and research director. He joined in January 2008 after being an associate director of Arup Group, and a trustee of the Arup (UK) Pension Scheme, a hybrid final salary/ defined contribution scheme. He holds a degree in social anthropology and linguistics from University College London and a PhD from Birkbeck College in the faculty of politics and economics.

‘at all stages, the entrepreneur

will turn to the accountancy professional for advice, for opinion and for implementation. The accountant may enter the lifecycle at various points’ GROWING BUSINESS And so the business grows, and with it the increasing need for sound financial input. Growth may be organic, or it may be through acquisition and merger in order to penetrate new markets, provide new products and services. An ambitious entrepreneur will drive the business forward – others may be content


with its current size in order to maintain their own lifestyle. But over time the business will mature – it may itself become subject to a takeover bid, or the entrepreneur may seek to realise his or her investment and look for an exit route. Some may become listed, with external shareholders and all the accompanying regulatory requirements. But many more will fail, or cease to trade. However, the point here is that at all stages, the entrepreneur will turn to a trusted adviser – the accountancy professional – for advice, for opinion and for implementation. The accountant may enter the lifecycle of a business at various points – at its inception, as it goes through its growing pains, as it comes to an end – but at all times this input from the professional will have great value. SUSTAINING BUSINESS Understandably, during the current economic crisis, great attention has been paid to the role of external accountants, particularly auditors. But I would argue that greater attention should be paid to internal issues, especially the management accounts. While key values from the management accounts – profit and loss, cash surplus or deficit, assets and liabilities – can be reconciled to the statutory accounts, the importance of management accounting is that it can help the business. The users of the information can understand how the organisation has performed historically, and where its future lies. The management accounts reflect the diverse, though specific, drivers of a business. They are a vital aid to current and future decision-making. They help sustain the business. But they are used by a variety of individuals and groups within an organisation, many of whom will not be financially literate. And here lies one of the greatest challenges facing the professional accountant – numbers are meaningless unless they are understood, and acted upon. MESSAGE UNDERSTOOD It can be something as simple as presenting financial information in the form of graphs and charts, rather than as a spreadsheet, with columns of numbers where trends are less visible. The numbers, and their implications, may be clear to the trained eye, but unless the message is understood, they are irrelevant. And it is not just the internal audience that relies on clear, understandable information. Banks,


other providers of finance, tax authorities and credit-rating agencies will all expect to see evidence of sound financial management. Wellpresented financial information will enhance a business’s reputation, making the lender more likely to lend, the tax authority less likely to investigate and other businesses more likely to do business. As such, the CFO can clearly demonstrate the value of sound financial management to a business. Finance functions might be seen as a cost, as an overhead that should be kept to a minimum, but if the CFO can show that the company saved money through sensible tax planning, for instance, or even made money through its treasury function, then a business and its board of directors will be more than willing to invest. ALL-ENCOMPASSING When you think about the areas that fall under the finance function, you will know that it needs this investment. A list of skills and knowledge encompassed by a finance function includes the following: statutory accounting, management accounting, management information systems, project accounting, tax planning and compliance, transaction processing, asset management, supply chain management, corporate social responsibility, risk management, internal audit, treasury, and training and coaching. It will be constantly challenged in terms of its value, and this is only right. The onus will be on the CFO to rise to these challenges. Indeed, with this great opportunity comes a great challenge. CFOs and the members of the finance team know intrinsically that they can to add real value. They know that they are not just an overhead, but are able to have a positive effect on the bottom line. But the challenge for the team is to ensure that this fact is evident to the rest of the organisation. Communication is key, and there is no reason to suppose that professional accountants should be any worse than any other parts of the organisation at getting their message across. The CFO needs to take the lead in this. COMING OF AGE On the board, the CFO’s role is pivotal, in terms of access to financial and other data. And the fact that most corporate activities have financial implications heightens the strategic importance of the role to organisational survival and growth.

‘…there now is an

opportunity for the CFO to provide a stronger counter balance to a reckless decade that has witnessed the growth of the “cult of the chief executive”’ The relationship between the CFO and the chief executive is equally important. In most organisations, the CFO is the effective number two, second to the CEO. But perhaps there now is an opportunity for the CFO to provide a stronger counter balance to a reckless decade that has witnessed the growth of the ‘cult of the chief executive’. It is clear that corporate governance principles need to be radically reassessed. A decade of growth, and the elevation of the CEO above other board members, is coming to an end. Board remuneration needs to be rethought. The role and feasibility of non-executive directors needs re-examination. Questions are being asked about whether audit and remuneration committees have done what they were supposed to do. In all of this, the role and reputation of the CFO has come through relatively unscathed, if not positively enhanced. If the CFO is prepared to lead, the board will welcome him or her as a significant leader in the organisation. It is a great time for the accountant in business.



How is the accountant’s role changing?

Senior professionals in a range of very different positions share their views on the changing nature of the accountant’s role

John Muwanga FCCA Auditor general, Uganda

The role of an accountant in the public sector and more typically that of one in a government of an emerging economy used to be viewed as being synonymous with a glorified bookkeeper. This perception has changed during recent years. The number of qualified professional accountants in the public sector has risen in response to the increasing demand to engage experts who understand and are capable of implementing complex financial management information systems which can meet the challenges of the changing world. The public sector accountant’s role has, and is, transforming into that of a manager and coordinator of the financial aspects of the key business processes. Coupled with this new role, the accountant still remains responsible for ensuring that the stewardship and accountability systems are intact in an environment which, worldwide, is increasingly being faced with corruption and questionable ethical business practices.

John Roberts FCCA

Chairman, Royal Bank of Canada (Europe) and former chief executive of United Utilities There are two current risks that I think will impact the role of accountants. The first is the credit crunch, and the extent to which risk management in financial services is perceived to have been a major contributory factor. I believe there will be more emphasis placed on risk management and reporting – not just in financial services – with a greater focus on the role of boards, and non-executives in particular. This will place more onus on accountants to help boards put in place better systems for monitoring and controlling business risks, with a focus on the balance between risk and reward, both to the business and to the individual employees. The second risk is much more universal; the risk inherent in climate change. As governments become more concerned, there will be more need for accountants to turn their minds to measuring and reporting environmental performance of companies in a much more transparent way. In particular, carbon reporting will, over time, become as much a part of mainstream company reports as financial management is now. More, page 24.



Cesar Bacani

Former contributing editor, CFO Asia magazine The evolution of the accountant from number-cruncher to analyst, forecaster and strategist has been going on for some time in Asia, set off in part by the 1997 Asian financial crisis. During that dark time, finance professionals proved their worth as they shored up balance sheets, managed costs and advised the CEO and the board on the way forward. The current global recession is speeding up this evolution. This time even more is expected of the accountant as Asia’s post-crisis world shapes up to be one of more financial and governance regulations, tighter bank credit, higher and strictly enforced taxation, widespread adoption of International Financial Reporting Standards and triple-bottom line accounting, and risk management. There’s also the looming global cap-and-trade system in carbon emissions and rising Asian demand for low-carbon products and processes. Both will require new ways of valuing assets, allocating capital expenditure, and communicating with investors, analysts, customers and the public at large. It’s an exciting time to be an accountant in Asia, although debilitating for those happier hunkering down in silos and crunching the numbers, rather than being out interacting with every part of the business. Bacani writes a column in the Asia Pacific editions of Accounting and Business.

Helen Brand ACCA chief executive

We are seeing an international business environment which is becoming increasingly complex as a result of greater regulation, global competition and innovation in business finance. This is placing a premium on the analytical skills accountants bring to the table. At the same time, the accountant’s role is definitely broadening and is likely to widen even further in the future. Looking forward, our members are predicting that, in the next five years, there will be an increased emphasis on skills such as enterprise risk management, strategic scenario planning and improving the use of data and knowledge. This is good news for the future of the profession. It means varied and stimulating work which should ensure that a career in accountancy continues to attract talented recruits. For professional bodies like ACCA, the challenge will be to support members in the diversity of their roles, so they can take full advantage of these opportunities.



New environment, new CFO With the global economic recession forcing companies to re-evaluate financial fundamentals, research shows that CFO support is needed more than ever








53% The CFO’s role at this firm is more important now than it was a year ago The CFO’s contribution is perceived internally to be more valuable now than it was a year ago  The finance function gets more boardroom support now than it did a year ago

The CFO’s contribution

Finance leaders and their teams are now seen as a valuable resource to guide companies through the economic maelstrom, on both operational and strategic sides of the business. This has inevitably placed greater demands on CFOs, who have never been so stretched. But they know they now have the support of the board, so they have the ability to adapt and thrive in the new economic environment. ‘We have gone through an extremely reckless decade,’ says Steve Priddy, director of technical research and policy at ACCA, ‘where people thought we could carry on forever. We are in a duller world now, but a world that is better suited to the CFO.’ Priddy talks about a golden age for accountants in business, and this view is borne out by the latest research. Earlier this year, ACCA commissioned CFO Research Services to survey 450 senior finance executives around the world, asking for their thoughts on the impact the new economic environment was having on their roles, responsibilities and priorities. The findings, in the resulting report The CFOs New Environment, are illuminating and show how vital the CFO has become for both a company’s success and, perhaps more importantly, its very survival. Yes, companies were more focused on cash and liquidity before the downturn. And, yes, the CFO is expected to be more hands-on, controlling costs and monitoring the money. But they are also far more involved in risk management, business strategy and communications than ever before. The research states that eight out of 10 finance executives believe the CFO’s role is more important than it was in the previous year. Threequarters say the finance chief’s contribution is seen as more valuable, with seven out of 10 believing the finance function is receiving

n Strongly agree n Agree

ometh the hour, cometh the CFO. The current global downturn is shining a spotlight on the role of the modern chief financial officer. Companies are now placing far greater reliance on the CFO’s advice and understanding than they ever have done in the past.

more boardroom support than before. And it is risk identification and management that is top of the CFO’s agenda. Some 80% say they have taken a more active, hands-on role in risk management, the same percentage that say they are more involved in overhead cost reduction initiatives – an area that sits within the CFO’s more traditional remit. ‘Risk management is everybody’s business,’ says David Ahmad, CFO of the UK branch of Fortis Bank, who has taken the step of incorporating risk management into the specific tasks and targets of each member of the finance team. Indeed, the focus on risk management has led more than two-thirds of the finance executives in the research to say they are carrying out more training in this area. ‘There were tremendous pressures on company boards to take risks – unsustainable risks – so there is a role for the CFO in understanding the business model, understanding the returns that are being made and understanding the year ahead,’ says Priddy. But managing risk in an ever-changing economy is proving to be a challenge. For instance, how do you manage a risk such as the systemic freezing of the credit markets when, until recently, such a risk was deemed unthinkable? And the wide, rapid movements in fuel and other commodity prices, coupled with vicious exchange rate swings, has caught many a finance executive on the hop. However, CFOs are still required to pay attention to detail – traditionally a strong suit for finance executives. According to Ken Lever, CFO of hi-tech manufacturer Numonyx, finance chiefs and their teams cannot forget about basics in their fight for survival. ‘You can’t be looking at the horizon if you are falling in potholes,’ he tells the researchers. ‘And the problem is there are an awful lot of potholes around at the moment,’ he adds. BASIC ISSUES Lever observes that basic issues, such as headcount, systems and appropriate controls for dealing with customers’ liquidity and supply


‘You can’t be looking at the horizon if you are falling in potholes,

and the problem is there are an awful lot of potholes around at the moment’ chains, may have taken a back seat during more buoyant times. ‘When the economy’s going well, a lot of the basics take care of themselves,’ he explains, ‘so you don’t have to worry unduly about the liquidity of your customers, or about the continuity of supply.’ This is perhaps why, according to the research, 83% of the finance executives say that managing costs is taking up more time than it did in the previous year. Lever also highlights an important aspect relating to the switch from boom times to bust – a large number of finance executives may have the knowledge to deal with difficult situations, but they may not have had the experience.

As banks around the world – such as Spain’s CCM – reacted to changing conditions, CFOs have needed to spend more time persuading them that their investments will be worthwhile.

‘Some people won’t have gone through these difficult periods of the economic environment,’ he says. ‘It’s more a dearth of experience rather than a dearth of knowledge.’ If CFOs and their teams can emerge from the current economic meltdown relatively unscathed, then they will be in a far better position if and when the next economic slowdown beckons. As it is often said, nothing beats experience. CFOs AND STRATEGY And it would appear that finance chiefs are being given the opportunity to bolster their experience in strategic planning. According to the study,



A large number of


finance executives may have the knowledge to deal with difficult situations, but they may not have had the experience somewhat more difficult. The fog of uncertainty that envelops much of the business world currently means that many long-term plans have been put on ice. Nearly eight out of 10 feel that developing such a strategy is more difficult, while well over half admit their companies are delaying important strategic decisions. Of course, one company’s indecision is another’s opportunity. Some CFOs speak of the chance to do ‘smart’ acquisitions. Take the example of Virgin Mobile. John Feehan, CFO of the mobile virtual network operator in the US, says the company took the opportunity of a declining economy to grow its subscriber base through acquisition. After acquiring US cellular operator Helio for $39m (£24m), not only was Virgin able to boost the number of users, it was also able to reduce its own debt by attracting new investment. And it was able to reduce a combined headcount from 1,000 to 400 – the same staffing levels it had before going into the deal.

nnnn Bars represent percentage of CFOs answering yes

Occupational pension scheme matters

Oversight of IT function

Interaction with regulators

Tax planning matters

External audit

Banking relationships

Credit control and cash collection matters

Capital expenditure decisions




44% 41%

58% Remuneration and bonus scheme issues

71% 58% Monitoring company’s staff numbers and workload matters

79% 76%


80% Overhead cost reduction initiatives

Risk identification and management

Has the CFO taken on a more active, hands-on managerial role?

CFOs and their finance teams are more involved in shaping a business strategy than they were last year. Nearly three-quarters of those asked agreed that the finance department works more closely with business units than 12 months previously, while two out of three say the CFO is now more involved in creating a medium- to long-term business strategy – and, not surprisingly, this is taking up more of their time. It is also worth noting that demand for this is a two-way street – operational business units are looking to their colleagues in finance just as much as the finance team is looking to influence those at the coalface. As one respondent put it: ‘The interaction from other functional areas is now initiated by those departments. Finance becomes involved from step one as opposed to step three.’ Another underlines this by saying: ‘Financial goals have to be included in strategic planning and the results should be measured to evaluate overall success of the strategies established.’ Unfortunately for all those concerned, implementing strategic decisions has become

INVESTMENT DECISIONS As well as playing havoc with strategy, the recession is making it more difficult to give the green light to general investment decisions. Some 83% of the senior finance executives involved in the study say their company is delaying non-essential investment until economic conditions improve. That is understandable, though just over a third also say the company is delaying investments that are essential for revenue growth at the same time. And yet it is widely recognised that this growth will pull companies and the global economy out of the recession. CFOs point to two major causes. The first is that the scarcity of capital makes even the simplest of investments more complex than they used to be. So CFOs have to work harder, and with more investors, than before. Second, shareholders, banks and other key stakeholders are nervous – time and effort needs to be spent persuading them that an investment is worth making, even if the money is available. Jonny Mason, CFO of Odeon and UCI Cinema Group, emphasises the need for involvement in such decisions. ‘The operational heads are


nnnn Bars represent percentage of CFO’s answering yes

Managing the order book

Exiting unprofitable business lines

Managing headcount

Arranging financing with lenders

Communicating financial performance internally and externally

Contributing to strategic decision-making

Managing cashflow

Managing operational and strategic risk

Managing costs










looking more to the CFO to provide reassurance that investment projects can be afforded and to prioritise between different projects. Whereas in the past, their view might have been that finance will find a way to get this funded, they are now acutely aware there are tougher constraints and they need to operate within more fixed parameters.’ Like many of his peers, Mason says he has to work much harder to raise capital from different sources, and unlike days gone by he cannot assume that, as a private equity-backed business, once that financial facility runs out another one will be waiting in the wings. But arguably, the most radical change in the CFOs’ environment has come in the world of communication. This is not just internally, within an organisation, but externally, with key stakeholders – shareholders, banks, analysts, suppliers, customers, even journalists want to hear How much of the CFOs time have the following tasks demanded?

This report on which this article is based is part of a series of projects commissioned by ACCA to evaluate the impact of current global economic conditions on the finance community. ACCA has been an active and prominent commentator on the implications of global economic conditions for the finance profession and business at large. In commissioning this study, ACCA wanted to find out how the economic environment is shaping the CFO’s role and affecting the perception of their organisational value. With business under more pressure than any time in recent years, ACCA also wanted to identify the skills and strategies leading CFOs are using to cope with conditions and share these with a wider audience. The CFO’s New Environment can be found at www. accountants_ business

from those who are in control of the purse strings. Again, eight out of 10 finance executives say they have either increased, or plan to increase, the level of internal communication they carry out, while two-thirds reckon they have, or are about to, increase their communication levels with external audiences, according to the study. An initial reaction to this might be that this is possibly the most uncomfortable area for CFOs. But Priddy disagrees, saying there is no reason to believe accountants are no better, but no worse, at communications than other business unit heads. But he agrees there is a larger onus of finance to communicate, and in a non-financial way – it could be as simple as illustrating a presentation with a graph rather than a string of numbers, so long as the message is clear. Respondents agree. ‘Communication is a key to successful business plan implementation, whether it is internal or external,’ one says. ‘I have seen too many mistakes made due to poor or improper communication procedures.’ Encouragingly, the study finds that, even in these times of tight budgets, 95% do not plan to decrease the level of external communication, while 92% have the same attitude towards internal communications. Some finance bosses are proactively encouraging their teams to develop their communication skills. Doug Fraser, CFO of TAQA, the Abu Dhabi National Energy Company, says: ‘In finance you tend to have people who are very technically strong… but sometimes lack the ability to communicate effectively and also get buried in the details. Whether my people are speaking to investors or internally, I want them to be able to make their point quickly, articulately and persuasively.’ It might well be good to talk, but it is important to ensure the audience is listening as well. So there is much that CFOs and their teams are doing to help guide their organisations through these troubled times. They have risk management firmly at the top of their agendas, and are ensuring they have the skills to understand the risks, as well as the opportunities. They are talking to the right audiences, both internally and externally, and they are talking in the right way. And yet they are still managing to keep an eye on the detail, they are managing costs, analysing investments and maintaining sound finances. And above all else, they are ensuring they are at the heart of the organisation and that they have stepped into the spotlight at this crucial hour. Philip Smith, journalist



How is the role of CFO changing? Finance chiefs in very different roles share their views on the changing nature of the CFO’s role

Rita Purewal FCCA

FD, Wolverhampton Wanderers Football Club Today’s CFO faces a very different business environment from the finance professional of the past. Against this constantly changing landscape, CFOs are having to reassess and revaluate their current role to ensure that they can maintain their value to the business. Previously, it was sufficient and acceptable for a finance function to be reactive. The onus was on recording, validating, verifying and presenting financial information on a historic basis. Now the emphasis is on being much more progressive, innovative and proactive and CFOs must be able to anticipate and demonstrate what changes may lie ahead so the business can remain competitive. As IT systems have become a lot more advanced and finance software more refined and robust, less time is now spent on the recording and validating. Consequently, a lot more time is spent analysing and interpreting key financial data in developing a more visionary approach, which in turn has resulted in the formulation of sophisticated forecasting techniques and business plans. This has also meant that the recipients of this information have, over time, raised their expectations of what they can expect a finance professional to deliver and how they should deliver it. Communication is therefore a key quality which CFOs must possess – long gone are the days of the stereotypical number-crunching accountant in a back room. CFOs have had to transform and adapt and are now seen as an integral part of the business – playing an active part in all stages; from strategic planning, through identifying opportunities by preliminary evaluation through to execution and delivering these plans. The CFO must have a commercial mindset and be able to demonstrate through effective communication that increased efficiency and productivity can be achieved if a particular course of action is undertaken. Financial scandals over recent years have resulted in a more stringent and regulatory framework which the CFO must operate within. With a CFO being answerable to a wide cross-section of end users he or she must also maintain stakeholder confidence by being transparent and visibly showing that compliance is achieved. Accessibility to the global market and the opportunities this has opened up for businesses have also affected the CFO’s role and with international compliance being high on the agenda, CFOs need to be informed in their approach. Given all the challenges CFOs have to face, there is a need for them to constantly reinvent themselves to maintain their position.

CFOs have had to transform and adapt and are now

seen as an integral part of the business – playing an active part in all stages



Brian McCarthy FCCA MD, Le Masurier Group

Sergiy Ivanyuta FCCA CFO, AES Ukraine

I would not say it is changing much. Rather, there is an ongoing return to basics to focus on the operating business as opposed to ‘fancy’ M&A. If your data is clean, knowledge of the business (through the data) is sufficient and risk management is in your blood, the CFO and management team will be much better able to deal with the issues they face. And of course the CFO will be listened to those days! Inside the business, a major focus is now on internal communication. Finance needs to act fast to show management the impact of the crisis. Finance should act as a proactive adviser, as opposed to a dictator. Conflict needs to be avoided, especially in crisis, as integrated teams work better than those where conflict is in the blood. Concentration on liquidity in the short-term is unavoidable, but it is more important to concentrate on how to make money, especially as you will need to prove sustainability to external parties. The time we now spend on risk management is huge. And the accounting role these days should not be underestimated. Having wellrun planning systems, billing systems and data warehouses is a huge benefit and helps in times of rapid change. Proactive and wellstructured accounting teams are also a must.

The role of the accountant is changing dramatically against a backdrop of significant worldwide recession and uncertainty. Accountants are becoming integral to core business sustainability and the identifiers of the value drivers that promote competitive advantage. CFOs are the new business leaders – naturally embracing the roles of CEO or MD. In the coming years, I believe that the technical skills of an accountant will be taken as a given; minimum expectations that you are well grounded in corporate finance, financial control and analysis, and have practical demonstrable experience of both management and statutory accounting. The emerging accountant of the future though will be the fundamental driver of corporate strategy, applying analytical skills to identify areas of competitive advantage and in setting strategic financial performance goals. He or she will be a more balanced leader, able to exercise commercial judgment in business decision making and in determining risk; all of which will be underpinned by strong social, corporate and personal ethics. I strongly feel that future accountants will also embrace a commitment to lifelong learning, supporting their own development along both academic and professional pathways.



Future thinking Carbon accounting, narrative reporting, access to finance, and audit are crucial issues for the profession. Roger Adams introduces these centrepieces of ACCA’s new Accounting Futures programme of research, collaboration and discussion

A Roger Adams FCCA is ACCA’s executive director – policy. He is responsible for coordinating and managing ACCA’s global policy positions on a range of professional issues, including sustainability and corporate responsibility. Adams has directed ACCA’s work in the corporate social responsibility area for over 15 years. In 2002, ACCA became the first professional body to be awarded the prestigious Queen’s Award for Sustainable Development.


CCA has never shied from addressing topical issues of concern to regulators, politicians, the commercial world and the profession in general. Our past work in areas such as international accounting standards, sustainability, and support for smalland medium-sized enterprises (SMEs) is widely acknowledged as having been hugely influential in challenging public perceptions and political agendas. The economic, political and environmental climate has exposed flaws and shortcomings in the way in which public policy and regulation have developed in recent years, in areas such as financial regulation, financial reporting, corporate transparency, climate change and assurance provision. ACCA’s Accountancy Futures programme has been established to respond to these external challenges. From ACCA’s perspective, the future landscape for the profession offers no sign of any fall-off in demand for professional accountants. Indeed, ACCA’s Accountancy: The Future Outlook report cites that: ‘CFOs, partners and senior accountants generally predict buoyant demand for qualified accountants over the next five years, with almost two-thirds of those surveyed expecting demand to increase. Just over a quarter expect demand to stay the same, and by far the smallest percentage – less than one in 10 respondents – anticipate falling demand.’ But neither does it indicate any slackening off in the pace of change, or lessening of the complexity of the issues that professional accountants must address. The anticipated development of accounting and finance roles – and of the finance function itself – will drive the skills, knowledge and attributes required by the professional accountant. The ability to exercise professional judgment based on a foundation

of ethics, broad but deep technical excellence, plus strategic awareness and communication, will be key. In response to the challenges presented to the profession by the new business environment, ACCA has identified four areas of focus – carbon accounting, access to finance, narrative reporting, and audit and society – around which our future research and insights programme will be organised. These four themes collectively represent a response to what ACCA sees as some of the most crucial issues facing the profession and its various constituencies in both the short and the long term – from tomorrow’s cashflow to next year’s annual report disclosures, to the reporting and auditing of carbon emissions in five-to-10 years’ time.


1. CARBON ACCOUNTING To include the development of a greenhouse gas emissions standard, emissions trading, accounting for the green collar economy and business models beyond carbon. The question of carbon emissions – in other words, how we manage, measure and hopefully reduce them – is central to the issues of climate change and global warming. Lord Stern’s seminal 2006 paper on challenges posed by these issues concluded: The benefits of strong, early action considerably outweigh the costs. Unabated climate change could cost the world at least 5% of GDP each year. If more dramatic predictions come to pass, the cost could be more than 20% of GDP.

The cost of reducing emissions could be limited to around 1% of global GDP. When the immediate financial crisis has passed, the climate change crisis will remain. The accountancy profession is gradually recognising that, if not already at the tipping point beyond which irreversible climate change will occur, then it is very nearly at that point, facing inevitable costs for business and society. There is a major role for the profession to play in developing strategies and solutions in response to the carbon challenge, and ACCA is determined to play a leading role. 2. ACCESS TO FINANCE To include microfinance, credit unions, Islamic finance, sovereign wealth funds, mutual funds,



project finance and investment appraisal in practice. The current financial crisis has exposed serious weaknesses in our ability to give ‘life support’ to cash-starved organisations. The causes of these weaknesses lie in a variety of sources, such as insufficient attention being paid to risk management, over-extension of lines of credit and a neglect of financial fundamentals. But together they have created a perfect storm, the major symptom of which is a massive loss of confidence and trust at every level of the market. New research sponsored by ACCA and conducted by CFO magazine concludes that: ‘The CFO’s job has become much more challenging. The vast majority of respondents say that, in the past year, the CFO has adopted more of a hands-on, managerial role in banking relationships, capital expenditure decisions, risk identification and management, monitoring employee numbers and workload matters, credit control and cash collection, overhead cost-reduction initiatives, and remuneration and bonus schemes. ‘In light of this, it is understandable that the majority of respondents say the CFO is spending more time managing headcount, arranging financing, managing cashflow, managing costs, contributing to strategic decision-making, communicating financial performance, and managing operational and strategic risk.’ Our proposed work programme under the access to finance banner will encompass a range of initiatives designed to help the CFO cope more effectively with this changing environment. 3. NARRATIVE REPORTING To include simplification of reporting, usefulness of narrative reporting, new developments in business forecasting, narrative reporting and risk, better disclosure, aspects of societal accounting, accounting for diversity, accounting for post-retirement benefits and the use of new reporting technologies such as eXtensible Business Reporting Language (XBRL). Conventional historical financial reporting has been under attack for a number of years. According to many critics, the existing model is fundamentally flawed. Some of the recent attempts to reform certain aspects of financial reporting, such the introduction of fair value rules, have not had the desired effect as fundamentally changed market assumptions erode the reliability, and hence the usefulness, of the information that emerges from the complex asset valuation models used.


Nevertheless, it is difficult to see that traditional reliance on balance sheet and income statement data is going to completely evaporate overnight. More likely, the fair value rules will be revised and we will see extensions in so-called ‘narrative reporting’, designed to fill in the gaps that traditional, historically focused, financial reporting inevitably leaves in its wake. Already we have seen an increased focus on risk reporting. Some commentators (for example, the Big Six) have called for greater transparency based on customised, industry-relevant key performance indicators. Still, others argue that the climate change crisis demands greater transparency over the way in which sustainability issues are linked to corporate strategy and impact earnings and comparative performance. The ACCA narrative reporting theme will embrace and evaluate the variety of tools that are being proffered as a fix for an otherwise flawed conventional reporting model. 4. AUDIT AND SOCIETY To include the decline in licence to operate, the rise of non-statutory audit and assurance activities, audit in developing economies, audit for the accountant in business, and wider debates on the value of audit and assurance in society, either as a whole or as part of the checks and balances of stable, sustainable social and economic conditions. The term audit evokes a variety of responses from organisational stakeholders, ranging from it being a fundamental tool of accountability to having little value because (a) its outputs do not match user expectations, or (b) because the commercial auditor is never truly independent when paid by the client. Audit (and its associated term – assurance) is, however, a widely diversified activity – growing stronger and more sophisticated in some of its forms (for example, internal audit and assurance of non-financial reports), while coming under fire in its historical heartland – the independent audit of limited liability enterprises. The future of the conventional external audit is under threat for a variety of reasons – the oft-discussed expectation gap, the extreme concentration in the supply of audits for multinational corporations, and the costs which high-quality audit and ethical requirements impose on SMEs and small- and medium-sized practices. ACCA’s future of audit and assurance focus will not be a forensic examination of any previous mistakes, but will develop activities across a


‘ACCA will seek to

capture and distil thinking at the highest level: drawn from ministers, industry leaders, presidents of accountancy bodies and heads of regulators, as well as leading practitioners and experts’

range of audit-related themes with a view to describing the shape of the audit profession of the future, its stakeholders and its practices. For each theme, ACCA will be developing a long-term research programme that is likely to include a combination of opinion-based research with relevant consumer or expert groups, such as consumers of financial information, analysis, expert witness commentary and longitudinal studies. The programmes will be integrated to build up a more complete picture, or comprehensive insight into the theme. All ACCA thought leadership output will seek to bring theory to life with relevant commentary and insight from leading experts. ACCA will seek to capture and distil thinking at the highest level: from ministers, industry leaders, presidents of accountancy bodies and heads of regulators, as well as leading practitioners. For each theme, ACCA will have an interactive online presence that will include microsites,

discussion boards, rich content/updates, blogs, etc, as well as online seminars/webcasts and links to relevant third-party sites. We will actively seek out a programme of engagement in relevant influential circles for our key thought leaders around the selected themes, customised in-market to reflect local priorities and current issues. The first fruits of the Accountancy Futures programme have already started appearing in Accounting and Business magazine. In this first edition of Accountancy Futures magazine, a range of articles related to our four core themes will be published for the first time. Reader feedback on any of the articles would be greatly welcomed by the ACCA technical secretariat. Email with your views. The Accountancy Futures website is at



More than greenwash Dr John Roberts, director of a number of companies in the renewables sector and former United Utilities chief executive, says boards need to be more aware of the money that can be saved – and made – from looking at climate change issues




ith the days counting down before the world’s environment ministers meet in Copenhagen this December, many will be hoping that a clear plan on tackling climate change will emerge. And many will also be hoping not only that a plan will become evident, but that also the major economies will commit to implementing the plan. And that the commitment will be followed with concrete action. COP 15, as the United Nations climate conference is known, will thrash out a treaty that will replace the Kyoto Protocol, which celebrates its 12th birthday this year. Back in 1997, 184 parties signed up to the protocol in Japan. One notable exception was the US. Yet this time round the signs are positive that the American delegation will not leave the Danish capital without putting their names to the treaty. But it is important to remember that the hopes for serious action should not be left solely in the hands of governments. Businesses small and large can equally commit to tackling what is probably the most significant, and life threatening, issue facing our world. By addressing our own environmental impact, businesses can have a direct effect in tackling climate change, and at the same time will, I sincerely believe, be able to reap the economic rewards of their actions. Put simply, there is money to be saved and money to be made – costs can be reduced and new technologies exploited both in terms of improving efficiencies and providing products that will help others find such savings.

Dr John Roberts CBE is a fellow of the Royal Academy of Engineering, the Institution of Engineering and Technology and ACCA. He is chairman of Royal Bank of Canada (Europe), Viking Consortium Holdings and Remote Energy Monitoring Holdings. From 1999 to 2006 he was chief executive of United Utilities.

‘Implementing a programme

that reduces energy consumption will not only be good for the environment, it will also be good for the bottom line’ Businesses could be forgiven for thinking that the climate change agenda should be placed on the back burner while they grapple with the impact of the global recession, but they are missing an opportunity. Implementing a programme that reduces energy consumption will not only be good for the environment, it will also be good for the bottom line. It is no different from any other form of resource management. We have seen waves of redundancies as businesses have sought to contain costs – how many jobs could have been saved if energy bills were cut? Of course, the first step is to truly under-


stand our environmental impact. Accordingly, as business leaders, we need to measure our carbon footprints. Then we can understand how to make reductions, and report on how successful we are in making those reductions. We need to set out our own clear targets, and build those targets into our rewards structures. As accountants in business, we are uniquely placed to measure, implement and report on how well our businesses succeed in moving towards a low-carbon environment. By ensuring there is a consistency in how these moves are reported, we can also ensure that there is no greenwash – that the reductions are meaningful and sustainable. There are however many hurdles, and sadly they can all too often be found at the very top of our organisations. Chief executives and their boards of directors can be cynical, and they may not see how such action can possibly improve company performance and profitability. It will be down to the accountants to demonstrate the upside of such action. MEASURING EMISSIONS A good starting point is PAS 2050 – a publiclyavailable specification for a method of measuring the embodied greenhouse gas emissions from goods and services. This is produced by the British Standards Institution alongside the Department for Environment, Food and Rural Affairs and the Carbon Trust and can be downloaded from BSI’s website. The document not only provides a number of tools to help in the assessment of existing goods and services but also allows for the evaluation of alternative product configurations, be they sourcing and manufacturing methods, raw material choices and supplier selection. Chief executives might also be interested to know that consumers can also use the same tools to calculate the carbon footprint of the goods and products they use. If they don’t like what they see, they will buy elsewhere. Once a company has calculated its carbon footprint, it is then easy to pick off some of the low-hanging fruit – energy-efficient light bulbs, IT systems and air conditioning for instance – in a very low-risk way. Then it is possible to look at issues such as transport and travel – perhaps looking at the issue of new technologies such as video conferencing – and review how your raw materials are produced and shipped. These are all actions that any business can take and the benefits can be quantified in very simple financial terms.


But then there are equally important intangible benefits – a business that develops a reputation of being a responsible business will become attractive to consumers, clients and new recruits: but this has to be genuine – if an organisation indulges in greenwash, then people will see through it pretty quickly. If we want to attract high-quality people to work for us, we have to understand that they can be very questioning, especially those from a younger generation. Beyond this, it is important to remember that the green agenda has created, and continues to create, a massive new market in products and services that did not exist before. There are the obvious ones in the energy fields – wind, wave and solar power generation – that are providing great opportunities. Then there are other technologies such as smart metering, which will allow consumers to measure more accurately how they are using their energy supplies, and therefore manage those supplies. Of course, this is a new frontier, but it is a market that is underpinned by UK and European legislation and a groundswell of public opinion that is becoming more and more in favour of sustainable and renewable energy. So there are a whole series of waves that can be ridden here. Yes, we are in the middle of a recession but this is precisely the time when

Indonesian children plant mangrove trees at a Kapuk conservation area in Jakarta, Indonesia. Hundreds of officials and experts from 70 countries attended the World Ocean Conference in Manado, the first global meeting on the link between oceans and climate change. The May 2009 conference was billed as a prelude to the COP 15 talks.

the people that are bold, who do make the investment, who see this as the market opportunity that it is, will be the ones who will go on to be potentially very successful. BUSINESS OPPORTUNITY But we are not there yet – there are too many that believe this is an issue for the utility companies and for governments, rather than a mainstream business opportunity. Carbon management and energy efficiency is still seen as a specialist topic, and not embedded in general business thinking. Those that understand these issues, that recognise this will be the new ‘business as usual’, those that realise they need to future-proof their businesses in an economic environment where cheap and freely available energy is a thing of the past, they will be the winners. We still need collective action, and this why COP 15 is so important. If the US, China, India and Europe all sign up to a meaningful treaty that sets out clear actions and targets for the next 10 years and if there is a clear international commitment to the treaty, then COP 15 will be more than a talking shop. But businesses must not wait to see whether this commitment is translated into action, because by then the opportunities could have passed. And the days continue to countdown.



The case for a carbon standard We must have a globally-accepted carbon accounting and reporting standard – and accountants need to work with other professionals, says ACCA’s Dr Steve Priddy




lthough a few sceptics of the link between greenhouse gas (GHG) emissions and global warming still remain, most people now agree that action must be taken – and fast. Lord Nicholas Stern’s calculation, published in his Economics of Climate Change review, was that tackling climate change would cost 1% of GDP and that the consequences of not acting could cost up to 20 times that. As a result, ambitious carbon reductions targets are being set. For example, the UK’s Climate Change Act 2008 set the target of reducing total GHG emissions by at least 80% below 1990 levels by 2050. In the effort to reach such targets, governments will need to pull out all the stops. Entities will be increasingly required to account for and report on their GHG emissions – both to enable levels to be monitored, and to increase pressure on high emitters. Carbon reporting can highlight areas of organisational activity that are resulting in particularly high emissions and organisations can be surprised about what they discover. For example, when Wal-Mart completed a return on emissions for the annual survey by the Carbon Disclosure Project (CDP), it was horrified at its level of GHG emissions and resulting energy costs. An examination of its supply chains established that mobile refrigeration equipment was a major contributor. Thus knowledge gained through carbon reporting enables everyone to adapt their behaviour and reduce energy costs and GHG emissions. Carbon reporting can also serve to highlight areas of business opportunity, as the ‘green economy’ develops. Property will need modifying, new forms of energy generation (such as wave, wind and hydro) will need to be expanded and new technologies exploited (such as those related to carbon capture). However, accounting for and reporting on carbon emissions is a voluntary activity, at present, conducted by a handful of corporates and according to a range of guidelines. For example, a report from the Ethical Corporation Institute, based on a survey of FTSE 500 companies, claims to have found 34 different carbon emission measurement methodologies. This makes data comparison difficult, if not impossible. EARLY DAYS FOR REPORTING The annual CDP survey, in which 3,000 companies participated in 2008, collates information on carbon risks and opportunities, GHG emissions accounting, GHG performance and climate change governance. Its findings confirm


Traffic makes it way through flooded streets in Bangkok as heavy rains sweep into shops and homes. The region is among the most vulnerable to climate change, warns the Asian Development Bank.

that climate change reporting is still in the early stages and there is plenty of scope for improvement. Comparability between data sets is difficult. Although the majority of large quoted companies now disclose some meaningful carbon information (such as policies and quantitative emissions trend data), they only represent a minority of the world’s economic activity. Public sector institutions and the mass of small- and medium-sized unlisted enterprises also create emissions. Specific areas of carbon disclosures are also clearly lagging behind. Only a handful of organisations report on a broader range of carbon issues, such as adaptation strategies, product

‘At present, accounting for carbon emissions is a voluntary activity, conducted by a handful of corporates and according to a range of guidelines’


impact, transformational initiatives, assurance of disclosures and carbon governance. Efforts have been made to improve the consistency of carbon reporting and comparability of data. For example, the Global Reporting Initiative provides a sustainability reporting framework that is widely used, but its scope is broad. The GHG Protocol’s Corporate Accounting and Reporting Standard is currently the most globally recognised reporting standard for the measurement and disclosure of GHG emissions. However, it too is not sufficiently specific to help entities deliver consistent carbon reporting across entities. Without clearer standards, the inconsistencies and limitations in current carbon reporting are likely to become more of an issue as carbon reporting loses its voluntary status. Under the UK’s Climate Change Act 2008, reporting of carbon emissions will become mandatory for large- and medium-sized enterprises from April 2012. The business sector is already concerned about the challenge this will create. In May, for example, the Confederation of British Industry issued a report entitled All Together Now calling for a common business approach to GHG emissions reporting. However, it is not just the business sector in the UK that will be affected by government policy. The Carbon Reduction Commitment involves the introduction of a UK-based emissions trading scheme, similar to that in the EU. This becomes mandatory for about 6,000 large commercial and public sector organisations, including hospitals, schools and universities, in 2010. Participation in the scheme will involve emissions reporting and target setting. Given the climate change threat, the wider the reach of carbon reporting, the better. Ideally, all organisations will ultimately report on the GHG emissions. The challenge will be to achieve such reporting without creating an impossible regulatory burden for the smallest entities. Two documents that could help to increase standardisation in carbon reporting both draw on the GHG Protocol. In June 2009 the Department for Environment, Food and Rural Affairs (Defra) issued draft guidance on how to measure and report GHG emissions. The document contains general principles for measuring and reporting GHG emissions and is primarily aimed at largeand medium-sized businesses. It is positioned as a practical guide, written in accessible language, and includes a flowchart of the process involved in emissions reporting. Defra published guidance in September 2009 on its website.

FRAMEWORK PUBLISHED In May 2009, one month before Defra launched its consultation, the Climate Disclosure Standards Board (CDSB), a consortium of business and environmental organisations, published an exposure draft of its Reporting Framework – a document that arguably comes closest to providing a carbon accounting standard. It aims to provide a ‘single global framework for climate change-related disclosure to be used by companies in compiling their mainstream financial reports’. As a member of the CDSB’s Technical Working Group that helped to develop the draft framework, I believe it should go a long way to meeting the needs of carbon reporters. The framework has been written in the language of the International Accounting Standards Board, in an attempt to align it with International Financial Reporting Standards. For example, its goals are explained in the context of meeting the needs of investors. It also talks about the characteristics of ‘decision-useful’ information in the context of relevance, faithful representation, comparability, verifiability, timeliness and understandability, in line with the IASB’s guiding principles. It notes that disclosures under the climate framework should reflect management’s view of the way in which climate change affects company strategy. The CDSB framework includes four reporting templates designed to determine what to include in mainstream financial reports regarding climate change, and how to make disclosures decision-useful. The templates address: strategic analysis, including the corporate governance actions that are being taken both to manage the risks and maximise the opportunities associated with climate change; the regulatory risks from climate change; the physical risks (such as the impact of extreme weather); and the levels of greenhouse gas emissions.

Previous page: A local resident walks on a driedup riverbed at Huangyangchuan reservoir in Lanzhou, Gansu province. US energy chiefs are urging China to join the US in stepped-up efforts to fight global warming.

DIRECT AND INDIRECT PRODUCTION Guidance is also provided on areas of carbon reporting that need greater clarity. For example, one of the key theoretical issues in carbon reporting relates to the scope of emissions covered. Scope is an issue because entities not only produce emissions directly, but also as a result of their activities through third parties, such as outsourcers. The CDSB’s framework recommends that, at a minimum, companies disclose their total gross direct GHG emissions and indirect GHG emissions associated with the use of the steam, electricity, heating and cooling they purchase.



Companies are also required to consider disclosure of indirect emissions from sources not owned or controlled by the reporting entity but which are a consequence of its activities. These could include emissions associated with employees commuting to work, distribution of finished goods or transportation of waste. The CDSB framework is a comprehensive document. The more endorsement it gains, the better for standardisation of carbon reporting. However, endorsement by the IASB would be particularly valuable. The IASB appears the logical owner of the initiative to establish a single, international accounting standard for the measuring, monitoring and management of GHG emissions. It currently has a far more limited project underway, to consider the accounting requirements for organisations in emissions trading schemes. However, so far the IASB has appeared unwilling to take up the greater challenge of a general carbon accounting standard – despite the significant work done and progress already made by the CDSB. In general, however, the accountancy profession has been highly involved in the development of guidance and standards. For example, the CDSB’s Technical Working Group included not only ACCA, but also representatives of the International Federation of Accountants, the Canadian and Japanese accountancy bodies, the Institute of Chartered Accountants in England and Wales, and all the Big Four accountancy firms. This is not to say that accountants have all the answers. Establishing globally accepted carbon reporting practices is, of necessity, a multidisciplinary exercise. At the very least, it needs to involve economists, chemists and engineers, as well as accounting professionals. There are many technical issues to address in the field of GHG emissions measurement, and the accountancy profession needs to work with other experts to address them effectively. ROLE FOR ACCOUNTANTS It is essential that the accountancy profession continues to play a leading role in debates about such issues, and the further development of carbon accounting and reporting. It is also appropriate. After all, finance directors typically

Greenpeace activists unfurl a banner urging climate action opposite the luxury beachside hotel in Thailand where the 14th Association of Southeast Asian Nations (ASEAN) summit was held in February.

have wider access to performance data than any other member of the board. They have the skills, knowledge and experience to define and establish measurement systems that can collect data in the most cost-effective way. They are at the heart of an organisation’s sustainability – both in the short term to ensure its status as a going concern, but also in the medium to longer term, understanding its assets and liabilities, its business model and appetite for risk. Even if climate change was not emerging as one of

‘Establishing globally accepted carbon reporting practices is, of necessity, a multidisciplinary exercise. At the very least, it needs to involve economists, chemists and engineers, as well as accounting professionals’



the greatest challenges to humanity, the simple cost of energy as a proxy for carbon, and the alarming price spikes in oil and energy in 2008, should act as a wake-up call to the accountancy profession to seriously address and lead on the issue of reducing carbon from operations. The need for a globally accepted carbon accounting and reporting standard seems selfevident. Perhaps it is an idea whose time has finally come. The UK Treasury estimated that the collapse of the credit derivatives market has led to a permanent reduction in UK GDP of about 4% per annum. Many clever people are now looking for new challenges. Focusing their talents in the carbon reporting arena could provide both a satisfying role for them, and welcome support for those keen to see more effective carbon accounting and reporting.

ACCA AND GRI ACCA has always contributed to the sustainability debate, with the aim of promoting transparency in reporting and practice and has worked closely with the Global Reporting Initiative (GRI) for several years. Founded in 1997, the GRI is a long-term, multistakeholder, international process charged with developing and disseminate globally applicable sustainability reporting guidelines while achieving comparability, credibility, rigour, timeliness and verifiability of the reported information. These guidelines are for voluntary use by organisations for reporting on the economic, environmental and social dimensions of their activities, products and services. www.globalreporting. org

Hot topics Debate on many issues continues to rage. For example, views differ as to the correct price of a tonne of carbon dioxide equivalent, for which the commercial market gives a poor signal. The actual price of carbon may be volatile, but it is not high enough. The spot price quoted on the markets in spring 2009 was €10 (£8.82) per tonne. The EU emissions trading scheme introduced initial potential penalties of €40 per tonne, rising to €80 per tonne. Many climate change experts believe even this level is too low to reflect the true impact of GHG emissions. Another hot topic is the discount rate to be used in comparing emissions across time, or between the developed and developing economies. How low should it be? Some even argue the case for a negative discount rate because of the extreme urgency needed in responding to climate change and in reducing GHG emissions now. For more on Dr Steve Priddy see page 10



Carbon catalysts If climate change campaigner Al Gore and expert Lord Stern wanted to host a ‘carbon dinner party’ of leading lights, who would they invite?


n planning such a fantasy event, the two men would be in good company. In May 2009, 20 Nobel laureates and 40 other scientists gathered together in London for a symposium held under Prince Charles’ patronage. Their purpose was to discuss the connections between global warming and other urgent environmental, economic and development challenges facing the world. Attendees included many famous names, including Lord Stern and long-time environmental campaigner Jonathon Porritt, as well as numerous scientists well-known in their fields but perhaps not in the ‘outside world’. For our imaginary carbon dinner party, we have named Gore and Stern as the hosts, due to their prominence in the field. We have sought guests who are currently influencing and advancing global developments to counter climate change and reduce greenhouse gas (GHG) emissions,


or who have the potential to do so. The result was a long list of names, but 13 people were nominated numerous times. One notable feature of the guest list is that it contains five individuals linked to the Intergovernmental Panel on Climate Change (IPCC), which was set up by the World Meteorological Organisation and the United Nations Environment Programme in 1988. In fact, many of the other individuals involved with the IPCC could have been included in the list, reflecting the panel’s high-profile role as assessor of the latest scientific, technical and socio-economic literature related to climate change. The final list was hard to whittle down. In fact, Gore (pictured top left) and Lord Stern (bottom left) would need to hold multiple dinner parties if they wanted to meet all the current – and future – movers and shakers in the climate change field.


The guests If you wanted to gather current and future movers and shakers in the climate change field, who would you ask? We have compiled a potential guestlist

DR RICHARD BETTS Dr Richard Betts leads the climate impacts research team in the Met Office Hadley Centre and is one of the Met Office’s main spokesmen on the science of climate change. He has worked as a climate change modeller for 15 years and pioneered a number of key scientific

Richard Betts was the official scientific adviser for Live Earth UK developments in the climate change field. He has published numerous scientific papers, and is a lead author on the Intergovernmental Panel on Climate Change’s Fourth Assessment Report. In 2007 he was the official scientific adviser for Live Earth UK, a worldwide musical event organised to raise awareness of climate change, where he shared the stage with Madonna and Genesis. Betts was also an award-winning lead author on the Millennium Ecosystem Assessment – the authors shared the Zayed Environment Prize with Kofi Annan, former secretary-general of the UN.

Pankaj Bhatia is a leading expert on GHG Protocol standards and tools

EU’s position in the lead up to negotiations on the Kyoto Protocol. De Boer knows the politics of international climate negotiations inside out.

PANKAJ BHATIA Pankaj Bhatia is the director of the GHG Protocol Initiative workstream within the World Resources Institute’s Climate, Energy, and Pollution Program. He is an expert on GHG Protocol

Yvo de Boer broke down in tears while warning delegates in Bali standards and tools, particularly in the area of corporate GHG accounting and reporting. He oversees the development of GHG Protocol product lifecycle and supply chain inventory accounting standards and is responsible for establishing GHG Protocol programmes in collaboration with businesses and governments in developing countries. He also advises on the design of emission registries in the US and internationally. He has degrees in process and chemical engineering.

YVO DE BOER A passionate advocate for climate change, during the 200-nation Bali conference to cut carbon emission, Yvo de Boer broke down in tears while warning delegates that failure to reach an agreement on global warming could ‘plunge the world into conflict’. Executive secretary of the United Nations Framework Convention on Climate Change (UNFCCC) since August 2006, he has a key role in promoting sustainable development and implementation of the Kyoto Protocol. The UNFCCC sets an overall framework for intergovernmental efforts to tackle the challenge posed by climate change. Before joining the UNFCCC, de Boer was director for international affairs for the Netherlands’ Ministry of Housing, Spatial Planning and Environment. He has been involved in climate change policies since 1994, including helping to prepare the

DR IAN BURTON Dr Ian Burton is scientist emeritus with the Adaptation and Impacts Research Group of the Meteorological Service of Canada and an adjunct professor with the Institute for Environmental Studies at the University of Toronto. A lead author of IPCC reports, Burton is a pioneer in climate change adaptation – initiatives to reduce the vulnerability of natural and human systems against climate change effects. In 2003 he was the first winner of what is now known as the Burtoni Award, given in recognition of outstanding contributions to climate change adaptation science and policy. He has advised many Canadian and international organisations.

Ian Burton is an IPCC lead author

and a pioneer in climate change adaptation



The final list was hard to whittle down.

In fact, Gore and Lord Stern would need to hold multiple dinner parties if they wanted to meet all the current – and future – movers and shakers in the climate change field aesthetics, sustainability, social justice and the business bottom line for corporations amid changing world conditions.

KEVIN CONRAD Kevin Conrad is special envoy and ambassador for environment and climate change for Papua New Guinea and executive director for the Coalition for Rainforest Nations, an intergovernmental initiative to facilitate environmentally sustainable economic growth. He is a leading

Kevin Conrad faced down US objections at a UN climate treaty talk figure behind global efforts to reduce rates of deforestation. At the 2007 UN Climate Change Conference in Bali, Conrad successfully challenged the US to drop its objection to plans for a post-2012 climate treaty – an achievement described by Time magazine as ‘a classic David versus Goliath moment’. Conrad faced down US objections at a UN climate treaty talk in 2008 when he said: ‘I would ask the US, we ask for your leadership. But if for some reason you’re not willing to lead, leave it to the rest of us. Please get out of the way.’

Paul Dickinson has written a book called Beautiful Corporations

PAUL DICKINSON Dickinson aims to build stronger and more sustainable markets that guard against abrupt and irreversible climate change. He is CEO of the Carbon Disclosure Project, a not-for-profit body formed in 2000 and which now holds the

Michael Gillenwater

co-founded the US GHG Inventory Program world’s largest database of climate change information. Data is gathered annually from companies on behalf of about 475 institutional investors with assets under management of US$55 (£30) trillion. Dickinson is also chair of videoconference booking service, Eyenetwork, and a member of the Environmental Research Group of the UK Faculty and Institute of Actuaries. Dickinson has written a book called Beautiful Corporations – free to download on his website – which brings together ideas of


MICHAEL GILLENWATER Michael Gillenwater has worked on GHG emissions and climate change policy since 1995. He is founder and executive director of the Greenhouse Gas Experts Network and also co-founder and dean of the Greenhouse Gas Management Initiative. Both are non-profit organisations focused on training a community of experts on the measuring, accounting for and managing of GHG emissions. Gillenwater is actively engaged in the work of the UNFCCC and lead author of several reports published by the IPCC. He co-developed the US Greenhouse Gas Inventory Program within the US Environmental Protection Agency.

DR JAMES HANSEN Head of the NASA Goddard Institute for Space Studies in New York, Hansen is best known for his research in the field of climatology, including analysis of current climate trends and projections of man’s impact on climate. He has also noted that the effect of GHG emissions on climate is determined by accumulated emissions over the lifetime of greenhouse gases in the atmosphere – by which measure the UK is still the largest single cause of climate change. No stranger to controversy, he called for the CEOs of large fossil fuel companies, including ExxonMobil and Peabody Coal, to be put on trial for crimes against humanity, accusing them of spreading doubt about global warming. He has also noted that the effect of GHG emissions is determined by accumulated transmissions over their lifetime.

James Hansen called for CEOs

to be put on trial for crimes against humanity


GEORGE MONBIOT A journalist, columnist for The Guardian, academic and environmental and political activist, George Monbiot has written that climate change is the ‘moral question of the 21st century’. He has called for radical action, including issuing

George Monbiot was shot at, shipwrecked and stung into a coma every citizen with a personal carbon ration. He is the author of several books, including Heat: How to Stop the Planet Burning. He also has a list of the top 10 people who deny climate change. In 1995, Nelson Mandela presented him with a UN Global 500 Award for outstanding environmental achievement. During seven years of worldwide investigations, he has been shot at, beaten up by police, shipwrecked and stung into a coma by hornets.

German government and former UK PM

the Nobel Peace Prize on behalf of the IPCC, along with co-recipient Al Gore. He holds PhDs in both economics and industrial engineering.

Mohan Munasinghe warned that change may lead to a ‘fortress world’

PROFESSOR MOHAN MUNASINGHE Sri Lanka-born academic Professor Mohan Munasinghe is vice chairman of the IPCC and director-general of the University of Manchester’s Sustainable Consumption Institute. He is the author of more than 90 books and 300 technical papers on economics, sustainable development, climate change,

DR RAJENDRA PACHAURI As chair of the IPCC since 2002, economist Dr Rajendra Pachauri is an influential figure in the climate change arena. He is also the directorgeneral of the Energy and Resources Institute in New Delhi, which is devoted to researching and promoting sustainable development. In January 2008 he was awarded the secondhighest civilian award in India, the Padma Vibhushan, and in December 2007 he accepted

Jennifer Morgan advised the

JENNIFER MORGAN Jennifer Morgan recently joined the World Resources Institute as director of its climate and energy programme. She moved there from E3G where she spent three years as director of its climate change programme. During this

time, she was key adviser to the German government and advised former UK prime minister Tony Blair on his Breaking the Climate Deadlock project. Before joining E3G, Morgan led the global climate change programme of the World Wide Fund for Nature, heading its delegation to the Kyoto negotiations. She has also served on the Climate Action Network board.

power, energy, water resources, transport, environment, disasters and IT. He has warned that unless governments act quickly to curb GHG emissions, climate change may lead to a ‘fortress world’ in which the rich lock themselves away in gated communities while the poor fend for themselves.

PROFESSOR ROBERT SOCOLOW Robert Socolow is professor of mechanical and aerospace engineering at Princeton University and is known for his views on the technology of climate solutions. His current research focuses on global carbon management and fossil-carbon sequestration. Socolow is also co-director of Princeton’s Carbon Mitigation Initiative, a 15-year research project supported by oil company BP and car maker Ford. Under the CMI, Princeton has launched new research into environmental science, energy technology and geological engineering. Socolow is co-author (with ecologist Stephen Pacala) of Stabilization

Rajendra Pachauri accepted

the Nobel Peace Prize on behalf of the IPCC

Robert Socolow has a PhD in

theoretical high-energy physics from Harvard

Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies. He has a PhD in theoretical high-energy physics from Harvard University.

Many thanks to individuals at the Carbon Disclosure Project, the UK’s Met Office, KPMG, the WWF, SustainAbility and Acclimatise for their help in suggesting potential fantasy dinner party guests.



Leaps and bounds If the UK is to jump ahead in the renewables stakes then it needs to put in some serious training, argues the Renewable Energy Association’s Philip Wolfe


ow is a good time to review the state of the UK renewables industry as we seem to be entering a new phase. April’s gloomy budget highlighted the need for stringent spending cuts to alleviate the weakened state of the economy. Yet it announced more new money for renewable energy than all previous budgets put together. This could be a sign that the UK Government at last recognises that an urgent step change is needed to put us on course for our binding targets and a sustainable future. There also seems to be a new urgency in facing EU renewables targets which mandate 1,000% growth in the next decade. We must now coordinate action. Denmark, Germany, California, Portugal and Spain have showed that rapid market development can be delivered by a coherent policy portfolio combined with concerted government action. Past progress on renewables has been painfully slow. Deployment under the Renewables Obligation has been hampered by a sluggish and unpredictable consenting regime, biofuel suppliers were undermined by a drafting error in the Renewable Transport Fuel Obligation and the UK’s network infrastructure is ill-suited to decentralised energy. Meanwhile, important new measures including renewable energy tariffs and zero carbon buildings initiatives are not due for implementation until 2010–11 and 2016–19 respectively. It is vital that the Renewable Energy Strategy be published imminently and the National Action Plan which follows in 2010 have measures to solve these and a host of other issues. Fortunately, the recession has not thrown the renewables industry into a spiral of decline. Renewables are now recognised as economic and social multitaskers, delivering jobs, employment, growth and innovation while locking in future energy and climate security. There will be intense competition for the emerging sustainable energy markets of the future. Late movers like the UK are in danger of missing out. However, if we all work together to put forward a coherent transformational change plan at the rate required, then it can still be achieved.


Philip Wolfe has worked in the renewable energy sector for more than 30 years. A Cambridge engineering graduate, he was the founder chief executive of what is now BP Solar. He stepped down as director general of the Renewable Energy Association recently, but continues to act for the association in a part-time role.


Credit lines We bring five financial experts around the table to ask how CFOs in Asia develop and maintain strong banking relationships during the downturn

A AF: Presenter, Don Durfee, former editor, CFO Asia SL: Simon Littlewood, president, Asia Now KC: Kelly Chan, financial controller, Moët Hennessy Diageo Hong Kong EN: Estella Ng, chief financial officer, Country Garden Holdings Company CL: Cassandra Lister, managing director, JP Morgan DN: David Ng, chief financial officer, Lippo

s the financial crisis has deepened, many companies in Asia are having difficulty in securing funding as banks become more selective about granting loans. How have finance directors coped with maintaining their liquidity and ensuring their banking relationships remain solid? We asked a panel of five experts in Hong Kong – three finance directors, a cash-management consultant and a banker – what they are doing to keep their businesses surviving and thriving. AF: Have liquidity issues risen higher on your priority lists? DN: Yes, with the economic downturn we are much more concerned about the liquidity of the company, and so we’re spending more time on this issue. Also, the banks are really conservative now and very cautious about lending. EN: Property is a capital-intensive industry. When we’re in a bull market, everyone is looking at yield enhancement and profit margin. When the market is down, liquidity as well as solvency is a top priority for the company. We have to keep ourselves alive before moving forward. AF: Cassandra, is this what you see with your clients? CL: Definitely. They want to ensure that the business continues to operate without any risk of default. We’re seeing clients looking to see how they can optimise their cashflows, not only optimising the yield but also controlling what goes out and what comes in. Ideally, whatever needs to go out goes out as late as possible, and what comes in comes in as early as possible. One of the ways to do this is by automating payment cycles. SL: From the middle of last year, I was starting to hear more and more from clients that cash was an issue for them. There are issues in terms of getting funding, so in some cases credit lines that companies have been able to rely on are


no longer there. And, because asset valuations have gone down, their ability to actually leverage assets and borrow money has also gone down. AF: What are the best ways to cultivate good relationships with the banks, so that the loans will be there when you need them? DN: It is very important to maintain a good relationship with banks. Whenever there is any important event or transaction, we will keep our bankers well informed so that they can be well aware of the development and prospects of the company. After a results announcement, the management of the company always takes the initiative to meet with the bankers and explain to them the financial picture and performance of the company. These contacts are particularly necessary when the company faces a bad result due to the global or operating environment. I think it is particularly essential to keep a good relationship with local banks. For foreign banks, it is equally important to maintain good communication channels and transparency. EN: Other than our normal credit dealings or the half-year submission of the [financial] report, we try to talk to the bankers and tell them about any major activity that’s going to happen, either by newsletter, phone call or meeting. So we at least keep our major banker informed. Also, with some of our credit lines, if possible we try to revise the terms so that they are more favourable. AF: Given the uncertainty that any particular bank is going to survive or be willing to lend you money, does it make sense to start broadening your pool of banks? Or is it a matter of just building closer relationships with them? DN: As a listed company, we need to have a broad and strong banking network and to maintain a good relationship with various local and foreign banks. Thus, when external funds are really required, the company will have stronger bargaining power and greater flexibility.


AF: Cassandra, is that good advice in your experience? CL: For the past few months, the trend has been to diversify rather than consolidate banking relationships. The advice that we give clients is that they should ensure that the banks have interoperability, not just integration. You can create a whole variety of relationships, but if all those banks don’t have interoperability, then moving your cash from one to the other, in times of urgent need, becomes impossible. AF: Kelly, what do you consider to be the right strategy for maintaining bank relationships during a downturn? KC: We have credit line facilities with four to five banks, both international and local banks, so we have diversified our banking relationships. We keep a close relationship with them and keep them informed of what’s going on with the business. They are usually very good in responding to our business requests and reasonably competitive despite the economic downturn. AF: Are there opportunities for companies that manage their cash well?

From top: Kelly Chan; Don Durfee (right); and Estella Ng

SL: Yes, I see companies with good cash positions negotiating very effectively with their suppliers, whose productive capacity is underutilised. So you can go to a supplier and say, ‘I’ll take more from you, but I want a lower price, so there are margin opportunities’. If you’re liquid, you may be in a marketplace where there is an opportunity to acquire market share and you have an undercapitalised customer base, which would be very true of much of China or Vietnam or emerging markets with a distributor structure. Where third parties are responsible for taking your product to the market, they’re typically undercapitalised, so if you have access to funds, you can go out and you can displace competitors, and third, there’s acquisition. AF: Given the ability to access bank funding, does anyone see such opportunities in this market? EN: As Country Garden is the biggest property development company in the industry, the banks are very supportive of us, which is why we have access to banking facilities for when opportunities arise.



DN: We have surplus facility at some of our banks. One of the reasons we ask our banks for additional facilities is for new business opportunities. So, we just have the bank line in place, in case there are some good projects to invest in. AF: Do you agree, Kelly? KC: We keep a few credit lines with a few banks, but we consider utilising the lines selectively for specific business purposes. It’s just for our flexibility and contingency, but the banks often ask us, ‘what’s your plan for optimising or utilising the credit lines?’ At the moment we use them more for dividend issues; we want to benefit or ride the advantage of the relatively low interest rate from the facility. Normally we negotiated on a regional basis with better bargaining power for better offers. And also we have more flexibility in terms of using the facilities; if Hong Kong doesn’t use them, then maybe Japan or Taiwan can. That way, they may feel more comfortable keeping the credit lines open. AF: Cassandra, are there things that companies can do to ensure that they have the best chances of maintaining a good line of credit with banks these days?

From top: Simon Littlewood; Cassandra Lister; and David Ng

CL: It’s important to maintain good relationships with banks. But companies also need to show that they have control over their liquidity. We often advise adopting a framework to ensure you understand the tenure of your cash, establishing control and visibility over your cashflows and having sufficient back-stop facilities in place for emergencies. It’s about shock-proofing your financial operations. We’re seeing clients who are shoring up cash to be prepared for the worst cash scenarios. Once you understand the tenure of the payment received, then you can also adequately forecast and segment your cash both for your actual and potential needs. This article is based on a roundtable discussion held by ACCA in June 2009. Those parts of the debate that related to working capital management were published in the Asia Pacific edition of July’s Accounting and Business magazine. This article extracts some of the comments on access to finance. You can view more of the discussion at



More than academic If small businesses are to thrive then it is vital that they protect their intellectual property, yet many have little knowledge of this area. Accountants can help


ffective management of intellectual property (IP) has a major impact on the ability of small- and mediumsized businesses (SMEs) to access the finance their businesses need. However, too many SMEs appear unwilling – or unaware of the need – to seek advice on protecting or fully exploiting their IP. Intellectual property consists of the proprietary knowledge, skills and relationships that cannot be easily acquired by means of market-based transactions. It is the basis of the uniqueness of individual SMEs and is the source of income flows for businesses. It is therefore a generator of

future value and plays a crucial part of accessing finance. For example, venture capital backers pay close attention to whether IP rights are fully protected and owned by the company they are being asked to back. However, research commissioned by the UK’s Intellectual Property Office (IPO) in 2006, found that many SMEs are oblivious to the importance of intellectual property management. ‘That research found that many SMEs, and particularly micro-firms, are worryingly unaware of how the IP system works,’ says Dr Robert Pitkethly of St Peter’s College, Oxford University, UK, ‘and many small firms don’t



tend to ask for IP advice.’ Those that do receive advice take it from a wide variety of sources – not just from solicitors, patent attorneys and the IPO. These findings inspired new research, again conducted by Dr Pitkethly and funded by the Economic and Social Research Council (ESRC) and ACCA, into how SMEs gain an awareness of IP. It particularly focused on the role of non-IP specialist professional advisers, such as accountants, in mediating IP awareness to micro firms. Preliminary findings were presented at a debate held in May 2009. (Participants’ views are set out below.) The research revealed an IP divide. Some SMEs are highly dependent on IP and also highly IP aware, as are their advisers. Other firms, which may lack IP awareness or think they have a low dependence on IP, may be failing to exploit their IP resources. ‘Improving overall levels of IP awareness is a critical issue for the competitiveness of UK industry,’ Dr Pitkethly says. However, the IP experts needed to raise such awareness, such as patent attorneys, have little incentive to market themselves directly to SMEs because of ample work from more lucrative clients. On the other hand, virtually all SMEs are in contact with accountants. Improving accountants’ basic understanding of IP and contacts with patent attorneys could enable them to play a key bridging role, benefitting both themselves and their clients. ‘Too many [SMEs] underestimate the impact that IP management can have on their businesses – whether in protecting inventions or brands, or in helping to attract essential funding from venture capital backers,’ says Professor Ian Diamond, chief executive of the ESRC. ‘The research findings indicate that accountants can play an important role in bringing IP issues to their SME clients’ attention. This could be a valuable area for further investigation by the accountancy profession itself.’ ‘SMEs are crucially important to the health of the UK economy,’ he adds. ‘If SMEs are to fulfil their potential, they need to maximise value generation from their intellectual property. Sarah Perrin, journalist PROTECTING MY INVENTION Tanya Ewing (pictured), creator of Ewgeco and British Female Inventor of the Year 2008 ‘Ewgeco is a utility monitoring device that shows real-time usage levels of electricity, gas and water, and calculates a building’s carbon


footprint. I had the idea in April 2006, after receiving a large gas bill and struggling to link it to the information on my meter. I started sketching what I thought a meter should look like and that ultimately led to Ewgeco. The business now employs seven people in Scotland and was valued at £3.4m in September 2008. ‘We are currently going through our third round of fundraising, and are aiming to get the maximum value from our IP. In our first two rounds we raised £920,000 from business angels, and our IP was vital. Everybody always wanted to know who owned the IP (the company does) and how well it was protected. Our IP is very well protected. For example, we use many consultants and all of them sign assignation agreements. Therefore, the


exploit their ideas. I’ve also benefitted from the Intellectual Assets Centre in Glasgow, which helps organisations manage their intellectual assets. ‘For the past 15 months we’ve been advised by law firm McClure Naismith, which is helping us to commercialise the IP in our company and advising on the management of IP costs. You could spend huge amounts on IP protection, so you need to prioritise – for example, taking action only in overseas markets where you are most likely to trade.’

company owns anything they work on, such as product design, feasibility or electronics. We have applied for a patent and protected the look of the meter through design registrations, and the Ewgeco name through a trademark. ‘My search for IP advice started with the Intellectual Property Office website. I received a lot of help via the Innovators Counselling and Advisory Service for Scotland, which offers free advice to help people protect and commercially

BEING AWARE Dr Robert Pitkethly, St Peter’s College, Oxford University ‘SMEs often ignore IP issues until forced to consider them, perhaps by the threat of infringement proceedings or failing to raise finance from sources that pay close attention to IP management – such as venture capitalists. Venture capitalists are very switched on to the need for IP rights in firms and can be crucial in getting SMEs to talk to IP experts. ‘The reluctance of many SMEs to consider IP sufficiently is not just due to lack of ‘effective IP awareness’ but to a lack of ‘IP value awareness’. SMEs tend to emphasise the upfront costs of some forms of IP protection, but are less focused on the potential benefits or value that they can bring. Some SMEs simply ignore the IP issues altogether. ‘Web-based information, such as that provided by the Intellectual Property Office, has a significant role to play in raising awareness. It is free and can provide a useful route to advice. The difficulty, however, lies in getting SMEs to ask the initial question about why IP is important. ‘The firm’s accountant, who could guide their client towards expert IP advice, could prompt this question. However, many accountants are not doing this. The vast majority appear to have no contacts among patent attorneys and do not refer work to them. However, accountants have a vested interest in giving clients introductions to good advice because their clients will be more successful and everyone benefits. ‘Increasing the IP awareness of accountants might be achieved by the addition of IP issues to checklists, designed to ensure that issues

‘Accountants can play an important role in bringing IP issues to their SME clients’ attention. This could be a valuable area for further investigation by the accountancy profession itself’



critical to clients are not missed. In research, the reaction of accountants to this idea was generally positive. However, people using the checklists need to understand the questions, so if IP issues are included, appropriate training will be needed. Otherwise, the process could descend into a mindless box-ticking exercise.’ IP ACCOUNTING NEEDS ADDRESSING Professor Robin Jarvis, head of SME affairs, ACCA ‘Access to finance is an issue for SMEs, and in particular it is more difficult for knowledge-based businesses with large amounts of intangible assets to raise funds externally. Banks still look for tangible assets. Accountants have a role to play here, in terms of getting IP recognised in some form in the annual financial reports. It’s a problem that standard-setters do not recognise knowledge-based value in financial reports. This is an area of accounting and reporting that needs to be addressed. ‘When people talk about intellectual property, they tend to use a restricted definition – IP that attracts legal ownership, as in IP rights. I would like to think more broadly, using a definition that interprets IP as knowledge-based, non-physical resources capable of generating future earnings. It’s a definition that extends IP to include customer links or employees with proprietary knowledge – generators of value for the business. Gaining patents and formal IP rights is important for locking in value. But even without a patent, for example, there can be an income stream and that income stream generates value. ‘Dr Pitkethly’s research sets out an important challenge to the accountancy profession to develop skills and knowledge to help SMEs understand the value of intellectual property. Some firms do give that advice, but they are in the minority. ACCA is helping them to do that, for example, by including IP knowledge in appropriate continuing professional development.’ USING IP TO BOOST YOUR BUSINESS Matthew Dixon, partner, Harrison Goddard Foote and council member, Chartered Institute of Patent Attorneys (CIPA) ‘It’s not just IP awareness that’s important for SMEs. A lot of people know the words that are associated with intellectual property – trademarks and patents and so on. But what’s really important is understanding how to use IP as a tool to help your business succeed. Businesses make money – not patents.


Among those taking part in the debate on ‘Increasing SME Competitiveness through IP Awareness: the Role of Advisers’ were Robin Fry (pictured above left), Matthew Dixon (above right), Robin Webb (opposite), Tanya Ewing (previous page) and Dr Robert Pitkethly (first page of this article).

‘That said, it’s particularly important for technology businesses to consider patents, and it’s important for SMEs generally to understand how to lock value in – through making sure they own important copyrights, for example. People seek registered IP rights because it’s easier to show these to investors than to explain where your copyright lies. I advise clients to make copyrights more visible as an investor-friendly portfolio. ‘The experience of the management team has a big impact too. The most effective clients of patent attorneys typically have past IP experience – often they have been on the right (or wrong) end of an IP suit, or a successful trade sale, and have seen first-hand the actual value of the IP involved. ‘CIPA has put together case studies showing how people have used IP to further their business. These are not dry interpretations of the law, but practical examples people can use for inspiration.’ SAVING MONEY LATER Robin Fry, partner, Beachcroft LLP and member, Law Society’s Intellectual Property Working Party ‘It might be assumed that the businesses which most need IP advice are either high tech or in the creative area. But every business uses others’ intellectual property in some form. And


if an early-stage business inadvertently infringes another’s trademark or design, an IP claim against it could be devastating. All businesses should of course seek to protect their own IP rights: register product and company names as trademarks, ensure they own their domain name and assign all copyrights of staff and external contractors into the company. This can save a huge amount of money later on. ‘Where businesses hold their IP is also important. For a manufacturing or retail business, there is always the concern of insolvency. And if that happens the IP may end up with the liquidator. For trading companies, our advice is to consider placing all IP outside the company – either with an individual founder or, better, in a discrete IP holding company. It is then licensed down into the trading company but reverts up automatically in case of insolvency. Arrangements can ensure that external investors can be fully protected as well. Astute advice at an early stage can be very valuable to both the founders and the investors later on.’ MAKING INFORMED DECISIONS Robin Webb, innovation director, Intellectual Property Office (IPO) ‘Achieving the necessary step change in IP awareness among the huge number of UK SMEs will be a major challenge. You have to get the communication channels for engagement right. ‘This has become easier – people automatically go to the internet for information now. The IPO website is an invaluable tool for providing information. But the trick is to engage the people who have day-to-day contact with businesses. So at the IPO, we are thinking hard about how we can help intermediaries – about what information we can make available to them that they would find helpful, and about how we can explain why they might want it. It would be great, for example, if accountants could give their clients starter advice on intellectual property, and then refer them to the IPO website and the IP healthcheck for SMEs there. ‘Intellectual property rights are a means to an end – it’s realising the value in the intellectual property that’s the name of the game. Having a patent or a trademark doesn’t solve every problem, but generally it increases – sometimes dramatically – the ability to secure value from IP. Above all, businesses need to make informed decisions – about both how they will protect and exploit their intellectual property and the valuations placed on it.’

ACCA event: The material in this article is based on a debate held by ACCA in partnership with the Economic and Social Research Council (ESRC) and the Intellectual Property Office. Held in May 2009, it was entitled ‘Increasing SME Competitiveness through IP Awareness: the role of advisers’



Nourishing tomorrow’s Microsofts SMEs are critical to the future of the world economy but face a tough borrowing environment. IFAC president Robert Bunting says the profession can help

Robert Bunting became president of the International Federation of Accountants (IFAC) in November 2008. He was previously deputy president and a member of the IFAC board. As deputy president, Bunting served as chairman of IFAC’s planning and finance committee, where he led the organisation in the development of its operational and strategic plan for 2009–12. Bunting is a partner at Moss Adams LLP where he served as chairman and CEO from 1982 to 2004. Moss Adams LLP is a member of Praxity (formerly Moores Rowland International) where Bunting served as chairman from 1998 to 2004. From 2004–05, Bunting was chairman of the board of directors of the American Institute of Certified Public Accountants (AICPA).



ould Sir Richard Branson have started his first record business in this economic climate? Could Steve Jobs ever have moved Apple out of his garage? Think of Microsoft, Genentech, Google, and IKEA. They were all at one time small businesses and today are some of the largest companies in the world. Each found its own unique path to growth, but they shared a common challenge: the need to obtain funding at various stages in their development, along with some good advice on how to use it. During an economic crisis, it is more critical than ever for small- and medium-sized enterprises (SMEs) not only to find the funding they need to grow, but also to determine how they can manage their businesses more effectively and minimise future risks. Professional accountants, especially small and medium practices (SMPs), have been at the forefront of serving the SME community and its changing needs for decades. Now they need to be even more attuned to the needs of small businesses so they can help them keep their doors open. In fact, they can’t afford not to. SMEs are critical to the future of the world economy. According to the Organisation for Economic Cooperation and Development (OECD), ‘a thriving SME sector is essential for job creation, social cohesion, innovation and growth in advanced industrialised countries’. (See the rise of the small business, right). UNIQUE CHALLENGES Despite the dominant role that SMEs play in fuelling economic growth around the world, they are caught in the financial turbulence of the current financial crisis. Even though there are some signs of recovery, smaller businesses are still finding it hard to obtain capital and credit, sustain retirement plans, and meet regulatory and compliance requirements. While a recent American Express Small Business Monitor survey showed that 37% of small businesses see growth opportunities in the next six months, with 28% planning to recruit to exploit them, it also found pessimism among small business owners. One of their greatest

THE RISE OF THE SMALL BUSINESS SMEs account for over 95% of enterprises and between 60% and 70% of employment in OECD countries. In the US, companies with fewer than 500 employees account for more than half the non-farm private domestic product (80% of all domestic product) and about half of all private-sector employment. Source: US Small Business Administration’s Office of Advocacy. According to a BusinessWeek report, from the Pioneers of Prosperity Africa Awards last year, the outlook for emerging businesses in health insurance, information technology, and media ‘is helping Africa move from developmentaid recipient to a mainstream economic player’.




Professional accountants worldwide can serve as

advocates for the needs of SMEs not only to bankers, but also to governments and regulators

concerns is getting credit, and with good cause, considering SMEs’ reliance on credit cards and bank loans to finance large purchases. The borrowing environment is difficult for SMEs, which may have challenges even at the best of times. According to the OECD, SMEs are particularly vulnerable to the credit crunch; entities with the weakest financial structure and lowest credit ratings suffer most. Bankers may look unfavourably at SMEs just because they are smaller – and may deny them access to the capital and credit that are made more readily available to larger entities. These funds would help them grow and attain the mass to better control costs, branch out, or form appropriate alliances. A number of banks have also suspended credit lines for large numbers of business owners, while local banks have raised loan restrictions. In addition, some changes in regulation place additional burdens on SMEs, even though the SMEs are not the target of the regulation. IMPROVING THE LOT OF SMEs So what can be done to help struggling SMEs become the successful companies of tomorrow? Regulators, at least, are giving SMEs some breathing room. In the US, the Securities and Exchange Commission has again postponed compliance with Sarbanes–Oxley’s reporting requirements for small businesses and the International Accounting Standards Board (IASB) continues to give special attention to SMEs. The new IFRS for SMEs ‘provides a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies’, according to the IASB, and can lower costs for financial statement preparation and auditing. The International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants also consider input from small companies in the development of their standards. SUPPORT FROM SMPs SMPs, which are frequently seen as the greatest allies of SMEs – because they share and


IFAC INITIATIVES SUPPORTING SMPs AND SMEs Free downloadable guides (see www. on business planning, quality control for SMPs, and using International Standards on Auditing (ISAs). Policy paper on Single Set of Auditing Standards – Implications for SMEs, see Redrafted ISAs (effective 15 December 2009), including FAQs and resources to aid implementation at clarity-center/index International Center for Small and Medium Practices – includes current resources, news, SME/SMP discussion board and relevant links, see

understand some of the same challenges as SMEs – are best positioned to help their smaller clients to grow. There is much that SMPs can do to make their SME clients’ lives better – and enhance their own value at the same time. First, it is important to let them know their business and their industry is understood, including the issues they are facing and how they can be addressed. Second, the SME’s potential can be highlighted in order to create a vision for change. Third, an SMP can provide the tools and support needed to help the SME achieve that vision, such as particular management advisory services. SMPs can also advise smaller business clients on important areas relating to the credit crisis, such as reassessing capital investments, tax planning, and evaluating accounts receivable and credit lines. Services to the client might also include subjecting proposals to robust analysis and applying realism to overly optimistic goals. SMPs can also consider sharing information on risk management, fraud prevention, and human resource issues, among others. By providing services that can help the client prepare his or her company to weather the economic crisis and ultimately thrive, SMPs enhance their own value. A CRITICAL ROLE IN FINANCING When it comes to SME financing, the knowledge and professional service of SMPs can greatly enhance an SME’s chances of securing a loan. Lenders often focus on a narrow range of information, including the business plan and the quality and liquidity of the collateral used to secure the loan. SMP professionals can help SMEs determine what kind of loan best meets their needs, introduce them to a banker who respects his or her judgment and, in general, provide the financial advisory assistance that allows clients to spend their time on their businesses. Professional accountants can assemble the loan documents in a way that showcases the information that banks look for (so that small business clients get the financing they need). This


includes identifying and describing the assets of the business – or what the entrepreneur personally will offer as collateral – the terms of existing debt obligations, and a robust discussion of how the loan proceeds will be used. Importantly, professional accountants worldwide can serve as advocates for the needs of SMEs not only to bankers, but also to governments and regulators. THE ROLE OF IFAC The International Federation of Accountants (IFAC) speaks out on the behalf of SMEs through wide-ranging outreach activities and support of its member organisations.

For example, IFAC emphasises that any new regulatory proposals consider the needs of all small businesses to ensure that unnecessary or unintended financial and other burdens are not placed on them. Additionally, through committees and boards, it considers how best to assist the world’s SMPs in delivering high-quality relevant services to the SME community. Some of those services are listed opposite. Finally, it is exploring new service areas, such as the ability for SMPs to offer alternative assurance services to SMEs. In these ways, IFAC is enhancing the role and strength of SMEs in the global economy.

IKEA has grown from a small business to an international retail giant with stores in international centres such as Beijing.



A small door to big business Accountants are small businesses’ preferred source of advice, so the UK Government should consider channelling support via practices, says ACCA’s Professor Robin Jarvis




Professor Robin Jarvis is ACCA’s head of small business. He also chairs FIN-USE, a panel set up by the European Commission to address financial services issues. He is also a director of the Institute of Small Business and Entrepreneurship. His current research interests include financial reporting for small entities, the demand for the voluntary audit and the role of the accountant as a business adviser. He is the author of nine books and has written and published numerous research papers.

Previous page: UK business secretary Lord Mandelson (left) with prime minister Gordon Brown at the Labour Party Conference in September 2009



overnments have always recognised the contribution made by small- and medium-sized enterprises (SMEs) to the economy. A good illustration of the UK Government’s interest in this sector, going back some years, is that of 1931, when Ramsay MacDonald’s coalition Government set up the Macmillan Committee to examine the problems that small businesses were experiencing accessing finance – and you can guess the state of the economy then. The committee was chaired by Lord Macmillan, the eminent Scottish law lord, and included the economist John Maynard Keynes, and trade unionist Ernest Bevin, who later became foreign secretary. So what has changed, if anything? The national media, in the current recession, has reported on a number of statements made by Gordon Brown and his Government concerning problems that SMEs face in accessing finance. The difference between past and present is the extent to which the economy relies on

SMEs and particularly the smaller businesses. According to a University of Cambridge paper, SME Finance and Innovation in the Current Economic Crisis, the Government currently spends £4.3bn in addition to the £3.6bn worth of tax breaks per annum supporting SMEs, so it is critical that this investment is directed at those businesses that are making the most important contribution to the UK economy. The extent of our reliance on SMEs, and the landscape of businesses across our economy, often comes as a surprise to many. Knowledge of this reliance and SME needs is critical to Government in developing policy, as well as to accountants, who are the main providers of business support to SMEs. A reasonable starting point in examining the growth of SMEs in the UK economy is the comparison of the number of business entities in the UK private sector between 1980 and 2007 (the latest statistics). The early 1980s is often used as a base in such comparisons, as


this was the time when there was a significant restructuring of the UK economy under the Thatcher Government. In 1980, there were 1.9 million business entities, compared with 4.7 million in 2007. This increase is also reflected in other economic indicators, such as employment, where nearly 60% of the private sector working population now work for SMEs. On the right are some of the reasons why there has been this change in the influence in the economy from large industrial companies to SMEs. SIZE ISN’T EVERYTHING We can explain the persistence and growth of small firms by all of the above to some extent, but what we could also argue is that small firms are complementary to large ones. In many ways, SMEs carry out functions that would not be economical for large companies because of the limited size of the market, or because personalised service can give a competitive edge. Another very important factor is that in many economies, it is the SMEs that are responsible for innovation, not the large corporations. For example, current IFAC president Bob Bunting often quotes that for every 13 patents issued in the US, 11 are issued to SMEs. One of the biggest debates surrounding SMEs is what constitutes an SME. The most common definition in the UK is that provided by the European Commission. The criteria the EC uses as a measure are the number of employees, turnover and net asset value. Taking the number employed as an example of one of these measures, the definition for an SME is an entity that employs fewer than 250 people. The characteristics and the needs of SMEs vary significantly within this definition. Consider, for example, the one-person business as compared with a business that employs 249 staff. The extent of the concentration of SMEs in terms of size is also an important factor that should drive Government policy. Seventy-four per cent of the business entities in the UK currently are one-person businesses, covering nearly 17% of the working population.

Many businesses in the traditional industries have failed because of falling demand and changes in working practices. Changes in technology – small enterprises can now compete with large firms in some industry sectors by catering to niche markets. SMEs are delivering services to large firms which could previously only have been delivered in-house within these large firms. Privatisation has also played an important role, where many economies have experienced moves to privatisation of publicly owned businesses. This policy often allows SMEs to take on supplier contracts from public entities. There has been a move to a more entrepreneurial environment through the encouragement of risk-taking.

So-called micro-businesses (defined as those that employ fewer than 10 people), including one-person businesses, represent 95.7% of business entities in the UK and employ 33% of the total working population in the private sector. From these statistics it quickly becomes apparent that a significant proportion of SMEs are smaller entities. A more insightful view of the economy can be obtained by examining the patterns of business activity over the past five years. The growth rate of small businesses (those that employ less than 50 people) over this period has been 20%. In contrast, medium and large business entities have been declining both in number and in the number they employ. Employment in small businesses during this period increased by 880,000. For every job created by a mediumsized business, small businesses have created 37 new jobs. What are the implications of this profile of SMEs in the UK? From the Government’s perspective, they should be supporting smaller businesses through the recession. The problem is that, arguably, they do not know or understand these businesses. For example, many believe that the recent proposal by the European Commission and promoted by the UK Government to take micro-companies, some 84% of the total companies in the UK, out of the requirement to file financial reports, has not been fully thought through. From the accountancy profession’s perspective, independent evidence indicates that professional accountants in practice are the preferred sources of advice to small businesses. This is perhaps not surprising because it is these smaller business that do not have the resources to address many of the administrative requirements of running a business. This advice is not just restricted to compliance work but extends to advice, for example, on employment law and health and safety legislation. Government would do well to recognise this situation and to consider delivering its initiatives to provide support through accountancy practices.



The future evolution of audit The recent credit crisis has put the spotlight once again on auditors. The audit profession needs an overhaul if it’s to survive, says Dr Steve Priddy



audit, an examination of accounts by an authorised person or persons: a

calling to account generally: a statement of account: a periodical settlement of accounts (obs.): audience, hearing (obs.)


he audit function is probably coterminous with human society. The presence of auditing has been inferred from records of a Mesopotamian civilisation going back as early as 3500 BC. These records, involving financial transactions, displayed a variety of markings that may be construed as a system of verification. Internal controls and separation of duties probably arose at the same time. Ancient Rome employed the ‘hearing of accounts’, where one official would compare his records with those of another – an application of both separation of duties and verification. But it wasn’t until the Industrial Revolution in Europe that auditing with characteristics similar to current auditing – that is, beyond the hearing of accounts to include verification of accounting records and associated supporting documentation – came into being. Yet despite this long history, the purpose of audit is now in question. While there were similar periodic bouts of questioning during the corporate collapses in the 1980s and 1990s, the worldwide financial crisis of the past two years has given the issue a new urgency. Focusing on that narrow subset of audit – statutory external financial audit of private sector entities – the evidence will be based on the UK market, although the challenges faced by the audit profession have a wider international resonance. Audit is at a crossroads and is suffering from criticisms that have plagued its practice for many years. The understandable public demand for financial reforms following the current economic recession may fundamentally recast audit into unpredictable and possibly detrimental forms for organisations and society. Puzzlingly, for such a fundamental human function, there is little documented research on the value audit brings to society. A notable exception is Marleen Willekens’ 2007 report: The Effects of External Auditing in Privately Held Companies: Empirical Evidence from Belgium. For her study Willekens sampled 1,332 relatively small companies whose size criteria was about the legal threshold for mandatory audit in Belgium; and 6,890 companies of all sizes. It


Dr Steve Priddy is ACCA’s director of technical policy and research. For more details, see page 10.

sought to test the association of submission to audit with several characteristics of benefit to civil society: a reduction in earnings management; good tax regularisation and disclosure practices; overall financial performance results, and cost of debt levels. MAKING A DIFFERENCE The report’s conclusions were clear: ‘We find that auditing does make a difference. First, earnings management is lower in audited companies, and further also decreases in the level of audit demand. Second, tax regularisation disclosure is higher in audited companies, and further also increases in the level of audit demand. Third, we also find that overall financial performance is higher in companies that are audited. However, the latter result only holds for the sub-sample of very small firms that adopt a limited disclosure schedule of financial reporting. Finally, we do not find evidence that supports the hypothesis that cost of debt is, ceterius paribus, lower in audited companies versus unaudited companies.’


Yet this relatively positive message about the value of audit has been largely ignored by governments and policymakers, who have been keener, in recent years, to reduce the number of businesses subject to statutory audit. By portraying audit as synonymous with red tape and a ‘burden’ from which small businesses need to be freed, they have undermined its value. The EU has steadily increased the audit threshold over the past decade to the current level of £6.5m from 6 April 2008. This covers comparatively large businesses with up to 50 staff. There appears little official awareness of the scope for fraud that the absence of audit might engender. At the larger end of audit, the mood is similarly negative. The criticisms of the audit profession and its role in the banking crisis, by the UK’s House of Commons Treasury select committee’s recent report: Banking Crisis: Reforming Corporate Governance and Pay in the City, has some depressing observations. The report states: ‘The fact that the audit process failed to highlight developing problems in the banking sector does cause us to question exactly how useful audit currently is. We are perturbed that the process results in “tunnel vision”, where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures. ‘We remain concerned about the issue of auditor independence… Representatives of the

The fraud and subsequent bankruptcy at Italian food giant Parmalat is one of a number of scandals in the past decade that have damaged the reputation of audit.

investor community told us of their scepticism that audit independence could be maintained under such circumstances. This problem is exacerbated by the concentration of audit work in so few major firms. We strongly believe that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the Financial Reporting Council (FRC) consult on this proposal at the earliest opportunity.’ ACCA’s oral and written evidence to the committee, see overleaf, sought to explore how audit might evolve and generate greater value. But the problems and barriers to change were also raised by other participants. Professor Michael Power of the London School of Economics, for example, while being open to reform, said that it was not ‘reasonable’ to expect auditors to be challenging business models and raising strategic issues with finance directors, because that was not their job ‘and if we want it to be their job, then things would have to change quite substantially’. This point was also taken up by Jonathan Hayward of Independent Audit who said ‘there is no evidence to suggest that the auditors have failed to do that which they are obliged by duty to do, the issue is around whether they should have been doing something else’.



The report also mentioned that: ‘The FRC warned that any proposals to extend the purpose and intended audience of statutory audit would need to consider the competence of auditors to perform the new requirements, the costs involved, the exposure of auditors and others to liability risk, the need for legislation, and international considerations such as UK competitiveness.’ MALAISE AND THE SOCIAL GOOD This litany of problems – are auditors doing the wrong thing? Is it too difficult to change the audit fundamentally? – and an over-defensive posture and long list of what a statutory audit is not about, is at the heart of the malaise draining the profession of its ability to provide a social good. In fact, if we look at what auditors should do, a moment’s reflection points to significant ways in which the audit role can evolve and recover its relevance. According to the FRC, from the same Treasury select committee paper, the primary purpose of an audit of the financial statements is for the auditor to provide the shareholders with an independent assurance that the directors have prepared the financial statements properly. Let us consider the nature of financial statements as they exist today. Such statements purport to be a historical record of the financial performance of the organisation. But as with any historical account, specific conditions of existence shape that history. And importantly, financial statements – particularly where they are prepared on a going-concern basis – incorporate fundamental assumptions about time future as well as time past. In terms of provisions – the useful economic life of assets, the outcome of long-term contracts, valuation methodologies, discount and compound factors – historic financial statements are, in fact, saturated with a view of how the future will be. And at the heart of that view is the organisation’s business model (see right). How the organisation generates its turnover and its profits and losses is also impacted. The next stage in evolution of the audit process is developing the skills and the ability to understand and then critically engage with the business model. Indeed, ACCA in its written evidence to the Treasury, has argued that revisiting the idea of the Operating and Financial Review (OFR) would be a productive step since it would allow boards of directors to more transparently set down their model and the risks and mitigations associated with the sustainability of that model.


If the OFR were audited in a manner of critical engagement, the value of statutory audit would be increased substantially.

An organisation’s business model covers almost every aspect of its operations. It is impacted by factors such as: the firm’s competitive environment and market share place in the supply chain resource and human capital constraints customer relationships major supplier relationships access to finance form of ownership regulatory shifts and appetite for risk.

BIG FOUR DOMINATION The malaise of audit today is not simply in the negativity of its offering. The UK market continues to be dominated by the Big Four audit firms and this causes concern, not least among the UK regulator, which has repeatedly expressed concern about the impact on capital markets should one of the major firms exit the market. Others have expressed concern about the stifling of competition where such an oligopoly exists, both in terms of pricing, but also of innovation in auditing theory and practice. As a career, auditing is still perceived negatively by both practitioners and observers. This is a shame because audit training provides first-hand experience of the wealth of businesses and business models that comprise an economy and allow it to grow. The UK regulator has sought to address audit’s malaise via a range of activities, including the use of limitation of liability, as long as it is proportionate and appropriate. ACCA supports this – it is folly to have the axe of unlimited liability hanging over the profession, particularly in the audit of large complex institutions. The regulator has encouraged the disclosure of audit fees and profits to open up competition. But despite these measures, the numbers of firms in audit inexorably declines and as long as audit is perceived in such a negative light, it is doubtful whether that decline can ever be reversed. In all of this the passivity of the profession itself is remarkable. Aside from the past two years of banking crisis, the trends, characteristics and criticisms of statutory audit have not changed in 30 years. Is it that the profession lacks a hero, such as Sir David Tweedie is a hero to the accounting profession? Or is there institutional numbness, or complacency that things will carry on in the future just as they carried on in the past? Whatever the reason, the recent Treasury select committee hearings and publications should serve as a wake-up call. There is much to be done, not least in simply understanding what auditors do. As Professor Power put it to the Treasury committee: ‘What is it that auditors know, what is it they do, what is it they are capable of doing, who do they rely on in order to carry out their work? I think if we open the black box and have a look at that, there are some very interesting questions to be asked.’ Precisely.


Annual reports: dead or alive? PG61 EDITION 01


ACCA’s Dr Afra Sajjad looks at the past, present and future of narrative reporting and how it can make the annual report a useful and living document


he increasing interest in the reporting of intangible assets and triple bottom line has resulted in suggestions for adopting a new business reporting model to substantiate the diversified information needs of the users of annual reports. To an extent, the preparers of contemporary annual reports have met this challenge by using narrative reporting to bridge the information gap. In its various guises – business review, management commentary, management discussion and analysis, chairman’s statement, corporate governance statement, environmental statement, remuneration statement, and health and safety statement – narrative reporting has become a significant segment of the annual report in many parts of the world. Standard-setters have shown a keen interest in narrative reporting. The idea of narrative reporting is a familiar one in the US, where, since 1968, the Securities and Exchange Commission’s disclosure requirements have required inclusion of management’s discussion and analysis (MD&A) of financial conditions and results of operations in the annual reports. MD&A is also an essential element of the annual report for public companies in the US. There is a requirement in Canada that the financial statements and the MD&A for public companies should be approved by the board, and neither document is to be distributed without the other. EUROPEAN REQUIREMENTS In Germany, since the 1930s, there has been a requirement for narrative reporting in the form of a management commentary. In 1978, the European Union introduced a requirement that the reporting package of financial information should consist of financial statements and the annual report, specifying that the annual report ‘…must include at least a fair review of the development of the company’s business and of its position’ (Article 46, Fourth Directive, 1978). The requirements for a management commentary type of reporting are set out in various legal instruments adopted by the European Union, in


Dr Afra Sajjad is the head of education and policy development, ACCA Pakistan. She also oversees education initiatives aimed at giving students study support and leads ACCA’s narrative reporting technical work. With a doctorate degree in financial reporting from Dublin City University, her research interests include corporate governance, ethics and Islamic finance.

particular the Fourth and Seventh Company Law Directives (1978 and 2003). The International Federation of Accountants (IFAC) is also taking a keen interest in the development of an updated series of best practices for improving narrative reporting globally. In the UK, there is Reporting Statement 1, which outlines guidelines for the preparation of the operating and financial review, and under the Companies Act listed companies are required to include an extended business review in the director’s report. In April 2006, the International Accounting Standards Board (IASB) issued a discussion paper on management commentary. It identifies the management commentary as the primary component of an annual report alongside the financial statements and accompanying notes. The paper considers narrative reporting to be


an opportunity for an entity’s management to comment on the business model by providing a context for the financial statements. The management should aim to disclose balanced, reliable, understandable, comparable and relevant information, both historical and futureoriented, about the main trends and factors underlying the development, performance and position of the entity concerned. Recently, the IASB has issued for public comment a proposed non-mandatory framework providing guidance aimed at improving the consistency and comparability of narrative reporting across jurisdictions. This is intended to help reporters prepare and present a management commentary. The exposure draft is open for comment until 1 March 2010. WIDER VIEW Sustained by standard-setters’ initiatives aimed at enhancing the transparency and value of annual reports, businesses have taken an extremely holistic approach to narrative reporting. Narrative reporting has supplemented and complemented financial statements by including information on the nature of the business, strategy and structure, customers, human resources, innovation, intellectual assets, supply chain, economic performance, operating performance, brands, environmental, social and ethical performance, risk and uncertainties, and corporate governance. This disclosure has been made in various formats – text and figures, illustrations and graphs, key performance indicators and case studies. Write from the Start, a recent Deloitte survey of narrative reporting practices in the annual reports of UK companies, reveals that narrative reporting makes up 54% of the annual report. Businesses’ substantial investment in data collection and the production of narrative reporting raises the question of whether the users of annual reports consider narrative reporting information to be value-relevant. An ACCA research report, Narrative Reporting: Analysts’ Perceptions of its Value and Relevance, states that despite the ‘volumetric expansion’ of narrative reports, most of which are voluntary, there is little systematic evidence of how, and by whom, narrative reporting information is consumed. PricewaterhouseCoopers’ 2007 Survey of Global Fortune 500 companies describes ‘contextual narrative reporting’ as a means of reducing the complexity and opacity of today’s annual reports. ACCA’s research report concludes, however, that there is a need to

Narrative reporting in emerging markets Ranhill Utilities Berhad (RHB) Listed on the Kuala Lumpur Stock Exchange, Ranhill Utilities Berhad (RHB) is Malaysia’s leading water company, with a presence in Malaysia, Thailand, China and Saudi Arabia. The Malaysian Stock Market regulatory obligations compelled RHB to include a narrative corporate social responsibility (CSR) reporting section in the company’s annual reports. As RHB gathered and analysed environmental and social performance and corporate governance-related data for disclosure in the annual reports, the company’s management came to appreciate the idea of narrative reporting. Managers believe it facilitates enhanced holistic understanding of the business processes, resulting in improved streamlining and integration of different processes. This results in increased awareness and analysis of supply chain procedures, stakeholders’ engagement processes and other business processes aligned with CSR principles and their possible disclosure in the annual reports. Being a signatory to the UN Global Compact and following the Global Reporting Initiative guidelines, RHB takes a structured approach to corporate responsibility disclosure. As for the future of narrative reporting, RHB believes that CSR narrative reporting is no longer optional. It is a must if companies want to provide value-relevant information to the users of annual reports and at the same time want to assess the complete picture of the company so as to ensure its sustained growth. RHB also says annual reports are a useful framework for providing information about non-financial performance and position, and it foresees more and more companies converging and harmonising their annual report and sustainability report.



explore the users’ understanding of narrative reporting information. Volumetric expansion may have resulted in information overload, which in some cases may be contributing to the complexity of annual reports. The report calls for research into the exploration of the use of narrative reporting by its users, and concludes that ‘at a fundamental level’ analysts, who are the main users of annual reports, do not consider narrative content to be useful, while others struggle to understand it. LOST OPPORTUNITIES In the absence of any regulatory frameworks that specify the contents of the narrative disclosure, it is observed that narrative reporting preparers are opting for the ‘safe’ option of saying the bare minimum – including key performance indicators that are positively skewed at times and not easily understandable, and that still focus on historical financial measures – resulting in a boilerplate style of narrative. Businesses are therefore possibly losing a convenient opportunity to use narrative reporting as a strategic tool for building trust and rapport with stakeholders by transparently communicating historical and future-oriented information. Despite the inclusion of narrative content, annual reports are therefore falling short of fulfilling the information needs of users, which would be achieved by enabling a wider, more holistic users’ assessment of the financial and reputation risks facing the company and thus facilitate informed decision-making. Concerns about the credibility of the narrative disclosure have also been raised, as the level of audit and assurance attached to narrative reporting is far less rigorous than that for the financial statements. The inceptors and promoters of narrative reporting conceived it as a framework for including historical material, as well as future-oriented information about risk, financial position and performance, thus facilitating a judgment about the viability of a business. Has narrative reporting achieved these ideals? The absence of objective and meaningful risk reporting in annual reports has led to proposals

about the evolution of risk reporting. Specific, well-rounded quantitative disclosure of strategic, operational, market, credit and reputation risk assessment, estimation, impact and management would increase the value relevance of risk reporting. It would also reduce the information asymmetry that exists between an entity and its stakeholders. Write from the Start notes that in line with the demands of current economic conditions, 89% of the surveyed UK companies are including some form of risk information in their annual reports. The risk disclosure remains generic, however, with limited discussion about managing the challenging economic conditions. The going concern statements in the annual reports include the bare minimum statutory information, therefore, an opportunity to provide robust future-oriented information about the financial business position, performance and viability to the users of those annual reports is being missed. An ACCA research report, Narrative Reporting: Analysts’ Perceptions of its Value and Relevance, states that despite the ‘volumetric expansion’ of narrative reports, most of which are voluntary, there is little systematic evidence of how, and by whom, narrative reporting information is consumed. The report can be found at www.accaglobal. com/narrative

RELEVANCE TO READERS The future of annual reports depends upon their ability to satisfy the information needs of their users. With a glaring spotlight on transparency in reporting, the value of annual reports to their users is again a subject for discussion. The popularisation of narrative reporting earlier this century had enabled annual reports to address the challenge of the knowledge economy, which is underpinned by the growing prominence of intangible assets. The future of annual reports also depends upon both the ability and willingness of narrative reporting preparers to take account of users’ reservations about the value relevance of these reports and the preparers’ appreciation of the potential of narrative reporting for fulfilling users’ information needs. To achieve these aims they need to include reliable, relevant and understandable historical and future-oriented risk management, business forecasting and financial and non-financial measures of performance. But there is hope. If economic growth gave rise to the popularisation of narrative reporting, the economic slowdown could lead to its maturity.

If economic growth gave rise to the popularisation of narrative reporting, the economic slowdown could lead to its maturity



Narrative reporting in emerging markets Pakistan Refinery (PRL)

UEM Environment UEM Environment is a Malaysian private limited company that supplies environmental management services to businesses by providing cost-effective integrated wastemanagement solutions. Being a private limited company, UEM is under no statutory obligations to either produce an annual report or include narrative reporting in any report it chooses to produce. However, the company’s commitment to transparency in the communication of its operations to its stakeholders has compelled it to include environmental and social performance narrative content in its annual reports. UEM considers the annual report to be a communication tool for engaging with stakeholders, while narrative reporting provides a framework for documenting and communicating the company’s efforts at environmental protection and preservation, as well as its social responsibility initiatives. UEM is currently concentrating on disclosure of historical environmental and social performance, but believes that reporting of future performance would increase the usefulness of its annual reports. Guidance on future reporting of environmental and social performance could facilitate this.

Pakistan Refinery Ltd (PRL) is Pakistan’s leading oil refinery. In 2002, senior managers were informed that the company’s competitor, National Refinery Ltd (NRL), had won the ACCA-WWF Pakistan Environmental Reporting Awards. This prompted them to enter PRL in the following year’s awards scheme. Driven by the desire to win the awards so as to gain a competitive advantage, PRL’s health and safety team and communications team undertook extensive research to produce a winning report. The report was based on Global Reporting Initiative guidelines. It included comprehensive environmental reporting disclosures in the form of key performance indicators, compliance with national laws and environmental achievements. Over the years, PRL has proactively improved its environmental reporting standards by including a product lifecycle assessment, stakeholders’ engagement process and environmental audit statement. Like RBH, PRL also believes that its commitment to narrative environmental reporting developed as the company came to appreciate the value of environmental reporting in gaining a greater holistic understanding of its business operations.



Saving the environment while saving costs Ali Hassan Habib, director general of the World Wildlife Fund’s (WWF) Pakistan arm, outlines the case for environmental, social and sustainability reporting




t is often argued that corporate performance reporting should be regarded as an opportunity to improve internal process and control liabilities. But more often than not, companies do not appreciate the strategic advantages of providing environmental performance information. However, with the increase in environmental awareness, as well as greater understanding of how good environmental practice can be linked to good financial performance among stakeholders, firms are increasingly realising that a company’s reputation for corporate responsibility is crucial to its business success. In addition, with increasing concerns over the issue of climate change, carbon reporting has become important for industries. In fact, countries have started developing and implementing bills and protocols for industries to report carbon emissions. For instance, the UK’s climate change bill has been adapted to include a 60% reduction in emissions by 2050. The bill also involves the power to enforce emissions trading schemes, such as the Carbon Reduction Commitment (CRC). CRC requires firms to include carbon emission information in their financial reports and will come into force by 2010. Though carbon reporting seems like a daunting concept involving complexities such as financial reporting, it also involves incentives for companies, such as increasing their reputation in a green business community, as well as helping them to gain the status of an environmentally conscious company. In this respect, WWF is establishing partnerships with leading corporations to voluntarily reduce their greenhouse gas emissions. According to the partnership, climate saver companies should cut their carbon emissions by 14 million tonnes annually. By increasing their energy efficiency, these companies are not only protecting the environment but also making huge cost savings. Leading companies, including Nokia, HP, IBM, Fairmont, Coca-Cola, Johnson & Johnson, Tetra Pak and Sony, have joined WWF as climate savers. We consider the ACCA Environmental Reporting Awards to be the right step in the direction of

creating awareness and appreciation of environmental protection. In Pakistan, WWF has partnered with ACCA to help make the corporate sector understand the importance of environmental, social and sustainability reporting. In an effort to create an environmentally aware business community, ACCA and WWF have been promoting the culture of corporate social responsibility reporting by providing companies with proper guidance and helping to increase awareness. A few decades ago, accountants were limited in their jobs of financial reporting. However, with the help of the ACCA and WWF Pakistan partnership, accountants and the corporate sector will be guided towards one common objective – considering the environment while running calculations.

WWF has teamed up with ACCA in Pakistan to raise awareness of the importance of corporate social responsibility reporting.

We consider the ACCA Environmental Reporting Awards to be the right step in the direction of creating awareness of environmental protection



China leads the XBRL revolution Few countries have been more enthusiastic than China about XBRL, and it is playing an important role in promoting investment from other countries


roclaimed by some as an invention that will be more significant than the transition from paper and pencil analysis of financial information to the use of electronic spreadsheets, XBRL (eXtensible Business Reporting Language) is increasingly popular. China in particular has been keen to adopt the technology-based financial reporting system. While XBRL has been in use in Europe and the US for a number of years, China was the first country to formally adopt XBRL for financial reporting in 2004. In the near future, according to Chinese finance officials, the use of XBRL will be extended to include tax, statistics, IPO approvals, and non-official and internal financial reporting for smaller mainland Chinese companies. Mutual funds began reporting using XBRL in early 2009. Currently, more than 60 Chinese mutual fund companies give daily, monthly, quarterly, semi-annual and annual reports to the China Securities Regulatory Commission (CSRC) in this way. From the initial testing period carried out in 2003 by the Shanghai Stock Exchange (SSE), involving 50 companies, the application of XBRL has grown from covering brief financial data to various periodical reports of listed companies, including report summaries, quarterly reports, half-year reports and full annual reports. The number of elements defined by information disclosure taxonomies has also increased from about 500 to roughly 4,000. ‘Compared to some other countries, while China was late in implementing XBRL, we have made significant advancement in adopting the system for listed companies’ information disclosure,’ Zhou Qinye, deputy president of the SSE told foreign journalists visiting the exchange in May 2009. He says the major driving forces behind XBRL in China include the CSRC, SSE, Shenzhen Stock Exchange, Graduate University of Chinese Academy of Sciences (GUCAS), Global Business Intelligence Consulting Company and the Ministry of Finance. ‘China’s success in using XBRL is, on the one hand, due to our latecomer advantage in that


XBRL is a member of the family of languages based on XML, or Extensible Markup Language. Under XML, identifying tags are applied to items of data so that they can be processed efficiently by computer software. XBRL is a powerful and flexible version of XML which has been defined specifically to meet the requirements of business and financial information. It enables unique identifying tags to be applied to items of financial data, such as ‘net profit’.

we can draw on and learn from existing international experiences and well-established practices. On the other hand, it is also closely associated with the efforts made by the SSE leaders in implementing and adopting XBRL,’ Zhou says. China also had to overcome the obstacle of applying XBRL to full annual reports and ad hoc reports with no history to learn from. ‘Through hard work and practice, we not only solved this tough problem, but also contributed to the application of XBRL in areas beyond financial reporting,’ he adds. MORE WORK TO BE DONE Professor Liu Shiping, vice chairman of the executive committee of XBRL China, says China’s adoption of the XBRL system has revolutionised progress in the development of worldwide business reporting. ‘China has taken large steps conducting relevant research and application, and, in some aspects has reached an advanced level that leads the world. Nonetheless, there is still a great deal of potential left untapped for XBRL popularisation,’ he says. Often referred to as ‘golden finger’ in China’s financial circles, Professor Liu also says the key advantages of XBRL include the potential to be a global standard for handling financial and non-financial data. ‘Our stock exchanges in Shanghai and Shenzhen really like the effectiveness of XBRL for data transformation speed and precision. The CSRC is also very pleased with the efficiency for audit and risk detection of data provided by mutual fund companies,’ says the professor, who is also chief scientist and associate director of GUCAS’ Research Center of Finance Sciences and Technology. He says China’s implementation of XBRL in its capital markets has made it possible for interested parties around the world to read and understand financial reports produced by listed companies. This has given China certain advantages as investors and analysts across the globe can access the information they require. According to Professor Liu, analysts outside the mainland use English-based applications to


access data available from the Chinese stock exchange websites, directly from reporting companies, or via a direct market data feed. For instance, Credit Suisse HOLT has used XBRL to expand its coverage of the Chinese A-share market from 300 firms, which it previously tracked manually, to well over 1,000, which it now tracks automatically.

Analysts outside the mainland

use English-based applications to access data available from the Chinese stock exchange websites, directly from reporting companies, or via a direct market data feed Elsewhere in Asia, stock exchanges in Japan, Singapore and South Korea all mandate XBRL data. From the beginning of 2009, Japan’s Financial Services Agency required all public companies to submit their financial statements in XBRL format. Professor Liu explains that China was able to implement XBRL quickly because companies did not need to physically switch to XBRL

reporting. Instead, they continued to fill out the standard template forms, while behind-thescenes software translated line items into XBRL data. ‘This method of implementing XBRL allowed China’s capital market to quickly adapt to the new information standard with no cost of compliance for reporting companies.’ PLAYING CATCH-UP However, the downside is that Chinese companies are not going through the learning process that companies in the US, Europe and other parts of Asia that have adopted XBRL now face in order to comply with reporting requirements. ‘It will take time for Chinese companies to learn and adapt XBRL for their other reports, but it is a direction that many companies will move to. In the short run, the cost of implementing XBRL could be a factor. But in the long run, it will benefit most of the companies that adapt to the system,’ says Professor Liu. ‘To encourage more companies to use the XBRL system, we have developed a template tailored to company reporting preferences featuring a user-friendly and easy-to-use interface. The template makes reporting as easy as editing a Word document file. Additional functions



such as the availability of annotations and an index to laws and regulations also help reduce workload for clients,’ he adds. While mainland China has demonstrated an eagerness to extend the areas for XBRL use, it has made little headway in Hong Kong. According to a Hong Kong Chamber of Commerce spokesperson, few chief financial officers are aware of what XBRL can do, where it stands in its development and implementation, or how a company might take advantage of it. In fact, according to the spokesperson, few CFOs have any XBRL knowledge at all. HONG KONG: SLOW PROGRESS Sonia Khao, ACCA Hong Kong’s head of technical services, says that there has been scant development since the Hong Kong Securities Commission established a working group to examine the development of XBRL in 2005. ‘There has been very little progress made and little in the way of XBRL expertise to be found in Hong Kong,’ she says. Edge Zarrella, KPMG’s Hong Kong-based global head of IT advisory, believes that it is not so much a matter of if, but when XBRL or a similar tool becomes the standardised format for business reporting. ‘An important feature of a well-functioning capital market is that relevant information about companies is disclosed in a timely and accurate form and such information is readily accessible by investors and analysts,’ he notes. So far, the real obstacle for XBRL has been taxonomy with no standardising definitions for different types of financial data. ‘Without an agreed-upon taxonomy, one company’s view of free cashflow may be different than another’s, which makes it nearly impossible to make meaningful comparisons between the two,’ Zarrella adds. Kurt Ramin, emeritus chairman of XBRL International, and adviser to the International Accounting Standards Committee Foundation, believes there is no downside to XBRL other than it requires companies to implement and learn the mechanics of a new system. ‘XBRL tracks data much better than doubleentry bookkeeping. This means a reduction of errors (no re-input of data) and better, faster and comparable data languages and formats, and business/financial reporting. I can’t see any cons, except there is something new to learn,’ he concludes. Chris Davis, journalist


Dr Afra Sajjad, ACCA Pakistan’s head of education and policy development, says: ‘While regulators in different parts of the world have shown keen interest in XBRL, the number of companies voluntarily adopting the system remains low. In general, CFOs have shown a lacklustre, couldn’t care less approach towards XBRL adoption. Therefore, the future of XBRL relies on the preparers of financial data to buy in into the idea of XBRL. Appreciation rather than compliance with regulation will determine the success of XBRL in the long term.’


Politics, pressure and pendulums International Accounting Standards Board member Warren McGregor tells Calum Robson how he sees global moves towards IFRS playing out


f any point on the road to a globally accepted set of accounting standards is regarded as a watershed, then for Warren McGregor, a member of the International Accounting Standards Board (IASB), it was the 2007 decision by the US Securities and Exchange Commission (SEC) to permit foreign companies listed in the US to use IFRS. ‘That was a clear demonstration that the SEC considers IFRS as a sufficient basis for users of financial reports to make decisions,’ he says. Of course, the US is some way off fully signing up. However, in June 2009, President Obama unveiled a regulatory reform programme that expects standard-setters to have made ‘substantial progress’ towards the development of a single set of high-quality standards by the end of 2009. While previous American objections have revolved around favouring a rules-based system, McGregor believes that this argument has been largely won by the advocates of a principles-based approach. He expects the debate to be livelier about transition: ‘Especially in this economic climate, the costs of change for smaller entities may be more evident than the benefits; we’ve seen that happen with other countries,’ he says. ‘The way around that is not to impose a big-bang-style change to IFRS. Large companies would probably move over first; it would then be phased in for the others over an agreed timescale. Eventually, though, someone has to take leadership and say: this is really important from a global perspective, so it has to happen.’ Withstanding political pressure will continue to present challenges, and not just in the US. After the IASB responded to EU criticism by offering concessions over IAS 39, Financial Instruments, (something which McGregor hopes will ultimately be removed), the organisation bolstered its governance structure, establishing a monitoring board – including representatives of national regulators – with a remit to safeguard the quality of the standards.

Warren McGregor was appointed to the IASB in 2001. Before joining the board, he was a founding director of Stevenson McGregor, a boutique accounting practice specialising in financial reporting and accounting standards. In 2007, McGregor was appointed an honorary professor in the accounting and finance department of Monash University in Australia.

But although in April 2009, the IASB successfully avoided being forced into more changes to IAS 39, scope for regulatory arbitrage will continue: ‘You can’t eliminate that threat while there is more than one set of standards that could be characterised as international,’ says McGregor. ‘But let’s say the US and all the main jurisdictions adopt IFRS. There will still be occasional pressure if one jurisdiction feels that new or amended standards negatively impact on them, compared with other jurisdictions. That’s something we’ll just have to live with; the monitoring board will need to be nimble and receptive to reasonable grievances but alert to potential carve-outs that undermine the overall objective.’ The IASB is keen to move swiftly but not at the expense of proper due process. However, McGregor says that after 2005, when Europe adopted IFRS, the pendulum started to swing too far towards discussion papers, feedback statements and field tests. ‘Some parties simply don’t like change,’ he says. ‘But now that there are more countries using IFRS, it will be trickier for one jurisdiction alone to insist on added due process. We’re better able to counter challenges that might unnecessarily slow things down.’ Going forward, he’s optimistic, even if changes in mindset and culture are required to get remaining players over the finishing line: ‘There are always dangers when politicians are involved,’ he says. ‘But let’s be positive; their involvement shows the subject is firmly on their radar. Governments and regulators really believe in the importance of a single set of standards; that in itself engenders a spirit of common purpose. We’ve already seen that in the G20 communiqué and in statements by the Financial Stability Board. ‘Jurisdictions will rarely see eye-to-eye on absolutely everything – but at least they now all agree on the need to move in the same direction.’ Calum Robson, journalist





Harmonising Islamic finance Dr Mohamad Nedal Alchaar, secretary general of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), puts forward the case for international accounting standards for Islamic finance


n order to appreciate the necessity for distinctive international accounting standards for Islamic finance, it is important to bear in mind the specific characteristics of Islamic Financial Institutions (IFIs). The operations of IFIs are conceptually and markedly different from those of conventional financial institutions. The main source of fund mobilisation for any financial institution is by means of deposittaking operations. The main sources of funds accepted by IFIs are through what are deemed ‘investment accounts’. TREATMENT OF INVESTMENT ACCOUNTS These investment accounts are segregated into two categories – unrestricted investment accounts and restricted investment accounts. Unrestricted investment accounts represent funds that have been placed in IFIs by their customers based on a contractual agreement that the IFIs will invest these funds at the institutions’ own discretion. IFIs have the rights to use those funds unconditionally, without any restrictions imposed by the customers. Funds in restricted investment accounts have to be invested in accordance with investment avenues or criteria stipulated by the customers. IFIs do not have unconditional rights to use or dispose of these funds. For both unrestricted investment accounts and restricted investment accounts, IFIs act only as an investment manager for their customers, such that any investment risk is borne by the customers themselves. As such, the institutions are not liable for losses arising from the

AAOIFI and conventional standards In order to highlight the co-existence of AAOIFI accounting standards and conventional standards, it is perhaps useful to segregate them into three categories.

1. Conventional accounting concepts that are inconsistent with Shari’a principles This refers to AAOIFI’s accounting standards that have been issued because the equivalent conventional international standards cannot be adopted in whole by IFIs. In some cases, the equivalent international standards cannot be adopted in whole as their adoption will give rise to Shari’a compliance issues. In others, the equivalent international standards do not fully cover the characteristics and essence of Islamic banking and finance practices. In these cases, AAOIFI develops its own accounting standards which apply to topics covered by the equivalent international standards. Therefore, a number of AAOIFI accounting standards apply to areas that are covered by conventional international standards, but AAOIFI accounting standards have taken into consideration the specifics of Islamic finance. For example, AAOIFI standards on general presentation and disclosure for financial statements of Islamic financial institutions includes topics covered by conventional international accounting standards on, among others, presentation of financial statements, cashflow statements and revenue.

Dr Mohamad Nedal Alchaar is the secretary-general of the Accounting and Auditing Organisation for Islamic Financial Institutions (, which is an international organisation with over 200 members from over 40 countries. Dr Alchaar has a vast working experience in financial markets and institutions in addition to his central banking experience in developing countries. He was director of market performance analysis at Fannie Mae, and previously vice president at Johnson & Higgins in Washington DC. Dr Alchaar also taught for several years at The George Washington University, where he received his PhD in monetary economics. He has also published several well-recognised books in the field of banking and financial markets, such as Financial Markets, Economic Inquiries and Fundamentals of Banking Operations, in addition to other scientific articles in the field of monetary policy and exchange rates analysis.



performance of the investments, other than in cases of misconduct or negligence on the part of the IFI. Given that these investment accounts are quite distinct from conventional bank deposits, it is not appropriate for them to be accounted for in the same way. AAOIFI accounting standards require that unrestricted investment accounts be presented as a separate line item between liability and equity, in the balance sheet of an IFI. This is based on the premise that although IFIs have unconditional rights to use these funds and invest them at their own discretion, the institutions are not liable for any loss except for cases of misconduct or negligence. AAOIFI accounting standards also require that restricted investment accounts be presented off balance sheet and reported separately in what is called Statement of Changes in Restricted Investments. This is to reflect that IFIs do have unconditional rights to use these funds, and that the institutions are only managing these funds according to the specific conditions imposed by their customers. In instances where IFIs have applied conventional accounting standards, the investment accounts have been treated as a deposit and classified as a liability. Given the characteristics of these accounts, such a treatment would not necessarily present an accurate view of the IFIs’ financial position. TREATMENT OF ISLAMIC LEASES Similar difficulties also arise if conventional accounting standards are applied to Islamic financing transactions, such as Islamic leasing, or Ijarah. There are two types of Islamic leasing: Operating Ijarah, where, in a similar way to a conventional operating lease, no transfer of asset ownership takes place; and Ijarah Muntahia Bittamleek, where the lease ends up with transfer of asset ownership from the Islamic financial institution to its customer. This asset ownership transfer is similar to, but not exactly the same as, conventional finance lease. In both Operating Ijarah and Ijarah Muntahia Bittamleek, the asset ownership rests with the IFI as the lessor throughout the lease term. This is in line with the Shari’a requirement that the subject matter in Islamic leasing is the benefit from use of the asset. In addition, it is also a requirement in Ijarah Muntahia Bittamleek that the contract for transfer of asset ownership should be independent of the contract for leasing the asset. AAOIFI accounting standards therefore require both Ijarah and Ijarah Muntahia Bittamleek to be


2. Accounting for transactions unique to Islamic financial institutions This category refers to AAOIFI’s accounting standards that have been issued for specific Islamic banking and finance practices that are not covered by conventional international standards. These are the standards specifically developed for financial transactions or practices that are unique to the international Islamic banking and finance industry. Typically, these transactions or practices are not covered by the existing international standards. AAOIFI develops the accounting standards to apply to these transactions or practices. These include standards on Murabaha Financing, which is based on the concept of deferred payment sale, and Salam Financing, which is based on the concept of deferred delivery sale, which are common Islamic banking transactions. treated in a similar way to a conventional operating lease, with the asset being reflected in the books of the IFI throughout the lease term. If conventional accounting standards are applied, both Ijarah and Ijarah Muntahia Bittamleek would likely be classified and treated as finance lease, especially if the lease term covers a major part of the economic life of the asset, or if there is transfer of asset ownership at the end of the lease term. Applying finance lease accounting treatment to Ijarah and Ijarah Muntahia Bittamleek does not give an accurate view of an IFI’s financial position. Furthermore, if the financial report does not reflect the fact that the lease asset ownership rests with the IFI throughout the lease term, this could be considered a violation of Shari’a principles. ACCOUNTING FOR DIFFERENT RISKS It should also be appreciated that the conceptual differences between Islamic and conventional financial practices also give rise to conceptual differences to the dimensions of risks. In addition to risks such as those pertaining to market, credit, liquidity and operations, IFIs also have to manage risks associated with elements that are prohibited in Islam. For example, IFIs are not allowed to enter into transactions with an element of uncertainty, such as transactions that deal with future movement of the stock market. Risks associated with these elements could not be mathematically quantified,


but IFIs have to manage them through compliance with Shari’a rules and principles. AAOIFI standards help IFIs in ensuring that the Shari’a rules and principles are followed and manage the risks of non-compliance. SUPPORTING INTERNATIONAL IFI The intricacies and the uniqueness of Islamic finance practices are an important reason for the industry’s own standards. As mentioned earlier in this article, the financing and deposittaking structures that are used in IFIs’ operations are conceptually and markedly different from those encountered in conventional banking and finance. As the essence of some Islamic finance transactions differs from the practices in conventional finance, so some of the conventional standards are not wholly compatible for the Islamic finance industry. HOMOGENOUS INTERNATIONAL STANDARDS As well as working with the major conventional accounting standard-setters to find common solutions where possible, there is an ongoing need for unifying Islamic finance practices and standards across markets. AAOIFI facilitates the harmonisation process in a number of ways, including the fact that their standards take into account the Shari’a interpretation of all the major Islamic schools of thought, while ensuring they are designed for global adoption. The unique conceptual nature of Islamic finance makes it important to develop universally applicable standards in a number of areas. Thus, for example, AAOIFI have to date issued a suite of globally accepted standards, including: Shari’a standards (40) prescribing Shari’a acceptable structures for products and services integral to Islamic finance; governance standards (7) focusing on how IFIs should be governed in line with Shari’a principles; and lastly accounting (26) and auditing (5) standards, ensuring consistency and transparency in financial reporting. Such standards, which appropriately reflect the concepts and essence of Islamic finance, as well as facilitating the harmonisation of Islamic finance practices, are essential to enhancing the confidence of users of Islamic financial products and services, and, ultimately, to further expand the industry. ENHANCED CONFIDENCE With the growth of Islamic finance across the globe, it is vital that existing and potential stakeholders who rely on financial reporting are able to rely on the financial statements

3. Consistent accounting standards and principles Refers to conventional international standards that can be adopted by IFIs. There are a number of conventional international standards that can be adopted by IFIs in their present forms. Generally, adoption of these standards does not give rise to any Shari’a compliance issue and the scope of these standards is adequate to cover the relevant practices by IFIs. For most of these cases, there is no necessity for AAOIFI to develop the equivalent standards. of the institutions about which they will be making decisions. The use of common standards ensures that the financial statements of an Islamic financial institution can be easily understood and easily compared with those of other IFIs across different markets. As IFIs, like all other businesses, look for ways to broaden their avenues for accessing finance and expanding through cross-border investments and acquisitions, it is critical that a globally accepted set of standards are applied and understood. This will enhance transparency for all stakeholders throughout the financial reporting supply chain, be they preparers, auditors, regulators and the investment community as a whole, as well as give confidence to the users of the financial products and services provided by the IFIs. CONCLUSION It is clear that gaps and differences exist, and will continue to exist, between some accounting standards for IFIs and conventional standards. While the fundamental principles of financial accounting are universal, there are gaps and differences between those that are needed to regulate IFIs and their conventional counterparts. These are a natural result of the conceptual differences between Islamic and conventional banking and finance practices, and the need for IFIs to balance disclosure of financial performance, while ensuring Shari’a compliance. That said, as well as continuing to engage with conventional standard-setters to find mutual solutions where possible, it is vital that commonly accepted Islamic finance standards, such as those produced by AAOIFI, are promoted and accepted internationally.



Complex conundrum Does the complexity of financial reporting reflect today’s business environment, or could standard-setters do more? ACCA’s Aziz Tayyebi investigates


inancial reporting aims to reflect economic and business reality, which ultimately shapes how investors formulate their investment decisions. Obscuring that reality can have a chain of negative consequences impacting investors themselves, lenders, customers, suppliers and employees. In recent years there has been growing concern from across the financial reporting supply chain that the complexity of financial reporting has eroded confidence in financial reports themselves. In response to the growing concerns about financial reporting across the globe, the issue of complexity appears to have been rising up the agenda of international standard-setters. Simplifying accounting requirements has often been cited as the reason for amendments to financial reporting standards in recent years from the International Accounting Standards Board (IASB). Similarly in the US, the Securities and Exchange Commission (SEC) has consistently raised concerns about how financial reporting has become unnecessarily complex, while a hallmark theme of the Financial Accounting Standards Board (FASB) chairman has also been reducing the complexity and improving the transparency and usefulness of reported financial information. WHY IS ACCOUNTING COMPLEX? The statements made by such institutions imply that complexity can be resolved by their endeavours. But it is clear that considerable complexity can originate from the intricacy of commercial transactions and events themselves. The accounting for such transactions, by their very nature, is complicated and beyond the control of standard-setters. It is therefore important from the outset to acknowledge and distinguish two types of complexity in financial reporting: that which is inescapable, due to the inherent complexity of certain transactions; and that which is avoidable, having been brought about by accounting standards themselves.


Aziz Tayyebi works as the financial reporting officer of ACCA and is a leading contributor to ACCA’s commentary and policy positions on global and national developments in financial reporting. As secretary to ACCA’s Financial Reporting Committee, Tayyebi prepares position papers on key developments in financial reporting, as well as developing ACCA’s formal responses to relevant consultative documents. He also heads ACCA’s thought leadership in the field of Islamic finance, contributing articles and discussion papers on the subject, and responding to external consultations in this area.

INHERENTLY COMPLEX TRANSACTIONS One of the most complex areas of financial reporting is accounting for financial instruments in general, and derivative financial instruments in particular. Financial instruments are in themselves complex, and there is an element of unavoidable complexity when accounting for such transactions. Such instruments can include features that make them difficult to analyse and account for, as well as leading to apparent inconsistency in accounting treatments for what are in substance very similar instruments. Many believe that at the heart of the global financial crisis, which mushroomed following the US sub-prime mortgage fiasco in 2007, were the extremely over-complex financial instruments being used to shift risks off balance sheet. As most of the financial institutions themselves apparently did not appreciate the scale and intricacies of these instruments, accurately valuing and accounting for them was always going to be difficult. Complexity in transactions is certainly not restricted to financial instruments. As global businesses look to more sophisticated methods of maximising shareholder returns, both the types of product they sell and the contracts used to sell them have become increasingly varied, inevitably making them challenging to interpret from an accounting perspective. UNNECESSARY ACCOUNTING COMPLEXITY As a recent UK Financial Reporting Council discussion paper Louder Than Words revealed, there is a unanimous belief that although transactions themselves may be complex, they ‘can be explained more clearly than they are at present’ and communicated more simply in company financial reports. The implication being that the underlying reason for the lack of clarity in financial statements is the financial reporting regime, which in turn stems from the accounting standards themselves. Such avoidable complexity has an adverse effect on all participants in the financial reporting process – be they preparers, auditors, users,


regulators themselves and other stakeholders. There are time and resource costs related to maintaining knowledge of detailed requirements, record-keeping, performing difficult calculations and estimations as well as the analysing and interpreting the resulting financial reports by decision-makers. While additional guidance and disclosure is frequently beneficial in preparing and understanding elements within company financial statements, complexity in standards simply adds to the volume of both. In terms of guidance this can lead to greater risks of error and compliance failure. Where this additional guidance is in the form of detailed rules at the expense of soundly based principles, professional judgment can be frustrated. Similarly, voluminous disclosure requirements, which increasingly occupy greater proportions of the financial statements, can be counter-productive. Overly complex disclosures can efface the transparency of the financial statements such that they do not reflect the financial performance and condition of the entity – surely their raison d’etre.

Hard to unravel: considerable complexity can originate from the intricacy of commercial transactions and events themselves.

CAUSES OF AVOIDABLE COMPLEXITY One of the main factors is the volume of formal and informal literature. While this is an issue for the IASB it is far more pronounced in US Generally Accepted Accounting Principles (GAAP), which encapsulate literature from a host of authorities. This can result in inconsistencies between standards, while making it a minefield for those searching and applying guidance. The other key concern with accounting standards is that they are often overly prescriptive. Not only can this lead to more complex and lengthy standards but core principles can be obscured by detailed ‘bright-line’ rules, which in turn are vulnerable to financial engineering. This root cause cannot be remedied by a series of short-term fixes, which in themselves often result in further pain for those having to apply the standards. The long-term solutions to these issues will ultimately require extensive changes to the standard-setting process, with a conscious effort to develop and maintain principles-based standards.



CONCLUSION Clearly the causes of complexity are numerous and impact a vast range of elements in financial reporting. That these causes are both inherent in the transactions themselves as well a consequence of the actual accounting standards makes it a difficult and ever-evolving issue to resolve. However, it is clear that a resolution to avoidable complexity is crucial to ensuring the fruits of standardised accounting in general and international accounting standards in particular do not spoil. Many argue that fewer rules-based standards will avoid both the voluminous literature and the vicious cycle of financial engineering that are associated with overly complex standards. However, it is equally important to universally define what is meant by principle-based accounting, to ensure that principles across standards are consistent and to adequately answer concerns that reduced rules and guidance could lead to a lack of comparability and transparency across financial statements.

ACCA survey findings: recommendations for standard-setting A recent members’ survey commissioned by ACCA, Complexity in Financial Reporting, investigated the difficulties in applying the current requirements of International Financial Reporting Standards (IFRS). Based on the views of members from across the globe, directly involved in the preparation of financial statements and focusing on six significant areas of financial reporting, it is evident that there is considerable complexity in financial reporting. Excluding the views on income tax accounting (which 69% of members still found complex), only 10% of members found the other areas surveyed to be relatively simple. When asked whether that accounting area was complex, a significant proportion of respondents believed that while it was complex, it was also acceptably so, in today’s business environment. This sentiment was also reflected in the responses to questions about why those areas were complex. The score attributed to the difficulty of understanding the transactions themselves was consistently the second ranked in all the areas considered. The predominant concern for respondents across all areas of financial reporting was the cost (time and money) of fulfilling the requirements within standards. Additionally,


Survey suggestions for improving the reporting process include the following: * greater engagement with the preparer community * research and analysis to understand the issues with current accounting * emphasis on the need to focus only on material disclosures.

the relatively high scoring attributed to the difficulty in understanding the respective standards themselves, further indicates strong opinion that there is an element of avoidable complexity, a direct consequence of governing accounting standards. The strong preference to use the accounting standard itself as a primary source (70% of respondents) for application (rather than interpretive guidance and other materials), clearly indicates how important it is for standard-setters to ensure that those standards are understandable and not too burdensome to apply. The report can be found at

Perceived degree of complexity of specific accounting areas 0 10 20 30 40 50 60 70 80 90 100

Hedge accounting (IAS 39) Financial instrument disclosure (IFRS 7) Share-based payments (IFRS 2) Pensions (IAS 19) Income tax accounting (IAS 12) Business combinations (IFRS 3) Yes, excessively complex

Yes, complex but acceptably so

No, is relatively simple


Taken on trust With public trust in both corporates and the state at an all-time low, we should consider governance that covers both sectors, says ACCA’s Gillian Fawcett


here is a problem with governance. Recent high-profile scandals such as the demise of the banks, MPs’ expenses, and the catalogue of business and service failures in recent years mean it is time to rethink corporate governance for both the private and public sector. The overriding question is whether there should there be a common approach to corporate governance and a shared set of ethical standards for both sectors. Some would argue against this as they consider the public sector so distinctive that a common approach to governance could never apply. However, given that the public sector landscape is changing, and partnerships and the commissioning of services are gaining momentum, there is a strong case for having greater cohesion on governance, which every governor can understand. ACCA would like to take part in any future debate. Historically, the corporate governance landscape has developed piecemeal in response to corporate and service failures. It is confusing and often misunderstood by those who govern and are governed. Concerns regarding public trust in both private and public organisations have been rising over the past two decades. Wrongdoing in the private and public sectors led to the publication of the Cadbury Report in 1992, which was intended to raise the standards of corporate governance. The cash-for-questions scandal, where MPs tabled parliamentary questions in return for money, gave rise to the Committee for Standards in Public Life in 1994. STANDARDS OF DECENCY Under the chairmanship of Lord Nolan the committee produced its first report in 1995, which outlined seven principles for guiding the behaviour of those engaged in public governance. These principles included selflessness, integrity, objectivity, accountability, openness, honesty and leadership – all seven are meant to be well understood by the holders of public office, but some would argue they are so bland that no one can be expected to follow them. Further changes were introduced following scandals such as those involving Enron, which

A protester impersonating former Royal Bank of Scotland (RBS) chief executive Sir Fred Goodwin at RBS’s AGM in April 2009. The public ownership of banks such as RBS highlights the need for governance which is common to both the public and private sector.

resulted in the Sarbanes–Oxley Act of 2002. In the public sector, the Laming Report (2003) identified that corporate governance failures were at the heart of the failure to prevent eightyear-old Victoria Climbié from dying. The UK Bristol Royal Infirmary Inquiry into the high rate of death in children’s heart surgeries also highlighted governance failures. The Donnygate (1997) scandal, which identified widescale corruption by councillors, the London Borough of Westminster homes for votes scandal in 2001 and, more generally, poor standards of behaviour by councillors across local government paved the way for further changes in governance. In 2000, the UK Government went so far as to legislate for the introduction of the Standards Board for England (2001), which oversees the ethical conduct and behaviour of councillors.



The proliferation of definitions, codes and standards that

have developed over time are clearly no longer fit for purpose

More recently, serious flaws in governance have been identified as being at the heart of the failure of the banks. The non-executive oversight of bank executives fell short and has brought governance issues back into the public eye. Similarly, MPs’ expenses and the system of parliamentary allowances have negatively affected public trust. Public trust in both private and public institutions is now at an all-time low – although some would argue it always was low, even during the second world war.

Former communities secretary Hazel Blears resigned from her cabinet post in June 2009 after being implicated in the MPs’ expenses row. She came under fire despite repaying £13,000, following allegations she avoided paying capital gains tax on a property sale.


GOVERNANCE AND PUBLIC TRUST A wealth of literature supports the suggestion that good corporate governance is inextricably linked to public trust in an organisation. In a 2003 report entitled Corporate Governance – Improvement and Trust in Local Public Services, the Audit Commission argued that the quality of corporate governance has a direct effect on levels of trust in public services. This close relationship between trust and governance is connected to the high level of risk associated with high-level decision-making, and the potential for this risk to be reduced through governance arrangements in which an open culture exists is accepted and supported. There is little doubt the corporate governance landscape is complex. The proliferation of codes, definitions and standards that have developed over time are clearly no longer fit for purpose. There is more common ground in the problems facing both sectors than differences. For example, both need to be effectively addressing issues of probity and accountability, and both are concerned with strategy formulation and scrutiny. How can governors effectively govern when there is so much confusion? An Office for Public Management report, Rubber Stamped? The Expectations and Experiences of Appointed Public Service Governors (2003), revealed that the expectations and experiences of appointed public service governors differed widely. It concluded that the governance of public sector organisations does not work well. The seven principles of public life (Nolan) are widely accepted in the public sector. A Committee for Standards in Public Life poll, Public Attitudes Survey (2008), showed that the public places a high priority on selflessness and integrity, objectivity, and accountability and openness. Undoubtedly, the desirability of pursuing those principles set out by Nolan is universally acknowledged, but in a world of increasingly complicated governance structures, and in the context of political differences, there is still much that is open to debate. There are deep-rooted problems in how the principles are interpreted and applied by different leaders, professions and the public. For example, the qualities the public will look for in different


Historically, the balance of attention on corporate governance has fundamentally been on having the right systems and processes in place. The softer factors of standards of behaviour and organisational culture have not been given the prominence they deserve, yet research shows that more often than not corporate failures and the abuse of power are underpinned by poor standards of behaviour and/or corruption. Low levels of trust in both the private and public sector are sustained by poor standards of behaviour, as argued by myself and by Mark Wardman in Ethical Governance in Local Government in England: a Regulators View.

Gillian Fawcett is ACCA’s head of public sector. She is responsible for developing policy on technical matters affecting public services and monitoring developments. Before joining ACCA, Gillian was a senior fellow working with the Office for Public Management (OPM) in the organisational development and policy team. She has also worked for the Audit Commission in the UK, where she was a senior policy adviser.

leaders and professions depends on the nature of the role. Honesty and trustworthiness are the most significant personal qualities of public leaders, but the public wants civil servants to be efficient, competent and professional. Principles can be defined in different ways, which affect how they are interpreted by leaders, the professions and the public. Integrity could be interpreted as trustworthiness, personal integrity, organisational integrity or all three. Michael James Macaulay of Teesside Business School, and author of Zeno’s New Paradox? The Flying Arrow of Integrity, argues that if ‘integrity’ was simply a matter of perception, then it is already open to abuse. A dishonest and corrupt politician, for example, could conceivably obtain high levels of public trust simply by appearing to have personal integrity. Arguably, if there are such inherent problems of interpretation, now is the time to revisit the principles, and make them equally applicable and understandable to the public and private sectors, as well as the public. Adopting a common approach to governance is not without difficulties. For example, if you look as far back as the Poulson scandal in the 1970s, it was argued that the widespread use of bribes, hospitality and gifts to councillors to obtain redevelopment contracts was ‘typically common of business practice’. This indicated that a different set of ethics was applied to the private sector. Undoubtedly, the challenge will be to design a set of ethical standards that are generally accepted by both the public and private sectors.

FOCUS ON ETHICS A new common approach to governance, one which focuses more on ethical behaviour, is needed for both the private and public sector. It is only when governors and the holders of public office adhere to the highest of ethical standards that public trust will be regained. Now that the spotlight is firmly on achieving effective governance, more research is required and we need a better understanding of how and at what stage poor standards of conduct and behaviour can have a negative impact on the delivery of public services. Undoubtedly, a better understanding will help prevent future governance failures and shift the focus on ‘prevention and not cure’. Following Cadbury and Nolan, there have been many attempts to create a common approach to governance through joint standards for governors. In 2005, the Langlands Commission’s Good Governance Standard for Public Services attempted to further map out the principles of good governance that those involved in public services need to understand and apply. In 2008, this was shown to have had broad application across the public sector and has gained some momentum with other sectors. However, there needs to be more of a sustained effort by the government, academics, regulators and professions to have a more cohesive approach to governance for both sectors and to ensure there is enforcement of the regulations so that good governance is firmly established. To summarise, the public ownership of the banks, the growth of partnerships and private sector providers delivering public services make it even more relevant to review the governance landscape and consider introducing a common approach to governance – and one that everyone can understand. The challenge, of course, is how. ACCA looks forward to that debate.



Tax for the 21st century Taxation has become a minefield for businesses, individuals and governments alike. ACCA’s Chas Roy-Chowdhury outlines some basic principles that could help


ax is turning into one of the key strategic issues of current times. Barack Obama made promises to act against tax havens as one of the key elements of his US presidential election campaign and, following his inauguration in early 2009, there was a flurry of concessions issued by private wealth centres ahead of the London G20 summit in April. Switzerland, Hong Kong, Singapore and others agreed to adopt the Organisation for Economic Cooperation and Development’s (OECD’s) tax transparency standards and information exchanges. Their action followed a decade-long campaign by the OECD. These concessions were welcomed by G20 governments, which have long accused tax havens of allowing individuals and companies to thwart their own countries’ tax laws by hiding wealth. However, the moves did not go far enough for some critics, who say tax authorities still need to provide a challenging degree of evidence before they can extract information from such havens. And ongoing public comments from G20 leaders meant the issue was still high on the agenda at the follow-up gathering in September 2009. But there are, inevitably, two sides to the story. ACCA strongly supports the rights of governments to pursue suspected tax evaders. It could also be said that some offshore centres have not helped themselves by pursuing the letter, rather than the spirit, of internationally agreed rules aiming to increase transparency. However, given that the development of tax havens has been accelerated by the rapid growth of offshore banking, carried out by large Western banks, these centres could reasonably point to the financial regulatory failures of the leading countries, as revealed by the economic crisis. It is also true that many leading nations offer similar tax concessions in terms of gross interest-paying bank accounts and tax-friendly regimes for rich non-domiciles who bring wealth to those nations while having their tax base in their countries of origin. Accusations of double standards can legitimately be directed at the leading countries for aiming their firepower


at offshore financial centres, while ignoring practices closer to home. Given these high-profile issues that have seen tax rise up the political agenda, ACCA believed it was timely to set out a clear exposition of what makes an efficient and just tax system in the 21st century. In April, ACCA published Tax Principles: From Adam Smith to Barack Obama, on which this article is based. The paper puts forward the 12 tenets that would represent the basis of effective tax systems around the world.

Chas Roy-Chowdhury is head of tax at ACCA. He has a degree in applied economics and is a fellow of ACCA. He worked in public practice from 1980– 1991, when he joined ACCA’s technical department.

Accusations of double standards

can legitimately be directed at the leading countries for aiming their firepower at offshore financial centres, while ignoring locations and practices closer to home


ACCA’s 12 tenets of taxation 1. AVOIDANCE/EVASION There is a clear division between tax avoidance (or planning, or mitigation), which is legal, and tax evasion, which is not. The former attempts to reduce the amount of tax that is payable by means that are within the law, while making a full disclosure of the material information to the tax authorities. In contrast, tax evasion works outside the rules by hiding income through non-disclosure, or making wrongful deductions. Tax law must be clear and certain and businesses will always look to minimise the impact of tax as part of their normal commercial activity. But, while most businesses try only to comply with the law, there are cases of convoluted tax planning schemes designed simply to exploit loopholes in the law. ACCA does not support this artificial activity.

2. TAX AS A PERCENTAGE OF GDP ACCA accepts that the current unprecedented degree of economic turmoil may require special

measures from national governments. Notwithstanding current conditions, we believe that levels of taxation should be clearly stated as a percentage of gross domestic product (GDP), as far as is practicable. ACCA does not seek to enter the political debate on the appropriate level of tax and public spending. But substantial tax increases represent a significant burden on businesses and individuals and should be subject to an impact assessment designed to challenge the need for new regulations and to establish an accurate and updated estimate of costs. Once new measures are put in place, there should be a means of measuring and evaluating their impact in terms of their proclaimed public policy objectives. Government should rationalise and set a target of tax levels as a percentage of GDP, as part of its economic management, and then be held to account via objective measurement and variance analysis.

In February 2009, UBS admitted to US tax fraud after accusations that it helped thousands of US clients use Swiss bank accounts to evade taxes. Mark Branson (above right), CFO of the global wealth management and Swiss businesses of UBS based in Zurich, is pictured prior to a US Senate’s homeland security and governmental affairs subcommittee hearing in March 2009.




Prosecutor Gerrit Gabriel arrives for the beginning of the tax evasion trial against Klaus Zumwinkel, former CEO of Deutsche Post, at the Regional Court in Bochum, Germany in January 2009.

ACCA believes that tax legislation and operations should be simple to understand and comply with. Research shows that, globally, companies spend almost two months per year complying with tax regulations – 15 days for corporate income taxes, 21 days for labour taxes and contributions and 21 days for consumption taxes. It is essential that the volume of legislation is kept to a minimum. Much of the increase in tax law and administration in recent years is due to new anti-avoidance measures introduced by tax authorities. Small businesses in particular have no time to engage in esoteric tax planning and are simply trying to cope with the volume of laws. Changes in tax law – particularly those which reverse tax breaks or incentives and on which basis businesses have made plans – should be kept to an absolute minimum.

4. OPENNESS, TRANSPARENCY AND ACCOUNTABILITY Tax policies should be transparent and non-discriminatory unless part of a declared discriminatory policy, such as one aimed to encourage new enterprise, for example. ACCA’s view is that this use of tax by elected governments is legitimate but such taxes should then meet the principles of being transparent, simple and effective. Governments should be wary of over-complicating the tax system with too much tinkering to ‘reward’ certain groups of taxpayers. On major issues of tax policy, there should be clear consultation where the options are specified at the start, and properly considered with an audit trail. There should also be openness on the application of tax policy. So-called ‘stealth taxes’, such as the phenomenon of ‘fiscal drag’, whereby personal tax thresholds are not increased in line with rising prices and incomes, thus bringing more individuals into higher-rate tax bands, cannot be justified.

5. CERTAINTY The tax systems in many jurisdictions can be criticised for their lack of certainty in outcomes or operations. The UK and US authorities do not explicitly ban particular types of tax planning, as they are within the law, but nonetheless take a negative view of them. Companies using these legitimate tax-planning techniques may find themselves having to report to the authorities or becoming the subject of onerous tax enquiries. Often, these artificial ‘blocks’ are used by the tax authorities as a way of ‘fine-tuning’ legislation. This is unacceptable for companies trying to plan their business activities. It should always be possible for different taxpayers who look at legislation to come to the same interpretation of the law.

6. TAX COMPETITIVENESS The globalisation of business means that each country should ensure its tax rates are competitive and its regime user-friendly. Tax is a key factor in ensuring the overall attractiveness of a location to new business. The danger with competition, however, can lie in very low tax rates, where offshore tax havens or flat tax systems can lead to ‘beggar my neighbour’ approaches which can entrench wealth inequality. ACCA supports the principle of nations being free to determine their tax affairs within the context of a global competitive environment.



But governments must be wary of causing retaliatory action and trade wars by drastic business tax cuts.

7. EFFICIENCY Tax systems should be efficient for governments in terms of their ability to secure the revenue that is due to them and to prevent tax leakage and the development of a black economy. But a tax system should also be efficient for taxpayers in terms of their ability to comply with its requirements. It should not be forgotten that small businesses represent the bulk of economic activity in most countries and the burden of regulation can have a disproportionate effect on small firms, as the smaller the business the heavier the compliance cost.

8. SUNSET CLAUSES Tax systems should have a review principle that demands tax legislation be periodically overhauled and consolidated to bring it up to date and make it easier to follow. Outdated laws should be removed. All anti-avoidance legislation should have sunset clauses attached. This will ensure they are regularly reviewed.

9. CLEAR LINK FROM TAX TO SPEND (HYPOTHECATION) There is a lack of credibility with tax systems in that taxpayers do not know why they are being taxed and what the revenue is being spent on. It would be of benefit to society, individuals and businesses if there was a clear link from tax taken to its application.

The Bernard Madoff company yacht Bull was seized in the Cap d’Antibes on the French Riviera in April 2009 as part of a battle to recover client losses from the jailed fraudster.

11. HUMAN RIGHTS Taxpayers have rights as well as responsibilities. They are obliged to pay their tax in full and on time. But states have a responsibility to not impose their will in the field of taxation in an arbitrary or vexatious way. For instance, the incorporation into UK law since October 2000 of the European Human Rights Act has empowered taxpayers to challenge pernicious tax law in certain cases. For example, where it could be argued there is fundamental uncertainty or unjustified additional cost of operating in one particular business vehicle rather than another. A similar approach throughout tax jurisdictions should become the norm.

10. AVOIDANCE OF DOUBLE TAXATION An essential principle of tax law must be that income be subject to tax only once. This applies both to direct tax and consumption taxes, such as VAT where input tax recovery should be available at each stage of the transaction chain. In the case of direct taxes there needs to be an efficient and effective mechanism available in all countries to give relief to a company which has already paid tax in another jurisdiction before subjecting that same income, in whole or in part, to taxation. In practice, too many countries do not consider it important enough to offer this tax relief. The ‘arm’s-length’ principle, whereby tax authorities treat transactions between connected parties by reference to the amount of profit that would have arisen if the same transactions had been executed by unconnected parties, is a long-established convention which should be the basis of international tax affairs.

12. ‘TAX SHIFTING’ – GREEN TAXES One of the most important ways in which elected governments can use taxation for social policy is to change behaviour which is damaging to the environment. Accountants should play an active part in efforts to reduce global CO2 emissions. The concept of ‘tax shifting’, by increasing carbon taxes on the usage of fossil fuels but reducing them for payroll, income or corporate taxes, should be promoted. Governments must also look to use tax policy to aid positive change by incentivising investment in new, cleaner technologies across a wide range of industries.

Tax Principles: From Adam Smith to Barack Obama is available at



‘The magic telescope has

a variable focal length that can be used to produce different results…The magic telescope is powerful’



Pensions and the magic telescope Companies need to take a balanced and realistic view of the risks in accounting for defined benefit pension schemes, says Paul Boyle

Paul Boyle is the departing chief executive of the Financial Reporting Council, the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance.


here are many accounting and reporting challenges relating to defined benefit pension schemes. The pension obligations of these schemes typically stretch for decades and hold assets that are invested to earn returns, and used to meet these obligations as they fall due. The accounting challenge is how we compare a long-term flow of benefits with a current stock of assets. To help illustrate the points I have used a real but anonymous pension scheme. The scheme is closed to both new entrants and to the future accrual of service by existing members, which is becoming the typical situation for UK pension funds. The projected benefits payments are shown by the dark grey line on the chart overleaf. The payments start modestly, reach an annual peak after 47 years and finally end after 108 years. The total projected cash amount payable (what is referred to as the liabilities) is £141m.

The scheme has assets of £14m. Assuming investment returns of 7% annually, the assets grow – as shown by the red line on the chart – to just over £30m in about 35 years’ time before gradually declining, with the last pound of benefits paid by the last pound of assets. One possible accounting method is to compare the future values. In this example, the assets are projected to be sufficient to meet the liabilities. Since we know the best estimate of the liabilities is £141m, it could be argued that the value of the assets is also £141m. We could refer to this value as the future value of present assets. The accounts would show that the scheme was in balance (assets of £141m - liabilities of £141m). However, some may be uneasy about taking credit in today’s financial statements for 100 years’ worth of future investment returns. The alternative is to account on the basis of present values. Although there may be some complications if the scheme has invested in alternative assets for which a present value is not readily determinable, the present value of the assets is generally accepted to be what someone would pay for it (that is, the market value). With regard to the liabilities, it is common sense that an obligation to pay in the future is less onerous than an obligation to pay today. The practical question is, how less onerous? We can use discounting to quantify this: the present value of the liabilities of the scheme discounted at 4% is only £30m. Discounting is like a magic financial telescope – designed to be looked through the fat end. The purpose of a normal telescope is to make small things in the far distance appear larger. The magic discounting telescope has the opposite effect by making large things in the distance appear smaller. However, the view through the telescope is a distorted one because eventually £141m has to be paid. The magic telescope has a variable focal length that can be used to produce different results. Increasing the discount rate to 7% reduces the reported present value to £14m. The magic telescope is powerful.




AN Other pension scheme 35

Sponsors and trustees of pension schemes should seek to develop a better understanding of the cashflows in their schemes.




n n n n


Benefits – cash Assets at 7% return Assets at 4% return 90% funding

There is a high probability of further shortfalls emerging in pension schemes with a deficit because the liabilities have been reduced to take credit for the returns on non-existent assets.
























101 106


The choice made by accounting standard-setters is that it is more appropriate to represent pension liabilities on a present value basis. The accounts would show that the scheme was in balance (assets of £14m - liabilities of £14m). But present value accounting also takes credit for 100 years of future investment returns – by reducing the reported value of the liabilities rather than by increasing the value of the assets. Discounting has a theoretical underpinning – the time value of money – which depends on two critical assumptions, both of which are rebuttable in the real world. First, it assumes there is a financial asset that could be invested in which will generate certain returns that average at 7% compound over the life of the liabilities. I have failed to find an asset that offers 7% compound, risk-free over 108 years. It could be argued that the best estimate of the total expected return after allowing for risk is the risk-free rate. If our scheme achieves returns of only 4% annually, the yellow line on the chart shows that assets hardly grow as the returns are insufficient to pay the benefits after a few years and the assets are exhausted by year 27, leaving £117m of benefits unpaid. Second, it assumes the money is available today to buy this financial asset. This assumption is also frequently rebutted or partly rebutted in practice. If our scheme is only 90% funded,


then even if investment returns are 7% annually, the assets of the scheme, shown as the light grey line on the chart, grow to only about £23m and start to decline about 10 years earlier. The result is that the assets are exhausted after year 46 leaving £77m of benefits unpaid. Each of these scenarios could be rectified if the sponsoring employer injected additional funds into the scheme. In the first scenario, with returns of 4% rather than 7%, the additional amount required would be £16m. In the 90% funding scenario the additional amount required would be £1.4m. However, if the additional funds are not injected at the valuation date, then even larger amounts will be required because some investment returns that are assumed in the calculations will not, in fact, be generated. This is relevant to assessing pension deficit recovery plans. A naive observer might think a pension deficit of £10m will be cleared by paying £1m each year for 10 years. Unfortunately, due to the effect of ‘missing’ investment returns, the deficit can be predicted to take 17 years to clear with annual payments of £1m. My conclusions are listed on the right.

The views in this article are personal and do not necessarily reflect those of the FRC’s board

The higher the rate used to discount pensions liabilities the greater the risk of shortfalls emerging at a later date. The greater the delay in addressing pensions deficits the greater the amount required to address them. Companies should consider whether their disclosures about the likely cashflows associated with their pension obligations are adequate to convey a balanced and realistic view of the risks they face.


Caution pays The Canadian approach to risk management is one to follow, says the president of the Certified General Accountants Association of Canada


rust, integrity and accountability are at the heart of a healthy and well-functioning financial system. They’re the basis for a strong and vibrant economy. And the attributes are also fundamental to an effective and respected accountancy profession. However, faith in all of these principles has been badly shaken in the fallout from the worst global financial crisis since the second world war. The chief executive of a leading Canadian bank told a US Senate committee earlier this year that the American banking community knew about the risks that led to the crisis, but were too greedy to take the measures necessary to avoid them. Ed Clark, CEO of the TD Bank Financial Group, suggested that the risks were well known. ‘It’s not as if there was mystery out there that the US mortgage system had in fact gone way out on the risk curve and was doing what most bankers regarded as crazy lending,’ he told the hearing. Of course, similarly risky deeds were taking place around the globe. Others have put the blame not on greed but, more diplomatically, a lack of discipline in risk management. Regardless, calls for changes to the way institutions manage risk have become all the rage. But to what end? How many of these lenders plan to make significant changes

Canadian prime minister Stephen Harper says the country’s banking sector has reasonable regulation with minimal micromanagement.

Anthony Ariganello joined CGA-Canada in June 2003. He was previously president of Avon Canada and has also held senior positions with Nortel Networks. He is also a certified public accountant.

to their risk-management processes? Even after all that the world has been through, I worry that there may still be too much complacency around the management, reporting and measurement of risk. And without a strong commitment to bring about fundamental change, trust, integrity and accountability can never be restored. A roundtable held by ACCA and CGA-Canada in April 2009 concluded that professionalism and ethics must prevail, and risk-management scenarios should inform corporate actions. We in Canada take considerable comfort and pride in the fact that Canadian banks shunned the perilous practices that devastated so many of their international counterparts. Indeed, World Bank president Robert Zoellick has said that Canada’s financial system should serve as a model for other countries. While the industry has made mistakes as it has expanded into international markets, the losses pale beside those of their global peers. The reasons? For one, the Canadian banking sector is well regulated. The country’s prime minister Stephen Harper has described it as reasonable regulation with minimal micro-management. Canada’s bankers are also essentially a cautious lot, which is reflected in their prudent risk and capital management practices. Therefore, it’s good news that risk management processes around the world are being reviewed. More telling, however, will be how much reform occurs and how deeply it actually permeates the financial industry’s culture. Anthony Ariganello, president and CEO, Certified General Accountants Association of Canada,





Tower of strength World leaders are not the only people focusing on financial regulation. A major ACCA report suggests nine building blocks for a better regulatory framework

F ACCA’s head of policy Ian Welch is responsible for driving ACCA’s thought leadership and policy initiatives. He was previously head of corporate communications, heading up ACCA’s global media and public affairs teams. Before joining ACCA in 2003, Ian was a senior PR manager at KPMG for five years and was formerly a journalist on Accountancy Age.

inancial regulation has become one of the hottest topics of the economic downturn. Traditionally the preserve of back-office compliance staff, it has been transformed into a subject which dominated the G20 world leaders’ summit in London in April 2009 and which remained high on the agenda in the September follow-up. Why the dramatic change? Partly because of politicians’ natural desire to be seen ‘doing something’ in response to a crisis. They can hardly be blamed for wanting to reassure their electorates that lessons have been learned – and stronger regulation is a visible way of proving that point. But the key question is – are the right lessons being taken on board? ACCA decided to examine the subject in detail. We spoke to regulators, CFOs, auditors and other players from the world’s major financial centres to ensure we had genuinely international viewpoints. The result was the publication of a major report: The Future of Financial Regulation in June 2009. There were, inevitably, varying perspectives on the reasons for the crisis. But there was general agreement that, because of the fundamental importance of the financial sector to the world economy, the response had to be thorough and wide-ranging. All the contributing factors to the crisis must be reviewed before any overhaul of the international regulatory system takes place. Only joined-up action will ensure the entire financial system is better equipped to withstand shocks of this magnitude in future. Restoring confidence in the operation of the financial and capital markets is crucial and targeted action is needed on many fronts. Chief among the necessary remedial actions are changes to the way that banks operate. For example, the way in which regulatory authorities identify capital and operational benchmarks and supervise compliance needs reform. Given the globalised character of the banking sector it also makes sense for governments and regulatory authorities around the world to share information and expertise and to

coordinate approaches on these issues. But we do not want this to become a uniform ‘one-sizefits-all approach’, where requirements and procedures have to be adopted by national regulators regardless of local circumstances. Competition of ideas between regulators is healthy and need not lead to regulatory arbitrage. And as Philippe Danjou, former director of the French securities regulator, the ANF says, it is essential that enforcement be carried out at local level with regulators being physically close to those being regulated. Competition is key. The emergence of institutions that are ‘too big to fail’ is anathema to good regulation. We believe, for example, that the UK Government’s generally positive white paper on regulation in July 2009 was not tough enough on this issue. However, we welcome the fact that the UK Government did not respond with heavy-handed ‘solutions’. Sarbanes–Oxley, the US legislative aftermath of the Enron scandal, is not an example to be copied. We believe it is essential that regulators get buy-in from the regulated businesses to the agreed objectives. The indirect contribution, which can be made through improvements in self-regulation by companies and their various stakeholders, is crucial. This is why we disagree with demands from some quarters that the so-called ‘light-touch’ approach to regulation should be superseded by a more bureaucratic and intrusive approach. It is beyond dispute that, in a great many cases, the framework of regulatory controls has failed to protect stakeholders and the wider economy from the consequences of unwise or irresponsible corporate actions. Asking people to follow sound principles rather than detailed rules is far more appropriate. And as the Dubai Financial Services Authority told us: ‘Associating light-touch regulation with “principles-based” and intrusive or close monitoring with “rules-based” is misleading. The terms are not mutually exclusive’. An indiscriminate legislative crackdown could fail to differentiate those aspects of current



regulatory practices that operate successfully, either generally or in individual markets, and those that should be reformed. It must be acknowledged, for example, that the banking sector has been subjected to extensive regulatory requirements. It would be misleading to suggest that the various banking failures could have been avoided if the banks concerned had only been subjected to more detailed rules. It is more likely, in our view, that where direct regulatory failures have occurred, they have been due more to the inadequate enforcement of the existing rules rather than to an insufficiency of the rules themselves. Attention needs to be given to enhancing the staffing capacity and market knowledge of the regulatory authorities. Edgar Zhi, CFO of RBS in Shanghai, sums up the problem: ‘These days, regulators and non-executive directors are too far from the banking industry.’ The inadequacy of corporate governance in banks was one of the major causes of the crisis and addressing it must be part of any new regulatory system.


Government finance ministers at April’s G20, headed by prime minister Gordon Brown, emphasised that strengthened regulation and supervision must promote propriety, integrity and transparency.

The Future of Financial Regulation sets out nine principles that ACCA considers should be addressed in the design and implementation of regulatory frameworks. These cover both what regulatory authorities and individual entities should address. Therefore, the framework of regulation should aim to ensure that there are effective internal arrangements that reduce the need for direct regulatory intervention by the external authorities. The principles are summarised below: PURPOSE OF REGULATION There needs to be a clear understanding of the purpose of regulation. It should facilitate legitimate business activity, provide essential safeguards for the interests of stakeholders, and ensure fair competition in the market. In order for regulation to be credible and effective, authorities need to have a thorough understanding of the businesses and markets that they are supervising. This in turn requires the involvement of individuals with the appropriate skills and experience.


COMPETITION Governments and national and regional authorities should regard healthy competition in the marketplace as crucial to the enhancement of their regulatory systems. Governments and regulatory systems may have contributed to the scale of the crisis by allowing entities to become ever larger and more powerful. The concentration of market power in the hands of a few very large entities has presented significant challenges to regulators and will continue to threaten the effectiveness of regulation unless steps are taken. STANDARDS OF BUSINESS CONDUCT Companies should be expected to carry out their activities in accordance with high standards of business conduct. The adoption of a firm commitment to an ethical corporate culture would not only help to protect the interests of shareholders and external stakeholders, but would help to achieve internal and external transparency and help the company combat threats such as fraud and bribery. STANDARDS OF COMPETENCE Companies should be expected to possess appropriate skills and human resources at all levels of the business. In addition, each of the company’s board of directors should be able to understand the technicalities of the business that is being conducted on their behalf. They will therefore be in a position to exercise their functions of stewardship. CORPORATE GOVERNANCE Serious questions have been posed both about the ability of non-executive directors to exert effective supervisory control over the executive, and the way companies engage with their institutional shareholders. Boards, shareholders and, where appropriate, other stakeholders should have a common understanding of the purpose and scope of corporate governance. In other words, they should all appreciate the ultimate aim of securing long-term prosperity for the company concerned. ACCOUNTABILITY Companies should be expected to account for their activities transparently, thoroughly and with due regard for the demands, rights and information needs of their stakeholders. But there are legitimate concerns about some aspects of financial reporting. The accounts of banks in particular have become so detailed,

complex and lengthy that their capacity to meet the information needs of most investors is being questioned.

Any changes to the way that banks operate will be particulary felt in Canary Wharf, London’s financial heart.

INCENTIVES Remuneration for directors and employees should be integrated into a company’s strategic plans and should not encourage behaviour that could be detrimental to the long-term interests of the company. RISK MANAGEMENT AND INTERNAL CONTROL All companies should set up risk-management and internal controls and these should be able to be objectively challenged by the board, independently of line management. Ideally the officer responsible, if not a member of the board, needs to be accountable directly to the board rather than to executive management. There need to be clear procedures for reporting issues and whistleblowing employees who give information about wrongdoing in good faith should not be penalised. FUNDING Companies in the financial sector should be required to have capital structures and levels of liquidity corresponding to the scale and level of risk inherent in their activities and which make reasonable provision for changes in economic circumstances. The international regulatory authorities should take a coordinated approach to the definition of optimal capital levels for the major retail banks. CONCLUSION We are pleased that many of the findings of our report have been echoed in official responses to the crisis. For example, the US Treasury white paper Financial Regulatory Reform, published in June 2009, cites the failure of risk management systems to keep pace with the complexity of new financial products and gaps and weaknesses in the supervision of firms by regulatory authorities. The communiqué issued by the G20 meeting of government finance ministers also repeated ACCA’s call for the adoption of ethicsbased corporate cultures by emphasising that strengthened regulation and supervision must promote propriety, integrity and transparency. This has to be the way forward for the new era of financial regulation.

The Future of Financial Regulation is available in full at



Measuring success Identifying returns on tangible assets is one thing, but how does a finance function determine the success or otherwise of investment in people? Sir Andrew Likierman, dean of London Business School, provides some pointers


ost finance functions find it a problem to cope with management education. Of course it is essential to invest in people. But how can finance measure its success? Unlike investment in tangible assets, identifying returns is difficult, especially at the level of executive education. So most organisations have a training and education budget that may depend on how loud HR can shout. Or it is linked to the economic cycle and as a result, peak ‘investment’ is almost always at the top of the cycle with lowest levels at the bottom – arguably wrong in each case. Finance, meanwhile, is often a more-or-less passive bystander, a tendency which can be exacerbated by line management’s lack of enthusiasm to measure. Their comments: ‘No resources’ and ‘not worth the cost and effort’ can often mean ‘not my priority’, ‘senior management’s not interested’ or ‘I’d rather not find out’. So what should the finance department do? There are things to do before, during and after a programme. BEFORE THE PROGRAMME Finance should insist on evaluation of success for the individual and the organisation as part of the decision to go ahead. In practice, this means that when looking for information on outcomes (eg promotion or retention), don’t wait until after a programme. Anticipate the need for data and put mechanisms in place to provide it. Learning objectives should also be integrated into the business plan and into a talent management programme, otherwise the education involved becomes isolated from the business. Swedish manufacturer SKF’s solution has been to make the head of talent management responsible for executive education. Finance also needs to agree the time and money to be devoted to measurement with HR. There is no right answer to this – evaluation can range from the cheap and cheerful to the highly sophisticated. The choice depends on how much


is being spent on the programme, and what time and money the company is willing to provide. A specially devised programme for hundreds of executives at a top business school will need far more evaluation than a local two-day skills course for a couple of supervisors. An example of a sophisticated model is given by Swiss pharmaceutical manufacturer Novartis, which used a comprehensive assessment process to enhance the leadership skills of 12,000 managers. This included pre-work to identify the issues, line managers discussing the programme with participants and then reviewing actions, coaching support, personal development plans, assessing programme results and linking them with performance priorities. What about using return on investment to assess an investment in education? This could be useful for low-level skills training, where costs and benefits can be clearly linked to the course. Here, the benefits rarely come from an identifiable decision or decisions and occur over an extended period. So linking benefits credibly to most programmes is generally not possible. Probability percentages of the link between results and the programme give an air of precision but are not easily verifiable.

Professor Sir Andrew Likierman FCCA is dean of London Business School. He is also non-executive chairman of the National Audit Office and a non-executive director of Barclays. In the course of his career Sir Andrew has also been head of the Government Accountancy Service and an MD of the UK Treasury. His previous non-executive posts have included being chairman of the Economists’ Bookshop Group and of the market research firm MORI.


DURING THE PROGRAMME. The key for this stage is feedback from the participants, which will be improved by asking for comparisons to programme objectives, not whether everyone had a great time. Comment, rather than scores, should be emphasised, and HR should carefully analyse and discuss the results with line managers. AFTER THE PROGRAMME This stage is crucial, and outcomes should be tracked wherever possible. Depending on the kind of programme that is involved, opportunities include coaching, peer group support, project work, networking and sharing knowledge within the organisation. Integrating measures relating to the programme into performance reviews greatly improves an individual’s motivation to measure. Time lags make it difficult to connect what has been learned with subsequent action. This problem can be mitigated by setting milestones for actions after the programme, by incorporating feedback into annual appraisals and by providing a first-class commentary about links to the programme, such as evidence on decisions taken. Finally, in answering the question: ‘Was the programme better than others which were (or might have been) available?’ recognise that comparisons need to be made with caution. Avoid direct comparisons between programmes as a whole. Even if there are two supposedly identical programmes, each could attract a different mix of participants. But do try comparisons on individual elements of the programme portfolio, such as the extent of knowledge transfer or the use of assessment processes. CONCLUSION Considering the investment made in education, measurement deserves a rigorous approach. It does not need to be either costly or complex – the principles of good measurement are always the same, no matter what the process is. Finance can help by insisting on measurement, not only to get better value, but also to achieve better outcomes.

Examples of good practice in measuring results The German insurance group Allianz uses 360-degree feedback before and after the programme, enabling individuals to gauge how others perceive they have developed during the programme. Mining company Rio Tinto supplements immediate programme evaluations with an online survey three to six months later. Participants are asked for quantifiable changes and for examples of things that are done differently as a result of the programme. This is supplemented by an annual survey of sponsors asking about the perceived value and impact of the programmes. After a UK Government leadership programme, line managers of participants were interviewed to find examples of where learning had been transferred to the workplace, with questions designed to make sure the contribution of the programme was separated from other influences. Barclays Bank brought together participants a year after a programme to exchange views on what had been learned and for participants to help each other get the best from their follow-up.





Streetwise Donna Street is president of IAAER, an organisation which aims to bring together academia with the world of policy and standard-setting


ar from the often-mentioned yet erroneous perception of accounting academics sitting in intellectual isolation, most are increasingly keen to produce research to influence policy and international standard-setting. They want to assist young scholars in emerging economies, and to facilitate networking between senior accounting faculty in emerging economies with their international peers. And ACCA is committed to helping the International Association for Accounting Education and Research (IAAER) achieve these objectives. This is an ‘exciting and overwhelming’ time to be an accounting academic, says Donna Street, professor and Mahrt Chair in accounting at the University of Dayton and president of the IAAER. Strong interest is being shown by policymakers and standard-setters worldwide in having their work informed by evidence that is both independent and rigorous, at a time when global standards in accounting and auditing are rapidly achieving acceptance by more countries around the world. Street believes that providing a forum for accounting academics from different countries to network and collaborate is vital. ‘In today’s world, if accounting academics are going to have a voice, and if we are going to achieve our objectives, we need to collaborate and work together,’ she says. ‘It’s also important that we network and collaborate with professional bodies such as ACCA.’ The mission of the IAAER is ‘to promote excellence in accounting education and research on a worldwide basis and to maximise the contribution of accounting academics to the development and maintenance of high-quality, globally recognised standards of accounting practice’. The association provides a forum for individual academics to share ideas, but also has about 50 institutional members representing national and regional academic accounting bodies and all the major professional accounting bodies, including ACCA. The IAAER and ACCA have joined forces on a number of projects, and earlier this year the two

Donna Street is the Mahrt Chair in accounting at the University of Dayton, Ohio, US. Her research interests include international accounting standards and financial reporting issues.

bodies signed a memorandum of understanding (MoU) to formalise their partnership. Under the terms of the MoU, over the next three years, IAAER and ACCA will work together to promote research designed to help inform the development of international accounting, auditing, and accounting education standards. They will also encourage and support academic research in emerging economies, by organising consortia and networking workshops and running a mentoring programme for emerging scholars, among other strategies. ‘ACCA’s relationship with the IAAER is of great value to our members around the world,’ says Caroline Oades, ACCA’s head of research. ‘ACCA is committed to supporting research that has high impact and relevance outside academia – to policymakers, standard-setters as well as industry leaders and the profession. The IAAER’s commitment to such research makes it a natural partner for us, as does its commitment to encouraging the development of research skills and teaching capacity in growing economies around the world.’ EASTERN FOCUS In June, the IAAER and ACCA held a consortium in Bucharest, Romania, designed to provide doctoral students and junior faculty with information on developing successful academic careers. Attendees had the opportunity to interact with professors of international standing and fellow young academics. The consortium also included a paper development workshop, where participants received guidance on how to improve the quality of their research. The IAAER and ACCA plan to jointly host two such consortia per year, holding them in emerging economies such as Bucharest, São Paulo in Brazil, Istanbul in Turkey, and Kuala Lumpur in Malaysia, the location of IFAC’s World Congress of Accountants in 2010. Separately, the World Bank has approached the IAAER about helping senior faculty in new EU member states and south-east Europe, who are trying to incorporate international financial reporting and auditing standards into their



academic curriculum and to link that curriculum to the professional accounting certification requirements. ‘A key focus of these networking workshops will be on strengthening the link between the classroom and being prepared to enter the accountancy profession,’ Street says. ‘It’s about enhancing awareness of the importance of linking the accounting curriculum to the development of desirable skills and abilities of professional accountants, thereby better preparing graduates for successful completion of professional certification exams. Among other things, the latter requires coverage of international financial reporting and auditing standards.’ Street believes that ACCA has a lot to offer here, due to the fact that its certification curriculum is based on international standards. INTERNATIONAL STANDARDS Coping with evolving curricula is not just an issue for emerging economies. ‘In the US, our accounting curriculum focuses on US GAAP and US GAAS,’ Street says. ‘But we are now seeing some companies thinking seriously about moving to IFRS, so we are starting to change our curriculum. Moving from US to international standards will be a challenge, but they are conceptually very similar. Moving from the type of accounting that you had historically in some of the regions we are targeting with the World Bank is going to be even more of a challenge.’ As well as supporting academics in emerging economies, the IAAER’s other key goal is to encourage research that helps the development of high-quality accounting, auditing and accounting education standards. By bringing together national and regional accounting academic bodies and encouraging collaboration, the IAAER provides a natural contact point for the International Accounting Standards Board (IASB) and the International Federation of Accountants (IFAC). ‘As both the IASB and IFAC and the standards they issue become more important, it is key to have an international accounting academic association to collaborate with national and regional accounting academic groups,’ says Street.

Professor Street has been published in numerous journals and serves on several editorial boards, including the Journal of International Accounting Research, and the Journal of International Accounting, Auditing and Taxation, and Accounting in Europe. She is a past president of the International Section of the American Accounting Association and Beta Alpha Psi. Before becoming president of the IAAER she served on its executive committee as VP publications and VP research.

‘There is so much to be done globally. I just hope IAAER can work with both accounting academics and professional bodies in a spirit of collaboration’


The IAAER is keen for academics to be involved directly with international standardsetters and other influential bodies. Street is concerned about the lack of any academic members of the IASB following Professor Mary Barth’s term expiring in June 2009, a situation that she hopes will be swiftly rectified. ‘The IAAER continues to work with our national and regional partners and we have encouraged several individuals to put their names forward to be considered for an IASB position,’ Street says. Fortunately, Holly Ashbaugh Skaife from the University of Wisconsin-Madison now has a seat on the IASB Standards Advisory Council (SAC) representing IAAER. Street believes Ashbaugh Skaife’s position on SAC will help provide some academic input into the work of the IASB and also assist the IAAER in identifying relevant research questions that can form the basis of valuable sponsored research. Street is herself a member of the Education Advisory Group to the IASC Foundation’s director of education, and Gary Sundem of the University of Washington represents IAAER by holding an observer seat on IFAC’s International Accounting Education Standards Board. In terms of its research preferences, the IAAER is focused on encouraging projects that address issues on the standards-setters’ agenda where academic research could be helpful. In the past, sponsored by KPMG, the IAAER has commissioned academic research projects looking at financial statement presentation, and the liability/equity distinction. IAAER and KPMG have an outstanding call for research addressing any issue on the IASB agenda. ACCA will be sponsoring research projects each year following on from roundtables held under the ACCA/IAAER MoU. These will focus on an issue of significant importance to ACCA members and their clients or employers. In 2009, the topic is the IASB’s IFRS for SMEs. The roundtables will involve individuals from practice, regulators and other groups. ‘The key is to do “impact” research – not just an academic exercise,’ Street explains. In other words, the research has to have real-world relevance. Referring to the fast pace of accounting change and the spread of IFRS and ISA around the world, Street says: ‘There is so much to be done globally. I just hope IAAER can work with both accounting academics and professional bodies in a spirit of collaboration. When you work together, it is amazing what you can achieve.’ Sarah Perrin, journalist


ACCA offices*


ACCRA Ghana +233 (0)21 688362 ADDIS ABABA Ethiopia +251 115 159533 BEIJING China +86 (0)10 65186122 BLANTYRE Malawi +265 995 377200 BUCHAREST Romania +40 (0)21 312 79 45 CARDIFF Wales +44 (0)2920 786 494 COLOMBO Sri Lanka +94 (0)11 2301920 DHAKA Bangladesh +88 044 7670 3047 DUBAI UAE +971 (0)4 391 5451 DUBLIN Ireland +353 (0)1 498 8900 GABORONE Botswana +267 318 8756 GLASGOW Scotland +44 (0)141 534 4810 GUANGZHOU China +86 (0)20 8755 7932 HANOI Vietnam +84 (0)4 3946 1388 HARARE Zimbabwe +263 (0)4 704 798 HO CHI MINH CITY Vietnam +84 (0)8 3910 3488 HONG KONG China +852 2524 4988 ISLAMABAD Pakistan +92 51 111 22 22 75 JOHANNESBURG South Africa +27 (0)11 459 1900 KAMPALA Uganda +256 (0)414 251328 KARACHI Pakistan +92 (0)21 111 22 22 75 KUALA LUMPUR Malaysia +6 (0)3 2713 KUCHING Malaysia +6 (0)82 425051 KYIV Ukraine +38 (044) 498 34 50 LAGOS Nigeria +234 1 461 6269 LAHORE Pakistan +92 (0)42 111 22 22 75 LONDON UK +44 (0)20 7059 5000 LUSAKA Zambia +260 (0)1 223810 MOSCOW Russia +7 495 737 5542 MUSCAT Oman +968 24 566842 NAIROBI Kenya +254 (0)20 2730728 NEW YORK USA + 1 212 310 0105 info@ PHNOM PENH Cambodia +855 (0)23 991 676 PORT LOUIS Mauritius +230 210 9701 PORT OF SPAIN Trinidad and Tobago +1 868 622 3434 PRAGUE Czech Republic +420 222 240 855 SHANGHAI China +86 (0)21 6391 6777 SINGAPORE Singapore +65 6734 8110 SYDNEY Australia +61 (0)2 8245 0222 TORONTO Canada +1 416-966-2225 WARSAW Poland +48 (0)22 692 4110

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


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


29 Lincoln’s Inn Fields London WC2A 3EE +44 (0) 20 7059 5000

Accountancy Futures – Issue 01  

Accountancy Futures – Issue 01 – November 2009 (Published by ACCA)

Accountancy Futures – Issue 01  

Accountancy Futures – Issue 01 – November 2009 (Published by ACCA)