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FUTURE VISIONS OF THE GLOBAL ECONOMY 29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000



Editor Chris Quick +44 (0)20 7059 5966 Managing editor Jamie Ambler Sub editors Peter Kernan, Adrian Arratoon, Vivienne Riddoch Design manager Jackie Dollar Production manager Anthony Kay Head of publishing Adam Williams Pictures Corbis Printing William Gibbons Paper James McNaughton Group. This magazine is produced on paper that contains certified fibres sourced from forestry within 120km of the paper mill. The mill operates under ISO 14001 certified environmental management system and has its own biomass energy production. 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 A list of ACCA 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 140,000 members and 404,000 students, who it supports throughout their careers, providing services through a network of 83 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 2010 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 Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566. 29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000



How will the accountancy profession shape the global economy over the next 20 years? As with all questions about the future, there is no right answer. But this second edition of Accountancy Futures continues the journal’s mission to explore and debate the big issues that will affect finance professionals – and on which the accountancy profession itself will have an impact – in the 21st century. Carbon accounting, narrative reporting, access to finance and the value of audit are the four big issues that form the backbone of ACCA’s programme of research, debate and events. Many articles are based on ACCA research, and we are delighted to include contributions from heavyweights such as IAASB chairman Arnold Schilder, IFAC president Robert Bunting, and Malaysia’s Securities Industry Development Corporation CEO John Zinkin. But for our cover feature, ACCA has asked a panel of experts for their predictions of how the global economy might look in 2030. If you want to find out about the future, read on. Chris Quick, editor You can find out more about ACCA’s Accountancy Futures programme at

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

John Davies head of technical +44 (0)20 7059 5972

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


ACCOUNTANTS FOR BUSINESS We look at the collaborative foundations that the smart CFO relies on to build a value-adding world-class finance function, ask experts from around the world about the evolving role of the finance chief, consider how SMPs should evolve to satisfy SMEs’ growing needs, and provide insight into the advantages of IFRS for SMEs.

Lighting installation adjustments

inside the Chinese pavilion at the Shanghai World Expo COVER


AUDIT AND SOCIETY With the role of audit under scrutiny, we explore its value and future, look at what private sector auditors can learn from the public sector, and report on a series of audit roundtables from around the world.


NARRATIVE REPORTING The financial crisis has brought about a new emphasis on business models, especially on how sustainable they are. We explore how narrative reporting could help give users of accounts useful information about them. We also take a look at how far finance professionals are getting to grips with XBRL. ACCESS TO FINANCE With the halcyon days of easy credit for businesses long gone, we report on how businesses of different sizes and in different parts of the world are faring when it comes to accessing finance. We also look at Islamic finance.

allows companies and accountants to prepare properly’ PG80

‘India’s clear roadmap to IFRS CARBON ACCOUNTING Some businesses are creating value from the shift to a low-carbon economy. We look at how they are doing this. We also report on how accountants are incorporating new thinking into setting standards for climate change, and how businesses rather than governments are driving the increase in climate change and carbon disclosures.



Looking ahead We preview some forthcoming research and events

01 ACCA BACKS IFAC SUSTAINABILITY MOVE The International Federation of Accountants (IFAC) has signed a memorandum of understanding on sustainability with the Prince of Wales’s Accounting for Sustainability Project. This supports the global accountancy profession’s role in developing sustainable organisations. The memorandum specifies that sustainable reporting practices must be embedded. Measures to be adopted include the development of a community website for professional accountancy organisations to collaborate on sustainable practices, establishing an international integrated reporting committee to develop an improved reporting model, and incorporating accounting for sustainability within professional training and education. ACCA backs the project. More at

02 MICROFINANCE STUDY ACCA is examining how accountants can support the applicants and recipients of microfinance. This is a critical source of finance for millions of businesses, particularly in developing and emerging countries. The


The Jamii Bora Trust has grown into Kenya’s largest micro-finance institution since its inception in 1999. It now has 200,000 members who count on its loans, housing and healthcare plans to help them out of extreme poverty. Kenya held the Microcredit Summit in April 2010.

ACCA team is talking to stakeholders to explore ways to enhance the probability that businesses that receive microfinance survive and grow.

03 DELOITTE AND ACCA TALK NARRATIVE ACCA and Deloitte are embarking on a joint international project that will explore challenges in narrative reporting from the perspective of finance leaders. Today’s corporate reporting is scrutinised by a range of stakeholders, leading to many demands being placed on the annual report. This new study will look at the extent to which these demands vary in different countries, how they shape the views of finance leaders who are responsible for narrative disclosures and the challenges of narrative reporting in annual reports. CFOs and FDs of listed companies are being surveyed in nine international markets, along with investors. The study will be published later this year.

04 IAAER AND ACCA LAUNCH AUDIT RESEARCH ACCA has commissioned research into auditing issues of global importance. It has been working in collaboration with the International Association



for Accounting Education and Research (IAAER). The research is to comprise four separate projects that are intended to support the work of the International Auditing and Assurance Standards Board (IAASB). Specifically, these will focus on whether there is consistency in the application of auditing standards, the implications of eXtensible Business Reporting Language (XBRL) for the financial statement audit, the audit methodology for smaller audit firms, and the nature of professional judgment in auditing. Research teams from Australia, Germany, the Netherlands, the UK and US will present research designs at the International Symposium on Audit Research in Singapore, with interim research findings to be presented in the US early next year, followed by delivery of the final results at a conference in Europe in October 2011.

ACCA Hong Kong celebrated its 60th anniversary at a reception attended by 200 guests. Guests at the event in April included guest of honour John Tsang, financial secretary of the Hong Kong SAR government, and special guest Paul Chan, legislative councillor (accountancy constituency).

07 VIRTUAL CONFERENCE DEBATES KEY ISSUES ACCA’s 2010 Global Virtual Conference will take place on 28 July. Bringing together more than 2,000 experts to discuss topical issues such as the future of the global economy, talent and Generation Y, the conference will use the latest virtual technology to offer a unique international forum for ACCA members, employers and other stakeholders. Its theme is Accountants for Business: the role of the virtual economy. Broadcast live, the free event will feature a mix of live debates and pre-recorded content. The event content will be available for viewing until the end of October 2010. Email extevents@accaglobal. com to register your interest.

05 ACCOUNTANTS FOR BUSINESS A new paper from ACCA, In Pursuit of Sustainable Business, examines what has been learnt by finance professionals over the past two years. It considers the agenda for the profession and the value that accountants can bring to businesses of all sizes and in all sectors. It supports what ACCA sees as the role of accountants as promoters of sound business practice, champions of sustainable business development and identifiers of value drivers which lead to high-performing organisations. The paper is available at accountants_business

08 THE ROLE OF THE SMP ACCA Hong Kong’s guest of honour John Tsang, financial secretary of the Hong Kong SAR government.

In support of its practising members, ACCA has commissioned three research projects examining the role of the small and mediumsized practice in providing business support, looking at various aspects of this provision. These include the growing provision of HR and employment law advice to SMEs. The publications will be a source of policy initiatives within ACCA’s global strategy and will be published in Q3 2010.

09 CALL FOR ETHICAL COMPASS The business world should focus more on ethical responsibilities and prioritise the recruitment of senior executives and financial staff with strong ethical compasses, according to a new ACCA report. Risk and Reward – Tempering the Pursuit of Profit looks at where the financial system went wrong prior to the financial crisis, with a massive failure of ‘people risk’ being identified. It argues that a strong commitment to ethical business conduct on the part of directors and key staff is a strong line of defence against reputational damage and should be an essential part of any risk management strategy. The report is available at

10 LIFETIME ACHIEVEMENT AWARD Roger Adams, ACCA executive director – policy, has been awarded the Lifetime Achievement Award by the British Accounting Association (BAA) for his contribution to the accounting



ways to achieve a transition to a sustainable economy. Winners of the GRI Readers’ Choice Awards for sustainability reporting, voted for by stakeholders from 55 countries, were also announced at the conference. ACCA is an Awards partner. All the categories were won by companies from Brazil. Also at the conference, two new studies revealing an increased focus on sustainability were released, including Carrots and Sticks – Promoting Transparency and Sustainability, produced jointly with KPMG, the United Nations and the University of Stellensbosch Business School. Find out more at

13 CHANGING ROLES FOR THE SMP ACCA SME expert Professor Robin Jarvis has co-authored an analysis of business advisory services provided by small and mediumsized practices (SMPs), published by the International Federation of Accountants (IFAC). It concludes that the needs of SMEs are changing and highlights ways for SMPs to evolve to meet these needs. More on page 24.


and finance community. The award is given to people who have made a substantial and direct contribution to the academic accounting and finance community.

11 DERIVATIVES REPORT A recent ACCA report reveals evidence of significant variations in the quality of riskmanagement disclosure practices concerning the nature and type of derivatives used by large US and European businesses to manage exposures to unexpected fluctuations in currency and interest rates. Derivatives Reporting Practices by Multinationals is available at

12 GRI CALLS FOR GREATER DEFINITION A standard for integrated reporting – where financial reporting converges with environmental, social and governance (ESG) reporting – should be defined, tested and adopted by 2020. This was the challenge set by Ernst Ligteringen, chief executive of the Global Reporting Initiative (GRI), of which ACCA is a founding member, at its Amsterdam Conference on Sustainability and Transparency in May. Nearly 200 speakers from business, finance, politics and civil society, joined with more than 1,200 delegates, to take part in more than 50 sessions debating the


Helen Brand: ‘WCOA is a great opportunity for us to share best practice and new ideas, injecting confidence to face the future’.

Senior accountants and representatives of accountancy bodies will be converging on Malaysia in November for the 2010 World Congress of Accountants (WCOA). Held every four years by IFAC, the event is expected to attract 6,000 participants. Its theme is Accountants: Sustaining Value Creation. Malaysia’s prime minister, Datuk Seri Najib Razak, will give the keynote speech. He said: ‘The WCOA provides a rare opportunity for the accounting world’s pioneers to help build the framework for assuring an anxious global investment community. Through the exchange of information, creation of networks and promotion of standards, the 2010 WCOA participants will have a significant impact on accounting best practice for many years.’ ACCA is a gold sponsor of the event. Helen Brand, ACCA chief executive, says the World Congress provides ‘a great opportunity for us to share best practice and new ideas, injecting confidence to face the future’. Find out more at

15 …AND ACCOUNTING ACADEMICS The World Congress for Accounting Education and Research will take place in Singapore in November attracting accounting academics from around the world. Held every four years alongside the World Congress of Accountants (see above), the event is the flagship of the International Association for Accounting Education and Research (IAAER). ACCA is a gold sponsor. See


The world in 2030 How might the global economy look 20 years from now? ACCA asked leading economists and other experts to predict how the future will look


emember what the world looked like 20 years ago? 1990 was the year Nelson Mandela was released from prison, Germany was reunified and the worldwide web was born. So how might the world look 20 years from now? A new ACCA report, Where next for the global economy? A view of the world in 2030, captures the views of a broad panel of experts from business, academia, journalism and other professions. They paint a picture of an environment different from today, but formed by the continuation of current trends. Accurately predicting the future in any detail is notoriously hard, but trying to foresee trends can help businesses and governments plan ahead. Some key ideas are summarised here. THE DISTRIBUTION OF GLOBAL POWER Globalisation and the growth of emerging markets will result in a ‘flatter’ world by 2030. Many panellists predict that, in 20 years’ time, ideas, capital and ways of doing business will flow between advanced and emerging

Vision of the future: a visitor walks inside the China National Petroleum Corporation Pavilion at the Shanghai World Expo 2010. About 70 million visitors are expected to attend.

economies. Who will dominate the global power base in 2030 is up for debate. Some panellists envisage a world where political and economic power has moved to the East. An East-East axis of power could emerge, with thriving trading routes stretching from Asia to the Mediterranean via North Africa. Others see some shift in power, but foresee the rise of the ‘new West’, including smaller Western countries. Advanced economies will continue to innovate, benefiting from their political and economic stability. Also, the power of nations will constantly shift, depending on where they sit in the chain of production at any given time. This will be a world of mutual dependence. RESOURCES: SCARCITY AND COMPETITION Sustainability issues will remain important in 2030. Growing populations, particularly the swelling middle classes in countries such as India and China, will stimulate huge consumer demand and this ‘aspiration generation’ will have massive global impact. Competition for



natural resources will intensify, with a need for a more coordinated approach to accessing resources such as oil, food, minerals and water. Interest in regions with relatively unexploited natural resources, such as Africa, will grow. Many panel members believe that achieving economic growth at the same rate will be ecologically unsustainable, and limited access to resources could have a disproportionate impact on developing countries. But some think that countries developing clean technology could partner with emerging markets. THE FUTURE OF FINANCIAL MARKETS Global markets are expected to grow, though some panellists expect the rate to be slower, with the financial crisis encouraging greater caution. International regulatory cooperation will continue and panellists anticipate the convergence of financial regulation. While international regulation is needed, panellists are concerned that global standards should not translate into a rigid, one-size-fits-all approach. Overall, panellists expect to see more voluntary regulation, as well as statutory rules. Panellists agree that potential sources of investment will increase, with sources of best return not necessarily located in the West. Investment demand and supply will roughly balance out, although competition for funds is most likely to occur in SME-dominated states. THE CORPORATE ECOSYSTEM In 2030, panellists expect to see more diverse and fluid business models. Businesses will become ever more specialist and linked by


Let there be light (right): one of the steel-and-glass funnels of the main Shanghai Expo building. The socalled Sun Valleys flood light into the basement structures of the building. Below: the Yezi car from the Shanghai World Expo – the jetpacks may have disappeared but tight synthetic clothing retains its place in the futurists’ hearts.

increasingly virtual ties. It will result in a ‘world of shopkeepers’. Entrepreneurialism will thrive and small enterprises achieve a bigger footprint by collaborating with others. Multinationals will be ‘cultural chameleons’, understanding different business practices. More federations of businesses are anticipated, offering an adaptable response to regional market characteristics. Family businesses will continue to succeed. Deconglomeration will result in a more ‘intuitive’ form of outsourcing. Some panellists also expect higher-value activities, such as accountancy and other professional services, to be outsourced. GOVERNANCE AND GOVERNMENT Developing governance and assurance will be critical as the globalisation of business continues. New forms of governance will emerge alongside more fluid, collaborative business models. Panellists anticipate more self-governance through the creation of cultures where the responsibility of ‘doing the right thing’ is embedded in organisations. Governments will be under increased pressure to provide quality social services to long-living populations without increasing taxes. The future role of governments will depend on whether they place more emphasis on the need to provide the right environment for business or to regulate and govern the private sector. Sarah Perrin, journalist Read the Where next for the global economy? report at


Many panel members believe that achieving economic growth at the same rate as in past decades will be ecologically unsustainable. Limited access to resources could have a disproportionate impact on developing countries



Back to the future. Members of our panel give their predictions about what the world’s economy will be like in 2030 ANDREW DILNOT, ECONOMIST, PRINCIPAL OF ST HUGH’S COLLEGE, OXFORD UNIVERSITY ‘In 25 years’ time, real GDP in the developed world will have doubled. If China and India grow at 8% a year, in 2035 they will be five times as large as they are now.’ NENAD PACEK, PRESIDENT, GLOBAL SUCCESS ADVISORS ‘The business world will be astonished by the rise of new companies that come from emerging markets. At how powerful they will become. They should not be underestimated in any way.’ JAPHETH KATTO, CEO, UGANDAN CAPITAL MARKETS AUTHORITY ‘I can see a very strong shift, particularly in Africa, in where foreign direct investment, assistance and trade is coming from. We have seen Indian companies getting into telecommunications and China becoming involved in banking.’ ABBAS SHOJAEI, PARTNER, SALEHANDISHAN & CO ‘The most likely new consumer market will be in areas such as the Middle East. The aspiration generation will also be in countries like Iran, where there are lots of young, talented people who have not had the chance to prove themselves so far.’ MALCOLM WARD, LEADERSHIP TEAM, GRANT THORNTON UK ‘We talk about India, China, South America... but there is the whole continent of Africa which hasn’t really become economically active yet.’ SAUL ESTRIN, PROFESSOR OF MANAGEMENT, LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE ‘You can think of global warming like a massive tax – an unstoppable, unsustainable tax on economic growth, which will fall disproportionately on the poorer countries.’ JOHN DEFTERIOS, CORRESPONDENT, CNN BUSINESS NEWS ‘Countries are defining their USPs much more aggressively than they would have done five years ago. One can see regions of the world from a Jordan to an Egypt or Malaysia quickly defining their USPs – whether it is a call centre, a pharmaceuticals hub, a financial


Andrew Dilnot In 25 years’

time, real GDP in the developed world will have doubled

Nenad Pacek New companies

from emerging markets should not be underestimated in any way

Japheth Katto

I can see a strong shift in where foreign direct investment is coming from

Abbas Shojaei A new

consumer market is most likely in areas such as the Middle East

Malcolm Ward

Economic activity equals huge consumption... and some difficult home truths

Saul Estrin

You can think of global warming as being like a massive tax on economic growth

John Defterios

Countries are aggressively defining their USPs

Maury Peiperl

The portability of people and money means little exclusivity


Chin Kwai Fatt services hub, telecoms hub and trade facility to be able to serve those who have wealth, like the Gulf countries.’ MAURY PEIPERL, PROFESSOR OF LEADERSHIP AND STRATEGIC CHANGE, IMD ‘The portability of people and information, especially information and money, means that while you will have clustering, there’s little exclusivity. There are relatively few barriers to most of that clustering, and, typically, there will be multiple clusters in one speciality and multiple specialities in one region.’ CHIN KWAI FATT, MANAGING DIRECTOR, PRICEWATERHOUSECOOPERS MALAYSIA ‘“Collaboration” is the catchphrase for new businesses. By definition, these new, small companies will be shopkeepers but at the same time they can provide intellectual capital and operate on a virtual basis with their customers or suppliers. So there could be designers sitting somewhere in Singapore, in Korea, but providing a service to the manufacturing plants in China.’ VERENA CHARVET, MANAGING LAWYER, INVESCO ‘We may see a development of more interesting joint venture-type arrangements. So you would have a situation where two large companies see a market opportunity, but neither of them wants to take the complete risk; or one of them brings certain skills to the project and another brings other capabilities.’ MIKE HOBDAY, PARTNER, IBM ‘The paradigm of outsourcing low-value, lowskill work will be increasingly challenged. For example, in application-management services I am seeing high-value architecture and development services being offshored to India, with the prospect of end-to-end delivery of IT services coming from Pune or Bangalore.’ MARK GOYDER, FOUNDER DIRECTOR, TOMORROW’S COMPANY ‘You need organisations and cultures to be assured by the knowledge that anybody can say to anybody “I think that is a silly idea” or “Why on earth are we doing this?” And organisations need to be more transparent so that the public can say “Why on earth are you doing that?”’

‘Collaboration’ is the catchphrase for new businesses

Verena Charvet

We may see more interesting joint ventures

Mike Hobday

Outsourcing low-skill work will be increasingly challenged

Mark Goyder

Organisations need to be more transparent

Loughlin Hickey A culture

where anything that is not in the rules is fair game is dangerous

Antonio Estrany Y Gendre

Innovative markets are likely to be more stable and entrepreneurial

LOUGHLIN HICKEY, GLOBAL HEAD OF TAX, KPMG ‘If you have a rules-based system [of regulation] the rule-maker takes responsibility for having the correct rules. Therefore a culture grows where anything that is not in the rules is fair game. I think that’s a really dangerous place to go.’ ANTONIO ESTRANY Y GENDRE, FORMER BOARD MEMBER, HSBC ‘It’s more likely that innovative developments will happen in markets that are stable and have an entrepreneurial tradition and mindset.’





Time to collaborate ACCA’s Jamie Lyon takes a look at the collaborative foundations that the smart CFO relies on to build a value-adding world-class finance function


ver the past decade one of the key questions occupying the minds of chief financial officers has been how to shape the finance function to better support the business. Primarily, this is a recognition of deepening business complexity, with global operations driving a need for more effective insight and analysis from the finance department. It is also a reflection of the desire for cost efficiencies and a wish for assurance that the regulatory and stewardship aspects of the organisation are being handled effectively. In short, the finance department has been multitasking for some time. At the end of 2009 ACCA published its Accountants for Business report, a precursor to ACCA’s global 2010 theme of Accountants for Business, which considers the role of accountants across organisations as part of a new value agenda. The report itself focused on the evolving role of the finance function as a partner to the business, identifying the key areas occupying the attention of finance during the economic downturn. It emerged that finance continued to operate across core areas such as supporting the business in its strategy, managing its regulatory responsibilities, ensuring effective control over the organisation’s assets and controlling its risk. However, it was clear that, because of the challenging business climate, finance functions were also having to devote more resources to their historic remit and core focus. Areas such as cash management, deleveraging the business and reducing costs suddenly became critically important. Finance was also expected to be delivering much more effective insight to support the business because the decision-making environment was so treacherous. The ability of finance to support the business, as outlined in the report, depends on a number

HOW FINANCE TEAMS SPEND THEIR TIME 6% Management reporting 19%

Strategy and planning

20% Budgeting and forecasting 25% Performance improvement projects 30%

Business analysis

of key issues. World-class finance functions are better placed to deliver the organisation’s agenda primarily because their internal reputation is very strong. This reputation is earned and not granted automatically by the business, so it is imperative that finance professionals and functions support the business in the most effective way, and help the business drive value. Strong finance leadership, effective IT and the alignment of finance strategy to the overall business were all cited by the report as the key differentiating characteristics of great finance functions. But above all else it is the quality of the people in finance that makes the real difference. If the skills, knowledge and capabilities of finance people are leveraged in the right way, the finance function becomes a valued partner to the business. To tap in to these qualities, and to capitalise on these skills, the relationships that finance maintains across the business become very important. This year offers a great opportunity for the finance function. It represents a possible golden age for CFOs and finance leaders to drive, influence and shape the strategic agenda because they have earned the right to do so over the past 18 months.

IS FINANCE RISING TO THE CHALLENGE? PwC’s finance effectiveness benchmark report looks at how the best performing finance functions are able to meet evolving business needs, balancing being a business partner with traditional responsibilities.



Maintaining and extending these relationships effectively should be a key strategic aim of the CFO and the finance function; success will be critical to capitalising on the opportunities that 2010 presents. RELATIONSHIPS INSIDE THE BUSINESS Strong internal relationships help to extend finance expertise right across the business, and many finance functions have sought to systematically transfer financial understanding in this way. It is sometimes referred to as building financial management capacity in the organisation and is successful only if finance develops and maintains strong relationships and collaborative practices. The use of finance champions across the business is a common approach. More specifically, the advent of ‘business partnering’ has been a key strategic aim of the finance function. This involves finance functions seeking to create value by aligning themselves more closely to the needs of the business, with shared objectives and support for improved decision-making. In practice, the term covers myriad operating models. It can make strategic sense to embed finance talent in operating units, particularly where business operations are geographically dispersed or highly product-diversified. Supported by smaller centralised finance units driving a standard protocol across common processes such as reporting and investment appraisal, and an offshored or outsourced transaction processing function, the ‘retained’ finance function is typically more adept and more likely to drive value (see right). Challenges to overcome with the business partnering model include redesigning endto-end processes, reviewing the skills and training needs of finance staff, and assessing the fitness for purpose of IT capabilities and decision support tools. Typically there are also significant implications for organisational design and roles, and the responsibilities of finance staff. But good relationships help finance extend its remit, which goes hand in hand with greater influence. The perception of finance changes, so it is not seen simply as a back-office function crunching the numbers. Instead, the finance function gets involved and leads on wider business initiatives such as change management programmes, major projects, product development, and innovation and research. The astute CFO recognises the critical influence of the finance function across the business. Relationships matter, too, because sometimes the finance function has to initiate change


EMBEDDED FINANCE UNITS Finance decisions support and analytics are embedded in commercial operating functions to improve decisionmaking and to inculcate financial literacy into the business units. CENTRAL FINANCE UNIT A smaller centralised unit is set up to ensure consistency across companywide financial processes. Typically supported by group functions such as tax, treasury and internal audit. OUTSOURCED TRANSACTION PROCESSES Back-end processes such as accounts payable, accounts receivable, general ledger and payroll are outsourced to drive down costs, increase efficiency and enhance expertise.

programmes that may trigger resistance. For example, last year saw large cost reduction exercises across many businesses. Effective communication is key here. In extending any relationship, it should be recognised that finance is not just an exporter of good practices across the business – it is an importer, too. The best finance functions recognise the contributions and added value that other departments can bring to how finance itself operates. Consider, for example, the relationships between human resources and finance. There is a natural alignment between the objectives of the two functions, both of which want to recruit, develop and retain competent finance people in the organisation. Recognising the specialised nature of finance operations, many HR departments have created business partnering roles specifically for finance, so that its needs can be better understood and delivered on. People capability is fundamental to the success of any finance function, so an effective working relationship between HR and finance is a business necessity. RELATIONSHIPS OUTSIDE THE BUSINESS External relationships also matter. The range of stakeholders with a vested interest in the remit and activities of the finance function continues to grow, and, to many, the finance function is the face of the business. In many ways, the CFO and the finance function are the guardians of the corporate brand, and the major interface between key stakeholders and the business. The function has primary responsibility to the shareholders of the organisation in ensuring that its financial matters are run with diligence and expertise, yet its influence and remit now extend well beyond this stakeholder group. Finance continues to work with its traditional partners, such as tax authorities, auditors, government regulators, the banks, investment authorities and pension advisers. At the same time, finance’s remit is continuously expanding so that it comes into contact with other stakeholders such as corporate and social responsibility groups, property consultants and asset management groups, management consultancies, suppliers, customers, logistics partners and so on. To fulfil these obligations effectively with all of the external stakeholders, good relationship management and the creation of a culture of trust and responsibility are key. Read Collaborative Working: Relationships Matter in Finance at accountants_business


Smoother operators Jamie Lyon investigates how personal networks affect a CFO’s career


ollaborative working practices are important at an individual level, too. The trajectory or path of an individual’s career in finance can be shaped by the strength of their personal relationships – in other words, it’s who you know and not what you know – but this is only one of many factors that may ultimately determine the types and levels of career that people go on to pursue across the profession. Aspirational accountants on the CFO career path benefit enormously from an effective network. Good networks facilitate new opportunities, and a strong network helps ambitious finance professionals gain insight and advice from people with different experiences, as part of the learning journey. A good network generates career opportunities and reduces the risk of career dead ends. Most finance jobs are not advertised, and career opportunities often come about through a contact network. Alternatively, an effective career network can simply operate as a knowledge plug – that

is, there will be someone in the network with the relevant knowledge and information that an individual needs and who can be called on to supply it. A network shouldn’t be used to confirm what individuals already know; it should be used to fill in what is not known. Ambitious finance professionals with an eye on a CFO position need to think carefully about how they develop their network. There are some golden rules which should be applied. Effective networkers typically build bridging positions between disparate groups; in simple terms, this means that they have access to information and can share that with different parties who are not directly networked or connected to the owner of the information. It’s a powerful position to be in. Time also matters. Early networking in a career usually pays off because strong networks take time to cultivate; individuals are more likely to be able to capitalise on the opportunities that a network presents earlier in their finance careers because they may be less constrained by personal circumstances.



The quality of the network is much more important than the quantity of contacts. With networking, less is often more. Where a network is too large, individuals do not have sufficient time or energy to devote to developing relationships properly. At the other end of the scale, having too small a network, or one localised to specific areas of expertise, can also create problems. Some finance professionals play high-risk strategies by identifying and aligning themselves with a single individual who is senior to themselves. They then devote all of their energies to developing just this relationship because they believe the chosen individual is destined for a senior role and assume they will also be taken along. The problem with this strategy of hanging onto someone else’s coat tails is that it leads to a neglect of other relationships that could be developed. Sometimes the ‘coat-tails’ strategy pays off but more often fails because the ‘mentor’ does not receive the promotion expected – a classic case of backing the wrong horse. Organisations often elect to bring a new CFO in from outside, which can easily cause disruption in the next tier down among people who have invested significant time in building strong ties with the outgoing one. The fear is that the new CFO will bring in their own people – in other words, from their own network – for key roles. The learning point is that both internal and external networks should be cultivated so as to maximise opportunities and learning experiences, and to navigate around potential career blocks. A crucial point is that the most diligent collaborative workers invest time in developing strong relationships that last. They think carefully about how the network will extend their abilities. These relationships typically work on a reciprocal basis, which builds up trust and strengthens ties; poor networkers commonly develop networks that are too large and woefully superficial. Good networkers make sure that wherever possible they are able to accommodate requests, and provide independent objective advice and feedback. They ensure they fulfil the promises they make. They do not alter their values or beliefs simply to fit in with the current vogue and, as a result, they earn respect for their integrity. They invest significant time and resources in developing their relationships, and recognise that effective networking is a long-term game. When the top position is reached, the strength of relationships and networks continues to matter. A CFO who has developed a


strong network is likely to be much more successful in their role internally, and even more so externally. Canny CFOs understand that the role of finance is evolving and that interactions with external stakeholders are just as important to its success as internal relationships. They recognise that effective engagement with shareholders, regulators, governments, tax authorities, banks, suppliers and customers is key. The CFO role is more challenging and more complex than ever, and in the current environment is coming under even greater scrutiny. CFOs who are good at building friendships, allies and networks are most likely to succeed, not just because they will bring people on side, but also because their networks operate as shared learning environments where ideas, knowledge and experiences can be exchanged, and advice sought from peers and associates. Few CFOs will have experienced a business period as challenging as it has been over the past 18 months and will have had to learn a great deal in a short time, so being able to call on contacts for advice and to share experiences will have been welcome. A CFO who has built up a strong external network is also well placed to keep pace with emerging good practice in the marketplace. Good networks offer CFOs informal opportunities to benchmark their finance function. It may also help them recruit talented people into the organisation and it will always help them keep their own career options open.

Jamie Lyon FCCA, senior professional development manager – employers at ACCA, is responsible for undertaking research on learning and development issues affecting the global accountancy profession. Prior to joining ACCA he spent over a decade in industry as an accountant, working both in the UK and internationally.

Less is often more. Where a network is too large, individuals do not have sufficient time or energy to devote to developing relationships properly


The CFO speaks out The role of the finance chief in business is evolving. We ask finance experts from around the world what changes they are experiencing on the ground


e are often told that the role of the CFO has changed beyond all recognition. And in many ways that’s true: strategic outlook and commercial savvy will usually be in the top three or four qualities demanded on any headhunter’s list of must-have attributes. It’s certainly become fashionable to cast the finance director as being above the numbers. But even the most successful CFOs recognise the need to manage the basics, along with communicating financial issues to the rest of the business and demonstrating a firm understanding of risk management. Indeed, all these skills and more are now required of the modern CFO. The following quotes were taken from various sources including recent ACCA events, The Economist’s CFO conference and interviews in ACCA’s member magazine Accounting and Business. ON GETTING A GROUNDING IN THE BASICS ‘You’ve got to build up experience. You can’t suddenly move up into an FD’s role and become a strategist. You can’t just change overnight. We can all become experts in

narrow fields, but early on in their careers people need to get as much experience as possible. To be pigeonholed in the first steps of your career is very dangerous.’ DAVID KEENS FCCA, FD, NEXT, UK, RETAIL ON MAKING DECISIONS IN TOUGH TIMES ‘I think that there are probably six important decisions that you make in your career. And it seems to me that we’ve had those six made in the past few years. ‘It usually takes about six years to find out whether those decisions were right or wrong. That has been of some benefit to those who make the decisions since they are never there to see the effect. But for us, the bonus has been that the rightness or wrongness of decisions will be identified within six months. And that’s changed the environment in which we’ve operated.’ CHRIS LUCAS, CFO, BARCLAYS, UK, BANKING

To be pigeonholed in the first steps of your career is very dangerous. DAVID KEENS PG19 EDITION 02


is bound by rules and accounting standards. Sometimes people find it difficult to embrace change. I want to encourage people in my department to think creatively. If people are open to change, they will think about how to make something more efficient.’ ALICE WONG, FINANCIAL CONTROLLER, CITY TELECOM, HONG KONG, COMMUNICATIONS

The CFO is an integral element in planning, implementation, troubleshooting and monitoring. LUKMAN IBRAHIM ON WORKING WITH THE BUSINESS ‘You are actually in the business function, so the CFO is an integral element in the planning, implementation, troubleshooting and performance monitoring processes. This means you have to know the subject matter, you have to be well versed and widely read. There’s no short cut. The automotive business is very technical as you have to work with the engineers, you have to understand engineering language, you have to talk like an engineer to gain their confidence and acceptance.’ LUKMAN IBRAHIM FCCA, CFO, DRB-HICOM BERHAD, MALAYSIA, INDUSTRY ON INVESTING IN INTERNATIONAL MARKETS ‘There’s always a tendency to want to push hard with investment, but there can be shocks in emerging markets – look at Venezuela, or Zimbabwe or Indonesia. The CFO needs to be wary of that. He must be positive but not blind to the risk. Consumers are not isolated or insular any more. The ability to travel is massively important; it means consumers are jetting across borders into new markets, so you have to be aware of that.’ COLIN DAY FCCA, CFO, RECKITT BENCKISER, UK, HOME, HEALTH AND PERSONAL CARE ON DEVELOPING THE FINANCE FUNCTION ‘Other than number-crunching and financial reporting, I am trying to develop the financial department so it can act as a business partner with other City Telecom departments and external stakeholders. Although we are not directly sales-related, we are working to support the company’s 10-year financial and business objectives contained in our “Big Hairy Audacious Goals”. Much of our work


ON SERVING TWO MASTERS ‘One of the key things to balance is this: if, as FD, you’re in a situation where you are more operational and strategic, then you’ve still got to do the basics of finance and the general stewardship role. At M&S, I’m the FD who has arbitrated where the capex spend has gone; with another hat on, I look after IT and supply chain. So I want to spend money on the systems in the business, on warehousing and so on. How do I manage that conflict – pushing forward investment to get returns, along with my duty to the shareholders who might want to go slow? So that’s a challenge and you need skill and maturity to deal with that. It’s increasing as well. Your diplomatic and influencing skills will have to come to the fore too.’ IAN DYSON, FD, MARKS AND SPENCER, UK, RETAIL ON WORKING WITH SUPPLIERS ‘We decided we needed to reduce inventory on the balance sheet, something a lot of companies were doing. We put more focus on improving forecast accuracy, and that puts pressure on managers to run a tight ship. The second thing was that we always paid off our manufacturers very quickly by virtue of having a lot of cash to do so. But we said: “It’s still a partnership and you have to play your part.” So we pushed out terms and that had a big one-off impact. We needed that flexibility, so we negotiated it.’ MARINA WYATT, CFO, TOMTOM, UK, COMMUNICATIONS ON LEADERSHIP AND MOTIVATION ‘The FD should perform a figurehead function and not look just to lead the finance function. As leader you need to have the skills of motivating people. A lot of FDs, possibly the majority, are now seeing themselves as almost deputy CEOs, not just internally, but among shareholders too.’ JOHN NICHOLAS FCCA, NON-EXECUTIVE DIRECTOR, CERES POWER, UK, ENERGY

Sometimes people find it difficult to embrace change. I want to encourage people in my department to think creatively. ALICE WONG


aspects. I think that as a profession we do have a tendency sometimes to be a little snooty about the technical elements – “You couldn’t possibly understand.” That attitude doesn’t help.’ IAN DYSON, FD, MARKS AND SPENCER, UK, RETAIL

We started asking searching questions such as ‘Do we have the right people?’ and ‘Are we the right size?’ GOH GEOK CHENG ON SPREADING THE ‘GOSPEL’ OF FINANCE ‘It’s vitally important. People generally in the business will be interested in the financial side of things – the profits, the share price and so on. That’s partly because 30% of our employees own shares in M&S. They follow the share price and we talk to them about it. And it helps if your finance function is staffed by articulate and commercially minded people who are happy to spend some time explaining things to non-finance staff. Thinking of it as “teaching” is too dry. We underestimate just how interested people are in the financial

A sign in a business district in downtown Tokyo shows the evolution of man. The role of the finance director is also evolving as the needs of businesses change.

ON ASKING DIFFICULT QUESTIONS ‘We started asking searching questions such as “Do we have the right people?” and “Are we the right size?” I asked the business managers to think hard about what was needed instead of what we wanted to spend money on. This forced people to think of creative ways to find solutions. At the end of the day it was a very productive exercise.’ GOH GEOK CHENG FCCA, CFO, PRUDENTIAL SINGAPORE, FINANCIAL SERVICES ON WORKING WITH THE SENIOR TEAM ‘It’s very dangerous to have too many people who see themselves as the leader. There needs to be the CEO, who is the leader, and the CEO needs support. ‘The role of CFO is going to be a lot more outward-facing now than it was 10 to 15 years ago. CFOs need to hold their position more to external parties, whether that’s the bankers or the investors. Over the past few years the CFO has taken on a much more public face, but it must be a teamfocused public face. When it comes to public perception, there must be one face, regardless of private disagreements.’ DAVID KEENS FCCA, FD, NEXT, UK, RETAIL



Strong as bamboo, pure as jade In an extract from his new book, Dr Wang Jun, China’s vice minister of finance, considers what is needed for accountants and the profession to flourish in China


ccounting must not only seek the truth, it must also strive for goodness and beauty. ‘Goodness’ refers to the integrity of accounting; ‘beauty’ to the quality of accounting. In the course of overall economic and social development, accountants are the equivalent of runners at an athletics meeting or footballers at a match. If runners and footballers cheat, how can the competition be conducted in a fair manner? How can the credibility of the competition be established? Accountants, particularly leading talents in the profession, must cultivate good moral character and strong integrity. In relation to issues of accounting integrity, we must pay attention to the construction of both the system and the culture, strengthening professional conduct through the system and moulding the values of accountants through culture. While accountants need to have strength of character, like bamboo, they also need the qualities of jade, which remains pure and unblemished even in a bad environment. They must also have a mild disposition but the inner strength to resist improper instructions, even when pressure is applied. They must have the courage to protect the interests of society, and a weighing scale within their hearts to assess the degree of importance of the issues. Qualified accountants must place the law above their superiors and adhere only to the law. DEVELOPING AN ACCOUNTING LANGUAGE Philosophy and language are closely related fields. Behind the development and movement of every language, we can see the influence of the philosophy of the times. Linguists tell us that people live with a series of linguistic codes, and the only connection between people and the world is the linguistic code. To the philosopher, language is the carrier of human life. Accounting language functions as the code that connects accounting with the socio-economic world and the lives of people, and should continue to be remoulded and


Accounting with Heart: China’s Role in International Finance and Business by Wang Jun is published by John Wiley & Sons. ISBN 978-0470825709.

elevated to a higher level within the modern conceptions of philosophy. The language of accounting is inherently complex and not easily understood by the general public. I have been giving this a great deal of thought in relation to the computer interface, where the hardware can be very sophisticated, and the application software very complex, but the interface is displayed in such a way that it is very user-friendly. To apply this to the language of accounting would require the language being changed to suit the tastes of the target audience, in much the same way that film director Zhang Yimou makes his movies accessible to foreign as well as Chinese audiences. Currently, the language of accounting can be understood only by experts with a very strong background of professional knowledge. But it is entirely possible to express complex economic activities in simple terminology that will enable ordinary investors and the general public to understand the subject. Accounting does not have the fireworks created in the ‘audit storm’ (a series of auditing campaigns initiated by the National Audit Office of China from 2003) and does not draw as much attention as the country’s economic statistics. The problem that we face currently is that though accounting has done a lot of work, it rarely has a voice of its own. This is largely because traditional accountants only know how to explain accounts using accounting language, and


there is no interaction and empathy with the other disciplines. How then can we transform the language of accounting into a language that can be understood by society at large? Here we have an example of the limitations of knowledge, thinking and perspectives working against the profession. In many circumstances, thinking has been ‘formatted’ by accounting, and vision has been confined within the view from a fixed window. Now is the time for us to repackage the system. Language originally existed to make it convenient for people to communicate with each other and facilitate the transmission of information. It is only by making accounting language more accessible to the general public that it can be more easily understood and applied by people who are not professional accountants, and more easily provide services to the socio-economic and political domain. A GRAND VISION The essence of philosophy is the unity of opposites, of communality and individuality. If all accountants make up the community, then the highly talented accountants are the individualities within the group. Hu Angang, the influential economics professor in the School of Public Policy and Management at Tsinghua University and advocate of ‘green revolution’, has pointed out that when we invest in the training of champions of accountancy we are investing in the future of accounting. Currently there are over 12 million accountants in China, but only around 300 leading accounting talents, who are still undergoing training and cannot be considered as real leading talents yet. This ratio of approximately 40,000 to one is too big, and there are too few champions. In Luo Guanzhong’s 14th century novel The Romance of the Three Kingdoms, the warlord Cao Cao is described as having a huge army with many generals, and it is often said that for every million valiant soldiers, there are a thousand generals. In our current situation, there are 12 million valiant soldiers and only a few hundred generals. The ancients had a saying: ‘Life becomes free from doubts at 40.’ But how applicable is this within our profession? Are all our comrades who are 40 years old able to lead China’s accountancy profession out into the world? Only when we have accumulated a certain number of talents who are free from doubt can we effectively promote the production quality of accounting in China to move forward. If we add two more zeros to the numbers of the leading accounting talents that we currently

Wang Jun was recently presented with ACCA’s Outstanding Innovation and Leadership Award

ACCA chief executive Helen Brand, who presented China’s vice minister of finance with the award in Beijing in January, paid tribute to his leadership in developing the Chinese accountancy profession. ‘The global profession has been enriched immeasurably by Wang Jun’s talent and passion,’ said Brand, ‘and ACCA is delighted to present him with this sincere tribute to all he has achieved.’ Accepting the award, Wang Jun said: ‘In my view, it is more a collective award than a personal honour as it represents ACCA’s recognition of the efforts made by the Chinese accounting and auditing community and by my colleagues in advancing the accounting profession, promoting China’s economic reform, and opening up and supporting international accounting and auditing convergence in China.’ At the award ceremony, Wang Jun quoted Confucius as saying that when improving oneself, it is important to do so on a daily basis. That Confucian aphorism has been taken to heart by the accountancy profession in China, with the number of accounting firms in the country growing from 200 to 7,200 between 1988 (when CICPA, China’s first professional accountancy body, was set up) and 2008.

have, and further develop fully the various accounting elites who are currently talents in the various industries, it would be like 12th century poet Xin Qiji’s image of ‘an army with golden spears and armoured horses swallowing up thousands of miles like the tiger!’ We can look forward to a day when the training and selection of leading accounting talents will not require the intervention of the government and the industry organisation. We can then do away with training programmes to select and train leading talents in accounting because they will be produced naturally and will emerge on their own.



The evolution of SMPs International Federation of Accountants president Robert L Bunting says SMPs should evolve to satisfy SMEs’ growing needs


mall and medium practices (SMPs) today can no longer rely strictly on compliance work to pay the bills. The reason why is simple: SMEs (small and medium-sized enterprises) – the traditional client of the SMP – increasingly need a broad range of competencies beyond the core skill set of the small practice. At the same time, the threshold for mandatory statutory audits has risen in some countries and increases are under consideration in many others. A fast-changing and complex regulatory environment means that SMEs want their SMP to provide proactive business advisory services. SMEs need advice that will help them generate business plans and financial forecasts, identify and manage risk, define and implement IT systems, and value the business. SMPs must evolve to meet these growing needs or face dwindling clients and revenues. A new study by the International Federation of Accountants (IFAC) makes clear that smaller accountancy practices need to address their skills base, their working methods and their referral models if they are to meet the evolving needs of the SMEs that are their lifeblood. The study – The Role of Small and Medium Practices in Providing Business Support to Small and Medium-sized Enterprises, written by professors Robert Blackburn and Robin Jarvis – points out that accountants are still SMEs’ most frequently used source of advice. According to a study last year by the UK’s Open University, trade connections, the media, family and friends are all important, but none ranks as highly as the accountant. SMPs are usually highly experienced in dealing with SMEs and, as small enterprises themselves, can empathise with their clients’ resource constraints. This contrasts with very large practices where the focus is on large companies and SME clients may have to deal with several departments.


The Role of Small and Medium Practices in Providing Business Support to Small and Medium-sized Enterprises – by ACCA’s head of small business Professor Robin Jarvis and Professor Robert Blackburn of Kingston University and published by IFAC – is available for download at www.

BUILDING TRUST But the assumption that SMEs nearly always choose an SMP is not correct. A significant proportion of the clients of large accounting practices – the Big Four and second-tier practices in most countries – are SMEs. These are more likely to have the resources and the benefits of economies of scale to offer services and products to meet their clients’ accounting and other specialised support needs; in fact, they often position themselves as ‘professional services supermarkets’. Many SMPs actually use larger firms to provide limited speciality services to their SME clients or as a technical backstop for their own client service work. While compliance work will remain hugely important for SMPs – accounting services and tax are core services at all levels in public practice – technical competency and timely delivery in compliance work build trust and usually lead to requests for non-compliance advice and support. This is a time-proven formula driven in part by the nature of most small business owner-managers, many of whom are determined to make all their own decisions and avoid advertising any managerial weakness. In this kind of ‘fortress enterprise’ culture, many SMEs do not request advisory services until the expert has already provided a specific demonstration of their competency. BECOMING KNOWLEDGE PROFESSIONALS Business consulting services represent a crucial growth area for SMPs. As mentioned at the start, the raising of the statutory audit threshold has diminished a key revenue stream for many SMPs and the market is increasingly competitive. As a result, if they are to thrive rather than merely survive, SMPs must diversify and focus on other advice requirements for SMEs (or provide audit services to larger companies). They must




Robert L Bunting became president of the International Federation of Accountants (IFAC) in November 2008. He is a partner at Moss Adams where he served as chairman and chief executive officer from 1982 to 2004. Moss Adams is a member of Praxity (formerly Moores Rowland International) where Bunting served as chairman from 1998 to 2004. From 2004 to 2005, Bunting was chairman of the Board of Directors of the American Institute of Certified Public Accountants (AICPA). Go to for more about the SMP Committee.

WHY SMEs USE SMPs Competency: SMEs often lack the full range of managerial expertise. Most outsource their financial management to SMPs with their required technical competencies and expertise in statutory audit and taxation. Trust: As members of a regulated profession with codes of conduct, accountants enjoy ‘institutional’ trust. Their provision of compliance services wins them ‘competence’ trust. Responsiveness/ proximity: SMEs rate SMPs’ responsiveness to their demands so highly that it can be regarded as more important than a qualification or competency. The geographical proximity of SMPs to their SME clients is also important. Many owner-managers prefer face-to-face meetings with their advisers, and value ease of access.


develop their skills base beyond bookkeeping, tax preparation and audit. In short, they must move from being accounting technicians to knowledge professionals. So how can SMPs overcome the unavoidable resource constraints in-house and provide a range of services to their clients? The most common model is to expand the technical and soft skills of existing personnel. Some accountants can make the transition from ‘accounting expert’ to management adviser through experience and self development. Others may need training or coaching to grasp the necessary flexibility and an understanding of the context and cultural environment of the SME. For example, accountants might need to hone their interpersonal skills or make time to discuss a client’s succession planning (or other business advisory needs). Another common model is to focus on a specific industry sector or speciality linked,

for example, to the music industry or environmental legislation. This model usually works best in large cities or where a particular industry is highly concentrated. But there have been successful cases where SMPs are willing to travel further to serve their clients. A third model, which can be a standalone strategy or one that complements the first two, involves the SMP participating in a highquality referral network. Before using one, SMP owners should analyse the different types of networks and carefully consider how they will monitor service quality and timelines for the clients they refer. But referral networks offer SMPs many potential advantages: they are an effective way to satisfy the increasing breadth of demands from SME clients. They also offer the opportunity to gain clients through referrals from other network members or to win new ones due to their more extensive service capabilities.


Small standard, big impact Some 60 countries so far are on course to adopt the new accounting standard for smaller companies. Accountancy Futures asks the IASB’s Paul Pacter about the advantages of the IFRS for SMEs and how the standard works PG27 EDITION 02



n July 2009, after nearly six years’ work, the International Accounting Standards Board (IASB) issued the international financial reporting standard for small and medium-sized entities (IFRS for SMEs). It’s a standalone standard intended for any company that is not publicly accountable and prepares general purpose financial statements for use by lenders, vendors, customers, employees, development agencies, governments and others who provide resources to the company. An entity has public accountability – and so should be using full IFRS – if its securities are publicly traded or it is a financial institution that holds funds in a fiduciary capacity for a broad group of outsiders (such as a bank, pension fund, mutual fund, or brokerage). ACCOUNTANCY FUTURES: Describe IFRS for SMEs in a nutshell. PAUL PACTER: Good financial reporting made simple. AF: How is it ‘good’? PP: It is tailored to the needs of users of SME financial statements and to the capabilities of those who prepare and audit SME financial statements. Full IFRS is intended to meet the needs of investors in public capital markets, who use financial statements to help forecast earnings, share prices and overall enterprise value. Users of SME financial statements generally have greater interest in short-term cashflows, liquidity, balance sheet strength, and interest coverage. AF: And in what way is it ‘simple’? PP: SMEs are typically less complex enterprises than the large, publicly listed, multinational corporations that use full IFRS, so it makes sense to tailor the reporting requirements accordingly. IFRS for SMEs is less complex in five ways. First, topics not relevant for SMEs are omitted. Examples include earnings per share, interim financial reporting and segment reporting. Second, where full IFRS permits accounting policy choices, IFRS for SMEs generally allows only the easier option. For example, there is no option to revalue property, equipment, or intangibles; there is a cost depreciation model for investment property unless fair value is readily available without undue cost or effort; there is no ‘corridor’ approach for actuarial gains and losses; and there is no fair value option for financial instruments. Third, many of the principles for recognising and measuring assets, liabilities, income, and expenses in full IFRSs have been simplified. For example, goodwill is amortised, all borrowing


and R&D costs are expensed, there is a cost model for associates and jointly controlled entities, and there are no available-for-sale or held-to-maturity classes of financial assets. Fourth, significantly fewer disclosures are required (roughly 300 versus 3,000). And finally, the standard has been written in clear, easily translatable language. AF: Why do SMEs even need to prepare financial statements? PP: It boils down to a few words: better access to capital. In virtually every jurisdiction, from the largest economies down to the smallest, over 99% of companies have fewer than 50 employees. There are 21 million SMEs in the EU and 20 million in the US alone. In the UK, there are 4.7 million private sector enterprises, employing 23 million people, and with an estimated annual turnover of £2,800bn (2007 data). Over 99.9% have fewer than 50 employees. But, remember, it is not the IASB that imposes a requirement for SMEs to prepare and publish financial statements and to have them audited. Governments impose those laws because they see a public benefit in having good financial information about companies made available. In most jurisdictions, at least half of SMEs

It is not the IASB that imposes a

requirement for SMEs to prepare and publish financial statements and to have them audited (including micro-firms) have bank loans. Most are also financed in the form of credit granted by vendors or, sometimes, customers. Credit rating agencies use the financial statements to develop ratings. Many SMEs have outside investors not involved in the day-to-day management of the entity. Clearly, there are users of their financial statements beyond the owner-managers and tax authorities. Good financial information translates into better access to capital at lower prices. This is not just speculation: research studies involving tens of thousands of SMEs in dozens of countries have consistently found that private companies with greater financial reporting quality and transparency experience significantly fewer problems gaining access to external finance (and obtain those funds at a lower cost) than do other private firms. AF: So why not just use locally developed SME accounting standards? Do we really need a global SME standard?


Paul Pacter will become a Board member of the International Accounting Standards Board as of 1 July 2010. He will also chair the SME Implementation Group. From mid-2003, he was director of standards for SMEs at the IASB, where he led the development of the International Financial Reporting Standard for SMEs. He previously worked for the IASB’s predecessor where, among other things, he wrote IAS 39 on financial instruments. He served as deputy director of research at the FASB and as executive director of its parent foundation, was vice chairman of the Advisory Council to the US Government Accounting Standards Board. From 2000 to 2010 he was a part-time director in Deloitte’s global IFRS leadership team and a specialist in Chinese accounting standards.

PP: Back in 2004 the trustees of the IASC Foundation, the IASB’s oversight body, asked that question as part of a review of the constitution. The answer from around the world was a resounding yes, a global SME standard is needed. Feedback from both advanced and developing economies was that a single set of highquality financial reporting standards should not be the sole province of listed companies, which account for a tiny percentage of the total number of enterprises. The vast bulk of private companies should also be able to benefit from internationally recognised, highquality standards. This was our starting point for developing IFRS for SMEs. The bottom line is this: if capital providers do not understand or have confidence in the financial information they receive, then an SME’s access to capital suffers and the cost of acquiring that capital rises. AF: IFRS for SMEs brings a whole new constituency to the IASB: small companies and small audit firms that have not worked with full IFRS. What is the IASB doing to help them make the transition to IFRS for SMEs? PP: It’s not just a whole new constituency but a vast new constituency. Full IFRS is used mainly by listed companies. The 52 securities exchanges that are members of the World Federation of Exchanges contain fewer than 50,000 listed companies altogether. Those listed companies are roughly 0.01% of the total number of enterprises, so we are talking of a constituency for IFRS for SMEs of tens of millions of firms. To assist in implementation, the IFRS Foundation and the IASB have already taken a number of steps. When IFRS for SMEs was issued, it was accompanied by implementation guidance in the form of illustrative financial statements and a presentation and disclosure checklist. It is all available for free download (see links on page 31). The IFRS Foundation has developed a set of comprehensive training materials for IFRS for SMEs, with one training module covering each section of the standard. Each module has the full text of the standard with commentary, examples of application, case studies, selfassessment questions, and a comparison with the related full IFRS. The materials are posted on the IASB’s website for free download (see end of article). The IFRS Foundation and IASB are holding three-day ‘train the trainers’ workshops all around the world, with a particular focus on developing countries and emerging economies.

The complete PowerPoint presentations used in those sessions are available on the IASB’s website for free download (details at the end of the article). IASB staff make presentations about IFRS for SMEs to encourage adoption and to explain the standard. And the IFRS Foundation is forming an SME implementation group (SMEIG). AF: What will SMEIG do? PP: SMEIG will have two main responsibilities. The first is to develop non-mandatory guidance for applying IFRS for SMEs in the form of questions and answers that will be made publicly available on a timely basis. The second is to make recommendations to the IASB about any need to amend IFRS for SMEs. Terms of reference and operating procedures for SMEIG are available on the IASB’s website (see end of article). The IFRS Foundation invited nominations for membership of SMEIG, and selection by the trustees is currently under way. All members of SMEIG will serve on a voluntary basis and SMEIG will conduct business by email. AF: How frequently will IFRS for SMEs be updated? The IASB issues a half-dozen or more exposure drafts each year, and makes an equal number of amendments to full IFRS. Will each of those result in a change to the IFRS for SMEs? PP: The short answer is no. The longer answer is that the IASB intends to review thoroughly SMEs’ experiences in applying IFRS for SMEs when two years of financial statements using the standard have been published by a broad range of entities. Based on that review, amendments will be proposed to address implementation issues. At that time, the IASB will also consider new and amended IFRS that have been adopted since IFRS for SMEs was issued. After that initial implementation review, the IASB expects to propose amendments to IFRS for SMEs by publishing a single omnibus exposure draft about once every three years. Because IFRS for SMEs was issued in mid-



‘The benefits to my clients of an internationally recognised

standard to aid comparability are obvious, especially if they are seeking to raise finance on a national or international basis’ 2009, the first two years in which the standard will be used by a broad range of entities will be 2010 and 2011. Therefore, the initial review of the standard is likely to commence in late 2011 or early 2012. If some changes to IFRS for SMEs are regarded as urgent, the review could be undertaken in two phases rather than one.


AF: IFRS for SMEs was issued 10 months ago. Have any jurisdictions decided to adopt it yet? PP: Many. To date, to the best of our knowledge, 60 jurisdictions have either adopted it or publicly stated an intention to do so.

Central America: Belize, Costa Rica, El Salvador, Nicaragua Panama

AF: Can you summarise the benefits of IFRS for SMEs? PP: The advantages, in short, are as follows: 1: Better access to capital. 2:  Simpler, less costly preparation of financial statements. 3: More understandable financial statements tailored for the needs of lenders, vendors, rating agencies, and other users of SMEs’ financial statements. 4: Textbooks are available. 5: Software is available. 6: There are free IASB training materials. 7:  There are IASB train-the-trainers workshops and freely available training presentations. 8:  Implementation Q&As have been published by the SME implementation group. 9: And there is a special newsletter (IFRS for SMEs Update – first issue, March 2010) for SMEs and auditors using IFRS for SMEs. 10: Most importantly, the economy as a whole benefits. If capital providers understand and have confidence in the financial figures, an SME’s ability to obtain the capital it needs improves. Ultimately, the economy in which it operates improves as a result. But the proof of the IFRS for SMEs pudding will clearly lie in the eating. So Accountancy Futures asked three practitioners – one in the UK, one in pioneer adopter South Africa, and one in Ukraine – whether they looked forward to providing IFRS for SMEs-compliant financial reports for their clients.


South America: Argentina (proposed), Brazil, Guyana, Venezuela Caribbean: Bahamas, Barbados, the Eastern Caribbean states, Trinidad

Africa: Botswana, Ethiopia, Namibia, Sierra Leone, South Africa, Tanzania, Uganda Asia: Cambodia, Hong Kong, Philippines; Malaysia and Singapore are considering adoption Europe: UK (proposed), Ireland (proposed), Turkey; European Commission is consulting Available for use without any action: Australia (but considering a disclosure exemptions-only local standard), Canada (which has also adopted its own SME standard) and the US


John Tiltman, Stourton Accountancy Services

Chama Kamukwamba, MSI Management Consultants

Laura Garbenciute, PwC

JOHN TILTMAN FCCA, UK The IASB says the main benefits of IFRS for SMEs will be to improve comparability for users of accounts, to enhance overall confidence in the accounts of SMEs, and reduce the significant costs involved of maintaining standards on a national basis. Speaking as a general practitioner, my clients would certainly agree with the first two points, although the third one would not be of any great interest! With SMEs accounting for over 95% of all companies around the world, the benefits to my clients of an internationally recognised standard to aid comparability are obvious, especially if they are seeking to raise finance on a national or international basis. There is a ‘learning curve’ to go through, especially the first time the standard is adopted, but small businesses are used to constant changes in legislation and the benefits will outweigh the initial extra time and costs. In real terms there are few major differences to UK GAAP (for SMEs) in any case, and as we all now live in a global economy, I cannot see any benefit in resisting international standards. CHAMA KAMUKWAMBA FCCA, SOUTH AFRICA The SME standard is a back to basics call for the accountancy profession. The impact of globalisation and the complexity of financial products have generated accounting standards whose complexity has gone far beyond the comprehension of ordinary users of financial statements. Some of the standards have not only raised costs but have also deviated from one of the basic qualities of information: understandability. This world of complexity

If capital providers understand and

have confidence in the financial figures, an SME’s ability to obtain the capital it needs improves. Ultimately, the economy in which it operates improves as a result

far beyond the comprehension of millions of ordinary users of financial statements undoubtedly contributed to some of the worst accounting scandals that the world has had to endure in recent years. Given that the global numbers of SMEs far outstrip public accountability entities, the SME standard is not only democratic but a redeeming feature for the IASB and the accountancy profession as a whole. It was extremely positive for South Africa to have been the first to adopt the SME standard. It bodes well, not only for the development of SMEs but for the broadening of accounting skills in our country. As the champion of SME issues, ACCA should be pleased about this development. LAURA GARBENCIUTE FCCA, UKRAINE IFRS for SMEs is the most cost-effective and efficient approach to follow for private entities in Ukraine. It retains many of the principles of full IFRS, but simplifies a number of areas that are generally less complicated or not relevant for SMEs. It also significantly reduces the volume and depth of disclosures required by full IFRS, resulting in financial statements that are more user-friendly for private entity stakeholders. Private Ukrainian entities applying IFRS for SMEs will benefit from its simplified approach in accounting for business combinations, preparation of consolidated financial statements, accounting for borrowing costs, financial assets and liabilities, property, plant and equipment, intangible assets, employee benefit plans, income taxes, research and development expense recognition, investment properties, and noncurrent assets held for sale.

Implementation guidance is at: Training materials are available at: PowerPoint training presentations are at: Terms of reference and operating procedures for SMEIG are at:



Raising the bar International Auditing and Assurance Standards Board (IAASB) chairman Arnold Schilder explores the future of audit and the challenges facing the profession




ith the key role it plays in underpinning public confidence in financial reporting, the value of audit is incontrovertible. But the world economy has come under stress as a result of the financial crisis, and anxiety about economic stability has been driven by a loss of financial confidence. So while it is right to say that audit failure, as such, did not contribute to the crisis, questions remain about the relevance of the auditor’s role going forward. Auditors, say the critics, missed something fundamental in not spotting the crisis developing sooner. It’s an irksome question, but also a kind of compliment: the world puts a great deal of faith and trust in auditors. Even though auditors are watchdogs rather than bloodhounds, the crisis has raised fundamental questions about the future of audit, its role and relevance. Clearly, external audit is key to the quality and credibility of financial information, and thereby market confidence. Over the years, external audit has also become a critical pillar of the regulatory and supervisory infrastructure. Many policy initiatives have reinforced its value, and the role of audit is highly respected in the regulatory structures that have multiplied in the past decade. Failure to deliver high-quality audits has adverse consequences for economies and societies. While it’s pleasing to see the value of audit so widely recognised, that recognition raises expectations as well as the concomitant risk of not satisfying those expectations. THE QUESTION OF QUALITY So how can the bar on audit quality be raised further? A substantial amount of research and policy analysis has been carried out on audit quality, and the first thing of note to emerge is that practitioner compliance with the standards is good evidence of quality and demonstrates that the audit lives up to some highly praised standards. But it’s not enough to say that audit work conforms to, say, the new clarified International Standards on Auditing (ISAs). That’s not to demean standards, but they are just one element in the world’s perception of audit quality, and auditors cannot rest on their laurels. Just as important are the messages that the auditors communicate. Does what auditors say make sense to the users of the company accounts? Does it help those users or add value? Quality is not just about the standards but also about the effectiveness of those standards and their effective application. Perceptions of audit quality are influenced by



responses from users and any debate about the auditor’s findings in committees and among the main shareholders. Ultimately, the issue of audit quality is complex but the only way to make progress is to address all these factors. I really would like to commend ACCA’s leadership in this respect. I am aware of your roundtable discussions and the policy papers you have presented, asking and exploring these pertinent questions. ROCKY ROAD TO ISAs The IAASB helps by setting high-quality standards. Under the able leadership of my predecessor, John Kellas, all ISAs have been redrafted in the ‘clarity’ style. Moreover, about half have also been thoroughly revised. This whole suite of clarified ISAs is a major contribution to audit quality. The revised standards deal with important issues, such as communications to those charged with governance and alerting them to control deficiencies, estimates and fair value, related parties, the role of experts, group audits and so on, all of which demonstrate the board’s audit quality ambitions and expectations. So the standards have been produced – but where are the customers? Will practitioners use ISAs? Adoption is about getting the national organisations to incorporate them into national or regional standards. But there are 21 official languages in the EU alone, and until the clarified ISAs have been translated into all of them they cannot be adopted by the European Commission. (There are also regional variations of languages that may require different translations.) Implementation is an even harder nut to crack. Will practitioners use these standards in the way they are intended? If not, then what can be done about it? Capacity, training and education are key issues here. All the network firms are working on methodologies, programmes and manuals, but how will smaller practitioners cope? How can they be helped? Can they benefit from what others have already done? The IAASB has established an implementation monitoring task force to help here. MEETING EXPECTATIONS The expectations gap is real, and auditors have to deal with many users and regulators, so it’s important to find out what those users and auditors expect and how those expectations change over time. Regulators share our aims and sophistication, so the IAASB has established a regular dialogue with the International Forum of Independent Audit Regulators (IFIAR) and others.


Arnold Schilder is chairman of the International Auditing and Assurance Standards Board (IAASB), the international audit standard setter. He was a member of the managing board of the Dutch central bank from 1998 to 2008. He has also served as chairman of the Basel Committee on Banking Supervision’s Accounting Task Force, been a member of the Public Interest Oversight Board, served as president of Dutch accounting body Royal NIVRA and worked as an international audit partner at PwC. In addition he has been a part-time professor of auditing at the Universities of Amsterdam and Maastricht.

Users are perhaps a harder group to satisfy, but they are the people the accounts and audit reports are written for and for that reason they matter enormously. One investor recently remarked to me: ‘We care more about the soft stuff in reports, all the estimates and assumptions and uncertainties and judgments and qualitative disclosures.’ In the past, disclosures were principally an explanation of the numbers that came up in the balance sheet and the profit-and-loss account. But the disclosures part is now so extensive there is a risk that it runs to as many as 400 or 500 pages. The soft stuff is important, but investors want more relevant information. IAASB-commissioned academic research on auditor reporting found that the external auditor’s report has a positive symbolic value. Even a qualified opinion matters. But there’s not much of communicative value in the audit reports – a lot of boilerplate but no specific messages. In the UK, having more of the boilerplate on a website rather than in the audit report is helpful. But we could learn from France, where they have justification of


materiality decisions involved, so the IAASB has decided to re-examine the auditor’s responsibilities relating to disclosures. There is a specific project on the revision of ISA 720, and another project is under consideration to look at the broader question about the quality of disclosures and their audit.

Auditors, say the critics, missed

something fundamental in not spotting the crisis developing sooner. It’s an irksome question, but also a kind of compliment assessments. In the disclosure part of an annual report the board and management explain a number of the softer issues, the judgments they have made and why they came to certain estimates and the underlying assumptions. That will be picked up in the auditor’s report and commented on. It’s a reinforcing process: the board knows the auditor is going to make reference to these disclosures, so the directors make certain the financial statements provide a thorough explanation, and it also reinforces the quality of the auditor’s work. So it’s not just the auditor’s report that matters but also the broader area of disclosures. The risk of opaque disclosures has been addressed but not in a very meaningful way. There are a lot of professional judgment and

ASSURANCE FOR SMEs There have been national developments that affect small and medium-sized enterprises (SMEs), including increasing thresholds for exemption from statutory audits. If SMEs volunteer for an audit, that’s fine, but the profession must be able to provide other services, too, that are geared towards SMEs. So the IAASB is prioritising the development of standards for other, non-audit, assurance and related services. Two standards are relevant: reviews and compilations. We can gauge how their revision responds to SMEs’ needs but some perspective must also be gained on the likes of hybrid products. A practitioner can, of course, give a compilation report with some assurances. Some sophisticated users want to know more specifically about debtors or inventories in a subsidiary; just do that work, they say, and the results will show us what we want to know. How does that fit in this broader perspective? Formally, a compilation engagement does not provide assurance, but it still generates a perception of assurance because the practitioner will have compiled the report. I once tried to explain to a banker that we had issued a compilation report only, so there was no audit opinion and no assurance. He said: ‘Well, Mr Schilder, as long as I see your signature behind that, it’s fine for me.’ There are more questions about whether there is an even broader assurance role for the profession, and if there should be related assurance standards accordingly. A lot of investor demand for non-financial information falls in a risk-management framework, so are risk management, internal controls and business models areas that auditors should address more? The IAASB will soon start its consultation process on the strategy for 2012–14, and we are keen to receive input on these broader questions. Other assurance developments include a project on complex financial instruments, derivatives and so on, with consultation on the revision of practice statement IAPS 1012; we hope to issue an exposure draft in September. This article is based on a speech that Arnold Schilder gave to ACCA’s council in March 2010.



Audit lessons Private sector auditors in the UK can learn from the example of the ‘bigger picture’ approach to audit in the public sector, argues ACCA’s Gillian Fawcett

P 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.


ublic sector auditing in the UK has improved in quality and breadth in recent years, while fees have fallen. By contrast, in the private sector audit has come under criticism for its cost and inability to prevent company failures. There may, therefore, be lessons that could be learnt from the public sector experience. There are important differences between audit practices in the two sectors. Public sector practice is much more far reaching, considering audited bodies’ value for money more extensively; it costs less and is not as constrained by fear of litigation as it is in the private sector. Differences cannot be explained by who undertakes the audit work, though. While the main public sector auditors are the National Audit Office (NAO) and the Audit Commission, the big private firms also carry out public sector work under contract to the Audit Commission, as well as undertaking capability reviews of government departments. SETTING STANDARDS Auditors in both sectors adhere to the same high ethical principles, use the same basic methods and apply the same independent auditing standards. Both have robust quality assurance processes in place and are subject to peer reviews. In neither sector do auditors prepare financial statements; rather, they provide assurance about whether they meet specified rules and standards. Yet there are differences. Private sector audit has a much narrower scope, essentially being limited to a true and fair opinion on a company’s financial statements. In the public sector, however, audit provides assurance that transactions are recorded in accordance with the relevant authority, legislation and regulations, but goes further, considering aspects of corporate governance and publishing separate reports on value for money.

BY APPOINTMENT The auditor appointment process also differs between the two sectors. Company auditors are appointed by the shareholders, while the Audit Commission appoints auditors to local authorities and other public bodies for which it has responsibility, with the Comptroller and Auditor General – the head of the NAO – the auditor of all government entities. WIDER PUBLIC SECTOR REMIT The wider remit in the public sector has developed because of the limited value of financial statements as a means of judging bodies that exist to provide services rather than making profits. External audit is therefore recognised as an essential part of the process of accountability for public money and the governance of services. This wider role has enabled it to become more innovative and challenging, with the Audit Commission’s Comprehensive Area Assessment (CAA) probably the most sophisticated audit in the world. The CAA considers whether an audited body has sound and strategic financial management, robust strategic commissioning arrangements and good management of natural resources, assets and people. It also evaluates use of resources based on risk, drawing on cumulative audit knowledge and evidence, and ensuring that the audit is proportionate. PRIVATE SECTOR ‘TUNNEL VISION’ Similar innovation and focus on value for money may be stifled in private sector audit by the fear of litigation. This may help to explain the perception that private sector audit is ‘tunnel visioned’, as the UK House of Commons Treasury Committee noted in its report, Banking Crisis: Reforming Corporate Governance and Pay in the City. The Treasury Committee argued that auditors should obtain a ‘big-picture’ view of an


organisation. This could also help to address concerns about auditor independence and prevent some litigation if warning signs can be identified earlier. There remain, however, serious worries among private sector auditors about the risk of litigation. Despite the Financial Reporting Council issuing guidance to enable companies and auditors to enter into liability limitation agreements, their use is not widespread. CUTTING COSTS The challenge, then, is to reduce costs while ensuring that audit can identify risks and emerging problems. This has been achieved in the public sector, with Audit Commission fees reduced by 12%. If the public sector can both widen scope and cut costs – bearing in mind its use of private firms – then it should be possible in the private sector, too. One obstacle is the different fee setting structure in the private sector. Authority to agree a company’s audit fees is invariably delegated by shareholders to the directors, while public sector fees are determined by the audit bodies. In the private sector this could, potentially, compromise quality, whereas in the

public sector it is a matter of political debate. The size of fees varies significantly, too. A £700,000 fee for a large city council in England buys the audit of statutory accounts, service inspections and assessments of the council’s programmes. A similar-sized private sector company would, for £800,000, obtain only an audit of the company’s financial statements. CONCLUSION Cultural and structural barriers prevent the private sector from adopting the model of audit undertaken in the public sector, but there are many lessons that could be applied. ACCA believes that the wider scope of public sector audits allows them to be more progressive and innovative than those conducted in the private sector. The NAO, its devolved bodies and the Audit Commission have faced challenges over many years to improve audits and reduce costs, and have succeeded in evolving robust methodologies for auditing value for money.

Enhancing External Audit: Learning from the Public Sector, by Gillian Fawcett, is available at

RECOMMENDATIONS Auditors should seek to rebuild investor confidence by improving transparency and education. The scope and narrow terms of reference of private sector audits should be revised. Private sector auditors should learn from their public sector counterparts, in particular regarding the auditing of risks and the broader aspects of governance. The impact of audit price and the fear of litigation should be evaluated.



A wider role? Larger entity audits should pay more heed to the needs of a wider circle of stakeholders than simply investors, says ACCA’s Ian Welch




he global financial crisis has seen commentators in many countries questioning the value of audit. And while attention has been focused on the large audit sector, which is involved with the banks and other major financial institutions – such as the demise of Lehmans – there are also important issues at the smaller end of the audit market. Given the removal in recent years of the statutory audit requirement for UK entities with turnover below £6.5m, it is increasingly a voluntary exercise in this sector and so needs to demonstrate the value it brings to business. ACCA believes it is vital for the accountancy profession to re-examine the role of audit and to question whether a sufficiently strong case is being put forward for its benefits. We believe that audit has a key role to play as a source of public confidence in financial reporting but note that there is little published research that seeks to demonstrate its value in promoting business trust. ACCA plans to change this. It has recently held events on the value of audit in Belgium, the Czech Republic, Poland, Singapore, the UK and Ukraine. These events have brought together stakeholders such as regulators, governments, CFOs, senior auditors, investor groups and credit-ratings agencies to spark debate on how audit can be enhanced. We aim to bring together the ideas that have been expressed into a policy report by the end of 2010. So far we have been encouraged by the commitment shown by participants to finding

AUDIT VALUE A report from the Maastricht Accounting, Auditing and Information Management Research Center – The Value of Audit – commissioned by the Standards Working Group of the Global Public Policy Committee, provides a valuable resource that can help governments, policymakers and standard setters, as well as the accounting and finance profession as a whole, to make better informed decisions about the future model for audits and audit reporting. It is available at www. marc

new answers and by the variety of views expressed. It is clear that audit is valued but fresh approaches are needed to satisfy a wider number of market participants. Even ahead of the events, ACCA spoke with influential accountants and business people around the world to help shape its thinking and as a result we produced a policy paper, Restating the Value of Audit, which sets out an agenda. It will be once again finessed following the roundtable series, but the framework is summarised here. While we reject claims from those critics who argue that the audit model is broken, we propose that the profession should develop approaches in respect of larger entity audits that pay more heed to the needs of a wider circle of stakeholders than simply investors, and hence better meet the demands of the market. This will be achieved by extending the scope of the audit, from giving an opinion on financial statements alone to engaging on issues such as risk management, the effectiveness of corporate governance and testing the assumptions around an organisation’s business model and its likely sustainability. Auditors give no view on the business model, and some participants who spoke at last year’s UK Treasury Select Committee inquiry into the banking crisis insisted that to do so was not part of an auditor’s remit. This concern has also been raised at some of the roundtable events, but many others have shared ACCA’s view that there is no reason why auditors could not, and should not, be able to do (Main photo) US protesters hold signs behind Richard Fuld, chairman and CEO of Lehman Brothers Holdings. (L–R) Protesters hold banners reading ‘Where is my money?’ during a Madrid rally for Spaniards affected by Lehmans’ bankruptcy; Hong Kong Lehman Brothers minibond holders demand refunds; Victims of Lehmans’ insolvency protest in Hamburg, Germany.



New forms of assurance will continue to emerge, some driven by regulation and others by voluntary means and market demands this. Many of the experts we have spoken to believe communications with boards include commentary in this area anyway, so why not make this part of the standard audit process? If auditors could engage properly with the business model, allowing them to test its assumptions, real value would be added to audit. The new UK government has announced it will re-introduce the Operating & Financial Review, which ACCA welcomes, as this will be an ideal vehicle for companies to set out their principal risks and the sustainability of their business model. This move was predicted by Steve Maslin, chairman of the Partnership Oversight Board at Grant Thornton in the UK, because he recognised that the renewed debate around improved information by preparers on risk management and provision of assurance about those disclosures would lead to pressure for the OFR’s reinstatement. But could auditors take on such responsibilities? Yes; the same firms take on a wider approach to auditing public-sector bodies, where they report on the financial statements and cover corporate governance and efforts by their clients to secure value for money for the taxpayer. Of course, sophisticated and complex business models in the largest global companies create challenges for auditors, and any expansion of the role means that the liability issue has to be addressed. At the roundtables, it has become clear that many believe the fear among auditors of unlimited liability has had a deadening effect on their willingness to innovate and move into new areas. But a way can and must be found to solve this problem, as it is in everyone’s interest to do so. One issue that has often come up is increasing communication. Good work is done in the audit process but investors only see the final outcome; many would appreciate seeing some of the thinking that goes into the conclusion. Audit committees, directors and auditors consider the risk areas, key business areas and processes to ensure that they work within the boundaries set by them. Investors and other stakeholders may value the audit more if they understand more of the work that goes into what one panellist called the ‘audit blackbox’. Another issue has been increased timeliness. While audit reports are being produced much more quickly after the year end, there are likely to be continued demands from regulators and investors for more frequent


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 public relations manager at KPMG for five years and was formerly a journalist on Accountancy Age.

reporting to the market. There are also calls for a more forward-looking focus in the audit report rather that one which is essentially retrospective. On any report, it is important to strike the right balance between sufficient detail and accessibility to the intended audience. Forms of reporting must be appropriate to size and complexity, but we believe assurance can add value to business to instil and maintain confidence and trust among their stakeholders and to identify where there are areas for enhanced performance. At the smaller end of the market, a continued drive should be made to establish appropriate segmentation of services. New forms of assurance will continue to emerge, some driven by regulation and others by voluntary means and market demands. But the underlying essentials of assurance, that of bringing an independent and quizzical assessment of a business, will continue to add value to SMEs as they emerge from the economic downturn and help provide confidence in obtaining access to finance. Audit-type skills are intrinsic to the training of an accountant, providing insight and experience of business models and engendering values of professional scepticism and independence of thought, which enable accountants to advise businesses well. ‘Unbundling’ the audit product from its lengthy checklists could be a key to providing assurance and business confidence in areas of particular concern or risk according to the needs of the individual company. Procedures could be agreed with audit-exempt businesses, which would add value by exploring areas of concern to management. It is this sort of innovative approach to the requirements of business that will maintain the value of audit. New value propositions that are driven by market demand will be more enduring than those that cling on to regulatory or statutory backing for their existence. The profession can best face down the sceptics by being bold, progressive and establishing new assurance offerings which meet the needs of businesses, stakeholders and wider society. It is important that it does, because the economy needs the confidence that audit can engender. It is now up to the profession to demonstrate that value. ACCA’s policy paper, Restating the Value of Audit, is available for download at


Audit perspectives: Ukraine An ACCA debate in Kiev stressed audit’s role in promoting transparency and lifting the economy out of recession, reports ACCA’s Dr Nataliya Vovchuk


udit plays a pivotal role in business by promoting transparency, curtailing corruption and enforcing adherence to regulation, and is critical to economic recovery. That was the message from attendees at an ACCA debate on the future of audit, held in January in Kiev. Attendees, including government regulators and representatives of the Big Four firms, heard that economic recovery in Ukraine depended on audit’s ability to guarantee accurate financial disclosures for businesses as a precondition for raising working capital. Vladimir Vakht, managing partner of Deloitte & Touche in Ukraine, said: ‘It is more difficult and expensive to get working capital in Ukraine than on international markets. Transparency and accuracy of financial statements are key to getting access to these markets.’ He saw the adoption of International Financial Reporting Standards (IFRS) as driving both economic development and the demand for professional audit services. Volodymyr Bogatyr, deputy minister of justice in Ukraine, added that adopting IFRS would create a level playing field for Ukrainian and foreign business.

But Lyudmyla Pakhucha, director of audit at PwC Ukraine, warned against the ‘Americanisation’ of IFRS. She said: ‘Tough regulation is more easily circumvented than common sense. If reporting is based on tough rules – for example, filling out some forms – it is possible to comply formally with the rules but to distort the assets.’ Viktor Suslov, head of the State Commission on Regulation of Financial Service Markets in Ukraine, was particularly critical of auditors: ‘There are cases of auditors confirming deliberately false reports. If we talk about the role of audit in the fight against corruption, we should mention corruption among auditors.’ Ivan Nesterenko, head of the Auditors’ Chamber of Ukraine, advocated the publication of the audit opinion and conclusions as well as the company report: ‘Everybody should see them to avoid the situation where the commission gets one version, the issuer gets another and the shareholder gets a third.’ In short, there is a feeling in some quarters that the audit profession in Ukraine needs to get its own house in order if it is to fulfil its potential to increase transparency and efficiency in the business sector.

Dr Nataliya Vovchuk is head of ACCA Ukraine, Baltic & Caucasus States. She has been the coordinator of several international projects run by KPMG/Barents, the National Center for the Training of Bank Personnel of Ukraine, and the Russian Collegium of Auditors.



Audit perspectives: Europe European roundtables on audit made telling points about the value of its by-products and need for greater communication, says ACCA’s Glenn Collins

J Glenn Collins FCCA is head of advisory services at ACCA. He is responsible for a team of experts who provide advice and support to ACCA members on a range of issues, including audit, financial reporting, business advice, taxation, company and business law and ethics. He spent 16 years in public practice, specialising in audit and business, before joining ACCA.


ust as important as the confidence an audit gives a company’s shareholders are the by-products it generates for the economy and society in general. That was the message of an ACCA roundtable, held in Brussels, on the future of audit. With the European Commission about to overhaul its directives on audit exemption thresholds, the discussion in Brussels – and in a series of European roundtables – focused on SME audits and, in particular, what the effects of increasing the threshold would be. There was agreement that the threshold should be raised gradually rather than in one hike, and that member states should set their own limit within the overall EU maximum exemption threshold (currently €8.8m turnover). Steve Maslin, partner and head of external professional affairs at Grant Thornton, said: ‘An audit creates useful by-products, such as the imposition of financial discipline on companies, the deterrence of fraud and increased comfort on going concern.’ Maslin called on the EU’s policymakers to remember that the collapse of just one local company from a lack of financial discipline could have serious repercussions on 50 others in the region. Moderator Sara Harvey, chair of ACCA’s auditing technical committee, agreed: ‘When governments are looking to the private sector to lead the economies of Europe out of recession, the contribution of auditing and accounting to the achievement of business confidence should not be treated lightly, even at the small entities level.’ She added that ACCA’s recent policy paper had argued for the gradual ‘unbundling’ of complex audit procedures for smaller clients and the development of assurance products: ‘To tackle SMEs’ needs better, we should start thinking about introducing a cheaper and quicker scaled-down version of the full audit, and agreeing procedures with the business to provide assurance on the areas of risk that are of most importance to them.’

The three roundtable discussions in the UK also examined the EU audit exemption threshold and the regulatory burden of an audit against the value it brings to businesses in terms of increased confidence and accountability. At the UK events, investors and providers of finance and credit wanted businesses and their auditors to move towards providing current and targeted independent reports. Although the roundtable stressed that the unique attributes of good auditing and reporting should not be lost, auditing and reporting have to evolve to meet the need for greater communication demands. However, the panels recognised that open dialogue between the entity and its auditors needs to continue. Would this open dialogue continue between an entity and its auditor if it was known it would be made publicly available? And second, the appetite for litigation hinders all parties from openly communicating. It was clear that timely, relevant and clear reporting is required and needed by all users and we should build on our strengths. Reports on the audit-related roundtable discussions are available at


Audit perspectives: Singapore A roundtable debate had no doubt about the true value of audit, but concluded that auditors could be more transparent, says ACCA’s Darryl Wee

F Darryl Wee is head of ACCA Singapore, responsible for ACCA’s presence and reputation in the country. He joined in January 2010 after being chief commercial officer at Nestronics Singapore. He also spent seven years at Agilent Technologies. Wee is fluent in English and Mandarin and holds an MBA from Rutgers University.

ollowing a succession of regulatory failures, the value of audit is again under attack. Critics have asked whether auditors do enough to alert investors? Are auditors sufficiently independent? Can stakeholders rely on an unqualified audit report? Such questions were debated in a recent roundtable discussion in Singapore. The conclusion was to reaffirm the value of an audit. From the investors’ perspective, it lends credibility to a company’s financial statements, providing comfort to all stakeholders that an independent verification has been conducted and that the audited accounts can be relied on. Companies with audited accounts typically enjoy lower interest rates on their bank loans, which reduces their overall cost of capital. Stakeholders are right to trust auditors’ adherence to financial reporting and governance standards, their professional scepticism and their integrity. But while the value of audit was reaffirmed by the roundtable participants, there was a clear view expressed that more needed to be done in terms of communicating the work which is involved in the audit to a greater number of stakeholders. There is increasing dialogue between the external auditors and the nonexecutive directors on the audit committee on issues such as aggressive accounting policies, but these discussions are not directly shared with shareholders as the current communication framework is limited. It was felt that often comments in the management letter were more valuable than those in the audit report and a way needs to be found to give the shareholders, who pay for the audit, more access to these views. Of course, care would need to be taken with any such change. And audit liability generally needs to be addressed as legal liability needs to be proportionate to the fees earned. Failure to do so may deter talented people from

entering the audit profession, which would be bad for business and the economy. The roundtable acknowledged the concerns about auditor independence. But the most convincing argument was that audit independence is a state of mind; as this is not measurable, auditors have to be objective and professionally sceptical and must be seen to be so. While current financial reporting standards are principles-based, the roundtable warned that further refinement would lead to more prescriptive and compliance-based standards, eroding auditors’ ability to exercise their professional judgment. Greater regulation might remove the uncertainty of interpretation of auditing standards, but the mechanistic process of ‘form over substance’ had not prevented the recent failures of major financial institutions. Accordingly, a line needs to be drawn on the extent of further refinements to the current regulatory framework. Reports on the audit-related roundtable discussions are available at



Model reporting? The credit crunch put new emphasis on the importance of business models in assessing corporate health. ACCA’s Dr Afra Sajjad explores the issues


he bankruptcies of General Motors, Lehman Brothers and Woolworths, the sub-prime mortgage crisis in the developed economies, and the SME survival crisis in emerging economies – all involve, to a greater or lesser degree, a flawed business model that has caused hardships for stakeholders. Could those hardships have been mitigated by the various organisations communicating their business models relevantly and reliably in their annual reports so stakeholders could form an objective view of future prospects? Over the years there has been debate on the usefulness in decision-making of annual reports. To meet the information expectations of users, new information has been added to annual reports. As well as the statutory financial statements, today’s reports often provide disclosures of risk management, corporate and social responsibility performance, value drivers, relationships, intangibles and strategic outcomes. They occur in such places as the operating and financial review, the statement of corporate responsibility, the management discussion and analysis, the management commentary and the business review. Since the financial crisis, as expectations have been shaped of annual reports as descriptors of business models, suggestions have emerged about narrative reporting’s potential for communicating the business model. What about the scope of the business model story? As the model is, to put it simply, a way of doing business, disclosure would have a pervasive effect on all aspects of a business’s operations: the competitive and legal environment in which it operates, its place in the supply chain, the nature and level of its engagement with key stakeholders, the quality of its board of management, its commitment to sustainable development, and the actual products and services it delivers. An incisive account of the business model


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.

could offer decision-influencing information by explaining the infrastructure, the networks, the resources that drive the strategic direction, the business differentiators and value drivers, the implementation of the unique value proposition, the profit margins, the cashflows, and the associated internal and external risks. As the business model is fundamental to business growth, are there current examples of companies that give extended disclosure of their business model? Improving Corporate Reporting, a recent opinion piece by the Malaysian Institute of Accountants that appeared in Accountants Today, looked at companies submitting their reports to the Malaysian National Annual Corporate Report Awards. It concluded that even though the companies disclosed information on aspects of their business model and achieved excellence in producing integrated corporate reports, the discretion that preparers had over what information to include could result in the exclusion of vital but commercially sensitive information. It also found that the active involvement of top management and the willingness of the business to be open and transparent in its communications encouraged completeness of disclosure. It suggested the scrutiny of an independent body to improve transparency and serve as a test of management’s mettle. RISING TO THE CHALLENGE The Accounting Standards Board in the UK produced a report, Rising to the Challenge, which reviews narrative reporting in the annual reports of 50 UK-listed companies. It argues that the gaps in communication about the sustainability of business models since the credit crisis could be filled by narrative reports that would supplement financial statements by telling the story of how the company generates cash. The report concludes that the best reporting companies already disclose


business models. Specific requirements are, however, needed to improve the robustness of such disclosure. Are there any internationally recognised requirements for disclosing the business model? An exposure draft on the management commentary, issued by the International Accounting Standards Board (IASB) in June 2009, offers a useful reference point for narrating a compelling story about the business model. Aiming for consistency and comparability of narrative reporting across jurisdictions, the commentary gives the company an opportunity to offer historical and future-oriented decision-useful information to the primary users of financial statements about the entity’s financial position, financial performance and cashflows. It also provides a context for understanding management’s objectives and strategies for achieving them, the entity’s risk exposure, and the effectiveness of its risk management strategies and its resource management. Narrative reporting can accordingly provide a framework for disclosing the business model. So if a framework for business model disclosure already exists, is there any need for further blending of such disclosure into the narrative

reporting landscape? Is regulation the way forward? Is discretion within certain guidelines the alternative? Is our vision myopically blurred so that we cannot see that the business model story has already blended into the narrative reporting landscape? A theme underlying management commentary consultation events, organised by ACCA in different jurisdictions, is that a comparable, balanced, reliable and relevant management commentary – a narrative report – is itself a story of the business model. If an incisive business model story is a narration of the historical and future financial and non-financial value drivers, then why since the financial crisis are doubts being cast over the capacity of such reports to articulate the business model? BUSINESS MODEL TRANSPARENCY What emerged from the consultation events was that, despite improvements in the quality and quantity of narrative reporting across jurisdictions, the challenges of consistency, reliability, cost-benefit analysis, measurement, relevance and understandability continued to add to concerns about the usefulness of narrative disclosure in making decisions.



So why does the assertion that narrative disclosure makes a useful contribution to decision-making remain beset by misgivings and uncertainties? Why have the challenges not been overcome? Relentless efforts have been made to address the reservations. There is now an abundance of policy papers, discussion documents, industry guidelines, non-binding frameworks, legislation and directives. Have these efforts borne any fruit? Despite international and sectoral differences in the quality and the quantity of narrative disclosures, it is apparent that corporate disclosures about governance, directors’ remuneration, resources and relationships, products and services, and environmental and social responsibility are all becoming essentials of the annual reporting landscape across jurisdictions. If the reporting horizons are expanding, will greater appreciation of

the limitations and objective evaluation of the challenges of narrative reporting allow greater acknowledgement of its usefulness? Generally unguided by any conceptual framework, at times grappling with regulatory requirements, with knowledge and skills gaps still to be bridged, and facing the ever changing expectations of narrative report information, the preparers of annual reports have striven to come up with decision-useful reports that encompass a compelling story of the business model. The bursting of the dotcom bubble, the Enron scandal and the financial crisis have prevented recognition of their achievement. After every crisis, loud calls for increasing transparency in annual reports have moved the goalposts of narrative reporting. Consolidation rather than revision, reflection rather than retaliation, realism rather than romanticism would lead to


acknowledgement by policymakers, standard setters and the business world of the efforts being made to render narrative disclosure an absorbing story of the business model. For narrative reporting to tell the business model story effectively, certain questions need to be answered. For whom should the business model be disclosed in narrative reports – investors, employees, customers, the general public, or all of them? Are the information expectations of a diverse range of users resulting in misperceptions about the completeness and relevance of disclosure? Is the abundance of information in narrative reporting distracting from the visualisation of a clear and concise picture of the business model? Are perceptions of the ever increasing information load and complexity of narrative reports deterring preparers from disclosing their business model in its entirety? Does the fear of investors’ overreaction to negative

Models in the red: the Chevrolet Corvette was one of General Motors’ most popular brands, but the company’s business model proved less robust, with GM going bankrupt last year.

news preclude balanced disclosure? What would pave the way for creating positive perceptions about decision-useful narrative disclosures are: critical evaluation of the needs of primary users; contextual, balanced and simple disclosure underpinned by a longterm vision; and a revisiting of expectations and realisations of narrative reporting. Reflecting on solutions would enable narrative reporting finally to accomplish its true aim of helping the primary users of annual reports form an objective judgment on the future of the business through an absorbing story of the business model. The Improving Corporate Reporting paper is available at corp_rep and the ASB’s Rising to the Challenge report is available at


Generation XBRL? It has huge benefits, but XBRL financial data tagging technology is being held back by lack of knowledge among potential users, an ACCA report has found


he business case for XBRL needs to be made more effectively than is currently the case. XBRL (eXtensible Business Reporting Language) could be very beneficial to numerous stakeholders, but the full range of possibilities can be realised only when a critical mass of businesses and stakeholders engage with it and endeavour to move to an XBRL reporting environment. This is the main finding of an ACCA report, called XBRL: The Views of Stakeholders. The report found that although the XBRL community had the technical abilities to develop solutions for widespread benefit, the lack of resources being put towards this key step in business reporting is limiting the speed of its application. EUROPE DROPS BEHIND This is now particularly the case in Europe. The recent direct support by the Securities and Exchange Commission (SEC) for XBRL in the US may leave European financial markets behind, because they will not be able to take advantage of the opportunities that could be provided by regulatory support for the next generation of financial reporting technology. The report looked at the views of four UKbased stakeholder groups on the adoption of XBRL in organisations. These stakeholders represent some of the key players in the adoption of XBRL in companies: business practitioners, auditors, tax practitioners, and users of financial information. Questionnaires were sent to each of the four groups to ascertain their views. The findings show that, although internet use and basic forms of digital reporting are very common, with most people having knowledge of PDF and HTML documents, very few practitioners know anything about XBRL. The few that do have knowledge of XBRL agree that it could be very useful both in enhancing the integrity and reliability of data and speeding up processing times.

The report, XBRL: The Views of Stakeholders, was written by Theresa Dunne, professor Christine Helliar (both of the University of Dundee), Andrew Lymer and Rania Mousa (both of the University of Birmingham). It is available at www.accaglobal. com/rr111

The major obstacle appears to be the time and effort needed to learn about, and apply, XBRL. Practitioners do not think they have time in their schedules or resources within their organisations to learn and implement the technology. As a result, the business case for XBRL has not been made. Even though software is now available that makes it easy to render XBRL documents into a usable format and spreadsheets are available with XBRL facilities, these developments have not been deemed adequate encouragement for a more general take-up of the technology. The evidence suggests some support in principle for checking that the correct taxonomies have been uploaded and that the tagging of data transactions has been completed accurately. But there is only limited support in principle for external auditors to carry out this checking; respondents to the surveys were fairly blasé about this aspect of assurance at this stage of XBRL’s development. Ensuring the reliability and demonstrating the integrity of XBRL taxonomies and tagging do not currently appear to be of great concern to the business community. Practitioners’ views on the role of government and regulators in mandating XBRL use were mixed. This is particularly interesting in the light not only of the SEC’s recent mandating of the use of XBRL for large company filings in the US, but also its use in the UK by Companies House and Her Majesty’s Revenue and Customs (HMRC) for business and company tax filings in the UK. It would appear that, in general, UK businesses would prefer to decide voluntarily if and when to adopt XBRL, rather than being forced to use the technology by a regulator. There was also concern that companies do not have the IT expertise to be able to implement XBRL, despite the recent development of software that makes the task far easier. Overall, there is a considerable lack of knowledge of XBRL within UK business.



Turning the credit tap on and off ACCA’s Emmanouil Schizas mines the quarterly surveys of ACCA members to find the truth about failure in the bank lending market


hroughout the downturn, the percentage of ACCA members in small businesses reporting problems in accessing finance has been high (ranging from 34% to 45%) but lower than media reports have suggested is the case. After all, not every business requires large amounts of finance. ACCA global research shows, for instance, that for every SME that entered the downturn cash-positive and became cash-negative, two have gone through the reverse process. On the other hand, for those SMEs that continued to rely on external finance, matters often became desperate. The same ACCA study found that one in nine growing SMEs would struggle to survive without finance. Luckily for these businesses, the supply of finance improved (and demand fell) by mid2009, following the barrage of bank bailouts and monetary stimulus. But as the first signs of recovery emerged, those SMEs that tested the lending water found that banks were still wary. Since then, ACCA members have reported some genuine improvement but it is clear that SMEs have had much more trouble than large corporates in getting loans and will continue to do so for some time. IN SEARCH OF NEW VILLAINS Banks are well aware of how tight finance has been for some SMEs. In fact, figures from ACCA’s regular member surveys of global economic conditions suggest an uncanny correlation between SMEs’ and large financials’ perceptions of access to finance. And, to be sure, no major bank is willing to risk an exodus of small businesses, which contribute more than a quarter (27%) of retail banking turnover despite accounting for only 10% of all retail banking customers. However, SME debts represent nearly half (46%) of the total risk-adjusted assets of retail banks, which makes tighter lending


Emmanouil Schizas is senior policy adviser for ACCA’s SME Unit. He deals with access to finance, regulation, late payment and the public procurement market. He is also editor of the ACCA Global Economic Conditions Survey and acts as the secretariat to the ACCA UK SME Committee.

standards for small businesses a priority for the banks as they set about rebuilding their balance sheets. Our analysis, based on the pooled member survey data to date, suggests that both the tightening and easing of credit for SMEs, where they have occurred, have been driven almost entirely by changing credit risks, especially the risk of SMEs’ customers paying late or going out of business. Once this effect has been allowed for, those SMEs facing cashflow problems appear to have experienced much more trouble accessing finance than their peers before the last quarter of 2009. Is this evidence, then, of market failure slowly flowing out of the system? One way of looking at this is that there was much more evidence of market failure in the boom years than in the recession. Banks have never really intended to take on the customer credit risks of small businesses through their lending. Some banks have openly said that debt is an unsuitable instrument for such risk. But we also know that in the boom days the banks did slide down that slippery slope because good economic conditions, coupled with extremely low funding costs, meant that they could afford to be complacent about potential losses. There is another way of looking at this, though, and that is that the banks have never been very good at assessing credit risks in small businesses and were at a loss at how to do so in a recession of unprecedented depth. There is some evidence that banks use information on trade credit to sniff out good risks, in the knowledge that businesses often know things about their trading partners that a bank will not, and can control their behaviour in ways that a bank cannot. When the business credit market shut down in the first wave of the credit crunch, the result was a further contraction in supply that has not yet been reversed to any great extent.


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So how good is this explanation? According to our survey data, access to finance for large corporates has not been driven by cashflow alone. Lenders seem to have factored in the strength of corporate order books and changes in operating costs as well, and to have done so throughout the recovery. It is fairly clear, then, that lenders have relied on information about the fundamentals of big businesses, but not of SMEs. Without quality information to guide them, banks simply won’t approach a small business with poor cashflow. A RETURN TO SANITY Ultimately, banks are still in the business of lending to smaller businesses, but they are decidedly out of other lines of business. Thankfully, one of these is guesswork; a great deal of the tightening in the supply of credit to SMEs is simply a return to sanity. Other dropped lines of business include the financing of working capital and the (implicit) supply of trade credit insurance, where the banks’ once abundant cash will be missed by many. But at least they are now firmly back in the business of collecting and scrutinising information. In this new model accountants have much to offer to businesses and lenders. ACCA’s global economic conditions surveys are available at More about access to finance at



In search of umbrellas: The view from Europe The halcyon days of easy corporate credit are gone, says Peter Williams, and dark clouds menace the refinancing horizon Peter Williams has written on accounting, financial reporting and auditing issues for many years, and regularly appears in Accounting and Business. A qualified accountant, he edits a number of magazines, including The Treasurer, and is a former editor of Accountancy Age, Financial Director and Management Consulting. He lives in west London with his wife, two teenagers and a border terrier.



usinesses, bankers and politicians share a common concern over the future financing of companies. Ever since the credit freeze struck in the summer of 2007 fears have been expressed over the ability of finance directors to find the credit their companies need to keep trading. In Europe the banks have always provided the bulk of lending, however much or little is required. In the US there is more diversity, with large and mid-sized corporates finding credit in markets such as private placement. European large corporates have successfully looked to those alternative sources, including the bond market, to satisfy their credit requirements. But for smaller European firms, these markets are too expensive or too difficult to access and so remain closed. Surveys from business associations illustrate just how difficult it can be. One suggested that 20% of small firms whose loan applications had been rejected had no idea why the banks had turned them down. The British government has responded by suggesting a credit czar to look over the shoulder of banks as they make up their minds. A more realistic idea may be debt advisers, which is becoming a more popular option with large businesses. Small firms would benefit from a similar independent service to offer them insight into the banks’ thinking. The future supply of capital, both equity and debt, is by no means guaranteed. The banking industry may be permanently changed by a focus on home markets and mergers to create super-banks – resulting in less competition – and a revamped regulatory regime that forces banks to hoard capital. As banks seek to rebuild their financial strength there has been a sea-change in the way they view lending. Before the credit crunch, finance directors could have as much bank finance as

they wanted and on very favourable terms – low interest rates and with few restrictions or conditions; so-called covenant-lite lending. One of the key characteristics of post-credit crunch lending has been its shorter tenure. Whereas businesses used to be able to secure facilities that stretched for five or seven years, those horizons have now shrunk to three years. And many of those loans will fall due in 2012, which means every finance director and treasurer will be starting the refinancing process next year. Uncertainty persists about a string of key financial issues. Governments’ indebtedness and the tentative global economic recovery are the two biggest. Given this serious backdrop it is by no means clear that corporate refinancing will occur as a matter of course. Sure, few large businesses have collapsed as a result of the credit crunch. Indeed, it might be argued that many small firms that did collapse after being denied finance simply lacked competitive edge and good management and so deserved to fail. But what is more awkward to explain is when big high-profile businesses collapse because of lack of finance. In the UK in March 2010 engineering company Jarvis called in the administrators. The headline in The Daily Telegraph read: ‘Jarvis calls in administrators after banks refuse to help.’ It is impossible to tell whether Jarvis is an aberration or the harbinger of a trend that could stretch into the 2012 refinancing spike. But it shows that the relationship between bank and business is under considerable strain. You can’t talk to a bank for long without hearing the word ‘relationship’. In the creditfuelled years banks played the relationship card as a way of keeping their clients as other banks circled with tempting offers. Mark Twain is credited with describing a banker as ‘a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain’. A few years ago bankers on the conference circuit delighted in regaling audiences with variations of the quote. Not so much recently. With the way that access to finance appears to have fundamentally changed, finance directors could be forgiven for fearing that a shortage of umbrellas may become a permanent feature of their professional lives.


Keep stockpiling cash: The view from Asia Asian economies have not been as badly damaged by the global recession, but the region’s businesses will remain under pressure, says Cesar Bacani


bout this time last year, I remember speaking to Frank Lai, then CFO of semiconductor manufacturer China Resources Microelectronics. ‘We’re definitely not going to be overgeared,’ he said. ‘If at the end of the year you’re overgeared, the banks will no longer support you.’ He was also careful about staying liquid, targeting a 29% hike in cash to HK$900m in 2009 by getting rid of inventory even at a slight loss and cracking the whip on accounts receivables. You never know about credit availability, said Lai, who is now executive director and deputy managing director at Hong Kong blue-chip China Resources Enterprise. ‘We don’t have that problem because of our prudential credit. But a lot of companies in Hong Kong in November and December [2008] found their loans were not renewed or renewed at half the facility. You touch wood and hope this will not happen to you, but there is never any guarantee.’ One year on, I don’t see compelling evidence that things have changed much. For a time in China, banks were lending liberally until the central bank began raising reserve requirements to help avert asset bubbles. But even as money supply was growing at an astounding 35% last year, the banks were choosing to lend to the big, state-owned businesses rather than private sector firms and SMEs. It’s a pattern you see in Asia’s other banks as the West slid into recession in 2008 and 2009, even though China, India and Indonesia still managed economic growth. Companies like China Resources get access to bank credit whether they need or want it or not. Other businesses that really need money have to go through hoops to borrow from the banks. That’s not likely to change any time soon, given that Asia’s central banks and governments are now withdrawing stimulus measures and raising interest rates. You can argue that Asia’s financial institutions can be more open-handed, given their generally robust balance sheets going into the global recession, a result of the tough lessons they learned during the 1997 Asian financial crisis. Many of the region’s companies had strong balance sheets too, again because of that crisis. Exports are also recovering, domestic consumption is strengthening and

economic growth is forecast in Asia this year. Don’t hold your breath, though. The Western economies are still under pressure. Western banks have pulled back from Asia to address their problems at home, and that means companies will need to rely on local banks more than ever. Credit risk committees in financial institutions remain wary, particularly as the banks await ‘too big to fail’ regulations and other new rules. ‘At the moment, it’s more important not to lose money than it is to make money,’ former investment banker Quentin Amos, head of corporate finance and advisory at mining specialist Runge, told me in February. What can CFOs do? I think Lai’s strategy last year of stockpiling cash and avoiding overleverage remains sound today and in the foreseeable future. Asian businesses should go on making systems and processes more efficient, cutting costs and promoting productivity. These moves are not only good for the bottom line but also likely to endear them to the banks. The global economy will not fully recover from the crisis just past unless the US and Europe get back on their feet. It will take years before things get back to normal. ‘But “normal” is not 2007,’ says Amos. ‘The pricing of risk became ridiculously low through 2006 and 2007. The years 2003 and 2004 represent what we would call normal pricing of risk.’ That’s not such a bad thing. Things would be even better if the CFO’s focus on cashflow, efficiency and productivity become part of a company’s DNA even when the good times finally return.

Former personal finance editor and senior business editor at Asiaweek, Cesar Bacani is a Filipino citizen and permanent resident of Hong Kong. He is the author of The China Investor: Getting Rich with the Next Superpower and is currently a contributing editor for CFO Asia and CFO China. He is managing partner at New York and Hong Kong-based consulting firm The Editors Group, and is an award-winning poet.





Forever blowing bubbles The value destruction that occurs when the unstable Western financial markets turn down couldn’t happen under an Islamic financial system, says John Zinkin


way of life as well as a theological system, Islam goes a great deal further than most other religions in regulating commercial endeavour and laying down market rules of engagement. There are five key concepts in the way that Islam views business: unity, equilibrium, social justice, property as a trust and the banning of some businesses on moral grounds. These concepts, along with the central idea that mankind acts as a steward for Allah, actively encourage triple bottom-line thinking – in other words, social and environmental performance is also taken into account – and sustainable business practices. The current financial crisis is so severe because much of the world has moved away from markets where the community owns businesses to ones where people have gone from being owners to investors and then speculators. The value destruction that occurs when markets turn down simply cannot happen in an Islamic financial system. Conventional finance, by contrast, is not merely inherently unstable but highly volatile, too. CONVENTIONAL VS ISLAMIC FINANCE Back in the days of the gold standard, central banks used real assets to back money creation, but in the modern conventional system they print unbacked ‘fiat’ money, use interest rates as standard policy instruments and are prepared to refinance private sector banks. By contrast, an Islamic central bank cannot use interest rates as a policy instrument and does not refinance banks; if necessary, it injects money into the system by buying foreign exchange, gold index-linked government debt, commodities or real assets created by government. It’s a similar story with banking corporations. Non-Islamic banks can lend a multiple of their reserve base, which puts the national payment system at risk, but Islamic banks must

hold 100% reserves. Whereas conventional banking is single tier, Islamic banking is a twotiered system. Tier 1 consists of amanah or safekeeping plus payments, transaction services and transfers with 100% reserves. Tier 2 is made up of investment activities where deposits are longer-term savings used for investment in trade, leasing and productive activities. Tier 2 assets are immune from the unbacked expansion of credit. Returns arise ex-post from profit or losses of operations and are distributed to depositors as shareholders of equity capital. In essence, Islamic finance forbids leverage: all transactions must be backed by real, tangible underlying assets. The excessive leverage permitted by the conventional system creates a huge inverted credit pyramid based on the thinnest of real foundations. In Islamic finance, interest-based debt contracts do not exist, so overinvestment and excess speculation, which is also forbidden, simply cannot happen. By contrast, interestbased debt contracts in conventional systems lead to overindebtedness, which in turn drives overinvestment and excess speculation. Credit cannot be created out of thin air in Islamic finance. The risks are mitigated as they relate to returns from investments rather than the capital of the institution. The explosive credit growth fuelled by modern conventional finance has undermined creditworthiness and underwriting standards. In Islamic finance, risk is individual to the business and not systemic, as there is no speculative mania and liquidity overexpansion is forbidden. In non-Islamic finance, risk is both individual and systemic because speculation and excessive growth in liquidity are both allowed. There are no risk-free assets in Islamic finance, with the rate of return on financial assets determined by returns to the real

John Zinkin is CEO of the Securities Industry Development Corporation and deputy chairman of the Institute of Corporate Responsibility, Malaysia. He provides executive coaching and is also deputy chairman of the Institute of Corporate Responsibility Malaysia. Zinkin’s special areas of interest are CSR and corporate governance, and his latest book, Challenges in Implementing Corporate Governance: Whose Business is it Anyway?, has just been published by Wiley.



sector; returns are therefore positive in a growing economy. By contrast, non-Islamic central banks set interest rates deliberately low, regardless of risk (the Greenspan legacy). Returns are stable in Islamic finance because there is no value or maturity mismatching between assets and liabilities: if asset prices fall, then so do the liabilities. This is not the case in non-Islamic finance, where returns are unstable because there is value and maturity mismatching between assets and liabilities: asset prices may fall, but the liabilities do not, with volatility accepted as it promotes hedging. In short, unlike conventional finance, Islamic finance forbids interest rate-based bonds, finance based on the securitisation of fictitious assets, speculative finance, hedge funds and consumer credit that is not backed by real assets, preventing the creation (and subsequent deflation) of asset bubbles. THE MINSKY EFFECT What is known as the Minsky credit cycle explains why there is such a difference in the two systems’ stability. A period of economic and financial stability lowers investors’ risk aversion and encourages releveraging. Investors start borrowing excessively and push asset prices up excessively high. In this process of releveraging there are three types of investors/borrowers. The first, sound or ‘hedge borrowers’, can meet interest and principal payments out of their own cashflows. The second, the speculative borrowers, can only service interest payments out of their cashflows. They need liquid capital markets so they can refinance and roll over their debts; otherwise they are unable to service the principal. Finally, there are the ‘Ponzi borrowers’, who can service neither the interest nor the principal payments. Continual increases in the prices of the assets they have invested in represent the only scenario in which they can keep on refinancing their debt obligations. The other important aspect of the Minsky credit cycle model is the loosening of credit standards both among supervisors and regulators as well as the financial institutions and lenders, which, during the credit boom/ bubble, find ways to avoid prudential regulation and supervision. This idea isn’t new. US economist Irving Fisher recognised it in the 1930s when he argued that overinvestment and overspeculation were particularly damaging practices because they were undertaken with borrowed money: ‘They would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass


ISLAM’S GENERAL RULES OF BUSINESS The economy cannot be treated independently from society and nature. The market is to be regulated so any failure does not have the socially disruptive effect of violating norms of justice and fairness. Private property and private enterprise are inalienable rights but occur within the context that property in all its forms is a trust (amanah). Economic activity is filtered through a moral lens of what is good or permissible (halal) and what is harmful or forbidden (haram). Businesses may not discriminate between employees or stakeholders on the basis of race, colour, gender or religion. Muslims are reminded that the higher their position, the greater the responsibility they bear, and the need for fair labour practices. The importance of learning is explicitly recognised in terms of developing employees’ potential.

Floreat, not fiat: Islamic finance forbids leverage and prevents central banks from printing unbacked money, so profits are based on returns from real assets.


effect of the stampede to liquidate… the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.’ To prevent this, Fisher proposed the Chicago Reform Plan, which split the banking system into two parts: a depository component with 100% reserves; and an investment component with no money contracts and no interest payments, where deposits were treated as equity rewarded with dividends, and assets and liabilities were fully matched. The plan was not accepted. However, the model is very similar to Islamic finance, which is also two-tiered. It is clear that, unlike the conventional financial structure, an Islamic system could not create the explosive increases in liquidity that fuel asset bubbles because the central bank must have backing for its money and banks cannot use the money multiplier to gear up their lending. The opportunity to lever up is also limited, given that securitisation must be backed by real, underlying assets. As a result, it is extremely difficult, if not impossible, to generate the explosive growth in liquidity that caused the systemic instability and volatility of the latest global financial crisis. An Islamic financial system discourages hoarding and prohibits transactions that incorporate extreme uncertainties, gambling and risks. By prohibiting gharar (uncertainty), Islamic finance aims to closely link the assetbased ‘real’ economy with the financial economy, unlike conventional interest-based finance. ISLAM’S RULES OF BUSINESS Like other religions, Islam emphasises promise-keeping, honesty, fairness, charity and responsibility to others in society. All of these behaviours promote a general sense of responsibility in business. Resources must be utilised in an equitable manner with no one having a ‘permanent’ claim on any property, and they should not be destroyed or exhausted. All forms of productive work are considered an act of worship, provided any material enhancement and growth leads to social justice and spiritual enhancement. Any business deemed to be haram or forbidden (such as those involved in alcohol, gaming, arms and pork) is specifically prohibited. Also forbidden are usury and interest, exploitative business dealings, transactions where there is information asymmetry, corruption, and environmental damage. It is reasonable to conclude then, that a financial system based on Islamic precepts would lead to a more responsible and more equitable approach to business than the Western model.



No more business as usual In the new economy, accountants will have to provide reports on an integrated basis, rather than for discrete assets, insists Mervyn King


he trouble with our times is that they are not what they used to be. Companies are no longer used as mere forensic tools in which risk can be ringfenced from those who provide the capital – the shareholders – but have become integral to society. This is so because there is no other organisation on the planet that pools human and monetary capital as does the company. We are also living at a time of three crises: a financial crisis, a climate change crisis and an ecosystem/natural resources crisis, where we have reached ecological overshoot. In short, we have consumed natural resources faster than they can be regenerated. The economic model of the past 150 years of ‘take, make and waste’ has been based on two assumptions: that the earth has infinite natural capital and an equally infinite capacity to absorb waste. Neither is correct. Our natural resources have been depleted, our water supplies polluted, and greenhouse gases continue to spew into the sky as if it were an open sewer into which they would just disappear. Business can no longer be conducted as usual and we have to learn to make more with less. We are now operating in a new economy. The major shareholders today are financial institutions, particularly pension funds. Pension fund trustees have a duty to make informed assessments of the sustainability of the businesses they invest in, as reflected in the stewardship and investor codes that are springing up around the world. These codes furnish guidelines to the trustees of pension funds on how to make those assessments. But trustees can only discharge their duty of making informed assessments if companies report on an integrated basis – namely, the economic, environmental and social impacts, both positive and negative, caused by their operations. Traditional accounting reports on discrete assets. In the new economy, there is a


strategic interdependence on five aspects: financial, human, natural, social and manufactured/technological. As a result, companies have to report on an integrated basis and auditors have to expand their skills so they can verify and give assurance on integrated reports. That this is a worldwide trend is clear from statements from the International Federation of Accountants on integrated reporting, and writings such as those in the book One Report: Integrated Reporting for a Sustainable Strategy. The King III report on governance in South Africa has also recommended integrated reporting, which has recently become a listing requirement of the Johannesburg Stock Exchange. Every country must impose an obligation on all entities to report on the consequences of their operations on the economy, society and the environment. The stakeholders linked to each entity will be the compliance officers. They will quickly know, from those reports, whether they should continue supporting the company and its products or not. Sustainability is the moral and economic imperative of the 21st century, and integrated reporting is a step in making life on earth more sustainable.

Professor Mervyn King is chair of the board of directors at the Global Reporting Initiative. He is also chair of the United Nations global corporate governance committee and former judge of the Supreme Court of South Africa. King has consulted, advised and spoken on legal, business and corporate governance issues in 39 countries and is author of the book The Corporate Citizen.


Disclosing the future Businesses rather than governments appear to be driving the increase in climate change and carbon disclosures, says ACCA’s Roger Adams


n 2008, 3,000 organisations around the world published standalone corporate social responsibility (CSR) or sustainability reports. Despite the economic recession of 2009, the signs are that established corporate reporters are continuing to report and that new corporate reporters are continuing to emerge. Disclosures on climate change and carbon emissions have traditionally been a relatively small part of the standard CSR report. But over the last five or six years, corporate attitudes to such disclosures have been changing. Research conducted jointly by ACCA and the Global Reporting Initiative (GRI) immediately before the Copenhagen climate talks (COP15), which were held in December 2009, showed the frequency of climate risk-related disclosures is increasing, even if the main content of those disclosures did not always provide the level of detail that experts think is appropriate for socalled high-impact sectors. In a review of the climate change disclosures made by a select group of high-impact

A man walks past a multimedia environmental presentation projected onto the Old City walls of Jerusalem on 22 April as Earth Day is marked by turning off the lights illuminating the Old City for one hour.

multinationals, largely based in the developed nations, the ACCA/GRI report showed that climate change disclosures have doubled over the period between 2003 and 2008 but noted that they fell short of what informed financial statement users actually want. The report also recognises that a proper response to the climate change crisis demands cooperation between the developed and developing world. Developing countries are expected to account for 75% of greenhouse gas emissions over the next 25 years. China alone is already responsible for one third of the global total. If we accept the premise that corporate reporting drives corporate behaviour, then the extent to which businesses in these emerging economic powerhouses embrace climate change reporting will be critical to the future of the planet. The study shows that large companies from Brazil, China, India and South Africa report on their climate change policy, their climate change strategy and governance, as well as on perceived physical and regulatory risks.



All of them engage in mitigation as well as adaptation actions. They set targets and measure them, although very few use external independent assurance, which is perhaps an area that needs further study. Some, but not many, Russian companies do the same. So while some governments are reluctant to take on binding greenhouse gas reduction targets, an impressive group of business leaders is already fully engaged, with a significant number in BRIC countries (Brazil, Russia, India and China) and South Africa. This is an important message to the climate change negotiators, to the business community and to the world at large. A number of initiatives are likely to mature in the next two years (see right) that will reshape the carbon reporting landscape. And progress at the corporate level on addressing climate change seems unlikely to be impeded by the apparent lack of success in the COP15 negotiations. Despite the widely held fears that the failure of the Copenhagen climate talks to agree a formal and binding international emissions regime would lead to a policy vacuum, the panellists (representing industry and the investment sector) at a recent ACCA/KPMG debate on the climate change challenge all felt that an irresistible sustainability momentum had now developed. The absence of any international agreement, they thought, was largely compensated for by a growing framework of national or regional regulation, coupled with an intense focus on best practice driven by strong market signals. Corporate action is taking place against a background in which for 2008 – according to the KPMG International survey of sustainability reporting – nearly 80% of the largest 250 companies worldwide issued sustainability or corporate responsibility reports, compared with around 50% in 2005. To round off this review of the past, present and future of climate change and carbon reporting we should also note that at the end of January 2010 we heard that the Securities and Exchange Commission (SEC) in the US intended to issue an ‘interpretative release’ aimed at providing public companies with guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change. According to the New York Times of 27 January 2010: ‘The Securities and Exchange Commission said on Wednesday for the first time that public companies should warn investors of any serious risks that global warming might pose to their businesses.


A number of initiatives are likely to mature between 2010 and 2012 which will significantly affect the climate change/carbon reporting landscape: The Climate Disclosure Standards Board (CDSB) – which has representatives from the US, the EU and Japan as technical advisers – has recently issued an exposure draft dealing with carbon measurement and disclosure. The UK government has made provision for mandatory carbon reporting for the medium/large UK corporate sector from 2012 and is currently consulting on the details. The European Commission will hold a series of stakeholder-focused workshops later this year to ‘explore the desirability and the feasibility of stakeholders moving towards an agreed set of KPIs for ESG performance’. The UK Carbon Reduction Commitment came into effect in April. It requires the UK’s 5,000 biggest energy users to track, measure and report their UK emissions as a precursor to mandatory enrolment in a new emissions trading scheme. The Swedish government has mandated the use of the G3 sustainability reporting guidelines from the Global Reporting Initiative (GRI) for all state-owned enterprises. HM Treasury in the UK is considering making sustainability reporting mandatory across the whole UK public sector, using the Connected Reporting Framework developed through the Prince of Wales’ Accounting for Sustainability initiative as a basis. A consortium of influential professional and regulatory global bodies convened by the Prince of Wales’ Accounting for Sustainability project, and backed by IFAC, is preparing to lobby the G20 group to establish an International Connected Reporting Committee at the heart of whose remit would be disclosures relating to the ways in which the sustainability debate is impacting on corporate strategy and performance.

Although the agency has long required companies to reveal possible financial or legal impacts from a variety of environmental challenges, it has never specifically cited climate change as bringing potentially significant business risks or rewards.’ However, the SEC’s announcement should be read with some caution. The UK’s Financial Reporting Council (FRC) has made clear its own views on CSR reporting in a consultation document called Louder than Words : Principles


and Actions for Making Corporate Reports Less Complex and More Relevant, which suggests that: ‘(annual) reports currently aim to please too many types of user. There is a need to refocus them on their primary purpose: providing investors with information that is useful for making their resource allocation decisions and assessing management’s stewardship. We suggest that regulators and companies should reconsider how they address the needs of other stakeholders – for example, with specialist interests in environmental and employee diversity issues… Annual reports are arguably not the best place for specialist commentary (on environmental/employee) issues… unless they have a material bearing on current or future activities.’ The future looks good for the new breed of ‘short-form/narrow-focus solutions’ such as the Accounting for Sustainability Connected Reporting Framework and the climate changefocused CDSB recommendations. From a user perspective, if you are an investor with pretensions to ESG (environmental, social, governance – another term for CSR), then you may well get what you need in terms of targeted and audited climate change data. If you are a traditional mainstream investor, then you’ll be trying to find out what all these new disclosures signify. But if you are an employee, a community representative or an environmental activist with wider interests than just carbon and climate change, then you may continue to struggle to get data at all, save via the more traditional standalone voluntary CSR report. HIGH-IMPACT SECTORS: THE CHALLENGE OF REPORTING ON CLIMATE CHANGE The business world’s response to climate change is examined in detail in a four-part joint report by ACCA and the Global Reporting Initiative. Launched at last year’s COP15 Copenhagen climate change summit, the report provides an insight into the degree to which large companies around the world from the 15 most high-impact industry sectors have begun to disclose their greenhouse gas emissions and their strategies for reduction. The report includes an analysis across highimpact industry sectors between 2003 and 2008 and a separate analysis of 2008 carbon reporting disclosures in the BRIC countries and South Africa.

Roger Adams FCCA has recently retired as ACCA’s executive director – policy. He managed ACCA’s global policy positions on professional issues, such as sustainability and corporate responsibility. In March, he was given the Lifetime Achievement Award by the British Accounting Association.

The future looks good for

the new breed of ‘short-form/narrowfocus solutions’ such as the Accounting for Sustainability Connected Reporting Framework and the climate changefocused CDSB recommendations

Performance of the 36 companies analysed in the joint report by ACCA and the Global Reporting Initiative improved year on year from 2003 to 2008.


High-impact Sectors: the Challenge of Reporting on Climate Change is available at

0% 2003 2004 2005 2006 2007 2008



Swarming around standards Lois Guthrie looks at how accountants are incorporating new thinking into setting standards for climate change and other non-financial reporting


arket failures are often associated with information failures and we need to put the latter right to eradicate the former. In response, demands are increasing for effective regulation and common standards that promote accountability, responsibility and transparency while at the same time encouraging innovation. This is the remedy that many believe will restore market health and confidence, enable investors to allocate and invest capital effectively and allow participants to defray risk. Of course, before treatment is prescribed, we need to diagnose the condition that is impeding or silencing effective flows of nonfinancial information. Theories abound about the reasons for information failure leading to market failure. Some point to inadequacies in reporting. Others blame the overdose of complexity in financial theory and technology for the breakdown of reporting. The nonfinancial reporting standard setter is faced with contradictory diagnoses of ‘too little’ and ‘too much’ information. FILTER AND FOCUS The wide range and type of information that is potentially relevant to sustainability reporting makes it particularly vulnerable to claims of ‘too much’. In developing its climate change Reporting Framework, the Climate Disclosure Standards Board (CDSB) relies on traditional accounting remedies for focusing attention on wanted, and filtering out unwanted, information. In particular, it adopts relevant principles from the International Accounting Standards Board’s ‘qualitative characteristics of decision-useful information’ to provide focus on what is most relevant, reliable, complete and understandable and help to filter out what the UK Accounting Standards Board has called ‘immaterial clutter’ in narrative reporting. Through the


integration of climate change information into mainstream reporting, CDSB’s Reporting Framework encourages management to restrict disclosures to matters that impact the company’s business strategy, performance or financial condition.

Lois Guthrie is executive director of the Climate Disclosure Standards Board, responsible for their work to develop a framework for climate reporting in mainstream annual reports. She joined the Carbon Disclosure Project in 2004 after a career in international taxation and social security at PwC and Zurich Financial Services. She studied environmental policy at the Open University and holds an MSc in Responsibility and Business Practice.

COMPLEMENTARY APPROACHES Standards, regulation and traditional accounting formulae provide the technical rigour and solid foundation for setting robust reporting standards for non-financial information. However, alone, they are no longer enough. The enhanced and integrated business reporting ‘movement’ that advocates the benefits of integrating financial, nonfinancial, contextual and strategic information is indicative of the demand for a more holistic approach to information provision. UNITY FROM DIVERSITY The first and perhaps most important step is to convene the right group of experts to set and test reporting standards. CDSB’s development of a framework for corporate reporting on climate change has attracted interest and involvement from accountants to astrophysicists as well as engineers, scientists, academics, activists, policy makers and philosophers. Swarm intelligence recognises that a single ant isn’t smart but their colonies are. The colony of interest around CDSB’s work promises an outcome based on rich common ground from which the seeds of a new type of reporting and information can flourish.

The non-financial reporting

standard setter is faced with contradictory diagnoses of ‘too little’ and ‘too much’ information


DYNAMIC REPORTING The emerging theory of complexity economics portrays the economy as a complex adaptive system. The financial crisis seems to confirm the need to reconsider orthodox views about the nature of the economy. This has practical implications for those setting standards, particularly for non-financial information. How does a standard, which by definition enshrines an approach literally and temporally, reflect a complex adaptive system? No more is this dilemma evident than in the development of standards for climate change-related reporting, influenced by the almost daily introduction of new policies, regulations, practices, theories and facts. The complexity of climate change, the absence of universally agreed characterisations of its ‘assets’, ‘liabilities’ and ‘contingencies’ and the need for reporting that allows for cycles of review and update mirroring the complex, adaptive system, presents unprecedented challenges for the developer of standards. LANGUAGE In a situation where stakeholders from such diverse worlds as accountancy and astrophysics meet to devise an adaptive global reporting standard on climate change, the importance of agreed and shared language is paramount. Conceptions of a unit of carbon dioxide inevitably vary in the mind

The colony of interest around how the simple actions of individuals add up to the complex behaviour of a group is what the buzz about swarm intelligence is all about.

of a scientist and an energy broker. Standard setters such as CDSB can play an important role in reaching agreed-upon language and definitions to craft the ‘carbon-Esperanto’ needed for a successful global trading system. COALESCENCE The evidence of demand for change in business reporting and enhanced information needs, including for climate change-related information, is overwhelming. As demand for information grows, so do approaches to reporting. Standard setters can encourage and record coalescence around desired characteristics so that consistency of approach is achieved over time and the benefits of a particular approach are confirmed through widespread adoption. REALITY Firm on the foundations of traditional practice, accountants are cautiously but determinedly incorporating new thinking into setting standards for climate change and other non-financial reporting. Whatever the route they take though, the destination is reality and the aim is to ensure that reporting will result in the provision of information that reflects real business practice, real business performance, real value creation and the real needs of information users. Stakeholders deserve to be told nothing less.



Seismic shift Can businesses create value from the shift to a low-carbon economy? Yes, says Jon Alexander, although the strategy he advocates may come as a shock

I Jon Alexander splits his time between an innovation role with the National Trust and working as part of a team helping the marketing industry to investigate more constructive uses for their creativity. He wrote this essay in 2009 while studying for an MSc in Responsibility and Business Practice.

n two very different parts of the world, two very different innovation programmes are under way in the same industry. The first is in the US, where in 2009 a $2.4bn fund was set up to get a million plug-in hybrid cars on the road by 2015 and make the US economic recovery a green one. But there are two big problems with the programme. First, industry reticence: no major manufacturer has indicated a willingness to take on a programme of the scale that would meet the targets. Second, even if the plan works out, it doesn’t match the scale of what’s required. One million hybrids would amount to less than 0.5% of the total US fleet, with the fuelinefficient remainder accounting for half the world’s carbon emissions from cars. Moreover, the stimulus plan is for hybrids, and current prototypes revert to petrol after 40-odd miles. The other side of the world is the setting for the second innovation stream in the car industry. The latest project of Muhammad Yunus, the Grameen Bank founder, is to challenge Volkswagen to deliver an affordable vehicle for the Bangladeshi masses, much like Tata’s Nano project. But affordability isn’t the only goal: Yunus has also demanded that the engine be entirely pollution-free and easily removable in order to power an irrigation pump or household generator when not in use. Volkswagen, he says, has leapt at the challenge. There are three big contextual differences between the two programmes that explain why Yunus can do what the US can’t. Each difference allows us to define a rule of thumb for the kind of innovation needed to create solutions commensurate with the scale of the challenges we face. RULE #1: START FROM SCRATCH This first rule derives from the first contextual difference, which is the existing national infrastructure: Bangladesh has two cars per 1,000 population, the US has 765. The relative absence of powerful industry lobby


groups and vested interests in Bangladesh helps visionaries such as Yunus because it lets them start with a clean slate; this is a time for invention, not just innovation. Venezuelan economist Carlota Perez says that periods of economic turmoil are key to the development of new technologies and infrastructure. In essence, her analysis is that some of the old has to be swept away before the new can find its most successful forms. The power of starting from scratch is apparent in the UK energy industry, where a 10-yearold business called Good Energy, although still very small, is growing rapidly. Consider the company’s feed-in tariff schemes, which started paying people with domestic solar panels and wind turbines for every unit of energy they generate (even the ones they use themselves) at a time when paying customers anything at all inverted the established model. Good Energy’s example shows what is possible when you are brave enough to turn established wisdom on its head. RULE #2: FINANCIAL VALUE IS THE MEANS, NOT THE END The second rule springs from the second contextual difference: the genre of value sought in the innovation process. Yunus is seeking the greatest possible public good; US public companies are legally obliged to seek financial returns for shareholders as their ultimate goal. Yunus’ first foray into business was Grameen Bank, the organisation that made microfinance famous. It all began when Yunus, then an economics professor at the University of Chittagong in Bangladesh, went to visit poor households in the nearby village of Jobra. He found that the villagers were paying extortionate interest rates on trivial sums; loans totalling $27 had effectively enslaved 42 people in Jobra. Grameen Bank began when Yunus decided to lend those people the $27 they needed from his own pocket. He was paid back at a level


of interest that allowed him to lend to more people but which his borrowers could afford to pay, starting to work their way out of poverty. The lesson here is that financial value is useful, necessary and powerful but must not be the ultimate objective. Governments chase GDP almost as frenetically as businesses chase shareholder value, but it is only when people focus on their true goals and use financial value as a servant to help achieve them that they succeed. There can be no more pressing case for this than the transition to a low-carbon economy. If creating financial value is the overriding goal of that transition, we will not succeed. There will always be quicker ways to turn a buck than the low-carbon route. But although the financial value of low carbon may be smaller in the short term, it will be sustainable and sustained, just like Grameen Bank. Targeting financial value has never, and will never, inspire true innovation. When aiming at financial value, you have to work incrementally and base your assumptions on reliable parallels. This results in what I call Gillette innovation: the addition of another blade to a 73-blade razor. The managed innovation that takes place in major corporations with the express purpose of deriving financial value is almost always of this sort. The finest examples of innovation in recent years prove the point. Google, for example,

came out of two self-confessed ‘geeks’ experimenting with what they could do with the internet. These entrepreneurs continue to recognise the need for (relatively) unmanaged innovation, allowing Google engineers to spend 20% of their time on their own projects, with no initial pressure to show financial return. This is the circumstance of true innovation: the space to think, anticipate and understand a market intuitively, rather than modelling it financially. And our capacity for true innovation is precisely why we have a chance of successfully moving to a low-carbon economy. True innovators understand that the switch to a low-carbon economy is the prerequisite for the creation of financial value, not the other way around. True innovators create what is needed rather than what will make money. And true innovators will then, and only then, work out how to achieve the financial value that will make their innovation viable.

Innovation, Indianstyle: a potential buyer checks out a Tata Nano as the world’s cheapest car (costing 100,000 rupees or about $2,000) arrives at a New Delhi showroom.

RULE #3: SATISFY NEEDS, NOT WANTS This rule stems from the third contextual difference between the US and Bangladeshi car programmes, which is the genre of need responded to in the innovation process. Yunus is responding to a fundamental need, while US industry has its perception of need blurred by consumer desire. True innovators will create what is needed, but what does ‘need’ mean? Chilean economist



Manfred Max-Neef distinguishes between the concepts of ‘need’ and ‘satisfier’. For example, we need subsistence, which is fulfilled by food; but we don’t need a home to live in – what we need is protection, which is fulfilled by the home. Max-Neef lists nine fundamental human needs: subsistence, protection, affection, idleness, creation, identity, understanding, participation and freedom. And he divides the satisfiers that fulfil these needs into five genres, according to their effectiveness. Two of these are particularly important in this context: pseudosatisfiers and synergic satisfiers. Pseudo-satisfiers give the impression of satisfying a need while undermining it in the medium to long term. In much of the developed world today, branding seeks to associate products with values that the purchaser then incorporates in an attempt to satisfy the need for identity. Synergic satisfiers satisfy many needs in one. Growing one’s own food, for example, satisfies the need for subsistence but also provides participation, creation and identity. True innovation should start with needs, not desires, and should aim to create synergic satisfiers, avoiding pseudo-satisfaction at all costs. Any innovation that creates synergic satisfiers will automatically be low-carbon. Returning to the original example, it is clear that years of advertising have turned cars in the US into pseudo-satisfiers of identity,


Innovation, US-style: a Toyota plug-in electric hybrid vehicle and refuelling station on display at a New York car show.

freedom and protection. But as cars become bigger, faster and greedier for gas, so they undermine the capacity of people to fulfil their needs for freedom and protection. Yunus’ plan with Volkswagen, on the other hand, embraces synergic satisfaction. A pollution-free engine as a generator will help satisfy the need for subsistence while the car will help satisfy the need for freedom and increase opportunities for creation and participation. With no pollution, there will be no long-term threat to people’s need for protection – and no carbon. Could every new product, service or business be designed on the principle of synergic satisfaction of fundamental needs? There seems no reason why not. Indeed, the principle opens up a world of opportunity, particularly in the markets of the global north because so many of our needs are pseudo-satisfied. Take the need for identity, for a sense of self in relation to the world, for example. At present, almost all the efforts in countries such as the UK and US to fulfil this need are expended on pseudo-satisfiers. The reliance on material goods to satisfy needs generates enormous quantities of unnecessary carbon emissions. So how else could the need for identity be satisfied? What would a synergic satisfaction of this need look like? The School of Life in London ( offers an example. By offering truly adult education in the form of courses about love, politics, work,


play and family, it helps students develop their relationship with the world, and therefore their identity. This process, undertaken as a group, also fulfils the need for participation and understanding as people work through the process together, and the course aims to unleash the creativity of participants, so the need for creation is also satisfied. By facilitating the development of identity from within, rather than relying on external factors such as material possessions, The School of Life offers low-carbon innovation, and its ambitious growth plans suggest it is working. THE WORLD TURNED UPSIDE DOWN This is all very well, but it is by no means mainstream. This cannot be the case for much longer, given the timescales we face. Corporations must embrace these ways of thinking, and fast. So how might this happen? The starting point must be a redefinition of the meaning of value. While financial value and, particularly, short-term shareholder returns remain king, we have little chance of breaking out of our current destructive cycle. The growth of ethical investment suggests that people increasingly want to know what their money is doing, not just that it is growing. Is it so radical to imagine an end, if not to shareholder ownership, then at least to distanced shareholder ownership, where only financial returns are measured? If every shareholder was responsible for the actions of the company in which their money was invested, would we not see a fast and drastic change in behaviour? With the economic downturn, the UK has been forced to take the first steps on this path with such actions as the nationalisation of Northern Rock and bailouts for other banks. We should now embrace the opportunity and reinvent the context for innovation. If we do it right, we will see a proliferation of ideas like Good Energy, The School of Life, and, if we are lucky, Grameen. When that happens, we will have a low-carbon economy. So which of the two car industry innovation streams would you most like to be part of: the US or the Bangladeshi? To my mind, it is an easy decision. It’s the kind of innovation that will not only lead to a low-carbon economy and a sustainable future, but will also be the most fun to be involved in. If that combination isn’t about creating value, I don’t know what is.

Affordability isn’t the only goal:

Yunus has demanded that the engine of the new car be entirely pollution-free and easily removable in order to power an irrigation pump or household generator when not in use President Obama awards the Medal of Freedom, the highest US civilian honour, to Muhammad Yunus in recognition of his outstanding achievements.

Winning essay: This article is abridged from Jon Alexander’s

first-place prize-winning essay of the 2009 Ashridge Sustainable Innovation award. Download the shortlisted entries at PG65 EDITION 02


Asia works on sustainability Tay Kay Luan explains the clear trend towards CSR reporting in Malaysia, Indonesia, Singapore, Thailand and the Philippines


sia is a huge region exhibiting dramatic population growth, rapid urbanisation, massive industrialisation and a rate of economic growth that is the envy of developed economies in the rest of the world. As a result, it faces a daunting sustainability challenge, and its response will have a huge impact on the global environment. But what is also clear is that Asia’s businesses are accelerating their advance towards sustainable practices and processes. ACCA recently undertook research, published as Sustainability Reporting: the Rise of the Report and Regulator, that found that more major companies in Malaysia, Indonesia, Singapore, Thailand and the Philippines are now reporting their social and environmental performance. Since 1999, the number of companies in those countries reporting on sustainability (either in a standalone report or at least mentioning social and environment performance in their mainstream report) has doubled to 128. One of the significant observations in the ACCA study is that the growth in sustainability reporting in Asia is driven by regulatory involvement, greater awareness in local media and public conferences, and a rise in the number of social concerns raised by society. For example, since 2007 Indonesia has had legislation that requires companies to disclose their corporate social responsibility (CSR) activities. Listed companies in Malaysia are also required to describe their CSR contributions. Malaysia is the Asian country with the highest number of CSR reporters; a total of 49 Malaysian companies have produced 97 sustainability reports in the past eight years. The Philippines generated the lowest number, with 11 companies producing 29 reports. And although the number of publicly listed Malaysian companies generally lags behind international trends and practices in the reporting of CSR policies and performance, the overall quality of the reports submitted for the ACCA Malaysia Sustainability Reporting Awards 2009 has certainly improved. The survey found that the electronics sector produces the most reports, followed closely by oil and gas and mining. There is an increasing trend towards standalone sustainability reporting, and the majority of companies in the survey write their reports in-house.


Tay Kay Luan is president of the Business Council for Sustainable Development in Malaysia and is a regular author and speaker on business and sustainability developments. He was previously ACCA’s director for special assignments, responsible for driving ACCA’s policy and thought leadership agenda in Asia Pacific.

WHY REPORT? The most common reasons given for producing a sustainability report include improving the corporate brand and internal processes, strengthening stakeholder engagement, enhancing transparency with employees and offering more accountability. Other reasons include complying with regulations, gaining competitive edge and improving relations with shareholders and potential investors. The main target audience – that is, the readers of sustainability reports – consists of shareholders, regulators and customers. The number of CSR awards focusing on specific areas such as community, environment, workplace practice, diversity and management practices is also on the rise. But a key driver is external. As businesses and trade expand offshore, so the demand for more disclosures on environmental and social performance becomes more apparent, as evidenced in the plantations sector. The number of companies using the Global Reporting Initiative (GRI) has increased, as has


Environmental activists at a rally in front of the US embassy in Jakarta, Indonesia, last December, urging politicians to take bold measures to curb greenhouse gas emissions.

A worker at a recycling plant in Singapore that strips tyres down and shreds them into rubber pellets for use in cement making.

Protesters with caricatures of ‘heads’ of countries, the IMF and the World Bank during a demonstration in Manila. Environmentalist groups slammed the US for not acknowledging its contribution to the greenhouse effect.




21 Singapore





25 Malaysia


VOLUNTARY VERSUS MANDATORY In the capital markets of Indonesia, Malaysia, the Philippines and Thailand, regulators see corporate sustainability reporting as good practice, encouraging listed companies to state their social and environmental contributions. In Indonesia, the regulators have insisted that companies in the natural resources sector disclose their CSR activities. Bursa Malaysia, on the other hand, produces a CSR framework to help companies listed on the exchange to disclose their environment, workplace, community and marketplace performance. All newly listed companies must provide a description of the CSR activities or practices that they or their subsidiaries undertake. The exchange is also developing board-level guidelines on CSR. Since Bursa Malaysia launched its CSR framework and mandatory mention of environmental and social performance in 2006, the number of companies disclosing non-financial information has also increased. The Singapore government prefers persuasion as a way of building consensus, although Singapore Compact, which represents business

Number of companies producing sustainability reports

the number having their reports assured. Some companies in the ACCA survey had also received requests for information from the Carbon Disclosure Project (CDP). ACCA’s research indicates that the extensive use of more internationally accepted reporting guidelines is key to gaining greater credibility and consistency with global norms. There is also a view that assurance is more important than guidelines in improving clarity. The use of online reporting is predicted to rise, as is the number of sustainability reports and the extent of their verification and sophistication. Further support and capacity building will be needed to enable better standards and deliver the value of disclosures to diverse readers. This is a positive development and evidence of improvements in the use of third-party assurance, which helps improve the credibility and soundness of annual reports and reinforces the confidence of stakeholders.

interests, encourages companies to adopt reporting practices. The Thai government, along with a range of stakeholders in the finance sector, has started to encourage sustainability reporting. The Thailand Stock Exchange’s corporate governance code advocates setting and disclosing clear policies on environmental and social issues. However, much more can be done to raise corporate awareness and to adopt such practices. Advocates of mandatory reporting believe companies need to disclose their environmental, social and governance performance as part of their long-term opportunity and risk profile. Some, especially larger companies, even go so far as to integrate the corporate sustainability reports into the audited financial statements. A plethora of standards and frameworks exist for reporting purposes. The best-known – such as GRI, OECD guidelines for multinationals and ISO 26000 – have contributed to deeper debates around the whole concept of sustainability. Even in the absence of mandatory requirements, there is competition between companies wanting to enhance their reputation for compliance with best practices and to win recognition for their social and environmental performance. There is concern that mandatory reporting leads

The framework of reporting will undoubtedly evolve, driven

by the need to raise standards of reporting and improve linkages between performance management and corporate responsibility. All of these improvements will certainly reduce the number of glossy reports but they will also improve credibility, increase transparency and enhance stakeholders’ trust PG68 EDITION 02


to a box-ticking mentality, whereas a choice of frameworks allows companies to pick whatever they are comfortable with. Beyond reporting, many companies are also uncomfortable with mandatory CSR practices, given the diversity of issues and differences in the environments in which they operate. The voluntary adoption of reporting is a natural progression for companies that want to differentiate their standards. Although allowing companies to volunteer their disclosures is a questionable practice, the codes and standards of reporting are still evolving. FUTURE REPORTING Future sustainability reports will continue to move away from rhetoric and concentrate on credibility. What will make a difference to the readers of annual reports is when an organisation starts aligning its CSR policy with its evolving business model and its measurable impacts on the environment and society. In ACCA’s interviews with external readers, only 13% said they had read the annual reports in full or in part. A growing concern is that threequarters of those surveyed felt that companies would need to report more on matters of material importance. Future sustainability reporting should include how far or how well companies are tackling global issues. Climate change, for example, is an issue that has been addressed in policy and strategy matters, and has involved disclosures of significant carbon emissions, the redefinition of responsibility, better disclosure of targets and context, clearer communication of issues and more external verification. Risk management in sustainability reporting gives a better understanding of corporate risks and the opportunities of value creation.

Left: in Thailand a technician checks a sample of used cooking oil, which is a feedstock for biodiesel generation. Right: workers producing mangrove charcoal in Malaysia, an industry revived for its export value despite environmental concerns.

Intangibles such as brand innovation, resource efficiency, talent development and values and commitments from management all make interesting reading. Increasingly, large home-grown companies are expanding abroad. Offshore markets include countries with longstanding environmental laws, so some form of reporting of environmental compliance is necessary. For example, pressure groups have linked a number of multinationals’ palm oil products to rainforest destruction. Sustainability reporting in Asia is here to stay. Future reporting will continue to demonstrate the importance of quality management, more thirdparty inputs and stakeholders’ inclusiveness in addressing global or regional issues. The framework of reporting will undoubtedly evolve, driven by the need to raise standards of reporting and improve linkages between performance management and corporate responsibility. All of these improvements will certainly reduce the number of glossy reports but they will also improve credibility, increase transparency and enhance stakeholders’ trust. It is likely that regulators will continue to encourage these practices. Voluntary reporting will continue to innovate, with more than just hard-copy reports. Online reports or innovative flyers, press advertorials and customer leaflets now allow stakeholders to gain relevant information easily. Product content labelling will probably be next, signifying the emergence of responsible marketing. Most stakeholders will still prefer a printed report or at least updated reports that can be downloaded from the internet.

Sustainability Reporting: The Rise of the Report and the Regulator is available at



Failure to flex With their huge financial muscle, pension funds could transform the way businesses approach climate change. But are they tackling the issue?


ensions have for a long time been the subject of public unease. Individual company funds, fund managers and boards of trustees have all drawn fire and, over the last decade, become subject to intense scrutiny. With pension shortfalls fixed firmly in people’s minds as a cause for concern, the potential impact of climate change on stock market returns – and therefore on fund performance – is an issue whose time has come. A new report from ACCA and the Economic and Social Research Council brings the role of pension fund trustees in influencing climate change to the fore. Written by Professor Jill Solomon of King’s College London, Pension Fund Trustees and Climate Change is based on interviews with 20 trustee board members representing UK funds ranging in size from £4.5m to £19bn and with memberships of between 400 and 350,000. The study looked at issues such as trustees’ attitudes to briefing pension fund managers on incorporating climate change factors in their share selection and whether they believed they had a fiduciary duty to scheme members regarding such decisions. An active response to climate change could, the report argues, have a material impact on the behaviour of corporations. ‘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,’ it says. TRUSTEE ATTITUDES The report suggests that UK pension fund trustees are not well briefed on climate change issues and lack information, data and resources to assess the potential impact on the investment portfolio performance in their care. Climate change is rarely discussed in trustee meetings and there is a low level of


awareness of fund managers’ knowledge. Trustee accountability to members is also low, with many admitting that they rarely engaged on the issue with their membership. AWARENESS OF CLIMATE CHANGE The majority of respondents thought that climate change should represent part of their environmental and social governance agenda, albeit a perhaps less important element compared to investment in inappropriate organisations or governments, for instance. For many, the report argues, the link between climate change and financial return is an unproven one, and there remains a pervasive belief that a socially responsible investment (SRI) policy is at odds with strong financial returns. Although some respondents make a nod towards the notion that, in the long term, climate change can impact on companies’ activities and performance, few demonstrate any clear understanding of the implications for their own role. THE INVESTMENT PROCESS Trustees have been criticised in the past for taking too passive a role in the investment process. The Myners Reports of 2001 and 2004 and a 2007 National Association of Pension Funds (NAPF) study held that they did not fully engage with investment and lacked the necessary skills to fulfil their role. This concurs with Solomon’s study which found that, in relation to climate change, trustees showed little detailed knowledge of how far fund managers engaged with companies.

There remains a pervasive

belief that a socially responsible investment policy is at odds with strong financial returns


As the ACCA report points out, this lack of involvement contrasts sharply with the recommendations of the Carbon Trust’s 2005 report, which argued that trustees should encourage their fund managers to engage with investee companies on climate change risk. However, 16 out of Solomon’s 20 interviewees did not know whether climate change was discussed, and only two were aware of such issues coming up. It seems that trustees are lagging behind both public opinion and the investment community. Initiatives such as the Carbon Disclosure Project, the Institutional Investors Group on Climate Change and the FTSE4Good climate change criteria all demonstrate that the investor community is looking for fuller disclosure on environmental issues. ACCOUNTABILITY TO MEMBERSHIP Solomon’s report also found that trustees were not communicating with their membership. All of the interviewees bar two said they did not engage with members on climate change issues, and this was representative of a lack of communication across the whole area of SRI. There also seemed to be little demand from members for such information; only one respondent said they received feedback on their responsible investment policy.

Activists campaign outside the European Parliament for a ‘Robin Hood Tax’ that could help to tackle climate change. Pension fund trustees are, however, lagging behind policymakers, the public and others in the financial community in their understanding of how investment and climate change are linked.

the overall picture was one of low awareness and understanding of the issues. Interviewees pointed to an absence of reliable data on climate change and a lack of clarity on its links to fund performance. Trustees felt there was a lack of guidance on the issues from their advisers and perceived their fiduciary duty as a block, with climate change considerations seen as inconsistent with maximising returns for the fund. Perhaps more striking was a disconnect between the SRI policy of sponsor companies and their pension schemes. As one trustee said: ‘Our company has a sustainability policy and a very strong ethics policy. That doesn’t necessarily apply to the pension scheme because we’ve got other people’s money.’ CONCLUSION With climate change scepticism on the one hand and the belief that it could have a long-term material impact on the other, trustees have set themselves apart from policymakers, the public and others in the financial community. And yet their influence is hard to deny. As one put it: ‘We can probably influence companies to perhaps change their policies on their carbon footprint. Now I might be naive here but it is certainly worth a try.’ Liz Loxton, journalist

THE DIFFICULTIES Trustees from larger funds were generally more aware of the connection between climate change and financial returns, but

Pension Fund Trustees and Climate Change, by Professor Jill Solomon, is available at



When profits come second A small but growing number of UK companies say they don’t automatically put maximum profits before green principles


n the old days when businesses talked about sustainability, it was in relation to maintaining profit growth or hitting quarterly targets for earnings per share. But now that climate change is seen as the most pressing issue facing the planet, companies are under pressure to show that they are being run in an environmentally sustainable way, by reducing their carbon footprint or producing ‘greener’ products and services. They also have to meet a growing number of environmental regulations. But what does a sustainable business look like? And how can financial reporting incorporate environmental factors such as carbon emissions? These issues were addressed by a recent conference in the UK that marked the publication of ACCA’s Pursuing Environmental Sustainability report. The research for the report included a study of 23 companies such as cleaning product manufacturer Ecover and clothes retailer howies. It found that all 23 shared the same core values. Among their corporate principles are a determination to see money only as a means to an end and not pursue profit maximisation, and a refusal to draw clear boundaries between the organisation and the environment. ‘Money was not the focus for what these organisations were trying to achieve,’ said Nick Barter, research fellow at the University of St Andrews and co-author of the report. The report concludes: ‘The organisations could be described as hybrids between conventional businesses and societal innovators in that they are trying to pursue their environmental ends in an economic world which for the most part does not value those outcomes.’ Environmental activists argue that the pressure to maximise returns for shareholders means that environmental considerations are trumped by profit. But some of the businesses interviewed in the ACCA survey said that profit


and sustainability were not incompatible. One respondent at shoemaker Terra Plana said: ‘I would say [the founder of the business] puts the environment first and finance second, and I would say our new FD puts finance first and the environment second.’ The managing director of Triodos Bank, which says it only invests in ethical, sustainable organisations, said that the proposition it offered customers was ‘not one about maximising shareholder return – that’s very clear. It’s about investing in a bank that is taking a more sustainable view.’ Barney Rhys Jones, the managing director of Good Energy, which makes electricity from renewable sources, and supplies 26,000 homes, told the conference: ‘Mission versus profit: it sounds a lot like make money or make a difference. It’s important to do both.’ THE VALUE OF ASSURANCE As companies come under pressure to verify claims about sustainability to regulators, investors and consumers, some are going to independent parties, such as audit firms or specialist consultancies, to provide assurance statements for company reports and policies on sustainability. Two assurance standards widely used by the accounting profession are Accountability’s AA1000 and the International Auditing and Assurance Standards Board’s ISAE 3000. Mark Line, chairman of consultancy Two Tomorrows, said assurance was the ‘bedrock of corporate social responsibility’ and ‘can uncover opportunities to start new products and services in response to society’s needs’. Yet many companies are sceptical about the value of sustainability assurance, according to David Owen, professor of social and environmental accounting at the University of Nottingham. ‘There is a dichotomy of views as to whether assurance adds value to the reporting process,’ Owen told the

Clean and green: cleaning product manufacturer Ecover prioritises the pursuit of environmental goals.


ACCA conference. Although assurance is a growth area, the reports are voluntary and may be used for good PR without giving the whole picture about a company’s record on sustainability, he added. Developing a carbon accounting standard is a big issues facing the accountancy profession. ACCA’s Roger Adams said: ‘As sustainability enters the mainstream, auditing practices will evolve and deliver a different level of assurance.’ Jessica Fries of the Prince’s Accounting for Sustainability project, which aims to create a financial reporting model that better reflects social and environmental factors, told the conference: ‘Sustainability should run like a thread through financial reports.’ PUBLIC SECTOR TRAILBLAZER Sustainability is as much an issue for public bodies as it is for businesses. John Lelliott, director of finance and information services at the Crown Estate, which manages a £6bn property portfolio, told delegates about its sustainability policy, including support for offshore wind farms. ‘By 2020 30% of UK electricity should be developed by renewable

energy and we are probably involved in the majority of that,’ he said. Sustainability is becoming a mainstream business issue but there is still a long way to go before action on this crucial issue matches the rhetoric in glossy annual reports. In a question and answer session at the ACCA conference, one delegate asked how accountants could make investors more aware of assurance standards for verifying corporate statements on sustainability in annual reports. Line said that accountants needed to make the business case for sustainability. ‘You need to explain the impact of sustainability in terms that investors can relate to,’ he said. ‘Explain the impact of sustainability in terms of dollars and pounds.’ Rhys Jones added: ‘Talk about reputational damage if customers don’t believe your claims. Consumers are now more sceptical about what they are told.’ Nick Huber, journalist The Pursuing Environmental Sustainability report is at and Key Issues in Sustainability Assurance is at



Running dry Pakistan’s water is running out, creating huge problems for business as well as people. ACCA’s Dr Afra Sajjad reports from a panel discussion on water, the new carbon


akistan is one of the most waterstressed countries in the world, and faces a future of outright water scarcity because of high population growth. To meet the water needs of a growing population, it is estimated that by 2025 Pakistan will need more water than the country currently has available. Agriculture is a major contributor to the economy of Pakistan and a major source of employment. Sugar cane, wheat, rice and cotton are important cash crops and play an important role in the agricultural economy. However, all four are highly water-intensive crops that have a huge and damaging impact on water resources. This, coupled with the current inefficiencies of the country’s water system, has created a water shortage. Industry is also a major consumer of water and its scarcity is affecting businesses. In the Karachi Fish Harbour, for example, fresh water is no longer available. Businesses have a role in reducing water consumption by creating awareness of efficient water use, recycling water, supporting clean water provision and ensuring that waste is discharged to appropriate standards. Initiatives need to be undertaken to raise awareness of the commitment to water health and safety as well as conservation and protection. The latter includes treatment, filtration and disinfection of source water, wastewater collection and reuse, and a sanitation system that avoids the contamination of water resources. The panellists included Arif Masud Mirza, head of ACCA Pakistan; Ali Hassan Habib, director general of the World Wildlife Fund (Pakistan); Farhan Sami, country team leader for the World Bank’s Water and Sanitation Project (South Asia); Muhammad Javed Malik, federal secretary for the environment; and Syed Ahsenuddin, vice president of Engro Polymer and Chemicals.


With its population having quadrupled in the past 60 years, Pakistan is now the world’s sixth most populous country. Combined with a leaky water distribution system and heavy water extraction for thirsty staple crops, that growth has left the country facing the prospect of the taps running dry by 2025.

See page 44 for Dr Afra Sajjad’s biography.

CSR DISCLOSURES STEP UP Disclosures on corporate governance, risk management, corporate social responsibility (CSR) and future prospects have started appearing in annual reports in Pakistan over the past decade. A new requirement means listed companies now have to provide descriptive as well as monetary disclosures of CSR activities. A framework for transparent CSR reporting already exists in Pakistan. ACCA and WWF Pakistan launched the Environmental Reporting Awards in 2001 to encourage more organisations to publicly report environmental and social issues, and to raise awareness of accountability and transparency issues. But even though the quantity and quality of reports have increased, reservations have persisted about the inclusion of comparable information on CSR performance, stakeholder engagement, forward-looking information and third-party verification. Reporting models that enhance transparency in business reporting require serious consideration and evaluation. Their development depends on a mechanism for rewarding excellence, the regulation of disclosure, the celebration of achievements, institutional activism, and a joined up approach to embracing new reporting models that involve different business departments.


Diversity drivers What’s the best way to encourage smaller companies to embrace diversity in the workplace? An ACCA-hosted debate took a look at the issues


mall and medium-sized businesses are vital engines in the global economy. In the UK, SMEs employ 59% of the private sector workforce and so can play a key role in promoting equal opportunities. Could they be stimulated to do more to recruit and support individuals from disadvantaged or minority groups? Researchers, business advisers and politicians all appear to agree on the business case for diversity in the workplace. The employers that draw on the widest pool of talent – regardless of gender, sexuality, age, disability or race – are more likely to employ the best person for the job and therefore to be more successful. In addition, there is increasing evidence that people are more productive when they are happier; they are happier when their work environment enables them to be open about themselves; and they can be more open when they feel free from prejudice. Creating a tolerant, meritocratic workplace is therefore good for business. The key question is, how can SMEs be best encouraged to do this? Legislation is one approach. In the UK, a new Equality Act became law in April of this year; it will come into effect in phases, with the main provisions coming into force this October. The Act is primarily designed to consolidate the UK’s numerous existing laws on discrimination and makes relatively few changes to existing requirements facing businesses. But it does change UK law in a number of ways. For example, it gives government the power to require businesses with more than 250 employees to report on gender pay differences. It also allows positive action, so that employers (of any size) can appoint individuals from under-represented groups rather than having to base decisions purely on merit. While legislation on equality issues is essential, a recent ACCA-hosted debate on equality and diversity in the SME sector – which was held before May’s general election

– suggested that laws are not sufficient by themselves. There is, it found, a need for the provision of information and training for businesses, particularly SMEs, so that they understand the benefits of treating staff (and job applicants) fairly and have the skills and policies to be able to do so. Those policies need not be long and complex, but they are essential for creating business commitment to equality and diversity in the workplace. The debate also identified the need to support businesses in providing a greater range of flexible working opportunities to help disadvantaged groups participate fully in the workplace. In the UK, employees with parental responsibility for children aged 16 or under (under 18 if disabled) have the right to ask their employer to be able to work flexibly (although their employers have the right to refuse on the basis of business needs). There has been some debate over whether this

Helen Brand (left) and Sara Harvey discuss how SMEs can develop their commitment to equality and diversity.



right should be extended to all employees. However, a report by the House of Commons All-Party Parliamentary Small Business Group expressed concern that greater formalisation of flexible working could place a significant administrative burden on SMEs and put them at a competitive disadvantage. The report called instead for more government support for SMEs in the form of continued subsidised training for those supervising staff, more effort by jobcentres to offer (and help employers to design) flexible and part-time jobs, and changes to the benefits system to provide incentives for people to start working part time. It also recommended that support for SMEs offering flexible working be directed through private sector business advisers, such as accountants. So what do academics, politicians, business representatives and advisers think about the role SMEs play in promoting equality and how this can be encouraged? A number of individuals share their thoughts below.

Mark Harper

PETER UNWIN, DIRECTOR OF THE CENTRE FOR EMPLOYMENT RESEARCH AT THE UNIVERSITY OF WESTMINSTER The statistics suggest that employment in small businesses is a better pathway to work than in larger firms. The UK government’s 2007 Labour Force Survey found that smaller employers generally had a higher percentage of female staff, and a higher percentage of staff in smaller firms had been unemployed 12 months previously. Smaller firms also appeared better at employing people classified as ‘work-limited disabled’ and at offering parttime opportunities. So within smaller firms, there would seem to be flexibility in giving people a route into employment in ways they don’t often find in larger firms.

Peter Unwin

CHRIS CREEGAN, DIRECTOR OF PEOPLE AND PUBLIC AFFAIRS AT THE NATIONAL CENTRE FOR SOCIAL RESEARCH Does legislation lead to equality? From my experience talking to employers and employees, in terms of delivering equality and diversity in the workplace, the answer would be no. Legislation provides a framework and an obligation, but businesses also need an incentive. It is also important to understand that what works for larger businesses won’t necessarily work for smaller firms. Business policies need to be fit for purpose. We need to create a better understanding of what we mean by a policy. It doesn’t have to be burdensome or bureaucratic, but the evidence suggests that you don’t achieve equality without some commitment, and that implies a policy.

Chris Creegan


MARK HARPER, CONSERVATIVE SHADOW MINISTER FOR DISABLED PEOPLE AT THE TIME OF THE DEBATE (NOW PARLIAMENTARY SECRETARY, CABINET OFFICE) To be successful in business, you need to hire the best people. By at least thinking about hiring a more diverse workforce, you will have better people and be more successful – that’s the argument. If we can persuade people that’s true, the need for legislation goes away. Small businesses do quite well in this respect. ANDREW CAVE, HEAD OF POLICY AT THE FEDERATION OF SMALL BUSINESSES (FSB) Small businesses can have false perceptions of what they may be required to do to comply with equality legislation. We often find FSB members are unsure what the requirements are and so they overcompensate. Take the requirement for businesses to make ‘reasonable adjustments’ for disabled employees. Many small businesses are astounded when they find out how little such adjustments would cost. Similarly, very few small firms are taken to tribunals for equality reasons, but large payouts often affect how businesses perceive employing minority groups. Andrew Cave


These small businesses are unlikely to have inhouse practices to document and to deal with equality and other human resources issues in the same way that large businesses do. They don’t have the resources. Small businesses are more likely to turn to accountants for help than to other sources. Our members need to understand more than simply what the law requires because in this, as in other areas of business, the law does not create value – good practice does.

ANDY LOVE, LABOUR CHAIR OF THE ALL-PARTY PARLIAMENTARY SMALL BUSINESS GROUP THAT REPORTED ON THE CHALLENGES THAT FLEXIBLE WORKING RAISES FOR BUSINESSES In our report, we found there are a number of significant advantages to flexible working in terms of improved staff morale, increased loyalty and reduced turnover. We also found that flexible working is much more widespread among small businesses, although in an informal setting. There is a resistance from small businesses to making such arrangements more formal; they have concerns about taking on an additional workload and paperwork. Any future equality legislation ought to be designed from the bottom up, thinking about the impact on small businesses. There is a need for the provision of more information, training and support to small business personnel, particularly managers and owners. There is a role for advisers, particularly accountants, to help make this information and support available. LORD COTTER, LIB-DEM SPOKESMAN FOR BUSINESS, INNOVATION AND SKILLS AT THE TIME OF THE DEBATE Any legislation on equality should be accompanied by at least as much effort in changing attitudes and demonstrating the benefits for profitability from diversity. But businesses can sell themselves short. The majority of SMEs adopted flexible working and employed the best person for the job long before politicians got involved, because it made the best business sense. But it is not just up to employers to drive forward equality. Government has a role to play too. For example, inadequate access to childcare is a key barrier to parents, especially women, in the job market.

Andy Love

SARA HARVEY, ACCA COUNCIL MEMBER AND DIRECTOR OF ACCOUNTANCY PRACTICE HINES HARVEY WOODS We know that SMEs maintain a personal relationship with their employees. The benefits of small firms include the ability to be flexible and to treat employees as individuals with differing needs and expectations. However, a recent study for the Department for Work and Pensions also suggested that small businesses were more likely to reject applicants with ethnic minority names. Most of the arguments against imposing regulatory burdens on SMEs cite evidence of the economic importance of SMEs. But if we do not wish to coerce them, or if they cannot be coerced without putting jobs at stake, we must ask what options we have for winning over the less enlightened employers among them. There can be no real progress in employment practices without the active involvement of SMEs. Sarah Perrin, journalist

Lord Cotter

The House of Commons All-Party Parliamentary Small Business Group report, Flexible Working: Challenges for Business, can be found at www.accaglobal. com/flexible_working

HELEN BRAND, ACCA CHIEF EXECUTIVE Excluding entrepreneurs, the average business in the UK has only 15 employees.



Bangladesh: on the shop floor Has the increase in social reporting, combined with consumer and media pressure, improved conditions for Bangladesh’s clothing workers?


ocial responsibility disclosures have increased substantially among major clothing brands and their suppliers in developing countries, such as Bangladesh, following media pressure. But does this really make a difference? According to a recent ACCA study, from the mid1990s non-governmental organisations (NGOs) became increasingly active in highlighting the use of child labour and the poor working conditions in the Bangladeshi clothing sector. This followed changes in the legislative environment, with the introduction of the Child Labor Deterrence Act to the US Congress which called for the banning of imports of goods manufactured using child labour. US television network NBC and other media outlets then highlighted the practices of factories in Bangladesh and China that supplied US retail giants and Western companies. Pressure from the International Labor Organization, UNICEF and the US government grew for Bangladeshi factories to end their use of child labour. With increasing pressure from NGOs, Western trade unions and consumers for retailers to stop selling goods made using child labour or produced in factories without adequate health and safety measures, retailers started to demand changed working conditions. RESPONDING TO PRESSURE It is apparent, notes the report, that market forces have been driving changes in workplace practices. Multinational buying companies have become the mechanism to produce social changes via market-based incentives and suppliers are beginning to respond. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA), which represents 4,200 Bangladeshi entities, put in place mechanisms to encourage local suppliers to improve working conditions and tackle the use of child labour. An interviewee connected to BGMEA confirmed that practice


Pressure from international organisations, the media and consumers has led to improved working conditions in Bangladesh’s factories.

had changed because of pressure from the multinational buying corporations. ‘The 1990 buyers only wanted product: no social compliances were required and no restriction was placed on the employment of child labour,’ he said. ‘Now, buyers have changed their attitudes towards us, perhaps because of the pressures from Western consumers. We had to change ourselves following buyers’ requirements and to fit with global requirements and restrictions. Western consumers and human rights organisations pressured foreign buyers, and then foreign buyers pressured us.’ Without such international pressure, says the report, organisations operating in developing countries are slow to embrace social practices and related accountability for their actions. REPORTING FOR DUTY Changed practice is evident not merely within the factories but also within company reporting


Criticism is only possible

where accurate information about factory conditions can be obtained processes. ‘Buyers [in Western brand clothing distributors] know we are complying with their standards,’ said another BGMEA interviewee. ‘Many buyers collect BGMEA annual reports and monthly newsletters.’ This trend in Bangladesh began in the early 1990s when there was a sharp increase in human resource and community-based disclosures by BGMEA members, although it has not, so far, extended to reporting on environmental impact or energy use. Concerns in the Western media about the treatment of women employees, the use of child labour and workers’ health and safety conditions led to a strong rise in disclosures, with those on the elimination of child labour beginning in 1992 and peaking in 1996, coinciding with international media attention and threats of consumer boycotts. Health and safety disclosures increased following negative publicity about large numbers of deaths in clothing factory fires, while community health disclosures also became more common, including information on the establishment of medical facilities and community awareness campaigns regarding Aids and other illnesses. Poverty alleviation programmes and the education of children received more attention, too. A look at the changing social and environmental disclosure practices of leading retail brands operating in Bangladesh and other developing countries over decades, illustrates this. By analysing annual reports over a 19-year period, researchers discovered that social reporting of poor working conditions peaked in the late 1990s, with a high correlation between media coverage and the nature of disclosures. This

Women outside the Garib and Garib sweater factory in Gazipur, Bangladesh, where 21 workers were killed and 50 injured in a fire in February. Health and safety disclosures by companies are becoming more common after media attention following similar incidents.

was also consistent with the period in which BGMEA felt under pressure from buyers to improve working conditions. The findings of the research support the view that negative media coverage of working conditions resulted in the corporate social disclosures of the multinational buying companies and triggered improvements in their suppliers’ factories. Criticism is, however, possible only where accurate information about factory conditions can be obtained, says the report. An implication of this is that manufacturers and exporters in societies that do not have as free a media as in Bangladesh will not face the same pressure. Paul Gosling, journalist

Social Responsibility Disclosure Practices: Evidence from Bangladesh is available at



India takes the IFRS road India has set out a clear roadmap to IFRS that allows companies and accountants to prepare properly, says ACCA’s Aziz Tayyebi

I Aziz Tayyebi is ACCA’s financial reporting officer 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.


n January 2010, the Ministry of Corporate Affairs of India announced its roadmap for the convergence of Indian accounting standards. This, along with the subsequent announcement on transition for financial institutions in March, has paved the way for making international financial reporting standards (IFRS) an integral part of India’s corporate reporting landscape. India plays an important role in the global economy and many Indian companies occupy significant positions in international capital markets. India’s IFRS convergence is not only likely to help the economy expand, but will also further the acceptance of IFRS as the global accounting language. Over the past decade, IFRS has become the primary global accounting framework, winning widespread acceptance in the international capital markets. Over 100 countries now either require or permit the use of the various standards and interpretations that make up IFRS. This number is expected to increase to more than 150 within the next few years, as countries like India, Canada and Brazil will require some of their companies to apply IFRS-based standards. The growth of IFRS has been fuelled by support from groups such as the (then) G7 finance ministers and the International Monetary Fund (IMF), which clearly saw a single accounting regime as integral to strengthening the international financial architecture. In 2000, the International Organisation of Securities Commissions (IOSCO) formally recommended that its members accept IASC standards for cross-border offerings and listings. Another coup for IFRS was the announcement that all consolidated financial statements of listed companies in the EU would have to be

prepared using IFRS from 1 January 2005. Since that date, not only have 30 EU/EEA member states adopted IFRS en masse, but so too have a number of other countries. And although the US does not permit IFRS for domestic registered issuers, the Securities and Exchange Commission (SEC) accepts IFRS financial statements filed by foreign private issuers, without reconciliation to US generally accepted accounting principles (GAAP). In 2008, the SEC proposed a roadmap for the use of IFRS by US issuers, which would see a number of filers preparing such financial statements as early as 2010/11, and a final phased adoption from 2014 to 2016. Given that other major economies, such as Brazil, Canada and India, will have adopted IFRS well before then, US acceptance will cement the position of IFRS as the globally accepted accounting language. INDIA’S IFRS ROADMAP In line with the momentum around the world for businesses to communicate with stakeholders and investors in the language of IFRS, India


IFRS has been given the green light by India’s Ministry of Corporate Affairs, with a phased transition.

has embraced the opportunity to benefit from adopting a global set of accounting standards. In a concept paper on IFRS convergence in India, the Institute of Chartered Accountants of India (ICAI) proposed 1 April 2011 as the date of adoption. But the foundations of the road to convergence had been laid many years earlier. As well as being a member of the IASC, the Accounting Standards Board (ASB) of ICAI has been formulating IFRS-based Indian accounting standards for close to a decade. The concept paper set out a map as to what companies would be required to use them, and concrete plans to converge existing standards. The increasingly close proximity of Indian GAAP to IFRS, as well as the ICAI’s proposals on convergence, was also recognised by the Committee of European Securities Regulators (CESR). In 2008, CESR ruled that companies using Indian GAAP for listing on a European securities market could continue to do so without reconciliation. After setting up a core group of leading members of the business community and

the accounting profession in 2009 to address the IFRS implementation challenges, the Ministry of Corporate Affairs of India (MCA) announced a phased convergence strategy. Companies would have to implement IFRS equivalent standards in three phases, depending on whether they were listed and their size. Other companies would continue to use applicable Indian GAAP, so creating two tiers of accounting standards in India. This is not dissimilar to other countries and jurisdictions that have adopted IFRS. Most other countries require IFRS only for listed or very large companies – essentially, the international companies for which IFRS was designed. The remainder use a different accounting regime, often based on a distinct national set of GAAP. OTHER ROADMAPS Accounting standard setters in India have always emphasised the need for deviations to ensure compliance and consistency with the legal, regulatory and economic environment. Although the ASB is developing a set of IFRS-equivalent Indian accounting standards to remove all significant differences, it will decide on any jurisdictional amendments that may be required. This is understandable to some extent, allowing the ASB to reflect national issues and maintain a closer relationship with the local tax system. It also reflects the position taken by other IFRS adopters, such as mainland China, Hong Kong SAR and Malaysia. By contrast, while officially applying IFRSequivalent Australian accounting standards, Australia has to all intents and purposes reverted to the adoption of IFRS as issued by the IASB directly, thereby retaining the benefits



of truly global standards. EU countries also essentially adopted IFRS directly, although there is an endorsement mechanism. EU countries offer an interesting parallel with India’s convergence path. Like its Indian counterpart, the UK ASB announced its intention to align UK accounting standards with IFRS sooner than the EU imposed application date for listed companies, wherever possible. Its aim was to smooth the 2005 adoption through a phased approach, with existing UK standards being revised or replaced. As with Indian accounting standards at the time of the ICAI’s consultation paper, a number of accounting areas were not specifically addressed by UK GAAP, such as share-based payments and financial instruments. Standards entirely based on IFRS were subsequently issued in the UK as they have been in India. However, the expected take-up of the IFRSbased Indian accounting standards is quite different to that in Europe as a whole. There were concerns that as many as 20,000 companies in India would have to implement the new standards in 2011 compared with only about 7,000 in the EU. Concerns over the number of companies covered by IFRS implementation in India were finally allayed by the MCA’s roadmap in January 2010, which took into account the level of preparedness of industry and accounting professionals; a mere 500 or so companies are expected to fall into this bracket for implementation in 2011. In July 2009 ACCA chaired a series of roundtables in Delhi, Mumbai and Pune, where leading finance professionals from various sectors of Indian business discussed India’s pending transition to IFRS. As this took place before the MCA’s final roadmap, the foremost concern was the potential number of companies that would be taking up IFRS, and the lack of ready expertise. Other concerns that were raised are noted below.

Now that the transition timetable has made the future clearly visible, Indian corporates, particularly those migrating in phases 2 and 3, need to get to grips fast with the requirements.

IFRS AND INDIAN GAAP While Indian accounting standards have already been converging, differences remain, particularly for recognition and measurement around business combinations and financial

The pressure on transitioning

companies will be significant when compared to the more coordinated approach taken by regulators in Europe and other parts of the world PG82 EDITION 02

instruments. Many companies in Europe faced similar issues when they converted to IFRS in 2005, although the transition was reasonably smooth. But Indian companies will have only had access to the finalised set of IFRS converged standards by 30 June 2010. Given that additional review of accounting and tax legislation will also be happening in 2010, the pressure on transitioning companies will be significant, when compared to the more coordinated approach taken by regulators in Europe and other parts of the world. Again, the pragmatic, phased approach taken by the MCA will at least ensure that there will be fewer companies overall affected by the initial transition in 2011. Phase 2 and 3 companies will have the benefit of reviewing the earlier transitions to assist with their own conversions, two to three years later. PREPAREDNESS The relatively late announcements about the convergence process by regulators and standard-setters in India are one of the main reasons why many companies were reluctant to invest heavily in their IFRS implementations. The fact that IFRS could require a thorough review of IT systems to capture particular


information needs means that over 50% of the costs of IFRS conversion are related to IT, according to a KPMG report. However, for the large companies adopting in Phase 1, the costs will be proportionately lower, and most will have advanced reporting systems in place to cope with any new IFRS requirements. The experience of other countries that have adopted IFRS is that those companies that are well prepared are able to minimise costs and enjoy a smooth and efficient transition. From the roundtables, it is apparent that Phase 1 companies in India are more advanced in terms of having strategies and implementation steering groups in place, and advanced training, assessment and communication programmes. While Phase 2 and 3 companies, which have so far not made any major investment of time and resources, now have more time, they must use that extra time to put programmes in place, especially those related to education and training.

CHANGE TO IFRS COMPARED The EU adopted endorsed IFRS (announced in 2000). India will converge its accounting standards to IFRS (announced 2010). APPLICATION OF IFRS AND TRANSITION In Europe, IFRS required for consolidated accounts of listed companies, with voluntary adoption permitted. In India, there is a phased adoption. Phase 1 (2011) is for Nifty/Sensex-listed companies; companies with net worth above Rs 10bn; overseas listed companies; and (2012) insurance firms. Phase 2 (2013) is for banks with net worth above Rs 3bn; and companies with net worth above Rs 5bn. Phase 3 (2014) is for listed companies with net worth under Rs 5bn; and banks with net worth above Rs 2bn. NATIONAL GAAP APPLICATION In the EU, all other companies, including individual accounts of listed companies use their national GAAP. In India non-listed companies with net worth below Rs 5bn and SMEs use GAAP.

WHAT ELSE CAN HELP? The accounting profession will be in the lead of the IFRS conversion process, and it is vital that companies tap into the expertise of their auditors and professional consultants as early as possible. Accounting firms played a major role in the smooth transition in Europe and other parts of the world, and they will be able to bring that knowledge to bear in India. There is little question that IFRS will affect the profits and balance sheets of Indian companies – some positively, some negatively. It is therefore essential for channels to be in place to ensure that investors, analysts and financiers are updated in a timely manner so as to understand the impact of moving from IGAAP to IFRS. It is crucial that companies implementing in 2011 communicate the quantified effect of transition over the ensuing months. Many European companies did this a year ahead, in their 2004 financial statements, which was a major factor in reassuring markets, especially over uncertainty about reported profits. CONCLUSION While converged standards allow for adaptation in the Indian context, the true benefits of IFRS will be through minimising any carve-outs. It is imperative that national standard setters and regulators, together with industry and the profession, play a more active role in the development of IFRS itself, by passing on any specific issues they have early on to the IASB. Otherwise, IFRS will be shaped by other, more vocal jurisdictions, ultimately distancing Indian IFRS from full IFRS.



How healthy is your risk appetite? The credit crunch generated a great debate about risk appetite. ACCA’s Paul Moxey explores what the phrase actually means

R Paul Moxey is head of corporate governance and risk management at ACCA. He leads ACCA’s policies on corporate governance and risk management, and is a leading contributor to its responses to global developments in this area.


isk appetite is a strange term, conjuring up thoughts of food. We may have an appetite for a good meal but the risks associated with the meal, such as getting fat, are a turn-off. We generally associate appetite with nice things and risk with bad, so ‘risk appetite’ is something of a contradiction. However, understanding an organisation’s risk appetite is regarded as a prerequisite of sound risk management. The new UK corporate governance code now requires this. But while people often have an intuitive understanding of what risk appetite means there is no generally accepted definition. In all the discussions on risk appetite I have been part of, the only things that could be agreed was that it is an important subject and a difficult one. One definition is ‘the amount of risk that an organisation is prepared to accept, tolerate or be exposed to at any point in time.’ It sounds simple enough until you begin to apply it. How

do you measure it? Do you measure it for each risk? How can you aggregate different risks? In financial services, the term has become commonplace, and is expressed in figures. At investment banker Lehman Brothers, for example, risk appetite was expressed as a dollar amount and measured by ‘value at risk’. It tends to be used like a system of budgetary control: people are given risk limits and are expected to stay within them. Outside financial services, it is usually a subjective, unsophisticated and undeveloped process, and expressed in terms such as prohibited activities, unwanted conditions and positions on a scale of impact and likelihood for individual risks. A recent survey that Matthew Leitch (an author specialising in internal control and risk management) and I conducted about risk terminology yielded the following fairly typical response: ‘Risk appetite – a much used concept and apparently a cornerstone of operational risk. The problem is that while


The risk rules In spite of the difficulties of defining risk appetite, a clear understanding of the acceptability of risk should help to prioritise actions and ensure a consistent approach across an organisation, so it is worth making the effort. Indeed, the effort is more important than the result. One should not take risk assessments as fact but they should be an aid to good judgment. The following six suggestions should help make sense of it. 1. PAST AND FUTURE Risk is about the future, and while the past may be a poor guide to the future, history can repeat itself sooner than you think. Consider the behavioural issues, group-think, the tendency for groups to take bigger risks. Consider the personality factors that affect the perception of risk. And try thinking creatively about some risk scenarios and whether they could happen to you. 2. CAUSE V EFFECT Risks have causes. One cause can give rise to many risks and several causes

can conspire to create a bigger risk. It is not a binary, linear process. It is therefore unwise to rely on a risk register. When you are considering risks and your organisation’s appetite for and tolerance of risk, think about whether you are considering the cause of risk or the effect of risk. Once again, think about scenarios; how can causes conspire? 3. TOP V BOTTOM Is the understanding about risk and the willingness to take it the same at the top and at the bottom of the

consultants speak of it frequently, it’s such a nebulous concept that I have never heard it clearly defined and I have no idea either what it means or how you would set it.’ In his review of the corporate governance of banks, Sir David Walker makes about 30 references to risk appetite. He does not define it but he emphasises a quantitative approach. Risk is generally measured in terms of impact and likelihood. In many non-financial services organisations, something would be regarded as outside the business’s risk appetite or tolerance if its impact and likelihood were assessed as high. But this is a very crude process: neither impact nor likelihood can be predicted with confidence; the approach is piecemeal towards risk analysis; and it ignores the fact that risks often come more than one at a time. Another challenge is to make sense of how personality affects people’s understanding of and reaction to risk. Lloyd’s the underwriters

organisation? It should be. Beware of silos, and link risk taking to strategy. 4. QUALITY FIRST Focus on qualitative considerations first. You can add quantities later but it is important to have a shared understanding of risk and how to manage it before risking being blindsided by the spurious accuracy of numbers. 5. RISK REWARD No-one takes a risk just for the sake of it. People do it because of some perceived reward or benefit, even if is simply the thrill

derived from it. Why do organisations consider risk appetite, and practice risk assessment without comparing the risk of something with its potential benefits? Benefit as well as risk can be considered in terms of impact and probability. Bear in mind that while you may want people to manage risk at a corporate level, people consider risk at a personal level. Personal risks and benefits may be very different from corporate risks and benefits, as banks have learned to the taxpayers’ cost.

6. KEEP IT SIMPLE Finally, keep it simple, at least at first. It is in everyone’s interest to have a clear understanding of objectives, the risks affecting them, their willingness to take risk in pursuit of gain, and how those risks can be kept within acceptable limits. There is no need for rocket science. Start simply, using common sense, in a way that is appropriate to your business, not someone else’s, and ensure that everyone understands it. You can always complicate it later if you want to.

published a fascinating study in March on the application of behavioural theory to attitudes to risk. It reveals that people think differently when they are in groups, which can lead to a greater acceptance of risk if group members hide behind a diffused responsibility. It happens in board meetings: a group can embark on or fail to challenge something a member of that group would not do on their own. People have cognitive biases too. They are poor at estimating probabilities, they neglect prior information, they do not take account of sample size, they find complex ‘chain-like’ systems hard to envisage and they are biased if they like something about the option. Some people are more impulsive and likely to take risk. Also, culture will determine people’s approach to any system of risk appetite and tolerance, and any risk defined in figures is unlikely to address cultural risks. Is there a solution? The Risk Rules panel on this page is a start in the right direction.



Banking on change ACCA research suggests that banks’ pay structures incentivise short-term, risk-taking behaviour. ACCA’s John Davies discusses executive remuneration

J John Davies FCIS is acting head of technical at ACCA. He is responsible for coordinating ACCA’s policy positions on issues relating to business law and financial crime. He co-authored two recent ACCA policy papers on the consequences of the financial crisis, namely The Future of Financial Regulation and Risk and Reward: Tempering the Pursuit of Profit.

udging by public and media sentiment over the past couple of years, the fairground arcade staple of whack-amole will at some point be replaced by the sport of whack-a-banker. The credit crunch blame-game does not appear to be dissipating. A particular bone of contention between the banks, politicians and the public is the issue of bank bailouts and bonuses for banking staff. Banks have recognised that they played a large part in the economic crisis. At a UK Treasury Select Committee hearing into the crisis in 2009, RBS and HBOS famously apologised, while adding that the global economic maelstrom had overtaken them. Taxpayers have found it hard to understand why bonuses and massive pay packages are still being paid to those who have been widely blamed for the crisis. As well as apologising, senior executives at banks have made shows of conciliatory behaviour, with several top bankers publicly turning down their bonuses. In the US and UK, the chief executives at Barclays, HSBC, Lloyds, RBS and Citigroup all rejected bonuses or pay. For example, Barclays Bank president Bob Diamond turned down a bonus this year for the second time in a row despite the bank making a £11.6bn profit. However, Diamond will still be taking home £22m this year from the sale of Barclays Global Investors, in which he had a stake. SHAMEFUL On Wall Street, bonuses for last year leapt 25% from the year before to an average of $123,850 (£86,831) per person, with $20.3bn to be paid out in total. Last year, a ‘horrified’ President Obama was reported as regarding some of the bonuses paid for 2008 as ‘shameful’, ‘an outrage’ and ‘irresponsible’. Although the payouts for 2008 were well down on previous figures, there is still an air of unacceptability about big pay packets. While


banks are within their rights to pay bonuses that they can afford, doing so in the current climate has made many people angrier and led to serious political capital being made from bank bashing. There is something to the banks’ argument that unless they pay high bonuses top bankers will take their talent elsewhere. But there is also an argument that without globally coordinated action on the level of bonuses, nothing much effective can really be done to control them. There is a global knock-on effect with pay. If Wall Street is happy to pay out, then London has to do the same to keep hold of talent. Bonuses go up fast in the good years, fall only slightly in the very bad, and then continue their inexorable march when business shows signs of recovering. The issue of banker bonuses is particularly important if either the level or structure of remuneration incentivises behaviour such as excessive risk taking. In essence, that is what many bankers have been accused of, causing a global recession as a consequence. The issue has produced a lot of argument but to date there has been remarkably little research done on the subject. ACCA has now stepped into this gap and published new research into the relationship of bonuses to profits. The report, The Accounting Statements of Global Financial Institutions and the Recent Crisis, was written by experts from Cass Business School, Gatehouse Bank and the Global Association of Risk Professionals. A total of 19 banks were analysed for the research. The number included large global investment banks and large US and European commercial and corporate banks. Brandon Davies, a former treasurer and a nonexec of two banks, who co-authored the report along with Gilad Livne and Alistair Milne, both of CASS Business School, says: ‘The sample is small, but our analysis shows there has been


substantial growth of executive compensation in all these banks, especially towards the end of the period 2001 to 2006. It is also clear that there are very great differences between banks. Some have a relatively low rate of growth of senior executive remuneration, some an extraordinarily high rate.’ Deutsche Bank stands out in the research for its conservative compensation culture, with a stable remuneration system between 2003 and 2006, even while the bank’s revenues grew rapidly. On the other hand, at Northern Rock, remuneration packages between 2001 and 2006 grew by 483%, leaving senior executives at the doomed mortgage lender on similar packages to those at major commercial banks. EXCESSIVE GROWTH There are individual banks – notably Barclays, Goldman Sachs, Lloyds TSB and Northern Rock – where senior executive compensation grew much faster than dividends and pre-tax income, at least until 2006. But although total senior executive compensation grew very fast over the years 2001 to 2007, in most of these banks its growth was not clearly more rapid than dividends or pre-tax earnings growth. The report’s authors believe that senior executive remuneration has responded to far too great an extent to short-term changes in bank earnings and share prices, and has been only loosely related to the long-term corporate performance that creates shareholder value.

If this is indeed the case, then it indicates that banks’ remuneration structures incentivised short-term, risk-taking behaviour. On a related issue, the report says that financial reports, especially those of banks and other financial institutions, are already very long and complex. It suggests there must be much greater disclosure, especially of returns and risks broken down by business line, of potential liquidity risks and of remuneration. This is necessary both for effective corporate governance and for regulation. So what of the future? Remuneration practices were not the only cause of the banking crisis, or even the most serious. But for governments, regulatory bodies and the general public alike, bankers’ bonuses will continue to resonate as a very potent symbol of the way many bankers appear to see the world around them. If the banks do not, of their own volition, better align their remuneration practices with their sustainable profitability, the new taxes that have already been introduced could become the start of a wider regulatory clampdown. After all, the implicit state guarantee which saved the banks last time will only ever be as good as the state’s ability, and the public’s stomach, to pay.

Chief executives of financial institutions wait to speak to the media at the White House after meeting President Obama to thrash out plans to rid financial institutions of bad debts and jumpstart lending.

The report, The Accounting Statements of Global Financial Institutions and the Recent Crisis, is available at bank_bonuses



Upskilling the planet One of the best ways to improve public services in emerging economies is to instil financial management skills. Accountancy bodies are at the forefront of a campaign to help governments around the world meet the challenge


ood financial management is crucial to improving public service outcomes. But in many countries the quality of financial management has been poor, with too few qualified accountants and a shortage of the skills required for the effective oversight of public expenditure. The need to improve financial management has been recognised by the International Federation of Accountants, the World Bank and accountancy bodies. Organisations such as the World Bank, the IMF, the Department for International Development and the European Commission have all made funds available for financial training in developing countries and emerging economies, with the aim of building sustainable financial capacity in public services and improving accountability and transparency in public spending. While both developed and developing nations struggle to cope with an increasingly complex financial management environment in the public sector, skills shortages are especially acute in developing countries and emerging economies. In China, for example, there are believed to be fewer than half the 300,000 qualified accountants required by the private and public sectors. The public sector in every country needs to build up and sustain sufficient financial management skills. But in many countries skills deficits in the public sector have created very serious problems. Financial management reforms have lagged behind those in the private sector and while it is difficult to recruit skilled staff, it is even harder to retain them. Public bodies can be inefficient, incurring unnecessary losses and wasting funds, with weak allocation of resources. The quality of financial data and budgetary reporting is often inadequate, and auditing systems can be out of date. Governments are now challenged to comply with internationally accepted accounting


World Bank president Robert Zoellick (opposite, above) at IMF headquarters in Washington. Both organisations have helped fund financial training programmes in emerging economies to improve accountability in the public sector.

practices. ACCA has been closely involved with programmes in several developing countries and emerging economies to raise financial management skill levels in the public sector to deal with these challenges. PAKISTAN The World Bank sponsored a project to improve financial reporting and auditing (PIFRA) which was introduced to Pakistan by its auditor general in 1994. The project was also backed by the IMF, the Department for International Development and the Asian Development Bank. ACCA partnered the auditor general’s office to provide support and ACCA members worked as financial management specialists to monitor implementation of PIFRA. The objectives of PIFRA were to produce reliable, relevant and useful accounts; to improve government audit procedures through the adoption of internationally accepted accounting standards; and to strengthen financial management practices by implementing a governance and legal framework for an independent and effective audit function and internal controls. The PIFRA programme had five components: developing accounting standards, reporting systems and financial procedures; improving government auditing systems and standards; developing HR management, organisation and systems development; providing professionlevel training and strengthening professional and specialist skills; and developing the management information systems needed to support IT requirements. PIFRA implementation has been overseen by the World Bank. Government officers are happy with progress and believe that ACCA members have provided invaluable support. Fifty-two auditors in the auditor general’s office are undertaking the ACCA Qualification to improve capacity and the diversity of skills, which is


VIEW FROM PAKISTAN Ismaila Ceesay FCCA, senior financial management specialist, World Bank Pakistan is nearing completion of a series of public financial management reforms, part of the project to improve financial reporting and auditing (PIFRA). Its objectives are to improve capacity and financial resource management, budgeting, expenditure control and accountability at national, provincial and district government levels. The World Bank provided finance and technical assistance. PIFRA was set up to modernise the country’s institutional framework and automate the budget compilation, accounting, financial reporting and auditing processes. By the end of the first phase in 2005, PIFRA had separated the accounting and auditing functions, established a uniform chart of accounts and budget classification compliant with international standards, and designed and piloted an automated system. PIFRA 2, to be completed by December 2010, establishes a budget preparation, accounting, reporting and audit system for federal, provincial and district governments. PIFRA improvements include the preparation of reliable financial statements, consistent with the IPSAS cash basis standard, within three months of year-end; presentation of audited accounts and risk-based audit reports within seven months of year-end; and establishing system-generated quarterly fiscal reports for macro-economic review and analysis. A countrywide integrated financial management system helped in preparing and compiling annual budget estimates, processing transactions with in-built controls, preparing payroll for 1.9 million employees, pension and provident fund accounting for over one million employees, and preparing periodic budget execution and fiscal reports. The systems have been implemented across central, provincial and district government. Successfully implementing a long-term, sustainable and government-led reform programme requires the coordinated efforts of government and development partners and managing resistance to change. To prevent the reforms being rolled back, and day-to-day operations of government agencies being jeopardised, the continued operation of the installed systems must be financed after project closure. The World Bank is engaged with the government to ensure the benefits of the reforms continue beyond 2010. PIFRA has placed Pakistan at the forefront of public financial management reform in South Asia. The cooption of qualified accountants from the private sector to support public servants engaged in budgeting, accounting and auditing, and to provide technical assistance in the transition to international standards, helped bring success.



assisting with the development of public sector financial management in Pakistan. ZIMBABWE Zimbabwe had an acute shortage of qualified professionals in the public sector. ACCA worked in partnership with funding bodies and the auditor general’s office to increase capacity and overcome the skills shortage. The initiative involved ACCA using quality training as a means of recruiting and retaining staff, leading to professional awards such as ACCA’s certified accounting technician (CAT) qualification. The changes have helped to develop a more professionalised civil service, with accountants and accountancy students given more support and status. BOTSWANA Although Botswana is a relatively wealthy country, its public sector had problems in recruiting and retaining professional staff, particularly where it was competing against private sector employers. ACCA worked with the auditor general on a plan to train auditors and provide financial management skills development. The auditor general became a registered employer to train auditors, with staff mentoring provided by qualified expat staff and external audit firms. An experience requirement was tailored to the work of the audit office and a level of progression with exams was developed with the auditor general. This was based on a competence matrix used by the Big Four firms and followed through with in-house coaching of trainees and their supervisors. Trainees tended to stay with their employer longer after these initiatives were put in place. VIETNAM Auditing performance was not a priority for state audit in Vietnam, which concentrated on finance and compliance. Audits failed to show whether spending led to improvements in budgeting or service standards. Improving the quality of performance audit requires a switch in budgeting focus from inputs to outputs. Also required is the creation of a database and framework to monitor and evaluate expenditure and allow for the study of the impact of policy and resource allocations. Gillian Fawcett, head of public sector, ACCA Paul Gosling, journalist

Improving public sector financial management in developing countries and emerging economies is available at


Top: a patient is taken home on a stretcher by relatives from a Harare hospital. A serious shortage of qualified accountants in the country has been remedied by bringing in professional qualifications.

Middle: a classroom in Botswana. A national training scheme has helped the country recruit and retain accounting staff.

Bottom: a building site in Hanoi, Vietnam. The country’s auditing approach has been reconstructed to focus on outputs rather than inputs.


The trouble with targets Targets are crucial in managing performance in the public sector, but the way in which targets are set can cause problems. ACCA’s Gillian Fawcett highlights the way forward


report on public sector performance and accountability, produced by the Organisation for Economic Cooperation and Development (OECD), states: ‘Governments have always been keen to achieve results, but calls to improve public sector performance in OECD countries have become particularly loud and insistent over the past couple of decades.’ Governments have responded to the criticism by setting public sector targets to focus on achievements – in other words, outcomes.

In the UK, government departments produce business plans with performance goals and public service agreement (PSA) targets for the following three years and beyond. The methods of implementing these goals and targets differs from one country to another. The UK has opted for a top-down, wholesystem approach from the start. There is a well-known saying in the UK public sector: what gets measured gets done. The aphorism emphasises the importance of measuring the right things and properly

Demonstration in London against cuts in public sector spending prior to the general election.



identifying the costs and benefits as part of the target-setting process. A number of useful models have been developed to help governments and public servants design and implement performance targets. The Audit Commission in England has developed one of many frameworks that are available to help practitioners think about setting effective performance targets. A common way of developing and defining performance targets is to measure economy, efficiency and effectiveness (the three Es). It identifies inputs (the money that must be spent to acquire the resources to provide the service at the most efficient cost), outputs (the optimum service to be provided) and outcomes (the actual impact for addressing inequalities and meeting citizens’ needs). An understanding of the relationship between resources committed and the benefits that are generated is critical to setting effective performance targets. It’s not enough to measure performance in terms of an organisation’s ability to meet targets. It is of equal importance to know what it cost to meet the target and what additional cost would be required to improve performance further. It is only when these costs have been identified that you can have effective decision-making and efficiency in resource allocation. A TRICKY BUSINESS The identification of costs and benefits can be messy. A whole suite of initiatives are sometimes needed to address issues such as inequalities in education or health, and performance targets are only one aspect of those issues. The Public Management and Policy Association acknowledges that ‘community-based initiatives do not lend themselves to scientific measurement. They are messy and indeterminate; their impact on issues such as illness on mortality rates is often indirect.’ The measurement of costs and benefits becomes increasingly difficult where multiple organisations and stakeholders are involved. In the UK local authorities that serve areas with higher deprivation require greater concentrations of input in those areas to take on a role beyond their service area. The use of multi-professional teams, partnership working and a multi-agency response makes the identification of costs and resources for meeting a specific target more difficult to disentangle from other initiatives. In 2003 the parliamentary select committee on public administration warned against giving excessive attention to what can be easily measured at the expense of the impossible to


measure quantitatively, as the latter may be fundamental to a public service. The problem with performance targets such as that address education inequalities in England (for example, the PSA target of 60% of children to achieve the equivalent of five GCSE grades A to C by 2008) was that they provided little or no incentive to go the last mile to reach the ‘hardest to reach’ groups. Problems with such groups are so intractable they can only be dealt with through tailored and targeted interventions, which are perceived as highly resource-intensive. Local public service providers are often judged on making the biggest performance difference. They may not be inclined to tackle small pockets of inequality, which will be the most resource-intensive to tackle. Some councils in England recognise they have reached an optimum in some areas and can’t push any further, and so have shifted resources to meeting other priorities. This can have very negative consequences for broader outcomes, such as community cohesion. MEASURING PERFORMANCE Targets can also result in divergent activities in the pursuit of higher performance. For example, some councils in England find it

The problem with

performance targets such as that address education inequalities in England (for example, the PSA target of 60% of children to achieve the equivalent of five GCSE grades A to C by 2008) was that they provided little or no incentive to go the last mile to reach the ‘hardest to reach’ groups. easier to target affluent parts of the area they serve to meet their recycling targets. The impact of such targeting is to reduce recycling rates in more deprived parts of the borough, such as on council estates. Both the costs and benefits of achieving the target are distorted, with, for example, a lower cost masked by higher performance. The strategy of relying on national targets to promote equity has raised a number of eyebrows. A 10% improvement in services can be achieved if all providers improve equally, but it can equally be achieved if some services do better than 10% while others fall short. If top performers improve the most, the effect is to widen the equality gap.


See page 36 for Gillian Fawcett’s biography.

GOAL-ORIENTED PARTNERSHIPS In England, local councils, health and voluntary bodies have to work in partnership, but occasionally there is an absence of strong leadership, resources or momentum. In this scenario, no organisation is rewarded for pursuing the goals of another organisation, or each may have too few resources to commit in pursuit of the goal. Sometimes crossboundary service delivery fails because of competing priorities or incompatible targets. For example, the more the police meet their target of closing the justice gap – putting people in prison – the more difficult it becomes for the prison service to meet its targets on overcrowding and re‑offending. Motivation to achieve performance targets can be further reduced if different agencies have targets that appear to be in conflict. For example, the police may want to increase their conviction rates for criminal damage, but the youth offending team’s priority is to prevent young people from entering the criminal justice system by offering restorative justice. REPORTING AND MONITORING Public bodies in England materially misstated their achievements in 80% of the PSA target validations made by the NAO. There were inaccuracies in performance data and a lack of attention to performance measurement techniques. Also, various problems were encountered because of poorly thought out targets that had not considered the practicalities of monitoring. These findings meant it would be less likely that the costs/ benefits were fully identified. There are some general lessons to be learned across three key areas, as follows: 1 TARGET DESIGN Effective performance targets require clarity about what issues should be addressed. The challenge for public services is to undertake a robust equality impact assessment at the policy design stage, and reflect on the choice and design of the performance indicators and







Cost effectiveness Source: Audit Commission


initiatives needed to address the issue. The costs and benefits should be reflected and identified at the design stage. The NAO found that the best examples of PSA targets for addressing inequalities were those closely aligned to local priorities, such as reducing crime or road traffic accidents. 2 QUALITY OF INFORMATION When the costs of meeting a target are under consideration, the cost of collecting, monitoring and analysing data is not often captured and/or reported by organisations. In some cases this oversight may be a result of organisations collecting the data anyway as part of their own systems. Good-quality information is critical for effective decisionmaking. Data collection at both the national and local level needs to be supported with robust analysis if we are to know what good performance looks like in reducing inequalities. 3 COST AND BENEFITS The costs and benefits of addressing issues that involve inequalities should be identified as part of an impact assessment. Be clear about what issues you are addressing and what aspects you are measuring. Inputs, outputs and expected outcomes should be clearly identified, although some elements may not be identifiable because of the complexity of the issues. While the complexity of the issues that targets are seeking to address should be recognised, the real challenge is for organisations – and increasingly partnerships – to improve how they account for and identify costs, resources and benefits for meeting a specific objective. LESSONS LEARNED There has been a great deal of criticism of the performance target regime. Equally, there is an appreciation that performance goals and targets across the OECD countries are crucial for performance management. If there is a lesson to be learned from the UK’s experience of implementing performance targets to address issues such as inequalities, it is that there needs to be greater clarity about how performance targets contribute to addressing complex social issues; in particular, not allowing the inequalities gap to become wider. The costs and the benefits of social initiatives may be difficult to identify, but they are not insurmountable.

Performance Targets can be downloaded at and the OECD performance report is available at



The tax knowledge gap Most business decision-makers do not have to consider the tax consequences of their decisions. Is this a problem?


n any tax system, the way that companies and their advisers manage their tax knowledge can have big repercussions. It can, for example, affect the amount of tax paid and how effectively compliance obligations are met. And if tax legislation is designed to change or encourage particular actions, governments need taxpayers to have enough knowledge to achieve those goals. So how well informed about tax issues are operational decision-makers in businesses? Can they easily obtain information or advice on tax? And how useful is the information that corporate taxpayers supply to the advisers handling their tax affairs? These questions are addressed in an ACCA research report, The Management of Tax Knowledge, by John Hasseldine FCCA, professor of accounting and taxation and co-director of the University of Nottingham’s Tax Research Institute; Kevin Holland, professor of accounting and taxation at the University of Southampton, and Pernill van der Rijt, a research fellow at the University of Nottingham. They looked at the operation of the UK tax knowledge market, where HM Revenue


Path of enlightenment: the UK tax knowledge market can be divided into a producer (HMRC), buyers (businesses) and brokers (advisers), and all three have lessons to learn in diffusing knowledge about the tax effects of operational decisions through the business.

and Customs is a knowledge producer, corporate taxpayers are knowledge buyers, and accountancy firms (in their role as tax advisers) are knowledge brokers. They interviewed staff in all three areas of the UK tax knowledge market, and the interviews were backed up by questionnaires. FLAWS The research findings reveal flaws in the operation of the UK tax knowledge market. Only 47% of companies require their operational decision-makers (such as managers in HR, production and R&D) to consider the tax effects of their decisions. And only 33% of companies consider those decision-makers proactive in seeking advice from internal tax specialists. Most companies (65%) think operational decision-makers lack the skills and knowledge to consider tax effects properly. What is not clear is whether the low level of tax knowledge among operational decisionmakers is the result of a deliberate corporate strategy. ‘Would training decision-makers in tax be cost-effective?’ asks Holland. ‘It’s hard to know whether lack of awareness is the result


of a rational decision.’ Revealingly, attempts to survey HR managers and engineers attracted too few responses for meaningful analysis. This suggests the difficulty of raising interest in tax issues with non-finance specialists. The research reveals differences in perceptions of the role played by accountancy firms in advising their corporate clients. For example, a comparatively small proportion of corporate taxpayers appreciate the role played by external advisers in facilitating agreement with HMRC. Around two-thirds of companies think that using external tax advisers provides insurance against a tax risk. ‘You want some external assurance that the decision you’ve come to is the right one,’ said one respondent. ‘You want someone else to have come to the same conclusion as you so that you don’t get sacked for it later.’ But just 30% of advisers appear to appreciate the insurance aspect of their role. ‘I have never been convinced that accountancy firms always understand what their clients are looking for from their tax advisers,’ says Hasseldine. ‘It’s important that accountancy firms really do understand what their clients are asking of them.’

operational decision-makers and better relations with HMRC. Regardless of whether internal tax experts are in place, the report argues that all corporate taxpayers should set policies for tax knowledge management, and at least identify responsibilities in both tax and non-tax functions. The report recommends that corporate taxpayers take a more proactive approach to HMRC exchanges, using the tax authority’s expertise early on. They could also be more proactive in their relationship with their tax advisers, and more organised in supplying necessary tax-related information. Tax authorities could themselves consider ways of raising the levels of tax awareness among operational decision-makers. ‘They could use professional institutes and associations as a means of making and developing contacts with operational decisionmakers,’ says Holland. ‘We approached a number of engineering and other institutes during our research and they were very supportive of our questionnaire.’ Tax authorities could also improve their methods of capturing feedback from taxpayers and advisers, enabling difficulties in

‘I have never been convinced that accountancy firms always understand what their clients are looking for from their tax advisers’ Although corporate taxpayers and tax advisers consider HMRC’s website and newsletters to be highly important sources of tax knowledge, there is room for improvement by the tax authority. ‘It can be incredibly difficult to find information,’ says Hasseldine of the HMRC website. ‘If you look at new business start-ups and the challenges they face, one option is to go and seek advice from an accountancy firm – and that has a cost. But they do need some knowledge and it’s not all in one place [on HMRC’s website]. Just through the difficulty of finding the information they need, new business start-ups may drop into the hidden economy and become trapped there.’ CORRECTIVE ACTION The main implication for corporate taxpayers is clear: awareness of tax considerations needs to be raised among operational decision-makers. Companies without in-house tax experts might consider whether they are missing out on valuable benefits. Although maintaining internal tax expertise has a cost, companies with their own experts have higher levels of tax awareness among

interpreting legislation to be identified earlier. As for tax advisers, the researchers suggest they could become more proactive in their dealings with corporate taxpayer clients. They could seek more direct contact with operational decision-makers, trying to become involved at an earlier stage of the decisionmaking process. They could also do more to highlight their ability to facilitate agreement between clients and tax authorities, while recognising the insurance motive in some of their clients’ decisions to obtain their advice. The report reveals the challenges involved in raising and maintaining tax knowledge among non-specialists. One issue is that tax rules rarely stand still. ‘We have such constant change in tax,’ concludes Chas RoyChowdhury, head of tax at ACCA. ‘There is so much to communicate that it can be hard to know where to start.’ Sarah Perrin, journalist Download The Management of Tax Knowledge at





Diamond deal Understanding the social impact of economic policy will be key to the future role of accountants, argues Professor Ian Diamond, chief executive of the Economic and Social Research Council


an Diamond is a man on the move. When Accountancy Futures caught up with the chief executive of the Economic and Social Research Council (ESRC), he was preparing for the next stage of his own career. This involved moving 600 miles north, as he is taking on the role of principal and vice chancellor at the University of Aberdeen after nearly eight years at the helm of the ESRC. A social statistician by background – he was a researcher, senior lecturer and professor at the University of Southampton before joining the ESRC in Swindon in 2003 – he believes passionately in the research council’s work and how it can help those looking to understand how economic policy benefits, or indeed detracts from, the public good. The ESRC is the largest public funder of research and training in social sciences in the UK. Its funds come primarily from the government, notably the Department of Business, Innovation and Skills. But it also works in partnership with the private sector and the ‘third’ sector, including charities. MAXIMUM EXPLOITATION One of the ESRC’s key tenets is that those who receive its funds should not only carry out the research but also seek to exploit it by clearly communicating its results. That way the general public as well as the government and other interested public bodies can benefit from the researchers’ insights. ‘In doing everything that we do, I believe passionately that anyone using public money to undertake research or to be trained should, if appropriate, maximise the opportunities that come from that research or training for the public good,’ Diamond explains. ‘That is why we have partnerships with government, with the private sector, and why we expect those people in receipt of our funds to use it.’ If, for instance, someone carried out research on an aspect of the government’s tax policy,

the ESRC would expect them to communicate those results, talking with policymakers to ensure that public policy was informed by evidence raised by the research. ‘It ensures evidence-based policymaking,’ Diamond says. It means that the taxpayer-funded research does not just sit on a shelf somewhere gathering dust. ‘Where there is a chance of having an impact, then we expect that to happen,’ says Diamond. Every three to four years, the ESRC reviews its strategic priorities in consultation with the academic community and its stakeholders in the public, private and third sectors. There are seven priority areas for the ESRC: opportunities and risks in the global economy, global uncertainties and security, the environment and energy, public health, lifelong education and skills, population change and diversity, and, finally, understanding individual behaviour, an area that cuts across the other six subjects. ‘Within each of these areas we have identified some research questions that the UK has a comparative advantage in answering,’ Diamond explains, ‘and we work often with partners in other areas to be able to maximise the relevance and impact of the research.’ And this brings Diamond on to the importance of working with the accountancy profession. The ESRC and ACCA recently signed a memorandum of collaboration to focus on shared strategic priorities. They agreed to act jointly on convening an international panel of experts, commissioning applied research and supporting student interns at ACCA to encourage interaction between business organisations and academic research. The panel will meet regularly to debate emerging or future issues that affect – or could affect – the world of accounting and finance professionals, their employers and clients. The aim is to provide a platform – both regional and international – that will

Ian Diamond’s work has crossed many disciplinary boundaries, most notably working in the area of population but also in health, in environmental noise and with local authorities. His research has involved collaboration with UK government departments including the Office for National Statistics, the Department of International Development, the Department of Transport and the Department for Work and Pensions.



heighten the impact of high-quality research in worldwide, high-level, independent and nonpolitical debate. ‘Working with ACCA is really a great opportunity for us because we believe that the accountancy profession has an enormous contribution to make to research and the impact of that research across a wide range of areas,’ Diamond says. ‘In each of those seven areas one can see very clearly and easily where accountants and the accountancy profession have possibilities.’ Diamond believes that the relationship between the two bodies is important for a number of reasons. The first is that ACCA is a global organisation. ‘This provides us with an opportunity to have both national and international reach for our research,’ Diamond explains. ‘Our partnership is rich in possibilities.’ But it is not just in the field of research where there will be such opportunities. There will also be opportunities around the training agenda, and Diamond sees ACCA as a valuable forum for the ESRC to deliver results and provide hands-on work in promoting those results. As an example, Diamond cites the economy. ‘We are finalising at the moment a set of post-doctoral funding opportunities looking at addressing some of the major challenges to come out of the current economic crisis. Each of those research projects will have an advisory group and it will be good to involve ACCA in some of those advisory groups.’ For instance, there could be opportunities, Diamond suggests, around the Greek economic crisis, banking regulation, or the housing market. ‘Each of these would benefit from a partnership with ACCA,’ he says. The ESRC is one of the seven councils that make up Research Councils UK; the other councils cover arts and humanities, biotechnology and biological sciences, engineering and physical sciences, medical research, natural environment, and science and technology facilities. Altogether, the seven councils invest £2.8bn annually in research that covers the full spectrum of academic disciplines, and many of the activities are undertaken collectively. IMPACT OF THE RECESSION Of particular interest to the accountancy profession will be the work that the ESRC has carried out assessing the impact of the recession. Its research looked at the impact on jobs, on people’s lives and on business. It drew on and explored the evidence from previous recessions, both in the UK and around the world, to assess how policymakers


If you look at any of the major

challenges facing the world today, then you cannot undertake the work to find the evidence around those challenges without social science THE ESRC IN NUMBERS The ESRC funds 32 research centres and groups, 15 research programmes and priority networks, 42 ventures, 11 large grants and 26 research resources. In 2009, more than 6,000 people attended events organised for the ESRC’s Festival of Social Science. The ESRC has a research budget of £204m.

could respond most effectively on a global scale as well as nationally. Before the memorandum of collaboration between ACCA and the ESRC, ACCA had already been working with the ESRC. One collaboration was a research report that looked at pension fund trustees and climate change. This report (see page 71) was the first to address pension fund trustees’ attitudes to climate change, and identified a significant lack of awareness; and where there was awareness it found a failure to translate that awareness into action. Both ACCA and the ESRC called for the issue to be brought into the mainstream so that trustees could have a greater appreciation of the links between climate change and the performance of pension funds. On a practical note, the joint initiative between the two bodies has created opportunities for current PhD award holders to undertake a three-month internship at ACCA. These currently cover sustainability in the public sector and narrative reporting. Diamond is moving on to cut a new facet in his own career, but the relationship between the ESRC and ACCA will remain strong, ensuring that development in policies and the accountancy profession are underpinned by evidence. It is important work. As Diamond says: ‘If you look at any of the major challenges facing the world today, then you cannot undertake the work to find the evidence around those challenges without social science.’ Philip Smith, journalist



Editor Chris Quick +44 (0)20 7059 5966 Managing editor Jamie Ambler Sub editors Peter Kernan, Adrian Arratoon, Vivienne Riddoch Design manager Jackie Dollar Production manager Anthony Kay Head of publishing Adam Williams Pictures Corbis Printing LiangTu

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 A list of ACCA offices can be found inside the back cover of this journal.

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 140,000 members and 404,000 students, who it supports throughout their careers, providing services through a network of 83 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 2010 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 Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566.

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FUTURE VISIONS OF THE GLOBAL ECONOMY 29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000


Accountancy Futures – Issue 02 – 2010  

Accountancy Futures (Published by ACCA)