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Editor Chris Quick +44 (0)20 7059 5966 Managing editor Jamie Ambler Sub editors Dean Gurden, Peter Kernan Design manager Jackie Dollar Junior designer Robert Mills Production manager Anthony Kay Head of publishing Adam Williams Pictures Corbis Printing Polestar Wheatons Paper Antalis 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 Mark Gold FCCA Deputy president Dean Westcott FCCA Vice-president Barry Cooper 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. Accountancy FuturesŽ is a registered trademark of ACCA. 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 2011 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. Accountancy Futures Edition 3 was published in February 2011. 29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000



The start of a new era in corporate reporting? The concept of integrated reporting – the integration of financial and non-financial information in a company’s reporting – now has real impetus with the launch of a committee of big-name companies, global accountancy firms, professional bodies and standard-setters to back it and draw up a plan of how it will work. It could range from the maintenance of International Financial Reporting Standards with some environmental and other bolt-ons, right up to a fundamental overhaul of corporate reporting. We will follow what promises to be a lively debate closely in Accountancy Futures, starting in this edition with a series of articles exploring the concept, including an article by Sir Michael Peat, chairman of the new committee. We also tackle many other topics of interest to finance professionals and business leaders keen to explore what the future holds and how they can shape it.

Chris Quick, editor You can find out more about ACCA’s Accountancy Futures programme at

Editorial board

John Davies head of technical

Dr Afra Sajjad head of education and policy development, ACCA Pakistan

Aziz Tayyebi financial reporting officer



ACCOUNTANTS FOR BUSINESS We explore the vision for integrated reporting and look at the new environment facing CFOs. We also examine the challenges Generation Y gives employers and report from the World Congress of Accountants.

CARBON ACCOUNTING We take a look at the development of carbon markets and the accounting and measurement issues they raise. Also under the spotlight are Scope 3 emissions – those that are produced indirectly by businesses. The fact that these are not being counted could hinder the development of a low-carbon economy.

Public sector goes global: Andreas Bergmann,

chair of the International Public Sector Accounting Standards Board, reports on progress in creating a global accounting framework. PG66


AUDIT With audit in the spotlight after the financial crisis, we ask how it could evolve in the future, reporting on the views of CFOs, auditors, investors and others. We also explore the thorny issue of auditor liability. NARRATIVE REPORTING We report on an ACCA/ Deloitte survey of CFOs’ views and perspectives on narrative reporting. ACCESS TO FINANCE Constrained access to finance leaves small businesses at risk from recovery just as much as from recession, finds a global survey of 1,750 small business by ACCA, CGA-Canada and Italian accountancy body CNDCEC.

Carve-outs and convergence: Paul Cherry, chair of the IASB’s

IFRS Advisory Council, shares his views on the future of International Financial Reporting Standards. PG82




Looking ahead A round-up of recent and upcoming research and events

01 INVESTING IN WOMEN Governments would benefit from paying more attention to the vital role women play in driving economic growth, new research shows. The Deloitte report, The Gender Dividend: Making the Business Case for Investing in Women, found that the role women play – or don’t play – can affect economic competitiveness. Go to www. to read the report in full.

02 MAXIMISE YOUR PEOPLE POWER A new report from ACCA and KPMG, Effective Talent Management in Finance, sends some clear messages about the importance of integrated talent management and the key elements required. The research highlights that less than 20% of organisations fully integrate talent identification, development, deployment and retention activity across the finance team. Talent management practices are often informal and sometimes run in isolation. The report looks at how talent management can shape and influence the structure of finance functions, and highlights the practices organisations should adopt to deliver the best possible talent development for finance professionals. Go to www. accaglobal/accountants_business for more.


Female solidarity: demonstrations in Makati, Philippines last year on International Women’s Day. It is on 8 March this year and is celebrated as a national holiday in China, Russia, Vietnam and Bulgaria.

03 IAAER AND ACCA PROLONG PARTNERSHIP The International Association of Accounting Education and Research (IAAER) and ACCA announced at the 11th World Congress of Accounting Educators and Researchers in Singapore in November 2010 that they would continue working closely together until 2014 – an extension of three years on the original memorandum of understanding. Donna Street, IAAER president and professor at the University of Dayton, said: ‘IAAER is delighted that the extension of our partnership with ACCA through 2014 will enable our organisations to continue to help focus academic research on issues facing international standard setters by informing the debate on a variety of agenda topics. The three-year extension also ensures continuation of our joint efforts to build accounting research and teaching skills capacity in transitional economies.’

04 ASSESSING PPP PRACTICES ACCA has commissioned research into publicprivate partnerships (PPPs). Using France and the UK – both mature in their use of PPPs – as benchmarks, the project will assess the PPP maturity of a number of countries in Asia Pacific. It will look at the degree of


establishment of policy frameworks provided by the central government, the sectors of application, and capabilities in relevant sectors. The project will identify the variety of PPP concepts globally with the aim of drawing up guidelines for appropriate local practice in a global context rather than advocating global best practice, and will pay specific attention to accountability issues.

Survey found that the positive momentum in CEO confidence was reflected in hiring plans. More than half of CEOs polled worldwide said they expected to recruit in the next 12 months. CEOs in Central Europe, Asia Pacific and Africa were particularly bullish about hiring. More at


ACCA is examining the role of corporate governance in controlling the risk-taking behaviour of boards. The study is designed to address the gap in research literature and wider understanding about the governance processes that determine the level of risk to which companies choose to be exposed when setting cash-holding and leverage policies.

Companies are increasingly seeking out and adopting sustainable business practices, according to emerging evidence from a global research project. A Review of Corporate Sustainability in 2010 reveals a clear increase in the numbers of companies with active programmes, the research, commissioned by KPMG International and carried out by the Economist Intelligence Unit, showed. For more visit



An ACCA survey of surveys of CFOs and CEOs in 2010 reflects uncertain environments, both macro and micro, and a strengthening push for innovation. Surveys by PwC, Deloitte, IBM and Ernst & Young are among the studies looked at. The uncertain environments range from the world economy to consumer demand, along with increasing regulation, shifts in economic power with increasing competition and price pressures. Accompanying the need to innovate and respond to changing environments, there is evidence of conservatism and control. Accountants’ skills in measuring and monitoring performance as well as controlling costs are being relied upon to provide stability.

As Islamic finance rapidly expands, so divergence in accounting practices is an ever more difficult factor. ACCA and KPMG have therefore embarked on a joint project to direct the International Accounting Standards Board’s (IASB) response to standardise accounting in this area. The first of three highlevel roundtables was held in Kuala Lumpur, Malaysia, last October. Subsequent meetings of the IASB, regulators, banks and ratings agencies are due to take place in April 2011 in London and Bahrain. A final report will be issued later this year.


07 GLOBAL BUSINESS RISK Regulation and compliance remain the biggest risks to global business in 2011, but cost cutting and lower margins are the fastest‑growing risks, according to new research. Ernst & Young’s Global Business Risk Report reveals that cost cutting had risen four places to number two and pricing pressures had moved up 10 places to fifth position compared with 2010. The report is available at

08 CONFIDENCE GROWING CEOs’ confidence in future growth has returned to nearly pre-crisis levels, according to a new survey. PwC’s 14th annual global CEO

11 THE IMPACT OF ECONOMIC CONDITIONS Global economic conditions continue to dominate business life. ACCA is launching a range of projects to research the effect of economic conditions around the world, and ways in which the impact can be managed. The aims of the research include: understanding trends and developments, championing the role of the accountant in business – especially the CFO – and illuminating areas of best practice to help companies add value to business strategy and operations. It will also identify ways in which accountants can add value as advisers, and work at understanding learning points and indicators for moving towards a refreshed global economy. Go to to read the latest insights and results of the most recent global economic conditions survey report.



The integrated imperative International Integrated Reporting Committee chairman Sir Michael Peat sets out a vision for corporate reporting that brings together the financial and non-financial


hen I took my first tentative steps as an accountant (they are still fairly tentative!), my grandfather told me that the essence of the job was to provide trust and confidence, vital prerequisites for commerce and prosperity. He added that accounting information should be clear and comprehensible – meaningful and powerful communication. The test was whether the information could be understood by an intelligent but non-financially literate person. HRH The Prince of Wales has always had a remarkable knack for putting his finger on


HRH The Prince of Wales: accountants must draw out the information needed to tackle pollution, climate change and over-consumption.

issues of long-term importance. Fairly soon after I started to work for him, some eight years ago, he made it clear that he didn’t believe that the accounting profession was providing the information needed to tackle the issues confronting the world economy at the beginning of the 21st century: increasing population, over-consumption of finite natural resources, pollution of land, sea and air and climate change. His Royal Highness felt that the limited information provided to investors, managers, employees, and indeed consumers and members of the public, was a major


barrier to the development of a more resourceefficient, sustainable economy. He established The Prince’s Accounting for Sustainability Project (A4S) to address this issue. During its first four years A4S created a prototype integrated reporting framework and provided practical guidance for how organisations can embed sustainability into their day-to-day operations. In July last year, integrated reporting developed globally with the formation of the International Integrated Reporting Committee (IIRC). The committee is a joint initiative between A4S, the Global Reporting Initiative and the International Federation of Accountants, together with a powerful cross-section of representatives from the corporate, accounting, securities, regulatory and standard-setting sectors. The role of the IIRC is to help develop a new internationally accepted approach to reporting – an approach which provides more comprehensive information about the full range of an organisation’s impacts and performance, past and future, in a clear, concise, consistent and comparable manner. In other words, to help develop reports that not only provide financial information, but information about an organisation’s governance, social and environmental performance; and not in disconnected sections or silos but in an integrated manner, which reflects the reality that all these elements (financial, governance, social and environmental) are closely related and inter-dependent and flow from the organisation’s overall strategy. This is a significant step forward and a daunting task, but it is a task that cannot be shirked if the information needed so urgently to meet the challenges of the 21st century is to be provided. Put briefly, integrated reporting is a vital building block to enable the world’s economy to evolve and maintain standards of living for people who already enjoy a good quality of life, and create them for the hundreds of millions who do not, without the present unsustainable over-consumption of the world’s finite natural resources. Information of this kind would meet the test articulated by my grandfather all those years ago.

Sir Michael Peat is principal private secretary to HRH The Prince of Wales and The Duchess of Cornwall. He has also served as keeper of the privy purse and been a partner at KPMG. A qualified accountant, he has an MBA from INSEAD and an MA in law from Oxford.

Integrated reporting is

a vital building block to enable the world’s economy to evolve and maintain standards of living for people who already enjoy a good quality of life, and create them for the hundreds of millions who do not

IIRC on integrated reporting Deep-seated changes to our current economic model are need to tackle the over-consumption of resources and the risk of catastrophic climate change. Every publicly listed company has to file an annual report on its financial performance in compliance with, in most cases, either International Financial Reporting Standards (IFRS) or US GAAP. Increasingly, companies are also producing corporate social responsibility or sustainability reports although these can vary widely in terms of relevance and quality, largely because there is no global standard for measuring and reporting on environmental, social and governance performance. What is required is a concise, comprehensive and comparable reporting framework that integrates material financial and non-financial information. It should be structured around the organisation’s strategic objectives, its governance and business model. The objectives for an integrated reporting framework are to: A support the information needs of long-term




investors, by showing the longer-term consequences of decision-making reflect the interconnections between environmental, social, governance and financial factors in decisions that affect long-term performance, making clear the link between sustainability and economic value provide the framework for environmental and social factors to be taken systematically into account in reporting and decision-making rebalance performance metrics away from an undue emphasis on short-term financials bring reporting closer to the information used by management to run the business on a day-to-day basis.




New dawn for reporting ACCA’s Neil Stevenson looks at who and what is driving the ambitious moves to develop an integrated reporting framework and make it compulsory



SUSTAINABILITY CHALLENGE The accounting element of the massive change required was highlighted by the creation of A4S in 2004, which reiterated the need for new approaches to accounting and reporting to reflect the broader and longer‑term consequences of corporate decisions. Without more complete and comprehensive information, management, investors and others cannot make the fully informed decisions needed to prosper in the face of sustainability challenges. A4S felt that the profession’s best contribution to sustainability would be to establish a

Integrated reporting framework

ial anc Fin : ce ur So

Ma nag em ent com me nta ry

INTEGRATED REPORTING: FOCUSING ON THE TOP SLICE Integrated reporting provides the top level structure for the whole reporting pyramid

ial nd soc ment a Environ


INTEGRATED REPORTING While there have been significant advances in sustainability reporting over recent years, no single body has so far had the authority or oversight to bring all the different reporting pillars together in a single, mandatory, fully integrated and globally endorsed framework. This is the ambition of the International Integrated Reporting Committee (IIRC),

Neil Stevenson is ACCA’s executive director – brand, and a member of the International Integrated Reporting Committee (IIRC) Engagement and Communications taskforce. His remit at ACCA covers marketing, communications, policy, technical issues and publishing. This includes promoting a global agenda of research and insights, complementing his interest in issues involving change and innovation in the global professions.

formed last year by a progressive section of the business, financial and accounting community, bringing together many leading accountancy firms, big-name companies, business groups and professional accountancy bodies, including ACCA. The two key bodies involved are the Prince of Wales Accounting for Sustainability Project (A4S) and the Global Reporting Initiative. A series of profile‑raising events are planned for 2011, kicking off with a roundtable discussion in Mumbai, India, chaired by International Organization of Securities Commissions chairman Jane Diplock, as Accountancy Futures went to press. The release of a discussion paper looking at an integrated reporting framework is planned for June 2011. Interested stakeholders are invited to comment before it is formalised and presented to the G20 in Cannes in November 2011. G20 approval will add credibility and inject vigour into the move towards global standardisation. The IIRC’s aim is that the framework will be constructed in a way that allows companies to report in a clear, concise, consistent and comparable way.

Govern ance a nd rem unerati on


he global financial crisis has persuaded many of the need for a new economic model that can protect businesses, investors, employees and society from a cycle of successive and increasingly debilitating crises. At present, short-term financial gains can take priority over long-term value generation, encouraging a gung-ho approach to risk-taking that can lead to a level of market instability, which has the potential to devastate individual businesses and whole economies. The current model of corporate reporting, it is felt, does not do enough to discourage such behaviour because it doesn’t pay enough attention to factors such as risk, strategy, governance and the sustainability of business models. These concerns, which have grown as business leaders and governments have agonised over the causes of the financial crisis, have given impetus to existing demands for a change in emphasis in corporate reporting on the grounds that it does not currently adequately reflect material environmental, social and governance (ESG) factors. These include resource usage, social impacts, human rights and how a business might contribute to or be affected by climate change. Many believe that over-consumption of finite natural resources and the risk of catastrophic climate change present one of the world’s greatest challenges – and is its biggest business risk. Supporters of integrated reporting argue that the inclusion of all these non-financial but nevertheless crucial risk factors into corporate reporting would help steer business decisionmaking in a more sustainable direction – in both financial and environmental terms. They argue that the quality of reporting would improve because businesses would provide a more strategic picture of the issues that are critical to their long-term sustainability and success. In addition, those managing companies would be able to make better resource decisions by including issues relating to natural and social capital as well as financial capital. The result would be a more holistic picture of the reporting entity that covers both risks and opportunities, and reflects the interconnections between ESG and financial factors.



global framework of mandatory ‘connected reporting’ requirements for listed companies and for a global committee of key stakeholder groups to push for global adoption. The GRI, along with other bodies such as the Carbon Disclosure Project, have made significant steps forward in formalising reporting guidelines for companies’ material environmental, social and economic impacts. Yet despite the corporate uptake and integration of more-than-financial impact assessments, there is still little evidence that collective corporate efforts have significantly halted activities that pollute, deplete resources and destroy non-financial value. The voluntary nature of such reporting initiatives means that take-up can be fragmented, allowing companies with large impacts on the environment and society to avoid full and transparent disclosure. WHAT WILL IT LOOK LIKE? Considering that integrated reporting is still in an embryonic phase, it should come as no surprise that a clear formulation of what exactly it constitutes is still being debated. Definitions range from the maintenance of current financial reporting and accounting practices based on International Financial Reporting Standards (IFRS) with an ESG section bolted on, right up to a complete change in the fundamentals of accounting and reporting formats. There is, however, agreement on the need for a concise and comprehensive integrated reporting framework which is structured around an organisation’s strategic objectives, its governance and business model, and integrating material financial and nonfinancial information. The key consideration is the strategic ingraining and disclosure of all ESG factors affecting the future financial performance

and associated risk rating of a company’s activities. The central tenet of integrated reporting has been part of the sustainability and CSR reporting space for a number of years, but it is IIRC’s ambition to bring together financial and non-financial risk disclosure in a global, mandatory framework which sets it apart from past initiatives, and which engages and relates to investors. Sceptics of the integrated reporting initiative point towards a raft of issues. The first is the sheer ambition of the change that is being put forward, involving the huge challenge of gaining global consensus to a mandatory change, especially given that it has so far taken more than 30 years to agree the global application of IFRS. Other criticisms include fears that it will lead to increased complexity in reporting and greater resourcing requirements, and a tick-box approach. But given the powerful backers and the fundamental financial and environmental issues involved, the launch of the IIRC may well turn out to be a turning point in the development of corporate reporting. However, alongside this development, it is clear that we will also need to encourage a greater proportion of shareholders to become more interested in the governance and sustainability of the organisations they invest in. This will be the best way of ensuring integrated reporting is embedded in business in practice. Much attention has been paid, rightly, to the models around auditing and assurance and corporate reporting. Perhaps we need to develop more urgency around this third dimension: governance and stewardship. This could lead to the fulfilment of the ambitions of those who advocate the ‘triple bottom line’: a sustainable approach to sustainability. For new ACCA/Deloitte research narrative reporting, see page 58.

The result would be a more

holistic picture of the reporting entity that covers both risks and opportunities, and reflects the interconnections between ESG and financial factors




Blurry greys: Clarification on what it means is needed, but ACCA’s Rachel Jackson says integrated reporting can sharpen the focus of corporate activities The idea of integrated reporting has been increasingly under discussion by stakeholders in the world of business accounting and sustainability reporting. The definition of what integrated reporting actually covers is currently a range of blurry greys rather than a crisp and clear black and white. However, looked at in broad terms, integrated reporting is simply the end result (the reporting) of a complex but inclusive process that integrates the business strategy with material sustainability issues. Some optimistic observers see an integrated strategy as boosting transparency and offering a clearer explanation of the relationship between companies’ financial and non‑financial performance. Other, more cautious professionals highlight possible challenges such as greater reporting complexity, comparability and assurance across sectors and countries, and discord in timescales between compilation of the integrated reporting framework and continuing physical impacts of climate change. There is no doubt that a well-developed integrated reporting methodology could focus corporate efforts to integrate material sustainability issues and impacts arising from business activities more deeply in strategic decision-making processes. Deploying an integrated strategy as a risk screen to assess operations for their medium to long-term sustainability and financial implications could strengthen governance protocols, create less disparate businesses and change financial market investment behaviour. Few companies currently take an integrated reporting approach. This blank canvas offers the relevant professions an opportunity to shape the framework. ACCA is pleased to be part of the IIRC, which has ambitious plans to do just this. We shall continue to participate actively, taking part in the debates that arise, addressing questions around the relevance of integrated reporting, finding ways to stimulate investor and regulator demand for integrated reporting, and developing useful reporting metrics.

Join the dots: Filling in the gaps left by the key guidance for integrated reporting is essential to drive widespread take-up, says ACCA’s Roger Adams Rachel Jackson is ACCA’s head of sustainability. She champions ACCA’s global sustainability agenda on reporting and disclosure with specific reference to environmental, economic and social issues. Rachel represents ACCA on various technical committees and working groups including FEE and the EPC Climate Change Adaptation Task Force.

Roger Adams FCCA is ACCA’s director – special assignments. He previously managed ACCA’s global policy positions on professional issues, such as sustainability and corporate responsibility.

One of the main proposals made by the International Integrated Reporting Committee (IIRC) is the need for new approaches to accounting and reporting to reflect the broader long-term consequences of corporate activities. By providing robust and comparable reporting guidance on how to link corporate strategy to financial and non‑financial performance, the IIRC can convince businesses and investors that financial value can be derived from integrated reporting. Integrated reports should clearly identify and explain the link between an organisation’s strategic goals and the resulting impact on parameters such as the wider business context, key relationships, resource dependencies and governance structures, and help establish a more holistic corporate risk profile. To ensure widespread business acceptance, the IIRC must connect the dots between itself and other key reporting guidance. ACCA continues to support the GRI and its sustainability reporting framework, and the Climate Disclosure Standards Board (CDSB) and its climate change reporting framework. As well as identifying the information needs of investors, the IIRC needs to provide solutions to any perceived barriers to the take-up of integrated reporting. The to-do list includes addressing the requirements of multiple stakeholders, determining the materiality of issues, giving an option of different reporting levels, assessing knock-on impacts to auditing standards and internal control checks, and overcoming corporate confidentiality issues. Opportunities and benefits arising from a move towards integrated reporting will have to be clearly demonstrated within an urgent context requiring the momentum towards a sustainable, low-carbon global economy to gather pace. Ultimately the establishment of an international framework that not only merges financial and sustainability outcomes but also supports the achievement of a sustainable economy will require support from governments, the finance and accounting community and wider stakeholder groups.



Perspective: the academic We put the same set of key questions about integrated reporting to two experts in the field. First up, Professor Robert Eccles of Harvard Business School

Professor Robert Eccles is a senior lecturer at Harvard Business School. He undertakes research on corporate reporting, and has written three books on the subject, including One Report: Integrated Reporting for a Sustainable Strategy (with Michael Krzus). He is also a steering committee member of the International Integrated Reporting Committee.

Q: How would you define integrated reporting? A: It is reporting in a single document the material measures of financial and non-financial (ie environmental, social and governance) performance and their relationships to each other. It is also about an integrated website that makes it easy for users to find and analyse in one place financial and non-financial information, including more detailed information of particular interest to specific stakeholders. Finally, integrated reporting is as much about listening as talking. A company should use its website for dialogue and engagement with shareholders and all other stakeholders to create a collective conversation. Q: What makes it different from existing concepts and models in this area? A: Two things come to mind. The first is corporate social responsibility or sustainability reporting, typically in a report separate from the company’s financial report; it was originally referred to as the triple bottom line of economic, environmental and social metrics. The second is the balanced scorecard, which includes financial and non-financial metrics. Q: Why do we need it? A: A sustainable society requires all its companies to have sustainable strategies. A sustainable strategy is one that creates value over the long term. This is in contrast to a focus on short-term financial performance

that imposes negative externalities on society. Integrated reporting establishes the discipline for integrated internal management of financial and non‑financial performance. It is also the best way to report on a sustainable strategy. Q: What are the main challenges to adoption? A: First, a company must truly have a sustainable business rather than just say it has. Second, a collaborative and multifunctional process is required for producing the integrated report; no one group has all the information necessary for doing so. Third, internal control and measurement systems for non-financial information are typically not as sophisticated and robust as those for financial information. Fourth, internal sceptics have to be brought on board. Fifth, a great deal of education will be required of the users of the integrated report, both shareholders and other stakeholders. Q: Will it make annual reports even longer? A: Not necessarily. An integrated report doesn’t have to be the annual report. Southwest Airlines morphed its Southwest Cares report into its integrated report. The key thing to note is that the integrated report is the material financial and non-financial information, so it doesn’t have to be long. Length often comes from detailed disclosures required by regulation. Q: What role do you see accountants playing in integrated reporting? A: Accountants have a major role to play, if they are willing to do so. They are experts in the measurement and reporting of financial information. They need to broaden their content knowledge to include non-financial information, often working with others who are expert in a particular aspect of it so they can help the organisations they work for to implement integrated reporting both internally and externally. Q: How can integrated reports be audited? A: Integrated reporting requires integrated auditing. There are a number of barriers to overcome here. Better standards are needed for non-financial measurement and reporting, auditors need to develop the capability to audit non-financial information, and there are also liability concerns.



Perspective: the entrepreneur Our second expert, Paul Druckman, allies business acumen to his work in driving sustainability issues in the accountancy profession Q: How would you define integrated reporting? A: Integrated reporting brings together financial and non-financial information in a clear, concise, consistent and relevant format. The goal of an integrated reporting framework is to improve the quality of corporate reporting so companies can provide a more strategic picture of the issues critical to long‑term sustainability and success. Integrated reporting includes information about natural and social capital as well as financial capital. This information provides important insights for those interested in the way a company thinks and acts. The framework should help to create a more cohesive reporting model by highlighting areas where convergence is needed in standards and national regulations. Q: What makes it different from existing concepts and models in this area? A: The strategic long-term perspective across the entire company differentiates it. Other models also address this concept and are generating good ideas, but the International Integrated Reporting Committee (IIRC) uniquely brings together for the first time financial standard setters, securities regulators and sustainability standard setters with representatives from companies, investors and civil society. Q: Why do we need it? A: The financial crisis has demonstrated the need for reporting that gives better information about how a business is performing against its long-term strategy. At present various standard setters and regulators are responsible for individual elements of reporting. There is thus a risk that multiple standards will emerge.

Q: Will it make annual reports even longer? A: This question misses the point. We are certainly not talking about combined reporting but integrated reporting. Combined reporting adds to the annual report but integrated reporting changes some of the fundamentals. Q: What role do you see accountants playing in integrated reporting? A: At present the ‘natural’ role for the accountancy profession has been seen to be in financial reporting. However, the training of an accountant is not in numbers but in information, the data that underpins an organisation. Thus integrated reporting is the domain of the accountant more than other professions. It may need broader thinking and the use of multidisciplinary teams with specific skills and experience, but the judgment and analytical skills inherent in the accountancy profession are the key. Q: How can integrated reports be audited? A: The information reported (and withheld) should be capable of being verified at some point in the future. Possible assurance may be in the form of an audit confirmation that the management has embraced integrated reporting framework principles. It is also worth considering whether management and auditors should confirm that the information reported is a fair reflection of the information used by management to run the business.

Paul Druckman is chair of the executive board of The Prince of Wales’s Accounting for Sustainability Project, and co-chair of the working group of the International Integrated Reporting Committee. After a highly successful business career as a technology entrepreneur, he is a non-executive chairman and director for a number of businesses.

Q: What are the main challenges to adoption? A: These troubled economic times may lead businesses to see priorities differently, plus there is an expectation from many quarters of deeper and more rigorous standards for financial and non-financial reporting. The convergence to integrated reporting appears to have a momentum that will mean success but there will also be the devil in the detail when it comes to implementing the design of the integrated reporting framework however flexible a framework is conceived.



After the storm The global financial crisis may be receding, but it has ushered in an age of turbulence for businesses and is posing unaccustomed challenges for CFOs


s we move into 2011 there is a general feeling that the worst of the financial crisis is behind us and a conviction that growth, albeit slow, is returning to the major economies. But there is also much less certainty about prospects than there used to be, and the postcrisis environment is one that is placing new demands on CFOs. As Krzysztof Rybi ski, former deputy governor of the Polish National Bank, said, after a crisis that has put an end to 20 years of moderation it is now difficult to make forecasts. How will the currency wars end? How will financial

The shocks of the past few

years have delivered salutary lessons to over-ambitious CEOs and given CFOs a more prominent role in decision-making markets react when central banks tighten monetary policy, as eventually they must? What will follow the cessation of EU purchases of southern European government bonds? Will the looming pension funding problem be solved, and how? Will growing government debt eventually be reduced by resorting to higher inflation? These are just some of the unknowns around us. And so Rybi ski declined to make growth forecasts when as guest speaker he addressed ACCA’s CFO European Summit in Warsaw in October. In what, borrowing a phrase from former US Federal Reserve chairman Alan Greenspan, the Polish banker termed ‘the age of turbulence’, any forecasts based on models using data from the last 20 years will give utterly wrong predictions. CFOs now have to think less about hard forecasts and more about scenario analysis, and making sure that their companies are equipped to react to any eventuality. The crisis has refocused CFOs’ work on their core responsibilities and, as Lukasz Topolnicki FCCA, finance director at retailer Castorama Polska, noted, many of the less interesting things in finance – internal controls, audit committees and the like – are returning to prominence. There is also much greater



emphasis than there used to be on the importance of trust and integrity. Ethical behaviour is an essential part of the ACCA Qualification, and the need for trust and integrity (and their close relatives – reliability and transparency) was frequently mentioned in Warsaw. These qualities are not technical

skills that can be taught, but have to develop from the culture of the organisation. And that, as Karen Burgess, until recently CFO of TVN, Central Europe’s largest media group, emphasised, depends very much on senior management’s approach, and on the longterm experience of working together. These values are important because the CFO can’t

Krzysztof Rybi ski: any forecasts based on models using data from the last 20 years will be utterly wrong.

always be checking what finance people are doing and must be able to rely on them and what they report. Transparency is needed both inside and outside the company. Crucial business information needs to be disseminated widely in a comprehensible form so as to build trust within the company. Delivering clear and reliable information to decision-makers depends on having reliable sources and so HR becomes of importance for the CFO too: people management and team building is a crucial part of the CFO’s role. Outside the company, the education of stakeholders, and particularly of shareholders, is important for retaining their support in turbulent times. Informing shareholders in detail of business plans and expectations should help protect the company even if the market deteriorates, suggested Ewa Bozek, CFO at Canon subsidiary Octopol Technology. Short-termism remains a vexing problem for CFOs, particularly for those of listed companies, with hedge funds and others trading in and out of their shares. In a volatile economic environment, the pursuit of shortterm targets is bound to be particularly disruptive. The balance needed is one between medium-term and long-term objectives. And with targets today less nakedly profitrelated than they were, a balance also needs to be struck between profit and risk. Risk management is more important than before and stakeholders increasingly want to see businesses set targets that are appropriate to the risk assumed. The pain inflicted by the volatility of commodity, foreign exchange and other markets in the past few years has refocused CFOs’ attention on the financials. The destruction of the assumption that credit will always be available at a price to companies – and to their customers – is also forcing CFOs to give more consideration not just to prospective returns, but also to the risks associated with them. Those risks can be mitigated and managed, but they can’t be eliminated. It is therefore important to think though the possible eventualities so as to be ready to react to them. It is also important to convey to stakeholders in a transparent, effective and trustworthy manner how risks are managed, stressed Pawel Cygan ACCA, VP of Polish power distributor Enion. While the changing business environment has been pressuring companies to return to fundamentals and pay more attention to risks as well as potential rewards, thus changing the objectives that CFOs find themselves bound to pursue, there have also been changes in the roles played by CFOs within organisations.



Traditionally, the finance function has been seen by many as being primarily one of keeping the assets safe and the books in order, but the shocks of the past few years have delivered salutary lessons to over-ambitious CEOs and given CFOs a more prominent role to play in corporate decision-making. Their being able

The pain inflicted by the volatility

of commodity, foreign exchange and other markets in the past few years has refocused CFOs’ attention on the financials to do so has been facilitated by the progress of IT, which is giving CFOs greater freedom to think strategically and innovatively. Management of information, so that it is accurate and delivered at the right time, is crucial if companies are to make the best decisions, and IT’s development is making it technically easier for CFOs to provide CEOs with the information needed. There is no simple technical fix, though. Developing financial management capacity also means increasing understanding of the organisation and the processes that take place within it, what information they can provide and how that can be translated usefully into numbers and narratives and delivered to decisionmakers, said Waldemar Wojtkowiak FCCA, CFO at credit insurer Euler Hermes’ Polish unit. If they are to raise the finance function’s credibility across the organisation, CFOs need to develop their soft skills. They can turn finance staff into an effective team by recruiting to achieve diversity, delegating responsibilities, teaching by analysing errors that have been made, and using rewards. Meanwhile, there is a need to engage in continuous dialogue with other managers, and finance for non-finance staff programmes can spread financial literacy through the company, enabling more effective communication with other departments. CFOs’ enhanced corporate role looks set to continue, for the lessons of the financial crisis will not be forgotten swiftly and the uncertain conditions that companies face in coming years are going to keep demand high for their special skills. But with resources limited, taking advantage of the opportunity to contribute more to strategic thinking is going to depend on using technology to build systems that can ensure the efficient performance of CFOs’ more mundane tasks. John Presland, journalist


CHRISTOS KASSAPANTONIOU FCCA, CFO, HOUSE MARKET (IKEA), GREECE, CYPRUS, BULGARIA ‘The finance function has to contribute by adding value, by being a business navigator, directing resources to achieve the company’s financial and business objectives. ‘It’s important to get out from behind the desk and away from your Excel spreadsheets, and to work on getting the trust of others in the firm. At Ikea, controllers have to spend time working in the sales and logistics areas; if they understand what drives stocks, staff costs and gross margins, they can contribute more to adding value. There are lots of KPIs, but we need to be able to communicate with business partners, with truck drivers or stock controllers, for example, in their own language so that they understand how they drive value. ‘Resources are limited and we must now do more with less. We have to build competence by developing systems and procedures, and delegating authority to finance people who understand the need for accuracy and checkable numbers. When both systems and reporting work reliably, then we can go to the sexier role of being the navigator and playing a more value-adding role.’




‘CFOs need new skills. The world is increasingly complex and turbulent and we need to spend more time trying to understand what’s happening, to understand our business and our market. Equally crucial are people and people management. In finance we have a tendency to concentrate on numbers, but people play a more important part in business than is often assumed. ‘We need to build the capability of the finance function and that needs leadership and vision. We need to know how to stand up in front of a finance team and make sure everyone follows what we say. That’s not easy, but it’s an increasingly important skill in these uneasy times. Once you’ve set up a vision, you can define roles and the direction you’re going in. ‘We must look at simpler ways of doing things. Many things are now done very differently from even 10 years ago. I have a vision of e-finance, of doing everything without signing pieces of paper. That will help us eliminate time-consuming back-office work and put more time into strategic thinking, which we all love but for which we’ve too little time.’

‘My first job as CFO was with Mars in 1990. I was immediately told that the role was to be a custodian, which is obviously the essence of the job. There were also three other Cs – all of them behavioural – to be a catalyst, to be constructive and to be challenging. ‘Googling the role of the CFO today yields a model that’s very similar to what Mars said 20 years ago. Deloitte says the CFO has “four faces”: steward – protecting and preserving the assets of the organisation; operator – balancing capabilities, costs and service levels; catalyst – stimulating behaviours to achieve strategic and financial objectives; and strategist – providing financial leadership in determining strategic direction and aligning financial strategies. Catalyst and strategist are what we’re really about when we’re trying to make a value-added contribution. ‘I’m trying to implement this model throughout my organisation, because even an accounts payable clerk can proactively go out and influence people to process invoices faster, pay better and develop better relationships with our strategic suppliers.’



The great talent show Generation Y professionals are different, and unless you meet their aspirations they will be taking their skills to your rivals, warns Mercer’s Jason Jeffay


lthough the past few years have been turbulent, many organisations see promising signs on the horizon. But one area that remains as elusive as ever is the competition for star talent, which will only intensify and test even the most proactive talent management programmes. Companies are aware that they need to attract, retain and manage key accounting talent. Accountants underpin oversight and supervision in an increasingly global regulatory environment, and help organisations manage risk effectively. However, talent shortages in the profession are already apparent, the result of shrinking numbers of new entrants, the failure of educational systems, and universal competition for the star performers. Young professionals are a vital source of talent. Currently, the people coming through are those born between 1980 and 1993, who have been dubbed ‘Generation Y’. Research by ACCA and consulting, outsourcing and investment services provider Mercer has uncovered the fascinating traits and motivations of


Ace face place: Facebook, created by Mark Zuckerberg, is one of the most popular social networking sites with Generation Y.

this group of tomorrow’s financial leaders, and the dramatic implications for business. Employers who fail to understand what drives Generation Y professionals will also fail to recruit and retain them. Most Generation Y professionals have grown up with the internet, mobile phones, laptops and social media. They are an extremely confident generation; they value security but will walk away if their employer can’t or won’t deliver their career path. The research, Generation Y: Realising the Potential, surveyed 3,200 individuals across 122 countries. It reveals a generation seeking dynamic career paths, both inside and outside traditional mainstream finance careers. MONEY AND MORE Make no mistake: money matters to this age group. But while they seek out competitive packages they also want a total package. As well as money, they are looking for work-life balance and a career at an attractive brand that reflects their own values.


Recruiting and retaining Gen Y professionals TOP FIVE ATTRACTION FACTORS

95% Career development and learning opportunities 87% Remuneration package (base salary) 83% Nature of role 81% Job security 81% Work-life balance TOP FIVE RETENTION FACTORS

64% Career development and learning opportunities 56% Challenging work 48% Remuneration package (base salary) 47% Relationship with line manager 45% Team morale Experiential learning is crucial. Employers and Generation Y professionals themselves both see it as key to developing the essential financial skills. It’s a tech-savvy generation, but face-to-face learning still resonates. Career development is front and centre for Generation Y, and employers need to put development at the heart of their career proposition. This is a generation that values job security but will leave the company if career promises are not fulfilled. Exciting careers are in heavy demand. Generation Y professionals want interesting and exciting careers, either inside finance or, increasingly, outside, using their valuable finance skills in a different capacity in the wider business environment. In the wake of the global economic crisis, organisations of all sizes and in all sectors have turned to their finance departments to help chart a pathway to recovery and to influence and shape business strategy. They accordingly face an uphill battle in attracting and retaining these valuable workers. According to the study, most Generation Y finance professionals are satisfied with their current role but are concerned about the future. Half believe their organisation is not able to offer them sufficient career development opportunities, and one in three wants to change employer – now. Unless employers effectively manage career expectations and development, they face a significant retention risk, particularly when global economic conditions improve. An effective career management process will combine three factors: transparency, control and velocity. Generation Y professionals want the transparency of knowing their options and alternatives inside and outside finance. They want the ability to exercise some control over their roles and experiences. And they want velocity to move quickly through those roles and experiences to gain a sense of progression and self-defined success.

Jason Jeffay manages Mercer’s consulting strategies in talent alignment and strategy, workforce architecture, leadership development and succession planning, performance management and employee value proposition and culture. He has more than 20 years of consulting experience, and is an author and speaker. He has sponsored and participated in leading-edge HR research, and has an MBA from the University of Chicago.

Organisations have a range of tools to help here. They can showcase the career paths available. Career maps, which offer employees knowledge and control over their own career paths, are also worth considering. A career map shows how the organisation wants people to progress, and is designed by working backward from a destination job to identify the feeder jobs that will let staff get there. Another type of career map is built on data about how and how quickly people move through roles to reveal the pathways that employees actually take to that destination job. This type of career mapping often reveals pathways the organisation wasn’t aware of and provides information about how long it takes to follow a particular career path. Employers can create career opportunities by restructuring work and moving people out if they reach a plateau or are underperforming, or through proactive churn. It’s also worth considering expanding secondment programmes and stepping up rotational activities to provide face-to-face courses and experiential learning. THE HEADLINES The lessons employers must learn from the research are clear. Lifestyle factors are more important than contractual elements in attracting Generation Y through the front door. The organisation’s brand, and the values it represents, are equally important. Remuneration must be pitched competitively as part of a wider attraction proposition. Career development is key to attracting, developing and retaining this generation of finance professionals. Employers must ensure they understand what career paths are available in the organisation and communicate these clearly to prospective employees. They also need to deliver a range of learning interventions to leverage the skills of Generation Y. Successful retention translates into a better return on training investment and lower recruitment costs. The biggest challenge facing organisations over the next few years will be the creation of value. Today we live in a knowledge economy, where information is key to value creation. Value will be created by people, ideas and the brand, and Generation Y finance professionals will be leading the way. Generation Y: Realising the Potential is available at Mercer is a leading global provider of consulting, outsourcing and investment services, with more than 25,000 clients.



I don’t knock on doors! It might be anathema to some, but small practices need to step up their marketing efforts to retain their strong position in the SME market


o evolve with the changing nature of owner-managed businesses and the regulatory environment, accountants will have to market their services more effectively to prospective clients instead of passively relying on referrals, new research from ACCA has found. The research also underlines how for some accountants the idea of becoming a salesperson is anathema, with some arguing that a greater marketing effort would erode their


credibility, integrity and ethics. One accountant interviewed during the course of the research said: ‘I’m not a particularly gregarious character who goes out and woos my clients with charisma. More work comes my way due to my work ethic.’ Another said: ‘I don’t knock on doors! It does not have the same credibility as a referral. It’s not a hard sell of the services, but a hard sell of you as someone with ability, credibility, integrity and ethics.’


MEASURING MOTIVATION Although accountants are traditionally viewed as trusted business advisers by small business owners, the main reasons why SMEs seek advice from accountants are for compliance and tax reporting purposes. Based on this assumption, the ACCA research wanted to present a detailed understanding of the nature of the services that accountants provide their SME clients in Australia and the UK. Specifically, this sought to examine the role of professional competence, trust and ethics, to uncover the factors influencing SMEs’ purchase of business advice and to look at the implications of the results for the accountancy profession.

The clear reluctance of accountants in small practices to become more proactive in marketing their services raises the question of whether or not the accountancy profession should, and could, increase its level of service marketing, the research found. More marketing may be counter-productive, requiring the accountant to play a role ‘out of type’ – a change of character that may breach the very foundations of trust and empathy that small businesses require from their accountant as a trusted adviser. The report, Business Advice to SMEs: Professional Competence, Trust and Ethics, by Kingston University’s Robert Blackburn and Monash University’s Peter Carey and George Tanewski, presents the results of ACCA’s study of small and medium-sized enterprises (SMEs) and their behaviours in seeking business advice.

FIRM EVOLUTION Business practices don’t stand still. Over the past few decades, accountants have developed their firms into multidisciplinary practices offering a more diverse range of skills and services to reflect the modern needs of their clients. These go beyond the traditional compliance and tax work typically associated with accountants. Also, regulation has changed. The requirement for a statutory audit has declined as exemptions have risen, for example. Whereas the ability of large accountancy firms to provide non-audit services to audit clients has been restricted, no legislative restriction has been placed on accountants providing statutory and non‑statutory advice to their SME clients. Despite these developments, SMEs do not always seek helpful external business advisers, even though there is clear potential for accountants to expand the management accounting services they provide to smaller companies. Moreover, the kind of work accountants provide to their SME clients – typically compliance and tax – is seen by owner-managers as adding no value to their business. It is simply something that SMEs have to do in order to comply with regulations. Indeed, accountants themselves consider this a burden of sorts to their clients. To be able to offer value added services, such as advice on succession planning or international trade, could help change the view that SME owners have of their accountants. One possibility is for accountancy firms dealing in the SME market to restructure and align their services more closely with the needs of their clients. However, respondents pointed to the fact that most small accountancy practices have a diverse range of clients operating in very different industry sectors, making it difficult for accountants to be specialists in all those different sectors.

FACTORS INFLUENCING THE PURCHASE OF BUSINESS ADVICE Size: The larger the business, the more likely it is to take advice from its external accountant. This finding counters the assumption that SMEs have a greater need for advice because they may lack such important skills as knowledge of financial controls. Age: The age of an owner‑managed business influences its demand for advice. Previous research shows the relationship with external advisers is more important during the earlier stages of the business, as the owner navigates unfamiliar regulatory and operational challenges. Finances: SMEs facing heightened risk are more likely to seek external advice to help minimise the risk, particularly when a ‘crisis point’ is reached. Lenders may exert pressure on SMEs to seek advice from their accountants before providing additional funding.



‘The market for business advice is highly competitive and while external accountants are well placed to gain this work, they need to convince clients that they have the necessary business expertise to deal competently with the owner-manager’s issues’ ‘To understand [a client’s] industry is really hard when you have 40 to 50 clients, basically across every industry, and it’s hard to be an expert in them all; probably of all the things clients say they want it’s the hardest [demand to meet],’ responded one accountant. Other options recommended that could accommodate the evolving needs of SMEs would be for accountants to employ a business development manager or develop strategic alliances with other professional services firms with specialist expertise. What was clear from the responses and analysis is that further research is needed on these complex issues of marketing to SMEs. Yet there remains a solid platform on which to develop the relationship between accountants and owner-managed businesses. The notion of trust provides a firm basis that accountants can build upon. RELATIONSHIP MATTERS The study found that trust was crucial to the relationship between the two parties. But, perhaps contrary to belief, the research found no link between the length of an SME’s relationship with its accountant and the level of trust, which suggests that such factors as service quality and delivery are more important than longevity for the establishment of trust. One reason why accountants are not seen as a normal source of management advice to small businesses was that they lack the requisite knowledge and business expertise. This finding again feeds into the issue of the unwillingness of many accountants to market themselves and their services effectively. The research findings show that SMEs seek business advice from a variety of sources. Instead of extending their relationship with their accountant, owner-managers prefer to use other sources. For example, one SME respondent used an external accountant for compliance advice, a financial planner for wealth management advice, and an independent business adviser for business advisory services. This analysis highlights an ‘expectation gap’ between what the SME owner believes accountants can offer and the services today’s accountants actually provide.


‘The market for business advice is highly competitive and while external accountants are well placed to gain this work, they need to convince clients that they have the necessary business expertise to deal competently with the owner-manager’s issues,’ the report states. Importantly, the study discovered that during so-called crisis points, SMEs did tend to seek external business help. If ever there was a time when SMEs were facing turbulence on many levels it is now. The economic upheaval shows no signs of abating in the immediate future, while regulators and legislators around the world are hard at work scrutinising financial frameworks to uncover the failings that led to the global financial crisis. This has led to a variety of regulatory and legislative changes – with more to come. Research has shown that such an environment gives rise to a demand for business services, particularly for businesses starting up. One accountant who was interviewed for the study said: ‘Problematic economic times can drive demand, or one-off events such as divorce, a more competitive industry or a highly geared business.’ The report comments: ‘Such events could be termed “milestone” events and may prompt the SME owner to seek out the services of the external accountant, having already built a continuing relationship of trust. Most small firms do not have sufficient in-house resources, certainly to deal with “one-off” events such as a rapid growth spurt or, on the other hand, business exit, and this means that they tend to look to their external accountant to fill the gap in their experience and knowledge base. In such situations, accountants could be regarded as an external resource.’ Currently, opportunities for accountancy firms to expand their services are ripe. Whether practices can take advantage of that moment, in helping their clients grow, exit their businesses or simply survive these tough economic times depend on their willingness to adapt. And that is something that lies in their hands. Michelle Perry, journalist Business Advice to SMEs: Professional Competence, Trust and Ethics can be found at


People power for SMPs Is there more scope for smaller practices to provide SMEs with advice on HR and employment law issues? Yes, say Mike Rigby and Professor Robin Jarvis PG25 EDITION 03



n the last issue of Accountancy Futures IFAC past president Bob Bunting highlighted the important changes in the role of small and medium-sized practices (SMPs) providing support to small and medium-sized enterprises (SMEs), citing evidence from a recent IFAC research paper. The evidence from the paper, entitled The Role of Small and Medium Practices in Providing Business Support to Small and Medium-sized Enterprises, indicates that globally SMPs are the preferred provider of business support to SMEs, providing an array of services including advice on HR and employment law issues. Indeed, from a UK perspective, research has found that SMPs are the main providers of advice on HR and employment law to SMEs. However, little is known about the nature of the involvement of SMPs in this relationship, and ACCA has commissioned research to find out. This article summarises the research and highlights some of the issues. To obtain a meaningful insight into the relationship between accounting practices and SMEs, the study carried out 20 in-depth interviews with accounting practices. The practices were mainly chosen at random although the study took account of the varying sizes of practices. The type of advice varied and was dependent to some extent on the size of the practice,

Another reason given for the choice of an accountant for advice was that SMEs recognised that SMPs’ needs and experiences are similar to their own and that they talk the same language. Practices fell into three categories in their approach to providing HR and employment law advice: the qualified HR model, the payroll model and the minimalist model. QUALIFIED HR MODEL In the case of the qualified HR model, qualified HR personnel were employed in the practice. These practices saw their involvement in HR and employment law more strategically than those in the other two categories and positioned themselves as part of a one-stopshop approach to their clients’ needs. The development of HR/employment law services was part of a decision to seek to provide a full range of support services to SMPs. As one of the respondents mentioned: ‘We want to become a broader-based advisory practice.’ These qualified HR practices initially moved in this direction because their clients were seeking HR/employment law support. The respondents pointed out that they were aware of their competitive advantage over HR consultancies that were not accounting practices: ‘Our clients can shop around for any HR package… but we are in a unique position.

Professor Robin Jarvis is ACCA’s head of small business and professor of Accounting at Brunel University. He is a member of the European Commission’s Expert Group – Financial Services Users Group and is a member of the International Accounting Standards Board’s (IASB) SME Implementation Group.

One reason given for the choice of an accountant for advice was

that SMEs recognised that SMPs’ needs and experiences are similar to their own. Practices fell into three categories in providing HR and employment law advice: the qualified HR model, the payroll model and the minimalist model reflecting its knowledge and experience of dealing with HR and employment law issues. Typically, the services provided by the practices in the study were employmentrelated. They included contracts, dismissals, redundancy, benefits and leave, resourcing (searching and interviewing), remuneration (setting up bonus schemes and grading structures) and succession planning. There were several reasons why SMEs chose accountants to give this advice. Trust was a significant one and was derived from the close relationship SMEs developed with their accountants while receiving traditional accounting compliance services, such as tax returns and auditing financial reports. Additionally, the trust relationship benefited from the institutionalised trust generated by the accountant being a member of a professional organisation underpinned by an ethical code.


They are already in-house, they already like our service, we know their business.’ Respondents recognised that by expanding the services they were offering it was possible to attract new clients. While these practices saw the development of HR/employment law support as strategically significant, their mode of entry into it was sometimes opportunistic. For example, one practice had appointed an HR specialist to deal with the practice’s own HR and employment law issues and only subsequently realised it represented an opportunity to develop an HR service for clients. Another practice had a long-standing referral relationship with an HR consultant. Recognising the growing demand for this type of service, it established a joint venture with the HR consultant. The level of business activity generated owed a great deal to a practice’s active promotion


Mike Rigby is director of the Centre for International Business at London South Bank University, and teaches on master’s programmes at Carlos III University of Madrid, and the Open University. His research interests include employment relations, SMEs, work-life balance, occupational health and safety, training and development.

of HR/employment law services. Partners were encouraged to promote HR services during general contact with clients. Direct promotion of the services also took place through mailings and via vehicles such as employment law seminars to which potential clients were invited. Not surprisingly, most qualified HR practices were the larger practices, and they generated a significant proportion of their total fee income via HR/employment law business. THE PAYROLL MODEL Some practices that provided HR/employment law support had developed these services alongside the provision of a payroll service to clients, albeit without the support of qualified HR staff. There seemed to be a consensus among these firms that if a practice offered a payroll service then the demand for HR advice would follow. This is because payroll services involve practitioners in dealing with clients’ staff. Any questions in relation to staffing will inevitably be first raised by the SME with the practice in its ‘payroll guise’. This point was cogently made by one of the interviewees: ‘It [HR advice] is a part of being an accountancy practice, especially if you are doing payroll. We have always done payroll and it’s bound to be an issue.’ Practices that provided payroll services, but

advice about tax and accountancy issues rather than HR. In general, these practices were very cautious about getting involved in this area of advice. They recognised that they lacked skills and knowledge. This was a major constraint to offering HR support and was often a function of the size of the practice. Their nervousness is illustrated by the following comments from interviewees: ‘Not my field. Extremely nervous because we don’t have the expertise.’ ‘Threat of litigation is a constraint… a growing worry… insurance.’ Despite this caution, most partners felt obliged to provide some support. Given the competitive nature of the market, they felt unable to withstand client pressure and obliged to engage in some dialogue with clients. There was evidence of partners passing on the more complex problems to third parties that were more qualified to deal with the problem. AFTERTHOUGHTS It seems clear that there exists the potential for the provision of HR/employment law support to SMEs by accountancy practices to add value to SMEs while enhancing the fee income of these practices. There are, however, concerns in those practices offering the minimalist model and, to some extent, in those just offering a payroll service. These need to be addressed. The study points to a number of ways concerns

It seems clear that there exists the potential for the provision

of HR/employment law support to SMEs by accountancy practices to add value to SMEs while enhancing the fee income of these practices. There are, however, concerns in those practices offering the minimalist model had not yet decided to appoint a qualified HR specialist, seem to represent a halfway house between the qualified HR model and those practices least active in HR/employment law. In the main, practices in this category were comfortable to be involved in HR/employment law. However, some practices recognised that they needed to upgrade their skills. A number of these practices were considering employing a qualified HR specialist, but were worried about the significant investment involved, particularly in insurance costs. THE MINIMALIST MODEL The smaller practices employed no staff who specialised in HR/employment law. The provision for support in HR/employment law was not actively promoted. It tended to be client-driven, demand-led and reactive. New clients were picked up because they wanted

could be addressed and the support role of these practices could be further developed: The development of a robust and tested model for the practices to engage in a brokerage role, enabling their small firm clients to access specialist HR knowledge. The encouragement of joint ventures between accounting firms and HR consultants. The merger of practices to enable the employment of specialist HR staff. The further development of the skills and knowledge of non-qualified staff dealing with HR issues. The enhancement of member support by professional accountancy bodies.

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The Role of Small and Medium Practices in Providing Business Support to Small and Medium-sized Enterprises is available at



Role call at global summit The recent World Congress of Accountants (WCOA) explored how accountants create value and how their role in the global economy will evolve


he quest for value creation was at the heart of the first plenary session of WCOA, held last November in Kuala Lumpur, Malaysia and organised by the Malaysian Institute of Accountants. Before the session got under way, the role of accountants as ‘value creators’ had been confirmed by a new ACCA research report, The Value Creation Model for Business: 2010 and Beyond. The study (which is covered in depth on page 33) found that accountants served the public interest, restored stakeholder confidence and ensured long-term and sustainable wealth creation. In essence, the ACCA study signals that accountants will bring greater oversight and supervision in an increasingly global regulatory environment, and help organisations manage risk more effectively. GUARDIANS OF ETHICS ‘The research shows business leaders believe accountants will help to improve the ethical standards across an organisation, with 58% of respondents believing this guardianship role will become more important in the future,’ said ACCA chief executive Helen Brand. ‘Indeed, twothirds of respondents placed risk management and internal control among the top skills required of accountants going forward.’ Brand said ACCA predicts rising demand for highly talented professionals, particularly in emerging markets. ‘Organisations need to be prepared to invest in their people to ensure their finance professionals are seen as leaders in the business, central to decision-making,’ she said. ‘Professional accountants already bring value through financial analysis, forecasting and an ethical approach. By enhancing their expertise in risk management, internal control and strategic decision-making, we believe that accountants will be at the heart of business.’ Sustainability is also a key feature for the finance professional of the future. ‘Fifty-six percent of business leaders expect the finance professional to be involved to a greater extent in sustainability and corporate and social responsibility issues,’ Brand said. FROM SCOREKEEPERS TO CO-PILOTS At WCOA, Wim Van der Stede, professor of accounting and financial management at the


China’s vice minister for finance, Wang Jun, highlighted the strategic role of the accountancy profession.

ACCA chief executive Helen Brand predicted rising demand for finance professionals.

London School of Economics, said: ‘There remains substantial pressure for finance professionals to move into roles that add more value to their organisations and broaden their responsibilities beyond traditional accounting tasks. The role played by finance professionals is evolving into activities that directly guide and support an organisation’s strategic direction – that is, from scorekeepers to co-pilots.’ Van der Stede said the recent global financial crisis had shown that ‘major corporations need finance professionals who understand risk management and financial instruments, can offer strategic guidance to executives and indeed can enter boardrooms as peers’. PROMPT ACTION WCOA panellist Dr Wang Jun, China’s vice minister of finance, highlighted how the strategic role of the accountancy profession had helped prevent the global financial crisis from escalating and so speeded up recovery. ‘In the face of the global financial crisis, accounting professionals worldwide united and acted promptly, fully leveraged their unique strengths and advantages, and emerged as an important force for maintaining market confidence and defusing the financial crisis,’ said Wang, who was presented with a special IFAC award at the opening ceremony of WCOA. He cited as an example the efforts of the Chinese accountancy profession, which had played an important role in preventing the financial crisis from spreading and keeping China’s economic recovery going. Wang said the Chinese accountancy profession, which has 12 million accountants, 94,000 of whom are practising CPAs, was transforming itself and focusing on the creation of a unified, dynamic system with both ‘Chinese and international characteristics’. He said the construction of the Chinese accounting system provided a ‘mighty support’ not only for the accountancy profession to cope with the crisis and develop in the future, but also for Chinese enterprises and the economy to weather the crisis and turn it into opportunity. ‘In the process of promoting the prosperity of the global economy, we have created value, we are creating new value, and we will continue to create even greater value,’ he added.


The WCOA plenary session had begun with a video message about the importance of integrated reporting from HRH The Prince of Wales, who set up Accounting for Sustainability in 2004. He said: ‘As accountants, it is your role and responsibility to provide better systems and information, which are so urgently needed, and to show that acting for the long term and in the best interests of communities and the environment is the right financial approach. I am asking accountants for creativity in developing the systems needed for the 21st century.’ In her presentation, IFAC board member Olivia Kirtley said that sustainability leaders typically outperformed sustainability laggards: ‘Today, the capital markets are rewarding companies that manage risk and sustainability well.’ Despite the rewards, Kirtley identified a ‘sustainability governance gap’. She said a McKinsey global survey earlier this year showed that 76% of executives believed sustainability contributed positively to shareholder value in the long term. ‘However, only 25% say it’s a top-three priority on their CEO’s agenda and

The iron abacus: China’s 12 million accountants have helped the country’s economy weather the crisis.

only 6% say their companies are very effective at managing sustainability,’ she said. ‘Better risk management and sustainability can support long-term business performance. We need to embed sustainability into the DNA of companies. Lack of sustainability can increase the risk profile of companies unknowingly.’ BACK TO BASICS The congress was reminded of the importance of the fundamentals by the managing director of Khazanah Nasional, the investment holding arm of the Malaysian government. ‘In various surveys on trust, the politician is often ranked at the bottom, followed by the CEO,’ said Tan Sri Dato’ Azman Mokhtar, who stressed trust and stewardship. The breakdown in trust extended to bankers, brokers and fund managers as well as accountants, he said. ‘Before we can talk of leadership, we need to regain trust. The profession has come through the crisis relatively intact. We are in a position to be the first port of call when people look for anchors and trust in a sea of mistrust.’



Future directions What can we learn from the 2010 World Congress of Accountants? ACCA president Mark Gold provides an overview of the issues raised at the event


COA 2010 was the best-ever attended World Congress with over 6,000 delegates registered. This is a tribute to the tireless efforts of the Malaysian Institute of Accountants (MIA), organisers of the conference, who promoted the event around the world directly and through many accounting organisation. The wide participation from so many countries also illustrates the power of our global profession, fostering closer links with many regions including Africa, Latin America and the Middle East. The accountancy profession is a learning profession. So what can we say we have learned? In ACCA’s report Where next for the global economy? A view of the world in 2030, we recognised that there is a shifting economic balance to the economies of the East. I think it is fair to say that a shift has already happened and the location of WCOA, in Kuala Lumpur, with its vibrant economy, was a fine symbolic location from which to observe this trend. The theme of WCOA, ‘Accountants: Sustaining Value Creation’, proved to be more relevant than


anyone had imagined in the heady days prior to the global economic crisis, when MIA and the International Federation of Accountants (IFAC) first developed their theme. WCOA was a venue in which we were able to demonstrate in how many ways accountants do bring value through their diverse roles, enhancing business. But a clear message from business is that we must continue to enhance what we do to meet the

ACCA Council member Alexandra Chin FCCA and ACCA’s president Mark Gold FCCA at the World Congress.

Congress facts and figures More than 6,000 delegates from 134 countries attended the 18th World Congress of Accountants in the Malaysian capital of Kuala Lumpur last November. It was a record-breaking attendance for the ‘Olympics’ of the accountancy profession and the first time WCOA had been held in South-East Asia. The welcome address was given by government minister Tan Sri Nor Mohamed Yakcop on behalf of the prime minister, Dato’ Sri Najib Tun Razak, who couldn’t attend. Delivering Najib’s speech, Nor said the choice of Malaysia as WCOA 2010 host reflected the trust and confidence of global financial and business communities in the standing of Malaysia’s accountancy profession. He added that accountants played a significant role in maintaining public confidence in financial markets.


Mark Gold is a senior partner in Silver Levene, the largest ACCA accountancy practice in the UK. Based in London, with offices in Bangalore and Beijing, Silver Levene is particularly well known in the entertainment and SME sectors. Mark has a strong entertainment and SME background and has spoken extensively about these areas. He has been an ACCA Council member for 11 years and has served as chairman of the Finance Committee, ACCA UK and the Creative Industries Committee. He is also vice chairman of the ACCA Small Business Technical Committee.

Datuk Mohd Nasir Ahmad FCCA, president of ACCA’s Malaysia Advisory Committee until 28 February 2011, attended WCOA.

needs of fast-changing business. There is a real risk in the glamour of a global conference that we overlook this imperative, instead becoming caught up with talking to ourselves about the many achievements we have made. I urge the profession to remember that we must continue to work to improve perceptions of business in relation to the value accountants bring, taking fully into account the needs of business and the views of the users and beneficiaries of our services as the prime evidence and catalyst for innovation. To put it in short, we must bring public value to all our work and ensure that business, politicians and the wider public understand the value we bring. POWERFUL VOICE Environmental issues were once whispered in enlightened circles, but being green was far from the main stream. ACCA was a lone, if powerful, voice in the profession in the early 1990s, creating a mandate for professional accountants to use their skills to reduce impacts on the environment. Sustainability is now a topic on everyone’s lips and this was well evidenced by the debates in Kuala Lumpur. We need to carve out the role which best suits the skills of the professional accountant. Our vision is for a profession in which the skills of accountants – analysis, reporting, value and risk identification, etc – are central to enhancing transparency in corporate performance with a view to driving down environmental impacts. This is good for business – lean business is good business – and for the wider environment. It has become clear in the past 12 months that we are increasingly using the word ‘sustainability’ to mean two things: long-term value and performance; and a sustainable planet. We must not confuse these two meanings. They are both central to our shared future. But their impacts are very different. I was encouraged to see that the recent WCOA placed integrated reporting top of its agenda. This is a welcome development which could lead to significant enhancements in corporate reporting and introduce a 21st century model. The aims of the International Integrated Reporting Committee include placing a greater focus on long-term performance and value creation, and integrating environmental and social impacts into one report, alongside issues relating to the business model, governance and risk. Ambitious indeed. But this is an area where we can learn and grow – providing we put the needs of shareholders and users of corporate reports at the top of our project plan. But I think it is self-evident that integrated reporting is now firmly on

the global agenda of the profession – and should be on the political agenda after the G20 meeting in November this year. A key learning point for me is that we must scope out the framework of this model and ensure a wide buy-in, as part of a wider programme to change business culture towards a longer-term perspective and away from short termism. FUTURE OF AUDIT Perhaps not to the fore of the overall programme, the future of audit was a major concern at WCOA. The temperature has been raised by the European Commission green paper on audit, released prior to WCOA itself. ACCA and many other forward thinking organisations have been calling for some time for audit to continue to bring value through enhancing the offering. We have recognised that there are needs of investors and the wider public which audit has not traditionally addressed – and there is scope for improving this in the future. As a partner of a leading small and medium practice, I fully endorse the principle of innovation, positioning accounting practitioners as business advisers, stemming from the excellent skills and professionalism I see in accountants wherever I travel. We should see the debate about audit as an opportunity to strengthen its value and to seek enhancement in areas that will be welcomed by business and regulators alike. Business needs assurance to enhance confidence and this is a principle the profession should take to its heart. However, confusion could prevail if the change agendas for corporate reporting and audit are developed in isolation. We should develop a new model for corporate reporting, ensuring that due consideration is given to developing it in a way which lends itself to robust independent assurance, and then consider how the audit can best serve this framework. We should not try to go down parallel tracks and risk misaligned future models. EMBRACING DIVERSITY My final reflection is the importance of diversity. The accountancy profession is a global one made up of many diverse parts: geographical, sector, gender, social background and so on. To be relevant for the future, we must embrace diversity and show how this can enhance business performance. I was pleased to note, for example, the prominence given to Islamic finance on the programme. But in a connected world we must work hard to ensure that the voices from all parts of our profession are heard and reflected.



Q&A Dr Chen Yugui

Secretary general of CICPA


n an exclusive interview, Chen Yugui highlights the efforts made by the Chinese Institute of Certified Public Accountants (CICPA) to develop the accountancy profession in China and explains how Chinese accountancy firms have thrived.

Q: In the past decade, what changes have

Chen Yugui

Chinese accounting firms experienced and what measures has the Chinese Institute of Certified Public Accountants (CICPA) taken? A: The past decade saw the rapid development of the Chinese accountancy profession, with reorganisation in line with international practices, enhanced levels of internationalisation and the gradual introduction of auditing and consultancy services. The profession has also established an international development strategy roadmap and has been concentrating on talent cultivation and becoming bigger and stronger.

Q: How can cooperation with international accountancy firms help Chinese companies to develop? A: The Chinese accountancy profession has always learned from international experience, and we have released and implemented internationally convergent auditing and ethical standards. We encourage Chinese accounting firms to join the international network in order to enhance governance, improve professional skills and advance global development, as well as the development of those international networks based in China.

Q: How is CICPA responding to the external environment?

A: In the 30 years of reform and opening up, China has made great achievements in economic development. This has created both opportunities and challenges for the profession. The Chinese government attaches great importance to the development of the Chinese accountancy profession and in 2009 put forward proposals to speed up its growth. In response, CICPA is actively developing worldclass firms and encouraging healthy and rapid growth to better serve the internationalisation strategy of Chinese enterprises.


How has the Chinese accountancy profession been affected by the global financial crisis? A: The growth of the profession was hindered by the crisis in 2009. With steady recovery in the Chinese economy and deepening reform – in particular the implementation of the strategy to transform economic development – the Chinese accountancy profession is faced with the necessity and opportunity of transforming and upgrading itself. While promoting non-auditing services development this year, CICPA is further pushing forward internationalisation, improving auditing standards and ethical standards in light of international convergence, training up international talent and enhancing governance. All these factors not only help to cope with the current international financial crisis but also help to lay a sound foundation for further development. Colette Steckel, Asia editor, Accounting and Business

ACCA and CICPA move closer together A memorandum of understanding between ACCA and the Chinese Institute of Certified Public Accountants was signed at WCOA in the presence of China’s vice minister of finance, Dr Wang Jun. ‘This event marks a significant milestone in the long-standing partnership between CICPA and ACCA,’ said ACCA chief executive Helen Brand. ‘It is proof of a strong commitment to work together towards the development of the Chinese and the global accountancy profession.’ She said the agreement would provide ‘support to our members through training and development opportunities, and will bring about the maintenance of high professional, technical and ethical standards’.



The CEO’s best friend Business leaders around the world are ever more convinced that professional accountants are the key to corporate recovery and value creation


VALUE DELIVERED Increasingly, business leaders see finance leaders playing a critical role in driving corporate strategy to create value. Almost half of respondents (46%) suggested their role in strategy was ‘critically important’.

50% 40% 30% 20%

4 Less importance


41 Same importance


55 More important

VALUE SOURCED Over half of respondents (55%) in all sectors and sizes of organisations said the role of finance professionals had become more important since the global economic crisis. Almost half saw professional accountants as ’highly essential’ in helping to create value. Drivers include greater competition creating a need for input from finance professionals into strategy and decision-making, more complexity leading to greater risk (which will generate further regulation), and heightened scrutiny of corporate performance. ACCA expects organisations to place new emphasis on sourcing and developing the skills of their finance employees. There will be renewed focus on recruiting and retaining talent across regions, specialised areas and niche sectors, reflecting a global shift to ‘federations’ of businesses, more small and medium-sized enterprises, and the development of multiple corporate hubs. ACCA expects to see emerging technologies embraced for their scalability, cost savings, and ability to serve multiple locations. E-learning will become more collaborative, coaching and mentoring will become more popular, and experiential learning will return to high favour.


he creation of value is what makes businesses successful, and the contribution of accountants to that value creation is increasingly recognised and prized by business leaders. That is the message of a recent ACCA report, The Value Creation Model for Business: 2010 and Beyond. It is clear from the report that the economic crisis has given accountants renewed status and influence in organisations, making them integral to business survival and value preservation, and key allies of the CEO. The ACCA survey of business leaders demonstrates the growing stature of financial professionals in businesses and highlights a number of emerging key themes.

They identified strategic business skills as the second most important skill for finance professionals, and business strategy and leadership as the fourth most important. ACCA expects a growth in finance business partnering, and outsourcing and offshoring of finance transactional activity and activities further up the value chain are also likely. Greater business complexity, new business models and growth will present new legal and regulatory issues and greater risk. Nearly half of business leaders (45%) said it was ‘quite likely’ they would employ more finance specialists; 26% thought it very likely. Financial analysis was the expertise identified as of most value in the future, followed by risk management. ACCA sees an influential role for professional accountants in delivering more effective risk management. VALUE SUSTAINED Business leaders see finance professionals taking the lead in driving up ethical standards across the organisation. Over half (56%) expect finance professionals to be involved to ‘a much greater extent’ in sustainability and

46% said that accountants played a

‘critically important’ role in corporate strategy The importance of the role of financial professionals in helping businesses create value since the global economic crisis. Source: The Value Creation Model for Business: 2010 and Beyond.

corporate social responsibility (CSR) issues. Finance professionals are also likely to play a greater role in developing and implementing frameworks to collect, measure and report on sustainability information. Finance professionals are likely to continue to play a key role in helping meet growing regulatory requirements – for example, in matters relating to tax or statutory reporting requirements. There will be renewed emphasis on ensuring oversight and supervision. ACCA believes the profession needs to restate the value of the auditor in helping sustain value creation. The audit model is not broken but new approaches to auditing larger entities could be developed, such as assessing the effectiveness of governance processes and testing the business model. For the ACCA Value Creation Model for Business report, go to www.accaglobal. com/pdfs/value_creation



The creation of a carbon market David Lunsford of the International Emissions Trading Association looks at the future for carbon markets and their need for standardised accounting practices






overnments around the globe are recognising the need to take action to limit the impact of climate change. The major international climate negotiations of 2009 and 2010 have visibly pointed to a widespread scale-up in the development of climate-related policies and measures at national levels. Embedded within grand climate commitments lies the use of market forces to price pollutants. Europe has been in the vanguard of creating these policy tools, implementing carbon markets to regulate emissions in EU member countries and then linking them across the region. One overlooked characteristic of carbon markets so far is the need to standardise practices for the accounting of emission units within company financial statements. Attempts to elaborate such standards deserve more attention and should be concluded before long. Transnational standards for carbon financial accounting will play a marked role in the ability ultimately to develop a global carbon market. SEEDS OF SUCCESS In the lead-up to the UN climate conference in Copenhagen in December 2009, many countries, especially in the developing world, announced progressive policies and measures they would be willing to implement unilaterally in response to climate change. While the mainstream media deemed this meeting a failure, the Copenhagen climate commitments have been included in the current text for a post-2012 successor to the Kyoto Protocol. The signs are that an unprecedented, widespread effort on climate will take place over the next decade. In succession to the Copenhagen meeting, governments gathered in Cancún, Mexico, last November to continue to build an international regulatory regime to combat climate change. The United Nations-led conference came several steps closer to creating a regulatory environment that mitigates the causes of climate change and helps people to adapt to a changing world. At Cancún governments agreed to try to keep temperature increases below a global average of 2°C, and all major emitters (and 80 countries overall) made pledges on emission targets and actions. A significant amount of detail now exists on new requirements for the monitoring, reporting and verification of greenhouse gases (GHGs) by developed and developing countries. A Green Climate Fund was also set up to finance mitigation and adaptation, with the goal of mobilising $100bn annually by 2020.


David Lunsford is international policy director of the IETA. He works on greenhouse gas trading policy, and analyses global trends in greenhouse gas measurement and carbon capture and storage. He has worked as an investment analyst, and has an MBA from the University of Geneva.

(previous page) Lighting up the world: protesters at the UN’s Cancún climate change conference.

Since the Kyoto Protocol was drafted in 1997, the development and implementation of climate policy has largely been viewed as an issue for developed countries. However, the negotiations in Copenhagen and Cancún have dramatically altered the climate action landscape, and given unprecedented impetus to the newly devised climate policies now being discussed and implemented across the globe. Many governments are also considering the use of market-based mechanisms to allow entities/companies with emission reduction obligations some flexibility. The EU’s Emission Trading Scheme (EU ETS), launched in 2005, is the first economywide market mechanism for trading GHGs, namely carbon dioxide. This market currently has an annual traded value of over €100bn and has grown sharply during the past five years. It has helped EU-based companies reach emission reduction goals at lower costs, in comparison with policy alternatives such as command‑and‑control regulation or carbon taxes. The ETS is the cornerstone policy instrument in the EU’s climate package and will stay intact. However, there are no firm rules about how companies covered by the scheme should account for EU emission allowances (EUAs) within their normal financial statements. Issued by the European Commission, EUAs represent the right to emit one metric tonne of carbon dioxide under the EU ETS and are the primary emission unit traded for compliance within the GHG reduction programme. AMBIGUOUS CARBON ACCOUNTANCY ACCA and the International Emissions Trading Association (IETA) recently surveyed major EU ETS emitters and published an authoritative report, Accounting for Carbon. The report points out that diversity in carbon accounting practice means that most company accounts cannot be directly compared, even though emission allowances are material to accounts. The ambiguous position of accountancy for EUAs has largely meant that company valuations across Europe do not reveal the underlying GHG emission risk exposure in a comparable manner. Instituting financial accounting rules for carbon emissions will benefit the perception and impact of the EU ETS. It could also improve the financial situation of companies performing well, ie optimally reducing their GHG emissions – under the programme. To date, financial accounting has been a weak aspect of the EU ETS. In comparison with other carbon market issues, where there has been extensive public and private


sector involvement and debate, discussions on carbon financial accounting appear to be taking place among a much smaller group of experts. Some regulators and professionals are anticipating the results of the joint International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) emission trading schemes project, which is due to publish an exposure draft this year. This draft should provide international guidance on carbon financial accounting and shed light on the main difficulties in developing a comparable standard for exposing GHG financial risks. Its adoption could underwrite the EU’s climate ambitions by measuring and evaluating how climate actions affect the economic bloc. It could also be used as an accountancy benchmark for other jurisdictions considering implementing a carbon trading regime. Significant changes to the EU ETS are coming in phase three (2013–2020), most notably a dedicated shift towards auctioning EUAs, rather than allocating them for free. This change should have implications for financial reporting on carbon, as incurred costs are more likely to be immediately mirrored in financial statements. The European Commission is now considering options to regulate financial

Eye-opening: a set of agreements reached at the Cancún climate conference has taken big steps towards building an effective regulatory environment that mitigates climate change.

Diversity in carbon accounting

practice means that most company accounts cannot be directly compared even though emission allowances are material to accounts

accounting for EUAs. It must decide whether to rely more on EU financial markets legislation or on international accounting standards, or a combination of the two. These upcoming rules could have far-reaching effects on the EU ETS and stakeholders, and on the formation of a global carbon market. Although the development of a global climate regulatory regime is well under way, it may take decades before a truly global carbon market, and therefore global price for GHGs, is in place. However, the long-term objective does not necessarily restrain the emergence of subnational, national or regional carbon pricing mechanisms at this very moment. DETERMINING THE PRICE OF CARBON Indeed, carbon prices are expected to become a key component of most major economies over the next five to 10 years, and many such prices will be determined within carbon markets. Carbon prices could implied – that is, delivered through measures for lowering the cost of clean energy solutions or low‑carbon energy resources, or by raising the cost of GHG-intensive resources. Alternatively, they could be distinctly determined through emission trading regimes or by levying carbon taxes. It is important to recognise that clear carbon prices are much easier to reflect in financial statements. In the short to medium-term, carbon prices will probably be incongruent, based on the appetite of governments to assemble tax or trading regimes that suit regional or national needs, or special circumstances. But if carbon markets form the backbone of carbon pricing regimes, they could ultimately be merged to form a global carbon market. Countries with already strong economic ties will likely establish links early on or even build markets concurrently, while other linkages may be established with the clear intent of mobilising capital towards a specific cause or to a desired location. The development and eventual linkage of carbon markets will take years to unfold but, given the global nature of the climate problem, and the historic experience of linking markets for similar commodities, and bearing in mind talks already in progress, there may be a truly global and effective market for greenhouse gas emissions within the next 30 years. With the evolution of multiple carbon pricing regimes and the globalisation of carbon markets on the horizon, the case of carbon financial accounting in the EU ETS and the near-term results of the IASB–FASB emissions trading schemes project will have increasing international relevance. The time for deepening public and private sector engagement on this issue is now upon us.



Calibrating the cost of carbon Accurately correlating ‘carbon’ costing with the quantities of GHGs actually emitted is crucial to climate change success, say the UK National Physical Laboratory’s finance director Alan Mann FCCA and his colleague Martyn Sené PG38 EDITION 03



esponding to the threat of global climate change is a national and international priority where the business community has a leading role to play. There is a clear need to understand, quantify, manage and report the climate-related impact of businesses, just as we do with financial performance. As Lord Adair Turner, chair of the UK Financial Services Authority, has said: ‘The first step towards managing carbon emissions is to measure them because in business what gets measured gets managed.’ The accounting and the scientific community both have a vital role to play in meeting this challenge. Demand for information about the actual and potential impact of climate change on business comes from many sources including shareholders, non-governmental organisations, regulators and consumers. Policymakers and regulators have introduced mandatory greenhouse gas (GHG) reporting, launched emissions trading schemes, and published disclosure rules and interpretations. Government-sponsored guidance on climate change-related reporting is also being developed. From research conducted in 109 countries, Deutsche Bank recently identified 270 government policies that set targets to reduce GHG emissions. While environment ministries across the world introduce rules on the monitoring and measurement of GHG emissions, ministries of finance, securities and business are equally active in formulating measures and guidance to track information about the business impact and risks related to climate change. DISCLOSURE BY DECREE Finance regulators in Denmark, France and Sweden now require the disclosure of certain environmental issues in corporate accounts. In the UK and Japan the disclosure of certain environmental matters has been made mandatory in annual filings. The US Securities and Exchange Commission has confirmed that existing securities law should be applied to cover disclosure of climate change-related risks. And the Ontario Securities Commission has been asked to state its position on the application of Canadian securities law to climate change-related disclosure. Climate reporting is increasingly important for businesses. And this is not only to meet current and future regulation, but also to manage risks, enhance their brand and gain a competitive edge. Thousands of the world’s largest companies in 60 countries report to the Carbon Disclosure Project (CDP) on their climate change risks, opportunities

and strategies, and GHG emissions; with 82% of the Global 500 responding to CDP’s information request in 2009. The publication of sustainability reports is prevalent, with more than 1,000 companies formally using the Global Reporting Initiative’s (GRI) G3 guidelines to issue and register sustainability reports. And companies are reporting more on non-financial issues in their mainstream financial reports, including climate change. In the UK a Deloitte study of carbon reporting practices in UK-listed companies, published in November 2010, found that more than half (57%) of the 100 UK-listed companies surveyed reported some carbon information, and over a third (37%) offered numerical data on their corporate carbon footprint. One in

Alan Mann is director of finance and support services at NPL. He was responsible for the commercial part of Serco’s successful tender in 1995 to operate NPL on behalf of the government, and formed the subsidiary that runs NPL.

Over the last 10 years

governments and other organisations have been creating a commodity called carbon – shorthand for the global warming potential of greenhouse gases five (20%) formally reported a specific target in relation to carbon reduction. But the Deloitte survey also found little consistency in reporting, a scarcity of thirdparty verification of data (supported by only 8% of respondents), and so few details provided about year-on-year activity that readers of most reports were unable to assess corporate performance in carbon footprint reduction. The findings are not a reflection on the willingness of the companies to monitor and report their climate impact, but a product of the immaturity of the tools available, the complexity of the climate reporting landscape, and (perhaps most of all) the lack of reporting and measurement standards. The work of bodies such as the Climate Disclosure Standards Board, with its roots in the worlds of business and accounting, is vital to bring about consistency. But science and technology (in particular, metrology, the science of measurement) also have a key role to play. And this is where the National Physical Laboratory (NPL) comes in. NPL is the UK’s national measurement institute, one of a network of laboratories around the world that provide the technical infrastructure for measurement. NPL’s work enables the measurements on which all of the economic and social activities in the UK rely to be consistent and fit for purpose. NPL undertakes R&D, develops measurement techniques, offers advice, maintains standards and ensures consistency between countries.



For more than a century NPL has been working to ensure the UK’s measurement infrastructure facilitates economic growth and improvements in our quality of life. NPL has recently undertaken a consultation with business and government, as well as its international counterparts, to understand how to support the international efforts to mitigate climate change. This consultation has highlighted a number of ways in which the measurement infrastructure needs to evolve, in particular to support the development of low carbon technology, the collection of increasingly accurate climate data, and the move to consistent assessment of ‘carbon’ for reporting, tax, trade and regulatory purposes. Over the last 10 years governments and other organisations have been creating a commodity called ‘carbon’ – shorthand for the global warming potential of GHGs. A plethora of market, tax, reporting and regulatory instruments have been developed to establish an actual or virtual price for this commodity


with the aim of slowing the rise and ultimately driving down the total inventory of GHGs in our atmosphere. For these instruments to be effective, the commodity ‘carbon’ on which they operate must be linked to the actual quantities we are trying to affect in a way that is understood and controlled. REALISTIC GLOBAL CARBON PRICE At present we are just at the start of a process to establish a realistic and consistent global carbon price. The number of organisations and activities affected is limited, not all GHGs are involved, and the effective price is low. At present we need only a reasonable correlation between carbon and real emissions or emissions avoidance. Our present tax, trade and regulatory instruments provide such a correlation. The current instruments are generally fit for purpose. However, as we move, hopefully with some urgency, to a world where more organisations and activities are affected, a broader range of

Martyn Sené is deputy director and director of operations at NPL. He has a PhD in photonuclear physics and has worked on a wide variety of applications of nuclear technology, including cold fusion.


GHGs is included, new low-carbon technologies are introduced and the price of carbon rises, we need to ensure that the correlation between carbon and actual GHG emissions or emissions avoidance keeps in step. When it becomes economically advantageous for an organisation to make changes to its activities that result in a 1% change in its carbon cost, we will need to ensure the change results in a real 1% reduction of GHG emissions. If the correlation between carbon and emissions is not maintained, then operational changes might have no impact or even make things worse, and our tax, trade and regulatory instruments will be failing in their purpose. This will have at least four consequences: 1. We will need to ensure that the measurement infrastructure for carbon continues to be fit for the purpose of enabling transparency in a way we take for granted in other commodities that are traded and/or regulated (such as natural gas and pollutants). 2. As we seek to select and converge our monitoring and reporting, we will need to ensure we manage how closely ‘carbon’ is correlated with real emissions. 3. As instruments evolve, we need to review science, technology and protocols in a controlled and consistent way to ensure the accuracy of correlation is maintained at the level required, and perhaps even to change the way we measure and report if techniques are no longer fit for purpose. This may be difficult, but it may be needed. 4. We will need new science and technology to measure new situations – for example, tackling the technically difficult issue of


measuring long-term leaks from carbon capture and storage systems. The international measurement system is there to enable this to happen and NPL is seeking to continue to play an internationally leading role in measurement science, technology and standards in this area. For our market, tax, reporting and regulatory instruments to be effective in their aim of reducing the global atmospheric greenhouse gas inventory, we need to harness the

If the correlation between

carbon and emissions is not maintained, then operational changes might have no impact or even make things worse expertise and experience of the finance and business community in developing consistent reporting. We also need the expertise and experience of the measurement community to create the underpinning science, technology and measurement infrastructure. Financial reporting has had centuries to develop to its current levels of sophistication. But if we are to achieve the necessary cuts in carbon emissions to address climate change, then how we report and audit companies’ climate impact needs to achieve the same levels of rigour in a fraction of the time. We would like to thank Lois Guthrie, executive director of the Climate Disclosure Standards Board, for her contribution to this article.



Low-carbon’s missing link Lack of reporting on indirect emissions is holding back the development of a low‑carbon economy. ACCA’s Rachel Jackson looks at how we can push it forward

M Rachel Jackson is ACCA’s head of sustainability. See page 13.


uch has been done in the past 10 years to develop credible methodologies to measure and report greenhouse gas (GHG) emissions. However, there is a noticeable exception to this progress – Scope 3 emissions. These are, in effect, GHG emissions that are not being counted but which are nevertheless crucial to the development of a vibrant low‑carbon economy. Scope 1 emissions are direct GHG emissions from sources owned or controlled by a company. Scope 2 emissions result from the generation of purchased electricity. Scope 3 emissions are all other indirect GHG emissions. They could be generated by employee business travel, external distribution and logistics, the use and disposal of the company’s products and services, or its supply chain. Measuring Scope 3 emissions provides the information needed to understand climate‑related risks and opportunities generated upstream and downstream from operations, beyond operational boundaries and in products and services developed and sold. The information could challenge companies to look at what they are doing, not just how they are doing it, and trigger development of new products and services, rather than just more efficient ways of delivering existing ones. It could result in decisions to substitute carbon‑intensive materials with ‘greener’ alternatives. It could result in significant changes in the supply chain, or investments in low-carbon transport and waste management solutions. It will almost certainly result in change. Yet Scope 3 reporting is rare. In 2009, while 409 (82%) of Global 500 companies responded to the Carbon Disclosure Project’s request for GHG information, only 209 (42%) gave any information about their Scope 3 emissions. Just six of those companies reported on all five classes of Scope 3 emissions. Yet carbon emissions have become an important element of risk and opportunity analysis. If accountants are to do their jobs properly, then they need to understand the implications of Scope 3 emissions. A new ACCA paper, Delivering Value in the Low Carbon Economy by Dr Alan Knight, looks

at why Scope 3 reporting has been so slow to develop and how this is holding back the type of innovation demanded by a low-carbon economy. None of the many regulatory or voluntary accounting and reporting programmes requires Scope 3 accounting and reporting. At best, they make it optional. The reasons for this are understandable. First, there is the fear of double counting, with the possibility that the Scope 3 emissions of one organisation could be the Scope 1 emissions of another. Second, what categories of indirect emissions should be included? How do you draw the boundaries? Should lifecycle methodologies be adopted and, if so, which? Third, there are evidence‑gathering and quality difficulties. If nobody is actually keeping this kind of data, where do you start? Are estimates acceptable and, if so, what methodologies? Are proxy indicators acceptable? What level of uncertainty is reasonable? THREE APPROACHES ACCA’s paper acknowledges these challenges. It identifies three types of approach being taken to Scope 3 emissions by companies, using case studies – of, among others, ExxonMobil, Walmart and Bayer – to bring the approaches to life. First is the ‘control approach’, which focuses on operational efficiency in areas over which a company has control, such as technological innovation within operations. Some are going a step further and adopting what ACCA terms the ‘influence approach’. This acknowledges the importance of Scope 3 information as a guide to areas for improvement where the company has high levels of influence, such as upstream in the supply chain. Improvements focus on technology and efficiency, but include innovations in materials, processes, products and ways of doing business. Finally, the ‘engaged approach’ brings an understanding of Scope 3 emissions into all business decision-making. Companies identify opportunities for innovation not just within their own operations and upstream, but downstream too – across the full value chain in the sectors in which they operate. Companies look not just at how their products are made, but also how they are used and disposed of.


Scope 3 is about innovation and the future. It is not about doing what you do better, but about understanding what to do differently and how TIMELY FOCUS ACCA’s paper is timely given that guidance on a Scope 3 accounting and reporting standard is expected to appear this year. Developed by the World Business Council for Sustainable Development and the World Resources Institute, the standard provides a comprehensive categorisation of Scope 3 emission types and guidance on how to account and report on each category. More than 60 companies have road-tested the standard, and many believe that a Scope 3 inventory could be completed annually. With political leadership on building a low‑carbon proving disappointing, businesses need to embrace the new guidance and take the lead in developing their emissions reporting. ACCA’s paper therefore includes recommendations for government, standard setters and business, as follows:

and standards and policy setters *Governments should consider making Scope 3 mandatory. should begin to account for and *Business report on Scope 3 emissions. 3 information and analysis should *Scope begin to be included in strategy development and in operational decisions and actions. Scope 3 information and analysis should begin to be brought into the investment appraisal process.


By looking at the full value chain, Scope 3 provides a broader challenge to business. Scope 3 reporting is an essential lever for taking organisations beyond the mere drive for efficiency to real business remodelling. Download Delivering Value in the Low Carbon Economy at



The information flow A new audit model that frees up the flow of relevant information to investors is needed, says Grant Thornton’s Steve Maslin


t is no great surprise that financial crises usually act as a fundamental driver of change for audit standards and financial regulation. And once more the audit profession has come under the spotlight, this time for its perceived failure to warn of the state of a number of banks’ finances before the crisis hit. Given the scale of the banking collapse, there is widespread and growing international political interest in the role that auditors played in providing (or failing to provide) early warning signals that all was not well in the global economy. The investigations by the European Commission and Britain’s House of Lords are only the latest to be launched. The questions asked of bank auditors are now being posed


about assurance for public companies as a whole. What exactly do investors know about the risks inherent in the business models of the companies in which they invest? Outside the banking sector, despite the funding crisis, we have not to date seen waves of unexpected listed company failures. In the final reckoning, and given its current scope, I believe that the audit profession has generally acquitted itself well. But while audit may not have fundamentally failed, auditors, along with other stakeholders, did fail to spot the extent of the looming crisis. This failure highlights the need for the role of auditors to change if they are to provide investors and bank supervisors with further value from their independent examination of


On financial stability, the profession needs to re-examine the way that it communicates with the banking supervisor in each jurisdiction – shortly to be the Bank of England in the UK. I believe that the Bank and leading audit firms are showing real leadership in this regard. They are working to establish a simple but effective communications framework which will set out how information can be shared between the audit firms, at various levels, and the Bank. The aim will be to ensure that information across the whole financial services sector is shared both formally and informally. This will encompass effective two-way communication between the profession and the Bank so that all participants, preparers, auditors and supervisor, are fully sighted in advance of what appears to be tomorrow’s vulnerabilities at the start of each reporting cycle, rather than merely analysing what went wrong last year. In line with the views Lord Lawson expressed at the House of Lords committee hearing, I believe there are lessons to be learned from the relationship that existed between the profession and the Bank in the days (20 or

The future of assurance revolves

around finding the right key to unlocking that information flow to help investors gain greater understanding without undermining auditors’ ability to get to the information they need businesses. Following the financial collapse, investors are looking for clearer disclosures from companies and for auditors to provide bold assurance statements. The European Commission green paper on corporate governance, which was published last year, points out that auditors play a vital role in the confidence of capital markets. While the task of strengthening capital markets requires a holistic approach from a range of stakeholders, the audit profession must recognise that it has a role to play and make proposals for what it needs to do differently to strengthen audit. If the profession is to stamp its authority as a key stakeholder in ensuring market confidence deep into the 21st century, it needs to get its head out of the mire of technical detail and to focus on how it can meet society’s needs post‑crisis. We have to define the profession’s role in strengthening financial stability and helping to engender sustainable economic growth. From the wealth of international research and opinions, it appears that a broad consensus is emerging.

so years ago) when I last audited a bank. Those lessons need to be learned both by the supervisor and the audit profession. On sustainable economic growth, the focus of the profession must be on rebuilding investor confidence. There is little disagreement that investors view financial statements as vital tools and value the assurance that they obtain from external audits. Having said that, the investment community has expressed a desire to see the reporting model evolve to provide clearer disclosures about business models, their inherent risks and the judgments and estimates that company management teams make when preparing financial statements. There has also been a clear call for external auditors to broaden the scope of their work so that investors and other users derive further value from their independent examination of these enhanced disclosures and indeed to give a clear opinion on the narrative disclosures in accounts generally. But as well as focusing on auditors, we need to find ways to encourage directors to give clearer disclosures in these areas and for auditors to provide bold assurance



statements. Investors undoubtedly need clearer disclosures – what they are not looking for is a proliferation of boilerplate reports. If those are the key lessons of the crisis, they give rise to important questions over how the role of external assurance and management commentary should develop to help investors understand companies’ business models, risks and judgments. Perhaps the first task is to step back and define exactly what the problem is before proposing solutions. From my discussions with many institutional investors, they believe that information which could benefit their decision-making is often discussed between auditors, company management and the audit committee but that they are denied access to it. They are unquestionably right. I believe that the future of assurance revolves around finding the right key to unlocking that information flow to help investors gain greater understanding without undermining auditors’ ability to get to the information they need. The focus has to be on providing investors – the primary users of audits – with information that they believe gives them a truer picture of a business’s financial status. That, of course, is not as straightforward a process as it sounds. The first issue is how companies respond to greater transparency. If what is currently a private discussion and report from an auditor to the audit committee were made public, would management be less likely to divulge the same level of information to the auditor? It is undoubtedly a risk, with the possibility that the audit will become more transparent but less robust if management elects to withhold data from its auditor that it currently discusses openly. Equally, it is management that should have the greatest insight into risks and judgments within a business. The goal should be to encourage the dialogue between auditor and audit committee to be more open without absolving management from its reporting. Grant Thornton has prepared a number of possible different scenarios for freeing the information flow to users, including having an auditors’ discussion at analyst presentations or a question and answer session at AGMs. The French-style longer audit report is another option, although not one I favour. A review of the pros and cons of our own proposals has made it clear to me that no single model is perfect. Of all the models we tested, the best solution, it seems to me, is to encourage companies to prepare more meaningful audit committee reports and require the auditor to report on the fairness



of those reports. Such reports should be ‘primary statements’ with a specific fairness opinion in the auditor’s report. If we get this model right, it will help to free up the flow of relevant information on business model, risks and judgments to investors. At the same time the model preserves the responsibilities and rights of the board to determine that information flow; but places

disclosure undermines confidence in listed companies and stock markets. Equally there is the issue of providing directors with ‘safe harbours’ to encourage clear and relevant disclosures over long‑winded boilerplate statements dictated by the company lawyers. As a profession, auditors should not allow the issue of liability to prevent the development of

If the profession is to stamp its authority as a key stakeholder in

ensuring market confidence deep into the 21st century, it needs to get its head out of the mire of technical detail and to focus on how it can meet society’s needs post-crisis. We have to define the profession’s role in strengthening financial stability and helping to engender sustainable economic growth the onus on the auditor to ensure this narrative is fair and reasonable. In 2009 I persuaded the chairs of 15 FTSE 100 companies and the six largest audit firms to fund research into how companies’ risk governance had changed as a result of the crisis. The obvious but nevertheless key finding was that good governance and reporting are about behaviour. The factors that influence attitudes must be addressed if we are to encourage good behaviour rather than resort to increasingly complex rule books. There should be, for example, a role for the world’s leading regulators, such as the UK’s Financial Reporting Council (FRC), to help investors explain to companies what good management commentary looks like from their perspective so that good presentation can be rewarded. Of course, investors with access to ‘more relevant’ information, in whatever form, need to treat it responsibly rather than make listed companies more vulnerable to attack. We cannot have an end result where greater

practical proposals for what good assurance looks like. No-one would deny that liability is an issue if auditors are asked to provide greater, forward-looking assurance statements, but we cannot allow that to become a stumbling block that inhibits new approaches being proposed. And there is now an important timing issue. It is more than two years since investment bank Lehman collapsed. While a number of emergency actions have been taken, it is time to get on with agreeing and implementing longer-term actions to help rebuild financial stability and investor confidence. Auditors must be at the forefront of the debate over the future of audit, and lead the movement for change rather than resist the development of new approaches. Auditors should not be blamed for the financial collapse, but the profession will be culpable if it does not recognise the need to help develop a reporting environment designed to prevent another financial collapse and to play a leading role in developing the new model. I am determined that we will lead from the front.

Steve Maslin is chair of Grant Thornton UK’s partnership oversight board and head of external professional affairs. He spent seven years as a member of the audit and assurance advisory panel of Grant Thornton International when

which represents the six largest UK audit firms on public policy matters. In 2010, he was appointed to the Accounting for Sustainability Working Group. His clients are a range of fully listed, AIM and large privately owned businesses.

head of assurance in the UK and represents the firm on the Global Public Policy Committee, which consists of senior partners of the world’s six largest audit networks. He is chair of the Policy and Regulatory Group,



In search of a wider role ACCA has been asking investors, CFOs, auditors and other stakeholders about how the role of audit can be enhanced. ACCA’s Ian Welch reports

H 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.


ow do you get greater value from audit? In the wake of the banking crisis, it’s a question that governments, regulators and auditors themselves around the world are grappling with. A leading example of the various inquiries that have been launched into the subject is the European Commission’s wide-ranging consultative document, which looks at all aspects of the auditing profession. National examples include the UK House of Lords’ inquiry into audit concentration. Back in 2008 when ACCA chose audit to be one of its four Accountancy Futures themes. ACCA’s belief was (and remains) that audit added considerable value to business, although we recognised that there was little published research or even current debate to support that hypothesis. In short, at that time, even though the global credit crunch was firmly under way, no-one was talking about audit. Therefore, as part of our Research and Insights agenda we launched a year-long series of high‑level roundtables in various countries so that we could garner opinions from a wide range of market participants – including auditors, regulators, CFOs, investors, ratings agencies and finance providers. The purpose was to assess views on how the role of audit could be enhanced, to answer some of the questions being aimed at it, and to inform the debates that would inevitably arise. The roundtables took place in Belgium, Malaysia, Poland (two), the UK (three), Ukraine, Singapore and Zambia. There were regional variations in terms of priorities, but many common themes emerged. ACCA will be looking to discuss these with policymakers and to take some of these ideas forward for further detailed research. Having at the outset nailed our colours to the mast in terms of audit adding value to business, we were pleased to discover that, for all the concerns raised in the various events, the importance of audit itself was rarely questioned. Participants in several roundtables questioned whether auditors had carried out their roles effectively enough in the run-up to the financial crisis, and a keen debate unfolded as to whether the role should be revised, but only at the smaller end of the market was there any serious questioning of

whether audit itself was necessary. Banks and ratings agencies made clear at several events that they valued the audit, so its importance to businesses in accessing finance should not be underestimated in today’s market where credit is tight. In Poland, a banker advised companies to make full use of their audit to get expert advice and improve the business (while respecting the ethics rules on auditor independence) rather than treating it as something negative to get through. At several events, participants referred to the lower costs of capital for audited companies – an assertion supported by the European Commission’s green paper. And the first Poland debate referred to an empirical study of 200 companies which showed that 70% had restated their profit and loss accounts as a result of discussions with the auditor. This suggests that those businesses not subject to audit would be disclosing erroneous data in their financials. 1 EXPANDING THE ROLE OF AUDIT While the audit as currently constituted was valued, there was also a strong feeling of frustration that it could do a lot more. Stakeholders would be better protected if the standard audit report incorporated a clear statement of responsibilities for reviewing and/or reporting on corporate risk management and governance arrangements. Roundtable participants showed interest in the auditor assessing and reporting on the client’s business model, or at least on the financial assumptions underlying that model. The corporate reporting regime also needs overhauling to include more forward-looking, qualitative and non-financial data. There is currently too much focus on out-of-date figures and not enough on risk information. This would be a major change for the audit profession and would need reform of current liability laws. Auditors’ skill sets and pre- and post-qualification training would also need reviewing. Where firms cannot provide the necessary expertise themselves, they will need to consider whether to recruit qualified staff or buy in the skills from outside. Such reforms will not be straightforward for the profession but if the audit is to evolve, they may be necessary.


2 REAL-TIME REPORTING The issue of more timely reporting came up in several roundtables. The current audit model needs to develop and ultimately include reporting on real-time information. Timely reporting helps companies improve

While audit as currently constituted was valued, there was also a strong feeling of frustration that it could do a lot more

and maintain strong credit ratings. By gaining a reputation for voluntarily making monthly management accounts (MMAs) available, including information on areas such as cashflow and key risks, businesses will be providing exactly the sort of data that ratings agencies, banks and other credit providers are looking for. Some banks were reportedly already asking for MMAs.

If this becomes the norm, auditors or reporting accountants will play a key attestation role and there were calls for this to be done publicly and online. It was also recognised that to achieve real-time reporting auditors may need to report on some key risk or performance areas of the business rather than the entity as a whole. External verification of MMAs throughout the year would not mean auditors generating vastly increased fees. The work involved in annual audit should be substantially reduced if there was regular attestation over the course of a year. 3 COMMUNICATION Linked with the extra transparency outlined in the MMA issue, several roundtables called for increased communication of the auditor’s input – including an end to the current ‘binary’ audit report. Only the audit committees and the boards get to see the full extent of the additional letters and reports, discussions



and enquiries, with other stakeholders merely receiving a yes/no outcome. It was argued that the audit ‘blackbox’ should be opened up if the real value of extensive audit work is to be appreciated by shareholders, and given that they are paying for it, that is not an unreasonable demand. Some argued that the contents of the management letter should be made available more widely. One UK participant said her company had been ‘really pushed’ by the auditors over going concern. Such challenging questioning of management should give comfort to lenders and other stakeholders that the financial statements are robust, so why is this work not brought to their attention? In Malaysia, shareholder groups wanted to see more interim reports and more ‘red flags’ raised if companies started hitting problems. 4 AUDITORS’ LIABILITY The caveat to all these suggestions was a requirement to solve the issues they would raise in terms of increasing the potential for litigation against auditors. At the events, the liability problem was noted as being a deadweight on audit innovation and a source of considerable frustrations (see the article that follows this one). 5 INDEPENDENCE In several roundtables there was a widespread belief that auditors had serious questions to answer. Why had auditors signed off clean reports on companies that had subsequently collapsed even though (at least with hindsight) the warning signs had been there? This often expressed itself in concerns about independence – were auditors robust enough in standing up to clients or were they more concerned with keeping lucrative assignments? Auditors at some roundtables conceded that more should have been done to stop toxic assets being parcelled up and sold on to unwitting investors by investment banks. But they rejected claims of lack of independence and no compelling evidence contradicts their position. But it is vital that auditors demonstrate ethics and scepticism: they must apply the spirit not just the letter of standards and stand up for what is ethically right. While international standards are important, they must not become a crutch for auditors to lean on or hide behind. There was concern that compliance with standards was beginning to override professional judgment. The profession must be remunerated properly in major and emerging markets. Several roundtables thought that fee levels were not high enough for firms to invest in quality and


The liability problem was noted

as being a deadweight on audit innovation and a source of considerable frustrations staff. Talented staff were being lost to the profession and audit committees that saw their main role as pushing down audit fees were short‑sighted. The profession, it was felt in many markets, provides a higher level of value to business than is fully recognised. CONCLUSIONS These were just the main issues that came up at the roundtables. Others included the role of audit committees and the need for audit to be ‘stratified’ according to the size and complexity of the client, particularly SMEs. Overall, the global roundtables reveal a positive view of what audit can bring to business. It is essential for the profession, policymakers and other stakeholders to work out a pathway to overcome some of the issues identified. But audit must evolve and be seen to deliver enhanced value to the client. As an investor representative in Malaysia put it: ‘Boilerplate reporting, standardised, is not sufficient. We want more from you.’


Auditors in the danger zone If the scope of audit – and the audit market – is to be widened, then the question of liability must be debated, says ACCA’s technical head John Davies

T John Davies FCIS is head of technical at ACCA. He coordinates ACCA’s policy positions on technical matters and has a special interest in business law and financial crime issues.

he independent audit remains an important part of the framework of measures that build stakeholder confidence in individual companies and the capital markets in general. While the global financial crisis has not thus far resulted in auditors being held responsible for any major corporate failures, we are seeing a significant increase in the incidence of litigation against professional firms in general, and a developing interest in the idea of rethinking the whole role of the audit. The thread of this interest can be summed up quite simply: if auditors have generally performed their professional responsibilities correctly, then the real issue must be whether those responsibilities need to be reformed and perhaps expanded to make audit more useful to primary and secondary stakeholders. This article looks at why this debate is taking place and focuses on the potential impact that any

expansion of auditors’ responsibilities would have on their exposure to liability. In the course of considering how the audit process might be reformed, it is worth recalling at the outset why it is that stakeholders might want an audit carried out in the first place. This question was analysed in economic terms by Wanda Wallace in The Economic Role of the Audit: A Look Back and a Look Forward (1980). She identifies three ways in which audit meets the economic demands of stakeholders. The first of these is related to agency theory: because shareholders delegate so much power to make decisions on their behalf to the company’s directors, their interests and those of the directors may conflict, and shareholders may feel they have to take additional action to protect their interests. Independent audit helps to reduce the ‘agency costs’ inherent in this situation. A second feature of audit is that it helps redress the problem of



information asymmetries – in other words, the lack of inside information that shareholders may have about what is going on inside their companies. By appointing an auditor who is thought to be competent and independent, the directors indicate their willingness to be open about their record of stewardship of their company’s affairs. The third purpose is that the audit plays an insurance role, with the auditor’s exposure to liability (and in practice the auditor’s insurance cover) providing a means of indemnifying investors against losses that they may incur. These three factors have a bearing on the level of interest in and reliance placed on audit reports by shareholders and others. Wallace suggests that the higher the agency costs, the greater will be the information asymmetries, which in turn is likely to enhance the demand on the part of shareholders to protect their interests via the audit. And the greater the risk of financial losses in a company, the greater will be the need for audit ‘quality’. These

members of audit committees and financial analysts were all in favour of seeing more reporting by the auditor on the company’s risk management and internal controls, as well as some perspective on the ‘big picture’. ACCA itself, in its 2010 policy paper Restating the Value of the Audit, which incorporated views expressed by senior ACCA members around the world, argued that auditors should also test the assumptions that underlie an entity’s business model, and its likely sustainability. There is, accordingly, a developing feeling that evolving market demands should be reflected in the shape of the audit. DUTY OF CARE Auditors are naturally sensitive to how change would affect their exposure to liability. Whether expanding the audit remit would lead directly to an extension of auditors’ liability will in practice depend on its consequences for auditors’ duty of care. In common law-based legal systems, the duty of care of professional

Auditors are naturally sensitive to how change would

affect their exposure to liability. Whether expanding the audit remit would result directly in an extension of liability will in practice depend on its consequences for auditors’ duty of care pressures can be said to be converging to create the present interest in expanding the auditor’s role. Expansion of the scope of the audit has been recently promoted by a number of influential parties. In 2009, the Treasury Committee of the UK’s House of Commons stated (albeit in a comment which perhaps should have been aimed at the process of corporate reporting generally): ‘The current audit process results in tunnel vision, where the big picture that shareholders want to see is lost in a sea of details and regulatory disclosures.’ The UK Financial Reporting Council is planning a high-level review of the scope of the audit, and has asked in particular whether the audit report needs to say more about risk. The European Commission, in its green paper on audit issued in October 2010, suggests that audit should ‘go back to basics’ and concentrate more on substantive verification of the balance sheet than on compliance and systems work. A study by Maastricht University’s Accounting Research Center (MARC), commissioned by the Global Public Policy Group of the six biggest international firms, recently found that while the audit is still seen as valuable, CFOs,


advisers is rooted in the civil law of negligence. This provides that, where specified conditions exist, an adviser is liable to pay compensation to a plaintiff for the economic loss that the latter suffers. The conditions which trigger negligence liability under current English law, and most parallel systems, are as follows: The defendant owes a duty of care to the plaintiff (this must involve the defendant being able to foresee that the plaintiff would suffer by the defendant’s negligence, and the existence of a ‘proximity’ relationship between the two). The defendant must be in breach of the duty of care. The breach must cause the plaintiff loss. The loss must have been foreseeable by the defendant. Where auditors are found to have been negligent in performing their duty, they can be sued for damages, which represent the economic loss stemming from that negligence. It is fair to say that, in most jurisdictions where these principles apply, the courts have been reluctant to extend the circumstances in which the duty of care applies. The key UK case of Caparo v Dickman laid down two very important constraints on


* * *

LIABILITY REFORM: AUSTRALIA Australia reformed its federal law on civil liability following a national crisis over the availability and cost of professional indemnity insurance that saw audit firm premiums rise by up to 400%. It has replaced the principle of joint and several liability (for cases involving economic loss and damage to property) with a general assumption of proportionate liability. Proportionate liability under the Australian model does not provide wholesale exemption from liability. Nor does it apply in the event of fraudulent or intentional conduct. Some Australian states also now have laws that allow professional liability to be capped. In New South Wales, for example, an auditor’s liability is capped at 10 times the audit fee for the assignment concerned.


actions against auditors. The first is that for a duty of care to be owed there needs to be a precondition of a relationship of proximity between defendant and plaintiff. Essentially this means that there must be a nexus or relationship between the two parties which will usually involve an assumption by one LIABILITY REFORM: THE US In the US, the Private Securities Litigation Reform Act 1995 applies a measure of proportionate liability in class actions, which are possible under SEC rules where share prices have fallen. However, even where a defendant is successful there is no provision for recovery of costs, so companies and auditors have faced increasing pressure to settle cases out of court. The legislation was passed following a huge increase in class actions during the 1980s, which forced the Big Four firms to pay a reported 9% of their total revenues in legal costs in 1991. Joint and several liability remains where a criminal offence has been committed.

report, though. Any ad hoc responsibilities will also be relevant. In Australia, for example, reforms made to enhance the governance rights of shareholders now require auditors to attend company AGMs and to answer any relevant questions posed by members about the audit opinion and the conduct of the audit,

The risk of one of the large audit firms failing as

the result of a catastrophic damages claim is now widely accepted to be a major systemic risk to the capital markets party of a responsibility to take care. The second constraint is that auditors, when auditing a set of financial statements, owe no duty of care to members or prospective members who make financial decisions on the strength of their work (unless auditors give separate undertakings or provide some sort of acknowledgement of proximity). Subsequent cases (such as Moore Stephens v Stone & Rolls) have reaffirmed the limited responsibility that auditors have for detecting fraud. The cautious approach of the courts, at least since the 1970s, has allayed fears of a flood of successful litigation against professional advisers. But this restrictive legal interpretation will not necessarily continue indefinitely. The present assumption made by the courts about the legal function of the auditor (to report to the body of shareholders on directors’ stewardship of their company, and not to provide a basis for economic decision-making by individual shareholders) is seen by some commentators as illogical and unsustainable. They point to the International Accounting Standards Board’s framework for preparation and presentation of financial statements, which makes it clear that the aim of general purpose financial statements is to provide information on entities’ financial position that will be useful to users in making economic decisions; it goes on to say that members who use financial statements to assess directors’ stewardship do so to make economic decisions. While International Standards on Auditing (ISAs) make it abundantly clear that an audit of financial statements does not relieve management or directors of their own responsibilities, and stress that the assurance an auditor gives cannot be absolute, they do at the same time provide that, in some aspects at least, the auditor has to be mindful of the economic decisions which users might take on the basis of the financial statements. Auditors’ exposure to liability will not be confined to the opinion set out in the audit

either orally or in writing. Answers given in response to direct questions posed by individual shareholders may well establish the required relationship of proximity, thereby increasing the potential exposure of the auditor. Any movement on auditors’ responsibilities which affected the duty of care would cast even more attention on the other highly relevant aspect of the common law on negligence, namely the rule on joint and several liability, which applies generally to actions for torts and civil wrongs. Where a person suffers loss as the result of tortious acts committed by two or more ‘several’ or ‘concurrent’ wrongdoers, then a plaintiff will be entitled to sue any or all of the wrongdoers for the full amount of the loss sustained. Accordingly, where a set of audited accounts contains misstatements due to fraud or management error, a plaintiff will have the choice of suing the company’s directors, the auditor and any other party who has been negligent in the case on a joint basis; alternatively, the plaintiff may choose to sue the auditor alone. This has led directly to auditors being singled out for attention for the perverse reason that they are subject to a high degree of regulation and carry a substantial amount of professional indemnity insurance. PROTECTING THE PLAINTIFF The virtue of the joint and several rule is that it maximises the likelihood that deserving plaintiffs will recover their losses. Without it, plaintiffs whose interests have been harmed by two parties might be worse off than if they had been harmed by only one. There is also the moral hazard argument that a negligent party would be in a better position in litigation if there was another negligent party who could shoulder the blame: in such circumstances the onus on the first party to do a thorough job might decrease accordingly. The counter-argument is that joint and several liability imposes a heavy, arguably unreasonable burden on a well-resourced



defendant to cover for mistakes made by other parties. The risk of one of the large audit firms failing as the result of a catastrophic damages claim is now widely accepted to be a major systemic risk to the capital markets. It is feared that this risk has been exacerbated by the financial crisis. The pervasive threat of litigation, it is claimed, leads to so-called defensive auditing, accusations of ‘boilerplate’ opinions and a reputation for the profession as aloof and conservative. Liability risk is also commonly cited as reinforcing the domination of the listed company audit market by the big firms. An additional ground for addressing the liability issue is therefore competition-related: to deal with the problem of the concentration of the listed company audit market in the hands of a small number of firms, and to encourage the involvement of smaller firms in higher-risk work. In fact, the argument for reform has been largely accepted and much remedial action has been taken in the recent past to try to protect auditors and as a consequence to stimulate market competition. Many countries now permit audit firms to incorporate, and so allow individual partners to protect their own personal assets should their firm collapse. In 2008, UK law changed to allow audit firms and their corporate clients to enter into liability limitation agreements, which amount to bilateral contracts that specify the limit of any negligence action a client company may bring against its auditor in respect of audit work. Some countries have long had statutory caps on the liability of auditors for negligent work they might be responsible for. Germany, for example, currently imposes a basic cap of €4m on audits of listed companies. The EU issued a formal recommendation to member states in 2008 to encourage them all to place limitations on liability for audit work. This followed a review which concluded that there was no evidence that limitation of liability, either by statutory caps or other means, had any detrimental effect on the quality of audit work. PROPORTIONATE LIABILITY Some common law jurisdictions have moved away from the joint and several liability rule altogether towards a system where financial responsibility is apportioned by reference to a defendant’s share of blame for loss caused – in other words, proportionate liability. Under this system, plaintiffs are expected to sue each wrongdoer who bears some responsibility for the loss they have suffered,


and each wrongdoer will be liable only for that share of a plaintiff’s loss that arises from their own negligence, as decided by a court. Recent developments in proportionate liability in two leading jurisdictions, Australia and the US, are described on the previous page. Reform in both countries was controversial. The same concerns over whether deserving plaintiffs should bear more of the risk associated with their claims have characterised the debate over the relative merits of proportionate versus joint and several liability wherever it has taken place, and will doubtless do so again. Ultimately, what is key to the whole debate about the future shape of the audit is whether reform is likely to maintain or enhance the value of audit in the eyes of shareholders and other stakeholders. Both sides have a

Accepting responsibility for

one’s own work is one thing – doing so for someone else’s is something quite different direct interest in achieving this outcome. The interest of shareholders is in obtaining a form of assurance which they think they need to protect their interests. Auditors for their part are aware that if they do not address the demands of the market in terms of range and quality of assurance, that failure will risk having a long-term impact on the market price they can charge for their services. As drivers of quality and professionalism, auditors must go on accepting responsibility for the work that they do. But accepting responsibility for one’s own work is one thing – doing so for someone else’s is something quite different. This point is especially relevant since audit, unlike other areas of professional advice, involves giving an opinion on a body of work that has been carried out by someone else. The special character of this situation means that, whatever its constituent elements, audit will always have inherent limitations and will never be able to offer a complete guarantee of a client’s financial health. While expanding the range of areas which are subject to an auditor’s attention might well satisfy the information and assurance requirements of stakeholders, reform would not work in practice if auditors felt they were thereby exposing themselves to unreasonable levels of liability. For this reason, the debate on the future role of the audit has to proceed in tandem with a debate on a reasonable and proportionate basis of liability.


Accounting for confidence Professor Michael Mainelli FCCA takes an alternative view of audit, arguing that accountants should learn from the world of science about measurement PG55 EDITION 03


B Professor Michael Mainelli FCCA FCSI is executive chairman and co-founder of thinktank Z/Yen. He is a professor of commerce at Gresham College in London and a visiting professor at the London School of Economics.

eginning a decade ago with the embarrassing failures of large firms boasting successful-looking financial statements, and continuing into the present with questions being asked about why problems at our large financial institutions weren’t spotted earlier, the time has come to rethink auditing. And in analysing what might be done, a little science couldn’t hurt. When people move from science to accounting, they are stunned to find that auditors do not practise measurement science. Accuracy and precision are at the heart of scientific measurement. Accuracy specifies how closely a stated value is to the actual value. Precision specifies how likely repeated measurements under unchanged conditions will produce the same results. A measurement system can be accurate but not precise, precise but not accurate, neither, or both. If it contains a systematic error, then

Which is worse, forcing

directors to specify a single number, such as a guesstimated mean, or asking them to specify the likely range of outcomes? increasing the sample size by measuring more often will make it more precise but not more accurate. Scientists view measurement as a process that produces a range, and they express those ranges using intervals. There is a big difference between point estimation and interval estimation. The former is about a single value, the latter is about a range. Auditors provide a point estimate, scientists an interval. Without digressing into the statistical detail of credible intervals and confidence intervals, we can say scientists express most measurements as X, with an interval. In a simple example assuming a normal distribution, you might be said to weigh 78kg ± 0.65kg. If +0.65 or – 0.65 are one standard deviation from the mean, then 68% of the times you measure your weight the scale will show a value between 77.35kg and 78.65kg. There are ways of expressing more complex distributions, but the key point is that scientists are trying to express the characteristics of a distribution, not a single point. Social scientists also use confidence levels to report interval estimates. In a poll of voting intentions, for example, pollsters might express the result as 40% of respondents intend to vote for a certain party. A 90% confidence interval for the proportion in the


whole population having the same intention on the survey date might be 37% to 43%. From the same data the pollster might also provide a 95% confidence interval, which might be 34% to 46%. What might a world of auditors using interval estimation with confidence levels look like? Well, the end result would be the presentation of major entries for the profit and loss, balance sheet and cashflow statements as distributions. For example, a profit figure might be stated as £83,120,000 ± £1,500,000. On a balance sheet, the value of freehold land might be stated as £150,000,000 ± £45,000,000, recognising the illiquidity of property holdings. Next to each value would be confirmation of the confidence level – for example, 95% confidence that another audit would produce a value within that range. Finally, there would be a picture, a histogram of the range, so people could see its shape. CONFIDENCE ACCOUNTING For want of a term that distinguishes the use of intervals and confidence levels from the use of points or discrete values, let’s use ‘confidence accounting’, a term used by several proponents of the shift to interval estimates such as the Long Finance Initiative. Confidence accounting simplifies discussions of which number to pick (the lower of cost or value, for example), because the range itself is expressed clearly. There are numerous examples of difficult single numbers in audits – think of assets in exploration, or environmental liabilities. For users, presentation would be easier to understand, with footnotes simplified or made redundant. Confidence accounting goes to the heart of the mark-to-market debate. Different instruments have different values for different entities. A hedge fund that has been caught out on a long-term instrument in the short term is different from a pension fund that can hold the instrument to maturity. Presenting a range of potential future valuations, informed by historic prices, is surely better than a marked‑to-the-market price at a particular valuation date. There is greater value in an audit that confirms a range of market values applicable to a specific business. Which is worse, forcing directors to specify a single number, such as a guesstimated mean, or asking them to specify their views of the likely range of outcomes? Some organisations will want to provide extremely wide ranges in their distributions. Where that reflects reality, so be it. In other cases, managers will hope that a wide range will remove some of the responsibility of


meeting a target. But consistently silly future estimates recorded in the financial accounts are there for investors to judge. Markets will price the value of tighter distribution ranges, and auditors will be able to sell the value of greater work to provide better disclosure.

Confidence accounting

goes to the heart of the mark-to-market debate Audit buyers have limited information on which to base choices, so they choose what others have chosen – an algorithm that over time spirals in on a few brands not competing on measured quality. Major audit firms assert quality, bragging that compliance has grown in burden and cost. Dispiritingly, an outsider cannot evaluate quality by analysing published audits. Under confidence accounting, external assessors could evaluate performance. Any major firm will have a number of client failures over a period, say the past decade, but are these within the bounds of their audited financial statements? If so, perhaps a good, or even too prudent, auditor. If not, perhaps a sloppy, or statistically unusual, auditor. WHAT WILL AUNT AGATHA MAKE OF IT? To a traditional point estimator, confidence accounting looks complicated. Many claim that the mythical Aunt Agatha will not understand. Yes, the profession will need to work on specifying standard measures and representations, but auditors should worry more about their ignorance of scientific measurement than about Aunt Agatha. Others will say these changes may lead to managers ‘gaming’ a new system. Perhaps, but managers are already gaming a system that provides too many get-outs based on the unfairness of reporting on single numbers. Others will invoke the ultimate clincher for the status quo: confidence accounting is against vested interests, doesn’t solve everything and might reduce the unmeasured quality of present practice. Yet reform will come, and better that it relies on science rather than more compliance. Work is needed: a commitment by the auditing establishment to reform, a restructuring of audit skills, and better communication to users of financial information. Auditors are taught that good financial information is accurate, complete, relevant, reliable and timely. Confidence accounting reflects the financial situation more accurately, provides more complete information, is more relevant to many users, allows reliability to be checked and takes better account of timing issues.



Lost in the narrative Narrative reporting risks suffocating users in detail. Deloitte’s Professor Isobel Sharp and ACCA’s Dr Afra Sajjad consider the issue from a CFO’s perspective


arrative reports were originally conceived to provide valuable business information in two forms. First, there was material of a non‑financial accounting nature that was not covered in the financial statements. Second, there were narrative explanations on the performance, position and (to a more limited extent) prospects for the business, which were based on the financial statements but written in a way more accessible to more people. However, increasingly encumbered by demands for more details, narrative reporting is now suffering from information overload and a box-ticking mentality. The global debate on the role and scope of narrative reporting has intensified as governments, regulators and businesses have agonised over the causes of the global financial crisis and what to do to prevent another. Few dispute that corporate reports should combine retrospective and prospective overviews of the business model and integrate disclosure of an organisation’s strategy and objectives, business sustainability, governance and risk, along with information on its key


The banking crisis sparked protests across the globe, including this one last year in New York. It also intensified debate over the role of narrative reporting.

performance indicators. The issue is that the present detailed requirements are far from optimal in assisting businesses to provide a coherent report covering the major points and thus to tell their story. DEBATING THE FUTURE To try and make this happen, a number of consultations and discussions on the future of corporate reporting are taking place. For example, the UK government has consulted on the future of narrative reporting, including the possible reinstatement of a compulsory Operating and Financial Review (OFR) for companies. Last year the International Accounting Standards Board (IASB) received over 100 comments on its proposals for a voluntary framework to help businesses prepare and present narrative reports. The International Financial Reporting Standards (IFRS) practice statement on management commentary was issued in December 2010. And the European Commission is currently seeking opinions on how to achieve clarity, understandability and transparency in corporate governance practices – issues


encapsulated by the moves towards integrated reporting, which is explored in articles in this journal starting on page 8. In the world of corporate reporting there is often a heavy focus on investors’ views, with preparers relegated to providing information on the practicalities of proposals. Preparers’ views are often dismissed as self-interested, biased to communicating less or good news only. But preparers want to engage with investors and other stakeholders, and ensure that listed companies inform the markets of significant developments as soon as possible. It is the preparers who understand best what is happening in the business and so are in the best position to decide what should be communicated to shareholders. HITTING THE NOTES It is therefore vital that the views of the preparers of narrative reports help define the debate, which is why a recent ACCA/ Deloitte survey, Hitting the Notes But What’s the Tune?, sought the views of finance heads. It asked 231 CFOs, group finance directors and equivalents in publicly accountable companies across nine diverse reporting environments (Australia, China, Kenya, Malaysia, Singapore, Switzerland, the UAE, the UK and the US) to identify the drivers of narrative reporting, the areas most valuable to users, and how reports could be improved. The survey, undertaken between April and June 2010, reveals that narrative reporting in 51% of businesses is driven by the finance function. However, while it identifies shareholders as the most important perceived audience (88%), followed by regulators (67%), it is also clear that the requirements of both are seen as equally important (82% and 83% respectively). But if both shareholder and compliance requirements drive narrative reporting, are those requirements compatible? And if not, which are given preference? Finance leaders believe that shareholders want explanations of financial results and position (87%), disclosure of the most important risks and their management (67%), plans and prospects (64%), a description of the business model (60%), and key performance indicators (58%). Yet the top three actual disclosures in reports are explanations of the company’s financial results and financial position, corporate governance policies and procedures, and the directors’ remuneration report. In other words, while shareholders may indeed be the key perceived audience, the form and shape of narrative reporting is actually determined by the legal and regulatory requirements in the different jurisdictions,

Professor Isobel Sharp CBE is a partner at Deloitte, where she specialises in corporate reporting and governance. She was president of the Institute of Chartered Accountants of Scotland for 2007/08, is a visiting professor at the University of Edinburgh Business School, and is a board member of the Independent Parliamentary Standards Authority.

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. She has a doctorate in financial reporting from Dublin City University, and her research interests include corporate governance, ethics and Islamic finance.

just as it is for the financial statements. Regulators need to evaluate whether regulation enhances responsibility in reporting. It could be that compliance with the detailed legal requirements merely adds to complexity for users of reports, obscuring meaningful information about the business model in a mountain of detail. If better, rather than more, disclosure is the way forward, the question is how the needs of shareholders and regulators can be satisfactorily integrated in one report. A WAY FORWARD Many finance leaders think that the usefulness of narrative reports could be enhanced by the inclusion of an external auditor opinion (58%), more emphasis on forward-looking information (57%), and guidance from IASB (51%). But the strongest response on how to improve current reports came from the 65% who would prefer a reporting environment with more discretion and less regulation. It is understandable that, as a result of the financial crisis, regulators want to ensure there is greater transparency and accountability in reporting. But this vision could be better realised by nurturing a corporate reporting culture founded on trust between reporters, regulators and users, and shared responsibility rather than box-ticking. By engaging more with shareholders and preparers, regulators could align disclosure requirements with shareholders’ requirements or make use of the corporate report mechanism. The way forward may lie in integrating the needs of users and regulators with preparers’ perspectives. Narrative reports could be built on high-level frameworks and principles while giving preparers discretion to provide the details needed by key audiences, and rewarding transparency and accountability. The economic slowdown may well be a time for mapping the future shape of narrative reporting. Whatever the outcome, the current position is unsustainable. The ACCA/Deloitte report likens the situation to the comedy sketch where the pianist André Previn meets the comedian Eric Morecambe. Previn plays a classical piece beautifully, followed by Morecambe giving a discordant rendition of the same work. Accused by Previn of hitting the wrong notes, Morecambe ripostes that he did indeed play all the right notes, just not necessarily in the right order. For narrative reports to be music rather than so much noise, the current score will have to be revised. The report Hitting the Notes But What’s the Tune? can be viewed at www.accaglobal. com/hitting_the_notes



Preparers’ perspectives Risper Alaro Mukoto FCCA

Finance and human resource manager, Centum Investment Company, Kenya ‘While the regulator demands specific disclosures which focus on corporate governance and the timely submission of information, user needs may go significantly beyond what a company is currently required to report.’

Ron Dissinger

CFO, Kellogg Company, US ‘Regulators should be sensitive to investor needs and consider them when deciding what is mandated within narrative reporting.’

Eamon Byrne FCCA

Chief financial officer and company secretary, Exco Resources, Australia ‘It is difficult. You want the necessary discretion to say what you can to create good, meaningful information for your stakeholders and you also want some standard structure to work to, if only for comfort.’

Faizatul Akmar FCCA CFO, Time dotCom, Malaysia

‘We need to balance the shareholders’ requirements and perception about their reaction to disclosures. Balancing regulatory requirements and giving information to shareholders for making decisions will be good, but how do we do it?’

Amos Ng FCCA

Chief financial officer, Straco Corporation, Singapore ‘Regulators are there to serve the needs of stakeholders. Achieving compliance with the laws and rules governing narrative reporting lends credibility and reliability to your annual reports. If things were left entirely to the preparer, this would lead to varying standards.’

Ramanathan Narayana

Financial controller, Dubai Insurance Company, UAE ‘To protect the policyholder and the stakeholders, the regulatory authorities in most of the countries want more disclosures for enabling the common man and the shareholder to understand the company better.’

Eric Hutchinson FCCA

CFO, Spirent Communications, UK ‘I see the regulatory requirements of narrative reporting moderating or enforcing certain things which need to be communicated and generally imposing a balance that would not otherwise be there.’ PG60 EDITION 03


Finding a financial lifeline Constrained access to finance leaves small businesses at risk from recovery just as much as from recession, a global survey of 1,750 SMEs has found


worryingly high number of small businesses fear they lack the cash reserves to survive another economic downturn, according to new research conducted by Forbes Insights in association with ACCA, the Certified General Accountants Association of Canada (CGA-Canada) and CNDCEC, the professional body for certified accountants in Italy. The study surveyed more than 1,750 small and medium-sized enterprises (SMEs) in Canada, China, Italy, Singapore, South Africa and the UK; 30% employed fewer than 10

If they want to obtain credit,

businesses need to improve their cash positions first and foremost people, 39% had between 10 and 49 staff, and 31% had between 50 and 250 staff. While most SMEs believe the worst of the recession has passed, between 31% and 54% in each country think they do not have sufficient cash reserves to survive another

financial crisis. That’s a finding that could play out as catastrophe for many SMEs. Having tapped into their cash reserves to help weather the recession, a significant number are now concerned about financing their working capital. This anxiety is most pronounced in China, where 50% of SMEs say they don’t have adequate cash reserves. The Chinese banking system is not as well aligned to smaller-business lending as those of other countries, and the high growth rates experienced by many companies here could be straining their cashflow. Businesses must remain alert. Economic recovery is associated with more, rather than less, pressure on liquidity, and SMEs risk committing to more orders than their working capital can support. They could end up unable to refinance their short-term liabilities. CASH POSITION COMES FIRST Much of the demand for small business loans is driven by liquidity worries. Those with poor cash positions are most likely to apply for credit, but also least likely to get it, since they are seen as the poorest credit risks. In fact, according to the survey data, this ‘cash effect’



is the strongest driver of approval rates. The survey message is that if they want to obtain credit, businesses need to improve their cash positions first and foremost. While 23% of the SMEs surveyed say their ability to secure financing has improved over the past year, almost as many (20%) say it has got worse. Looking ahead, 39% of SMEs think their ability to secure financing will improve, while 11% anticipate it deteriorating.

Those businesses that

put a high value on professional or expert advisers have performed better during the recession One problem is that lenders tend to channel credit towards larger businesses or those with substantial assets. The worry for lenders is not risk as such, but risks they can’t assess. Those SMEs that cannot provide any security, formal businesses plans, cashflow projections and other relevant information, are unlikely to have much success in obtaining funds. To help SMEs in the credit market, the survey report recommends that providers of capital be clear about their lending and investment criteria and consider the need for security or personal guarantees flexibly, case by case. It also calls on business advisers and support agencies to prioritise improving SMEs’ creditand investment-readiness by explaining the information needs of capital providers and highlighting other sources of finance, such as business angels and venture capitalists. SHIFT IN FUNDING EXPECTATIONS Trade credit appears to be the easiest type of credit for SMEs to obtain; unsecured bank loans appear to be the hardest. Business angel investment is the hardest type of equity to obtain; retained earnings are the easiest (provided the business has earnings to reinvest). It appears hardest for SMEs to obtain credit for customer financing – lenders generally don’t want to take on customer credit risk. On the flip side, it appears easiest for SMEs to obtain credit for expanding capacity. With commercial providers of finance reluctant to finance working capital, assume customer credit risks or refinance debt, the weight of funding expectation has shifted to shareholders and trade creditors. The importance of trade credit as a financing source is critical, and the report recommends that governments acknowledge the fact. They also need to ensure that credit information is


widely available and that creditors have access to reasonable means of enforcing claims. The survey reveals that SMEs that sell primarily to other businesses are facing more intense cashflow issues than those that sell primarily to consumers. Among business-tobusiness (B2B) SMEs, 44% say that slowpaying and non-paying customers are their biggest cashflow issue, compared with 27% for business-to-consumer SMEs. B2B SMEs say their business customers are now far more cost-conscious, and demanding higher discounts and better terms. Yet some customers can act as a valuable source of financing for SMEs. The survey report recommends that SMEs explore supply chain finance solutions, whereby large customers with easier access to credit can finance their small suppliers by factoring invoices on their behalf through an intermediary. It also calls on governments to consider similar supplier finance options. Strengthening government loan guarantee schemes for small businesses would also offer solutions where sufficient collateral cannot be furnished. The main recommendation for governments, however, is that they provide early and reliable commitments on tax, spending, monetary policy and regulation in a bid to reduce uncertainty. Those businesses that use external advice and place a premium on both professional competence and personal trust have performed better, according to the survey. SMEs that seek advice on these terms (whether from accountants, or otherwise) have experienced stronger turnover growth than their counterparts and been more successful in raising capital. One of the effects of the recession has been to make SMEs better businesses, the survey reveals, and they now take on risk only where they can have control. Although the recession has led many to seek to rebuild liquidity before embarking on growth plans, small businesses have not become risk-averse. Many still see themselves as risk-takers by nature and, given the tools, equipped to handle whatever challenges come their way. RECOVERY POSITION Nevertheless, the survey shows that SMEs are turning inward, looking to put their financial houses in order so they can take advantage of economic recovery when it comes – as they mostly believe it will – this year. Well over half (58%) of SMEs expect revenue to be higher in 2011, and only 8% expect it to fall. A similar number (54%) expect profitability to be higher, with 10% anticipating a decline. This cautious optimism shown by SMEs in all six countries


‘Although there are signs of

Anthony Ariganello, president and CEO of CGA-Canada

economic recovery, the SME sector is not out of the woods yet. We believe it is vitally important to understand the issues faced by this sector. It is clear there are things to be done by policymakers, by business advisers, by financial institutions and by the businesses themselves.’

‘Professionals can play a crucial role in

Giancarlo Attolini, board member of Italy’s CNDCEC

the current financial crisis, supporting SMEs in their decisions concerning financing decisions and business planning. Good budgeting of financial resources and the ability to secure third-party capital are key in surviving the crisis. Financing needs to change, based on enterprises’ needs and geographical location.’

‘It has been a challenging two years

Helen Brand, ACCA chief executive

for small businesses but they have emerged, on the whole, somewhat wiser, more in control and cautiously optimistic. However, the recovery, such as it is, presents its own unique risks. Having the tools, the support and the confidence to navigate these risks can make all the difference between continued growth and stagnation for small businesses.’

surveyed has underpinned a recovery in appetite for risk and investment. However, SMEs are now taking more manageable or controllable risks. To support this stance, they will increasingly need to plan for multiple contingencies and consider macroeconomic factors such as growth shocks, interest rate rises, exchange rate volatility in a formal way when developing plans and policies. Investing in management information helps SMEs control risk. External accountants as well as accountants in business should be ready to support their clients’ contingency planning by identifying, validating and challenging key assumptions in business planning, valuations and assessment of financing needs. SMEs that take professional advice tend to be more confident about their chances of survival as a result, ensuring that they have fewer urgent financing needs and better access to credit. The survey report recommends that capital providers point out the value of

professional advice to their SME clients and consider directing unsuccessful applicants for loans to professional advisers. Having survived the recession, many SME owners and principals feel they are smarter about running their businesses today than they were prior to the recession. They have had to make some tough decisions to ensure the survival of their businesses, but those choices have made them stronger. The outlook is improving, and they see the next 12 months as potentially generating the revenue and profits they need to get back on their feet. However, should the economic recovery stall, many fear they could be wiped out. Peter Kernan, journalist The Small and Medium-Sized Enterprises: Rebuilding a Foundation for Post-Recovery Growth report can be found at



Kenya’s digital cash revolution Alnoor Amlani FCCA looks at the runaway success of mobile money in Kenya and its prospects in the rest of the world – developed as well as developing

W Alnoor Amlani is a writer and management consultant. After completing the ACCA Qualification, he spent three years writing for Kenya’s Executive magazine.


hen the British arrived in Kenya in the 19th century they introduced a formal currency for the very first time – the Indian rupee. Before then, most trade was conducted by barter, with rare cowrie shells, slaves and ivory used as mediums of exchange. But Kenya’s coastal people, who had been trading with Indian and Arab sailing dhows for centuries, already understood the concept of money. They called it ‘pesa’, from the Hindi word ‘paisa’, which means ‘money’. The coins had a hole in the centre, so they could be threaded onto a cord and carried conveniently. Today, Kenya has pioneered a form of digital cash and is rolling it out all over the developing world. Some 58% of Kenya’s 19 million mobile phone users now access

mobile banking services, leapfrogging most of the developed world in the evolution of money. The difference it makes to poor people is impossible to measure objectively, but it is nothing short of revolutionary. TECHNOLOGY FOR THE POOR With a basic mobile phone and an identity card, and no upfront costs, anyone can set up a mobile wallet, deposit Kenyan currency in it, carry it securely, receive money from and send it to dependants in far-flung places, pay school fees, settle utility bills and even apply for, receive and repay loans. For most Kenyans who are poor and considered unbankable by traditional bricks-and-mortar banking, there is the added incentive that costs per transaction are a small fraction of the charges imposed


by traditional banking services and there are no monthly subscriptions (ie no ledger fees). In the beginning, city workers used the technology to send money to their relatives in remote villages where there were no banks. Now there are mobile money offerings for shopping, saving, borrowing, insurance, foreign exchange, and stocks and shares – and many more are planned. Vodafone, in partnership with Safaricom, the largest mobile phone operator in Kenya, pioneered mobile money in Kenya under the brand name M-Pesa. Between 2004 and 2006, it piloted under a single microfinance company, Faulu Kenya. Anne Kimari, head of finance at Faulu, explains that the original idea was to use the mobile phone as a tool to promote microfinance uptake between its members. But Vodafone soon realised its potential and launched the service nationally in 2007. She calls it a ‘technology for the wananchi’. ‘Wananchi’ is Swahili for ‘citizens’. Zain, the country’s second largest national operator and currently rebranding itself as Airtel after the Indian operator bought it in 2010, quickly introduced its own Zap service. And Orange Telkom recently introduced a third service, giving Kenyans a variety of options with different credit limits, accessibility and service coverage. Airtel’s service operates in Uganda and Tanzania too, competing with MTN from South Africa, which operates its own mobile wallet system across 13 countries in Africa. ELECTRIC TRANSACTION SPEEDS The effect of mobile money on small business in the region can best be described as electric. Combining the convenience, speed, computing power and reach of the mobile phone with the network-based lending of microfinance has let small businesses conduct more transactions and make more informed decisions. They can do so faster, easier and with the assurance that their transactions are documented, verifiable and secure. The financial information is fed back to the microfinance providers, which can make more informed loans as a result, and expand their portfolios using the mobile money platform. Big business hasn’t been left out either. Staff who do not have bank accounts can now avoid queuing for their cash at the end of the month and opt for mobile money credits instead. The countryside, towns and cities are dotted with mobile money agents converting between digital currency and cash. Their tools are simple: a basic mobile phone, a secure cashbox, a digital cash float and a transaction book that the customer and agent sign.

‘The effect of mobile money on small business in the region can best be described as electric’ BANKS CATCHING UP According to a global survey by Netherlands technology firm Fundtech and research firm Aite Group, mobile cash transfers in Kenya now stand at three billion Kenya shillings (£24m) a day; that amounts to a staggering £8.8bn a year – a great deal more than small change for a developing country. No wonder the traditional banks feel left out. Most of this business is not coming their way. Indeed, they have the feeling that the business is going away from them. Last year Safaricom partnered with Equity Bank to offer a mobile bank account. And Zain partnered with Citigroup and Standard Chartered to offer a package of services. Kenya may be ahead in the digital cash revolution, but the rest of Africa and the developing world is not far behind. Safaricom has already licensed M-Pesa to Vodacom in Tanzania and Roshan in Afghanistan. Online community organisation Mobile Money Exchange lists 100 live deployments of mobile money technology in places such as Somalia, the Democratic Republic of Congo, Malawi, Niger, Pakistan and Cambodia, with 93 planned deployments in the next few years. And this begs the question... CAN IT WORK IN THE DEVELOPED WORLD? According to the International Finance Corporation Mobile Money Summit 2010, over the next two years the number of people with access to a mobile phone but not to traditional financial services is expected to grow from one billion to 1.7 billion, and mobile network operators are poised to earn $7.8bn in direct and indirect revenues from more than 350 million clients. For those in the developed world who already have easy access to digital cash from computers that are widespread and more secure than mobile phones, this may not sound like a killer technology. But for the poor and disadvantaged of the same developed world, it’s a different matter. Mobile money is a technically and financially proven technology that offers real benefits to those people who live in developing world conditions within the developed world. For the network operator prepared to act on this, there is an incredible business opportunity to exploit.



Holding governments to account International Public Sector Accounting Standards Board chair Andreas Bergmann on plans for a global public sector accounting framework




he recent deterioration in the fiscal circumstances of governments has brought to light as never before the need for better financial reporting by governments globally, as well as the need for improvements in the management of public sector resources. We are all affected by a government’s financial management decisions, and strong financial reporting has the potential to improve decisionmaking in the public sector as well as to make government more accountable to its citizens. The International Public Sector Accounting Standards Board (IPSASB) is an independent standard-setting board that is supported by the International Federation of Accountants (IFAC). When it initiated its standard setters programme in 1997, the goal was to develop a credible core set of accrual‑based International Public Sector Accounting Standards (IPSAS). IPSAS could be directly adopted by public sector entities worldwide or treated as a sound basis for adaptation through national standards. Since 1997, the IPSASB has developed and issued a suite of 31 accrual standards – plus a cash-basis standard for countries developing towards full accrual accounting. Accrual‑based accounting systems recognise income when it is earned

Many governments

operate on a cash basis and do not account for significant liability items such as pensions and major investments in physical assets such as infrastructure



The goal is to develop concepts, definitions and principles that respond to the objectives, environments and circumstances of governments and other public sector entities and, therefore, are appropriate to guide the development of International Public Sector Accounting Standards JOIN IN IPSASB is seeking feedback to help it develop public sector financial reporting concepts. The deadline for comments is 15 June 2011 for all three documents covering the first three phases (see opposite). Go to PublicSector/ ExposureDrafts.php


Andreas Bergmann became a public member of the International Public Sector Accounting Standards Board in 2006. He is a professor and director at the Institute of Public Management at Zurich University of Applied Sciences, and is scientific adviser for the recent public sector accounting reforms in Switzerland.

and expenses when they are incurred, rather than when they are received or paid. Many governments operate on a cash basis and do not account for significant liability items such as public sector pensions and major investments in physical assets such as infrastructure. The IPSASB encourages public sector entities to adopt the accrual basis of accounting, which will not only improve their financial management, but will also reduce the opportunity for incidents of financial fraud, as well as provide a clearer and more comprehensive snapshot of a government’s financial viability and health. The IPSAS suite includes several standards that were developed to address critical public sector issues – such as accounting for revenue from non-exchange transactions, reporting budget information, and disclosures about the general government sector. However, the majority of IPSAS are based on International Financial Reporting Standards (IFRS), with changes incorporated to address issues specific to the public sector. In particular, since the International Accounting Standards Board (IASB) is focusing more narrowly on financial investors, IPSASB recognises the need to develop its own conceptual framework. It is a framework that clearly and comprehensively addresses the concepts that underpin public sector financial reporting. The purpose of the IPSASB’s public sector conceptual framework project is to give a structure to the process of creating financial reporting standards, and to ensure that standards are based on fundamental principles. The goal is to develop concepts, definitions and principles that respond to the objectives, environments and circumstances of governments and other public sector entities and, therefore, are appropriate to guide the development of IPSAS. The project is a collaborative effort, to which a number of national standard setters have contributed significant and invaluable resources. It recognises the diversity of social and cultural traditions, and the different forms of government and service delivery mechanisms that exist in the many jurisdictions that may end up adopting IPSAS. Work already done by the IASB is taken into consideration, as far as it is already available and applicable to the public sector. The development of a public sector conceptual framework for general purpose financial reporting is the IPSASB’s highest priority for the next two years. Our very challenging goal is to complete all four phases of the public sector conceptual framework (described opposite) by the first half of 2013.


Conceptual framework phases The public sector conceptual framework project is divided into four phases. Each starts with board consideration of key issues, followed by a consultation paper. The feedback to the consultation will help mould the exposure draft, comments on which will help in developing the final version of the framework. All four phases have begun, with phase one being the most advanced. Phase one An exposure draft – Objectives and Users, Scope, Qualitative Characteristics and Reporting Entity – was issued in December 2010. It covers: concepts related to the objectives and users of public sector general purpose financial reports paper scope of financial reporting qualitative characteristics of information in general purpose financial reports reporting entity and group reporting entity. One key IPSASB view, as expressed in the exposure draft, is that the scope of financial reporting in the public sector needs to go beyond general purpose financial statements to encompass broader types of reporting. For example, in the public sector, reporting on the long-term sustainability of public finances is of crucial importance.

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Phase three A consultation paper on measurement was issued in December 2010 exploring the measurement bases that may validly be adopted for the elements that are recognised in general purpose financial statements in the public sector. The term ‘measurement basis’ refers to the concept used in determining the amount at which an asset, liability, revenue, or expense is stated in the general purpose financial statements. The consultation paper looks at how the measurement bases may be classified according to whether they reflect historical or current attributes of an asset or liability, represent an entry or an exit perspective, and reflect a market- or entity-specific perspective. It also considers the qualitative characteristics of information included in general purpose financial reports.

Phase two This part of the framework covers elements and recognition in financial statements. A consultation paper – Elements of Financial Reporting – was issued in December 2010. Elements are the basic building blocks of financial statements needed to meet the information needs of the users of these financial reports. The consultation addresses key questions: What are assets and liabilities in public sector financial statements? What are revenues and expenses in public sector financial statements? Are there other elements needed in public sector financial statements? What are the recognition criteria for public sector financial statements? How should IPSAS approach reporting public sector financial performance?

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Phase four Drafting of a consultation paper on presentation and disclosure is already in progress. The IPSASB has discussed issues, and the draft paper is expected to be considered at the March 2011 board meeting.



What are governments doing? With public sector approaches to sustainability under growing scrutiny, ACCA’s Gillian Fawcett considers how governments are tackling reporting


axpayers and citizens want to know what national governments are doing about today’s increasing sustainability challenges. Sustainability reports give national governments the chance to show how they are dealing with the social, economic and environmental challenges ahead. Sustainability reporting and corporate social responsibility activity has grown rapidly in the private sector and is slowly expanding into public sector reporting. However, there are clear differences between the two sectors, which may affect the organisational approach taken to sustainability reporting. A recent ACCA publication (Sustainability Reporting Matters: What are National Governments Doing about It?) highlights the key differences, which include the private sector having financial


Stepping up to the sustainability plate: to ease traffic congestion and pollution in Beijing, the city recently put a cap on the number of new car licence plates issued. The first lottery to distribute the new plates was hugely oversubscribed.

return as its primary aim while the public sector puts social benefit first. While sustainability reports typically include social and economic elements, the public sector has focused on environmental issues. Most governments rely on the 1987 UN definition of sustainable development as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. Arguably, the UN definition is so broad and vague that it is possible to prioritise social and economic considerations while still claiming to care about the environment. There is widespread interest in a global standard for sustainability reporting, but a key barrier is the difficulty of achieving a meaningful consensus on what sustainability means.


The ACCA report presents five case studies (Canada, Mexico, Philippines, Sweden and the UK) that illustrate the varying extent and focus of sustainability reporting. A range of initiatives exist in the five countries, mainly based on national sustainable development strategies. Many of the five provide data on indicators and targets against these strategies, and some also integrate environmental data into their national accounts. There is a range of reporting frameworks through which national governments publish their progress on sustainability. Adoption of these frameworks largely depends on the willingness and ability of national governments to report in this way. The ACCA report highlights the following differences between the five countries: Most understand sustainability in the light of the 1987 UN definition, but the emphasis is different between countries and has changed over time. Some have integrated sustainability into a single, mainstream government strategy, while others have a standalone sustainable development strategy. The countries enforce and promote their national sustainable development strategies in different ways. Some require lower tiers of government to develop plans and actions flowing from the national level; others require state-owned corporations to produce sustainability reports. Two of the countries (Mexico and Sweden) emphasise the international dimensions and effects of sustainable development as well as developing national frameworks.

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GUIDANCE AND FRAMEWORKS In 2005, the Global Reporting Initiative (GRI) launched a public agencies sector supplement to its reporting framework. In the same year the Centre for Public Agency Sustainability Reporting, in partnership with Australian government organisations, started to promote sustainability practices in public agencies through reporting. A recent GRI study concluded that GRI reporting in the public sector is still in its infancy. Different parts of the world have different priorities: congestion may be an issue in London, but it is less so in Canberra. There is also a difference in emphasis between types of public sector organisation: a local government may report on the state of its area, but such reporting may not be so relevant for schools. Any sustainability reporting framework should be appropriate to its local and organisational circumstances. There are also the effects of action beyond geographical borders to be

taken into account. For example, rising sea levels will have effects that reach far beyond coasts and islands. Drivers may also be different. Governments in receipt of aid, for example, may be required to account for their sustainability performance. And public sector organisations may often be reporting to another body on their sustainability performance, while those receiving reports will scrutinise assurance and audit processes for sustainability. A KEY ROLE FOR ACCOUNTANTS ACCA believes there is a clear role for finance professionals to play in sustainability reporting and in influencing how governments report on such issues. Finance professionals have core skills that are key to developing more robust, consistent, effective and useful sustainability reports for governments and the public sector. Accountants are well placed to understand the regulatory environment, to manage risk and to develop efficient frameworks to measure information that can be monetised. Sustainability reporting provides a number of challenges and opportunities for accountants that make professional development of particular importance. Effective sustainability reporting involves a deeper understanding of the interdependence of social, environmental and economic issues; it demands long-term and future-focused accounting practices; and it requires accountants to work alongside other professionals. The ACCA report raises a number of areas for debate, such as measurement models, frameworks, and the design of robust and consistent measures that reflect public priorities. ACCA believes sustainability will require fresh thinking in terms of balancing future and present costs and benefits across a range of measures and outcomes. The newly established International Integrated Reporting Committee (IIRC) is a welcome move. The IIRC is likely to be the next frontier for accountants if an integrated reporting framework to cover sustainability issues is adopted with a holistic approach to reporting on social, environmental and wider economic issues. It will be critical for the IIRC to take on board how its guidance and frameworks can apply to governments and the public sector. The sustainability challenges that confront modern-day governments are unprecedented. Effective sustainability reporting will be key to dealing positively with them. Sustainability Reporting Matters: What are National Governments Doing about It? is available at



On patrol for ethical conduct Can auditing uncover poor ethical standards? ACCA’s Gillian Fawcett believes the private sector can learn from public sector ethical governance audits


igh-profile failures in both the corporate and public sectors are often underpinned by poor standards of behaviour, weak cultures and even corruption. The recent banking crisis has yet again brought into sharp focus worries about poor ethical governance and standards of behaviour. But could audit help to detect poor governance and ethical standards in organisations at an early stage? The narrow terms of reference for auditing in


the private sector act as a barrier to auditing more widely for ethical governance. The costs and threats of litigation pose further significant barriers, and questions remain about whether it is possible to audit for ethical governance and whether an ethical mindset can be measured. It is also questionable whether an audit can be constructed to focus on prevention rather than cure. However, the private sector could learn some valuable lessons from public sector auditing


The benefits of the ethical governance audit are

that it is quick and easy to implement, it gives standard data for governors and staff at all levels, and it allows comparisons to be made between different organisations in England, which has been leading the way. So what lessons can the public sector give on auditing for ethical governance? Ethical audits have been performed across organisations in the public sector over a number of years. They largely originated in local government but have also subsequently been undertaken by health, fire, police and charitable bodies. They have manifested themselves in many guises such as tailored ethical governance diagnostics, organisational performance assessments, public interest reports and corporate governance inspections.

Police forces and other governmentrun services such as fire and health have carried out ethical governance audits following their introduction by local authorities.

PREVENTION, NOT CURE It is all too easy to identify the behaviours and factors that contribute to corporate failure after the event. With this in mind the Improvement and Development Agency (IDEA), conduct body Standards for England and the Audit Commission (England) have developed an ethical governance audit which combines and takes account of reliable hard data such as systems and processes and soft data such as leadership and cultural attributes. The overriding purpose of the ethical audit is to provide the auditor with a rounded assessment on organisational performance as a whole. So how does it work? The ethical audit includes a number of compliance and qualitative tests. At a basic level it tests how well an organisation meets specific standards, legislative and regulatory requirements such as whether it has a code of ethical conduct, whistleblowing arrangements, registers of interests and hospitality. At the next level it assesses organisational processes – for example, the effectiveness and transparency of the decision-making process. Outcomes are also considered – for example, numbers of complaints received and numbers upheld. Behaviour is also taken into account and captured through qualitative data. The ethical audit has both diagnostic and development aspects. It includes a diagnostic questionnaire that tests knowledge and understanding on 150 items that affect the ethical health of an organisation and is directed at both governors and those who are governed. Originally applied in local government, the model has been adapted and applied more widely – for example, to health bodies and universities.

The sort of questions asked of governors by the diagnostic questionnaire include: How clear are you about the values of your organisation? To what extent does the governing body reinforce and promote the values of the organisation? How confident are you that those values are appropriate to achieving the organisation’s objectives? How effective are the arrangements for ensuing good standards of behaviour by the governing body and staff? How clear are you about the strategic outcomes your institution is trying to achieve? How confident are you that the governing body systematically monitors and measures institutional performance? The benefits of the ethical governance audit are that it is quick and easy to implement, it gives standard data for governors and staff at all levels, and it allows comparisons to be made between different organisations. It also highlights strengths as well as weaknesses – an organisation may score highly on knowledge and understanding, but less well on behavioural issues such as bullying. By May 2010, over 100 local authorities had undertaken an ethical audit, as had a number of health bodies and universities, and common findings emerged. For example, most organisations showed a positive approach to promoting positive ethical governance. In local government, local politicians were far more likely than officers to think that communication between them was open and they trusted each other. Officers were less clear about their own ethical responsibilities while a third of locally elected members were unaware of whistleblowing policies. The ethical governance audit is a valuable assessment tool and has been a key influence on auditors’ judgments about governance and organisational performance. As an audit approach it is efficient and provides a catalyst for organisational change. The overriding question for private sector auditors to mull over is whether ethical audit is cost-effective for both auditor and client. It certainly provides greater audit assurance and delivers benefits for the client, including a broader commentary on organisational performance.

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Under construction Good quality financial infrastructures are as essential to the development of emerging economies as roads and railways


he development of emerging economies can be most visible when the infrastructure begins to take shape – roads and railways built to allow easy transportation, cables laid for effective communications, pipelines dug to carry water and electricity. This is the basic infrastructure ‘plumbing’ needed for any emerging economy and is the physical manifestation of development. And these days, great efforts are made to ensure that the roads don’t just peter out, that the pipelines get supplies to where they are needed, and that the communications connect the right people at the right time. Developing robust governance and effective financial reporting in emerging economies is analogous to this physical infrastructure. If the resources invested in putting the plumbing in place cannot be accounted for, then what will stop the roads going nowhere, the energy disappearing, the communications breaking down? For those investing in private businesses in these economies, the necessary corporate reporting plumbing is vital to ensure an acceptably high level of assurance. FIT FOR PURPOSE For accountants this means the institutions, the standards and the people need to be in place, functioning and fit for purpose. This has become all the more important in the wake of the recent global financial crisis. It is an issue that has been grasped by a number of international bodies and agencies. Take the United Nations Conference on Trade and Development (UNCTAD). It believes that for a market economy to function, highquality corporate reporting is essential. It is working to create a framework that can be adopted in emerging economies to ensure the infrastructure is in place and has no leaks. This has not been a sudden conversion. For more than 20 years, through the work of its Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR), UNCTAD has been pushing for the harmonisation of corporate reporting. This, it believes, will assist developing countries and economies in transition to meet international requirements and, most importantly, facilitate investment. After all, the cost of capital rises as a result of risk, and risk can be reduced by means of robust corporate reporting.


But the road to high-quality reporting can be difficult to navigate, which is why organisations such as UNCTAD and international bodies such as the International Federation of Accountants (IFAC) and ACCA, place such strong emphasis on capacity building. Russell Guthrie, IFAC’s executive director – quality and member relations, says: ‘The accountancy profession and high-quality financial reporting have a direct impact on economic growth and development. Credible and reliable financial information is a prerequisite for many social and economic benefits, including attracting foreign direct investment, supporting the SME sector (which can account for close to two-thirds of a country’s GDP), improving the delivery of public services, and enhancing transparency and accountability. ‘In emerging economies, the formal accountancy profession, as represented by professional accountancy organisations (PAOs) may be quite weak or even non-existent – so capacity-building is necessary to build and support these organisations. IFAC – often in partnership with regional organisations, the donor community, governments and private sector bodies – helps emerging economies build the necessary infrastructures. Through our resources, support and initiatives, countries are often able to overcome the challenges of lack of awareness, PAO weakness and capacity.’ Paul Hurks RA, director – international accountancy education and development of Dutch accountancy institute Royal NIVRA, comments that this sort of development work takes considerable time and patience. ‘My experience in accountancy profession development in developing nations is that it is a long-term effort. In developing nations there is often a lack of awareness of the value of audit and accountancy services in the country, as well as weak PAOs. It is necessary to break this vicious circle.’ But where this happens there are major benefits. Hurks comments: ‘Where the accountancy profession shows improvement there is a basis for development of the total financial infrastructure, as the level of accountability and transparency has increased. And there we find the basis of capacity building in a more holistic approach that will enhance


the country’s reputation and position for international markets and investors.’ Building an accountancy infrastructure is a complex process because it is part of an economy’s legal and regulatory system. It needs to be attuned to the interests of many stakeholders and the availability of financial, educational and human resources. Capacity building helps reinforce proper legal frameworks and institutional arrangements. It is concerned with developing and upgrading certain skills, competencies and performance. And it is also about enhancing the capacity of individuals, groups or institutions that are to carry out corporate reporting. ‘This is one of the key components for reforming the global financial architecture,’ says Tatiana Krylova, UNCTAD’s head of enterprise development. ‘Countries are looking into this seriously, but to do it they really need the institutional and technical capacity.’ With this in mind, UNCTAD is busy developing a comprehensive framework to act as a blueprint for economies seeking to build the capacity to deliver high-quality corporate reporting. This process is often accompanied by a wider drive for economic acceptability. Countries seeking

Route to a durable infrastructure: workers repair a railway track in Vietnam.

accession to the EU, for instance, need to have a high-quality financial reporting system as part of their overall financial architecture. It can also be seen in the context of more and more countries moving to International Financial Reporting Standards – the launch

Capacity building is

concerned with developing and upgrading certain skills, competencies and performance of IFRS for SMEs last year has hugely widened their applicability. More than 100 countries now use IFRS, and these countries, as well as their investors, look to support the move by ensuring other areas of the financial reporting plumbing are in place. ‘In 2009, we were requested to work towards a capacity-building framework, because most of our member states are following the trend of harmonising IFRS,’ explains Krylova. ‘But IFRS is just the tip of the iceberg. It needs to be supported by different institutional and technical capacities, which are lacking in some countries.’



A recent ISAR meeting reviewed a draft framework, which will now be developed. A series of roundtables is planned for 2011 to debate the issues and discuss case studies. The seeds of the capacity-building project were sown following a number of financial crises around the world, such as the SouthEast Asia crisis in 1997. As Mike Walsh, ACCA special projects consultant, explains: ‘There were worries that the financial architecture globally was fragile, and there has been a worry at the World Bank level that financial reporting was not terribly robust.’ Walsh adds that while the US implemented Sarbanes-Oxley and Europe introduced reform through the Eighth Directive as a response to these crises, notably the corporate scandals in the US in the early 2000s, it was not clear what action should be taken by the rest of the world: ‘Once you get outside the developed country system, the question is what should be done about the rest of the world.’ At the same time, the World Bank introduced Reports on and Observance of Standards and Codes (ROSCs) for audit and accounting, which takes into account the different levels of development and varying priorities in different countries and regions. A joint initiative with the International Monetary Fund, the reports assess the strengths and weaknesses of existing frameworks and accounting practices, including the degree of compliance with and enforcement of national regulatory systems. ‘They measure how far the countries have robust accounting systems,’ says Walsh. However, he adds that most developing countries face a challenge to cope with international accounting and auditing standards, and lack sufficient regulatory resources and qualified professionals. PILLARS OF STRENGTH This is where UNCTAD comes in, having developed a four-pillar model for capacity building. The four pillars are the legal and regulatory framework, the institutional framework, human resource capacity, and the capacity-building process itself (see opposite page). UNCTAD has developed the pillars into an overall framework that can be used as a tool by developing countries as they seek to address issues raised by, for instance, their ROSC review and other reports. UNCTAD will also be developing a database of good practice. ‘When we were developing the case studies on the practical issues so far with IFRS implementation, it became clear there were a number of capacity issues that needed to be addressed,’ says Krylova. ‘This is why ISAR was requested to take up this matter and why we are pursuing it.’


Building capacity attracts investors: scaffolders in Rio de Janeiro (top). May the forge be with you: UNCTAD’s framework helps countries to build their financial infrastructure (bottom).

Capacity building will take time. There are no overnight solutions and it has to work within the bounds of existing legal frameworks and the constraints of human resources. Change cannot be imposed – Walsh argues that a ‘bottom-up’ process is needed. But a suitable framework will at least provide the foundations for durable financial infrastructure and ensure that the roads go to the right places and that the drivers have the skills to use them. Recent research has shown that progress is possible and can promote international cooperation. UNCTAD, by its capacity building initiative, promotes a comprehensive approach to development for countries with different legal and economic characteristics that are all part of the global financial community. Thanks to Professor Gert H Karreman, a member of the UNCTAD Consultative Group for Capacity Building, for assistance with this article. Philip Smith, journalist


The four pillars of UNCTAD’s capacity-building framework

1. LEGAL AND REGULATORY UNCTAD suggests that a number of elements should be part of the legal and regulatory framework. The essential elements include audit and accounting standards and requirements, the endorsement and enforcement of standards, and monitoring/ complying with standards and requirements. Other essentials include licensing, training, corporate governance, investigation and discipline, quality assurance mechanisms (normally of auditors), and auditor liability/ accountability.

2. INSTITUTIONAL The institutional framework in which accountancy capacity building takes place includes many civic institutions, both private and public. The strength of these institutions has a crucial bearing on the success of capacity-building projects. These institutions generally consist of the legislative body, government ministries, regulatory bodies, the judiciary, the government registry of companies, stock exchanges, standard-setting bodies, ratings agencies, accounting firms, audit firms and professional accountancy organisations.

3. HUMAN CAPACITY Human capacity development includes the education, training, and retention of professional accountants and other participants in the regulatory and financial systems. Education requirements will cover school and often university, as well as the professional education of auditors and accountants. Also important are Continuing Professional Development, education for accounting technicians, training in specialised areas, and the education of other participants, including regulators and analysts.

4. PROCESS The process will include a strategy and realistic action plan that identifies priorities, timeframes, human resources, financial resources and stakeholders, and allocates the various responsibilities. Typical steps can include achieving an understanding of the project’s scope, identifying the gaps between the current situation and relevant international norms and best practice, developing a strategy and an action plan, and communicating the action plan to all key stakeholders. Other typical steps in the process include implementing the plan and assessing progress.

Capacity building will take time. There are

no overnight solutions, and it has to work within the bounds of existing legal frameworks and the constraints of human resources. Change cannot be imposed – a ‘bottom-up’ process is needed. But a suitable capacity framework will at least provide the foundations for durable financial infrastructure, and ensure that the roads go to the right places and that the drivers have the skills to use them PG77 EDITION 03


Sowing the seeds An initiative to encourage the development of research skills in transitional economies is under way to rebalance the world of accounting academia


he famous quote by the Chinese philosopher Lao Tze ‘Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime’ perfectly encapsulates a programme launched in 2009 to help research teams in transitional economies to enhance their skills. Concerned that research opportunities and funding were slanted towards experienced researchers and projects from industrialised nations, ACCA, in collaboration with not‑for‑profit organisation the International Association for Accounting and Education Research (IAAER), came up with the idea of encouraging research skills among early career researchers around the world. Funded by ACCA, the initiative sponsors research teams worldwide to develop projects that will further accountancy education and training in transitional economies. Seed corn grants of up to £5,000 will be paid in two instalments and can be used to cover research-related costs.


Projects are chosen for funding from the proposals submitted by early career researchers who attend IAAER/ACCA capacity‑building consortia or paper development workshops in the developing world. Each research team is mentored by internationally recognised scholars and present its findings to international audiences at accountancy conferences. The ideal target group is advanced PhD students or those who finished their doctoral studies within a maximum of five years. The paper development workshops typically last a day, and consist of several sessions where Donna Street, IAAER director for research and educational activities, and IAAER/ACCA mentors outline the aims of the programme and define the skills that are vital to conducting quality research as well as how to publish in international journals. At most workshops, the mentors also provide one‑on‑one feedback on proposals presented by early career researchers. ‘It’s that international perspective of how you write a proposal, how you address

Donna Street: learning how to survive the infamous ‘revise and resubmit’ process that challenges even seasoned researchers is key


your research questions, how you overcome the obstacles that always emerge when preparing a proposal and conducting a research project,’ explains Caroline Oades, head of research at ACCA. Typically, international researchers give presentations at the workshops outlining their own experiences, discuss areas where future research is needed, and illustrate the research process. The programmes focus on helping the researchers develop realistic expectations.

Young scholars need to focus not only on quality but also on how to target appropriate journals

An editorial panel is also normally held to explain how the editorial process of selection for publication works. ‘Developing an understanding of how to navigate the review process is crucial to becoming a successful researcher,’ says Street. ‘Learning how to survive the infamous “revise and resubmit” process that challenges even seasoned researchers and responding to reviewer questions and appropriately revising papers is key.’ QUALITY PLUS SUITABILITY Oades adds: ‘Just because you get turned down doesn’t necessarily mean your work is not of sufficient quality. Young scholars need to focus not only on quality but also on how to target appropriate journals. To publish in international journals, a topic must have international interest.’ So far grants have been awarded to five teams of accounting researchers. Some of the research topics for which recipients have received seed core funding include: quantifying corporate value distribution in the EU; XBRL reporting: trends and perspectives; a critical analysis of management accounting change in Romania; and an analysis of the suitability of the IFRS for SMEs implementation in Romania, the Czech Republic, Turkey and Hungary. Professor Barry Cooper, chair of the ACCA research committee, says: ‘These initiatives are making a real difference. The IAAER/ACCA consortia and seed grant programmes actively support the development of early career researchers, as well as the future development of the profession. We are already beginning to see concrete results.’ An illustration of an early success of the programme is a proposal presented at a paper development workshop that evolved into a forthcoming article in Accounting in Europe.

The authors are early career researchers Catalin Albu and Nadia Albu of the Bucharest Academy of Economic Studies and the mentors are Robert Faff and Allan Hodgson of the University of Queensland. The Albus are now in the US, on a Fulbright scholarship, with Street working to develop their research and teaching skills. This example proves that the consortia can lead to long-term relationships between the researchers and IAAER and ACCA mentors. A secondary, but no less important, aim of the project is for the researchers to disseminate the acquired knowledge throughout universities in their home countries to help perpetuate the circle of knowledge and research. SPONSORSHIP SOUGHT The ACCA-funded project is mainly coordinated by IAAER. More sponsorship is being sought wherever the programme operates. For example, in Romania KPMG co-sponsored a consortium. ACCA and IAAER seek out partners in each country/region to offer additional financial support to researchers, who often have to travel considerable distances to attend the workshops. In November 2010 a consortium was held in Kuala Lumpur, Malaysia, in collaboration with the University of Malaya and Malaysian Accountancy Research and Education Foundation (MAREF). The next consortium is scheduled for South Africa in 2011 in collaboration with the Southern African Accounting Association. Seed grant programmes are being offered in conjunction with each of these consortia. The aim is to expand the programme to other countries but financial constraints limit its spread. Currently, beneficiary countries are those where an IAAER conference or co-bannered conference is held which international researchers attend. ‘The number of IAAER members and ACCA representatives willing to volunteer many hours of their time to the programme speaks volumes for the importance both organisations attach to this important initiative,’ says Street. ‘All that limits expansion of the opportunity to more countries and more early career researchers is funding.’ Still, the initiative is in its nascent stages and positive outcomes will prove to potential donor organisations that it is worth investing because the long-term benefits by far outweigh the short-term outlay. Transitional economies will then be able to fill their own tables full of metaphorical fish instead of relying on industrialised nations to feed them. Michelle Perry, journalist



Crunch time The IASB has focused on converging IFRS and US GAAP. Will this be the year all the hard work finally comes to fruition? ACCA’s Richard Martin reports


he process of bringing national standards into line with International Financial Reporting Standards (IFRS) is often called convergence. Some, like the EU, have taken a big bang approach, adopting IFRS wholesale at a particular point. Others such as China, Malaysia and India have pursued convergence by making gradual changes to their national accounting systems so they become increasingly similar to IFRS, with perhaps an ultimate step to make them entirely the same. The US is an exception. US convergence involves the joint development of new standards and the amendment of existing IFRS to bring it closer to US GAAP. When the G20 and others talk about convergence and global standards, they seem often to be thinking about IFRS-US convergence, and that is now reaching a crunch point where it will change and set off in a different direction. PROGRESS SO FAR Convergence with the US has been set out in agreements between the developer of IFRS, the International Accounting Standards Board (IASB), and its US counterpart, the Financial Accounting Standards Board (FASB). The most recent agreement was a 2006 (updated 2008) Memorandum of Understanding (MoU), which set out 17 projects for joint new standards and amendments to existing IFRS, and a deadline of June 2011 to complete them. The MoU was clearly arranged with US financial regulator the Securities and Exchange Commission (SEC) as well as the FASB. In December 2007 the SEC allowed foreign companies with stocks traded in the US to use IFRS and set out a roadmap for deciding on IFRS for US-listed companies. Agreeing on the MoU seems to have been a condition for that 2007 decision and its completion is a likely precondition for further adoption. However, the MoU programme of change has always looked very ambitious and hard to deliver. The global financial crisis in 2008 showed up shortcomings in the accounting for financial instruments in particular. G20 meetings have called on the two boards to complete the convergence process and produce a single set of high-quality standards.


DELAY AND DISRUPTION Slippage against timetables is the standards setter’s stock in trade, and sure enough five MoU projects have since been abandoned and one (on financial statement presentation) significantly reduced in scope to make that June 2011 deadline feasible. While delays are one thing, much more important is that on the key financial instruments project there has been divergence rather than convergence. The IASB is part‑way through IFRS 9, Financial Instruments (its replacement for IAS 39), which will allow a mixture of historical cost and fair value. But the FASB has produced a fundamentally different draft standard, with essentially a full fair-value model for all items. It is not clear how this divergence will be reversed. A draft standard from the IASB on hedging is still out for comment. Key issues on a number of drafts have yet to be resolved, including loan loss impairments, leasing, insurance and revenue recognition. Given the work still to be done, December 2011 for completing the revised MoU seems a more realistic deadline than June. One factor that may interfere with that scenario is that after June 2011 there will be a significant change in the IASB. The chairman Sir David Tweedie and two others of the old guard will retire and be replaced by new members (including Hans Hoogervorst, the new chairman, and Ian Mackintosh his deputy). Will they be prepared to sign off on these key new standards, which have been discussed by the IASB for some years, so quickly after joining the board? There are also significant changes at the FASB. Bob Herz the chairman resigned suddenly last summer and three board members have been appointed subsequently. The votes on the financial instruments exposure draft were finely balanced and so the majority for the full fair-value approach may go. That would be a major backtrack, and the completion of the other joint projects will probably take the FASB more time. WILL IT BE WORTHWHILE? The SEC has said that by the end of 2011 it will have decided the fate of the US IFRS adoption roadmap. It could go for IFRS for all US-listed

Richard Martin is head of financial reporting at ACCA. He is responsible for monitoring developments in financial reporting, analysing the impact of changes and developing ACCA’s policy on these issues. He is a member of the accounting working party of FEE (European Federation of Accountants) and of its financial reporting policy group. He is also a member of the accounting and reporting group of experts at the UN Conference on Trade and Development.


companies or just for some – perhaps those that are more internationally oriented. The dates could be different for different groups and the start and end of the adoption process might be some way off. It the SEC goes for IFRS adoption at some point, it may set up an endorsement mechanism to approve any changes to the standards, much as Europe and other countries have. The FASB would probably adopt the new IFRS 9. If that happens, it may seem that convergence has all been worthwhile, but there are significant risks to IFRS. Other countries not yet fully on board could ask for their own US‑style convergence shopping list of changes to IFRS before going further. Also, the tens of thousands of existing IFRS preparers would have to implement a series of IFRS changes on the chance that doing so might persuade the US to sign up. With some changes, the improvement in reporting has not been very clear and they seem to be about adopting the US treatment. It is also possible that the SEC may say yes subject to the completion of a number of projects, and another series of convergence projects will then begin. If US adoption does not go ahead, then there will likely be a change of direction in IFRS. Convergence with the US would be seen to be a blind alley and the number of projects would be scaled back. The IASB would probably be asked to concentrate on assessing the post‑implementation experience, improving the application of IFRS and maintaining the existing set of IFRS. WHICH WAY WILL THE WINDS BLOW? It is crunch time for convergence. If the current programme can be completed in something like its present form, that may help boost the chances of the SEC adopting IFRS for some or all of its US-registered companies. Only this result will vindicate the whole convergence project, which has dominated the second half of the Tweedie years at the IASB. Key US indicators to watch will be the composition of the new FASB, and, in particular, Leslie Seidman’s attitude to the financial instruments draft. At the IASB, watch out for compromises to try to complete on the key projects and the position of the new IASB members to completing any that remain after June 2011.

Slippage against timetables is the standards setter’s stock in trade. While delays are one thing, much more important is that on the key financial instruments project there has been divergence rather than convergence



Carve-outs and convergence Paul Cherry, chairman of the IASB’s IFRS Advisory Council, shares his views on the future of International Financial Reporting Standards Q: With the development of International Financial Reporting Standards (IFRS) in the hands of the International Accounting Standards Board (IASB), what role will national standard setters play in the future? A: Identifying issues. The national standard setters are much closer to the front line than the IASB can ever be. They will operate like a network. For example, the AcSB in Canada will let the IASB know what it’s hearing from preparers on specific issues, whether it’s the oil patch or utilities or whatever, and feed that into the system. Everyone loves the outreach the IASB is doing, but realistically it can’t be constantly running around the world. Q: Are different influences from different parts of the world emerging? A: Yes, and I think this is really healthy. The US, Canada, the UK and Australia have been the big four in standard setting for decades. Many others haven’t been used to debating issues so bluntly in real time, often in public meetings. However, we’re now seeing


a much richer participation in the debate. Asia‑Oceania jurisdictions are really coming to life and I think you’ll see them becoming quite powerful players in the IFRS debate – not to set up their own standards but to make sure they punch their weight when presenting issues to the IASB that matter to them. Q: China is the most significant player on the globalisation stage. Is that true from a standards setting perspective as well? A: China is certainly very engaged in IFRS. It’s not yet adopting IFRS in its entirety, but it is moving in that direction. And it is very supportive of IFRS. Mainland China is represented on my advisory council. It has sent very senior officials who have been very blunt in saying that what matters to them is quality of interpretation and application. I’m told that hundreds of thousands of Chinese accountants are being trained in IFRS. Q: Do you see any major philosophical differences with Asia-Oceania or is the nature


of the region’s industry base the main driver of alternative perspectives on reporting? A: It’s probably a bit of both. Certain industries are more significant in some countries than in others, but Asia-Oceania is a pretty diverse group. Philosophically, they’ve come from a slightly different tradition – perhaps not as much transparency as we’re used to. Take Japan. It’s perhaps not quite as open as some other countries with respect to reporting, but it is shifting. It started out planning to take the parts of IFRS that it was comfortable with and not others; now it’s talking of adopting IFRS as a whole. If you come from a culture where these things were done more in private and perhaps through negotiation, it takes time for the business community to be comfortable with a new system. Q: Recently IASB chairman Sir David Tweedie expressed concern that carve-outs and partial adoption of IFRS could endanger the vision of one set of accounting standards used consistently around the world. What’s your take? A: It’s a very serious risk, and people are taking a very hard line. When I go to conferences the message I hear very clearly is that carve-outs are inappropriate, inefficient and contrary to people’s objectives. That’s going to destroy the brand and cannot be allowed to happen. A few years ago there might have been some tolerance for countries adopting a significant portion of IFRS. Now people are saying no. Another challenge will be with the IFRS for SMEs, which will be widely used. In fact, in some parts of the world it will probably be the only system used. The question is how we manage that so that non-accountants understand the system is different in some important respects from full IFRS. Q: Do carve-outs create a risk of the US not adopting IFRS? A: We’ll soon know. The Securities and Exchange Commission (SEC) is still saying it will make a decision in 2011. Its staff progress report laid out a lot of things that need to be done first. Some people thought the list was purposely long to make it difficult to change to IFRS, but I don’t read it that way. The SEC is trying hard to learn from the experience of other countries, especially Canada, because the Canadian marketplace and circumstances are the closest analogy for the US. One really helpful thing is the SEC’s focus on consistent interpretation and application of IFRS. A single set of global standards doesn’t accomplish much if it’s interpreted differently around the world. I don’t believe it’s nearly the problem today that it was, say, 20 years ago,

Paul Cherry is chairman of the IFRS Advisory Council. He has been chairman of the Canadian Accounting Standards Board (AcSB) and was a partner in PwC in Canada.

but belief isn’t enough. We need empirical evidence about how the standards are being applied in practice. That’s on the SEC’s list as a key activity. A changeover to IFRS in the US is not going to happen quickly. Canada took five years to change over and it will be a much greater challenge for the US. The current thinking is that it probably will make a commitment in 2011 but take a longish time frame to actually execute the plan. Q: When you say the US ‘probably will make a commitment’, what does that mean exactly? A: No country is going to commit unequivocally to a change of that magnitude without having a lot of confidence that the necessary steps have been taken. And it’s a bit of a chicken and egg thing. If you don’t make an announcement and set a time frame, then very little is going to happen. And that’s exactly what people told us in Canada. They asked for a deadline so they could plan; without a deadline they were not going to gamble and spend the money. That’s the dilemma the US faces. I think it’s got to be way more than a trial balloon, though. The US is a highly competitive environment. In my judgment, what will carry the day is the business case for IFRS. I think it’s there. Q: Do you envisage any other roadblocks to global adoption of IFRS? A: The international standards are high quality and comprehensive, and compare favourably to US GAAP and other systems. The core issue in my mind is the consistency of interpretation and application. That’s not a standard setting issue – it’s not the standard setter’s job to deal with enforcement. That said, the IASB has to encourage and support efforts to address those issues. Things like post-implementation reviews will become a major activity. Q: What will happen if the US doesn’t make a decision on adopting IFRS in 2011? A: There are a number of decisions that the SEC could make. However, we shouldn’t lose sight of the fact that, first of all, no matter what the SEC ultimately does, there is already a significant IFRS financial reporting presence in the US, and it’s going to grow. By 2013 more than two-thirds of the Global 500 will be using IFRS rather than US GAAP. What’s going to carry the day is the amount of pressure coming from the US business community; they see the efficiencies. The push has to come from the business community, I think, to make it successful. Ramona Dzinkowski is a Canadian economist and business journalist based in Toronto



Aussie rules A toxic combination put paid to Australia’s ‘root and branch’ reform of its tax regime. ACCA’s Chas Roy-Chowdhury draws the lessons from the debacle

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

sk any tax expert how their domestic tax regime could be improved, and they will probably be able to present you with a substantial list of flaws and corresponding suggestions for reform. Similarly, many politicians wax lyrical on the need for tax systems to be fairer or simpler. However, it is rare for any government to commission a major tax review – and it is that which makes the recent experience of Australia particularly interesting. The Australian government took the bold step of commissioning a ‘root and branch’ review of virtually every aspect of the country’s tax regime. When it was completed, the review contained some significant proposals for change. The result? One proposal was significantly altered, another was watered down and the majority were just ignored. The experience could provide some pointers for other jurisdictions about the possibilities and pitfalls in seeking tax reform. GRAND AMBITION In its 2008/09 Budget, the then Australian government led by Kevin Rudd announced it was undertaking a comprehensive ‘root and branch’ review of the country’s tax system. Its objective was to make recommendations for creating a tax structure that would ‘position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia’s economic and social outcomes’. The resulting report on Australia’s future tax system is known informally as the Henry Review after the chairman of the review panel, Ken Henry, secretary to the Treasury. The review panel’s remit included considering the appropriate balance between taxation of the returns from work, investment and savings, consumption – although the Goods and Services Tax (GST), which is applied to sales, was notably excluded from the review – and the role to be played by environmental taxes. The panel was to consider how to enhance and simplify the tax system. It was therefore comprehensive, looking at virtually all areas of the Australian tax system. The panel’s report – delivered to the government in December 2009 and made public in May 2010 – set out 138 specific recommendations.


One of the most significant was a proposal to introduce a rent-based tax for non-renewable resources. The Rudd government picked up the proposal and developed plans to introduce a Resources Super Profits Tax (RSPT), which was to be a 40% tax that mining companies would have to pay in addition to the standard 30% rate of corporation tax. The reasoning behind RSPT is that Australia has a finite amount of national resources and the state has a limited opportunity to benefit from them. The mining companies are capitalising on these limited resources and making huge profits from them. By levying a super tax, Australia would be able to generate substantial current revenues to help meet rising social costs (like many countries, Australia has an ageing population) and perhaps even finance some form of sovereign wealth fund for the benefit of current and future generations. Not surprisingly, RSPT met angry opposition from the mining companies, which threatened to put their expansion plans in Australia on hold. The conflict ultimately brought down Rudd’s government, with Julia Gillard taking over as prime minister in June 2010. RSPT was then modified into a Minerals Resource Rent Tax (MRRT) that applies to the mining of iron ore and coal. Commodities other than iron ore and coal (and oil and gas, which are covered by a Petroleum Resource Rent Tax) are not subject to MRRT, thus reducing the number of affected companies from 2,500 to around 320. Small mining companies (those with MRRT-assessable profits below 50m Australian dollars a year) are also exempt. The proposed MRRT rate is 30% compared with an envisaged 40% for the now abandoned RSPT; and after allowances (including substantial depreciation charges), the effective rate falls to 22.5%. Indeed, some experts believe the depreciation allowances could be so large as to reduce the final tax paid to virtually nothing. To cut a long and sorry story short, the original super tax proposals have been substantially watered down. CORPORATION TAX The Henry Review also recommended reducing the rate of corporation tax from 30% to 28%, and to 25% for small companies. Prior to


the August 2010 election Australia’s Labor government confirmed that it would cut the main rate to 28%, but it has subsequently reduced its ambitions to cutting corporation tax by one percentage point to 29%, proposed for 2013/14. The government has been silent about reducing the rate for small companies to 25%, though they will benefit from the 29% rate a year earlier than large companies. The Australian government appears to have missed a great opportunity to take advantage of the Henry Review proposals which would have made Australia more competitive in global tax terms, thereby encouraging inward investment and growth. The UK, for example, is reducing its corporate tax rate to 24% by 2014. The corporation tax rates levied by Australia’s nearer neighbours (apart from New Zealand, where the rate is also 30%) are also significantly lower: 25% in China, 17% in Singapore and 16.5% in Hong Kong. SIMPLIFICATION OPPORTUNITY Simplification was an important element of the review panel’s agenda, and the final report recommended introducing a flat tax rate of 35% for income between 25,000 and 180,000 Australian dollars. Such a change would have gone a long way to simplifying tax administration. At present, the vast majority of Australians have to prepare tax returns, but introducing a tax-free allowance of 25,000 Australian dollars would have reduced the number, or at least vastly simplified the tax filing process. The change could have been funded by, for example, raising GST. The effect would have been to improve the apparent attractiveness of Australia’s tax regime. Although tax as a percentage of GDP is relatively competitive with other jurisdictions, some parts of the country’s tax regime (the 30% corporation tax and a top income tax rate of 45%) make the overall package unattractive.

Australia has tested the tax

reform waters, but its failure should not leave tax advisers and politicians who want substantial reform of their tax regime feeling unduly pessimistic

FLAWS IN SCOPE As noted, raising GST would have been one way to generate revenues to offset a reduced tax take elsewhere. However, the Henry Review excluded GST from its scope. The current rate of GST in Australia is 10%. That’s relatively competitive in global terms, and other nations have been raising their rates. In October 2010, for example, New Zealand increased its GST from 12.5% to 15%. Raising GST in Australia would have been a simple way to support more significant changes to the tax regime and would have helped generate the revenue to meet rising demographic costs.



ONGOING DEBATE But that is not the end of the Australia tax regime story. The recent devastating floods in the country have prompted the announcement of a one-off tax on high earners to help pay for the huge reconstruction costs. And debates over the Henry Review continue. In October, the opposition party (Coalition) called for the economic modelling behind the review to be released to help inform its thinking on the potential viability of introducing lower, flatter personal tax rates. And a large tax summit is proposed for 2011 to provide a forum for debate about tax reform. Topics will include the proposed MRRT, even though that new tax is scheduled to apply from July 2012. The debate could encompass the merits of some form of carbon tax, which the Rudd government dropped in the face of opposition. Interestingly, BHP Billiton appeared to support a carbon tax. Gaining first-mover advantage in Australia might give the mining company a better chance of influencing the approach taken elsewhere. LESSONS FOR THE FUTURE One strength of the Henry Review was its independence from any one political party. This would seem essential for any body seeking improvement to tax systems. However, the Henry Review had a weakness in its one‑off nature. There was no ongoing independent

The fact that the Henry Review’s proposals have been largely ignored may simply reflect the political landscape in Australia body tasked to drive its proposals forward. Such one-off efforts at reform are far less likely to succeed than a sustained and systematic approach to achieving improvement. ACCA’s March 2009 discussion paper Is There a Way Out of the Tax Labyrinth? identified the merit of establishing independent vehicles for setting tax policy that would work on an ongoing basis. It proposed that experts separate from government should formulate and propose tax policy, and seek to simplify the tax system. In this context, it will be interesting to see what impact the UK’s new Office of Tax Simplification will have. It does appear to have widespread political support, is seen as independent, and will call on expert input over a period of time. Back in Australia, the fact that the Henry Review’s proposals have so far been largely ignored may simply reflect the political landscape in the country. General elections are held relatively frequently – every three years


– so radical changes to tax (and other policy areas) need to be introduced quickly to give them time to bed in before the next election comes along. Furthermore, the closely fought election in August 2010 resulted in a hung parliament, giving the new government limited scope for radical reforming action. Australia has tested the tax reform waters, but its failure to implement a radical overhaul of the system should not leave tax advisers and politicians who want substantial reform of their tax regime feeling unduly pessimistic. Tax reforms are undoubtedly possible. But successfully delivering them requires political will and a supportive political system. They also require input from an independent body that has an ongoing remit to continue arguing for improvements, where these are identified. Read the ACCA discussion paper Is There a Way Out of the Tax Labyrinth at

G’bye, digger: Julia Gillard dropped Kevin Rudd’s proposed super tax on mining companies after succeeding him as prime minister.


The truth about leverage Basel III won’t solve the terrifying risk multiplier that leverage can exert in the banking sector, say WestLB’s Sean Tully and ACCA’s Paul Moxey


xcessive leverage is one of the oldest problems in economic history, and is the driving force behind all credit booms and busts. Leverage multiplies both gains and losses, thereby multiplying risk. It can be seductive and very dangerous. None the less, regulators and others seem to be taken by surprise when excessive leverage creates busts. In the 1920s, for example, Americans exploited leverage by buying stocks on margin. Leverage then multiplied as investment trusts, who themselves issued stock, bought other stocks with borrowed funds, including the stocks of other already‑levered investment trusts. This was a pyramid that led to a massive build-up of debt, and a fragile boom in stock prices, which later collapsed. Total assets in these trusts reached around 7.7% of US GDP in 1929. In 2007, 7.7% of US GDP was around $1.1 trillion,

A sign marks the entrance for a foreclosure home auction in New York. Registered attendees must show a $5,000 cashier’s cheque or cash in order to verify that they are able to pay the required deposit due on the auction day if they are the winning bidder.

nearly as large as the $1.7 trillion CDO market. Excessive leverage was the key feature of the recent crisis. Regulators should know by now that leverage needs to be managed. Unfortunately, Basel III proposals miss the mark. Securitisation of loans massively leveraged risk thanks to defects in the regulatory system. Collateralised debt obligations (CDOs) of asset-backed securities (ABS) could leverage risk over 2,000 times yet still be AAA-rated and require less than 1% of capital under the Basel II rules. Under Basel III, the capital requirement on this sort of security might triple, which is not enough to deter people or banks trying to maximise return on capital. SEE-THROUGH LEVERAGE These matters can seem bafflingly complicated but it is possible to get a good insight into



the inherent riskiness of structured securities and of the financial system as a whole by looking at underlying leverage. We invite you to consider a new measure of leverage, called see-through leverage (STL). STL shows the underlying leverage of complex securities and should therefore be of interest to bank boards, regulators, risk managers, investors, governments and accountants. A 10% reduction in the value of a portfolio of mortgage loans means that a holder of all or part of that portfolio would lose 10% of their investment – there is no leverage. A feature of the build-up to the financial crisis was that structured investments were created from mortgage portfolios. The diagram opposite shows how structured investments, such as asset-backed securities (ABS), could be created based on the mortgage portfolio. Here, the ABS is divided into three tranches and a loss of 10% in the mortgage portfolio would wipe out the value of the equity tranche of the ABS, so such losses are leveraged 10 times. Just a 2% loss in the remaining value (90%) of the loans would wipe out the mezzanine layer in the ABS, so ABS mezzanine losses are leveraged 45 times. A CDO could be created to buy the mezzanine debt of the ABS. Suppose the CDO also issues senior debt, mezzanine debt and equity. While the mezzanine layer in the ABS carries a leverage of 45, the mezzanine layer in the CDO is leveraged a further 45 times, meaning the risk is magnified 2,025 times. A loss of just 0.05% of the underlying loans would wipe the mezzanine layer out after the equity layer has gone. Yet this ABS CDO tranche could be AAA-rated and require less than 1% of capital under Basel II rules because it was (wrongly) believed that the original loans were not correlated – that is, it was thought they would not all go bad at the same time. Synthetic CDOs could also be created and referenced to the ABS, which could mean that a loss in a mortgage portfolio could cause a loss in more than one CDO, further magnifying risk. It is hard to believe that anyone would have created, or bought, these instruments had they realised the risk created by such leverage. THE BASEL ACCORDS Under Basel I, banks did not have to hold any regulatory capital for undrawn committed facilities with less than one year in maturity. So banks could set up and hold special purpose vehicles which issued ABS without having to set aside capital. Do you wonder why banks have so much exposure to peripheral EU government debt? No regulatory capital was


Sean Tully is managing director and head of fixed income trading at WestLB. He has been a derivatives trader and trading manager for over two decades.

A fuller analysis of the causes of the crisis and worked examples of how to use see‑through leverage are in Restoring Confidence in the Financial System by Sean Tully and Richard Bassett, published by Harriman House. ISBN-13: 9781906659660

required for claims on OECD governments – banks were encouraged to lever up. The 1996 market risk amendment to Basel I brought risk measures to capital requirements. But almost no capital was required for super senior AAA-rated ABS CDO tranches whose spreads (the spread above LIBOR which the security pays) moved very little before the crisis. The calculations, based on value at risk (VAR), relied on a relatively short history and did not include previous housing declines. Spreads on these securities suddenly widened during the crisis and prices collapsed. Basel II compounded the problem by introducing credit ratings as a risk-sensitive measure. AAA-rated super senior tranches of ABS CDOs would require just 0.5% of capital. In the stable times before the crisis, low-rated (risky) assets could be combined into a CDO. Because the historic correlation in defaults between assets was low, over 80% of the CDO liabilities might be AAA-rated and require very little capital. Repackaging low-rated assets into CDOs with mostly AAA-rated debt meant the capital required for the same level of risk could be reduced substantially under Basel II. For example, the required capital under Basel II of a pool of sub-prime mortgages could be reduced by, say, 40% by putting them into a mortgage-backed security (MBS) and getting it rated. The mezzanine portion of the MBS could be securitised again into a CDO and the capital required for that mezzanine risk would fall again by, say, 45%. This meant more risk (and more leverage) could be held for the same capital requirement. In good times this increased return on capital but all the risk remained in the banking system. The Basel measures of risk implicitly ignored leverage and still do. Instead they relied on predicting future loss distributions for credit and market risks. VAR models and agency ratings depend on accurate predictions of future defaults, correlations between defaults and market prices, but it simply is not possible to predict highly unlikely events with sufficient accuracy. Spreads on super senior ABS CDOs hardly moved in the few years before the crisis. During the crisis, the magnitude of movement increased 60-fold. There is an important lesson here which goes beyond financial services. While it may be possible to accurately assess the likelihood and impact of risks if we have a complete picture of all possible outcomes, as with blackjack, the past is generally not a reliable indicator of future extreme price events. The seeming unlikelihood of something may cause risk managers and boards alike to ignore the possibility, so the situation may not make


it onto a risk register. There is evidence to suggest that organisations which use scenario analysis to identify what might cause a disaster and then prepare for the worst do better than those which rely on assessing the likelihood and impact of various risks and then trying to manage them. One should avoid complacency. Unbridled leverage means a fragile banking system. You might think that Basel III would address this primary cause of the crisis, but it has not, or at least not properly. Depending on the calculation method, AAA-rated CDOs might require between 1.6% and 3.2% capital. Under the old rules the capital requirement would be 0.56% to 0.96%. So the capital requirement has increased by about three times yet the leverage could still be 2,000. This higher capital requirement would have done little to restrict the build-up of leverage in the shadow banking system prior to the recent crisis. Nor does Basel discourage cyclicality as it is based on ratings or predicted losses under current conditions. Leverage, as a measure, does not vary through the business cycle, so its use would reduce cyclicality. Basel III still uses VAR-based measures and so would not have prevented the build-up in leverage which was at the heart of the crisis. The actual capital needed in 2008 for these CDOs was more of the order of 40%. Bank executives are incentivised to maximise return on capital. They do this by taking more

Paul Moxey is head of corporate governance and risk management at ACCA, and senior research fellow at King’s College London.

The opinions expressed by the authors are their own and do not necessarily reflect the policies of WestLB or ACCA.

CDOs of asset-backed securities could

leverage risk over 2,000 times yet still be AAA-rated and require less than 1% of capital under Basel II rules

risk and increasing leverage. Unfortunately, not only do the Basel III proposals do little to discourage excessive leverage, the fact that capital requirements have gone up on leveraged and unleveraged securities alike will give banks a strong incentive to hold more highly leveraged securities, as they yield more in good times, and do not require more capital. In bad times, of course, this strategy could wipe a bank out unless it is too big to fail. Financial engineers can still create almost any level of gearing (and therefore risk) they like within the Basel framework. SOLVING THE PROBLEM Something else is needed. Disclosure of the underlying leverage of structured securities would provide a valuable cross-reference and sanity check on risk calculations. You do not need to be a derivatives expert to calculate the leverage underlying structured products. Risk managers, compliance officers, internal auditors and board members could all use the approach. Investors and shareholders should find the measure invaluable. Regulators clearly should take an interest and politicians should find it edifying. Finally, financial institutions are required under IFRS 7, Financial Instruments: Disclosures to report on the sensitivity of certain assets to risk. Often done through VAR-type disclosures, these disclosures are difficult for non-specialists to comprehend. Information on the underlying leverage of securitised assets should be easier to make sense of and of benefit to all of us. This is something in which accountants can play an active and important role. While the hills still resonate with the sound of Basel, now is the time to get a grip on leverage.

The 2000s sub-prime mortgage credit boom bust Loan portfolio at bank

Asset-backed securities

Collateralised debt obligations

Further leverage?

Loan 1

Senior = £88

Senior = £88


Loan 2

Mezzanine = £2

Mezzanine = £2


Loan x

Equity = £10

Equity = £10



Mezzanine leverage

Senior: 1

Senior: 45x1 = 45

Mezz: 45 (£90/£2)

Mezz: 45x45 = 2,205

Equity: 10 (£100/£10)

Equity: 45x10 = 450





The SheFO: why so rare? The personal experiences of female CFOs help explain why there are so few women in the top financial roles of the world’s businesses


omen are more present than ever in corporate life. But although women have made some progress in breaking through the glass ceiling, there are still few of them in the top financial jobs. And that’s despite the fact that the front-line finance teams in most companies are for the most part composed of women. Panellists at ACCA’s CFO European Summit held in Warsaw last October discussed prospects for the ‘SheFO’. They looked at the particular challenges faced by women CFOs,

An excess of testosterone on

trading floors has been identified as one of the causes of the banking crisis. In Iceland’s spectacular financial collapse the only institution left standing was one that was run by women pondered why there are still so few of them, and related their own experience of building careers in male-dominated companies. Over half of ACCA’s students are women, as are a majority of US and UK graduates in finance. Yet in those countries only 20% of senior jobs are taken by women, which means that companies are failing to use a valuable talent resource. Men and women bring a set of different but complementary sensibilities to the table. Academics have demonstrated that a diverse group which accepts the differences within it does better than one that is homogeneous, and that organisations with women in senior management positions outperform those with all-male boards. Having a woman on the board can also help a company change its culture while having two makes a massive difference, reducing aggressive behaviour and making the organisation more sociable. Maureen Hand, the Barclaycard FD, is the lone woman on the company board and has found herself challenging male groupthink. Women, she says – and her fellow panellists generally agree with her – tend to question more and to test more the answers they are given; the result is much more robust decision-making.

Rita Purewal, FD of Wolverhampton Wanderers, adds that women are more risk-averse. She also believes women are more balanced thinkers because they have to deal with so many other issues at home as well as on the work front, which makes them multiskilled. An excess of testosterone on trading floors has been identified as one of the causes of the banking crisis. In Iceland’s spectacular financial collapse not only was the only institution left standing the one that was run by women but also women were made chief executives of the nationalised banks created by the government in the wake of the crisis. And, says Andrea Wu, the finance boss of Thomson Reuters, at least one major institution in London’s Canary Wharf avoided serious trouble when a female executive at the top pulled it back from taking what would have been a disastrous decision. If having more women at the top is good not just for women but for companies too, why are they making such slow progress in filling senior financial positions? A major factor is that they tend not only to deal with finance but also to act as chief family officers. It’s often assumed that they put family needs before company needs and women tend to have domestic obligations with commitments outside the workplace that men can often shrug off. They suffer particularly from the consequences of the career breaks, which affect their position and pay, they commonly take when children are born. It’s rare for a woman to get back on her career path at the rank she would have attained without such a break. National culture may also be an obstacle. In some countries it is expected that both women and men will work full-time, with extended family and domestic servants providing support. When Caroline Stockmann, now CFO at Save the Children International, was at Thai Unilever, half the local board was female and, in a culture widely seen as male-dominated, people were keen to meet her because of her position as the local FD. In Switzerland, by contrast, where she worked for Novartis, it is generally expected that after having a child a woman will work part-time. And in the Netherlands, where she also worked, she says that businessmen had difficulty in accepting a woman in her role.



It’s not just the country in which a company operates but also the culture of a company’s headquarters that’s important, says Joanna Biega ska, EMEA SCP planning director at Dell Computers. It makes a difference to, say, a Polish company’s habits if its parent is Japanese rather than American. And a management seeking to change corporate culture and encourage gender diversity makes a difference. Women also suffer from recruiters’ tendency to recruit in their own image, which favours traditional role models and what has worked previously. What’s more, says Stockmann, when senior managers recruit they tend to assess male candidates on their potential and women on their experience. That’s not out of malice but because it is easier to repeat something that’s been seen before. But it conflicts with the potential gains that come from diversity of experience and approach. Family support is crucial to success. Unless

a woman has that at home, it is very difficult to progress at the workspace. One panellist in Warsaw was able to boast of the support of a househusband; all of them stressed the importance of family support. Within companies, support from sponsors as women build their careers is important, while mentoring and coaching can help their progress. And companies should adopt attitudes that help women meet their various commitments – flexihours and distance working, for example. Winning a position is good; being able to operate in it is better. Although the panellists felt uncomfortable with the idea of positive discrimination, which is practised widely in the US, it can speed women’s progress to the top. Either way, with more women than men at the top of graduating classes entering the labour force, there is clearly no shortage of female talent to promote. John Presland, journalist

With more women than men at the top of graduating classes

entering the labour force, there is no shortage of female talent to promote ANDREA WU FCCA, HEAD OF FINANCE, CENTRAL AND EASTERN EUROPE, THOMSON REUTERS ‘It’s not just in finance that women are first woman Legislative Council member and underrepresented. There are differences being sponsored both by women managers between sectors too, so there are more who’ve extended the hand of sisterhood and women in media than in engineering. But in by male managers who’ve gone against the all companies when you get to the level of top old boys club. Support from your manager management the number of women is low. and company is important, but every woman ‘I’ve been helped by many factors, including who’s made it to the top has done so with the attending a girls school headed by Hong Kong’s help of a supportive family.’ RITA PUREWAL FCCA, FINANCE DIRECTOR, WOLVERHAMPTON WANDERERS FC ‘I operate in a very male-dominated industry: to get to our positions. As a result we value football. When Wolves were last in the them more and are particularly efficient and Premiership, in 2003/04, I was the only competitive. There’s an analogy with football, female FD out of 20 clubs; now three out of because players are like women: only a tiny 20 Premiership FDs are women, so things are minority – 1% – of Academy trainees make moving in the right direction. it to professional level. So players understand ‘There’s a lot of multitasking that women where women are coming from; I feel their have to do and we have to work twice as hard empathy and respect.’ MAUREEN HAND, FINANCE DIRECTOR, GLOBAL COMMERCIAL PAYMENTS, BARCLAYCARD ‘There are few of us at the top and we are ‘The way that women approach issues is very very strong when we get there. Much depends different. We’re not scary but rather direct on your personality and you won’t get there if because we ask the taboo questions. you’re shy. You have to have confidence to get ‘Having a woman on the board opens up the there, and you need the support and backing opportunity to explore things more deeply. of your family. It’s impossible to do this job in We can be more direct and light-hearted and 40 hours and you have to sacrifice family life can use male-female humour to achieve more or your work/life balance.’ open conversation.



Cracking the glass ceiling Women have been entering Pakistan’s workforce in large numbers since 2000, but very few make it to the board. ACCA’s Dr Afra Sajjad looks at why PG93 EDITION 03



hen decisions are collectively made, the robustness of the discussions and the suitability of the decisions benefit greatly from the skills, knowledge, perspectives and experience of both men and women. A gender‑diverse set of perspectives confers a greater ability to foresee and manage risks, and better strategic decision-making and planning. In a business world where women increasingly play an active role as entrepreneurs, managers and consumers, women’s insights on market segmentation are particularly important. Board diversity sends a strong message of business commitment to the creation of a culture that celebrates diversity and women’s advancement. This in turn supports an organisation’s gender diversity recruitment and retention efforts. It also enhances its image among stakeholders for controlling reputational risk. MAINLY MALE Historically, boards of directors have been dominated by men. Indeed, according to the latest Catalyst Census of Fortune 500 women board directors, almost 85% of the board seats of Fortune 500 businesses are still occupied by males. To compel businesses to consider gender diversity on boards as a strategic priority, a number of European market regulators are even considering imposing quotas of women on the boards of publicly traded companies as a requirement in corporate governance codes. Norway has already introduced a minimum 40% quota of women board members of public companies. France has introduced a parliamentary bill to require 50% of the boards of directors of publicly listed companies to be composed of women by 2015. And Spain requires any private company awarded a public contract to have a board of directors 40% of whom are women. An International Finance Corporationsponsored ACCA discussion paper, Gender Diversity on Boards in Pakistan of 2010, shows that, even though women have been entering the country’s workforce in large numbers since 2000, evidence of their ascent to the board is limited. Of the 303 companies surveyed, 94 had women on their boards; 72% of these companies were family-owned and for the majority of them (55%) the main criterion for the appointment or nomination of a woman to the board was that she was related to the owners. Of the companies surveyed, 41% considered the main benefit of having women on the board to be that they could act as custodians of business secrets and knowledge.


Dr Afra Sajjad is the head of education and policy development at ACCA Pakistan. See page 59.

In economies such as Pakistan’s, family-owned businesses are the norm. But appointing women to boards solely on the basis of kinship contravenes the spirit of gender diversity. By providing equal opportunities for women to bring ‘different’ experiences and perspectives to board deliberations, true gender diversity ensures inclusive and balanced decision‑making. The ACCA survey identifies the lack of availability of professional women in Pakistan with the required knowledge, skills and experience as the main challenge to the creation of boards that embody the spirit of gender diversity. An executive director of a multinational company, elaborating on the challenge, says: ‘Boards benefit from diversity in terms of experience, knowledge, perspectives and exposure. Men and women who make it to the board are those who have a comprehensive experience and knowledge of the business and various sectors, and have exposure to various organisational cultures. ‘Women are at a disadvantage as they usually do not have a hands-on approach to work, they generally are reluctant to go to the factory floor, and they have issues with travelling. Women’s family responsibilities hinder their commitments. Recruitment and promotion systems are based on the assumption that career paths for leaders will be unbroken. Women who take maternity leave or part-time work, or who relocate due to their husband’s career moves are at a disadvantage.’ OVERCOMING THE CHALLENGES Forums held to discuss the ACCA report’s findings were attended by business leaders, policymakers and civil society representatives. They agreed that as more ambitious, educated, professionally qualified and career-focused women enter the workforce, so women with the right skills, knowledge and expertise may, through persistence and assertiveness, overcome the challenges that can arise from stereotypes and preconceptions. As the expectation is that women should reach the board on their own merit by exhibiting the required attitude and aptitude, their progression from middle management to senior and executive roles would undoubtedly be helped by changes in the mindset and behaviour of male directors and managers. An enabling work environment, supportive families and greater social respect would also facilitate their promotion. With not a single woman director on the boards of 78% of the top-100 listed companies in Pakistan, it is important that leading companies acknowledge gender


Rahat Kaunain Hassan, chairperson of the Competition Commission of Pakistan, has a Master’s degree in law from King’s College, London, and has worked as a partner in civil and commercial law firms in Pakistan. She believes that gender diversity on boards will become a business practice, with more work-life support and women developing a positive approach to reaching the top. ‘For young girls to be supported in reaching the boards, what is needed most is an enabling environment,’ she says. ‘While this is partly up to the employer, it is primarily dependent on the individual professional’s approach. In the context of gender diversity on boards there are three important factors: doing away with gender bias and having a non-discriminatory approach, making conscious efforts to search for appropriately professionally qualified women for board representation, and creating an enabling environment to facilitate this approach. There should be uniform criteria for all. While all have a right to compete for a place on the board, it should not be conferred as a privilege on any professional on the basis of gender alone.’

Naz Khan, CFO of Engro Fertilizers, is a graduate of Mount Holyoke College and has also worked as chief executive officer of KASB Funds. Her association with Pakistan’s capital markets spans more than 19 years, and she has been actively involved in primary as well as secondary markets for both debt and equity securities. She has also worked as a consultant for Asian Development Bank on mortgage-backed securities. She considers that successfully overcoming personal and business challenges is the key to achieving success. ‘Business challenges are part of the game,’ she say. ‘Taking them on and overcoming them is a motivating factor in itself. The personal challenge is to define success for yourself because that is when you are most comfortable in your career decisions. ‘The two key challenges for women are time commitment and self-esteem. Time commitment can be addressed through flexi-hours, part-time, off-track opportunities, extended maternity breaks, etc. Self-esteem is harder to address, but doing so will allow more women to get to senior levels.’

Mixed boards make better decisions, not because men and women are fundamentally different but because they bring different kinds of experience and perspective to the boardroom diversity as a company practice to tap into the wider pool of skills, creativity, talent and experience available. This might also influence family‑owned businesses to open up their boards to independent professional experience and judgment. And that would pave the way for qualifications and experience, rather than kinship, to become the main criteria for nomination and appointment to the board. The advancement of women to board positions requires transparent and fair recruitment and promotion policies and systems to encourage professional and competent women to reach for the top. Effective coaching and mentoring may also help women to become successful hierarchy climbers. Women tend not to put themselves forward, which leads to a managerial assumption that they are happy in their present position. Male peers, by contrast, signal their ambition, their career successes and their readiness for the next step much more strongly to the promotion gatekeepers.

Download Gender diversity on boards in Pakistan at www. gender_diversity

Unless companies put mentoring and advocacy programmes in place, women may self-limit their advancement. The business case for gender diversity on boards in Pakistan will have to be developed on the premise that appointing women directors to the board means recruiting from the population’s overall pool of talent, knowledge, experience, creativity and skills. DIFFERENT, BUT EQUAL Mixed boards make better decisions, not because men and women are fundamentally different or because women directors are more intelligent, more empathetic or have better morals than male directors, but because they bring different kinds of experience and perspectives to the boardroom. Men and women have different social roles and often work in different social areas and positions. As a result, they have different experiences and values whose input would benefit the decision‑making process.



High-tech healthcare Can new technologies rescue EU health budgets by supporting a shift away from expensive hospital-based healthcare?


lectronic patient records, access to specialist services from home, and more efficient use of resources are just some of the benefits touted by advocates of e-health. But while technology has transformed most industries and public services, healthcare has been notoriously slow to embrace the high-tech revolution. Now, though, political momentum is gathering as new technologies offer the prospect of shifting patient care away from expensive treatment in city centre hospitals. The future, we’re told, will see more patients with diabetes, heart disease and other chronic conditions managed and monitored remotely in their homes – wherever they live. One impetus for change is the need to reform health systems to deal with Europe’s ageing population. Another is the fashion for finding cheaper ways to run state-funded services. On paper, e-health is a no-brainer. But health reform is challenging. Huge numbers of people are employed in the health services, and professional groups are strong. And, even if e-health technologies promise efficiencies in the long term, finding the cash to meet the upfront costs of shifting to those technologies is a hard sell in times of austerity. DOES IT WORK? But the big question facing e-health evangelists is whether the technology actually works. Here, the evidence appears to be mounting on the side of the technophiles. Once the preserve of niche technology companies writing nifty programs to help run outpatient clinics or send x-rays electronically, the e-health industry has now attracted big guns like Microsoft, Intel and Cisco. The IT giants are all looking for a slice of what they expect to be a lucrative new market. At a high-level conference – Towards enhanced eHealth governance in Europe – in the European Parliament last October, supported by ACCA and London-based consultancy Hanover, politicians, patients and doctors lined up behind e-health, although often with a caveat or two outlining what must be done to turn promise into practice. Perhaps the most unequivocal support came from EU health commissioner John Dalli. ‘When investing in healthcare, sustainability


is essential,’ he said. ‘In economic terms, e-health can help make savings by cutting out duplication of work and reducing the travelling costs for patients. That’s on top of the qualitative societal benefits it will bring for service users.’ Dalli’s major reservation is not that the technology is insufficiently advanced, but that systems have developed in isolation, leading to ‘interoperability problems’. It seems that custom-made software used in a hospital emergency department is often incompatible

EU health commissioner John Dalli FCCA (right).

The big question

facing e-health evangelists is whether the technology actually works. Here, the evidence appears to be mounting on the side of the technophiles with the software used in the operating theatre or the radiology unit. And if hospital departments’ ICT systems cannot always speak to one another, what chance is there of linking together all the hospitals in a region, let alone dissolving some of the barriers between European countries? Brussels’ powers are limited when it comes


‘As an accountant, I tend to assess policies in an objective

manner and weigh up a problem with a view to finding pragmatic solutions’ ACCOUNTANTS CAN DRIVE HEALTH REFORMS European health commissioner John Dalli has served in a string of Maltese governments as minister for finance and economic affairs but began his career as an accountant. He told the e-health conference that his ACCA training had served him well in politics, helping him cut to the chase when making crucial decisions. ‘As an accountant, I tend to assess policies in an objective manner and weigh up a problem with a view to finding pragmatic solutions,’ he explained. ‘The accounting discipline of looking for cost-effectiveness and examining economic output has been most important.’ He argued there was little choice other than to make use of the best available technology if EU countries were to continue providing health services to an older population. E-health is key to moving away from expensive and timeconsuming hospital‑based care. ‘If the results of medical examinations and tests can be shared between hospitals, then patients will not have to repeat the same tests when they go to another hospital,’ he said. He also wants to break down barriers between

health services across Europe to give citizens broader access to specialists: ‘We can have a few centres of excellence accessible to those who do not live nearby. For patients with rare diseases this is particularly important. We can have focal points of expertise that can then deliver services to all corners of Europe,’ he said. Dalli sees e-health as also helping to reduce medical errors and guarantee accountability. Despite his optimism, Dalli accepts that major challenges remain. ‘The key problem is lack of interoperability,’ he said. ‘Systems must be able to speak to one another within hospitals, between hospitals and ultimately across borders. Political will is needed to make e-health a reality.’ Dalli believes too much time has already been wasted talking about health reforms and is frustrated at the patchy uptake of e-health across Europe. ‘This isn’t science fiction – the technology is already here waiting to be used,’ he said. ‘It’s time to step up from just talking about it to embracing e-health.’



to health legislation, although there is a new European cross-border healthcare directive designed to allow patients to move between EU countries for treatment. Some see it as a golden opportunity to make health systems more compatible. And this brings us to another hurdle: data protection. Despite the prospect of improved standards of healthcare, there is still unease about how sensitive health information is managed locally, so the notion of routinely sharing NHS patient records electronically with Spanish doctors must be handled with care. Getting the right legal and ethical codes in place on data protection is fundamental to making electronic patient records portable. HIDDEN COSTS The cost efficiencies shown by projects like an ACCA-run telemedicine scheme in Italy make a cut-and-dried case for radical, technology‑fuelled reform. But healthcare has a habit of making simple changes look complex. Monika Kosinska, secretary general of the European Public Health Alliance (EPHA), warned the e-health governance conference that making the transition to e-health would necessarily disrupt how doctors and nurses did their jobs. ‘We have to ask whether there are hidden costs,’ she said. ‘What will it cost in terms of training and retraining? Staff are the biggest cost in healthcare, so we must ask what new e-health technician roles will mean for staffing budgets.’ At a time when adding to the public sector payroll is not an option, health managers will have to work out whether administrators or frontline staff could be retrained or replaced with technology specialists. The final, but crucial, barrier to implementing e-health solutions is, indeed, finance. Fabian Zuleeg, chief economist at the European Policy Centre (EPC), stressed that while investment might be vital to save money down the line, private sources of finance might be required in the short run. ‘Where will the investment come from?’ he asked. ‘We have to look at the corporates, public private partnerships and the profit motive in the provision of healthcare. Some of the funding may have to come from the patients themselves.’ There’s no denying the potential of technology to make health systems safer, user-friendlier and more efficient, but there is no shortage of barriers to be overcome first. Gary Finnegan, journalist Download Collaboration and communication technology at the heart of hospital transformation at


Antonyia Parvanova MEP: ‘e-health can boost access for patients in need of specialist care’.

ACCA deputy president Dean Westcott FCCA: ‘scope for cutting costs while improving quality is absolutely enormous’.

GOOD FOR PATIENTS AND FOR INNOVATION Influential Bulgarian MEP Antonyia Parvanova told the conference that policymakers had to realise that while Europe’s best hospitals had excellent technology, some rural areas had no doctors and poor internet connectivity. This, along with overcoming problems with interoperability, is a major challenge in using technology to raise standards across the EU. However, she believes that health technology can boost patient safety and innovation in the sector, and has called on national governments to cooperate in the area of health. MEPs, she said, had beefed up the directive to require EU health ministers to work together on e-health but the legislation had been watered down by member states. Herself a medical doctor, Parvanova said MEPs would negotiate with governments as part of the EU’s complex decision-making system. She hopes to convince health ministers that cooperation on e-health can be achieved without ceding power to Brussels, and dismissed suggestions that the European Parliament might overstep its powers: ‘We are not trying to intervene in the financing of health services – that is for member states – but we believe e-health can boost access for patients in need of specialist care.’ ‘EVERYBODY IS LOOKING FOR SOLUTIONS’ Dean Westcott, deputy president of ACCA, told the conference that the best available evidence showed investing in e-health could be cost‑effective. ‘Health systems are under pressure from ageing population, rising costs of new technology and medicines, heightened patient expectations and global economic challenges,’ he said. ‘Everybody is looking for solutions. We at ACCA firmly believe e-health has an important role to play in delivering efficient and effective healthcare.’ ACCA ran an EU-funded study of telecardiology services in Italy which allowed heart problems to be detected early by collecting data from patients in the community and sending it for analysis by hospital-based experts. ‘This provided firm evidence of a clinical benefit of telemedicine applied to cardiology and set out a roadmap for more focused use of healthcare resources,’ said Westcott. ‘For GP patients, it meant earlier identification of problems, which helps avoid costs in the long run.’ He argued that citizens benefitted from less travelling and fewer hospital stays. ‘We showed significant cost benefits, increased quality of care and cost-effective means of delivering health services,’ Westcott pointed out. ‘The scope for cutting costs while improving quality is absolutely enormous.’



Editor Chris Quick +44 (0)20 7059 5966 Managing editor Jamie Ambler Sub editors Dean Gurden, Peter Kernan Design manager Jackie Dollar Junior designer Robert Mills Production manager Anthony Kay Head of publishing Adam Williams Pictures Corbis Printing Polestar Wheatons Paper Antalis 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 Mark Gold FCCA Deputy president Dean Westcott FCCA Vice-president Barry Cooper 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. Accountancy Futures® is a registered trademark of ACCA. 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 2011 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. Accountancy Futures Edition 3 was published in February 2011. 29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000


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Accountancy Futures – Issue 03  
Accountancy Futures – Issue 03  

Accountancy Futures – February 2011 – Issue 03 (Published by ACCA)