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ONE WEEK, GLOBAL, LIVE AND ON-DEMAND ACCA’s Accounting for the future is a worldwide event exploring the role finance professionals will play in building a stronger and sustainable global economy. ACCA champions the connected accountant, and over five days we will harness the latest technology to bring together finance professionals from around the world to share and learn from their peers. Our experts will share the latest insights on how businesses and the corporate sector need to adapt to meet the future needs of stakeholders, regulators, the economy and the environment. The event will be brought to you via live webinars and on-demand sessions and you can participate in events taking place around the world. To register, and for further information, visit Topics to be covered include: sustainability investor engagement corporate reporting risk management valuation

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

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accountancy futures Editor Chris Quick +44 (0)20 7059 5966

accountancy futures

Editorial board

Managing editor Lesley Bolton Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar 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.

Chiew Chun Wee head of policy, Asia Pacific

ACCA President Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE ACCA Connect Tel +44 (0)141 582 2000 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 of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 154,000 members and 432,000 students in 170 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of 83 offices and centres and more than 8,400 Approved Employers worldwide, which provide high standards of employee learning and development.

ACCA offices*

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Alvin Chikamba head of policy, sub-Saharan Africa

John Davies head of technical

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 2012 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 5 was published in June 2012.

Dr Afra Sajjad head of education, MENASA

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Aziz Tayyebi head of international development

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accountancy futures

Accountants must increasingly think in terms of

multiple possible scenarios and develop their agility to cope with ever shorter business cycles. These initial findings of a research project by ACCA’s Accountancy Futures Academy, covered in this edition, apply equally to anyone involved in business. The articles that follow look at what is driving these scenarios and the strategies business leaders are adopting. Former US vice president Al Gore highlights the role of financial reporting in sustainable capitalism, UK entrepreneur Sir Richard Branson describes why ‘doing good’ is good for business and Vietnam’s finance minister Professor Dr Vuong Dinh Hue looks at the role of financial infrastructure. We also look at the power of technology, diversity, and the agenda-setting interest of investors in this year’s Rio summit on climate change – potentially the biggest scenario changer of them all. Chris Quick, editor You can find out more about ACCA’s Accountancy Futures programme at

Global forums ACCA’s 10 global forums bring together experts from the public and private sectors, public practice and academia. They aim to further thinking on current and future issues, and look for opportunities for the accountancy profession.

Accountancy Futures Academy Chair: Ng Boon Yew FCCA

Accountants for Business Global Forum Chair: Richard Moat FCCA

Global Forum for Governance, Risk and Performance Chair: Adrian Berendt FCCA

Global Forum for Business Law Chair: Faris Dean ACCA

Global Forum for Audit and Assurance Chair: Robert Stenhouse FCCA

Global Forum for the Public Sector Chair: Datuk Wan Selamah Wan Sulaiman FCCA

Global Forum for Corporate Reporting Chair: Lorraine Holleway FCCA

Global Forum for SMEs Chair: Mark Gold FCCA

Global Forum for Sustainability Chair: David Nussbaum

Global Forum for Taxation Chair: Mukesh Gunamal FCCA

(Top row from left to right)

(Bottom row from left to right)

Executive chairman, Raffles Campus

Executive director, LCH Clearnet

Director, national accounting and audit, Deloitte UK

Head of financial reporting, Qatar Shell

Chief executive, WWF-UK

Former CFO and deputy CEO, Everything Everywhere

Solicitor, Lyons Dean

Accountant general of Malaysia

Senior partner, Silver Levene

Director, global tax quality and risk management, Ernst & Young

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pg01 front cover pg02 contact details pg03 welcome pg04 contents pg05 pg06 environmental pg07 pg08 pg09 pg10 pg11 pg12 pg13 pg14 pg15 pg16 pg17 pg18 pg19 pg20 pg21 pg22 pg23 pg24 pg25 pg26 pg27 pg28 standards for business pg29 pg30 pg31 pg32 pg33 access to finance pg34 pg35 pg36 pg37 pg38 global economy pg39 pg40 pg41 pg42 pg43 pg44 pg45 pg46 pg47 pg48 pg49 pg50 environmental accountability pg06 Al gore and david Blood Ditching quarterly earnings guidance and delivering integrated reports are key to sustainable capitalism, say the Nobel prizewinner and the co-founder of his research firm pg09 Yvo de boer UN climate boss turned KPMG adviser says business is wising up to the green dividend pg12 Earth summit We take the pulse of the climate conference in Rio pg16 CFO AND CHIEF CLIMATE OFFICER Accountants have a crucial role to play in environmental issues pg18 Unfrozen aRCTIC The melting pole is opening up a new shipping route between Europe and Asia Pacific pg22 water RISK Shortages of the planet’s most basic resource is a growing threat to business pg24 Integrated reporting Worldwide momentum continues to build

pg44 professor dr vuong dinh hue Developing accountancy infrastructure is key, says Vietnam minister of finance pg46 future view The evolving role of the accountant pg48 sports appeal Why the Olympics means gold for local companies pg50 governance Turkey’s new Commercial Code wins warm welcome pg52 stars of india KPMG’s Jamil Khatri urges business leaders in the country to motivate staff standards FOR BUSINESS pg28 investor VIEWS Standards setters urged to listen to voice of investors pg30 essential ethics FEE boss: integrity is all pg32 tay kay luan It’s back to ethical basics, says top Malaysian banker access to finance

global economy pg38 dr yugui chen CICPA exec gives credit to China’s accountants for the country’s foreign investment boom pg40 Africa on the up Resource-rich continent bucks the downturn pg43 insights Three perspectives on a fast-moving world

finance transformation pg55 outsourcing There is plenty more potential still to be tapped in shared services

pg33 capital markets Developing frontier economies pg36 private finance Are public private partnerships good value?

Ending the default issuing

of quarterly earnings guidance will speed sustainable capitalism, according to former US vice president Al Gore PG06


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PG51 PG52 PG53 PG54 PG55 FINANCE TRANSFORMATION PG56 PG57 PG58 PG59 PG60 PG61 PG62 PG63 PG64 PG65 PG66 PG67 PG68 PG69 PG70 PG71 PG72 PG73 PG74 CORPORATE REPORTING PG75 PG76 AUDIT AND SOCIETY PG77 PG78 PG79 PG80 RISK AND REWARD PG81 PG82 PG83 PG84 PG85 PG86 PG87 PUBLIC VALUE PG88 PG89 PG90 PG91 PG92 PUBLIC SECTOR PG93 PG94 PG95 PG96 SMALL BUSINESS PG97 PG98 PG99 ACCA NETWORK PG100 BACK COVER AUDIT AND SOCIETY PG76 IAASB The difficult task of balancing stakeholders PG78 AUDIT REPORTS Will three-way tussle sink a much needed overhaul? PG58 PEOPLE POWER Tips on talent from Standard Life CFO Jackie Hunt PG63 TECHNOLOGY A world of big data beckons PG66 DIVERSITY Leading it, managing it – and driving performance and innovation with it PG69 GENDER Novelist and one-time Deloitte partner Penny Avis considers the future for female accountants PG70 MOBILITY Strategic HR will redeploy talent on a global scale PG73 SOCIAL MEDIA Online power has gone to a new level and emerging markets should harness it

RISK AND REWARD PG80 MANAGING RISK Listen to the shop floor to make it all work

PG82 CYBERCRIME Perception high, preparedness low PG84 SALARIES Closing the pay gap PUBLIC VALUE PG87 HELEN BRAND It’s more than just numbers PG88 SIR RICHARD BRANSON Doing good is good for business under Branson

PG91 ON MERIT ALONE Professions for Good chairman argues for a level playing field PUBLIC SECTOR PG92 SPENDING Without effective scrutiny of government expenditure, more fiscal meltdown is on the cards PG94 TAXATION How can governments persuade companies not to relocate when they raise tax rates?

SMALL BUSINESS PG96 FREEING THE SMEs Deregulation to help small businesses flourish is not as simple a proposition as it seems PG98 STEVE FORBES Top-down resource management is a surefire way to stifle innovation, says the CEO of Forbes magazine

CORPORATE REPORTING PG74 IFRS Global club spreads the bottom-line benefits

The older I get the

more I’m inspired to make business investments that can also change the world, says Sir Richard Branson PG88


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2020 vision Compulsory integrated reporting and an end to quarterly earnings guidance will help achieve sustainable capitalism by 2020, say Al Gore and David Blood Generation Investment Management recently published Sustainable Capitalism, a white paper that highlights the need for a paradigm shift to a more sustainable capitalism. It makes the economic case for mainstreaming sustainable capitalism by highlighting the fact that sustainability does not represent a tradeoff with profit maximisation but actually fosters superior long-term value creation. In this article, which is based on excerpts from the paper, the firm’s founders, Al Gore and David Blood, look at integrated reporting and the default practice of issuing quarterly earnings guidance. These themes embody two of the five key actions that the paper presents to accelerate the transition towards sustainable capitalism by 2020.

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‘Earth Hour’: on 31 March, Hanoi in Vietnam (pictured this page) and Asuncion in Paraguay (pictured overleaf) were among the places that turned off the illumination of public buildings for an hour as part of a global campaign to draw attention to the need to save energy to reduce global warming gases.

Other key actions include the alignment of pay structures with long-term sustainable performance, the encouragement of long-term investing with loyalty-driven schemes, and the identification/incorporation of risks from stranded assets. The paper defines sustainable capitalism as a framework that seeks to maximise longterm value creation by reforming markets to address real needs while considering all costs and stakeholders in a world facing such challenges as climate change, water scarcity, poverty, disease, growing income inequality and urbanisation. You can read Sustainable Capitalism, which includes footnotes not shown in this article, at

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S Former US vice president Al Gore is co-founder and chairman of Generation Investment Management, a partnership focused on a new approach to sustainable investing. He is also chairman of the Climate Reality Project and author of Earth in the Balance, An Inconvenient Truth, The Assault on Reason, and Our Choice: A Plan to Solve the Climate Crisis. He is corecipient of the 2007 Nobel Peace Prize for ‘informing the world of the dangers posed by climate change’.

ignificant progress has been made towards improving the reporting of sustainability metrics, such as the Carbon Disclosure Project and the Global Reporting Initiative. However, most disclosure is still not conducive to mainstream use by investors, since it typically lacks clear links with the company’s financial performance and long-term prospects. Moreover, some companies that can measure non-financial data (many already do so for internal purposes) hesitate to publish any information that goes beyond regulatory requirements for fear it may help their rivals or increase their exposure to lawsuits. This is one of many reasons that new regulation must be enacted to level the playing field. Few fund managers have analysts with the skills needed to perform bottom-up analyses of non-financial metrics. Understandably, most therefore look to third-party rating agencies to analyse company sustainability disclosures and provide ratings for them to interpret. With more than 100 rating agencies providing such advice, there is significant variation in the quality and value of rating systems. We applaud the commitment that some mainstream data companies, such as Bloomberg and Thomson Reuters, have made toward sustainability and support their efforts to increase standardisation and improve quality. However, we believe that the best-run companies are those that are not only already making the links between sustainability and financial performance internally but are also sharing those links in their investor communications. Integrated reporting provides the framework to ensure that a company has a sustainable strategy and can improve internal decisionmaking by exposing itself to the discipline of the market. A handful of companies have already begun to make the switch to the integration of sustainability and financial metrics in their

Significant, widespread change will come about only when integrated reporting is mandated

annual reports, explicitly showing the link between the two and, in the process, reinforcing the business case for sustainable capitalism. Given that privately held companies have a greater degree of flexibility in reporting, they are in a position to provide leadership in developing integrated reports. Many leading global private equity funds, such as KKR and Doughty Hanson, have already taken steps to invest in improving the sustainability of their

portfolio companies and are reporting on sustainability metrics. Funds could go further and persuade those companies comfortable with reporting the financial benefits of these activities to do so prior to going public. We support efforts by Professor Bob Eccles at the Harvard Business School, the International Integrated Reporting Council, and Aviva Investors, who collectively are pioneering the field of integrated reporting. Yet while these actors are playing a critical role in shaping this nascent idea and encouraging voluntary action by companies, it is clear that significant, widespread change will come about only when integrated reporting is mandated. Although this policy intervention will vary country by country, securities regulators and stock exchanges are well suited to oversee the requirement for integrated reporting. In South Africa, the Johannesburg Stock Exchange set an exemplary precedent in its 2011 decision to require all listed companies either to produce an integrated report or explain why they were not doing so. Even so, the mandating of integrated reporting is just the first step, as reporting standards around ESG (environmental, social and governance) information and its link to financial metrics will need to be refined continuously. What is critical is that the information provided is material to investors and relevant to the specific sector and company. ‘Cookie-cutter’ forms that do not take into account variations in what is most relevant from one sector to another are not adequate. Accountants must also work to provide assurance on non-financial information that is comparable to what they provide on financial metrics, and provide integrated assurance on both. We propose that integrated reporting should be mandated for publicly listed companies by the appropriate regulatory agencies and we encourage these companies to take voluntary action in the short term to provide integrated reports until such regulation appears. We also encourage investors, including private equity investors, to ask for integrated reports from their portfolio companies and incorporate this in their investment decisions. We also support the growing commitment by privately held companies to produce integrated reports. Quarterly earnings guidance Another key action that will accelerate the development of sustainable capitalism by 2020 is ending the default practice of issuing quarterly earnings guidance. In the modern world, we often appear virtually hypnotised by the short term in our politics, our culture, business and well beyond. In business specifically, the vast majority of

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David Blood is co-founder and senior partner of Generation Investment Management. Previously, he spent 18 years at Goldman Sachs, and served as co-CEO and CEO of Goldman Sachs Asset Management from 1999–2003. He is on the boards of Harvest Power, New Forests, SHINE, Social Finance UK, Social Finance US and the Nature Conservancy.

managers are now clearly choosing short-term profits over sustainable long-term growth. We have long known that an important part of the reason for this distortion is that executives are encouraged – by investor behaviour, incentives and business cultures – to focus on the business’s short-term earnings. Investors have become increasingly impatient with the CEOs of publicly listed companies who focus on longer-term value creation, and are too quick to penalise stocks for short-term underperformance even if that occurs in the context of a long-term investment plan. In many cases, a company’s ability to meet quarterly earnings guidance trumps the long-term performance incentives for CEOs and makes it much harder for them to focus investors on the long-term strategy. An empirical investigation conducted by Murad Antia, Christos Pantzalis and Jung Chul Park reveals that shorter CEO decision horizons are in fact ‘associated with more agency costs, lower firm valuation, and higher levels of information risk’. Research by John Graham, Campbell Harvey and Shiva Rajgopal shows that 78% of managers will reject a project with a positive NPV (net present value) if it lowers quarterly earnings below consensus expectations. And an astonishing 80% would focus on this recurring, short-term metric – at the expense of building long-term shareholder value – by making cuts in discretionary spending, including R&D and advertising. This kind of practice is managing for the short term, not managing sustainably.

Work by John Asker, Joan Farre-Mensa and Alexander Ljungqvist reveals that this valuedestroying habit is clearly manifested in data showing publicly held companies invest at half the rate of privately held companies when the gains from such investments will not be realised on a quarterly basis. They also show that this applies when an individual company switches between public and private ownership. And they make the obvious point that it leaves public companies less able to exploit new business opportunities. Not providing quarterly earnings guidance would help some companies alleviate the pressure on managers to meet financial expectations on a quarterly basis, and allow them to focus on building the business for long-term profitability. However, because most public companies provide quarterly earnings guidance, there is a ‘collective action’ problem for CEOs and boards that wish to end the practice. We applaud the few CEOs who, despite criticism, have decided to end earnings guidance and have talked openly about what investors should expect from the management time horizon. For other companies – and even whole sectors – quarterly guidance may be appropriate, but the decision to offer it ought to be part of a well-justified strategy and not simply an unthinking response to the prevailing habits of the market. We propose bringing together a significant group of CEOs who have already stopped providing quarterly earnings guidance with others who pledge to stop doing so as a catalyst for change around this practice.

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A clarity of vision Companies are starting to see the link between sustainability and financial results, says KPMG special adviser and former UN climate chief Yvo de Boer


ver the past two decades we have recognised that the way we do business has a serious impact on the world around us. It is now apparent that the state of the world affects the way we do business. The central challenge of our age – maintaining human progress while minimising resource use and environmental decline – can simultaneously be one of the biggest sources of future success for business. Given the unprecedented natural resource scarcity, skyrocketing food prices, escalating energy security issues and an expected population of up to 10 billion in 2100, the private sector is ever more challenged to overhaul its strategy and make its business models futureproof. For example, if companies had to pay for the full environmental costs of their production, they would lose 41 cents for every US$1 in earnings on average. External environmental costs of 11 key industry sectors (including upstream supply chain) rose by 50% between 2002 and 2010. They include things like pollution – external costs that society will likely have to pay for in the future but are not included in transaction prices. Today’s leaders are struggling with complexity. Until now, we found global trends on energy, water security and food scarcity complex enough. The convergence of other forces such as population growth, deforestation and a surging middle class is impacting on business and the world around us. Leaders are overwhelmed by the sheer scale of these problems and are struggling to act. There are ways to solve these problems, and that includes harnessing the capacity of business. Policymakers and the business community should ramp up collaboration and demonstrate renewed leadership in order to achieve sustainable and equitable growth objectives. Government policies, investor values and consumer preferences are also altering rapidly, thus impacting businesses’ bottom line and demanding a long-term vision, supported by immediate action. Is this forced by stakeholder demand, or primarily driven by sound entrepreneurship? It is up to each and every company to decide for itself. Rather than attempting to survive risks resulting from global megaforces, business

Yvo de Boer is KPMG’s special global adviser on climate change and sustainability, responsible for driving the development of the firm’s Sustainability Service. He is former executive secretary to the UN Framework Convention on Climate Change (UNFCCC), and currently chairs the World Economic Forum’s Global Agenda Council on Climate Change. De Boer helped to prepare the position of the European Union in the lead-up to negotiations on the Kyoto Protocol; assisted in the design of the EU’s internal burden sharing; and has led delegations to UNFCCC negotiations.

leaders can do much more. Indeed, with foresight and planning, and by undertaking pioneering actions to prepare for an uncertain future, they can thrive by turning risks into new opportunities. Companies need to develop resilience and flexibility for an unpredictable future and build capacity to anticipate and adapt. understand the risks First and foremost, businesses need to fully assess and understand future sustainability risks, for example by integrating them into an enterprise risk management tool, defining their responses to deal with them, and analysing opportunities for efficiency, substitution or adaptation. Integrated strategic planning and strategy development are needed as well; this requires business management to make sustainability central to their corporate strategy and incorporate it at all levels. Put simply, businesses must manage risks and capitalise on opportunities by turning strategic plans and strategies into ambitious targets and actions. One can think of energy and resource efficiency improvements, sustainable supply chain management, and investment into innovation on sustainable products and services, as well as gaining access to new markets for greener products, services and technologies. It is also imperative to explore tax incentives tailored to alternative energy, energy efficiency and other areas related to sustainability.

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Another much discussed but less implemented tool for success in this area is measuring performance and reporting on sustainability, as well as the related benefits. The growing trend of integrated reporting is an example of how companies are building frameworks for sustainability reporting processes, stronger information systems

The impact of melting glaciers is just one of the environmental issues that could have implications for the business world in the future.

Companies that leverage

external influences as opportunities are realising a competitive advantage

and appropriate governance and control mechanisms on a par with those currently used in financial reporting. time to talk Organisations cannot do this alone. Collaboration with partners on sustainability issues is vital to enhance leverage and improve the cost-benefit ratio of action. Business leaders should seek opportunities for genuine dialogue with governments and demonstrate new and innovative approaches to publicprivate partnerships. Improved dialogue could focus on economic instruments and market barriers that could be reduced to make sustainable business operation easier. Good

management used to be about preparing for the expected; now it is just as much about preparing for the unexpected. Without action and strategic planning, risks will multiply and opportunities will be lost. KPMG’s clients and business all over the world are seeing the link between sustainability and financial results becoming increasingly clear. Companies that recognise the external influences on their organisations and leverage them as opportunities are realising a competitive advantage. To that end, the exercise of measuring and reporting sustainability activities to stakeholders with clear, accurate data is increasingly relevant and quickly becoming a priority. Competitive advantage can be carved out of emerging risk. It is clearly no longer in question that we must transcend to a more sustainable economy. The question is the pace in which we are able, and especially willing, to achieve it. To thrive, or even just to survive, businesses need to understand the root causes of what affects their operations, not just the symptoms. The bold, the visionary and the innovative recognise that what is good for people and the planet will also be good for the long-term bottom line and shareholder value. This is how we can make our common economy futureproof.

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The global picture While KPMG’s latest survey of corporate responsibility reporting is largely positive, some countries lag behind


early all of the world’s largest 250 companies now report on their corporate responsibility activity, according to what KPMG believes to be the most comprehensive survey of corporate responsibility (CR) reporting ever produced. Published in November 2011, the KPMG International Survey of Corporate Responsibility Reporting found that corporate responsibility reporting is now undertaken by 95% of the Global Fortune 250. This has risen by 14% since 2008, when the survey was last carried out. In the absence of a regulatory global sustainability reporting standard, the drive for consistency and accessibility to quality data was highlighted, with the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines used by 80% of Global Fortune 250 companies. The survey also looked at the 100 largest

companies in each of the 34 countries surveyed. Corporate responsibility reporting had increased by 11% since 2008 to 64% overall. But there were geographical variations. Countries leading reporting in the 2008 survey continue to dominate today with 100% and 99% of UK and Japanese companies, respectively, reporting. The sharp increase in South Africa, taking third place with 97% (up from 45% in 2008), is attributed to the King Corporate Governance Commission code. The Americas rate was 69% overall (with the US at 83% and Canada at 79%), while the Middle East and Africa region, at 61%, is gaining ground; new entrant China launched with 60%. Lowest ranked were New Zealand and Chile (27%), India (20%) and Israel (18%). The KPMG survey is available at

Wim Bartels Global head, KPMG Sustainability Assurance Services ‘Unlike financial reporting, the disclosure of sustainability metrics to the market is largely unregulated. Restatements are four times higher compared to financial reporting and demonstrate that CR reporting has some way to go. Reporters that engaged formal assurance professionals were twice as likely to restate their reports as those without, demonstrating that assurance providers are demanding higher quality data, also signifying the need for increased focus on internal processes. ‘This survey shows almost half of the G250 companies report gaining financial value from their CR initiatives. CR has moved from being a moral imperative to a critical business imperative. The time has now come to enhance CR reporting information systems to bring them up to the level that is equal to financial reporting, including a comparable quality of governance controls and management.’

REPORTING LEVELS within top-six industries ENGAGED IN CR reporting

Forestry, pulp and paper











69% 0%











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Beating the drum With commercially minded investors joining in with ever louder calls for organisations to address sustainability issues, the Earth Summit in Rio highlights the subject’s growing importance to the business agenda


he June 2012 Earth Summit in Rio de Janeiro will be even more of a focus for the world’s attention than the first UN Conference on Sustainable Development held in the same city 20 years ago. For one thing, there are about 1.6 billion more people in the world today. For another, the environmental agenda has moved even further towards the centre-stage of politics, society and the corporate world.

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Moreover, the environmental argument being put forward by mainstream stakeholders now is less about forcing big business to comply with rules, regulations and targets. It is much more to do with making the case that taking a responsible approach to sustainability is, in fact, in the long-term interests of companies and their shareholders. A group known as the Corporate Sustainability Reporting Coalition (CSRC) has called on

countries attending the so-called Rio+20 event to develop a UN convention. This would require the signatories to compel company boards to think about the sustainability issues that affect them and to report on them in their annual report and accounts. Institutional fund management group Aviva Investors, the global asset management business of Aviva plc, led the formation of the CSRC, whose membership includes ACCA.

Rio calling: countries that do not heed the message risk falling out of step with the latest thinking on integrated reporting.

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Steve Waygood, chief responsible investment officer at Aviva Investors, says: ‘What we want is the board’s thinking. What we don’t want is the boards to simply delegate to their compliance teams that they need to report information that might be absolutely meaningless to their business.’ Made up of more than 40 financial institutions, non-governmental organisations, professional bodies and investors, CSRC is looking for an integrated report that brings together the financial and material non-financial information that investors need to get a more holistic picture of a company’s performance. One of the draft’s clauses in the Rio+20 final agreement reads: ‘We recognise the need for a global commitment on corporate sustainability reporting which promotes and encourages large private and public companies to take sustainability issues into account… and to integrate sustainability information within their reporting cycles.’ Waygood says that, although a step forward, this wording does not give a strong enough commitment to be truly effective. But overall, what effect does all this have on how corporates treat sustainability reporting? Rob Lake is director of strategic developments at the UN-backed Principles for Responsible Investment (PRI), a body led predominantly by pension funds and their fund managers. He says: ‘Significantly better information from companies about their sustainability

performance and sustainability risk exposure is absolutely crucial to what PRI investors are trying to do.’ PRI’s role, Lake explains, is ‘to find new and more effective ways to bring together and support groups of investors who want to take energetic action to exercise influence over companies’.

Brazil, host of the Earth Summit, has a tradition of antipollution protests, as seen here during a 2003 demonstration against the pollution of the Jordao River.

Different criteria The Johannesburg Stock Exchange (JSE) launched a Socially Responsible Investment (SRI) index in 2004. The criteria encompass a range of environmental, social, economic and governance indicators. While recognising that banks are different from mining companies or retailers, the criteria are not themselves specific tonnage targets, for example. Rather, they demand reporting on issues such as commitment to use targets, identification of significant impacts, and outlines of processes, responsibilities and action plans. Corli le Roux, head of the SRI and sustainability at the JSE, notes that take-up from the investor community has to date been slow. ‘There was little understanding of how sustainability could be incorporated into investment decisionmaking,’ she says. She adds that PRI has helped. However, le Roux points out: ‘The index has been mostly driven from the issuers’ perspective.’ Between 85% and 90% by market capitalisation of the top 100 JSElisted companies meet the criteria. While

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the criteria are continuing to evolve, this figure suggests that companies still have some way to go – and research suggests that JSE companies, for the most part, have yet to take real action by reducing their greenhouse gas emissions, for example. While sustainability has long-term implications, not every investor plays the long game. Savvas Savouri, chief economist at London and Dubai-based hedge fund Toscafund, says: ‘You can have those indices until they’re coming out your ears. They will always underperform because you’re putting a constraint on things. If you restrict your [investment] choice set, it will be inferior to a more general choice set.’ Lake says it’s not about pulling out of investments that don’t at present comply, but ‘trying to stimulate a much more productive dialogue between companies and long-term investors so companies understand that they have long-term allies in long-term investors’. In fact, the evidence is that companies that do well from a sustainability perspective also do well financially. Generation Investment Management, co-founded by former US vice president Al Gore, recently published a paper,

Sustainable Capitalism (see page 06), which suggests that environmentally conscientious companies can reduce cost of debt and face lower capital constraints. In the private equity sphere, a recent paper by Doughty Hanson & Co and conservation group WWF points to other research that suggests businesses that are committed to environmental, social and governance issues earn higher market valuations. The paper, Private Equity and Responsible Investment: An Opportunity for Value Creation, addresses the chicken-and-the-egg syndrome: ‘Companies lament that investors do not value their sustainability efforts, while investors complain that companies do not report sustainability initiatives in terms that they can value.’ There is still a long way to go. But now, thanks to the CSRC, governments are being called on to do something about the issue. At Rio+20, it wouldn’t be surprising if there were a carnival atmosphere. It would be entirely appropriate: for the louder you beat the drum, the more difficult it is to be out of step. Andrew Sawers, journalist

Steve Waygood chief responsible investment officer, Aviva Investors ‘We want boards to think about which parts of the available guidance matter to their firm and could affect future cashflows and the sustainability of their institution. It includes issues like the raw materials on which their company depends, and the wastes that are created in the way that their product or service is distributed. Where companies are excessively short term in managing these issues, then that can harm company value and, therefore, the value of the pension portfolios we run. This is why we consider it’s important for companies to have support to think long term from investors and regulators. One appropriate way of doing that is for regulators and investors to ask companies to disclose their long-term strategy, or explain why they have not.’

Corli le Roux Head of the SRI and sustainability, Johannesburg Stock Exchange ‘We launched the Socially Responsible Investment index to crystallise the debate around sustainability and sustainable development, to recognise what companies were doing in this space, and to enable engagement and responsible investment by investors. Over the years that has crystallised into wanting to positively influence issuers and investors in the way that they do business. We have had a significant amount of influence over the issuers and how extensively they take account of sustainability considerations in their operations. We are also seeing that influence being brought to bear on investors, as more of them start thinking about how to incorporate the imperatives of sustainability into their investment decision-making.’

Rachel Jackson Head of sustainability, ACCA ‘The investor and finance community should be key actors in the future of corporate reporting. Both investors and the world’s stock exchanges need to engage in, and embrace, the changes ahead in corporate transparency in order to utilise new and material information, in both investment decisions and listing requirements. Investors have an opportunity to shape the development and frequency of integrated reporting, improve general corporate accountability and progress analysis methods to account for deeper ESG (environmental, social, governance) issues. They need to start changing the time horizons on which their decisions and analyses are taken, and both request and use additional material ESG company data.’

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CFOs in climate change hotseat So what exactly does sustainability have to do with accountants? Over the course of the next decade, just about everything, says ACCA’s Roger Adams


espite all the work put in over the years to ensure that accountants and accounting bodies are seen as relevant to the debates on sustainable development and climate change, two commonly asked questions about environmental and sustainability issues continue to be asked. The first, asked by accountants, is, what’s this got to do with me? The second, asked by non-accountants, is, what have accountants got to do with environmental and sustainability issues? But we are rapidly approaching a time when neither question should have to be asked again, because accountants are increasingly occupying – and being seen to occupy – a central role in both the climate change and the sustainable development debates.

The COP 17 Conference in Durban in late 2011 took climate change negotiations between governments to a new place. Writing in The Guardian, Paul Toyne, head of sustainability at design consultancy WSP Group, outlined the implications of the agreement struck by the conference for the business community: ‘What is significant about Durban is that all UN countries will need to [set reduction targets] by 2020, including the new big emitters such as China and India. This sets the whole world on a course for a low-carbon economy for the first time. ‘The implications are profound for business, as companies that can sell services and goods that help realise this roadmap process will prosper. This should also stimulate investment in low-carbon technology and

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and to integrate sustainability information within the reporting cycle.’ This recommendation appears to speak to the recent establishment of the International Integrated Reporting Council (IIRC) and the increasing demand for a reporting regime which embraces traditional financial reporting (as governed by the IASB) and sustainability reporting (largely determined by the Global Reporting Initiative, GRI).

encourage the carbon offset markets, as negotiators at Durban acquiesced to new market mechanisms to put a price on carbon.’ the demands of durban At the business level, accountants – particularly FDs, CFOs and auditors – will need to be fully conversant with the implications of the Durban decisions. Between 2012 and 2020: Tighter limits on greenhouse gas emissions will be set globally, and by 2020 may be legally enforceable. Carbon emission trading schemes will expand and mature, as will their importance on balance sheets – the International Accounting Standards Board (IASB) has been developing a standard for some years. Sophisticated carbon offset schemes and carbon-related financial instruments, including derivatives, will become common. Investors will demand more and more disclosure detail on emissions and related risks, and governance systems will have to be augmented/expanded to deal with these new requirements. Corporate risk management programmes and processes will need to respond. Emissions disclosure regimes will begin to bite at the annual reporting level and carbon-intensive organisations will have to develop more focused investor relationship programmes as well as convincing adaptation strategies. Upstream and downstream reporting of greenhouse gas emissions (Scope 3 disclosures under the Greenhouse Gas Protocol) may be included within the new reporting regimes. Third-party assurance for greenhouse gas emissions will become mandatory. The International Auditing and Assurance Standards Board (IAASB) is finalising guidance on the assurance of emissions trading schemes for issue later this year. Corporate strategies will have to embrace the challenges of the low-carbon economy. Internal management processes such as capital investment appraisal decisions will have to formally embrace emissions issues as well as other significant sustainabilityrelated impacts. At the forthcoming Rio+20 UN Conference on Sustainable Development in June, one agenda issue that has already been widely reported is a proposal that sustainability issues should be integrated into the annual reporting cycle. Clause 24 of the so-called zero draft for Rio+20 reads: ‘We call for a global policy framework requiring all listed and large private companies to consider sustainability issues

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The future for accountants and

their employers seems likely to have sustainability issues at its heart Roger Adams FCCA is director – special assignments at ACCA. In 2010 he retired as ACCA’s executive director – policy, a role in which he managed ACCA’s global policy positions on sustainability and corporate responsibility. He has also received the British Accounting Association’s Lifetime Achievement Award.

According to the IIRC’s discussion paper Towards Integrated Reporting: Communicating Value in the 21st Century, integrated reporting sets out ‘to demonstrate the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, integrated reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.’ Were clause 24 ever to become legally enforceable or incorporated into a standard, the corporate reporting environment would change significantly. Playing a core role With Rio+20 and then COP 18 in Qatar in December, public policy developments in 2012 seem likely to make the future direction of travel more certain. Already 95% of Global 250 companies report on sustainability issues, up from 45% in 2002. With a well-advertised political will (stemming from the antipathy towards short-termism engendered by the global financial crisis) to elongate the investment time horizon, the future for accountants, their employers and the profession in general seems likely to have sustainability issues at its heart. CFOs and FDs will have to answer for the financial impacts and risks associated with the required transitions. They must communicate these to the corporate audit and governance committees. They must reflect them – and the action the organisation is taking to mitigate them – in their public disclosures to investors. And above all they must play a part in the creation of value by being a core member of the team that designs the long-term lowcarbon business strategy and business model After all, the financing of that is the crux of the CFO/FD’s role.

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Northern lite The opening up of the Arctic to shipping will bring big savings on the freight and carbon costs of transporting goods between Europe and Asia Pacific. Colin Manson reports

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espite the still contested debate about the extent to which greenhouse gas emissions from humans contribute to climate change, global warming is a reality. Nowhere is this more obvious than the Arctic Basin, where the melting of the ice sheets is viewed with increasing concern. In 2011 the retreating ice reached its second lowest ever recorded level, some 310,000 sq km off the 2007 record low. The 10-year running average reduction went from 10.2% in 2007 to a new high of 12% in 2011, according to the Colorado National Snow & Ice Data Center. In addition, the Northern Sea Route (along the top of Russia) was open throughout last August and well into September. The ‘Amundsen route’ of the Northwest Passage (along the top of Canada) was also open for the fifth year running. The opening up of the Arctic routes brings opportunities for ships trading between Europe and China, with a much faster transit time and so savings in both costs and emissions and the avoidance of piracy-prone areas off Somalia and the Straits of Malacca. The debate over the speed at which the ice will disappear from the Northern Sea Route is strongly contested, with more conservative opinion putting the commercial reality out to the 2030–40 timeframe. However, recent classified studies within the UK’s Ministry of Defence leaked to the Daily Telegraph last August place greater emphasis on an earlier opening up of the route, with a 2015–20 timeframe seen as a more likely scenario. On a more basic level, there is currently little research into the extent to which shipping will use the Arctic Basin. The Arctic Council’s 2009 Arctic Marine Shipping Assessment (AMSA) is the most recent globally accepted detailed assessment. However, the report was based on a 2004 survey of shipping through the Northern Sea Route and the Arctic Climate Impact Assessment’s 2008 median ice extent. Of course, the Antarctic Ocean also lies at a pole but conditions there are significantly

different from the Arctic. The way in which the Polar Code is being developed treats the environment at both poles in a similar way despite the very real differences in the way in which it behaves. For example, Antarctica is an ice-covered land mass with ice shelves extending outwards whereas the North Pole is covered by an iced-over central sea with land around the edges only. This makes for very different climate impacts, yet little is done to differentiate the way in which the Polar Code is applied in each area. Polar Code framework The International Maritime Organization (IMO) is developing the Polar Code regulatory framework with the various member nations and with participation from a number of NGOs including the Institute of Marine Engineering, Science & Technology (IMarEST). At present, it is focusing mainly on the requirements of ships that operate in or near ice conditions and the requirements of an ice navigator. Even though sea ice is retreating further and faster than ever, other considerations such as sea-air temperature differences, extreme wind speeds and visibility, despite their importance, are not receiving the same amount of attention. The Polar Code also fails to address the training requirements inherent in the current STWC mariner certification, as well as the

Colin Manson is the director of Manson Oceanographic Consultancy, which he formed in 2011 after retiring from the Royal Navy as a meteorological and oceanographic specialist. He has been a consultant to the Defence Science and Technology Laboratory, the Institute of Marine Engineering, Science & Technology and the International Maritime Organization.

The debate over the speed

at which the ice will disappear from the Northern Sea Route is strongly contested

additional maritime pollution and safety of life at sea issues associated with such remote and difficult to police regions. How will the changes to the Arctic affect the rest of the industrial world? With its opening up to sea freight, transit times between Europe and the expanding markets of Asia Pacific (notably China) will reduce significantly, albeit only during the summer months. At a recent conference on polar shipping held at IMarEST,

The Aurora Borealis over Blafjellelva River in Troms County, Norway.

over the top

japan south korea china

via suez canal miles days 11,000 34 10,700 33 10,500 32

via northern sea route miles days 7,400 26 7,500 27 7,900 28

savings (days) 8 6 4

Distances and times from Asia Pacific to Rotterdam in the Netherlands, based on 2011 transit times with some ice present. The likely increase in speed to 14 knots in the next five years would cut a further five days or so from transit times.

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there was much debate about the reduction in emissions, operating costs and transit times. The transit times between the port of Rotterdam in Europe and Japan, China and South Korea have been calculated (see panel, previous page) based on an average speed of just six knots along the north of Russia – a speed consistent with some ice being present throughout the voyage. Over the next five years or so, the extent of ice is expected to reduce, enabling the average transit speed to increase to perhaps 14 knots, which reduces the overall time considerably. The savings gained will include more than just the cost in operating costs, though – they will also include the carbon cost per tonne of cargo. At an average of, say, £50,000 per day, the Northern Sea Route confers a freight saving of around £400,000 from Japan, which could rise to perhaps £750,000 in the near future. The Arctic sea routes also remove the need for vessels to pass through the Malacca Straits and the northwest Indian Ocean – both areas of endemic piracy. Without this risk, insurance premiums can be reduced significantly although this is partly balanced by the increased premiums associated with the risk of ice damage. Suez Canal transit charges are also likely to go on rising, although the Arctic routes may incur the cost of an ice breaker escort. A widening window At the same time, stocks of components or finished goods can be reduced during the summer months, although here again the weather in an individual year may affect that holding. However, as the ice melts ever faster in the near future, the open water season will increase from the current eight to 10 weeks up to perhaps four months. This would reduce operating costs significantly but require more detailed overview of the stock control process. The IMO’s initiative in producing the Polar Code is a welcome step towards providing a regulatory framework for safe use of the Arctic Basin. However, to determine the true extent of the requirements and provide a robust yet flexible code, more research is desperately needed to generate better forecasts of the speed at which the ice will retreat, and hence the increasing availability of the Arctic routes as well as the volume of shipping expected to take advantage of that availability. Overall, the opening up of the Arctic Ocean and the Northern Sea Route represents potential savings in cargo costs, insurance premiums and stock holdings, as well as a reduction in the carbon cost of goods both imported

view of arctic basin showing two routes Northern Sea Route suez route

Over the next five years or

so, the average transit speed is expected to increase to perhaps 14 knots from and exported to markets in Asia Pacific. However, it needs the customer to be aware of these potential savings in order to ensure that freighting companies take proper note of the reduction in costs – they will be reluctant to do so as it will eat into their own operating model. Only by a straightforward application of market forces will savvy customers ensure that their operating costs are reduced by insisting that carriers use the Northern Sea Route. This will also improve their green credentials and raise their sustainability rating.

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Not so plain sailing Opening up the Arctic to commercial shipping is fraught with business as well as ecological risk, argue environmental campaigning organisations Open for business: the Northwest Passage between Canada and Greenland, captured by the Moderateresolution Imaging Spectroradiometer (MODIS) on the Terra satellite in September 2007.


he opening of the Northern Sea Route to shipping may mean big savings on the freight and carbon costs of transporting goods between Europe and Asia Pacific, but will a price be paid by the Arctic and its largely unstudied ecosystem? Greenpeace International polar activist Ben Ayliffe believes that price is currently too high. ‘This is the planet’s last wild ocean and any accident would have incalculable consequences and be very difficult to mitigate,’ he warns. ‘With more shipping we’re going to have greater risk of accidents in the last great wilderness left on the planet.’ But potential oil spills are not the only dangers increased marine traffic poses to the icy north. ‘There are also problems of increased black carbon [soot] to consider,’ says Ayliffe. ‘Increased shipping will trap more and more heat in the local environment, which will only add to the already severe effects of climate change. The Arctic is melting faster than any other region in the world. Having more black carbon there will add to that.’

There are also business risks. ‘It is extremely risky to try anything up there at the moment,’ says Dr Simon Walmsley, WWF International marine manager. ‘One of the greatest problems in the Arctic is the lack of hydrogeographic information. These areas have never really been surveyed. That’s a large risk for companies putting money into these ventures.’ There is also the human factor. With remoteness, harsh conditions and lack of search and rescue, Walmsley argues that accidents and loss of life could be a reality if industry starts rushing in prematurely to capitalise on cost savings. ‘For many years we have seen Arctic nations operating pretty good intra-port shipping in these conditions to supply remote settlements and developments,’ he says. ‘Problems are going to arise with transit in the Arctic when we get non-fit-forpurpose vessels up there with crews that are not used to operating in these conditions.’ Walmsley is involved in International Maritime Organization (IMO) discussions for the development of a Polar Code for shipping in the Arctic and Antarctic. ‘The Polar Code is an environmental and safety mechanism for ships in polar waters that are extreme,’ he says. In February, it was decided to delay the environmental section of the code by one year. ‘We’re not very happy about that,’ Walmsley adds. ‘The Arctic is one of the most sensitive ecosystems in the world, and experiencing the greatest rate of climate change – any sort of delay is not good. That’s a cost in itself.’ ‘It’s not all doom and gloom,’ says Ayliffe, but he warns that continuing industrialisation in the Arctic will firmly hammer the nail in the coffin of this vast frozen frontier. ‘Scientists are saying the Arctic sea ice is going into a death spiral,’ he says. ‘Greenpeace is calling for better governance to draw a line in the ice and say enough is enough. We really have to look at the future of this pristine region.’ Walmsley hopes the Polar Code will be developed sooner rather than later. ‘As climate change endures, conditions are going to change even more. Coupled with a lack of hydrogeographic information, that means you are quite blind out there. That’s why we need this code to be developed asap.’ To companies considering joining the Arctic shipping rush, he offers this advice: ‘Consider the risk, and whether it is worth it. Only fit-forpurpose vessels and operations – with crew that are specifically trained and experienced – should be allowed into these areas and, where the risk/sensitivity is too great, then industry should consider not operating at all.’ Kate Jenkinson, ACCA journalist

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accountancy futures: environmental accountability water

Waterproofing risk As potential water scarcity becomes a business issue, it is increasingly crucial to be able to measure its scope and associated risks, says WWF’s Stuart Orr


arallels have been drawn between potential water crises in the 21st century and the ongoing carbon and climate crisis. Undoubtedly, these are both challenges of global magnitude indirectly linked to the global supply chains of goods and services, but that is where the parallels end. Issues, risks and opportunities related to water are fundamentally different from those related to climate, and will require different strategies and solutions from both corporate and financial sectors. The key difference between climate and water risks is that the availability, management and impact of water use are local, and can be addressed at a watershed or river basin level. This means that business risk around water is related to location and exposure to local water stress, making the most effective response the improvement of local management to address local circumstances. This is a major departure from the marketbased solutions that are being proposed for carbon/climate change, where a universal equivalent indicator (CO2e) allows for commoditised trading. Water risk is a subjective concept. For a farmer, the danger may be back-to-back years of below-average rainfall. For the owner of a processing plant, it might be a temporary, sudden cessation of water during peak operation time. For a government, risks might include the increasing costs of accessing water for utilities and the implications of higher energy costs. Water is a fundamental human right. However, water’s social and cultural dimensions are juxtaposed with its use in various production processes, which imposes an economic value on water. It is this duality, together with the need for water to support all ecological processes, that triggers business risks. As water rises up the corporate agenda, it is also becoming an area of interest to the financial sector, though corporate and financial sector agendas do not necessarily align. Whereas a company may need to identify risks to build strategy, engage with suppliers or strengthen its social licence to operate, financiers are looking for where water may become a critical issue in the coming decades, with a cautious eye on investing in such areas and seeking a safer investment environment.

Such safer environments can either be a part of the investment or a complete relocation of the investment to other areas with lower water risks. Attaining investment where the risks are high from a business perspective, but low in terms of financial return, will be hard for companies looking to innovate and improve. Yet this is exactly where money should be flowing.

Based in Switzerland as a manager in WWF’s freshwater team, Stuart Orr has an academic and research background and worked for many years in the private sector in Asia and the US. He has published on water measurement, agricultural policy and water-related risk. Conservation organisation WWF is active in over 100 countries.

Improved resource management WWF engages with companies to understand water-related issues and helps to define strategy and stewardship with the goal of better resource management for all users. However, as water risk studies proliferate and a wide range of perspectives and interests come to the fore, there is a great danger that the complexity of water, its social and economic nature, and the myriad of local nuances of water management will become lost in simplistic metrics, evaluations and response strategies. There is an urgent need to clarify the scope and scale of risks, and to define effective tools for assessing and managing them, which is why WWF teamed up with German development bank DEG to develop the Water Risk Filter. Originally this was a project

David Nussbaum Chief executive, WWF-UK ‘It is our experience that water issues are gaining a lot more attention, particularly from companies and financial institutions. We are asked all the time to help organisations to better understand water, not just as an environmental challenge, but as a business and societal risk.’ Chair of ACCA’s Global Forum for Sustainability

Igor Chestin Director general, WWF-Russia ‘Today, only 38% of Russian towns have drinking water that meets sanitary requirements. The National 2020 Water Strategy focuses on optimising water usage and the improvement of water supply systems across the country. The main emphasis is being put on the quality of drinking water and waste water treatment.’

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designed to assess the exposure to water risk of DEG’s private sector clients, but over time the sound science and simplicity of the tool we created made it applicable to any investor, bank or company. The Water Risk Filter is a risk metrics tool, evaluating physical, regulatory and reputation risks for 35 industry sectors across the globe. At present, there is very little understanding of the water element in the value chain of goods and services, and often too much focus is given to managing water issues from within the fence line. The tool exploits the latest scientific mapping and indicators available to give the user a full picture of the risk exposure faced by a company, investment or client. red zones The tool will identify water ‘red zones’ – those places where existing and future water-related issues, such as scarcity or poor regulatory systems, would pose higher investment risk. From WWF’s perspective, the solution is not to abandon those places; from a practical standpoint this won’t be possible, as these issues are only going to spread globally in the coming decades. Instead, the strategy must be to turn red zones into green zones and manage resources in its context. WWF’s hope is that risk drives action outside the ‘factory fence line’ and prompts what we want in the places we care about: the better management, coordination, allocation and protection of resources. There is little doubt that water will become a significant business and investment issue in the near term.

Jim Gradoville Director general, WWF-China ‘The need for an effective water resource management system in China is a top priority. Both the government and the private sector will be involved and affected. Because an effective water management system must have clarity in those places where existing and future waterrelated issues exist, such as scarcity or limited regulatory systems posing higher investment risk for communities, industries and financial sectors, the Water Risk Filter is an excellent complement to the work of governmental authorities for the many stakeholders.’

A grain farmer assesses his failed wheat crop due to drought in Australia, which is the second biggest wheat exporter in the world.

Ali Hassan Habib Director general, WWF-Pakistan ‘Water resource management is a topic that is being discussed in Pakistan across the board in government and business. There is a realisation that private and public partnerships are necessary to cope with the emergency of water scarcity. However, there is a dearth of understanding in making connections between water issues and the associated risks to sectors such as the job market, the economy and investments. We need to have a better grasp of how we can communicate and build linkages between these sectors.’

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accountancy futures: environmental accountability integrated reporting

A gathering force Progress towards the adoption of integrated reporting around the world may be mixed, but momentum continues to build, says ACCA’s Rachel Jackson

I Rachel Jackson is ACCA’s head of sustainability. She leads ACCA’s global sustainability agenda on reporting and disclosure with specific reference to environmental, economic and social issues. She represents ACCA on committees and working groups.

ntegrated reporting remains a key goal for stakeholders interested in understanding an entity’s performance and future sustainability prospects. Momentum behind fulfilling this goal continues to build, as indicated by the 214 responses received to the International Integrated Reporting Council’s (IIRC) September 2011 discussion paper, Towards Integrated Reporting – Communicating value in the 21st century, which offered initial proposals for the development of an International Integrated Reporting Framework (IIRF). Early analysis of the responses reveals overwhelming support for the concept, but also numerous questions, issues and concerns. For example, some big issues to be addressed include whether the proposed investor focus is appropriate, and the need for clarification about ‘value to whom’ – whether investors, stakeholders or society at large. There is also much debate about whether one concise report can meet different needs, and whether an integrated report should be the primary report. The IIRC is currently running a pilot programme underpinning the development of the IIRF, in which ACCA is participating. Integrated reporting is fundamentally different to sustainability reporting in its focus on

issues that are material to the business. ‘Integrated reporting should be the pinnacle of a company’s articulation of its approach to long-term value generation and not a response to a list of externally generated indicators,’ comments Chris Tuppen, a partner in Fronesys, an environmental, social, governance and sustainability consultancy. ‘It will be essential to focus on the key issues that combine longterm societal trends with business-related risks and opportunities. Achieving this will require an extended interpretation of the traditional accounting concept of materiality.’ Sector-specific KPIs The importance of materiality is reflected in recent developments such as the establishment of the Sustainability Accounting Standards Board in the US to develop sector-specific KPIs for material environmental, social, governance (ESG) issues relevant to financial performance. This follows on from the work of the DVFA, the Society of Investment Professionals in Germany, which in autumn 2010 published KPIs for ESG, identifying for each of 114 industry sub-sectors the key ESG data it believes companies should report. A second fundamental difference between integrated and sustainability reporting

Lois Guthrie EXECUTIVE DIRECTOR, CLIMATE DISCLOSURE STANDARDS BOARD, AND TECHNICAL DIRECTOR, IIRC ‘The Carbon Disclosure Project (CDP) has heralded the advent of integrated reporting through its decade-long practice of asking organisations for a holistic view of their climate changerelated risks, opportunities strategies, governance arrangements and greenhouse gas (GHG) emissions measurements. The Climate Disclosure Standards Board, a special project of the CDP, focuses on eliciting concise, relevant, material disclosures in mainstream annual filings to investors. Working in collaboration with the International Integrated Reporting Council (IIRC), the organisations will advance their shared objective of transforming corporate reporting so as to encourage allocation of capital towards a more sustainable future.’

Professor Robert Eccles Chairman, Sustainability Accounting Standards Board ‘For most people, the word “report” connotes a paper document. Thus when they hear the term “integrated reporting”, they think of a single report. But integrated reporting is about more than a single paper document. Equally important is how a company utilises its website to provide information in a more integrated and useful way. Some emerging practices include having an easily searchable PDF document; providing financial and non-financial information in a spreadsheet so that users can download and analyse it; making it possible for users to create their own customised integrated report; and gathering feedback from users on how to improve the report and the website. The future of integrated reporting is on the web.’

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concerns their audiences. Investors currently form the primary audience for integrated reports, whereas sustainability reports are read by many other stakeholders. The IIRC is setting up an investor network, involving investor entities from around the world, to help ensure that integrated reporting meets investors’ content and presentation needs.

Communications consultancy Black Sun’s 2011 research report, Towards Global Sustainability, found that, overall, reports in the G20 region were meeting less than 50% of what Black Sun defined as integrated reporting good practice. South African companies were most successful at integrating and demonstrating the strategic importance to

South African firms could be forgiven for blowing their own vuvuzelas (on sale here in Cape Town) – research shows them top in the integrated reporting stakes.

Professor Mervyn King IIRC CHAIRMAN AND CHAIRMAN OF SOUTH AFRICA’S KING COMMITTEE ON CORPORATE GOVERNANCE ‘The ideal – integrated thinking and integrated management – requires the collective mind of the board to be applied to understanding how the financial performance affects the non-financial and vice versa. In addition, the board must understand how sustainability issues have been embedded into long-term strategy so that stakeholders can make an informed assessment as to whether the company’s business will sustain value creation. This cannot be done from the financial report alone – which would be like looking only in a rear-view mirror. The collective mind of the board must articulate in clear and understandable language the financial and sustainability issues and show that the business is going to sustain value creation.’

Terence Jeyaretnam Director, Net Balance, Australia, and member of ACCA’s Global Sustainability Forum ‘Does integrated reporting require integrated assurance? To answer this, one must consider the various forms of assurance undertaken by today’s leaders in financial and non-financial disclosure, and walk through the maze to find the most effective path for integration. The key forms of assurance sought by firms now include the traditional financial accounts audit, the non-financial or “sustainability” assurance (using ISAE3000 and/or AA1000AS), systems assurance (eg ISO audits), and assurance of carbon accounts (using local/international standards). The key challenge will be to build audit teams that can handle the breadth and depth of an assurance process that ties these together.’

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accountancy futures: environmental accountability integrated reporting

the business of non-financial impacts, actions and goals, meeting on average 73% of Black Sun’s criteria. European G20 countries came next, meeting 54%, followed by Brazilian companies (48%), companies in the Republic of Korea (41%) and US corporates (19%). South Africa is often identified as a leader in integrated reporting developments, not least because, in 2010, the Johannesburg stock exchange mandated integrated reporting in its listing requirements. ACCA-commissioned research by Jill Solomon of King’s College London and Warren Maroun of the University of the Witwatersrand, Johannesburg, looked at the impact this has had on the corporate reports of 10 major South African companies. They found a significant increase in the quantity of social, environmental and ethical information reported in their annual reports. In Australia, research by ACCA and Net Balance Foundation in 2011 looked at the extent to which companies within the ASX 50 had moved towards integrated reporting. Nine were found to be performing very well, and starting to recognise and communicate the importance of ESG matters to their core business, but 30 had reporting that was less than 50% integrated. However, integrated reporting in Australia has been boosted by the formation of the Australian Business Reporting Leaders Forum, bringing together stakeholders to help develop integrated reporting nationally and participate in international developments. slow progress Developments are somewhat slower in Asia, however. ‘There are only a handful of companies in Asia that could really integrate their reporting,’ says Richard Welford, chairman of consultancy CSR Asia. ‘The majority of large listed companies in every single Asian country do not report on their social responsibility or sustainability. Nevertheless, there is an upwards trend and, therefore, we need to find ways of encouraging accountability and transparency. We need to walk before we can run, however. Unless, we can get companies reporting on social and environmental issues in the first place, there is very little hope that we will even get as far as integrated reports.’ Progress is also generally slow in North America. ‘In Canada the level of uptake of integrated reporting, outside a small group of innovators, is currently low,’ says Matt Loose, director of consultancy Stratos Inc and member of ACCA’s Global Forum for Sustainability. ‘There are, however, signs that expectations of reporters are evolving to encourage greater ESG integration. In particular, the Ontario Securities Commission requirement to disclose

information on risks that might materially affect business performance provides a basis for targeting enhanced disclosure of environmental and social risks and performance.’ The Black Sun research shows European G20 countries come second only to South Africa in their integrated reporting performance. Vernon Jennings, managing director of Sustainable Development Consultants and member of ACCA’s Global Forum for Sustainability, notes: ‘Denmark was the first country in the world to require its largest companies to report on nonfinancial information in annual financial reports

Workers walk past a pawn office in central Sydney, Australia, where integrated reporting has been boosted by the formation of the Australian Business Reporting Leaders Forum.

This is an exciting time in

the development of integrated reporting in the belief that, by working strategically with corporate social responsibility, companies could become more competitive. A number of other European countries are also considering requiring companies to report on non-financial information. In the wake of the economic downturn, the limitations of financial reporting have become more obvious. Demand for integrated reporting is therefore likely to increase.’ This is without doubt an exciting time in the development of integrated reporting. All interested parties need to participate fully so that the international framework that finally emerges really does deliver valuable and comprehensive information reflecting an organisation’s true accountability.

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accountancy futures: environmental accountability integrated reporting

A fine balance Can investor stimulus of integrated reporting offset the concerns of businesses in emerging markets, asks ACCA’s Dr Afra Sajjad


or emerging markets in South Asia, the main priorities are economic consolidation and foreign inward investment. With greater transparency in business reporting promising to further these goals, integrated reporting is becoming a hot topic in the region. Companies can deploy it as a strategic communication tool to build trust with stakeholders, especially foreign investors, and enhance their reputation. It facilitates a better understanding of the business model, confers competitive advantage and provides balanced, comprehensive and reliable information on relationships, risks and resources. Policymakers and business leaders in the region are therefore starting to see integrated reporting as the future, but it has not been embraced wholeheartedly for several reasons. Businesses in emerging markets are concerned at just how financially realistic and rational it is to look beyond pure shareholder interests and financial profitability. The best way to convince businesses of the desirability of moving to integrated reporting may well lie in presenting case studies of companies in

Dr Afra Sajjad is ACCA regional head of education, the Middle East, North Africa and South Asia. She oversees education initiatives aimed at enhancing professional accounting education standards in the region and leads ACCA’s narrative reporting technical work.

emerging markets that have already done so and explaining the benefits they have gained. Also, should integrated reporting be driven by regulators or businesses? If businesses, how will consistency and balance be ensured? With a few exceptions, non-financial disclosure in emerging markets is driven by regulation. Emerging markets are still striving to develop the technical capacity to comply with International Financial Reporting Standards (IFRS). While IFRS has brought many benefits, it has been heavy on time and resources, sparking concerns about the financial and human investment required to build capacity for integrated reporting. There is also the fear that integrated reports may result in proprietary information being given away to competitors. And will the cost incurred in their preparation put a business at a competitive financial disadvantage? Fundamental to integrated reporting is balanced information. The experience of sustainability reporting in emerging markets shows that businesses are forthcoming in providing positive information about people, planet and performance. But in the absence of regulatory compulsion, most businesses prefer not to disclose any negative information. Integrated reporting’s business model disclosure can supply prospective decisioninfluencing information by explaining the business’s strategic direction, differentiators and value drivers, and associated risks. Despite recognition of the value of this, particularly for investors, there are concerns that the futuristic approach to reporting may not be prudent or even possible given the magnitude of political and economic uncertainties in emerging markets. External assurance With the reliability of sustainability reports in emerging markets a persistent concern, there are questions about the value of integrated reports if they are not externally assured. Annual reporting in emerging economies has generally been driven by finance functions, which have often been preoccupied recently with implementing IFRS. But who other than finance can drive integrated reporting in the business, which requires the co-ordination of resources across different functions? As the boundaries of annual reporting expand, new opportunities open up for finance professionals as value creators and promoters of sound practices that drive performance. But this role expansion has to be complemented by an expansion in skills and knowledge if they are to lead the move towards integrated reporting in emerging markets.

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accountancy futures: standards for business investors

The heart of the matter Legislators and regulators have a fragmented approach to accountancy and audit and are not hearing the voice of investors, says ACCA’s Sue Almond


Sue Almond is ACCA’s technical director. Her role involves influencing debate on technical issues affecting business and accountancy around the world. She spent over 20 years with Grant Thornton UK as national assurance services partner and has also worked at the Kreston International accounting network.

udit and accountancy have come under rigorous public scrutiny in the wake of the financial crisis as watchdogs have raised questions about the profession’s role in it. There have been public inquiries, reports from regulators and other authorities, consultation papers from government bodies and widespread media attention. Nor have the industry’s standard setters escaped. The International Accounting Standards Board (IASB) has been named in at least one report – by the House of Lords in the UK – as a contributor to the financial crisis. ACCA welcomes the interest as evidence of the importance of the profession in business life and an opportunity for continuous improvement. But the way in which issues and challenges have emerged could be creating a problem rather than a clear agenda for action. A need remains for a longer-term vision in this area. The current focus on audit regulation – such as in Europe and the US – will abate at some point, with new laws enacted and regulations promulgated. We should not let the ball stop here but look to how we can influence the long-term development of standards and regulation in a way that seeks to resolve some of the current

issues rather than wait for the next crisis, and the associated reactive measures, to occur. Standards and regulation are central to protecting the public interest. Within this, the accountancy profession needs a mechanism for constant improvement – not just when economic or corporate crises rise to the top of political agendas – to help develop standards that are more meaningful to investors and business. Businesses need standards that reflect the integrated nature of the reporting process and can provide the information that stakeholders, particularly investors, need. Fragmentation The main symptom of the current position is the highly fragmented approach in the way in which issues are raised and discussed. The consultation documents released by different government and political bodies offer no clear connection or narrative setting out a broader agenda. Nor is it always clear how urgent or important the issues raised are in relation to each other. Some regulators have even issued reports on aspects of accountancy and audit that are not based on research or evidence. The very nature of standard setting – with different boards responsible for different regimes – encourages a silo approach of

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accountancy futures: standards for business investors

considering issues from a single perspective. Each standards body considers those issues that relate to its own agenda, not necessarily the interrelated issues, creating a sense of disconnectedness. GOVERNANCE The financial audit can relate only to what is disclosed by a company. The process of reporting itself is strengthened by strong ethical codes and good corporate governance, so standards are ultimately interdependent. Issues raised in one area are likely to have effects elsewhere. Yet this is not a debate that is often held in business or in the profession. While corporate governance is integral to building investor confidence, there is no formal process for promulgating consistent global standards around corporate governance and narrative reporting. In terms of investor confidence, effective governance is as important as transparent reporting and independent assurance. As their investments are spread across many markets, investors want comparability. Yet while company results are produced in compliance with the same global standards, narrative reporting is undertaken according to a variety of national standards. In short, it is not easy to establish a complete picture of the issues and how they should be prioritised. This in part relates to the different ‘models’ applied to standard setting and regulation but ultimately it is symptomatic of a complex global financial system with many stakeholders and diverse jurisdictions relating to accounting and auditing. The voice of investors One overriding issue links all of the above: the voice of investors is not being clearly heard. Investors comment on current issues and challenges but theirs is not a consistent voice, nor do all policymakers consider it an appropriate starting point for a debate on the value of audit and accountancy. The views of investors are certainly not regarded as a reference point for prioritising issues and driving an agenda for continuous improvement in the interests of promoting greater transparency and meeting the needs of shareholders. Some of the recent initiatives seek to foster a more integrated approach to standards development. In the UK the Financial Reporting Council’s Financial Reporting Lab is one such development. And IFAC and other standard setters are increasingly looking to obtain more investor input into the process. These initiatives are still at an early stage and

Liz Murrall Director of corporate governance and reporting, IMA, UK ‘Investors, wherever they are based, invest internationally. We operate in a global market and look for comparability of annual reports, including the non-financials. The figures are generally prepared and audited using global standards, but narrative reporting is, at best, prepared using national standards.’

Steve Maslin partner and head of external professional affairs, Grant Thornton ‘Our investor roundtables with ACCA show that investors are willing to explore new approaches to financial reporting reforms. They support a more integrated process that emphasises the interrelated nature of accounting, reporting, auditing, governance, standards and regulation.’ Member of ACCA’s Accountants for Business Global Forum

ACCA will continue to encourage the relevant bodies to adopt an inclusive approach to make sure that the investor voice is heard. The way forward Engagement with stakeholders, particularly investors, cannot solve all the issues, but there are a number of benefits in adopting a more structured engagement to identify and evaluate issues. These include developing a proactive agenda for change, recognising the impact on business of any change, placing investors at the heart of accounting and auditing, and starting from an understanding and articulation of their concerns and priorities. Other benefits include helping policymakers and regulators to identify issues and priorities, offering evidence and a ‘route map’, generating an overview of all the issues in relation to each other, promoting a more integrated view of the wider financial and accounting system, and obtaining structured evidence which can inform wider debates in business, the profession and the political sphere.

Standards for business ACCA will be articulating a more integrated ‘standards for business’ model to capture input from investors, preparers, standard setters and regulators and effectively prioritise areas for change and development in the accounting system. The aim is to cut across the silos to provide balanced input from the different groups into the corporate reporting ecosystem. An ACCA/Grant Thornton report on a series of discussions on these issues, Putting Investors at the Heart of the Financial System, is available at

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accountancy futures: standards for business europe

A matter of ethics While reporting frameworks and independent assurance are vital, integrity must be at the heart of the profession, says FEE chief Olivier Boutellis-Taft Olivier BoutellisTaft is CEO of the Fédération des Experts Comptables Européens. He was previously governing board member of the European Policy Centre thinktank and has held various roles at PwC.


livier Boutellis-Taft has a difficult – and, he says, exciting – job. Not only is he the CEO of a federation that represents more than 700,000 accountants and auditors across 33 countries, but he is also helping to steer the profession through an unprecedented change. The financial crisis has propelled accountants into the public eye, forcing a rethink on how to handle new risks and a more introspective focus on the wider role of the profession. Auditors, meanwhile, have been caught in the regulatory drive of the European Commission (EC), with internal market chief Michel Barnier announcing a major shake-up of the sector.

‘Professional ethics is one of the bedrocks of the profession,’ Boutellis-Taft explains. ‘We have very strong standards and practices in the audit profession, but also in the accountancy profession, and that’s important,’ he adds. As head of the Fédération des Experts Comptables Européens (FEE, or the Federation of European Accountants), Boutellis-Taft and his team of 15 staff in Brussels, bolstered by experts from FEE’s 45 member bodies across Europe, including ACCA, are drawing up papers, guidance notes and commentaries on subjects from financial reporting and company law to ethics, corruption and sustainability. Boutellis-Taft embraces the ethics debate with

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gusto, pointing out that it is not accountants who have been willing to waive or tweak standards to suit themselves. ‘In the financial sector, when things started going wrong, there were voices out there saying, “Oh, we need to change the rules, it’s all about fair value, it’s all about IFRS 9.” The real issue we have is systemic: we all tend to move with the wind – investors, bankers, corporates, regulators and governments alike,’ he says. ‘One of the messages that the profession needs to send is that it is not a good idea to change the rules of the game when the outcome is unpleasant.’ Some rules will have to change, he admits, particularly to make sure governments and banks better reflect the new risks to their balance sheets posed by sovereign debt. Once seen as the safest asset in town, government bonds are being fundamentally revalued, with European banks facing emergency and longerterm capital requirements to make sure they can handle future crises, particularly in the wake of Greece’s debt restructuring. But auditors and accountants have been ahead of the curve for a while, Boutellis-Taft says, going on watch as early as 2007, when the subprime bubble started bursting. ‘Everybody was really on the ball quite early on, issuing guidance notes, alerts and drawing the attention of people in practice on new risk, what the current circumstances meant regarding the application of standards,’ he says. complete picture One of FEE’s latest policy papers points to the areas where accountants and auditors need to focus during the crisis, including the recognition and measurement of assets, impairment, credit and liquidity risk, going concern issues and proper disclosure. The application of high-quality global standards in these areas is even more important for government accounts, Boutellis-Taft says, to make sure that we have the ‘full picture’ on what is being reported. ‘We’re taking more risk, but the amount of this risk, the magnitude of this risk, may depend on future events,’ he says. ‘It is about having more certainty that what needs to be disclosed is being disclosed and a perspective that is not limited to cash movements.’ The best way to ensure transparency, he says, is to bring in accruals-based International Public Sector Accounting Standards (IPSAS). ‘If we move to a better reporting framework in the public sector, we’ll have more visibility on the quality of sovereign debt,’ Boutellis-Taft says. ‘You can’t drive blindfolded and avoid accidents.’ In 2009, only 22% of governments were using accruals-based accounting, according to a

survey by the International Organisation of Supreme Audit Institutions. Some 24% were still using cash-based accounts, while 36% were using bespoke national standards. ‘In cash accounting, even if you don’t misreport, you don’t report the full picture,’ BoutellisTaft explains. ‘That’s why it’s important that governments adopt robust financial reporting standards so there is transparency, not only on the situation but on how it may evolve.’ Just as important is to have ‘independent

‘It is not a good idea to

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

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accountancy futures: standards for business ethical responsibility

Morality lessons The financial industry needs an ethical re-education programme, says Tay Kay Luan, chief executive of the Institute of Bankers Malaysia


s political leaders and regulators struggle to fix the eurozone debt crisis, they need to bear in mind that the current problem is not entirely the fault of poor regulation, but of human ethics. Business history reminds us that a root cause of the current financial contagion is greed and the pursuit of self-interest in financial markets, where the systems are not able to detect banks overleveraging and cheats committing insider trading. The crisis was preceded by long runs of cheap and easy credit, price inflation and the creation of bubbles in property markets. Overstretched leveraging also put strains on financial institutions, creating unnecessary risks to any shift in economic cycles. Financial markets are critical drivers of the prosperity and development of national economies all around the world. However, when financial markets operate without a strong ethical base, they put at risk the public interest they are meant to serve and protect. Ethical leadership is critical to the sustainability of organisations. Although in very different ways, leadership failure in upholding ethical principles at Enron, Worldcom and Lehman Brothers, to name just a few, has largely been blamed for their demise. Resulting from this is the decline in public trust towards the banks. And because of its sheer size, the industry also gets in the headlines for the wrong reasons. At its peak, the market capitalisation value of the largest banks, at trillions of US dollars, was bigger than those of many emerging economies. In the more advanced economies, there is an urgent need to rebuild public trust in financial institutions, shown by the protests that took place in Wall Street in New York and the City of London. It is unrealistic to expect new regulatory reforms will help resolve these issues, due to the complexity of market transactions. Ethical training and education should therefore be mandatory in all financial institutions. Ethics should also be taken into account in the recruitment process. Embedding ethical components and values would raise the ethical consciousness and capacities of banking professionals, perhaps shaping behaviours at all levels, including senior management.

It is also necessary to establish an international banking education standards board whose remit would be to develop clear, internationally agreed benchmarks against which colleagues, customers, regulators and others can measure bankers’ ethical and professional competence. It would work to support national banking institutes and regional bodies in promoting rigorous ethical and professional standards, and facilitate the sharing and development of best practice between national institutes and regulators. Reforms in education should ensure ethical competence is applied, focusing on the moral values and judgments across all the varied practices in banking. And due to the diverse range of these services, this should be applied across all levels. While studies show that education may solve half the problem, the bank’s corporate culture is equally important in shaping employee behaviour. Degradation of ethical values may also be a result of the internal environment. While ethical codes of conduct are a necessary support, the promotion of right behaviours and values through training individuals to adhere and comply with ethical principles when making decisions is also crucial. Ethics training needs to be delivered through a series of applied case studies and proper testing, and should be reinforced at various stages of learning – both formally and informally.

Tay Kay Luan is chief executive of the Institute of Bankers Malaysia, and the past president of the Business Council for Sustainability and Responsibility Malaysia (previously BCSDM). He is a regular author and speaker on business and sustainability developments, and was previously ACCA director for special assignments for Asia Pacific, responsible for driving ACCA’s policy and thought leadership agenda in the region.

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accountancy futures: ACCESS TO FINANCE stock markets

Capital frontiers Strong financial reporting and auditing standards are among the key triggers for the successful development of the world’s ‘frontier capital markets’


he rise of the world’s developing economies can be clearly discerned in the swelling capitalisation of their equity markets. The value of equities listed on the Bombay Stock Exchange, for example, rose from US$130.4bn to US$1.63 trillion between the end of 2002 and the end of 2010, according to World Federation of Exchanges data. There could hardly be a clearer proxy for the growing economic importance of India than the steadily growing equity value of its corporate sector. The story of economic development is inextricably linked with the evolution of capital

Investors watch a stock trading board at a securities exchange house in Shanghai, China.

markets – the channel through which surplus savings created by rising prosperity flow to businesses that will put them to productive use, generating further economic growth and reinforcing capitalism’s virtuous circle. ‘Frontier markets’ are a subset of emerging markets. They have a lower market capitalisation and liquidity than the more developed emerging markets but are expected to resemble the latter over time. The development of capital markets for equity and debt give such economies access to the domestic and foreign funds that will finance business growth. The ability of strategic state-controlled businesses to

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accountancy futures: ACCESS TO FINANCE stock markets

tap capital markets for investment funds has been particularly important in upgrading key infrastructure and services. But to attract companies to sell their shares to the public and give buyers sufficient confidence to purchase them, successful capital markets need several key ingredients. ACCA researched the evolution of the world’s capital markets and its subsequent report Making Capital Markets Work in Emerging and Frontier Economies identifies the success factors. Overcoming ‘institutional deficit’ is key. Institutional deficit has many facets connected

‘Capital markets can look

big and liquid and at the same time be hollowed out from within’ with legal and regulatory systems, governance standards and exchange rules. Manos Schizas, senior policy adviser at ACCA, says that confidence in the financial disclosures that companies are required to make is critical. ‘As soon as investors lose faith in the quality of disclosures, a lot of what they previously thought was information turns out to be risk, or what they call tail risk,’ he says. There is even evidence, Schizas suggests, that changing levels of confidence in financial disclosures can be a leading indicator of a loss of liquidity in capital markets. In the developed world, confidence in financial disclosures started to fall quite sharply from around 2005, according to the annual World Economic Forum Global Competitiveness Report – well ahead of the financial crisis.

‘People know something is wrong and although they can’t tell you the world is about to crash, they can tell you that they feel the trust and reputational capital that the markets rely on is being eroded from under them,’ Schizas says. ‘It is possible for capital markets to look big and liquid and at the same time for them to be hollowed out from within. Policymakers usually won’t know this until it’s too late.’ For investors, confidence in the institutional framework is just as vital as trust in financial disclosures. Many large resources companies in the developing world undertake IPOs on major stock exchanges in developed markets under local listing rules as a way of lending weight to their claims of good corporate governance. Schizas calls this ‘borrowing the legitimacy of the brand’, and ACCA’s report

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stresses the importance of trusted ‘regulatory brands’ in frontier capital markets. This factor is particularly germane given the drive to establish regional capital markets. ‘In the Caribbean, as an adviser or as a broker you can migrate between stock exchanges with relatively few barriers,’ says Schizas. ‘And the same regional emphasis you see in the Caribbean is also present in many ways in East Africa, and other aspiring regional economic blocs. In a world like that, branding is enormously important because people can just up and leave very quickly.’ In frontier markets another concern is that major investing institutions such as pension funds and insurance companies are relatively undeveloped. Analogous issues are present on the ‘sell side’ too, notably around corporate

Above left: Warsaw Stock Exchange. Poland, like China, has a level of financial infrastructure that puts the country on most lists of emerging economies. The openness to foreign investors of frontier markets and their freedom from extreme economic and political instability are expected to help them develop the liquidity and large-scale market capitalisations of the more developed emerging economies.

Above right: Chittagong Stock Exchange, Bangladesh. Far left: Dubai Financial Market stock exchange. Left: Nairobi Stock Exchange, Kenya.

governance and the protection of minority shareholders. ACCA’s report cites studies that show businesses where a small number of shareholders exercise disproportionate control are more likely to engage a global audit firm to reassure the market about their governance. Again, the power and importance of ‘regulatory capital’ is clear, although ACCA is uneasy with the idea of auditors in some way making up for poor governance. The big issues in frontier capital markets typically arise because of the history of the companies that list their shares on them. Most are either part-privatised state enterprises or large family-controlled businesses. Both types provide governance challenges for regulators and investors in those markets. First, whereas regulatory and legal frameworks in the developed world are mainly intended to address principal-agent conflicts in the governance of companies, because of the dominance of large, family-run businesses in frontier markets the problem is much more likely to be disputes between members of the controlling family or shareholder bloc – principal-principal conflicts, as it were. Second, privatised companies that used to be – and sometimes still are – run as arms of the government are much more important in frontier markets than in the developed world. This can result in very different approaches to basic issues of process and governance than investors might expect to see elsewhere. Andy Davis, journalist, former editor of FT Weekend ACCA’s report, Making Capital Markets Work in Emerging and Frontier Economies, is available at

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accountancy futures: ACCESS TO FINANCE ppp

Going private Public private partnerships have been used to finance all sorts of projects, but a new ACCA study questions whether they really offer greater value for money


he private finance initiative (PFI) and other forms of public private partnerships (PPPs) have been widely adopted by developed and developing nations. The main driver has been the need to pay for new public infrastructure, without the government paying in advance. But there are important differences in the reasons why developed and developing countries use PPPs. In richer countries, such as the UK and Japan, PPPs have been used to keep the cost of additional public infrastructure off the government’s balance sheet. In the UK, the House of Commons’ Treasury Committee recently concluded that off balance sheet accounting had been decisive in promoting PFI. Japan’s use of PPPs declined substantially when accounting rule changes moved liabilities onto the balance sheet.

Transport PPP: unlike the other lines of the Beijing subway, which are completely stateowned and operated, Line 4 was built and managed by Beijing MTR, a threeway joint venture between Hong Kong MTR, Beijing Capital Group and Beijing Infrastructure Investment.

‘It may be wrong to completely

write off the capacity of PPPs to deliver improved and affordable public infrastructure. But they are no panacea’

Developing nations are differently motivated. Improved public infrastructure is needed to sustain high rates of growth. Although future tax revenues can meet the cost of those upgrades, governments do not have the money today. The use of PPPs can be justified because the cost of not improving infrastructure outweighs other factors. Value for money (VFM) criteria are less relevant. By contrast, VFM should be central in developed nations’ decision-making, but – as has been shown by the UK’s National Audit Office – this has often not been achieved by PFI/PPP schemes. Research published by ACCA, led by Professor Graham Winch of Manchester Business School, finds that ‘only in rare cases can there be high confidence that a private finance alternative offers greater value for money than a public sector comparator’. In the UK, PPPs were widely used because there was no alternative to obtain additional infrastructure. Developing nations can be attracted by drawing private sector expertise and risk-

sharing into a public sector project. But here, too, the rationale may be flawed. In China, partner companies may be stateowned enterprises. In Malaysia, the sovereign wealth fund may be a financier. The reality can be that the ‘private finance’ is actually public funding. And in both developed and developing nations the skills base in the public and private sectors may be too weak to maximise the benefits of PPPs. In addition, experience in developed nations suggests that some risks often cannot be effectively transferred. In developing nations such as China, private sector partners have required the government to provide a guaranteed return that undermines incentives to maximise operational efficiencies. It may be wrong to completely write off the capacity of PPPs to deliver improved and affordable public infrastructure. But they are no panacea and both the public and private sectors must learn from a difficult experience. Gillian Fawcett, head of public sector technical at ACCA, explains: ‘The UK has been the leader in the use of PPP, where it has been a bold experiment, in terms of its scope and innovation. As with all experiments though, there have been mistakes, errors and misunderstandings. ‘The case for private finance in the public sector has yet to be proven. The benefits gained from the availability of “extra” finance, the transfer of risk from public to private sector and improvements in decision-making processes are too nebulous to provide any certainty that they outweigh all the known problems about PPP. ‘PPPs allow governments to acquire additional and improved infrastructure earlier, stimulating economic growth. But in the UK, this has led to an overhang of debt in the shape of commitments to unitary charges stretching 30 years into the future. The legacy of PPPs can be a lack of flexibility both in how the infrastructure is used and in the management of public finances.’ Paul Gosling, journalist The ACCA report, Taking Stock of PPPs and PFIs Around the World, can be found at

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PPPs: a world tour china: Drivers: demand for infrastructure from urbanisation and fast economic growth. Public investment limited by budget concerns. No clear definition of PPPs, legal framework or VFM evaluation systems. ‘Private investment’ often from state-owned enterprises.

PFI debt on balance sheet. Monitoring of PFI projects has been inadequate.

FRANCE: UK-style PFI not yet popular. Lack of enthusiasm from public procurers and, since financial crisis, the private sector.

singapore: Only eight schemes procured. Drivers: VFM and private sector expertise. Constraints: efficiency of existing public sector infrastructure; administrative weakness in creating PPP opportunities.

malaysia: Government claims PPP very successful: enabled services and jobs to transfer to private sector, saving public investment and generating asset sales.

INDIA: Massive increase in use of PPPs since 2009: 1,112 projects worth US$135bn in pipeline. Drivers: economic growth and need for poverty alleviation. Constraints: poor administration; weak private sector engagement.

south korea: Drivers: need to improve infrastructure while paying for aging population; risk transfer; private sector skills; improved VFM. Schemes moving to schools, hospitals and homes.

indonesia: PPPs in place since 1980s. Drivers: need for equitable distribution of infrastructure, fast economic growth and desire to transfer project risk to private sector. Criticisms: inability to transfer risk and alleged nepotism. japan: Government committed to extensive use. Motivation has been ‘additionality’ of infrastructure, not VFM. Public sector less keen to use since accounting change put

thailand: Transport; energy; telecoms. Variable success. Constraints: lack of appropriate legal framework; no standardised contracting.

Source: Taking Stock of PPPs and PFIs Around the World

uk: Nearly 30 years’ experience. Drivers: public spending constraints; off balance sheet accounting; additionality. Problems: transaction costs, weak VFM; lack of risk transfer; impact of global financial crisis.

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accountancy futures: global economy china

Gateway to openness The CICPA’s Dr Yugui Chen describes how the accountancy profession has an important role in helping China become increasingly internationalised


hina’s 12th Five-Year Plan explicitly requires the implementation of a more active policy for the opening up of China, adherence to a combination of ‘bringing in’ and ‘going out’ to encourage outbound and inbound foreign investment to improve the global competitiveness of Chinese companies, and equal attention paid to the use of foreign capital and foreign investment. These approaches are also important to accelerate economic and scientific development. As for professional services, including the accountancy profession, the plan not only provides opportunities for development, but also puts forward higher requirements. More professional services needed In 2011, China set up 27,712 new foreigninvested enterprises, with total foreign investment reaching US$116.011bn; domestic investors made non-financial outward direct investments to 3,391 foreign enterprises in

Dr Yugui Chen

Dr Yugui Chen is deputy president and secretary general of the Chinese Institute of Certified Public Accountants (CICPA). The CICPA was founded in 1988 under the guidance of the Ministry of Finance to serve foreign enterprises, and then state-owned enterprises that underwent corporatisation.

132 countries and regions throughout the world, with accumulated direct investments made totalling US$60.07bn; the taxes on China’s ‘going out’ enterprises on overseas investments exceeded US$10bn; and China’s ‘going out’ enterprises created more than 1 million job opportunities. All these have greatly improved the capability of Chinese enterprises to utilise both the domestic and international markets, and promoted the interaction of the Chinese economy with the world economy, as well as the recovery and development of the world economy. But, we should also note

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that the development of China’s economy and the internationalisation of enterprises are not moving smoothly. In 2011, some Chinese enterprises revealed the failure of overseas investment and faced huge loss. The controversial issue of information disclosure by US-listed Chinese enterprises arose, resulting in the downgrading of Chinese stock. These cases show that the development of China’s economy and the internationalisation of its businesses require more familiarity with international operating rules and practices, improved risk management, and the ability to operate in the international arena. The effective solutions to the above issues will come from the provision of high-quality professional services and support. role of The accountancy profession The accountancy profession in China is actively encouraging accountancy firms to become bigger and stronger, as well as becoming more internationally focused, with the capability to provide more international services. Since 2005, the Chinese Institute of Certified Public Accountants (CICPA) has emphasised how firms can better service the Chinese economy. After several years’ endeavour, the CICPA has cultivated a number of expert teams, who possess the qualifications to enable them to practise to an international standard; established accounting and auditing standards systems that have converged with international standards considered a model for emerging countries and countries in transition; established auditing standards and codes of ethics that are equivalent with those of Hong Kong, and an audit supervision system that is equivalent to the European Union’s; encouraged accountancy firms to become limited liability partnerships; helped strengthen accountancy firms’ governance mechanisms, and promoted the expansion of services from traditional auditing to the tax and consulting areas. successful experiences By the end of 2010, 12 large accountancy firms in mainland China won the licence to adopt the Chinese auditing standard to provide audit services for mainland China companies listed on the Hong Kong Stock Exchange’s Hang Seng China Enterprises Index, making Hong Kong the bridgehead for exploring international business. Accountancy firms with experience in securities-related business set up 64 branches, member firms or affiliated firms in Hong Kong and other overseas areas. More than 20 firms joined the international accounting networks.

They provide Chinese ‘going out’ enterprises with auditing, consulting, accounting, taxation and other professional services. In recent years, the relevant agencies in China have become more aware of how the accountancy profession can better serve the international development of the economy, and have released a number of policies in support of this. helping the profession serve china The CICPA has released and implemented a development plan for the Chinese accountancy profession for 2011–15, which places emphasis on the promotion of the profession to better serve the economy. It focuses on encouraging and supporting large accounting firms to develop their practice networks in the world’s major economies. The CICPA wants them to establish business

The development of China’s economy requires more familiarity with international operating rules

entities and accomplish brand identity and unity, share information and resources, integrate quality control, efficient management and operation, as well as improve the level and capabilities in providing internationalised services. The CICPA will continue to further implement its strategies. Efforts will be made to train accountants with an international qualification to learn another language, cultivate an international perspective, be familiar with international rules and provide international services. It will continue to work to make auditing standards equivalent to those of developed countries and regions and strengthen the governance mechanisms of accountancy firms. It will focus on centralising all resources to promote the construction of IT systems across the profession, and improve the capability of accountancy firms to apply the IT. It will work to increase the supply and quality of non-audit firms. And it will encourage the provision of effective value-added services to meet the pressing demands of corporate strategic planning, risk management, internal control and tax planning. Meanwhile, brand awareness has an important role in shaping positive perceptions of the profession. Therefore, we will also focus on encouraging accountancy firms to forge brands that build on China’s century-old accounting heritage.

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Accounting for a growing Africa Despite the global economic downturn taking hold, African countries look set to continue posting good growth figures, reports Alnoor Amlani FCCA

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accountancy futures: global economy africa


hen the global financial crisis in the developed world hit the news, there was a collective gasp and here in Africa we held our breath. Respected analysts and observers in countries like Kenya and South Africa expected the crisis to affect them tremendously and even called for financial support from the donor agencies, but to their surprise it simply did not happen. Instead the usual droughts, wars and political upheaval caused some individual countries to suffer economically, but overall the crisis had a marginal impact in comparison to the damage caused in the developed world. Indeed, even after the global economic downturn has taken hold, African countries continue to post good growth figures and it appears this is not about to change. For the outside observer this is difficult to account for. After all, in the past when the developed world sneezed, Africa would catch the cold and find itself in hospital. Scramble for resources The observable fact is that this newfound resilience does not come from a solid manufacturing base and a local economy (such as in Germany’s case), because in terms of value addition, very little is being done. Neither does it stem from superior financial management of these economies. Rather it is mainly because of an external and global phenomenon. The scramble for Africa’s resources (especially oil and minerals) that is presently underway is the primary reason, as is evidenced from the various new mining, oil exploration and agriculture projects being launched in Ethiopia, Mozambique, Uganda, Nigeria, Angola, Kenya and other countries. History shows this has happened before, only this time it is purely an economic scramble. In this rush for resources the West is competing with the East, and Africa is benefiting as it plays one off against the other. The recent opening of the African Union headquarters in Addis Ababa is an example. Paid for by the Chinese, it is a state-of-the art building that reflects the cityscape and, at the very least, the short-term future for the continent. The demand for additional resources by the highly populated emerging economies of the East is pushing up the prices of many commodities and requiring additional extraction. All the players are willing to make concessions for these resources. As a result, today it isn’t surprising to meet a Chinese businessman in Congo who speaks fluent Kiswahili, Luganda and Kinyarwanda, as well as his native languages and English.

Africa’s major contribution to global development is commodities, yet because there is no active African commodity exchange recording transactions and providing price discovery to producers and consumers, the only way to get information on actual prices of most major commodities is to conduct specific market research. Indeed if one examines the numbers closely, it is not clear how many tonnes of gold, barrels of crude oil, kilos of uranium, bushels of bananas or ivory tusks that Africa provides to both West and East every year. Statistics are scarce indeed in Africa. Where they exist, they often have not been generated accurately, are outdated and, hence, must be treated with caution. The practical experience of working in Africa shows that quality information is often more expensive on this continent than anywhere else, and this is a major impediment to growth and development. Yet due to the increased growth exacerbated by the forces of globalisation, winds of political change, new interest in Africa by the East and the growing impact of information technology across the continent, the need for quality information, both financial and otherwise, is growing and needs to be fulfilled. paradigm shift To achieve this, however, participants in African economies must make a paradigm shift from being information hoarders operating in a grey market where disclosure is poor and risks are high, to being information sharers operating in the clear, paying taxes and fair salaries, and reporting professionally on their operations. In countries such as Rwanda, Tanzania, Botswana and Mauritius, where this has already started, the early rewards are being reaped. The result is higher growth, more stable economies and a growing empowered middle class, as well as significantly lower poverty in the lower class. Several parts of an African commodity exchange are currently being developed in different countries. An initiative in Ethiopia uses warehouses located at the rural farmer level to gather food commodities, maintain quality and share information with developedworld markets for better prices and deals. In Kenya and Ivory Coast, agricultural exchanges for coffee and cocoa are at various stages of development leveraging information technology to expand export markets. On the financial front, Africa’s growing pool of qualified accountants, many of whom are ACCA members, are already taking up the responsibility and the opportunity to fill this information gap. The stock exchanges in

Alnoor Amlani FCCA is an independent financial management consultant in East Africa who writes regularly on social and business issues.

A miner uses a mobile phone attached to a stick to make a call from the top of the Bisie mine in the Democratic Republic of the Congo. Minerals found in the region are used in a variety of such devices.

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accountancy futures: global economy africa

15 08


13 11

10 12 07





africa gdP growth 2011 01 ghana 13.6% 02 ethiopia 11.2% 03 rwanda 8.5% 04 nigeria 7.4% 05 botswana 7.2%* 06 mozambique 6.6%* 07 sierra leone 4.9%* 08 morocco 4.8% 09 kenya 4.3% 10 senegal 4.0% 11 chad 3.6% 12 benin 3.1% 13 mali 2.7% 14 egypt 1.8% 15 tunisia -2.2%




*=2010 figure

Source: African Statistical Yearbook 2012

Johannesburg, Nairobi, Lagos and Cairo have improved the overall level of financial reporting in these countries and attracted international investment. In Mauritius a strong financial services sector and enabling tax regime now manage the holding companies of groups scattered across the continent. Some governments, notably Mauritius and South Africa, are undertaking reforms, moving from outdated non-accrual (cash) accounting towards reporting in full compliance with International Financial Reporting Standards (IFRS). The result is better information to make decisions and, therefore, less risk, more assurance, better long-term investment, and more growth and prosperity.

reform. The environment in these countries is riskier, salaries are lower and living conditions poorer. In some cases political unrest has already taken root and the situation has deteriorated to critical points. Terrorist attacks in Nigeria by Boko Haram are bringing the oil economy to a grinding halt and, in Kenya, incredibly, several sitting key government ministers have been charged with crimes against humanity at The Hague. The risk that the citizens of these countries run is that they will not benefit from the present growth and, in effect, miss the boat. By the time they determine that the transparent and fair approach is the most rewarding way, the scramble will have moved on. However, as the North African spring in Tunisia, Egypt and Libya clearly demonstrates, the slow reformers have no choice but to change, because the masses can take to the streets and enforce it. In the end, proper accountability is inevitable at all levels if growth is to be sustained without social upheaval.

Slow reformers Whereas a few countries have moved ahead, the vast majority continue to drag their feet. In countries like the Democratic Republic of Congo, Ivory Coast, Madagascar, Kenya, Uganda and Nigeria, various forms of social disharmony are manifest as a result of slow

2012 meeting The ACCA Council, comprising senior members from around the world, will hold its annual meeting in Kenya in June 2012. Its theme is Accountants for Business in Africa: supporting growth, shaping the future. Council representative visits are scheduled for Ethiopia, Tanzania and Uganda. ACCA has around 10,000 members and over 80,000 students in subSaharan Africa.

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accountancy futures: global economy insights

Forward view Change is a certainty for the finance professional of the future. Three experts offer perspectives on trends and keeping pace with a fast-moving world Japheth Katto FCCA on how Africa can source growth finance ceo, uganda capital markets authority, and board member, international federation of accountants (IFAC) ‘Capital markets are fairly new in many African countries, but as a vital source of the long-term capital for financing business growth and huge infrastructure projects they could drive the economic agenda in Africa. It has been said that Africa is the next frontier for investment and the continent is laden with vast opportunities for growth, with a growing middle class and the discovery of oil, gas and minerals in a number of countries. There is no better and more transparent channel than the capital markets to raise the massive quantities of capital required to develop these resources. More and more companies are turning to Africa’s stock exchanges for funds.’

Betty Brathwaite FCCA on a people-first approach A deloitte partner in barbados and president of the Institute of Chartered Accountants of the Caribbean (ICAC) Betty Brathwaite FCCA has sage advice for accountants, auditors and businesses working in the Caribbean. Most countries have been strongly influenced by British tradition, she says, and personal relationships are also key. ‘There is still a basis of trust between the major businesses in each country and business is often conducted by verbal contracts.’ In such a personal business culture, ‘International Financial Reporting Standards (IFRS) is seen by a lot of businesses as something “foisted on us by our accountants” rather than a useful tool for managing their business,’ she warns, despite it being widespread in the Caribbean. And, with its many levels, IFRS is sometimes considered ‘much too extensive and of little use other than to the technical-minded’, she adds. Therefore, business experts and accountants should allow for human inconsistency and treat systems as an optional, says Brathwaite. However, in some jurisdictions, such as the Cayman Islands and the Bahamas, American and international commerce looms larger, promoting a ‘more prescriptive approach to doing business’, enhancing the value of systems. Interview by Keith Nuthall

Dr Giancarlo Attolini on how SMPs can grow chair of IFAC’s sMP committee, board member of the italian accountancy profession’s governing body, the CNDCEC, and a partner in an Italian practice ‘The global economy has changed considerably in the past few years. Therefore it’s no surprise that small and medium-sized practices (SMPs) are facing a changed economic and regulatory landscape characterised by significant challenges, but also with great opportunities. SMPs are best placed to thrive in the new global economy by embracing change. ‘First, they should consider offering advisory or consulting services, as these are a crucial growth area for SMPs. A 2011 International Federation of Accountants’ SMP Quick Poll found it was the second fastest growing source of fee revenue for SMPs after accounting and compilation. ‘Second, they should increase marketing and promotion efforts. Business advisory services should be marketed to existing clients (where ethical rules permit) and new clients should be targeted, as the poll suggests growth in practice fees will be driven primarily by winning business from new clients. This will demand more and smarter promotion and the marketing of the practice, its expertise. ‘Marketing efforts should focus on what distinguishes SMPs, including their reputation for competency and trust, responsiveness and geographical proximity, according to IFAC’s paper, The Role of SMPs in Providing Business Support to SMEs. ‘Finally, practices can internationalise to serve transnational clients by, for example, becoming part of an international network, and emerging technologies, such as cloud computing, should be exploited to cut costs and ultimately do more with less.’

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accountancy futures: global economy vietnam

Visionary accountant In an exclusive interview, Vietnam’s minister of finance, Professor Dr Vuong Dinh Hue, talks about accountancy’s role in the country’s growth


rofessor Dr Vuong Dinh Hue was appointed minister of finance in 2011 following a five-year tenure as auditor general of the State Audit of Vietnam. A respected and highly regarded figure within the accountancy profession, Professor Hue has been at the forefront of education in Vietnam, serving concurrently as dean of the accounting faculty and vice rector at the Hanoi University of Finance and Accounting over a number of years. He

I would like to promote the

value of accounting tools to improve financial transparency and accountability was made an honorary member of ACCA for contributions to the development of the accountancy profession in Vietnam. The award was given to Professor Hue by ACCA president Dean Westcott in October 2011. Q What challenges do you face as Vietnam modernises its business infrastructure and develops its accountancy profession? A The weak infrastructure is a ‘bottleneck’ in Vietnam’s current development. Vietnam considers the synchronous and modern infrastructure development one of the strategic breakthroughs in socioeconomic development of the country by 2020. The biggest challenge for the Ministry of Finance and myself is how to mobilise and allocate resources in the economy – including the state budget, government bonds, official development assistance and capital from all economic components – in the best way to meet the huge demand. Moreover, it is also challenging to use these resources most effectively, ensuring the balance between borrowing and paying capacity, financial security and public debt safety. To the accountancy and auditing sector in Vietnam today, the biggest challenge is to develop and complete the regulations of accounting (laws and norms) according to international practices and make them consistent with the specific conditions of Vietnam, especially the application of the principle of ‘market price’. In addition, the sector’s management organisation and

operation supervision need to be reformed so as to be compliant with the law, effective and helpful, to promote the service development to ensure the transparency of economic and financial information, as well as to support sound economic decisions. In particular, it is critical to improve the quality of the sector’s human resources. They must be talented – shown in knowledge, experience, profession – and ethical enough to work in the state’s management bodies, career organisations and in every company. Q What do you seek to achieve as minister of finance? Why? A Vietnam must have a transparent, strong and sustainable finance industry for the sake of the prosperity of the people. I would like to promote the value of accounting tools to improve the financial transparency and accountability of all agencies and units, organisations and individuals. Q What did your experiences at the State Audit of Vietnam teach you? A My experience at the State Audit of Vietnam has helped me get a sufficient overview on the financial status, macro and micro economic management, including both strengths and weaknesses. This is very useful for me in my new position. More importantly, I understand the values and benefits of audit and I am continuing to increase those values and benefits, together with my colleagues, the State Audit, audit firms and the auditing professional associations. Q How has the accountancy profession changed in Vietnam? And how do you envisage it developing over the next few years? A Vietnam’s accountancy industry has made remarkable progress. A new marketoriented legal framework on accounting – from the highest level of accounting law and the law on independent audit to the benchmark system, accounting mechanism and professional ethics standards – has been formed; the enterprise system providing accountancy services as well as human resources has been developed; the activities of accountancy professional organisations have been carried out and strengthened; and

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accountancy futures: global economy vietnam

Curriculum vitae Born on 15 March 1957 in Nghe An province, Professor Hue has a degree from the Academy of Finance in Hanoi and a PhD from the University of Economics in Bratislava, Slovakia. 2011present

Minister of finance.


Deputy auditor general, State Audit Office of Vietnam, going on to become auditor general.


Lecturer, Hanoi University of Finance and Accounting (HUFA), going on to become deputy dean, acting dean, dean and vice rector.

partnerships with international organisations such as the International Federation of Accountants, Confederation of Asian and Pacific Accountants, the ASEAN Federation of Accountants and ACCA have been reinforced. In the future, given the country’s progress and extensive integration into the global economy, Vietnam’s accountancy sector will

have big potential to develop. Accounting and auditing are not only the tools of economic and financial management; it continues to be a service sector and also a career recognised and highly appreciated. The Ministry of Finance is currently developing strategies for accounting development vision to 2020. Its targets are to complete and fully establish the legal framework and professional standard system, to expand the service market and to develop human resources, as well as to improve management and supervision capacity in this industry. The number of accountancy companies, accounts and auditors are expected to double by 2015 and triple by 2020 in order to meet the increasing demand of the economy. The development in terms of quantity, quality and professional capacity will, step by step, confirm Vietnam’s accountancy profession locally and internationally. Professor Hue was interviewed by Colette Steckel, Accounting and Business’s Asia editor

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Tomorrow’s world ACCA’s Accountancy Futures Academy is exploring the future role of accountants. It will be radically different, say its chairman Ng Boon Yew and futurist Rohit Talwar


he world is undergoing a period of profound transformation driven by global political, economic and technological shifts. Taken together, these forces suggest that the role and expectations of the accountant of tomorrow and the accounting sector as a whole could be radically different from what they are today. So how can the profession prepare for an uncertain future when we all feel there is already a full agenda dealing with today’s challenges? Recognising the need to help accountants explore these long-term drivers of change, ACCA has started the Accountancy Futures Academy. Its mission is to provide a radar to highlight the key trends, driving forces and ideas that could shape the future global business and accountancy landscape. The first initiative from the academy is a consultation with members of ACCA’s Global Forums. The objective is to identify the drivers of change that accountants should be thinking about to prepare them for the future challenges. This article looks at some of the emerging findings from the study, which is being coordinated by Fast Future Research. The changing economic landscape is seen as central to any exploration of the future of business. We are in the middle of a period of deep economic uncertainty. For accountants, this puts the spotlight on our risk and resilience plans – how are we factoring in the potential partial or total collapse of key parts of the economic infrastructure in individual markets or globally? INCREASING INFLUENCE While mature economies focus on surviving and navigating the current turbulence, emerging economies are growing, particularly the BRIC nations. It is clear that Brazil, Russia, India and China will have an increasingly influential say in how global economic systems are shaped and governed. These countries are presenting global accountancy firms with opportunities in terms of markets to expand into, but also challenges as a potential source of future rivals. Will multinationals transfer their accounting business to BRIC firms? Political power can be expected to follow financial power, with both China and India

having more of a say on the evolution of the key institutions of global governance. This could give both countries the platform to set the rules and agenda for the new so-called Asian century. This could have far-reaching implications for how the global accountancy profession could evolve, especially with regards to the definition and adoption of uniform global accounting standards. Could these standards increasingly come to reflect Eastern rather than Western practices? POPULATION SHIFTS Demographic shifts are reshaping the makeup of the global population. By 2050, the Asia Pacific region will have grown by more than the populations of Europe and North America combined, with Europe itself expected to shrink by around the size of Germany. Global life expectancy is projected to continue increasing and enforced retirement ages abandoned. This raises questions about how we effectively manage and provide career opportunities for multiple generations in the workforce. The business of business is also undergoing fundamental change, with new business models offering the potential to transform our notions of risk and value. Firms are increasingly opting to switch from ownership of fixed assets to renting the services provided by those assets – cloud computing is one such example. The risks of new product development and venture creation are also being transformed by crowdsourcing models such as, which let entrepreneurs and innovators raise the necessary financial commitments from the customer before embarking on the project. Sales approaches such as aggregated buying and the auction model are increasingly being used by businesses to sell their offerings. How will accounting practices and risk assessments need to change to take account of a rapidly changing set of business models with often unpredictable revenue streams? The chaos of the financial crisis has highlighted the need for businesses to construct ‘living wills’ to facilitate an orderly unravelling of their affairs in case of insolvency. Accountants can be expected to play a key role here, but how deeply will the finance function need to

Ng Boon Yew FCCA is chairman of ACCA’s Accountancy Futures Academy. He is executive chairman of Raffles Campus and chairman of the Strategic Foundation. A former partner of KPMG, he received the Public Service Star from the Singaporean president in 2004.


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accountancy futures: global economy change drivers

Going in for the skill Accountants must learn to plan for and think in terms of multiple possible scenarios. An emerging competence is developing the agility and processes to cope with ever shorter business cycles. Accountants also need to become adept at navigating and tackling operational and regulatory complexity and the rising number of non-financial indices used to measure value. The need to play a bigger role in business decision-making and the globalised nature of work mean accountants seeking international opportunities will have to expand their strategic, language and cultural skillsets. The backlash from the financial crisis, combined with greater moves towards environmental sustainability, will also result in growing regulatory requirements for accountants to act as public interest watchdogs. Rohit Talwar is a global futurist and founder of Fast Future Research. An award-winning speaker, he has consulted and spoken to business audiences in over 60 countries, focusing on using foresight and scenario planning to create and respond to disruptive innovation.

be embedded in the transactions, products, pricing models and market behaviours of the organisation to appreciate the scale and detail of what needs to be unravelled? The growing complexity of business and the need for more integrated measures of performance are placing greater demands on information technology. IT has already revolutionised the workplace by digitising workflows and assets, and creating new opportunities, with people generating realworld fortunes from buying and selling virtual assets in online environments such as Second Life. Advances in areas such as artificial intelligence could lead to further automation of core accounting functions, including the

more value-adding tasks requiring analysis and judgment. Further down the road, technological advances could mean we download core accounting data directly into our brains. The core question is whether the roadmap for accounting systems development will be flexible enough to cope with a range of possible business scenarios. Taken collectively, all these drivers suggest we are now entering a period of fundamental change for the global economy, for the general world of business and, as a result, for the accountancy profession. Go to for more on the Accountancy Futures Academy

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accountancy futures: global economy sport

Playing the game Hosting a large sporting event like the Olympics is a coup for any country, but what are the real benefits for business, asks sports journalist Mihir Bose


n 1851, when Prince Albert wanted to advertise the power of his wife’s empire, he decided to hold the Great Exhibition, advertising it as displaying the works of industry of all nations. Culture featured as well, with Charlotte Brontë, Lewis Carroll, and George Eliot taking part, but there was no sport. Today, a monarch’s spouse harbouring similar thoughts would almost definitely urge the government to bid for an Olympics or a World Cup. Indeed, as Queen Victoria’s great, great granddaughter celebrates her 60th year on the throne, it is debatable whether the events to mark that occasion will match those on display during the London Olympics. Modern sporting events are seen by politicians as validating a nation, even one such as Britain. Former prime minister Tony Blair was only persuaded to back London’s 2012 bid when Tessa Jowell, culture secretary, told him that it would be a shame that Britain, with the then fourth largest economy in the world, could not bid for the Games. Nelson Mandela felt South Africa had arrived when it became the first African country to stage the World Cup, and in Copenhagen in 2009, Brazilian president, Luiz Inácio Lula da Silva, shed tears after Rio won the right to stage the

2016 Olympics. As he put it, ‘Everybody talks of Brazil as the country of tomorrow. Here in Copenhagen tomorrow has arrived.’ But while such sporting events may have taken over from expos, do they actually promote a nation’s trade? British politicians argue they do, and Britain is estimated to have won £2bn of business at the Beijing Olympics.

London 2012 is expected to

bring £21bn of business to Britain. But a country must organise the event well Five years ago, Lord Tim Bell, Margaret Thatcher’s PR guru and chairman of Chime Communications, bought Fast Track, the sports firm set up by former Olympian, Alan Pascoe. Chime Sports Marketing is now the biggest sports business in the UK and the fifth largest in the world. Lord Bell says: ‘Expos are old fashioned. Modern sporting events like the Olympics and World Cups do develop business. You only have to see what happened in Sydney or Beijing. Sport brings people together. Governments invest in infrastructure, roads, transport links and all this contributes to a development of the business.’

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accountancy futures: global economy sport

Mihir Bose is an award-winning journalist, author and former BBC sports editor. He writes a weekly sports interview for the London Evening Standard and also writes and broadcasts on social and historical issues. His latest book is The Spirit of the Game: How Sport Made the Modern World. Bose, also a professional accountant, was consulted by ministers in the run-up to London’s bid for the 2012 Olympic Games. Follow him on Twitter @mihirbose

Lord Bell’s words are echoed by those who run the British firm PKL, which provides temporary kitchens. Its growth is a fascinating story of how Olympics in one country can develop business in another. For PKL, it all started in 1998. The organisers of the 2000 Sydney Games had come to London searching for firms to construct temporary kitchens. PKL was introduced to them by UK Trade and Investment and constructed a temporary kitchen at Sydney. Four years later in Athens, this went up to 30, followed by 26 for Beijing, although the number dropped to two for the 2010 Vancouver Winter Games, and one each for the Commonwealth Games in Delhi and the Youth Olympic Games in Singapore. But for London 2012, the firm is putting in 90 temporary kitchens. Peter Schad, commercial director of PKL, says: ‘Major, modern, sporting events are the equivalent of the Victorian Crystal Palace exhibition, providing wonderful business opportunities.’ Many countries which have won the right to stage a major event have used it to publicise its expertise. Australia did that very well from the Sydney Games, but there is no evidence South Africa has received similar benefit from the 2010 World Cup. model country Britain has arguably done the best following London’s success in winning 2012, particularly in the fields of public relations and marketing. Brazil, Qatar and South Korea used British know-how to construct their winning bids for the Olympics and World Cup.

One man who can speak with authority is Mike Lee, chairman of Vero Communications. He set up Vero following London’s 2012 bid, for which he was head of communications. An adviser to three winning bids – Rio 2016, Qatar 2022 and Pyeongchang 2018 – he says: ‘All of them are economically strong and see major sporting events as part of growth. But each of these countries has its own perspective. Qatar, having used its oil wealth to develop, sees the 2022 World Cup as part of economic diversification and to influence the worldwide community. South Korea wants to develop winter sports in the Pyeongchang region where there has also been much regional investment. Brazil, which is an emerging country and the sixth largest in the world, is expected to be the fourth largest by the time Rio hosts the 2016 Olympics. It sees the Olympics, and the World Cup in 2014, as significant boosts to inward investment, growth of leisure and tourism and announcing to the world that the country has arrived at the top table.’ Brazilian estimates of the business these two major events might attract range from US$47bn to US$100bn. London 2012 is expected to bring £21bn of business to Britain. But to benefit, a country must organise the event well, which the Indians failed to do with the Commonwealth Games in 2010. Alan Pascoe, chairman of Chime Sports Marketing, says: ‘Had Scotland pulled out, there might have been a domino effect. In contrast, the Kuala Lumpur Games saw the Malaysian gross domestic product increase, and it provides a benchmark for what such events can do for a country.’

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accountancy futures: global economy turkey

Turkey: open for business After 10 years in the making, the new Turkish Commercial Code will be given a warm welcome by both businesses and multinational accountancy firms


he development of commercial legislation in Turkey has failed to keep pace with the country’s economic growth over the past decade. While structural economic reforms have been carried out, a foreign investment law passed, and GDP levels more than tripled since 2002, Turkey has been slipping down the ranks in the World Bank’s Ease of Doing Business report. A key factor has been Turkey’s outdated Commercial Code, which was enacted in 1956, and the fact business has been kept waiting for a new 1,535-article Code drawn up over the past 10 years. Fortunately, this was finally approved by the Turkish parliament in January 2011 and will come into full force in 2013, and has been warmly welcomed by the private sector and its advocates, notably the multinational accountancy firms.

With Ankara inching towards European Union (EU) membership, over 90% of foreign direct investment (FDI) in the first half of 2011 originating from the EU, and with Turkey seeking to triple FDI from US$12.1bn in 2011 to an annual average exceeding US$30bn over the next decade, a new Commercial Code was long overdue. ‘For the past 10 to 15 years corporate governance has been affecting entities and companies, but there was nothing (legally binding) in the state code, so the new Commercial Code was needed on the demand side,’ says Professor Recep Pekdemir FCCA, a faculty member of the Istanbul Business School at Istanbul University. The new Commercial Code is designed to mesh Turkish commercial regulations with EU legislation. It adopts International Financial Reporting Standards (IFRS) and auditing

Istanbul’s busy restaurant and bar scene reflects Turkey’s thriving economic growth.

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accountancy futures: global economy turkey

Turkey aims to become world’s 10th biggest economy Turkey’s economy has been on a roll for the past decade, with its GDP more than trebling to reach US$735bn at the end of the 2010 fiscal year. With a population of 75 million and ideally situated at the crossroads between east and west, Turkey has built up a strong manufacturing-based economy. While a major exporter to the EU, Eastern Europe and the Middle East, domestic demand is strong, accounting for 70% of GDP. Turkey registered economic growth of 9.6% in the first nine months of 2011, the second fastest after China among the major economies, although it is forecast to slow to 4% this year. Nonetheless, Turkey aims to be the 10th biggest economy in the world by 2023 – it is currently 17th.

principles, and introduces concepts such as transaction auditing, penalties for noncompliance and mandatory company websites for posting financial data. ‘The most notable aspects of the new Commercial Code are the transparency of companies, corporate governance public oversight, accountability and quality assurance,’ says Nail Sanli, president of the Union of Chambers of Certified Public Accountants of Turkey (TÜRMOB). ‘The new Code is built upon the concept of transparency. Companies are required to have financial reporting complying with international standards and independent auditing of companies’ financial statements according to international standards. With the adoption of the corporate governance concept by companies, transparency will be achieved.’ With the new Code impacting all companies in Turkey there is a transition period before the law goes into effect. Implementation of a revised official set of Turkish Accounting Standards will occur on 1 July, but the provisions relating to IIFRS conversion, independent auditing and website requirements will not come into effect until 2013.

The new Commercial Code is

designed to mesh Turkish commercial regulations with EU legislation For the accounting sector to get up to speed with the new Code, training sessions have been underway for the past year at the country’s 30 leading auditing firms. ‘The accounting sector has always had very intense training programmes, but it has become more important because of the Commercial Code and we’ve implemented special compulsory training programmes,’ says Sanli. But not all firms will have to invest in the same level of training. ‘Out of the top 500 companies, about 75% are owned by international investors, banks and insurance companies. These large-scale entities already apply international reporting standards, but it

is different for the rest of the economy as they have not needed these kind of requirements,’ says Pekdemir. ‘Big foreign and local auditing companies will be expanding as more auditing is needed due to the Code, and they will increase their market share from auditing for large-scale entities to include small and medium-sized enterprises.’ Yet while the accountancy profession is stepping up its efforts, there will have to be improvements at a governmental level for the new Commercial Code to have full effect. As the US think-tank the Heritage Foundation notes on Turkey in its 2012 Index of Economic Freedom: ‘Property rights are generally enforced, but the courts are overburdened and slow, and judges are not well trained for commercial cases. The judiciary is subject to government influence. The intellectual property rights regime has improved, but infringement remains high.’ Further amendments Meanwhile, Turkish business has to contend with the fact that the Code may yet be amended still further. While 631 meetings were held over five years to draft the new Code, with ‘development, discussions and approval taking nearly 10 years’, says Sanli, further amendments are likely this year. ‘Before these two milestones are reached, in July and at the beginning of 2013, I expect there will be more changes to the law, such as implementation, amendments, guidelines and disclosure,’ says Pekdemir. ‘The Turkish Accounting Standards Board has the authority to make changes, while the finance ministry, which can be considered quite conservative, will want to make some amendments to hold back the powers of the big accounting firms.’ That said, given the efforts needed to get the Commercial Code passed, ironing out the practicalities is to be expected. For now, companies and foreign investors see the harmonisation of the new Commercial Code with the Corporate Income Code, Civil Code and Penal Code as a boon for business. Paul Cochrane, journalist

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inance and business professionals in India have a lot to grapple with – the volatility in the global markets, regulatory changes on the anvil in India, scarcity of talent and the need to constantly work on their own skillsets to stay competitive in the dynamic business environment. In an exclusive interview, Jamil Khatri, global head, Accounting Advisory Services, KPMG, discusses how business leaders can still keep their teams motivated under these complex circumstances.

Q What are some of the key issues faced by accounting professionals in India today?

A There is a lot of regulatory change that India is likely to witness in the near future. The new Companies Bill is likely to be cleared in the near future. The Direct Tax Code (DTC) 2012, if approved, should come into effect from 1 April 2013. And then there are the IFRS-converged standards that India will need to adopt in the coming years. Also, there are intermittent government projects like companies being mandated to report financial results in the XBRL format. The big challenge before finance and business professionals in India is not the change itself, but the uncertainty around these changes. Many of our clients wonder if the time they have spent on complying with International Financial Reporting Standards (IFRS) has been wasted, because the roadmap for IFRS convergence (as of today) is unclear. It is very difficult to plan around these changes as they do not know when these will come into effect.

Q Under such uncertainty, how do business leaders keep their teams motivated? A While the uncertainty is a big opportunity for KPMG, our clients are facing trying times. They don’t know where to invest their time. We are advising finance professionals to prioritise. For instance, at present there is no visibility around International Financial Reporting Standards. So we are advising them not to invest their time on IFRS and focus on the new Companies Bill, which looks imminent. They need to keep an eye on the latest developments. For instance, the Ministry of Finance (MoF) is now looking at a new way in which tax would be computed. On 17 October 2011, the MoF issued a discussion paper on Tax Accounting Standards (TAS). As a part of the discussion paper, the MoF has also issued the Draft TAS on construction contracts and government grants for comments and suggestions. If the recommendations in the discussion paper are eventually accepted and incorporated into the Income Tax Act, taxable income will be computed based on provisions

Beating the uncertainty With uncertainty in both the global economic environment as well as the regulatory environment at home, Indian accounting and finance professionals need to prioritise, advises KPMG’s Jamil Khatri

of the TAS, irrespective of the accounting standards followed for the preparation of the financial statements. Similarly, finance professionals need to look at the revised Schedule VI of the Companies Act, notified in February 2011. The revised schedule will be applicable to all the companies making their financial statements on or after 1 April 2011. So, effectively, revised Schedule VI is applicable for financial year 2011–12. Therefore, companies need to think about how

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material the impact would be. For a company with a lot of borrowings, the revised Schedule VI would have a big impact. We are asking our clients to invest their time in Schedule VI, DTC, new Companies Bill, IFRS – in that order.

Q With time, India will have a larger role to play in the global economy. In your view, how will the role of accounting professionals in India change over the coming years? A It’s a challenging environment for them. In

my view, four things are happening that are making the business environment complex: Businesses are going global and CFOs are in the forefront of globalisation. They need to look at the rules for setting up new businesses, new opportunities for M&As or joint ventures. Accountants have to deal with a larger landscape. Financing is becoming much more difficult. Capital markets are not as robust, so raising capital can be challenging.



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to volatility in input prices of * Due commodities and foreign exchange, CFOs have to play a larger role in risk management in these areas. Many cost structures are built around high growth rates. Organisations are turning to the CFOs to cut costs and become lean. Therefore, the CFO’s role is less about accounting and financial reporting and more about addressing these four issues.


Q What are some of the issues affecting accounting professionals that the Indian government needs to address? A It needs to give certainty around these initiatives. We need a proper and accurate roadmap. Bring in certainty and leave the rest to private companies.

Q Where is India in terms of IFRS adoption? A To be honest, we don’t know where we are going. The regulator – the Institute of Chartered Accountants of India (ICAI) – has suggested that the Ind AS be implemented from 1 April 2013 and not 1 April 2011 as planned. The government is yet to announce the implementation date for Ind AS. We don’t know whether the government has agreed to ICAI’s suggestion or not.

While the uncertainty is a big opportunity for KPMG, our

clients are facing trying times. They don’t know where to invest their time, so we are advising finance professionals to prioritise We also don’t know if these standards will go through in the form that they have been put out by the regulator. There are several concerns around the carve-outs. There are instances where the deviations from the IFRSs may be mandatory. However, we also have instances where carve-outs can be avoided. There is concern over whether there should be so many carve-outs. We also don’t know if there will be a rollback on the carve-outs. Moreover, when these standards apply to Indian companies, there will be an impact on taxation. The Central Board of Direct Tax (CBDT) has set up a working group to look into ways in which the implementation of IFRSconverged standards will impact taxation in India. I am a part of this group and, based on our recommendations, the CBDT has issued a discussion paper on this matter. Making changes to tax regulations is a prerequisite to the adoption of IFRS-converged standards. Additionally, the Companies Act 1956 also needs to be amended so that

there is no conflict between the law and the accounting standard. Similarly, the Reserve Bank of India guidelines need to be amended. Overall, there has been no progress since February 2011, when the Ind AS standards had been notified.

Q Do you think the accountancy profession in India has moved on from the Satyam scandal? Have all the issues been addressed? What are some of the changes that still need to be brought about? A Satyam has brought several issues to the forefront. Earlier, if the company and the auditors were okay with the accounts, all was fine. Now there will be a lot of scrutiny, which is a good thing. However, at a structural level I do not see any change. For instance, after the US saw the Enron scandal, the SarbanesOxley Act (SOX) came into effect. We don’t have a SOX equivalent here, as yet.

Jamil Khatri joined KPMG in 1995 as a trainee. He qualified as a professional accountant a year after he joined. Today, he heads one of the fastestgrowing practices of KPMG India – Accounting Advisory Services (AAS). In October 2011, he was appointed head of AAS for the EMA (Europe, Middle East, Africa) region of KPMG and two months later, in January 2012, he was appointed global head of AAS.

Interview by Swati Prasad, journalist

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Transformation untapped There is still an enormous amount of potential in outsourcing and shared services that finance leaders can unlock, as ACCA’s Jamie Lyon explains


hared services and outsourcing are now established features of modern business life across numerous functions – finance included. For many CFOs, the quest for reduced cost was a key driver for beginning this finance transformation journey, and their initial focus was typically on high-volume, low-added-value transactional processing. But over time finance leaders have realised there are opportunities to transfer additional areas of finance activity to outsourced service providers or captive shared service centres, freeing up the retained finance team to focus more firmly on partnering business units. Even now, the discussion is moving beyond partnering, with growing whispers of how analytics is going to revolutionise the finance offering to the business. If freeing up the retained finance functions and gaining insights into driving business performance are part of the drive behind shared services and outsourcing, practice has not always lived up to the theory. As ACCA’s recent report, Finance Transformation: Expert Insights on Shared Services and Outsourcing, shows, there is some way to go before all of the potential that shared services and outsourcing can bring materialises. Looking forward, one of the considerable challenges cited by the report is that finance leaders introducing an outsourced or shared


Q Will the outsourcing trend continue? A Even if there is little cost arbitrage to be gained from a low-cost location, there are benefits such as the adoption of a single best practice and more productive process, better spans of control, and standardised and enhanced data and reporting. These will ensure there is no turning back.


Q What goals do organisations have when opting for outsourcing or shared services?

A Some are choosing to deploy shared services and outsourcing tactically, to fix or improve the finance function. At the other end of the spectrum, some are comfortable driving broader change, unlocking greater value for the whole organisation.

services model need to make sure more effort is placed on creating the right retained function to drive the optimal finance model for the business. New roles and responsibilities must be clearly identified and articulated – and the capabilities of individuals within the team assessed for relevance to the new demands they will face. Internal teams may also resist the transformation of their function that PG55 EDITION 05

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comes with outsourcing and shared services models. The result may be the emergence of a ‘shadow’ finance team that merely duplicates effort and adds no value. Such experiences have clarified the paramount importance of effective change management procedures. This begins with the CFO, who must show leadership – pushing finance teams to adopt new ways of working that align with the role of business partner. evolving partnerships Thinking on what constitutes good practice in finance business partnering continues to evolve. The skills and capabilities required by successful finance business partners are numerous. As identified in previous ACCA research, they include the following: the ability to act like a business entrepreneur, proactively working with the organisation; the ability to use technology effectively to support advanced data analysis; influencing and conflict resolution skills to win the support of internal stakeholders; communication skills to explain financial analysis in simple terms to business leaders; and the initiative to identify issues where finance can provide added value. More value could also be delivered through the outsourcing model if new ways could be found to align the interests of clients and providers. This remains one of the major challenges and frustrations in the outsourcing

Caroline Curtis FCCA Senior director of controllership accounting and reporting, EMEA, Yahoo Q What benefits can be achieved through effective use of shared services? A Speed of execution, reduced operational risk, specialised capability when it may be needed (for example, with regulatory issues), operational flexibility and an ability to control talent development effectively.

Nick Atkin Partner, PwC Consulting Q How can organisations get the best from outsourcing and shared services? A Finance leaders must create and communicate a compelling case for change. This must engage and energise the organisation at an economic, rationale and emotional level. The transition needs to balance risk, quality and cost.

Anoop Sagoo Senior executive for business process outsourcing, Accenture Q What goals do organisations have when opting for outsourcing or shared services? A What they are most interested in now is performance. A good business provider understands what the business imperatives are and, importantly, recognises they will change over time.

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Jamie Lyon is ACCA’s head of corporate sector and leads its global research and insight programme on finance transformation, with a particular focus and interest on the evolving role of the finance function, finance effectiveness, and the role of the CFO.

Christian Kaufmann Vice president, finance services, Unilever Q Can ownership of end-to-end processes be fully outsourced? A Nobody has fully embraced end-to-end, because what it basically means is that different functions within an organisation must talk to each other. Normally, big corporations tend to struggle with that – it’s a real challenge for them.

James Meader Partner, Ernst & Young

Q What mistakes do organisations make when implementing an outsourced model?

A Often the retained team’s roles and responsibilities are not well articulated in the haste to implement, resulting in overstaffing and the formation of a shadow organisation. Businesses need to define clearly what is expected of the retained organisation.

Patrick van Hoegaerden Finance transformation director – Europe, Coca-Cola Company Q How can change management be handled effectively? A Developing a communication and change approach that recognises everybody is quite different and at different stages of acceptance is critical. Patience is important, and timing your move.

arena. Alignment can make or break the outsourcing model’s success and a lack of alignment between the parties’ rewards and incentives can negatively affect end-to-end finance service delivery. Finance leaders also find that their cultural values and targets may be at variance with those of their providers. CFOs are suspicious that service providers’ main goal, for example, is to ensure that their clients find it difficult to switch. Clear communication between the parties is vital for gaining an understanding of the challenges each faces. Looking ahead to future trends that could impact on outsourced and shared service centres, one area of change is likely to be the emergence of new preferred offshore locations. Current favourites, such as India, may continue to gradually lose their labour arbitrage advantages, encouraging both providers and buyers to look elsewhere. The Philippines and China, for example, are currently largely untapped markets for outsourcing purposes, yet both are emerging location options. Joining up Another area of development that could deliver substantial value for organisations is the move towards global business services – a joined-up approach to outsourcing and shared services that moves beyond individual functional boundaries. According to a report by HfS Research and PwC, The Evolution of Global Business Services: Enhancing the Benefits of Shared Services and Outsourcing, business leaders are increasingly focused on developing common business processes, supported by compatible IT systems, so that greater efficiencies and cost savings can be achieved, and greater force applied to the delivery of strategic objectives. Buyers of outsourcing services, while still primarily focused on reducing operating costs, are also highly motivated by the desire to achieve more effective operations at a global level. As these new models develop, the potential benefits to be gained from implementing outsourcing or shared services will grow even greater. CFOs have the opportunity to make a major impact on their organisations’ success in delivering strategies and strengthening bottom-line results by fully embracing the model – and by learning from the growing canon of evidence on how to maximise the benefits. Finance Transformation: Expert Insights on Shared Services and Outsourcing is at

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accountancy futures: finance transformation talent

People power Standard Life CFO Jackie Hunt explains why talent development has such a big role to play in the financial services giant’s transformation plans


he level of change within the financial services industry over the last four years has been profound and far-reaching. Areas such as strategic planning and risk management have become more and more challenging as the regulatory landscape changes, and growth prospects must be carefully assessed. Standard Life is transforming itself to meet these challenges and continue to thrive as a long-term business. Our strategy includes investment in technology, infrastructure and, most importantly, people. Developing talent is hugely important at Standard Life. I believe the practical and

Leaders are often made,

not born; similarly, talent needs to be developed and not left in a raw state cultural aspects of talent development in any organisation need to be firmly embedded across all areas of the business. For this to be successful, it has to be supported and reinforced at all levels. It requires positive energy, a singular focus and unswerving commitment. Perhaps the biggest demand for these qualities comes at executive and senior management level. I’m not necessarily advocating a top-down approach. It’s more that belief and support have to be amplified at the senior level, through energy, focus and commitment. I have two reasons for focusing on a strong culture of talent development. The first is the commercial benefit: it makes a difference to the bottom line. The second is that when it comes to financial services, I believe people are an incredibly valuable asset. The finance industry has encountered myriad problems in the last five years and the future landscape promises to be just as challenging and ripe with opportunity. People are the key, not just to meet these challenges, but to thrive on them and seek out the opportunities that they bring. An investment in people is an investment in the future. But it involves a lot more than just identifying where the talent is. My role in developing talent is concerned with

four key elements: setting the tone, defining the capabilities we need, getting the right people in place and creating an environment that supports, and at times pushes, people on to success. Naturally, my major focus is on my group finance team and the talent community we have across the group. But as a member of the board, I need to demonstrate those amplified qualities I mentioned before throughout the entire business. Setting the tone is about creating the right picture, the right frame of mind. At Standard Life, we help to create that feeling of championing talent in everything we say and do. We foster and encourage ambition but temper this with realistic expectations. The nature of our business – financial services – is often complex. It touches every part of the organisation, from customer service and sales to IT and marketing. We need to grow the leaders and experts who will shape our businesses’ future. But at the same time we must develop sound commercial skills and financial literacy right across the business. It’s critical to ensure these skills are there if we are to compete in our chosen markets. the right mix As well as being a complex business, financial services is incredibly diverse. There is no universal formula for a ‘financial services professional’ in today’s marketplace, but a solid understanding of the nature of the business and a level of commercial skill are essential. And beyond that foundation there is a broad palette of capabilities that we need to run our business. A good example in my team would be the contrasting capabilities of someone specialising in capital management and someone whose strengths lie in investor relations. Both roles require an advanced knowledge of financial concepts, but the former has to have strong capabilities in understanding liquidity and credit risk, analysing markets and trends, and building (or pulling apart) complex financial models. The latter needs the capabilities to turn all that analysis and complexity into understandable, compelling stories that explain what’s at the heart of our business, the thinking behind our propositions or group strategy. Capabilities

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Jackie Hunt

A South African accountant, Hunt became CFO of Standard Life in 2010. The Edinburgh-based savings and investment business has a market capitalisation of £5.3bn (April 2012), 9,000 staff, and operations in the UK, Canada and Europe as well as joint ventures in China and India. She joined the company in 2009 from Norwich Union Insurance, where she was also CFO, and was previously employed in a range of senior finance roles at Royal & SunAlliance and PwC. In 2011, she was appointed chairman of the Association of British Insurers’ financial regulation and taxation committee.

differ by role, but they also differ across levels of seniority. Leaders are often made, not born; similarly, talent when it’s spotted needs to be developed and not left in a raw state. This ‘gifted amateur’ approach to talent, as I call it, makes a huge assumption that when someone shows a particular talent for something, they can apply it to any situation. Sometimes people do make big career changes without any support. But we believe that spotting talent is the start of a development process, not the end of it. In my mind, the most critical element in talent development is the people themselves. Certain skills and experience are a must in our line of business. But for talent development, the vital third ingredient is attitude. Why? In my team of around 1,300 people we have a diverse range of skills and a need for a broad range of capabilities. My team includes accountants,

actuaries, treasurers, quants, risk managers, capital management experts and investor relations specialists. That’s a formidable range of qualifications, but I am convinced that attitude outweighs skill and experience, and makes my team what it is. Indeed, attitude is the key ingredient for success across many high-performing teams at Standard Life. And finally, the fourth essential element is the environment that we create to encourage and develop talent in our business. We can create the environment for talent and leaders to grow, but it’s the combination of skills, experience and the vital ingredient of attitude that makes it come to life. As you’d probably expect from a financial services company, the model we use is based on numbers. We use a 70/20/10 model for talent development: 70% of a person’s development comes through experience on the job, 20% through

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coaching or mentoring, and 10% from a formal programme like training. This is a realistic and grounded model. I say realistic because it places the emphasis on learning through experience, and grounded because it places responsibility for personal development squarely on the individual’s shoulders. Throughout our company, we actively encourage individual development plans, but especially so at senior levels of management. I feel these types of plan work better because they focus on long-term development – that is, ‘what do I need to do to be where I want to be in two to three years’ time?’ as opposed to ‘how do I get better at the job I’m doing now?’ A good development plan will include a mix of experience, coaching from the individual’s manager and training in the proportions I mentioned. It’s also important to focus on the person, not the role. One of the interesting things I saw when we started using individual development plans at Standard Life was how role-focused some people were. I’ve always believed that this way of thinking leads you to a dead end at some point. But focusing on the individual – their skills, experience and attitude – frees you from that inflexible path. One excellent aspect of working for a company like Standard Life is that the environment for talent to grow is truly international. We have businesses in Canada, Europe and Asia, as well as joint ventures in the rapidly growing markets of India and China. For my team this creates an environment in which their talents can be developed, not just outside of finance but across different types

of markets. I speak from personal experience, having worked in the US, Switzerland and New Zealand as well as my birthplace of South Africa. Gaining exposure to different businesses, cultures and work practices is vital in helping to grow future leaders in a globalised business world. People are an incredibly valuable asset where investment is required to identify talent, spot future leaders and, through creating the right environment, help them to grow and realise their full potential. Talent development is a two-way street at Standard Life, with commitment needed from the individual and

We actively encourage individual

development plans, but especially so at senior levels of management

the business. It’s part of my role to bring the energy, focus and commitment required to encourage our talented people to develop themselves, to show us their skills, experience and, most importantly, their attitude. So where is the commercial benefit to all this? Financial services is an industry that needs to be sustainable, and Standard Life has been serving its customers for 187 years. In order to make good on our customer promise, to look after our customers’ money for the long term, we need to have the right plans and the right assets in place to be sustainable. Because people are a vital part of that sustainability, investment in talent is an investment in the future success of our organisation.

Jeffrey C Thomson CMA: business partners IMA President and CEO ‘Accounting is an evolving profession and the role of CFOs and the finance function will present new challenges and opportunities over the next five years and beyond. Advances in technology, changes in regulation, and the global economy are all contributing factors. ‘Management accountants are increasingly important as strategic business partners in organisations. Beyond financial accounting, CFOs and their teams are expected to participate in roles such as developing new products and services, performing competitive analysis, mergers and acquisitions, and contributing to the organisation’s overall strategy. ‘Today’s finance function demands professionals with a broad skillset. As well as having a mastery of technical accounting skills, professionals need to become experts in leadership, communication and influence. These skills are vital in collaborating with cross-functional teams, selling ideas to management, and assuring confidence among shareholders. ‘What does this mean for accountants and the organisations they work for? Accountants need to keep pace with trends in the profession through continuing education and certification. Employers need to make talent management a high priority, in terms of recruitment, ongoing training and development, and making the most of talent to run the organisation. All of these factors contribute to a rewarding career in accounting as well as meaningful contributions to organisations and society overall.’ IMA (Institute of Management Accountants), based in the US, collaborates with ACCA in the production of the quarterly General Economic Conditions survey. See

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Richard Moat FCCA: export drivers Ex-CFO, Everything Everywhere, and Chair, ACCA’s Accountants for Business Forum ‘Businesses face a worrying combination of adverse economic and political issues. The US economy is improving modestly, but until the euro crisis is resolved, the currency’s travails will continue to act as a major overhang on debt and equity markets across the globe. ‘Some argue that this is not simply a recession, but the end of growth as we have known it. We are producing potentially peak levels of oil, water and food, which could herald a new era, still of progress, but without growth. ‘In the past, if the US caught a cold, the rest of the world went down with flu, but this time Asia and Africa have ridden out the crisis. In the EU, 22 of the 27 member states now have smaller economies than in 2007. ‘In emerging economies, the figure is 33 out of 150 states. Businesses must start regearing their exports towards these markets.’

Alvin Chikamba: ethical champions head of policy – sub-saharan africa, ACCA ‘With today’s accountants acting as guardians of integrity in their businesses, the major accountancy bodies are increasingly embedding ethical values and the importance of acting in the public interest in their syllabus and training frameworks. By demonstrating ethical leadership, integrity, objectivity and professional care, accountants help maintain and strengthen the reputation of the business they work for while protecting the public interest. ‘Evidence from the financial crisis suggests that regulation, codes of conduct, and compliance policies may not be enough in themselves to create a climate of ethical and responsible behaviour. Given that business decisions are ultimately made by people, behavioural factors are crucial in determining how any business acts. This makes it even more important to have people in positions of authority, especially in the finance function, who can be relied on to make decisions in the right way and for the right reasons.’

Mohamed Rafique Merican Mohd Wahiduddin Merican FCCA: the new CFO group CFO, Maybank, and Ex-CFO, Tenaga Nasional, Malaysia The role of the finance professional is increasingly shaped by the organisation’s strategic objectives. With globalisation an important avenue to pursue growth, the finance function has had to evolve. ‘To support the business’s objective, finance teams must have the necessary commercial knowledge and exposures to ensure viable investments are being made,’ says Mohamed Rafique Merican Mohd Wahiduddin Merican. He adds that key functions such as business development, risk management, investor relations, investment management and others will have to be reconstituted under the finance department, and that the CFO’s role will evolve in parallel with a company’s particular strategic direction. CFOs must increasingly play a more strategic role in partnering the CEO and be responsible for ensuring the company is moving in the right direction to achieve its desired mission. Other additional CFO functions will include business development and risk management. He believes CFOs will also be responsible for building relationships with investors and other stakeholders, and play the lead governance role, as most companies today uphold good corporate governance as an organisational imperative. Furthermore, with recent developments in the accounting world, the CFO is also expected to be responsible for the convergence of accounting standards to ensure full compliance with international accounting practices. ‘This is in addition to the traditional role that CFOs play in an advisory capacity especially to the board of directors and the CEO pertaining to commercial and investment decisions.’ Lastly, CFOs will be responsible for developing future financial leaders to ensure continuing financial leadership of the business. He adds that there are situations where outsourcing is deemed viable for a company. ‘For foreign investment, the services of international advisers that are more familiar with the target country may need to be engaged to provide the necessary facts and findings to facilitate proper decisionmaking by the respective approving authorities,’ he adds. Interview by Dalila Abu Bakar

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Kholeka Mzondeki FCCA: the business partner CFO, ARUP, SOUTH AFRICA It has been said that the CFO of the 21st century has to be a wizard: part adviser, part sorcerer, and part prophet. Excellent communication, business and leadership skills are just as important as the ability to analyse risk and crunch the numbers. Kholeka Mzondeki says: ‘When I did the strategy with the finance team I said, “Our role is changing more and more. Especially in these economic times people appreciate accountants who are business partners, not just number crunchers.” ‘Nowadays you’re a governor, you have to read the crystal ball and try to be a prophet, you are a reporter, you have to play your compliance role, and you have to be a communicator and more importantly a trusted adviser.’ Mzondeki believes that the CFO should be the CEO’s ‘right-hand person’. Companies that are ahead have long realised the value of finance partnering with business. ‘If you are playing your role well and you have an astute CEO, then whatever she does, she must always feel the need to say, “Let me check with my CFO and see if this makes sense.” ‘Then you know you are doing your job right. That’s where the CFO’s role as a business partner comes in.’ She says that CFOs also have to keep their eyes firmly on politics and the effect that it has on business. Transformation of businesses is vital, in particular in the South African context, not only because of employment equity legislation, but because it makes good business sense. ‘The more everybody is empowered, has got a job, has got skills, the more there will be demand for products, the more the economy will grow. Countries with a good proportion of middle class do well,’ she says. For CFOs who do business in other African countries, like Mzondeki, they have to become well versed in geopolitics and an expert in the tax systems of those other countries. Interview by Nicki Gules

Alice Wong FCCA: the ‘mini-CEO’ concept FINANCIAL CONTROLLER, CITY TELECOM, HONG KONG As financial controller of City Telecom – one of Hong Kong’s biggest telecommunications service providers – Alice Wong’s role is not just about monitoring the firm’s finances. ‘I see myself as my company’s business partner,’ Wong says. ‘My mission is the same as that of our department. Our role is not passive – we build business models for our company and pursue them.’ Wong has a busy work schedule, coaching the finance department’s 50 accountancy staff and overseeing a myriad of finance matters. These include payments, budgeting, taxation, financing activities and the development of the ‘mini-CEO’ concept. ‘Finance people always say they have difficulty in pushing other teams to meet budgets as they may consider themselves only a support function. ‘Here at City Telecom, we deem ourselves a business partner. Therefore, we have the responsibility to push others to achieve targets. ‘Each department head is empowered as the CEO of his/her own department and each of them has their own profit and loss to run. Our role is to proactively influence business decisions through ongoing communication of the financial impact, based on our accounting knowledge and judgment,’ Wong says. She also takes charge of annual purchases over HK$400m, mainly for deploying the next-generation fibre network in Hong Kong. Interview by Sherry Lee

David Harker FCCA: the chief executive Durham County Cricket Club, UK ‘Becoming chief executive was a big step forward and meant my remit became much broader, covering all aspects of business. My grounding in accountancy gave me the confidence to deal with commercial matters which I don’t think I otherwise would have had. As soon as you’re in a meeting and the people on the other side of the table realise you’re a qualified accountant it gives you a kind of gravitas and authority. ‘Cutting costs to get to profit quickly is not a difficult thing to do, but the key is not to make decisions that undermine the business. The aim is to be progressive, looking to the future, looking at the level of facilities and service we want to offer and reconciling that with the financials.’

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accountancy futures: finance transformation technology

A world of ‘big data’ beckons Accountants helped pioneer the use of IT to work smarter. Now we are more connected than ever, what does technology have in store for the profession?


lthough the work of Hungarian author Frigyes Karinthy may have passed you by, you may be familiar with his notion of six degrees of separation. Back in 1929, characters in his short story, Chains, played a game based on the idea that any two individuals could be connected through, at most, five acquaintances. In 2012, thanks to technology, and in particular social networking, we live and work in a world where everybody is connected to everyone else by a rapidly decreasing number of links. Karinthy’s game and its descendants have already evolved into the science of networks, which studies the laws that govern the function and growth of networks as diverse as bacteria, the followers of a Twitter feed, international conglomerates, the biological food chain, and expanding cities. Who knows where all this might lead? Many of us have

Ain’t no mountain high enough: ‘big data’ leader Google used snow mobiles to photograph the ski slopes of Zermatt in Switzerland for its Street View maps.

already seen networks reshape the way we communicate and collaborate in our personal and our professional lives, and many of us will live to see them deliver much more dramatic changes, because the devices that are used by the links in those chains are the repositories of increasing amounts of data. With the volume of electronic information doubling every two years we are entering an era of ‘big data’. Some of it is structured (think databases and spreadsheets) and some of it is unstructured (think digital photographs and tweets). Either way, vast amounts of data can now be accessed, analysed and searched more quickly and easily than ever before. The implications are vast for areas ranging from business intelligence and consumer spending patterns, through economic development and forecasting, to marketing and public health. In the era of big data, those who can exploit it by

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tapping into its hidden patterns will emerge as kings and queens. ‘The sexiest job in the next 10 years will be statisticians,’ predicts Hal Varian, chief economist at Google. You don’t need to look any further than Google to see how big data can change a company. Nor are the resources of the world’s leading search engine required to see where some other applications of technology are taking businesses. The accountancy profession itself has some prime examples. Finance has been at the forefront of the outsourcing and shared

Accountants were exploring

the potential of cloud computing before the ‘cloud’ tag had even been coined services model that is steadily reshaping global business. Patrick van Hoegaerden, Coca-Cola’s finance transformation director, says: ‘Our starting point was simplifying processes.’ Centralised finance has made it easier for the company to ‘drive skills, depth and expertise’ and improve decision-making across the business. Because of its role at the heart of business, accountancy has been among the first professions to use technology to ‘work smarter’ by facilitating collaboration across supply chains, increasing and automating the sharing of data and its exchange between separate entities. Accountants were exploring the potential of cloud computing before the ‘cloud’ tag had even been coined, by using online accounting systems to make it easier to remotely access clients’ financial data. Technology is also changing the way firms deliver staff training, as a recent ACCA report, The E-Professional: Embracing Learning Technologies, made plain. Richard Pollard, PwC’s global development leader, is quoted as saying: ‘We’ve had some really good experiences using technology for diversity training and coaching support.’ BDO director Greg Owens added: ‘Offering our online videos in a YouTube format has proved successful.’ There are already strong signs that the extent to which we are all connected (to each other and the internet) will result in organisations engaging in much more collaborative and open approaches. For example, some of the world’s biggest businesses are exploiting technology to collaborate on initiatives to cut costs and carbon emissions. In one such scenario, rival confectioners Nestlé and Mars synchronised their deliveries, so that part-load orders to the regional distribution centres of Tesco could be combined into single truckloads.

Open goal: Nike uses ‘open invitation’ to get customers and other stakeholders help it design products such as its T90 Ascente ball, here being tested in a wind tunnel by the Barcelona goalkeeper Victor Valdés.

Even the way businesses develop products and services has become more collaborative. Within months of the 2012 launch of the Kia Optima, South Korean carmaker Kia had redesigned the vehicle’s seats in response to criticisms ‘heard’ on social media. ‘It’s no longer unusual for smart marketers to listen in on customers’ conversations in social networks,’ says Gavin Michael, chief technology innovation officer at Accenture. Other businesses are going even further, exploiting ‘open innovation’ to get customers, and other stakeholders, to help them design products and solve problems. This approach has already spawned the open software movement and Wikipedia. Other pioneers include Beiersdorf, Dell, Nasa, Nike, Shell and Starbucks, while at Procter & Gamble more than 50% of product initiatives now involve ‘significant collaboration’ with over 1,000 ‘outside innovators’. But while this ever more connected and collaborative world may ultimately produce some great developments, it might be a mistake to expect too much. As Henry Ford once remarked: ‘If I’d asked people what they wanted, they would have said faster horses.’ Lesley Meall, journalist The E-Professional: Embracing Learning Technologies is available at

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How do you think technology will change the working life of the accountant over the next five years? John Bain FCCA Principal, JSB & Associates, Bahamas ‘Apple recently launched its upgraded iPad. Other companies will follow. Fast-paced technological advancement will continue unabated over the next three to five years. As businesses increasingly depend on technology for existing and new products, the working life of the accountant will become less dependent on traditional accounting and more dependent on technology. Accountants cannot help a business if they do not possess the correct technical knowledge to understand it. The biggest challenge to the working life of the accountant is obsolescence. We must keep up with the pace of business development. Either we adapt or we become irrelevant.’

Cristina Gutu FCCA Finance trainer, BPP Professional Education, Romania ‘The days of the pencil-and-paper accountant are long gone. Technology is becoming not only a helping tool for accountants, but a mandatory component without which they cannot survive in an evolving and competitive market. The proportion of accounting records being dealt with by shared service centres will increase. Therefore, a professional accountant will be required to use his or her core skills and capabilities – technical knowledge and expertise, critical thinking and understanding of a complete business, to mention just a few – to interpret and participate in the overall strategy of the business, rather than relying on recording accounting processes.’

Mubashir Dagia FCCA Executive director, Technology Trade, Pakistan ‘Fourth-generation gadgets will be the main tools for managing the accountant’s working life, allowing greater flexibility over how the work is performed – onsite or offsite will not matter. Technological advances will shift the focus from computing to consulting as accountants take on new roles as consultants, advisers and performance managers, being relied on to analyse business information, support decisions and provide strategic advice. Services currently provided by accountants such as data entry, bookkeeping and tax returns will become less profitable and will disappear due to automation. Accounting specialists will be favoured over generalists.’

Rosanna Choi FCCA Partner, CWCC, Hong Kong, and member of ACCA’s Council and Global Forum for SMEs ‘Technology has brought about a flat world that is both fast-paced and overloaded with information. But we know that information does not automatically translate to knowledge – critical thinking and professional judgment are needed to turn data into value. These attributes will therefore become even more important for professional accountants as we will need to bring them to bear to provide understanding and insight. Increases in offshoring and outsourcing will also give us the ability to move up the value chain. Furthermore, the fact that an accountant might see a client’s entire universe online makes cyber-ethics and professional scepticism issues of growing importance.’

Clare Minchington Executive director – E-DELIVERY, ACCA ‘Technological advances – especially around data and analytics – will provide a tremendous opportunity for finance professionals to help drive better business decisions and create competitive advantage. Analytical skills and the ability to make connections between sets of information will become even more important. By offering analysis, options and recommendations based on hard data, accountants have the opportunity to make themselves even more invaluable to business success. But in order to do this, they will need to have excellent communication and other soft skills. More technology certainly doesn’t mean that accountants will need fewer highlevel capabilities – quite the reverse.’

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accountancy futures: finance transformation diversity

Diversity in the round How does diversity help to drive business performance and innovation? Alison Maitland reports on recent ACCA research and roundtables

I Alison Maitland is an author, speaker and conference moderator, specialising in leadership, diversity and work. A former Financial Times journalist, she is co-author of Future Work and Why Women Mean Business. www.

t’s not often that you find finance and human resources people from different organisations in the same room discussing the importance of diversity to business. But that is what ACCA achieved, in partnership with the Economic and Social Research Council, in convening three Expert Panels in Delhi, Shanghai and London. The discussion at the panels, which also included experts from the public and voluntary sectors, media and academia, demonstrated how diversity is becoming a bedrock of business in the global economy. ‘Diversity is about survival,’ declared one Delhi panellist. Our task was to investigate how diversity – in its broadest sense – could help to drive business performance and innovation. As chair of the Shanghai and London panels, I found it interesting to hear panellists address the thorny question of how to manage diversity well. The conclusion from all three panels was that it starts and ends with good leadership. Bridging different cultures, for example, is an increasingly important skill for business leaders. They must encourage employees to share their views, and this can require a big

shift in cultures where individuals simply obey the boss. Traditional hierarchies are breaking down, and leaders often have to rethink their own attitudes and assumptions. As one Shanghai panellist put it: ‘In terms of managing people, it’s really a leadership mindset change [that is needed] to set in place the culture of being “first among equals”.’ This challenge for leaders is mirrored in ACCA’s recent report, Building a Better Business through Finance Diversity, which similarly questioned both HR and finance experts. In their view, business could only benefit if employees were able to express their diversity. If not, companies would end up with teams that looked superficially different but all thought in the same way. Creating the right environment for diversity to flourish can be difficult to achieve. Many ‘diversity initiatives’ fail to achieve traction. The report says that leaders need to be open to being challenged and expert at balancing ‘the contradictory forces coming at you’. In both the study and the panels, there was recognition that managing diversity takes time and effort, but that this is offset by the business

Dehli roundtable (from left): Lalit Jain, Mohini Daljeet Singh, Ashish Makhija and Vandana Saxena Poria.

Lalit Jain

Ashish Makhija

Senior vice president and company secretary, Jubilant Life Sciences ‘We send our financial chief from India to control the companies that we acquire. Diversity is a business call.’

Advocate, AMC Law Firm ‘Diversity breeds creativity and innovation. People from across the globe offer different dimensions. And all these dimensions need to be explored. With a diverse mix of people, you get fantastic ideas.’

Mohini Daljeet Singh Head, Max India Foundation ‘Diversity is inevitable. It is about harbouring a value system, about humanism. Diversity is about ethos, about values of the CEOs. And values are the same across the universe.’

Vandana Saxena Poria Chief executive, Get Through Guides ‘What about the chaiwallah who sells tea outside offices? Is diversity relevant to this tea vendor?’

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accountancy futures: finance transformation diversity

Get Through Guides chief Vandana Saxena Poria questioned whether diversity was relevant to a tea vendor.

advantage of reaching better solutions. Many Western companies are grappling with how to integrate diversity into every part of the business, rather than being a standalone function. One solution, which emerges from the report and the panels, is to make it an

integral part of leadership development. Today’s finance leaders, for example, need to have well-rounded business experience, not just technical skills. They have to learn to adapt to new business models and acquire knowledge of both developed and emerging

Shanghai roundtable (from left): Christina Antoniou, Michael Gui, Jean Ning and Jason Wang.

Christina Antoniou

Jean Ning

HR partner, Deloitte China ‘Diversity can be as simple as creating an environment where everyone feels they have the opportunity to perform to their best.’

Staff FP&A analyst, GE Industrial Solutions, Asia ‘There are different levels of cost. One is that diversity will lead to confrontation between different groups of opinions. You’ll need to make some mistakes and you will probably take some financial cost for some decisions.’

Michael Gui Senior consultant in talent management, Right Management ‘Diversity is a business imperative for those Chinese companies who wish to emerge like a phoenix in today’s competitive corporate arena.’

Jason Wang CFO, Henkel China ‘With diversity you can create certain stimulating dynamics within the team.’

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accountancy futures: finance transformation diversity

Monder Ram

India Gary-Martin

Professor of small business and director of the Centre for Research in Ethnic Minority Entrepreneurship, De Montfort University, Leicester ‘There is a business case for diversity, but if we latch on too firmly to that notion in isolation, with what intellectual armoury do we castigate organisations that are just staying afloat? We need to look at other levers to effect change, such as legislation.’

MD of investment banking technology and operations, JP Morgan ‘In organisations driven by revenue, being able to convince people to spend money on diversity depends on the numbers.’

Michelle Mendelsson Co-head of EMEA diversity and inclusion, Credit Suisse ‘When we try to educate people, if we can use empirical data to support what we are saying, that always resonates.’

Bieneosa Ebite

London roundtable (from left): Monder Ram, Michelle Mendelsson, India Gary-Martin, Bieneosa Ebite and Andrew Leck.

MD, Bright Star Public Relations ‘People are more savvy about wanting to research how ethical a company is, and diversity is part of that.’

Andrew Leck Head, ACCA UK ‘You can’t just impose a model you have developed in your own market. You need to have a diverse employee base.’

Finance diversity: why and how

* *

External changes are demanding greater diversity. Changing the responsibilities of the finance function requires CFOs to think more broadly about the skills of their team. The demands on the finance function are growing as companies expand further overseas. In a global economy, the ability to understand differences in cultures is a prerequisite for the finance function. Diversity of thinking encourages innovation. Business leaders must be comfortable with being challenged. There can be a tension between diversity and the need to develop standard processes across geographies. A broader perspective on recruitment can play a valuable role in creating a more diverse finance function. Finance executives should be encouraged to develop experience outside the finance function. * Finance leaders must develop broad geographical experience.

* * * * * * *

markets. They also need to think more broadly about individual skills and backgrounds when building their teams. Since cross-cultural intelligence is so important in global business, how can it be instilled more widely in the population? The London panel discussed incorporating it into schooling as an essential skill. The panel discussions also provided a window on to some of the rapid changes taking place

in the world’s rising economies. We heard how it is mostly young women who drive sports cars in Beijing and Shanghai these days, and how young, Western-educated Chinese have similarly high expectations of flexibility at work as their counterparts in the West. An interesting discussion took place in Shanghai about the diversity challenges posed by China’s business expansion into foreign markets. Panellists said that respecting other cultures would be fundamental to Chinese companies’ success with their overseas acquisitions and ventures, and that they would learn quickly. For me, the panels also raised some unanswered questions, including: How can businesses balance the need to have leaders with international experience against the difficulty that many dual-income couples have in relocating overseas? Do companies only value diversity at the upper end of the talent chain, or are they interested in harnessing the potential of diverse suppliers or of migrant workers? What does successful diversity look like? There is plenty more mileage in the debate.

* * *

Find ACCA’s report at www.accaglobal. com/transformation

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accountancy futures: finance transformation gender

Mentoring: still the way ahead Penny Avis, Deloitte partner turned author, looks at the future for women in accountancy based on her 20 years’ experience in the profession


started my career in the profession straight from university in 1989 and like many others, joined a Big Four firm as an accountancy trainee in audit. Back then there were no computers, internet, mobile phones or women partners in my office. I don’t even remember any women wearing trousers to work. The intake in my year was a 50/50 split between men and women. Today, we can dictate letters direct to computers using voice recognition software, make video calls on our mobile phones, find out anything about anyone in a few strokes of the keyboard and in most professional services firms, between 10% and 20% of the partners are women. The graduate intake is still a 50/50 split between men and women. How have things changed for women in the profession over those 20 years? My view is they have changed hugely. I can distinctly remember the first day I wore trousers to the office. It was 1995 and I had just started my career in transaction services as a manager. There has also been the recognition of the need to provide coaching and mentoring specifically tailored to women, creation of all important women’s networks and opportunities for flexible working. Different times, same challenges Yet, in many ways, the challenges that women face are exactly the same as 20 years ago. Although I know the experience of others has been different, I have never felt discriminated against either by the firm or by my clients. To me the challenge has always been about whether what I wanted from life was actually possible. The classic ‘Can I have it all?’ dilemma is still, in my mind, the biggest challenge. I wanted a career and a family, without compromising either. And sometimes that felt about as likely as me becoming an astronaut in the next NASA space programme. We have had 20 years of equal recruitment between men and women and yet the representation of women at senior levels is below where most firms want it to be. I believe it is because too many women look at the lifestyles of those above them and simply say ‘no thank you’. Having it all just doesn’t seem possible to many people. Yes, there will be role models in most firms –

Penny Avis Until May 2009 Penny Avis was a corporate finance partner at Deloitte, where she qualified as a professional accountant. She spent two years on the Deloitte UK board and was the youngest partner to manage a FTSE 100 client account. She was also the communication partner for the Corporate Finance division and a lead partner in the Deloitte Women’s Network. Avis is currently taking a career break from Deloitte and is now co-author of the fiction book series Never Mind the Botox, about four professional women – a lawyer, accountant, doctor and banker – all working on the sale of a cosmetic surgery business.

In the Never Mind the Botox series, Avis says the story of corporate financier Rachel Altman is the closest to her real-life career.

women who successfully manage a career and a family. But in my experience, just being in the firm was not enough. I needed to know them personally, be able to hear their stories and ask their advice. I needed a personal connection with them, to be inspired by them, for it to make a difference. I was lucky enough to be close to some of those types of role models. They taught me how to promote myself, plan my career, guided me through having children and made me believe that I could have a career and a sensible work/life balance. And they were right. They gave me a vision that it was possible. Not enough women in the profession today have that vision. All the courses, training and flexible working options in the world will never replace the impact of being mentored by a woman who has been there before. This places a huge responsibility and burden on senior women. And this is much more than simply being ‘held out’ as a good case study for others to aspire to. In my view, unless you have a personal relationship, your influence on the career choices of others will be minimal and this is where the majority of the diversity effort needs to be focused. Yes, it’s a huge ask. Yes, the senior women might be spread pretty thinly, but it will yield the best results. So what does the future hold? The support and opportunities for women will continue to advance and ever more creative flexible working opportunities will evolve, supported by mindboggling technological advancements. But real change will, in the end, be driven by wise women sharing their experiences with those coming up behind them, as it has been since the days of the cave man.

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accountancy futures: finance transformation mobility

Strategic moves The movement of talent between countries is becoming an increasingly important consideration for companies, reports Deloitte’s Rob Hodkinson


Rob Hodkinson is a partner in Deloitte’s Global Employer Services practice in London, responsible for its Global Mobility Transformation practice. He has over 20 years’ experience in providing tax and HR consultancy services to a large number of FTSE 100 and Fortune 500 clients. He is a fellow of the Chartered Institute of Taxation.

ompanies need to be both strategic and nimble in order to survive and prosper in an increasingly competitive world, buffeted by fluctuating fortunes in mature markets and rapid but inconsistent growth in emerging markets. The war for talent remains a key barrier to growth and organisations need to plan to develop their top talent giving them relevant global experience, but at the same time they need to be able to move quickly to get the right people, in the right place, when opportunities arise. Companies that adopt a strategic approach to global deployment of talent are more likely to take advantage of the opportunities for growth because their expertise and leadership is focused in the right geographies, products and sectors. Our recent Strategic Moves survey asked companies to rate their approach to global mobility and to comment on the importance of mobility to their strategic business and talent objectives. It also sought to explore whether an organisation’s mobility function was aligned to its business and which critical issues it should address. More than 140 organisations across the globe were questioned, representing an aggregate of at least 30,000 global assignments. The survey made it clear that the deployment of global talent will become increasingly important over the next three to five years, due to the complexity of doing business on a global scale and the increasing importance of emerging markets. HR leaders and senior business executives agreed that, more than ever, global mobility needs to become more integrated into core HR processes and act as a strategic partner to the business – complementing the company’s strategic business objectives and its talent agenda. A number of key themes common across all survey participants emerged. World-class organisations need to develop clarity around their mobility strategy, align mobility with talent and increase the value delivered by the mobility function. In our view, success requires a focus on all three of these objectives simultaneously (and flex with talent and business needs) to realign mobility with their organisation’s wider business and talent objectives.

the importance of a mobility strategy The findings showed that global mobility is an increasingly important strategic enabler which should align to core business objectives. Three-quarters of participating companies anticipated that the total number of globally mobile employees will increase, or increase significantly, over the next three to five years and over 80% of organisations anticipated that global mobility will become more important or significantly important over the same period. The overwhelming majority of respondents (88%) felt it was important or critically important to align their organisation’s global mobility strategy with their business strategy, with nearly half of all organisations surveyed agreeing that their top strategic business issue is emerging geographical markets. In reality however, there is a significant disconnect, with only 2% of participants believing that mobility is currently aligned to these objectives. What is also interesting is the trend in this response over the past three years. There has been a significant increase in focus on expanding into global and new markets – from 12% indicating this as a top strategic priority in February 2009, to 33% in January 2012. This highlights again the increasing importance of the mobility function and the role that assignments, transfers and moves have in helping companies meet their strategic objectives. Business pressures such as rapid growth in the emerging markets, globalisation and competition have forced companies to reassess their use of mobility as a tool simply for stop-gap resourcing towards a more thought-out approach. The immediate role that top talent are taking in developing new business is reflected in the fact that companies anticipate changes in the proportion of moves that are strategic in nature. Our results indicated that around 26% of current moves are initiated specifically for strategic talent or leadership development but there is also an expectation that this will increase. This highlights that multinationals already recognise the importance of strategic global deployment, even if they have not yet implemented new models. Moving global mobility to this next level will require careful planning, focused investments,

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Multinationals recognise the

importance of global deployment, even if they have not implemented new models and the development of new advanced capabilities enshrined in a formal mobility strategy. Global mobility is a major investment – one that can easily top £25m to £30m per 100 assignees. Businesses need to know that they are focusing their efforts on critical priorities and getting a return on investment. The need to integrate mobility Our survey also found many organisations are clearly anticipating a growing emphasis on talent and mobility strategies aimed at more effectively recruiting, connecting, and managing a global workforce. Facing a more global marketplace, companies are now placing a high priority in searching for talent in global and emerging markets so they can have the right people, in the right jobs, in the right locations.

Many executives recognise that the once emerging markets of the pre-recession days have become the catalyst for future growth, placing tremendous demands on talent managers to get new people in new jobs at new locations. As a result, organisations have realised that they must have a sharper focus on global mobility and talent management; they have zeroed in on the need to recruit hardto-find skillsets, and programmes to create career paths and challenging opportunities to retain key employees. Developing new leaders and providing them with experience to grow new markets is crucial. However, the current lack of integration with talent programmes and strategies means that many organisations will not be able to fill their talent pipelines with the global leaders required for future growth. The survey results showed that 60% of respondents felt global mobility is important or critically important to meeting the talent agenda. A further 37% felt that it is becoming more important. This illustrates that there is a growing recognition that getting the right people in the right place at the right time is important to the business, both in immediate terms, and in relation to talent development. Global leadership and pipeline was selected by a third of respondents as the global mobility issue most critical to their organisations’ successes. However, surprisingly, only 11% feel this issue was fully supported by their current mobility programme. Supporting organisational business means supporting the overall talent and mobility agenda of the organisation. This requires understanding the broad business and talent objectives and assisting in the integration of international experience in global competency development so they can have the right people, in the right jobs, in the right locations. Enhancing the value of global mobility The survey findings also reflected our understanding of the challenges facing chief executives and HR leaders. Global mobility functions have grown reactively, with responsibilities often split by talent, operations, HR shared service centres and disparate pockets of mobility expertise with no overall strategic direction or realisation that global mobility can enable many of an organisation’s business objectives. Approximately 40% of survey participants believed that their global mobility programme needed significant or radical improvement. A further 36% felt that their programme was adequate, with room for improvement. In total therefore, three-quarters of the organisations

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that participated in the survey rated their mobility function as no better than adequate. Perhaps of even greater significance was that nearly half of the business executives (outside HR) considered their mobility programme to be underperforming and not fulfilling the business and talent requirements compared with only 33% of HR respondents. This was the clearest indication that there is a significant disconnect between the perception of those within HR and those within the business in terms of whether global mobility is fit for purpose. Closing the gap The transition from global mobility being viewed as a transactional cost centre to a value-add strategic partner is difficult. The development of strategic expertise within global mobility functions will be important for companies to address future challenges. The survey showed that less than 10% of participants felt that their organisation currently perceives global mobility as a fully strategic function. These results do not compare favourably with other areas within strategic HR such as talent and development. However, when asked to think about the next three to five years, 94% felt that the perception of global mobility as a strategic or value-adding function would either increase or remain the same. This journey may prove

to be difficult unless HR and leadership are committed to the project in terms of communication, resourcing and support. Chief executives, finance and HR leaders should consider the following questions: 1 How mature is our global mobility programme? (see chart below). 2 Does our approach to global mobility support our business objectives and how is this managed? 3 How is global mobility perceived and valued within our organisation? 4 Given its rising importance, what are we doing to improve the performance of global mobility (including the policy, processes and structure)? 5 What is the role of our global mobility function in strategic and operational terms? 6 Have we reviewed our structures to ensure the most effective approach to mobility? In conclusion, all businesses have different strategies, however our survey indicates that the movement of talent between countries is becoming increasingly important and a strategic consideration for global companies. While not all companies will want to concentrate on development of future talent or nurturing a global culture, there should always be a strategic element to global mobility. To download a copy of the report, visit

talent alignment * Global with policies

the global mobility maturity model

talent pool * Global identification and tracking compensation/ * Global rewards

* * * tax preparation * Global Compensation compliance * Data security * Core service provision * Population awareness *

Streamlined processes Defined roles Vendor services management Technology services management Technology enablers


policies aligned to * Core business needs business * Advanced advisory services


Tailored policies

retention * Post-assignment strategies Policy review/business alignment

Operational stabilisation/ excellence

Operational stabilisation/ excellence





Operational stabilisation/ excellence

Policy review/business alignment

Integration with talent strategies

Risk and liability containment

Core service efficiency and effectiveness

Meeting business objectives and needs

Global talent management


Functional maturity

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accountancy futures: finance transformation social media

Noisy new world With an ever-growing barrage of content available on the internet, businesses in emerging markets would do well to harness the power of social media


e all know about the importance of the online world. Many people depend on it and all its applications to run their professional as well as their personal lives. It’s a world where trends shift so quickly that businesses can easily be left stranded if they fail to respond. There is another side of the coin, though, and that is that this very speed offers businesses a fast route to becoming cutting-edge and competitive. Wherever a business is in the world and whatever its size, it doesn’t matter – the web has levelled the playing field. In emerging markets, its power is keenly appreciated. At the time of writing there are, for example, 20 million internet users in Pakistan, five million in Kazakhstan and one million in Afghanistan. Altogether, more than a billion Asians have internet access. Social media and emerging markets are a perfect combination. Chat rooms caught on in emerging markets much faster than in developed markets. At the time of writing there are 6.4 million Facebook users in Pakistan, 2.4 million in Bangladesh and 1.4 million in Nepal. Some of the fastest-posted web content comes from emerging markets. All over Asia people are rushing to put their ideas on YouTube, Storify, Tumblr, LinkedIn, everywhere, in an attempt to connect. pull turns to push And that’s the point: web content is no longer sought out (or ‘pulled’) by people because there is simply too much noise and clutter online. With so many people creating content, if you really expect to be heard, you have to use not only the online space, but also the converged space: online and mobile. You have to be innovative and creative, and get to the point quickly. And that means social media. It’s not easy, but it is essential. The physical size of an organisation cuts little ice when it’s up against a blogger with a million followers. Lady Gaga has more Twitter followers than Barack Obama. Amitabh Bachchan and most other Bollywood stars interact with their fan base through Twitter updates. Brands such as Dell Pakistan, Ufone and Coke Studio, and singers such as Zeb and Haniya, have an active and growing Facebook presence.

One of the 1.4 million Facebook users in Nepal, which has a population of just under 30 million.

Whether it’s a special offer, customer recognition (or grievance) or a new release, social media gets a message out. It enables you to make a connection with your customers. The kind of campaign is up to you, which is why it is so important to recognise the social behaviour of the market you are in. And if you’re thinking that this entire social interaction thing could easily turn into a PR nightmare for your business, you’re right. That’s why you need to invest time and energy into making it part of your organisation’s policy and strategy. Taking ownership of a formal social media strategy is crucial. Keeping an eye on the analytics as part of your quarterly targets is just as important as reading up on the economic analyses. And here’s one last pearl of wisdom: social media doesn’t come cheaper than mainstream media. But it does grow faster and has far more traceability. Rabia Garib, editor-in-chief of CIO Pakistan and chief wrapper at

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accountancy futures: corporate reporting IFRS

Life in a post-Babel world Businesses around the world are starting to feel bottom-line benefits from the spread of global accounting standards, reports ACCA’s Ian Welch


Ian Welch is ACCA’s head of policy and responsible for driving ACCA’s thought leadership and policy initiatives. Before joining ACCA, Welch was a PR manager at KPMG and previously a journalist on Accountancy Age.

he spread of International Financial Reporting Standards (IFRS) across the world has been the biggest single development in accounting over the past decade. More than 100 countries have now adopted IFRS and more are due to follow. But has the move been beneficial for business? One of the original key drivers for the IFRS system was that it should increase crossborder trade and hence boost the global economy, because investors will be more likely to trust financial information in other countries that they recognise as being based on the same rules. The move was kickstarted by the Asian financial crisis of 1997–8. This crash showed the weaknesses, in Western investors’ eyes, of a system where accounting standards and corporate governance systems were so different in an important economic region. Several studies carried out since then have shown encouraging signs that IFRS is helping. ACCA-commissioned surveys of CFOs across Europe, Asia Pacific and the US in 2007 and 2008 showed a majority supporting global standards. But given the scale of the world financial crisis since then, ACCA decided to carry out new research in late 2011 to see if those views had changed.

Lorraine Holleway FCCA HEAD OF FINANCIAL REPORTING, QATAR SHELL ‘The pace of convergence may appear slow at times, but it is important for jurisdictions and users of financial statements to agree, as far as possible, on changes before they are implemented. Varying economic conditions provide a suitable test of IFRS in practice.’ Chair of ACCA’s Global Forum for Corporate Reporting

Ilona Weiss FCCA EXECUTIVE VICE PRESIDENT AND CFO, SYGNITY ‘Managing financial and management information across a global organisation is much more straightforward and cost-effective with a common reporting framework. IFRS enables investors to compare across different markets, reducing investment risk.’ Member of ACCA’s Global Forum for Corporate Reporting

Investors and CFOs in Asia Pacific, the Middle East, Europe and the US were asked to give their views as to whether, given the crisis, global standards in the form of IFRS had proved to be beneficial or not. The results were, once again, positive. Of particular encouragement to the International Accounting Standards Board (IASB) was that, even in countries at different stages of implementation, finance professionals seem positive about the regime. More than 40% said IFRS had improved access to capital and 25% said it had lowered the costs of capital. Almost half believed it had played a positive effect in increasing cross-border activity. While not overwhelming, these results are a strong vindication given the economic backdrop. In fact, the financial crisis has, if anything, improved perceptions of global accounting standards among both investors and issuers. Joining the club The IASB will hope that such findings ultimately persuade the biggest market of all to join the IFRS club – the US financial regulator the Securities and Exchange Commission put off a decision promised for December 2011 on whether it would adopt IFRS. At a time of continued economic uncertainty, and with a presidential election looming, the prospect of burdening US companies with implementation costs was unappealing. US respondents in our survey were less enthusiastic than those in other regions. James Hance, senior adviser at Carlyle Group, said: ‘Companies and financial firms are focused internally on running their businesses. Things are very tight and IFRS is going to require significant investment.’ But some were supportive of IFRS. Anne Simpson, portfolio manager and head of corporate governance at CalPERS, the California Public Employees Retirement System, argued: ‘We’re all very good at being able to identify costs and put a price tag on conversion. But should we be visited by horrors like the financial crisis and realise we’ve not invested sufficiently in quality accounting and auditing, then the cost runs to billions.’ Respondents also affirmed the value of one of the core drivers for IFRS adoption – the

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transparency and comparability it brings to the numbers. Russell Picot, London-based chief accounting officer at HSBC, confirmed the advantages of getting a single view of the group’s performance. ‘One of the great benefits has been a single set of rules which underpins a single set of numbers by which the group is run. It’s done away with the Tower of Babel of different reporting and accounting languages we had before.’ James Singh, CFO at Nestlé, the Swiss food giant, said: ‘The benefit comes in using a single standard for performance measurement, both inside and outside the company. From a regulatory standpoint, it’s an efficient way of preparing accounts.’ Some 60% of those surveyed agreed that global accounting standards were a facilitator of more consistent regulation. One of the problems most noted by respondents was where countries which have officially adopted IFRS still tinker and amend their own national systems. Ravi Nedungadi, president and CFO at UB Group, an Indian brewer, supports the idea of global standards but warned: ‘In reality what will happen is that there will be some carveouts that will be country-specific and require multiple sets of accounts. We’ve held back on reporting to IFRS until clarity arrives.’

‘IFRS has done away with the

Tower of Babel of different reporting and accounting languages we had before’ Pictured above: ‘Tower of Babel’ at Arches National Park in the US.

Richard Aitken-Davies FCCA INDEPENDENT CONSULTANT ‘Much achieved, much still to do. The credibility of financial reporting will always be stretched while similar transactions are accounted for differently depending on geography or management preference. US membership of the IFRS club is crucial.’ Member of ACCA’s Global Forum for Corporate Reporting and former ACCA president

Thomas Becker FCCA FINANCIAL CONTROLLER, CLS HOLDINGS ‘IFRS has led to improved comparability across countries. For preparers and reviewers of accounts with multinational responsibilities, it has streamlined in-house accounting policies, reduced complexity and made the reporting process more efficient.’ Member of ACCA’s Global Forum for Corporate Reporting

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accountancy futures: audit and society standard-setting

Calculated effort Former ACCA president and IAASB member Brendan Murtagh reveals how the audit standard-setting body reconciles differing views to achieve its aims


key objective of any standard-setter is to act in the public interest. In the audit environment, this means that a clear focus on the range of users of the audit report is required. This was very clearly illustrated by the comprehensive nature of the discussions at the most recent meeting of the International Auditing and Assurance Standards Board (IAASB) in March 2012, which considered the shape of the audit report of the future. In a diverse board such as the IAASB, reconciling the views of stakeholders from many jurisdictions that had input into the Consultative Advisory Group, together with those of the public and practitioner board members, can be challenging. Considered debate is needed to achieve practical output that meets the public interest, while ensuring the process is effective. There are those who would challenge any practitioner involvement in the standard-

setting process (half of the 18 board members are practitioners). However, it works well in terms of balancing user challenge, while achieving an output that can ultimately be put into practice. The public interest focus of the board requires that appropriate due process is followed, that all interested parties have an opportunity to

Considered debate is

needed to achieve practical output that meets the public interest express their views, and that those views are given due consideration by the board. This includes formal consultation documents and requests for responses, as well as formal and informal outreach discussions that take place with stakeholders. All this can make the standard-setting process appear

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cumbersome, but it is essential if the resulting standards are to be accepted by stakeholders around the world. It is also important to recognise that the IAASB does not operate in a vacuum. Many national and regional bodies wish to influence the development of standards and often to a different timetable. The IAASB engages with these stakeholders to give them an opportunity to participate in the development process, which can be a challenge. The European Union proposals on audit and the Public Company Accounting Oversight Board audit consultations are good illustrations of some of the wide-ranging developments that need to be taken into account, and which can impact on the planned standard-setting process. The IAASB has been very effective in reevaluating its priorities in order to respond to these developments. It is, however, important to recognise that projects of this nature take time to research and complete and so such flexibility is not easily achieved. precision needed The IAASB also faces an interesting challenge in balancing the strategic aim of delivering its work plan, with a focus on implementation, and an attention to detail in the precision of any material that is produced. Standards need to be translated into many different languages, so it is important that the final output is clear and unambiguous. Practitioners, regulators, training providers and those who produce audit methodologies and tools also need to be able to understand and implement the standards in the way in which they were intended, which places challenges on the precision of the drafting and the explanatory material in the ‘basis of conclusions’ documents published with any standard approved by the board. Standards also need to be applied to and by a wide range of entities which operate in many different legal, regulatory and cultural environments. This can present strategic and operational challenges, requiring significant engagement, globally and locally, to achieve support for implementation. The current debate in Europe on proportionate application of International Standards on Auditing to small and medium-sized entities may yet prove an area where the board will need to consider more active involvement to ensure a consistent approach is not undermined. It is also important to note that the standards are a suite and therefore developments in one area, or with one standard, may have a broader impact in terms of the other standards issued. The March meeting of the board included

Former ACCA president Brendan Murtagh FCCA joined the IAASB in January 2012. He is a founding partner of LHM Casey McGrath, based in Dublin, Ireland. He leads the firm’s assurance function and has over 25 years’ experience in advising clients, from SMEs to listed companies, in a range of business sectors. His experience includes insolvency, corporate consultancy and litigation support.

finalisation of the eagerly awaited ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, with considerable debate around the format and content of a limited assurance report that could be provided in connection with such an assignment. This debate may well have a much broader impact given the use of negative assurance reports across a wide range of other assignments such as review engagements on financial statements, a matter also currently under consideration by the board. The finalisation of ISAE 3410 highlights another challenge for standard-setters that have a formal rotation process for board members. This is how to get new members up to speed with a full understanding of the proposed standard, and the process which it has followed. A full understanding by new board members facilitates a meaningful contribution to the debate. Auditing standards do not sit in isolation from other standards, such as financial reporting standards. Much of the recent discussion by the board on how to usefully broaden the information in the audit report in areas such as going concern was influenced by what is included under the relevant financial reporting framework. Similarly, there is a link between the auditor report and what may be disclosed by the directors under the relevant governance code. Standard-setting is undoubtedly a challenging process. However, implementation of a set of global standards, based around public interest and which support business internationally, is the way forward.

Professor Arnold Schilder CHAIR, IAASB ‘Delivery of key IAASB projects will enhance the relevance of auditing and assurance around the world, leading to greater confidence in the profession. Brendan’s broad client experience and SME/SMP insight, supported by ACCA’s global membership, will be particularly valuable to the board.’

Sue Almond ACCA TECHNICAL DIRECTOR ‘The IAASB’s renewed emphasis on auditor reporting is extremely timely. ACCA receives consistent feedback on the need for more informative reporting and we believe a global solution is needed to meet the needs of users and investors.’ Sue Almond acts as technical adviser to Brendan Murtagh in his role on the IAASB

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accountancy futures: audit and society the auditor’s report

One report, three guvnors The auditor’s report on financial statements faces an overhaul. But if the major players cannot agree on the new script, the profession may be at risk, warns Deloitte’s Robert Stenhouse


ne of the current hottest show tickets, on both sides of the Atlantic, is for the critically acclaimed comedy One Man, Two Guvnors. The plot revolves around trying to service the competing demands of two employers at the same time. In a similar scenario, the audit profession faces the prospect of satisfying not two but three ‘guvnors’ with the European Commission (EC), the US Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) all proposing improvements to the auditor’s report on financial statements. The recent financial crisis has prompted a series of inquiries into the role of the auditor and the value of the audit. The ACCA view, that audit is ‘not broken’ but there is room for improvement, resonates with some of the proposals for change. In particular, the binary ‘yes/no’ format of the report has come under challenge. This was succinctly expressed by PCAOB chairman James Doty in June 2011: ‘Given the effort involved in an audit of a large company, and the complexity of many financial statements, investors want deeper insight from the auditor,’ he said. The EC proposals also suggest an expansion to explain methodology, including how much of the balance sheet has been directly verified, the levels of materiality applied and the key areas of risk of material misstatements. Auditor independence has been one of the key themes of the EC proposals, and it is proposed that the auditor is required to confirm its independence and give information on nonaudit services provided to the company, as well as length of time as auditor. At the same time, the proposals seek to reduce clutter and

boilerplate wording, mandating that these enhancements are delivered in a report no longer than four pages or 10,000 characters. This would, roughly, double the size of the average UK-listed company audit report.

Robert Stenhouse FCCA is chair of ACCA’s Global Forum for Audit and Assurance. He has been a member of ACCA’s Council since 2009 and chaired ACCA’s Auditing Committee. He is a director of national accounting and audit at Deloitte in London.

top priority? There is a clear danger that these initiatives will render the reporting aspects of the current International Standards on Auditing (ISAs) irrelevant if they do not respond to the EC and PCAOB action areas. The IAASB has prioritised and accelerated its existing project on auditor reporting in an attempt to avoid this outcome. The IAASB knows that the stakes are high. If its standard establishing the audit report format is ignored, what next for the remaining ISAs? Three key areas of IAASB focus include auditor commentary, going concern and other information included with financial statements. Dealing with these may respond to the majority of EC and PCAOB concerns. However, while the PCAOB and EC proposals

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of Forum members felt that mandating auditor commentary for smaller entities would add cost but little additional value. volume control The IAASB proposals include an explicit conclusion on the appropriate use by management of the going concern basis. Going concern is not, therefore, just an auditor’s report pass or fail; indeed, the subtlety of the auditor’s responsibility to ‘conclude’, rather than obtain sufficient appropriate evidence on the material uncertainty, is such that only the most sophisticated investors are likely to understand its nuances. One of the concerns raised by Forum members was that, in the stock exchange rules for some jurisdictions, references to going concern in the current audit report trigger defined regulatory responses. Replacing this on/off switch with a volume control relating to going concern may, initially, prove problematic. At a time when financial statements are increasingly complicated, narrative information has become more influential. This is an area where the scope of audit might be extended as contemplated by the PCAOB proposals. The IAASB discussions do not seek to extend current audit scope and are very similar to disclosures currently required in the UK. In a world of weblinks and smartphones, the concept of ‘reading’ other information seems a little unimaginative, old fashioned and open to challenge.

The IAASB knows that the stakes are high. If its

standard establishing the audit report format is ignored, what next for the remaining International Standards on Auditing? focus on the needs of the capital markets, the IAASB must also consider smaller entities. At the most recent meeting of the ACCA Global Forum for Audit and Assurance, forum members gave their views on the IAASB proposals to date. The biggest concern raised was the risk that an enhanced auditor’s report may increase misconceptions about what an auditor actually does rather than reduce them. The concept of the auditor providing ‘auditor commentary’ on the most significant aspects of the audit is now widely accepted as the way forward. The challenge now is to establish these requirements without unintentionally extending the scope of work, cost and liability associated with the opinion. If any of these aspects are to be changed then all stakeholders should be fully aware. A majority

The worst outcome for the profession would be that the three streams of activity diverge completely, resulting in the profession getting its three guvnors and significantly different requirements in Europe, the US and worldwide. This lack of comparability would damage both the value proposition for audit and, as a result, weaken the profession. The IAASB is making every effort to engage the other parties in its deliberations, but it remains to be seen how effective this will be. One thing is certain: this show will run and run. Any curtain call, when the reports might finally be implemented, is unlikely before 2015. Let’s hope, for the future of the audit profession, that the new reports are greeted with critical acclaim and rapturous applause.

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accountancy futures: risk and reward risk management

All in it together Effective risk management starts on the finance ‘shop floor’ and should embrace the whole organisation, according to a recent ACCA study


he day-to-day activities of financial controllers and other accountants on the business shop floor have a vital role to play in successful risk management and finance professionals stand ready to do more. This is one of the main findings of recent ACCA research looking at the role of accountants in risk management. Based on a survey of more than 2,000 members from all over the world, the research reveals a statistical relationship between good accounting practice – such as properly executed forecasting and budgeting – and a reduction in ‘dysfunctional behaviour’. Such behaviour includes a general lack of risk awareness in decisionmaking, playing down risk to get approval for proposals, overstating business benefits and underestimating costs. Accountants in the survey reported a high level of dysfunctional behaviour around decision making. Almost all reported the ‘gaming’ of forecasts. Others mentioned treating forecasts as targets, providing optimistic forecasts to avoid criticism and pessimistic ones to reduce expectations. The survey also found that such behaviour was commonplace – fewer than 1% said no dysfunctional practices occurred at their organisation.

Paul Moxey, ACCA’s head of risk management and corporate governance, says the findings highlight the importance of integrated risk management – the identification and management of risks as part of a core management process rather than left to a compartmentalised team or individual. ‘Risk happens at all levels of business and for all types of business functions,’ he points out. ‘It doesn’t sit in neat silos. Risk management needs to be something everyone in an organisation does. ‘Our survey showed that accountants, particularly at the shop-floor levels of a business, have an excellent grasp of

‘Businesses need to make sure they use the abundant risk skills of their qualified accountants’

Dean Westcott FCCA ACCA President AND Interim CFO, West Essex Clinical Commissioning Group ‘The financial crisis highlighted the disastrous consequences of ignoring risk management. It has since risen up the agenda, but its importance hasn’t always been reflected in budgets or actual actions and there’s a danger that, once the current crisis has passed, it will be forgotten.’

Ewan Willars ACCA POLICY DIRECTOR ‘Financial risk has long been on the radar of accountants. But as the role of the senior accountant in organisations of all types has evolved to that of business partner, the chief financial officer in particular is now a pivotal figure in managing business risks effectively, right across the entity.’

the risks faced by their organisation and the steps needed to negate those risks. Businesses need to make sure that they use the abundant risk awareness and risk management skills of their qualified accountants, and not miss an opportunity to effectively integrate risk management.’ As accountants offer decision support, such an approach puts them in an important position – after all, most ‘risky’ business decisions contain a financial element. And in most organisations accountants outnumber formally designated risk managers. As one respondent to the survey put it: ‘Although not always appreciated, the contribution of the finance section to risk management is huge and necessary in any organisation.’ Another finding of the research is that those in mid-level roles such as financial controllers and management accountants are much more aware of both risks and dysfunctional behaviour than are their board-level colleagues – including non-executives. Most non-executive directors said that overoptimistic forecasts to avoid criticism were never made in their own organisation, but only 20% of financial controllers or accountants agreed. Non-execs also seemed less aware than everybody else of problems with persistent quality issues.

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accountancy futures: risk and reward risk management

There are several possible explanations for this. Those at more senior levels are less involved in the day-to-day running of an organisation, and so are less aware of detail, taking a broader view of the business. It could also be that the information they are presented with by their teams is sanitised in some way. And, as the financial crisis showed, there are often plenty of incentives for not asking challenging questions or rocking the boat. One respondent, a financial controller in Ireland, told the researchers: ‘Decision analysis is sometimes hijacked by higher-level political motivations, leading to poor decisionmaking and adverse impacts.’ The study also shows clear support among accountants for ‘challenging senior people’ as part of an ideal business culture. A questioning approach can help avoid the kind

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

Shock and awe: photocall for Margin Call, a film starring Kevin Spacey (centre) with echoes of the collapse of Lehman Brothers and its impact on the US financial system.

of cultural bias or ‘groupthink’ that leads to risks being missed. The study found that input from accountants in the decision-making process had a number of beneficial effects. Some 95% of respondents said that accountants’ input always made people more aware of the uncertainties involved. A similar number said it helped people think more widely about the possible consequences of a decision, and only marginally fewer said it encouraged decisions that reflected the interests of all relevant stakeholders. In times of global economic uncertainty, it is this kind of quality input that could make the difference between success and failure. Rules for Risk Management is available at

Risk management tool ACCA has developed an online diagnostic tool that allows businesses to compare their risk management practices with those of the businesses surveyed for the Rules for Risk Management report, and identify potential areas of improvement. You can find the tool at www.accaglobal. com/risk

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accountancy futures: risk and reward economic crime

Old frauds, new technology? The rise of cybercrime has triggered well-founded fears about the damage it can do to a business, not least its brand, say PwC’s Tony Parton


rom the News International hacking scandal to Wikileaks, from Anonymous to Megaupload, cybercrime is rarely out of the headlines now. While the law struggles to keep pace with technological advances, businesses are finding themselves increasingly exposed to a wide range of different online threats. Furthermore, the cross-jurisdictional nature of cyberattacks often allows criminals to operate with little fear of being traced, caught or prosecuted. With cybercrime quickly developing a reputation as the crime of the 21st century, organisations are increasingly exposed to the risk of falling victim to it. So what exactly is cybercrime? For the purposes of our 2011 Global Economic Crime Survey, which focused on this threat, we defined cybercrime as: ‘An economic crime committed using computers and the internet. It includes distributing viruses, illegally downloading files, phishing and pharming, and stealing personal information like bank account details. It’s only a cybercrime if a computer, or computers, and the internet play a central role in the crime, and not an incidental one.’ Lacking definition Although this definition is a fairly standard classification, there is currently no global consensus on how the issue should be defined. This creates a challenge for organisations: if they are unable to determine what qualifies as a cybercrime threat, how can they hope to tackle cybercrime in practice? The term ‘cybercrime’ has been used publicly to refer to a very wide range of threats, ranging from economic crime and espionage, through to ‘hacktivism’, terrorism and even, on a national scale, cyber-warfare. According to our survey, cybercrime now ranks as one of the top four most prevalent economic crimes in the world. With 23% of our respondents saying their organisation had experienced it in the previous 12 months, it comes in just behind accounting fraud (24%) and bribery/corruption (24%), if a long way short of asset misappropriation (72%). Just 1% of respondents reported experiencing IT/ online-related fraud in our last survey in 2009. The surge is attributable to a combination of greater media attention, regulatory focus,

Tony Parton is a corporate investigations partner with responsibility for PwC’s forensic services in the UK and emerging markets. He has specialised in civil and criminal financial fraud investigations and as an accounting expert in corporate disputes. He has extensive experience of investigating alleged breaches of anti-corruption laws and regulations. He was assisted in working on this article by Jack Gray, an associate in PwC’s forensic services practice, who has worked on a number of high-profile

the significant rise in the use of technology for business transactions, and advances in technology that have made cybercrime easier to undertake. And it’s not just the volume of cybercrime incidents that is rising, but also the cost. Reputational damage was cited as the biggest fear for 40% of respondents in our 2011 survey. Risks include the theft of intellectual property, service disruption, the removal of personal information, significant destruction in brand value and loss of market share. Inside and out There has been a shift in recent years in where cybercrime threats are seen as coming from. Organisations are beginning to see cybercrime as an internal threat as much as an external one. It is critical that organisations recognise it’s not just the IT function that presents a major risk; HR and legal departments (until recently seen as low-risk areas) as well as finance also hold a great deal of confidential information of great value for cybercriminals. So what can organisations do to defend themselves against cybercrime? It is crucial that CEOs and board members become more cyber-savvy. A quarter of the organisations in our survey say there is no regular, formal review of cybercrime threats by the CEO and the board. Here, situational awareness is key – organisations are well placed to respond to the issue only when they understand both the current and emerging cyber environment they operate in. Organisations should also ensure they have a formal cyber incident response plan in place, with a team trained to react swiftly to any cyber crisis that may arise. As with many types of crime, when a cybercrime occurs, the first few hours are very important. An effective defence strategy should ultimately be led by the CEO and the board, establishing a clear tone from the top and ensuring that cybercrime policies are implemented and enforced consistently across the whole business. Organisations should look to review their existing IT security functions regularly to ensure they evolve in line with the cyber risk landscape. It is also vital that staff are provided with cybercrime-specific training to raise company-wide awareness of the issue,

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Three out of five organisations still do not

pay attention to social media sites and 40% do not currently have the capability to prevent and detect cybercrime Five ways to protect your organisation 1 Nurture and share cyber skills internally 2 Reassess your security function’s fitness and readiness 3 Leadership by a cyber-savvy CEO, with a cyber risk-aware culture 4 Set up a cyber incident response team and a crisis response plan 5 Take a strong and transparent legal stance against cybercriminals.

as well as informing staff of their individual responsibilities in the cybercrime fight. Finally, by pursuing legal action against known cybercriminals and publicising this process, organisations can send a strong message to the international community that they will do whatever it takes to protect their brand. The World Economic Forum’s Global Risks 2011 report noted that: ‘Cyber-security issues now top the list of risks to watch, ahead of weapons of mass destruction and resource security.’ What’s more, only 4% of the respondents to our survey reported that they perceived cybercrime risks to be falling. not walking the Talk What is worrying, however, is the apparent disconnect between many organisations’ projected intentions, and the reality in terms

of their capabilities and controls. Despite high perceptions of the threat that cybercrime poses, three out of five organisations still do not pay attention to social media sites and 40% of respondents admitted that their organisation does not currently have the capability to prevent and detect cybercrime. As the technological landscape in which we operate continues to change, organisations must remain vigilant in the face of the rising cybercrime threat. Smartphones and tablet devices, social media and cloud computing, all provide a wealth of attractive business solutions and opportunities, but also carry significant risks which organisations cannot afford to ignore. Those that successfully embrace new technologies, while at the same time dealing appropriately with the risks of cybercrime, will be the ones to secure a competitive advantage in today’s technologydriven environment. PwC’s Global Economic Crime Survey 2011 was based on 3,877 responses from senior executives and managers in organisations in 78 countries. Visit

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accountancy futures: risk and reward executive pay

Vast gulf calls for big changes The chasm between the pay of ordinary workers and those at the top has led to initiatives such as ‘say on pay’, but are they enough to narrow the gap?


he princely pay of top business leaders has long been grudgingly tolerated in the UK and US. From time to time a particularly lavish pay award generated a few days of hostile headlines before the furore died down. Recently, however, this tacit acceptance of jumbo pay for chief executives has been wearing thin. The rich rewards for those at the top, often endured by the public during more prosperous times, have rankled ever more as the wages of ordinary citizens have stagnated. This frustration has helped fuel anti-capitalist protests around the world and focused attention on growing inequality. Politicians on both sides of the Atlantic have responded by introducing measures aimed at slowing the relentless rise in top pay. 2012 is likely to be a crucial year in the drive to narrow the gap between the highest and lowest paid.

Occupy Wall Street protesters carry a giant Statue of Liberty during a march in New York.

One might have expected sluggish economic growth in most rich nations to take the steam out of executive pay. It has not. While top pay dipped immediately after the 2008 financial crisis, it has bounced back smartly in recent years. The sharpest rises were in the US and UK, which have long rewarded corporate bigwigs more richly than rivals in continental Europe. Compensation of chief executives of S&P 500 firms soared by a median of 36.5% in 2010, according to GMI’s CEO Pay Survey 2011. Their British counterparts meanwhile enjoyed a 43% boost to pay, Incomes Data Services calculated. And this is far more than just one year of excess. Decades of generous increases have taken top pay to stratospheric heights. In 1976 the average American CEO took home around 36 times as much as the average worker. This had climbed to 131 times by

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1993. Now a company’s top dog typically makes over 300 times the firm’s average salary, according to a recent reckoning by the Institute of Policy Studies in Washington. Around 25 US companies actually paid their top executive more than they paid Uncle Sam in federal income taxes. Meanwhile, over the last decade the real income of the average American has actually fallen by around 6%. The situation in the UK is only marginally better, figures from the UK’s High Pay Commission show. In 2009–11, the chief executive of BP was taking home 63 times more than the average worker, compared with just 16.5 times in 1979–80. It is hard to argue that these are the just rewards for extraordinary talent. Pay disparities are far more modest in Germany, where chief executives earn on average about 12 times as much as workers, a study by Towers Watson concluded. This lower pay doesn’t seem to have hurt performance. Indeed, over the past 15 years chief executives in continental Europe have on average turned in superior results than their better paid peers in the UK and US – delivering returns of 136% against 120% for firms in the FTSE 100 and S&P 500. In addition, examples abound of executives who enriched themselves while doing a terrible job for shareholders. John Chambers took home US$393m between 1999 and 2009 for leading Cisco Systems. Yet US$100 invested in the firm in 1999 was worth just US$71 a decade later, The Wall Street Journal calculated. It is also misleading to argue, as many companies do, that pay is being forced higher by natural market forces since globalisation allows executives to go wherever they will be best rewarded for their talents. The High Pay Commission argues that chief executives are far less mobile than the myth suggests. They found only one example of a successful FTSE 100 chief being poached in the past five years – by a British company. ‘Globalisation is used to justify lower pay for the poor and higher pay for the rich,’ says Deborah Hargreaves, who chairs the commission. ‘But there is no reason why lower chief executive pay outside the US and UK should not actually push down

wages. After all, if a French chief can do the job for half the price, why pay so much for a native one?’ So should the public be concerned if shareholders are throwing money away by overpaying chief executives? The answer is probably yes. First, higher pay for a chief executive takes cash away from other employees of a company. This growing inequality can be economically damaging, as

‘If leaders of big companies seem to occupy a different galaxy from the rest of the community, they risk being treated as aliens’ Sir Richard Lambert, former director general of the Confederation of British Industry

‘You have to realise if I

had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse’ Jeroen van der Veer, former chief executive of Royal Dutch Shell

US president Barack Obama pointed out in a recent speech. ‘When middle-class families can no longer afford to buy the goods and services that businesses are drags down the entire economy,’ he said. Meanwhile, the ultra-rich spend a far higher proportion of their income on assets – including stocks and property – which can exacerbate asset bubbles. Obama pointed to one recent study showing that more equal societies tend to enjoy stronger and steadier economic growth over the longer term. Vast income gaps can also harm democracy, giving ‘an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions’, as Obama put it. Since this plutocratic elite has no need for social services such as public education or healthcare, they may seek to undermine such institutions in the interest of lowering taxes. So with top politicians like Obama and UK prime minister David Cameron now on board, can the ratcheting up of executive pay be halted? As of January last year in the US, the owners of a firm have been given the opportunity to cast a non-binding vote against the compensation package being offered to top executives – a so-called ‘say on pay’. However, there are several reasons to doubt it will achieve much. Remarkably few shareholders have been willing to vote against boards on executive pay. Only around 44 boards were faced with a majority vote against their pay awards last year, out of around 3,000 US public companies, according to the GMI. In addition, UK shareholders have had a say on pay for almost a decade and still failed to slow top compensation. ‘Say on pay has not shown great promise,’ says Paul Hodgson, a senior researcher at the GMI.

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towards greater transparency on executive pay. Under the Dodd-Frank Act, passed after the 2008 financial crisis, US public firms will be compelled to publish the ratio of chief executive pay to the median. The High Pay Commission recommended such a step in the UK. There are also moves to make executive pay even more transparent. Although firms are already obliged to disclose the details of executive pay, the sheer complexity of many compensation packages can make it hard to untangle the details to arrive at a grand total. ‘The vigour with which companies in the US are fighting against publishing this figure suggests that this might actually work,’ says Sarah Anderson, a researcher at the Institute for Policy Studies. ‘It could galvanise worker opposition if they know that their chief is earning 300 times more than they are.’ Others are less hopeful. Dan Ariely, a professor of behavioural economics at Duke University and author of Predictably Irrational: The Hidden Forces That Shape Our Decisions, warns that the transparency approach has failed in the past. In 1993, securities regulators in the US forced companies to reveal details on pay and perks. ‘The hope was that this would lead to more modest awards,’ says Ariely. ‘Instead pay skyrocketed as chiefs who earned less than their peers clamoured for a better deal. Revealing the ratio might demoralise the workforce but is unlikely to dampen top pay.’

Until recently, investors have been unwilling to use even the existing power they had. This year, however, they have become more assertive – a phenomenon some have called the ‘shareholder spring’. In May the chief of British insurer Aviva stepped down after an investor protest over his pay. Almost a third of shareholders at Credit Suisse and Barclays failed to support the banks’ remuneration policies. Still it remains to be seen whether this spirit of rebellion will last. The US and UK governments are also moving

Anti-capitalism protesters in pig masks targeted the Lord Mayor’s Banquet in London in November 2011, in what they labelled ‘a symbolic event of the rich and powerful’.

insufficient remedy Yet more radical steps that might work are unlikely to be attempted. Part of the secret to Germany’s more moderate executive pay appears to be the representation of workers on compensation committees, says Steve Tatton, a pay expert at Incomes Data Services. ‘To give employees a say on top pay would be a huge culture shift for the UK and US,’ he says. The UK’s Labour Party supports such a move. But it will meet stiff resistance from businesses. Anderson believes the tax code could also be harnessed to cap top pay. ‘If firms were not able to deduct from corporate taxes salaries of more than 50 times the average worker’s wage it could help bring some sense of moderation to pay,’ she says. She would also like companies that eschew excessive pay to be given a head start in government contracts to sell goods and services to the government. For the moment, many of the most avant-garde solutions appear to be off the table. Without big changes, chief executives are likely to pull further away from the rest of society. Christopher Alkan, journalist based in New York

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accountancy futures: public value role of accountants

For accountants, public value means providing advice that leads to sustainable business growth and new, ethical opportunities being found. It means stepping in to make a positive difference to public life, rather than acting for purely commercial reasons. The best accountants defend the principles of robust corporate governance, facilitate sustainable access to finance, and consistently apply the highest ethical standards. As a chartered body that qualifies and regulates accountants, we take our public value remit very seriously. It is our aim both to deliver public value as a professional body and support the wider profession as it seeks to deliver public value too.

Value pack Accountants help protect society’s interests through their ethical and objective approach, says ACCA chief executive Helen Brand Helen Brand became chief executive of ACCA in 2008, having joined in 1996 as head of international development. She is also a member of the International Integrated Reporting Council and a member of its Governance Committee. She was awarded an OBE (Order of the British Empire) in 2011 for services to accountancy.

The financial crisis and its aftermath have justifiably prompted a re-evaluation of what value really means in the business world. Do we just look at balance sheets and profit statements, focusing only on the financials, or do we look at the wider value that business brings to the public and society? This second type of value – public value – is a particularly important one for the accountancy profession. To serve business effectively, accountants need to have the trust of the public and business. Without trust, the work and input of accountants have little credibility. Consider a few of the things that accountants do: preparing financial statements, providing strategic guidance, offering assurance services. The value of this work depends on accountants being seen to be able to take an objective and ethical approach, one that delivers public value. If the profession is seen as failing to operate in a way that protects society’s interests, then its value to business is lost. More specifically, public value means the delivery of services that defend and grow public resources, from financial resources through to environmental or human capital.

Safeguard for the future For ACCA, delivering public value takes several different forms. For example, it can be seen in our training of future generations of accountants, both in terms of developing the global economy’s workforce and in terms of providing access to the accountancy profession to talented individuals regardless of background. Public value also helps drive our research and insights work, which has seen us invest in a programme designed to explore some of the issues confronting today’s accountancy and business worlds: the future of audit; access to finance; risk and reward in business; environmental sustainability; and the way finance teams work. By delving deeper, by finding out what makes business people tick, by asking what it is businesses and society need from their accountants, we can help change the profession for better. We also deliver public value through our members. We ensure they are well trained before they qualify, require them to keep up to date after they qualify, and expect them to act professionally and ethically at all times. The public value contribution of our members is possibly the most obvious advantage of all that accountants bring to society. It’s our members working day to day in businesses of different sizes, throughout different sectors, and in different countries – they’re the ones who keep the wheels of business turning. Since the financial crisis, accountants have played increasingly central roles in businesses, providing greater input into strategy and working well outside of the traditional finance function. By putting their training into action and following through on the values of the profession they represent, accountants have the opportunity to spread the public value message throughout the business world and redefine how businesses measure success.

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accountancy futures: public value business

Change for the better Doing good is good for your business, says Sir Richard Branson. The new owner of Northern Rock recalls how Virgin Money banked on the philosophy


’ve always looked on my businesses not just as moneymaking machines, but as adventures that can, I hope, make people better off. The older I get the more I’m inspired to make business investments that can also change the world. There is a real opportunity for businesses and foundations to look at how we can use our investment portfolios as vehicles for change in their own right. There are tremendous opportunities in this area. At the moment, the buzz word – the new phrase – in the world for this type of investment is ‘impact investing’. During one of our leadership gatherings on Necker Island, Alex Friedman, who had recently left his job as CFO at the Gates Foundation, gave an inspiring presentation about the work he was doing to shift philanthropic dollars into investments that would deliver social and environmental impact. Alex wrote in a recent

‘No one leaps out of bed just

to read an email or answer the phone. They get out of bed to make a difference’ article in the Financial Times, ‘These days, it has become something of a trend to demonise capitalists and praise philanthropists. But if we are to make true progress in tackling our most pressing social problems and live up to our moral obligation to help those in extreme poverty, these two seemingly polarised groups need to come together in fundamentally new ways.’ At a broad level, he wrote, four steps are needed. First, foundations could carefully lend against a small portion of their assets not given away each year. Second, financial institutions have a unique opportunity to work with foundations to syndicate grantmaking opportunities. Third, banks could develop a wider range of social sector finance products. Finally, governments could provide tax incentives for high quality social impact investments both nationally and internationally. Inspired by Alex, we’ve been working with Virgin Unite, some large family foundations, financial institutions and the governments in the UK and the US to look at how we can help

This is an edited excerpt from Sir Richard Branson’s book, Screw Business as Usual, published in November 2011. One-hundred per cent of the royalties are going to the Virgin Unite not-forprofit foundation. www.virginunite. com/screwbusiness asusual

encourage financing to flow into investments that will be good for the world. We have the chance to encourage a whole new philosophy around this type of investment, one that gets people excited about meeting a need and delivering a solution – and making money at the same time. Everyone wins. One of the reasons I wanted to get into the banking industry is because I saw the money markets and finance as a way to build bridges between the social sector, big government and business. It’s the natural way in which Capitalism 24902 (see box below) should evolve for a fairer distribution of wealth. I’ve known Jayne-Anne Gadhia since she helped Virgin enter the financial services sector back in the mid 1990s. The business prospered and grew and in 1997 we launched the Virgin One account with RBS. RBS bought us out in 2001 and Jayne-Anne and her team stayed with the bank. I was sorry to lose them, and I said to Jayne-Anne, ‘If at any time you find you don’t like corporate life, give me a call.’ Six years later, she did just that. The timing couldn’t have been better for us. Virgin Money had by then developed three successful product lines: insurance, a credit card and a savings and investment division. But there was no real connection between them, either in the way they were organised or in the way they were marketed. So JayneAnne’s first and most important job was to come up with a holistic marketing message for those products. She said, ‘I initially started with a marketing thought – what is the thing that binds all these products together? And as we started to think about that, we realised we were looking for our “glue” in the wrong place. The products were the products; what bound them together was the people. Looking at Virgin Money as a community, rather than a profit-making vehicle, made the job of creating a distinctive brand that much easier. It freed us up to think about what we wanted the bank to feel like. Because no one – no one, not even bankers! – leaps out of bed in the morning just to open an envelope or read an email or answer the phone. They get out of bed to make a difference. We wanted to make a difference we could be proud of and over a few weeks of discussions we hit upon a one-liner that

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Capitalism 24902 Virgin founder Sir Richard Branson has encapsulated his new approach to business in the name Capitalism 24902, which is the number in miles of the earth’s circumference. He says: ‘The name had to capture the new level of responsibility that each of us had for others in the global village and how this needed to be a movement that went beyond a handful of businesses or one country.’

summed up our aspirations. What we actually want to do is make everyone better off. We want to find ways of doing business that benefit both parties. We want to establish win/win business relationships. ‘Making this happen throughout the company had an extraordinary effect. In saying to the whole business, “We’re here to make everybody better off”, people were able to make their own decisions within a clear context that’s normally quite hard to pin down. If you say to people developing a new product, “You need to tell us how this makes everyone better off”, it actually sets them thinking along lines that are good for the stability and sustainability of the business. We can’t charge one group

Across its companies, Virgin’s global branded revenues were around £13bn ($21bn) in 2011. Virgin Unite, its nonprofit foundation, implements programmes and campaigns around issues such as health, economic empowerment, conservation and climate change.

of customers more than another or less than another. We can’t find a way to tack on a hidden charge. We can’t give duff or illconsidered advice. Why? Because none of those things make everyone better off.’ At a time of huge turmoil and a deepening lack of faith in banking and bankers, Jayne-Anne and I discussed the way banking should go. Virgin Money’s clear brand goals have been like spectacles, bringing the whole operation into focus. Now they’ve begun to notice ways of using their existing business to drive quite unexpected change. Take, for example, the curve ball I threw at them in 2006. The London Marathon was looking for a new sponsor and one of my closest personal friends, Andy Swaine, mentioned this to me. I thought this was a great idea, as did Alex Tai from Virgin’s Special Projects Team – if only we could tie it in some useful way to a Virgin brand. Sponsoring a world class race and the world’s biggest annual fundraising event is not something you take on lightly, and certainly not something I would just drop into someone’s lap!

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Also, every Virgin company is very different. Some have long-standing philanthropic commitments elsewhere; others are start-ups that are devoting every spare hour to their survival; some lack the resources to take on a task of this scale. All I could do was ask, ‘Jayne-Anne, the London Marathon sponsorship is available. Would you be interested in taking it on?’ Her silence spoke volumes. I have to admit my first reaction had also been ‘What has the London Marathon to do with a financial services business?’ Yes, the marathon is the single biggest annual money-raising event on the planet. It raises over £50m per year. But that in itself was a problem. Virgin Money is typical of the Group in that it punches well above its weight. It has three million customers, but only 450 staff (even fewer when I phoned Jayne-Anne that day in 2007). The London Marathon was a major investment. Unless the fit between Virgin Money and the London Marathon was watertight, Jayne-Anne could be staring at the loss of a lot of money. There was another problem which made the idea even more tricky. Small though it was, Virgin Money was still employing too many people. So how could Jayne-Anne consider asking people to go and at the same time take on a major philanthropic cause? Money is always tight, especially in relatively small companies. How could we actually make that very significant investment work for us and help our brand? Pondering it, Jayne-Anne suddenly had a lightbulb moment. Virgin Money wasn’t a health business or a clothing company. They did handle money, though, and they knew how to handle deposits and withdrawals. How did the runners who took part in the marathon

Virgin Money Giving is the official sponsorship engine for the London Marathon and gets up to 25,000 hits a day.

handle money? How were all those thousands of individual sponsorship efforts processed? Jayne-Anne discovered that many of those transactions take place through an online charitable donation site called JustGiving. If you’re going to climb a mountain, or run a marathon, or bathe in beans, you can ask your mates to sponsor you through JustGiving. Your sponsor can make their financial donation through JustGiving’s online engine. It’s a nice idea, but there’s a problem. JustGiving is a commercial enterprise. For Jayne-Anne it was a heaven-sent opportunity. She realised that Virgin Money could operate a much better online donation engine. We had the hardware, the know-how, and we had the people – people who, only the day before, we had been thinking of making redundant. It was a brilliant solution – if she could get it to work. I love it when our Virgin machine moves smoothly into action to solve problems and make things work. In record time, we set up Virgin Money Giving with a wonderful woman, Jo Barnett, at the helm. So, rather than put a lot of friends out of a job, we set them this great task of developing a not-for-profit online charitable donation system, and we made that engine, Virgin Money Giving, the sponsorship engine of the London Marathon. This provided a service for the runners and their charities, and made the Virgin Money brand really visible in a meaningful way. It justified and explained our involvement in the marathon. It gave us the natural, watertight fit we needed between the event and the brand. Virgin Money Giving has already grown to be the online donation platform for over 4,000 UK charities across many thousands of organised events and personal challenges. The 2010 London Marathon collected more sponsorship money than it had in any previous year. It even got me running. In the first year Virgin Money Giving collected £25m in donations. The Virgin Money Giving website gets up to 25,000 hits a day. And thousands of pounds have gone to charity. All of our people are enormously proud that we’ve done it. It’s been a real demonstration of what we mean by making money while doing good. At a time when banks were perceived as just being in it for as much money as they could screw out of the customer, Virgin Money was showing that profit wasn’t our only motive. They gave back and they had fun. Truly a winwin that once again illustrates how doing good things can also do good things for a business and the morale of its most important asset, its people.

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accountancy futures: public value social mobility

Access all areas Professions for Good chairman Louis Armstrong blows the trumpet for meritocracy and a level playing field for those entering the professions


Professions for Good is a collaboration of professional bodies working on issues such as broadening access to the professions. Louis Armstrong is former chief executive of the Royal Institution of Chartered Surveyors, and has been both a barrister and an admiral.

any of us have a love/hate relationship with the professions. We love them when they prove their worth – great feats of civil engineering, incredible surgery, shrewd legal or financial advice – but suspect their exponents of shrouding themselves in mystique and wallowing in huge fees. The ubiquity of selfhelp information online has exacerbated this feeling, and there may even be some envy too. Professionals are indispensable in a knowledge economy. Independent professional bodies are proving crucial in providing answers to the question of whom to trust, asked with such urgency and despair by businesses around the world. Professionals are taking the lead in rebuilding confidence after the financial meltdown, promoting the values of highly trained and knowledgeable people acting with integrity in the public interest. To capitalise on this, a dozen UK-based professional bodies, including ACCA, have set up Professions for Good, or P4G in short. P4G represents over 1.2 million professionals and aims to promote their values and virtues, and work with government on policy issues.

Neil Stevenson ACCA EXECUTIVE DIRECTOR – BRAND AND STEERING COMMITTEE MEMBER OF PROFESSIONS FOR GOOD ‘Widening access to the finance professions will enhance business performance, but can only be achieved if all involved truly break down barriers to entry. ACCA, founded with the express aim of opening up the accountancy profession to people of all backgrounds, is recognised as an example of best practice in this area. We offer a range of flexible routes to qualification.’

Right now the hot topic across all political parties in UK is meritocracy: how to make sure that anyone, from any background, at any age, who can meet the standards set for each profession, is able to qualify and prosper in their career. In theory, the professions have long been meritocratic but, in practice, many factors inhibit talented people from becoming qualified. Issues include parental influences, shortcomings in the educational system, poor careers advice, entry policies and requirements in further/higher education, financial concerns, and lack of awareness or, indeed, aspiration. Professional firms and their governing bodies are rightly challenged about why their members so often come from a relatively narrow sector of society. So what should the response of professional bodies and firms be? First, we need to learn the scale of the problem. There is very little data here – it’s nearly all anecdotal. But help is at hand: P4G has launched a ‘social mobility toolkit’ to give guidance and supply templates for data collection. Benchmarks for inclusivity can be set, and progress measured. The toolkit has been endorsed by UK deputy prime minister Nick Clegg, who describes it as an impressive resource illustrating the importance of giving everyone a fair chance. Clegg last year launched a Social Mobility Business Compact in the UK to encourage mentoring and fairer access to internships. Second, we need to change attitudes. Making best use of talent from all backgrounds must be a mainstream mantra. Quick wins will include finding and publicising routes to qualification that offer an attractive range of options to people of all ages and from all walks of life. P4G’s social mobility toolkit is available from

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accountancy futures: public sector parliamentary scrutiny

Called to account Greater scrutiny of executive spending might avert future fiscal meltdowns, suggests an ACCA study, so how are different countries tackling this issue?


end for a bible.’ In a moment of high parliamentary drama, the UK House of Commons Public Accounts Committee suspended its proceedings and demanded a witness – the senior legal adviser to HM Revenue & Customs – be required to swear an oath promising to tell the committee the truth about meetings and contested minutes. The tax authority was being questioned over allegations it had concluded a sweetheart deal with corporate financier Goldman Sachs over its tax returns. ‘We demanded answers from civil servants to questions about deals,’ says the chair of the PAC, Labour MP Margaret Hodge. ‘I believe we uncovered serious systemic issues which substantially damaged the taxpayers’ interest and justified putting the witness on oath.’ But the action landed the MPs in trouble. The then cabinet secretary, Sir Gus O’Donnell, took the unusual step of writing to the PAC,

accusing it of constitutional impropriety in demanding civil servants account direct to MPs rather than via departmental ministers. ‘It seems,’ says Hodge, ‘that the PAC is rattling the cage too much for some. There are those who say that shows we’re doing our job properly, but there is a real challenge from the Civil Service with anonymous briefings, personal attacks and veiled threats to try and dismantle the PAC itself.’ So is the UK parliament ‘developing greater independence’, as Hodge claims? Bernard Jenkin, the Tory MP who chairs the Public Administration Select Committee, says all witnesses before parliamentary scrutineers should swear an oath of truthfulness. But is this just a brief demonstration of legislative potency in the face of the permanently almighty executive? ACCA’s international study, Parliamentary Financial Scrutiny in Hard Times, is more downbeat. It says there are no convincing signs in Canada,

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Australia, the Republic of Ireland or the UK – the countries examined – that elected representatives are in the driving seats. The report concludes that ‘parliamentary scrutiny on its own may not prevent the next financial crisis, but is a vital part of a nation’s governance by holding the executive to account for public finance. If done well, it may help manage the risks of a future financial crisis.’ Too wide a generalisation may miss countries where parliamentary scrutiny is more effective – New Zealand is often praised and, even within the UK, members of the new parliament in Edinburgh and assembly in Cardiff have thrown off some of the constraints of Westminster. Rick Stapenhurst, adviser to the World Bank Institute, has calculated that in 56% of OECD countries, MPs suffer no restrictions on their right to modify budget proposals, but also that in 72%, parliaments have no financial experts or budget specialists to support them.

Left: Canberra’s Parliament House in Australia is seeking to strengthen its ability to monitor budgetary decisions.

DOWN UNDER In Australia, the Labour administration has a slim majority. MPs have been consumed with politicking say commentators, and budgetary decisions in Canberra may be even more opaque – but even there, moves are afoot to strengthen parliament’s capacity to monitor budget making, which the opposition supports. In individual countries – such as Kenya where a new constitution was enacted in 2010 – there is scope for setting a better balance between representatives and executive. But it’s hard to spot any general trend towards reskilling representatives or wresting control of the public purse from ministers and officials.

Since the ACCA report was written, ‘technocratic’ governments have been formed in Italy and Greece, as a direct consequence of the eurozone financial crisis. In both, parliamentary debates have been truncated in the name of speedy decisions. ‘Activist parliaments can be a threat to fiscal discipline,’ says Dr Joachim Wehner, senior lecturer in public policy at the London School of Economics. You can’t make a straightforward connection between parliamentary capacity and dealing with the fiscal crisis, he says. Look at the US, where Congress has been blocking White House plans to adjust tax and spending. In Germany, the country that has been pushing the southern Mediterranean countries hardest, the trend may paradoxically be in the opposite direction. The Constitutional Court has recently ruled that big financial decisions must be taken by properly constituted meetings of the Bundestag, not by cabals of ministers and party leaders. In the UK, the Office of Budget Responsibility was explicitly set up outside parliament. It can embarrass the government if it reports that its financial projections are too optimistic – but only if the media make a fuss and MPs put pressure on the government. In the end, it comes back to elected representatives – and if they cannot or won’t hold the executive to account, who will? David Walker, journalist The ACCA report, Parliamentary Financial Scrutiny in Hard Times, can be found at

Margaret Hodge Chair of the House of Commons Public Accounts Committee, UK ‘Parliament is seeking to reclaim its authority to hold the executive to account. The public wants more transparency and people to be both properly responsible and clearly accountable. Many citizens will be less concerned with value for money and more concerned with other performance measures. Parents care about results; patients want to be seen quickly and the unemployed want a job. And the very early indications are that if we don’t put in place proper, vigilant systems, taxpayers’ money will be wasted. In the emerging fragmented world, with a massive range of bodies providing services from the taxpayer’s pound, we need to ensure that our audit and accountability arrangements are fit for purpose.’

Kevin Page Parliamentary budget officer, Canadian Parliament ‘One of the reasons for the creation of a legislative budget office was to promote transparency, to do as much analysis as possible to enrich debate. In my office we are providing estimates of cyclical balance, uncertainty, of ageing demographics. We also need to see this analysis from the Department of Finance to prevent the politicisation of some of these numbers. Too often, almost as a matter of convention, parliament is starved of information necessary to perform its fiduciary responsibilities. How often does parliament see real decision-supporting financial analysis prepared by public servants on procurement or legislation? Hardly ever. Is it possible to hold the government to account without access to decision-support financial analysis?’

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accountancy futures: public sector taxation

A taxing future Raising revenues while keeping taxpayers happy is a balancing act countries need to get right, say ACCA’s Chas Roy-Chowdhury and Jason Piper


overnments in both emerging and developed economies around the world face a substantial challenge: how to raise sufficient tax revenues to balance their books, without creating such a hostile environment that taxpayers move elsewhere. In the highly globalised modern world, the ability of corporates and wealthy individuals to relocate, taking their tax contributions with them, creates a real pressure on policymakers to consider their actions carefully. There are, of course, many different types of tax for governments to tinker with, but ‘green’ or environmental taxes are an area of increasing global focus. These have their own peculiarities, however. For example, a green tax on carbon, designed to influence behaviour and reduce carbon outputs, if successful, will inevitably result in a shrinking tax take. Environmental taxes can also be politically unpopular. Governments are wary of imposing too heavy a green tax burden for fear of voter rebellion. This applies in both developed and developing nations. The current US government, for example, shows no sign of using tax mechanisms to encourage lowcarbon behaviours. In India too there is high resistance to environmental taxes because of the anticipated negative impact on business and hence future growth. Indirect tax options When looking at ways to develop their tax bases, countries like India and the US could perhaps learn from Europe, where there is already widespread use of value-added tax. From an administrative point of view, VAT has an advantage over a straight sales tax applying only at the point of sale. Because VAT is incurred by businesses along the value-adding chain, it in theory provides a degree of protection from fraud and tax evasion. And because it is administered by businesses, not individual taxpayers, it involves fewer parties in the collection process. It can thus be particularly suitable for developing nations which may not have highly developed tax infrastructures. On the other hand, VAT is regressive, hitting poorer households disproportionately hard, so can prove unpopular.

Chas Roy-Chowdhury FCCA is head of tax at ACCA. He has a degree in applied economics and worked in public practice, after which he joined ACCA’s technical department. Jason Piper is ACCA’s technical manager, tax and business law. He is a chartered tax adviser, with Big Four and niche practice experience advising businesses and individuals on all aspects of UK and international issues, and has degrees in European and Commercial Law.

Voter concerns do seem to be hampering the introduction of VAT more widely. A federal VAT in the US is unlikely to happen soon, but it could be done, if policymakers were willing to make other complementary adjustments to the tax system. When Australia introduced 10% VAT at the federal level, numerous state taxes were simultaneously dropped. Understanding the global perspective is also vital for policymakers. Introducing any new unique tax could deter foreign investment and harm local business activity. Consider France’s plan to introduce a financial transaction tax, regardless of what other EU countries do. The country estimates that the 0.1% levy could generate €1bn in new tax revenues. But could France go it alone without its economy being damaged? Experience from Sweden, where such an experiment had a negative impact on the economy, suggests not. Similarly, raising rates of common taxes above the global norm is a concern for governments. A high local carbon tax, for example, is likely to drive businesses towards jurisdictions with no such taxes. New sweeteners Developing nations understandably want to make themselves attractive to foreign investment. However, they need to be careful about how they compete. In sub-Saharan Africa, for example, many jurisdictions have encouraged global corporates to set up operations in their territories by offering tax holidays. Now these are coming to an end, will the businesses move on to other locations offering a new sweetener? A desire to streamline national taxes and improve collection efficiencies has sustained interest in the introduction of a common consolidated corporate tax base in the European Union. Though opposed by a number of member states, including the UK, it remains on the European Commission’s agenda. An alternative version, the common corporate tax base (abandoning the consolidation element) is more politically acceptable to some member states, but again opposed by the UK. Though EU-wide implementation is thus highly unlikely, bilateral agreements between individual European countries could see it appear in some form.

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accountancy futures: public sector taxation

Governments are wary of

imposing too heavy a green tax burden for fear of voter rebellion The corporation tax model is itself problematic, its future the subject of debate for some years. The increasing ability of companies to relocate to lower tax jurisdictions is applying a downward pressure on national corporate taxes. There are particular issues here in relation to intellectual property rights. Global corporations can and do move their IP rights around. Governments have been clamping down on cynical IP relocations where the move is nominal rather than based on fact. Nevertheless, there is nothing they can do about genuine physical relocations. These pressures reinforce arguments for minimising taxes on productive activity, and shifting the burden towards consumption. Tax evasion Governments are also keen to reduce tax evasion. In Italy, it is thought to deny the national coffers around €700bn, money which could go a long way to reducing the public deficit. Action is being taken to address the problem in Italy and elsewhere. The UK, for

Workers and union members in São Paulo, Brazil, protest against income tax collected on profit sharing.

example, has seen a number of high-profile campaigns targeting specific groups, such as plumbers, dentists and personal tutors. Past evaders have been offered lower penalties as inducements to come clean. National tax authorities, are also sharing information more freely between each other, and seeking information from other sources. Helped by IT, the UK’s HM Revenue & Customs is increasingly using data-mining techniques to cross-check information provided by taxpayers on annual returns. The current climate is one where tax planning is seen in an increasingly poor light. Even the UK, currently alone among major jurisdictions in not having one, is considering the introduction of a general anti-abuse rule (GAAR). Looking ahead, tax advisers around the world could increasingly find themselves pushed into straightjackets, with few options open to them and their clients. This doesn’t mean that tax havens will disappear, however. Mainstream locations and particularly those associated with the UK, such as Jersey, Guernsey, the Isle of Man and the Cayman Islands, which are now considered well regulated, will persist. Their low tax offers will remain in demand. Despite the difficulty of predicting the future of tax, one thing is certain – taxpayers will always want to keep their tax bills down.

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accountancy futures: small business regulation

Setting free the SMEs Reducing the regulation of small businesses is key to recovery, but wholesale slashing of red tape can be counterproductive, says ACCA’s John Davies


f there is one straw that politicians across the world are currently clutching at in their plans to escape the economic mire, it is small and medium-sized enterprises (SMEs). By providing the right conditions for them to thrive, they hope for a reduction in unemployment, less dependence on welfare, more tax revenues and, ultimately, restoration of sustainable economic growth. Creating the right conditions means ensuring it is worthwhile for entrepreneurs to take the risk of running a business. And since the vast majority of enterprises across the world are ‘small’, the SME sector is receiving a great deal of attention from politicians and regulators, especially as SMEs appear responsible for proportionately more job creation than large firms, making them key to solving the problem of mass unemployment. With all this in mind, we are seeing a pattern of deregulatory activity across much of

the world targeted at SMEs, such as the European Commission’s action plan designed to minimise the regulatory burden on micro enterprises. In the US, red tape has already become a touchstone issue in the presidential election campaign. the stand of accountancy Accountancy can sometimes itself be the target in this grand effort to deregulate. We have seen a concerted effort by politicians in the European Union to eliminate statutory requirements for micro businesses to prepare annual accounts and publish them on the public record, on the grounds that such requirements represent a ‘burden’. On similar grounds, the mandatory audit requirement for the smallest companies has in the recent past been abolished even in countries like France and Singapore, which have long championed the universal audit.

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accountancy futures: small business regulation

So where should accountancy stand? Foremost, we must remember that the core function of accountants is to add economic value to the affairs of their clients or employers. Accountants do this by promoting the cause of efficiency in the way that businesses are run; the aim is to save businesses money and help them become more profitable. Therefore, accountants are always likely to be supportive of any initiative which promises to save compliance costs for their client or employer. For accountants, therefore, the guiding principle must be that regulatory measures which impose costs in excess of their benefits (if any) should be scaled back or eliminated. The process of deregulation must, however, acknowledge both sides of the cost-benefit equation. A simplistic approach of cutting business costs by scrapping regulatory requirements risks being counterproductive if by doing so a valuable benefit is eliminated. So the costs and benefits of individual measures have to be weighed up carefully on the basis of available evidence. Where the projected benefits of regulation are financial or economic, they can be more easily assessed than where they are more intangible, making the decision as to whether to retain individual requirements relatively straightforward. The exercise must also take into account the argument that businesses should owe obligations to wider society and to individuals and groups within society, and that the maintenance of this situation is good for them and for the economy as a whole. For businesses to owe reasonable obligations to their stakeholders, in the form of what is

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.

sometimes called a social licence to operate, may result in indirect benefits for those individual businesses, in that individuals will be more willing to work for them and providers of finance and other businesses will be more willing to lend and extend credit to them. On this basis, what is an appropriate regulatory burden for businesses should always be considered on the basis of the assessment of the net benefits of regulation, taking into account, primarily, the reasonable interests of a firm’s external stakeholders, but not forgetting the indirect benefits for businesses themselves. true Focus Those net benefits are always likely to be less evident for small and micro businesses because of their proportionately lower impact on the outside world and because of the relatively higher cost of compliance. It is therefore right that the focus of governments and regulatory bodies should be on SMEs. The process of deregulation should not only be focusing on the sectors that are in the greatest need, but should also be highlighting those areas of regulation which represent the biggest burdens. Employment-related regulation is a frequently cited example. Going into business is always risky. People need encouragement, and this means reinforcing the belief that the potential rewards outweigh the dangers. Stripping away unhelpful regulation has to be part of the process. For more ACCA research on SMEs, go to

View from: UK Professor Francis Chittenden FCCA, ACCA professor of small business financing, Manchester Business School ‘To make good decisions, business owners need reliable accounting information, as do their suppliers, their banks and the public agencies with whom they transact, such as tax authorities. As the recovery begins to gather pace in Europe, it is important that European Commission policies should support practices that enable good business decisions to be made. This is especially important for SMEs, which are recognised as the “engine of recovery”, and the vast majority of these are micro businesses – ie they employ fewer than 10 staff.’ Member of ACCA’s Council and Global Forum for SMEs

View from: Europe Dr Andrea Benassi, secretary general, UEAPME (the European craft and small business employers’ organisation) ‘Simplifying legislation and reducing useless and excessive administrative requirements is vital for the European economy in general and for small and medium-sized companies in particular. However, assimilating accounting to a mere administrative burden is contrary to the business reality. On the contrary, robust accounting is essential to business management and growth, to the proper functioning of markets, and to the development of a sound and sustainable economy.’ Member of ACCA’s Global Forum for SMEs

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accountancy futures: small business innovation

Make room for the big idea Innovation still thrives in economic adversity, but top-down resource management is a sure way to throttle it, says publisher Steve Forbes


ast year it often felt as though Europe was at the centre of the world. Every week brought either one more deal to end the turmoil in financial markets or one more threat of an apocalyptic endgame. Now, as its cash-strapped governments cut spending and its banks struggle to strengthen (or shrink) their balance sheets, Europe’s businesses are being called on to pick up the slack. Many question whether they can. This question was on our minds too ahead of the launch of our Forbes Europe publication. From the shopfloor to the boardroom, the spirit of enterprise and innovation thrives in economic adversity, but that doesn’t mean that business leaders and policymakers can afford to take it for granted. If our research demonstrated one thing, it was just how hard it is to pick winners. Trying to identify rising stars or obsessing about a great idea can blind leaders to their organisations’ true potential. As for innovative ideas, they are not nearly as hard to come up with as they are to implement. It is the inelegant and largely unsung task of securing everyone’s buy-in and mobilising resources that turns an idea into an innovation. That’s why governments are increasingly realising that innovation can’t be engineered. If anything, innovation tends to suffer when risk taking is outsourced to the government. Often the top-down way in which businesses manage their own resources is the biggest barrier to innovation. Does this mean that planning and budgeting is unnecessary? No. Serendipity on a shoestring will only take a business so far. But it makes more sense to make room for innovation where possible than to try to anticipate it.

Steve Forbes is editor-in-chief of business magazine Forbes, the grandson of its founder, and president and CEO of its publisher, Forbes Inc. He campaigned to run for the US presidency in 1996 and 2000.

From idea to innovation ‘An ACCA/Forbes survey in early 2011 questioned 1,245 executives across Europe. The resulting report, Nurturing Europe’s Spirit of Enterprise, available at, offers a glimpse into the enterprise and innovation process in businesses big and small. ‘Although the study set out to make international comparisons, these were superficial. What it discovered instead is the value of diversity. “Movers and shakers” are great at coming up with ideas, but have trouble seeing them through. “Star pupils” get buy-in from superiors. “Experimenters” bring the energy and drive. “Hangers-on” gain the organisation’s buy-in. ‘The difficulty of securing funds internally emerged as the biggest obstacle to innovation. Having a finance team that understands and supports the needs of entrepreneurial business is a good way of ensuring that when innovation does happen, businesses can grow on the back of it.’ Manos Schizas, senior policy adviser, ACCA

Joining the international brigade ‘Small and medium-sized firms remain underrepresented in international trade. An ACCA report – SME Internationalisation in Central and Eastern Europe, available at smallbusiness – attributes much of the lag to cultural, regulatory and practical barriers. Yet being able to export does not mean a guaranteed market: in the West, demand is still weak. In China and other Asian economies supply is rising to meet domestic demand. Flexibility and adaptability therefore matter as much for small firms as they do for larger ones. The internet has been very influential in closing the gap between small and large firms in international trade. But tapping into international networks and seeking local partners will always be necessities.’ Rosana Mirkovic, head of SME policy, ACCA

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accountancy futures Editor Chris Quick +44 (0)20 7059 5966

accountancy futures

Editorial board

Managing editor Lesley Bolton Sub-editors Dean Gurden, Peter Kernan, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar 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.

Chiew Chun Wee head of policy, Asia Pacific

ACCA President Dean Westcott FCCA Deputy president Barry Cooper FCCA Vice president Martin Turner FCCA Chief executive Helen Brand OBE ACCA Connect Tel +44 (0)141 582 2000 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 of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 154,000 members and 432,000 students in 170 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of 83 offices and centres and more than 8,400 Approved Employers worldwide, which provide high standards of employee learning and development.

ACCA offices*

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Alvin Chikamba head of policy, sub-Saharan Africa

John Davies head of technical

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 2012 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 5 was published in June 2012.

Dr Afra Sajjad head of education, MENASA

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Aziz Tayyebi head of international development

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08-12 OCTOBER 2012









ONE WEEK, GLOBAL, LIVE AND ON-DEMAND ACCA’s Accounting for the future is a worldwide event exploring the role finance professionals will play in building a stronger and sustainable global economy. ACCA champions the connected accountant, and over five days we will harness the latest technology to bring together finance professionals from around the world to share and learn from their peers. Our experts will share the latest insights on how businesses and the corporate sector need to adapt to meet the future needs of stakeholders, regulators, the economy and the environment. The event will be brought to you via live webinars and on-demand sessions and you can participate in events taking place around the world. To register, and for further information, visit Topics to be covered include: sustainability investor engagement corporate reporting risk management valuation

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

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11/06/2012 11:48

Accountancy Futures - Issue 05  
Accountancy Futures - Issue 05  

Accountancy Futures_Edition 05_June 2012. – ACCA's research and Insights journal. (Published twice a year)