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06/12/2012 11:40

ACCOUNTANCY FUTURES Editor Chris Quick +44 (0)20 7059 5966


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 – a division of Polestar UK Print Limited Paper Antalis McNaughton Group. This magazine is produced on paper that contains certified fibres and is manufactured under strict conditions that allow the grade to carry the EU Ecolabel. The mill operates under the ISO 14001 certified environmental management system. ACCA President Barry Cooper FCCA Deputy president Martin Turner FCCA Vice president Anthony Harbinson FCCA Chief executive Helen Brand OBE

Sue Almond technical director

Chiew Chun Wee head of policy, Asia Pacific

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. 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 2013 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 6 was published in January 2013.

Alvin Chikamba head of policy, sub-Saharan Africa

John Davies head of technical

Dr Afra Sajjad head of education, MENASA

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Aziz Tayyebi head of international development


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


06/12/2012 12:20

accountancy futures

With growth rates in emerging markets

outstripping those of ‘advanced’ economies, an exciting shake-up of the global economy is in prospect. We kick off this edition by exploring the critical role capital markets have to play in this – and the crucial role of the accountancy profession in developing corporate reporting structures and cultures that will let fledging exchanges grow and flourish. Elsewhere, we look at how businesses are starting to treat sustainability as a key to growth through the eyes of Unilever CFO Jean-Marc Huët and other senior figures at the consumer products giant. And former Olympus CEO Michael Woodford, who made headlines in 2012 by exposing an accounting scandal at the Japanese camera giant, paints an alarming picture of what happens when the basics of corporate governance and financial probity are ignored. Chris Quick, editor You can find out more about ACCA’s research and insights activities 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: Andrea Coulson

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

Senior lecturer in accounting, University of Strathclyde

CFO, Eircom Group

Solicitor, Lyons Davidson

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 access to finance pg07 pg08 pg09 pg10 pg11 pg12 pg13 pg14 pg15 pg16 public value pg17 pg18 finance transformation pg19 pg20 pg21 pg22 pg23 pg24 pg25 pg26 pg27 pg28 pg29 pg30 pg31 pg32 environmental accountability pg33 pg34 pg35 pg36 pg37 pg38 pg39 pg40 pg41 pg42 pg43 risk and reward pg44 pg45 pg46 pg47 pg48 pg49 pg50 pg38 australia The country’s Carbon Pricing Mechanism and where it stands in the climate debate pg40 carbon trading Who gains from Europe’s Emissions Trading Scheme?

ACCESS to FINANCE pg06 emerging capital markets Capital markets in the developing world are growing but require a professional ecosystem to become truly vibrant pg10 Africa Accountants are playing a key role in driving corporate governance and ethical processes in Africa pg12 irish pm Irish prime minister Enda Kenny explains how the country’s economic reputation is being revived and its regulatory regime reshaped pg15 zhou qinye Tailored disclosures are the future, says the former vice president of the Shanghai Stock Exchange

risk and reward

public value pg16 the trust gap With public confidence in accountants sagging, the profession needs to take action to build trust or risk losing its legitimacy

finance transformation

environmental accountability

pg18 Unilever CFO Sustainability is not so much a buzzword as a driver of corporate growth pg24 tomorrow’s cfo The goalposts are shifting and CFOs must respond to give businesses what they really need pg29 diversity Lookalike, thinkalike staff are not a force for innovation pg30 sri lanka On becoming an accountancy services outsourcing hotspot

pg32 china Carbon emitter in chief looks for a green revolution pg35 UN compact Here’s the deal on human rights, ethical and environmental responsibilities pg36 natural capital Accounting for biodiversity and ecosystem services

pg43 olympus fraud How blowing the whistle on corporate fraud cost the Japanese camera giant’s CEO his job pg46 tim harford Banking can learn from industrial disasters, says the Undercover Economist pg50 remuneration Compensation structures must be aligned not only with what people do but also how they do it pg53 value creation Governance and risk management are the pillars of sustainable business

Australia’s rich renewable natural

resources remain largely untapped due to uncompetitive economics PG38

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pg51 pg52 pg53 pg54 global economy pg55 pg56 pg57 pg58 pg59 pg60 pg61 pg62 pg63 pg64 pg65 pg66 corporate reporting pg67 pg68 pg69 pg70 pg71 pg72 pg73 pg74 pg75 pg76 pg77 pg78 TAX pg79 pg80 audit and society pg81 pg82 pg83 pg84 pg85 pg86 pg87 pg88 pg89 pg90 pg91 public sector pg92 pg93 pg94 pg95 pg96 small business pg97 pg98 in brief pg99 acca network pg100 back cover global economy pg54 new order Safehands, survivors, changemakers or buccaneers? A glimpse of four possible futures for accountants pg59 limited liability Company structures need to adapt to social imperatives pg62 Malaysia Country launches campaign to attract its talent exports back pg63 Bhutan Greater transparency and improvements to the financial infrastructure should help Bhutan meet its Gross National Happiness goals

corporate reporting


pg66 non-financial A triple bottom line of environmental, social and financial capitals is approaching as integrated reporting gains favour pg70 integrated The Earth Summit drew back from mandatory sustainability reporting but countries and stock exchanges are starting to gear up for it pg72 zhao lixin Chinese regulator wants investors to be the focus of information disclosure

pg78 GAAR Getting anti-avoidance rules right is not easy audit and society pg80 human rights A company’s treatment of its staff reflects its ‘soul’ pg83 Non-financial Auditors need to look beyond the financials pg86 the lessons The six large international networks meet regularly to draw the lessons for audit from the financial crisis

public sector

pg94 healthcare How health services

pg91 innovation Finding creative ways to deliver efficiencies in public services isn’t easy, but there’s a range of thinking tools to help managers do just that

globally are managing financial challenges small business pg96 growth Entrepreneurs are alive and well in every country and offer the best hope of sustainable global growth pg98 in brief ACCA International Assembly highlights, Islamic finance, and US adoption of IFRS

pg74 ici pakistan National reporting landscape has shifted decisively to transparency, says Waqar Malik pg76 quarterly Do quarterly reports do more harm than good by promoting short-termism?

pg88 exemption There are good reasons why audit should remain compulsory for mediumsized companies pg90 reputation Accountants can play a vital role in assuring a company’s brand

pg92 corruption Auditor-generals in developing countries are leading the fight against sloppy reporting and fraud in public bodies

A human rights audit can

give an insight into a company’s soul and how well it fits into the world PG80


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accountancy futures: access to finance developing economies

Capital qualities Strong capital markets are crucial to the growth of emerging markets, and in turn need good governance and professional standards to flourish, says Jane Fuller


f any proof were needed that the emerging, or even ‘frontier’, economies are exciting investors, Zambia’s first dollar bond issue would do nicely. About US$12bn of orders were attracted in September 2012 for the offering of $500m, which was increased to US$750m. The initial yield on this 10-year bond from a subinvestment grade country was only 5.6%. With developed world sovereign bonds looking expensive despite heavy indebtedness, this is one of several areas where the emerging world is catching up. In Standard & Poor’s autumn 2012 update, all the places potentially poised for an upgrade were in emerging or frontier parts of the world. A follow-through would see Indonesia achieve investment-grade status, with Mongolia only two notches behind. Progress on equity markets can be seen in the Morgan Stanley Emerging Markets Index (MSCI EM), which was up just over 9% in the first 10 months of 2012, with the Asian section topping 11%. Within the frontier MSCI, the African section soared nearly 38%. Does this international investor interest in emerging markets find support in the data for economic growth? On a broad-brush basis, yes. Zambia is in one of the regions – sub-Saharan Africa – that has enjoyed strong growth for the past decade. In its October World Economic Outlook, the IMF forecast an annual growth rate of 5% or more for the region for both 2012 and 2013, in line with the developing world average. This puts the 1.3% and 1.5% expected for ‘advanced’ economies in the shade.

Jane Fuller is former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank.

a question of demographics Throw in demographics and the picture gets even better. United Nations forecasts are for the world’s population to reach about nine billion by 2050 – two billion more than at present – and for the (currently) less developed regions to make up 7.9 billion of that. India will be the biggest and other fast growers include Pakistan, Nigeria, Bangladesh, Indonesia and the Democratic Republic of Congo. Surely all this bodes well for capital markets in the emerging world? Not necessarily. The first caveat is economic. Wealth per head is crucial to the financial services industry in general and capital markets in particular. Subsistence gross domestic product (GDP) per head of less than US$2,000 a year in many African countries does not supply a domestic investment pool of any significance. The second is political. The unrest that goes with weak or corrupt government causes volatility in less developed markets. Take Egypt. In 2012 the MSCI Egypt Investable Market Index was up over 50% (in dollar terms) by early November. But the performance over three and five years remains 8% to 10% negative, held back by the unrest that culminated in the Arab Spring revolt in 2011. The third comes from stockmarket data. Research by Elroy Dimson, Paul Marsh and Mike Staunton at the London Business School, covering more than 50 countries up to 2005, found no positive link between GDP growth and equity market returns. Similarly, Paul Marson, chief investment officer of Lombard Odier,

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accountancy futures: access to finance developing economies

focusing on developing countries, found no such correlation. The main reasons for this cited by academics and commentators are that investors tend to overpay for growth and that insiders siphon off profits, or otherwise restrict dividends, leaving too little for external shareholders. But the viewpoint of a foreign equity investor, who tends to arrive late because of lack of local knowledge, is a limited one. From the point of view of the country’s development, the story is more positive. Samuel Maimbo, lead financial sector specialist at the World Bank, says that longterm finance derived from capital markets is ‘crucial for the development of infrastructure, commerce and transformative industries such as manufacturing’. Or as ACCA puts it in its recent report, The rise of capital markets in emerging and frontier economies: ‘Capital markets promote economic development and growth by facilitating and diversifying firms’ access to finance.’ Manos Schizas, senior economic analyst at ACCA, says: ‘Business needs alternative ways to tap savings.’ In countries where banks are inefficient and uncompetitive, capital market funding may well be cheaper than a loan. In such markets, however, regulators are also wary of the destabilising nature of ‘hot’ money – inflating asset price bubbles on the way in and amplifying the downswing on the way out. Developing countries realise that capital markets are not an unalloyed good. Two recent examples of attempts to nurture them without overwhelming them come from Angola and Kazakhstan. In October 2012, Angola followed Nigeria and Ghana in setting up a sovereign wealth fund based on oil revenues. Starting with US$5bn, it is set to consider investments across Africa and internationally, as well as having a ‘strong

Above left: (wheatfields near the Virunga mountains) and centre (salt production at Walvis Bay): Rwanda and Namibia are two of only three African countries that appear in the top 60 of Transparency International’s Corruption Perceptions Index 2011. High ethical standards are integral to the professional ecosystem that lets capital markets flourish. Above right: Indonesia is hovering just outside S&P’s investment-grade status for sovereign bonds as investors move funds into emerging and frontier markets.

focus’ on the domestic market. The government plans to run the fund at arm’s length, with external fund managers. The planned initial public offering of 25% of Kcell, Kazakhstan’s largest mobile operator (controlled by TeliaSonera of Sweden), was due to take place mainly in London by the end of 2012. But the Kazakh government has also stipulated that a small stake should be sold on the domestic exchange. encouraging domestic markets However, even local sales cannot ensure liquidity. Maimbo says that in less developed capital markets, ‘domestic funds buy equity and sit on it’. To encourage more companies to list, he suggests a two-tier system whereby domestic listing rules are less stringent than in developed world markets. The counterargument was put by Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), in a speech in November 2012. ‘High-quality financial information is the lifeblood of market-based economies,’ he said. International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISAs) are both included in the Financial Stability Board’s ‘key standards for sound financial systems’. The ‘badge of development’ theme helps explain why the Pan African Federation of Accountants (PAFA) agreed to promote adoption of IFRS earlier this year. Wayne Upton, director of international activities and chairman of the IFRS interpretations committee, says that the adoption of IFRS brings credibility. For some countries it means a shift from following detailed rules to exercising professional judgment – in making valuations, for instance. The development of professional resources is crucial to this. Financial reporting in an internationally recognised format is not enough, however. Just

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as important is the credibility of the numbers, which raises questions about auditing and corporate governance. The professional scepticism of auditors is an issue in the developed world. That professional scepticism is even more open to question in countries where the state or wealthy families tend to retain controlling stakes. There are numerous initiatives to improve on this front. More than 120 countries apply ISAs – although a comprehensive review by the International Federation of Accountants in 2010 showed some variation in national approaches. CORPORATE GOVERNANCE ISSUES Some plain talking can be found in the Asian Corporate Governance Association’s CG Watch rankings, published with CLSA Asia-Pacific Markets. In the September 2012 rankings, Thailand had risen to third, behind Singapore and Hong Kong, but corruption was noted as ‘a major issue’. As for Indonesia, ranked 11th, it was classed as ‘regressing, but new regulator may help’. On North Asia, the comment is that despite much reform, the outcome is disappointing. The reasons given include: rigid corporate hierarchies and closed cultures, and a lack of political leadership. Better progress (from a low base) in South East Asia is attributed to clearer policies on things like board reform and shareholder rights, support for director training and the development of independent audit regulators. This amounts to a useful checklist of issues that need to be confronted. THE ONLY WAY IS ETHICS In the words of ACCA immediate past president Dean Westcott at ACCA’s Council meeting in Africa in June 2012: ‘Developing capital markets need increasingly transparent corporate governance and ethical business approaches to encourage investor confidence. The perceived

Thailand is rated behind only Hong Kong and Singapore for high standards of corporate governance in Asia, according to the September 2012 CG Watch rankings.

strength of accounting and auditing standards is a leading indicator of the health of capital markets and a strong predictor of their ability to drive economic growth.’ Progress in establishing capital markets and the professional ecosystem that helps them flourish cannot be divorced from a broader view of a country’s culture. A glance at Transparency International’s Corruption Perceptions Index for 2011, covering 182 countries, shows the vast majority of African countries below 100 in the rankings. Botswana, Rwanda and Namibia are honourable exceptions, featuring in the top 60. David Stevenson, an expert on emerging markets and Financial Times columnist, says the interesting point about stock market size relative to GDP is that it shows ‘the degree to which equity markets are being used as a viable source of growth funding’. If the percentage is low then shadow markets are more important. But there is no doubting the appetite from outside investors for access to these capital markets. Stevenson describes emerging market corporate bonds as the new ‘in’ category. In addition to better governance and financial reporting, what might prompt the development of capital markets? One driver might be nervousness about the strings attached to investment by foreign states or state-controlled companies. China’s investment in Africa has become a hot election issue – Ghana’s presidential election is the latest example. One clear answer is to diversify sources of funding for domestic development. More developed capital markets – for sovereign debt, equities and corporate bonds – would lessen dependence on both foreign direct investment and any one sector, such as oil, to power a country’s economic growth. The rise of capital markets in emerging and frontier economies is available at


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Samuel Munzele Maimbo LEAD FINANCIAL SECTOR SPECIALIST, WORLD BANK ‘In the face of the global economic crisis, investors are looking to African markets with renewed interest. But to reap the benefits this investor interest offers, inefficient listing procedures, limited scale, illiquidity, dated regulatory frameworks and inefficient market information dissemination processes must be overcome. ‘Improvements are being made. Stock exchanges have shifted to electronic trading systems and governments are working to increase listings, to invest in human capacity, to undertake education campaigns, and to improve investor protection laws and corporate governance codes. Countries such as Botswana, Egypt and South Africa are experimenting with secondary trading boards, which make lower demands on issuers in terms of listing fees, track record, size, reporting requirements, float and the minimum number of shareholders. ‘The evidence of success, however, is still mixed. While these efforts have increased liquidity more work needs to be done on both the financial and non-financial capital market ecosystem. Critical to this process is addressing the size of markets required to sustain liquid exchanges. With the exception of South Africa, markets are small and often dominated by a few stocks. Cross-listings and regional exchanges, such as the eight-country West African Economic and Monetary Union, listed on the Bourse Régionale des Valeurs Mobilières, are desirable but largely work-in-progress options.’ Co-author of Financing Africa, published by the World Bank, African Development Bank and the BMZ, and coeditor of Financial Sector Development in Africa, published by the World Bank.

Wain Iton CEO, TRINIDAD & TOBAGO STOCK EXCHANGE ‘While tax concessions can encourage small businesses to list, relaxing the associated reporting and assurance standards is not an incentive. What issuers might save in costs they are almost certain to lose in liquidity and demand for their stock – in other words, in costs of capital. ‘Tax incentives are often as important for their marketing value as they are for the savings they provide for companies or investors. A tax concession immediately engages the press and adviser community and can help capture the imagination of the wider population. The advice and guidance of a seasoned market specialist is important to companies trying to navigate their new obligations as a listed firm, and they themselves appreciate this. ‘It is important to define clearly what kinds of companies are meant to benefit from tax incentives, in order to ensure that incentives are properly aligned to policy objectives. High-quality listings are crucial to the early days of a junior board. Authorities should engage promising private firms directly as well as working with accountants and finance providers for high-quality referrals. ‘Issuers’ markets are not enough to ensure financial deepening. Secondary market activity is the true measure of market development.’ Wain Iton is featured in a case study in the ACCA report Making capital markets work in emerging and frontier economies, available at www.accaglobal/access

Jim McFie FCCA DIRECTOR, STRATHMORE UNIVERSITY SCHOOL OF ACCOUNTANCY, NAIROBI, KENYA ‘As the chairman of the audit committee of a company listed on the Nairobi Securities Exchange, we made a wise decision five years ago when we outsourced the internal audit to a Big Four firm. A 2008 report by PwC states that nearly 60% of instances where large companies experienced significant declines in shareholder value were the direct result of an inability to assess and respond to strategic business risks. ‘We wanted a world-class internal audit function – and we now have one. ‘One of the first tasks was to prepare a risk register and a risk heat map for the company. Our small internal audit coordinating group has learned an enormous amount from the Big Four team and will soon be able to work on its own. ‘In March 2012, the Institute of Internal Auditors surveyed 461 chief audit executives (CAEs) in the US. The top five skills sought after for new internal audit staff are, in order: analytical and critical thinking; communication skills; data mining and analytics skills; general IT knowledge; and business acumen. This is the second survey in a row in which CAEs have rated analytical and critical thinking as the number one skill sought after. ‘Our East African schooling system by and large fails to teach youngsters to think analytically, to communicate with clarity and precision and to have business acumen. Accountancy trainers have to take it upon themselves to make up these shortfalls: are we up to the task?’


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accountancy futures: access to finance uganda

Time to fly Japheth Katto, chief executive of the Uganda Capital Markets Authority, looks at the critical role of accountants in promoting governance and growth in Africa


ccording to the International Monetary Fund, Africa is projected to post GDP growth of 5% in 2012, compared with the projected expansion of advanced economies and the global economy by 1.3% and 3.3% respectively. The easing of inflation and strong domestic demand is expected to continue, making Africa the engine of global economic growth. Accountants therefore have a real opportunity to be at the heart of future economic success on the continent. But there are challenges. As African businesses grow and prosper, so does the need for a vibrant and effective accountancy profession. The opportunity for professional accountants is to position themselves firmly at the centre of good corporate governance, and align themselves with the debates on economic and social development. These are crucial as they will affect millions of people and businesses. We have the competence, reputation and influence to change the corporate governance and development landscape. In a 2011 survey on governance and ethical practices, Leadership and governance in Africa, ACCA found that the majority of its members believed accountants should be involved in driving activities to improve ethical practices. However, the survey also found mixed views on the effectiveness of governance codes and frameworks in improving practice. Despite their own efforts to reduce unethical behaviour, the majority of respondents said that lack of obligation and enforcement, along with political intervention in decision-making, were making the guidelines that had been provided less effective. According to the survey, the three main barriers to improving ethical behaviour and good corporate governance practices are: the levels of corruption, organisational cultures and lack of government support. These barriers can be broken down through the ethics of professional accountants based on fundamental principles outlined in the code of ethics issued by the International Ethics Standards Board for Accountants. Those principles are: integrity, objectivity, professional competence and professional behaviour. The developed world has witnessed numerous scandals arising from corporate governance

Japheth Katto FCCA has been CEO of Uganda’s Capital Markets Authority since 1998 and is a board member of the International Federation of Accountants. He has also held senior positions with the UK’s Investment Management Regulatory Organisation and the Financial Services Authority, and worked for the UK government’s Department of Trade and Industry. He was ACCA Uganda president from 2001 to 2003 and has also been a member of the ethics and disciplinary committee of the Institute of Certified Public Accountants of Uganda.

failures: Barings Bank, Enron and Olympus – and the global banking and financial crisis. These have led to a raft of regulatory responses, codes and legislation, going as far back as the UK’s Cadbury Code, through the Sarbanes-Oxley Act and right up to the FrankDodds Act. We have seen the results of the King Committee on Corporate Governance in South Africa, whose codes now apply to all companies listed on the Johannesburg Stock Exchange. We have also seen many regulators in Africa enhance their corporate governance regulations and guidelines. King’s impact Unlike Sarbanes-Oxley, the King codes adopt a comply or explain philosophy – a similar approach to the UK’s governance codes. The King philosophy consists of three key elements: leadership, sustainability and good corporate citizenship. King views good governance in essence as effective and ethical leadership. Business leaders should direct their companies to achieve sustainable economic, social and environmental performance. Sustainability is seen as the primary moral and economic imperative. Corporate citizenship flows from the fact that a company is accountable under the South African constitution and should operate in a sustainable manner. There are a number of widely accepted corporate governance principles, including separation of CEO and chairman, balanced boards with independent directors, and the establishment of effective audit, remuneration and nomination committees. Accountants would serve themselves well by reinforcing these principles at every opportunity. A key recommendation of King III, which was published in 2009, was that organisations should produce an integrated report in place of an annual financial report and a separate sustainability report. Such initiatives reflect the changing business landscape in Africa, and provide accountants with a great opportunity. They have a crucial role to play in good corporate governance. They are the gatekeepers and reputational champions, providing transparency in reporting, decoding regulation for the company, and supporting internal integration and adherence to good governance practice.

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accountancy futures: access to finance uganda

We must convince businesses that good corporate governance adds value to shareholders and other stakeholders

Accountants can deliver professional rigour and integrity, follow standards and procedures that highlight concerns and ensure that discussions on risk with management are healthy and productive, offering an independent challenge to the practices within a business. There is an equally important role for accountants to play in furthering social and economic growth. Strong professional accountancy organisations will help create a body of competent and capable accountancy professionals who will bring effective regulation and oversight of accounting, auditing and financial reporting. Financial information will increase in quality and reliability and facilitate the sound management of public resources. We will also see strong capital markets and a thriving SME sector. All of which will lead to financial stability, necessary for social progress, economic growth and development. The African Union and such regional economic groupings as the East African Community, the Southern African Development Community and Economic Community of West African States have important leadership roles to play, with good corporate governance at the top of their agendas. There will also be challenges. All stakeholders –

Ready for take-off: the accountancy profession has a vital role to play in supporting capital markets and enterprise, which in turn will aid social progress, economic growth and development.

market practitioners, directors, shareholders – need to be educated in the very best corporate governance practices. Corporate governance must be demystified and businesses educated to appreciate its importance. We must convince businesses that good corporate governance adds value to shareholders and other stakeholders and is a must for sustainability. At the same time Africa needs to ensure its professional accountancy organisations do not lag behind their counterparts around the world – we must ensure we have built the capacity to take on this opportunity. This is why the role of the Pan African Federation of Accountants (PAFA) and IFAC bodies such as the Professional Accountancy Organisations Development Committee, Compliance Advisory Panel, Professional Accountants in Business and Small and Medium Practices Committee is critical. In addition, global professional accountancy organisations such as ACCA with a big presence in Africa must play a supportive role in the development of the profession. But whatever the challenges, this is an opportunity that must not be missed.

Leadership and governance in Africa is available at www.accaglobal/lgafrica pg11 edition 06

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‘The crisis has

shown that short-term results can be deceptive in terms of an organisation’s actual financial position’


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accountancy futures: access to finance ireland

Recovery position Accountancy Futures asks Irish prime minister Enda Kenny about reviving the country’s economic reputation and reshaping its regulatory regime Q: Ireland went from Europe’s poster boy to one of its most troubled economies. How have you gone about repairing the country’s reputation? A: In 2011, when my government came into office, I made it one of our top priorities to restore the good name of Ireland as a place for business and investment. In this regard, the progress already made in repairing our damaged economy is well recognised internationally. Visits to and from US president Barack Obama and China vice president Xi Jinping highlighted the renewed faith and belief in Ireland from world leaders. This is reflected in the significant progress in returning our economy to growth and reforming our banking system. Step by step, we are bringing our public finances under control through a fiscal consolidation programme. At the same time, my government has brought a strong and determined focus to growth and jobs. As a result, Ireland’s recent performance has separated us from many other European economies. We’re expecting a second year of economic growth, driven by exports, in 2012. Our balance of payments is now positive. We have just seen the first annual decrease in unemployment since the start of 2005. Since my election, I have been conveying a clear message in all my international engagements: now is the time to invest in – and benefit from – Ireland’s recovery. Q: Much of the collapse of the Irish economy can be traced to poor banking decisions and poor regulation. How has the government addressed these related issues? A: The regulatory failures of the financial crisis have been the subject of extensive and objective analysis. A number of reports and investigations point out the problems to be addressed. Poor supervision, overly deferential regulators, poor risk assessment and a lack of follow-through on enforcement all played a part in the financial crisis. New proposed legislation draws on the lessons learnt from that experience. A new Central Bank Bill involves a careful overhaul of the Central Bank’s regulatory powers. The Bill brings clarity to the Central Bank’s ability to set requirements. It provides for good information flows and objective analysis to

The longest-serving member of the Irish parliament, the Dáil, since being elected in 1975 at the age of 24, Enda Kenny has led his party, Fine Gael, since 2002. An Irish Gaelic speaker from the west of the country, he became prime minister, or taoiseach, in 2011. He renegotiated the country’s EU bailout in that same year, describing it as ‘a bad deal for Ireland and a bad deal for Europe’, reducing the interest rate by 2% and extending the repayment period.

support regulatory supervision. Where things go off course, there is provision for prudential intervention and corrective action. Where the law is broken, there are effective yet proportionate sanctions. There are also provisions for restitution and costs after the fact. Legislation alone will not be enough to address the failures of the past. In recent years, the level of regulatory activity has intensified with increases in staff numbers and skill levels at the Central Bank. On-site inspections and review meetings have also increased. The Central Bank has published an enforcement strategy for 2011–12 setting out its approach for the benefit of consumers and the integrity of the Irish financial services sector as a whole. It has also taken a number of measures under its new approach to banking supervision, such as re-organising its internal banking supervision structures and investing heavily in training all supervisory staff.

Q: What lessons do finance professionals need to learn from the economic difficulties in Ireland and beyond? A: Everyone involved in financial services needs to consider how best to enhance risk management – there is a real need to monitor and plan for the worst-case scenario. The crisis made clear that, without contingency planning, organisations – both government and private sector – are not in a position to act quickly and effectively to address problems. One important change is to ensure that the time horizon for decisions is sufficiently long. The crisis has shown that short-term results can be deceptive in terms of an organisation’s actual financial position. A final point to consider is how company accounts can provide the best information to investors and regulators. The Central Bank has published guidelines for the banks to follow in developing and applying their impairment provisioning frameworks.

Q: Is there a need for greater attention internationally to professional ethics? A: It is important that all professionals act in an ethically appropriate manner. It is clear that a focus on profit to the exclusion of all else has not led to positive results for either individual companies or for the economy as a whole. The pg13 edition 06

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fitness and probity regime being rolled out by the Central Bank for the financial sector will seek to address some of these issues. A broader focus is required, which should include an ethical approach to doing business. This is not limited to financial services, but should be the norm across the corporate world.

Q: Poor financial planning and excessive optimism from major financial institutions played their part in the current difficulties. How can we prevent that happening again? A: We can certainly point to a combination of factors that were responsible. First, it is now very apparent to everyone that Ireland’s long period of financial prosperity lulled bank management into a false sense of security. This was not just a failing in Ireland – managers of large financial institutions all over the world forgot how to price risk effectively. Second, banks placed too much reliance on complex financial models and drew excessive comfort from what these were saying while common sense took a back seat. Third, we now know that mistakes were made in accounting and regulation which prompted and enabled banks to hold less capital in reserve. Significant changes in the way banks are run and regulated have been implemented both in Ireland and across Europe and more are on the way to ensure these failings are not repeated. For instance, more conservative provisioning guidelines have been implemented by central banks while, at a European level, banks will no longer be able to ‘game’ their capital requirements by manipulating the value of their risk-weighted assets as a new simpler leverage metric is in prospect.

Seal of approval: Irish prime minister Enda Kenny, seen here shaking hands with US president Barack Obama in the Oval Office in Washington, is keen to restore Ireland’s reputation abroad as a good place to do business.

part of a wider policy mix in the taxation area. There is also a rapidly expanding tax treaty network, R&D supports, an intellectual property tax regime, a special assignee relief programme, a holding company regime, and an efficient tax administration system. On a global scale, Ireland scores extremely well in many of the key areas for investors. For example, the IMD World Competitiveness Yearbook 2011 ranks Ireland first for corporate taxes, first for business legislation for foreign investors, and first for the availability of skilled labour. We have also been working to target highgrowth areas to develop clusters of activity and expertise for many leading industries. This approach encourages other companies in these sectors to seriously consider Ireland as a location for European operations.

Q: Some European countries are starting to reduce their corporation tax rate to bring it closer to the Irish rate. Is this a threat to foreign direct investment in Ireland? A: The one thing the business community prizes above all is certainty. Ireland’s longterm commitment to the 12.5% rate, which has broad political consensus in the country as well as general public support, means that this rate is now regarded as part of ‘brand Ireland’ throughout the business world. The competitive rate is underpinned by transparent and easy-to-use corporation tax rules. However, the 12.5% rate is only one

‘The 12.5% rate of corporation tax is now regarded as part of “brand Ireland” throughout the business world’

Q: You recently launched the Succeed in Ireland scheme to attract smaller and emerging firms to Ireland. How will it work? A: Succeed in Ireland is a programme which provides direct incentives to members of the Irish diaspora and others across the world to create jobs in Ireland. It targets international companies and businesspeople who would otherwise not be reached by the state enterprise agencies so that they consider locating economic activity in Ireland. The initiative will incentivise people around the world to be our eyes and ears on the global stage and help deliver new jobs and investment. This is an innovative scheme that offers a new channel to reach thousands of small to medium enterprises and spread the word about Ireland’s strong reputation as a location for business. You can read more about it at

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accountancy futures: ACCESS TO FINANCE china

Made to measure Zhou Qinye, former vice president of the Shanghai Stock Exchange, says forward-looking information in annual reports should be tailored and specific


e firmly believe that listed companies can do better in terms of accuracy, fairness and completeness of disclosures, in particular in the management discussion and analysis (MD&A) section of the annual report, which represents the core of the non-financial information disclosure. The focus of our disclosure improvement effort is to get listed companies to present to investors clearly and effectively industry developments and trends, and the company’s corresponding measures, strategies, operational plans, and so on. During the reporting period for 2011 annual reports, the Shanghai Stock Exchange (SSE) set out the requirements and key reminders for preparing the MD&A. Financial reports focus on past performance and historical information, while the MD&A puts more emphasis on the future. Forward-looking information should be complete, effective and fair, as well as tailored, specific and proactive. Currently, disclosures in annual reports tend to be boilerplate and lack real substance. Material information that is truly beneficial to investors’ decision-making is often concealed. To improve the relevance and effectiveness of disclosure, we encourage more tailored information. Companies should customise and adapt to the requirements based on their circumstances and the principle of materiality. The focus of information disclosure varies between industry. Companies should take into account their industry, their scale of operation and their market in tailoring what they disclose. In essence, this helps to achieve fairness in the disclosures. Over-regulation in disclosure requirements results in broad, overly specific disclosures. Management spends huge amounts of time

A professional accountant, a professor at multiple universities and a member of multiple regulatory bodies, Zhou Qinye is also a director of the Chinese Institute of Certified Public Accountants (CICPA). In November 2012, he was presented with an ACCA Achievement Award for his outstanding contribution to the development of the accountancy and finance profession.

and resources compiling periodic reports, and is discouraged from voluntarily disclosing other information, which may be more relevant. It is for this reason that we set up a corporate governance forum and introduced an award for corporate disclosure. Companies should drive the improvement to narrative disclosures from their MD&A. We hope listed companies will go beyond completeness, efficacy and fairness and strive for tailored and more specific information. It is not an easy task to evolve from the existing boilerplate-type of disclosures and the SSE will help guide companies through this long journey. We hope to strengthen cooperation across different sectors of society and work with all parties to promote further improvement in corporate disclosures. A report on disclosure best practices by SSE-listed companies is available at www.

Neil Stevenson executive director – brand, ACCA ‘Listed companies in China attach great importance to corporate disclosure. It is not just about satisfying compliance needs; some enterprises have also begun to explore more effective ways to meet investors’ needs for information that will allow them to gauge the performance and development trends of the company more accurately. At the same time, by actively communicating with investors and carrying out market value management, companies are able to capture refinancing opportunities in the capital market and utilise the capital market as a means of driving growth for the company.’

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accountancy futures: public value trust gap

Trust me, I’m an accountant The accountancy profession must take action to improve public confidence or risk losing legitimacy altogether, says ACCA president Barry Cooper FCCA


or a profession that prides itself on its integrity, objectivity and credibility, the finding of an ACCA study that the public views accountants as middling at best when it comes to trustworthiness is quite a blow. In a context of public austerity, there is a danger that accountants may be identified as little more than go-to people for wealthy individuals and businesses seeking to avoid paying their ‘fair’ share of tax. It is a matter of frustration that we are not always appreciated for the work we do. Part of the problem is that when things go right – as indeed they usually do – very few people notice. But when things go wrong, they can go wrong spectacularly and very publicly. That is one of the reasons why there is such a gap between how accountants see themselves and how others see them. One of the most telling statistics in the ACCA report Closing the value gap: understanding the accountancy profession in the 21st century is that threequarters of accountants believe that the general public consider them to be trustworthy yet only 55% of members of the public agree. So where do we really stand in the public’s estimation? As part of our research we asked members of the public to rank accountants as one of 13 professions. The result was worryingly mid-table – well out of range of a trophy although not in the relegation zone. Our consolation prize is that, as far as the public are concerned, we are not as bad as politicians, lawyers or journalists. We cannot blame this on the financial crisis – only 13% of people said their degree of trust in accountants had fallen over the past five years. Rather, it is a view that has developed quietly over time, beginning with the longstanding, stereotypical bean-counter image and steadily overlaid with the remnants of public failures such as Enron and WorldCom. We should all be worried about this. Trust and value go hand in hand. Unless we are trusted to provide value to the public through our work as accountants, we will lose our legitimacy – as will the public companies and markets that depend on the validation the profession provides. Nowhere is the risk greater than in audit. We have already seen fees squeezed dangerously, as whispered doubts over value become steadily louder.

The issues that we have to address are numerous, but connected. One is a basic lack of understanding about what it is that accountants do. Richard Sexton, PwC’s head of reputation and policy, for example, makes the point in the report that audit is seen as insurance rather than assurance. Another and potentially more serious problem is the conflict between professional integrity and commercial interests. Just over half of the people questioned for the research said they felt accountants work for the benefit of companies or themselves, rather than in the public interest. Even more worryingly, four out of five accountants blame their own profession for tax avoidance by individuals and companies. If we don’t trust ourselves, how can we expect the public to trust us? When it comes to trust, it is all about the public’s perceptions. Regulators cannot legislate for ethical behaviour; it has to be in the DNA of every accountant. Events such as the implosion of Arthur Andersen in 2002 make it clear that ethical behaviour is non-negotiable. While it has taken, and will continue to take, years to build

Professor Barry J Cooper FCCA is ACCA president. He is head of the School of Accounting, Economics and Finance at Deakin University, Melbourne, Australia.

Jennifer Tan CFO, Hutchison Telecommunications HK ‘A lot of people may not know the different responsibilities of accountants. We can have people in the regulatory function, in the treasury field, in liquidation – but the public just think we are auditors or bookkeepers. Image-building is important; we can show that even in accountancy we have different professions that can bring in different ideas and contribute in different ways.’

Jim Sylph executive director, professional standards, IFAC ‘When your sole source of income is an employee salary, it’s incredibly difficult to maintain the highest ethical standards and resign from your employment because of something that you are asked to do. The wider world will know nothing of the hundreds of times that an auditor has resigned from an audit client because they just don’t like what they see.’

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public perceptions of professions’ trustworthiness 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Politicians


former chairman, US Financial Accounting Standards Board ‘For the profession to maintain its value it’s important to be seen to be objective and credible. That doesn’t mean you shouldn’t also be a good business consultant and add value that way, but I think the primary value we add is through our objectivity. There are clearly people who hire accountants to put a veneer of credibility on things that are not very credible. I don’t think that serves us well.’

Civil servants

Robert Herz


executive board member for Reputation and Policy, PwC ‘It’s important for us to come out of the shadows and better explain what we do, how we do it and the value we generate. There will be some challenging conversations. But it’s important that you’re confident enough to talk about what you do, why you do it and why it’s important. Much of the observation about what accountants and auditors do is based on incomplete information.’










Richard Sexton

up complete public trust in the profession, the alternative is unthinkable. So what can be done? The report makes several recommendations, many of which are centred around the need for accountants as a profession to explain more clearly and more frequently what it is we do and why we do it. This is particularly necessary for auditing, and we need to be very clear about what audit is not as well as what it is. We also need to be sure that we are seen to be doing our work well and objectively. The report makes the point that accountancy is not certainty, which means that trust is directly related to the level of transparency and openness around the figures. Above all, accountants can help restore public respect in the business world by taking the lead in encouraging ethical and socially responsible behaviour. We know we have worth; now it’s time to prove it. Closing the value gap: understanding the accountancy profession in the 21st century can be found at

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accountancy futures: finance transformation unilever

Good for business In a three-part look at Unilever’s embrace of sustainability as its future and the engine of growth, we begin by talking to CFO Jean-Marc Huët


rowth and sustainability are not in conflict. There is no inherent contradiction between the two. In fact, in our experience, sustainability drives growth.’ It was with these words that Magnum-to-Marmite products giant Unilever embarked in 2010 on what it describes as its sustainable living plan, a 10year journey towards sustainable growth. The plan has the very ambitious target of halving the environmental footprint of Unilever’s products. This is set within the larger context of the company’s aim of doubling the size of the business – with a turnover of €46.5bn it is already the 57th largest company in the world. The plan also focuses on social issues such as nutrition, health, hygiene and waste.

Unilever’s 5,500-strong finance function is to drive sustainability and growth through the organisation. ‘Finance connects all the dots, be it from a category perspective, the geographies, the functions, the outsourcing. I don’t really want to use the word “powerful”, but it is a very integrated function, which really drives change throughout the organisation.’ Unilever’s finance professionals, he says, can handle the message and the context of what the company is trying to do. So how does this work in practice? Brandishing an analyst presentation entitled ‘Sustainability and savings leverage’, Huët starts to describe with conviction what he describes as the ‘virtuous circle of growth’. He starts with sustainability-driven product growth. This could mean innovations such as

‘We are talking about less packaging, more sustainable

factories, efficiencies in logistics. These are real, tangible ways in which sustainability can drive your cost base down’ Given the nature of the company’s impressive 400-strong product portfolio of householdname foods, drinks, soaps, shampoos and cleaning products, it is easy to see the marketing vision behind such a strategy. But the connection between sustainability and growth in the financial sense is less obvious. So what does the company’s CFO Jean-Marc Huët have to say on the matter? Quite a lot, as it happens. He is quick to dismiss any suggestion that the area is anything other than central to Unilever’s business model. ‘Sustainability is not a side concept,’ he says. ‘It’s not, “here’s our annual report and by the way we do some corporate social responsibility”.’ Sustainability, says Huët, not only drives growth but drives growth that is profitable. What’s more, Huët believes that the role of

the Pureit water filter, which provides ‘safe as boiled’ water for homes in areas where supplies are poor, without the need for electricity – Unilever says the product has brought safe drinking water to 35 million people. Or it could be developing new and bigger markets for existing products – Unilever is running a handwashing campaign with its Lifebuoy soap (first marketed way back in 1895) with the aim of reducing the incidence of diarrhoea and pneumonia. what customers want Huët says sustainability opens up new markets through joint initiatives with the company’s customers, such as a campaign with Tesco called ‘A better life starts at home’. Retailers rather than consumers, he points out, are the

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accountancy futures: finance transformation unilever

company’s direct customers. Tesco, Walmart and others, he says, believe that sustainability is important and that their customers care about it, so Unilever is working with them. He then points to the cost savings. ‘We are talking about less packaging, more sustainable factories, efficiencies in logistics. These are real, tangible ways in which sustainability can drive your cost base down.’ The final point is risk management. ‘This is in terms of our reputation, our ability to secure supplies, avoid stranded assets and the like.’ So with risks reduced and cost savings ploughed back into research and development, together with a sustainability-driven approach to innovation, the circle is complete and we arrive back at profitable product growth. sweet spot This strategy, says Huët, will help him make sure that Unilever gets into what he describes as the ‘sweet spot of consistent growth, profitable growth and competitive growth’. Finance people, he says, are equipped to make the trade-offs in budgeting and forecasting that are needed. ‘There are going to be certain initiatives that may be financially more expensive in the short term but are more sustainable in the long term.’ Finance professionals also manage the KPIs. ‘Finance plays a huge role in the collecting of the data, its integrity and making sure that we can really monitor the KPIs, which is a massive piece of work.’

Dutchman JeanMarc Huët was born in England, raised in Switzerland and holds an MBA from Insead. Appointed CFO of Unilever in 2010, he heads a 5,500-strong finance function. He has worked as a commercial manager in Italy, rose through the ranks in Goldman Sachs’ investment banking arm from analyst to associate to executive director, and been the CFO of babyfood manufacturer Numico and global biopharma company Bristol-Myers Squibb.

Sustainability, he says, inspires people because they really want to work in the area and think about sustainability and finance together. Getting finance people involved is not a problem in his experience. Unilever currently produces separate annual and sustainability reports but is considering whether to produce a combined report in the future. A quarter of its sustainability KPIs are already audited, which Huët says has been very time-intensive. And more assurance is planned. Integrated reporting, he says, is a good development. ‘But we’re also very realistic. This is not something that can happen overnight and we need to understand who our audience is. We need to ensure our systems can deliver KPIs around sustainability that are the same quality as our financial statements. But we are supportive of the development and are part of quite a few initiatives in this area.’ Huët’s business approach to sustainability does not mean he is blind to the societal advantages. ‘We are using resources at a higher rate than even before, and if we continue like this we will be living in a much more volatile world. It’s our responsibility in society to actually take sustainability into account and make it an inherent part of doing business. ‘If you extrapolate forward 10 years or so – if you don’t adopt sustainable, responsible growth in your business model, then you may be out of business. It just doesn’t add up.’ Chris Quick, editor, Accountancy Futures

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One of the top countries that attracts foreign investors – particularly multinationals like Unilever – is Vietnam. ‘This is a young, dynamic country,’ says Katherine Wu FCCA, vice president of finance at Unilever Vietnam. ‘With 50% of the population under 25 years old and growing fast in purchasing power, this is one of Unilever’s key markets, and we are committed to building a sustainable business here and make Vietnamese lives better.’ Vietnam’s youthful population is not just a significant customer base, it represents the present generation of graduates and young executives streamlining business practices. ‘If you look at the profile of young people at our company, most who join as management trainees are fresh from universities; they’re all very keen to learn and very passionate. This energy and desire to make an impact is very prominent compared to some other places I have worked,’ says Wu. She adds: ‘In terms of education, English-speaking skills and exposure to the outside world, young people here have stepped up significantly. I was on the board of advisers at AIESEC in Foreign Trade University in Ho Chi Minh City. Some years ago when the students were discussing how they could contribute to society, they talked about charity donations; now they are mapping out agendas and talking about how they can create a business model that will be self-sufficient and sustainable.’ Connla Stokes, journalist based in Ho Chi Minh City

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accountancy futures: finance transformation unilever

Green snowball A convert to the macro logic of sustainability, Tony Latham, Unilever’s finance chief for North Asia, is looking to make it happen at the micro level too


ased on resource consumption today and the resources that are available, at some point in the near future, demand will fundamentally outstrip supply. I’m not someone who was or is particularly environmentally aware but the facts on this are indisputable.’ So says Tony Latham, a finance professional through and through and anything but a typical environmental campaigner. But one

year into his new position as Unilever’s vice president of finance for North Asia and he has fully embraced the sustainability agenda that is increasingly shaping the mammoth multinational. More than most multinationals, Unilever has a large footprint in developing and emerging countries, which generate about 55% of its sales. Yet it is those very markets that pose one of the biggest threats of all to sustainability

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A professional accountant, Tony Latham joined SC Johnson in Australia in 1997 and was its FD in Indonesia based in Jakarta from 2003 to 2006. He then moved to Danone’s Numico subsidiary as its Thailandbased regional FD and became Amsterdam-based vice president of finance in Danone’s global medical nutrition unit in 2008. Rather than move up the ranks in Europe, he decided to look for something in Asia and in November 2011 became Unilever’s vice president of finance for North Asia, based in Shanghai.


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‘The moment you acknowledge how difficult

this is, the moment you build a contingency plan for failure, is absolutely the moment you will not succeed’

as emerging middle classes seek a better standard of living. They too want decent healthcare and comfortable lives with modern conveniences. And they can increasingly afford them. But here’s the rub: there are simply not enough resources for everyone to consume on the scale that the developed world does today. ‘At the macro level, the way the world is living  today is quite simply not sustainable,’ Latham says. Unilever’s sustainable living plan sets the company apart as much as its marketing savvy and penchant for product innovation. The company has stepped up its message of sustainability over the past couple of years while stressing that it is not a new convert to the idea. Latham says that sustainability has been at the heart of Unilever ever since Lever Bros launched its first packaged soaps in the late 1800s. The new plan creates a clear framework for the sustainability strategy. ‘The fact that Unilever has put the sustainable living plan at the heart of its business model, come out and stated what it wants to achieve and is now walking the talk is something that for me, as a relative newcomer to the organisation, is very impressive,’ says Latham. ‘The concept is not new. Lots of companies have been talking about this.’ IN LOVE WITH ASIA A year ago, he was working at Danone, a company whose leadership roles are mostly in Europe. Having worked for multinationals in Indonesia, Thailand and Australia, he had a ‘burning desire to come back to Asia’. And Asia he got. He is now based in Shanghai, China, with responsibilities for an extremely

diverse list of countries that includes China, Hong Kong, Taiwan, South Korea and Japan. The company has a substantial Asian presence. In China alone, close to 24,000 people depend on Unilever for a job at one level or another. Latham himself is in charge of the 130 or so finance staff who look after the region. Because his role is a strategic one he is very aware of the inherent contradiction in developing a business case for sustainable products. CREDIBLE CASE ‘At the macro level the business case for the Unilever sustainable living plan stacks up. It is believable, it is viable, it is increasingly necessary. It just makes sense,’ he says. ‘At a country level it is starting to make sense for a whole variety of reasons: governments are legislating, customers are demanding it, it gives us access to markets, etc.’ The challenges come the next tier down, says Latham, when an individual finance director is building a business case for the launch of, say, a new haircare product. ‘How does he or she start to capture the sustainability business case and business case for the launch of that particular product in a particular market? That’s the next step. We are working on establishing best practice for how to do that now. ‘It’s like a snowball coming down the hill and impacting more and more people through and outside the organisation. The moment you acknowledge how difficult this is, the moment you build a contingency plan for failure, is absolutely the moment you will not succeed,’ he says. ‘Unilever wants to be at the forefront of the solution and, as someone who is new to Unilever, I find it incredibly energising.’ Alfred Romann, journalist


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Challenge ahead for CFOs We report on Asian and European CFO summits, but first Richard Moat, chairman of the ACCA/IMA Accountants for Business Global Forum, looks to the future


hen the rules of the game change, people need to adapt. Some will rise to the challenges and opportunities ahead, and others will not. But when it is not just the rules but the game itself that changes, it takes real talent and skill to come out on top. This is the scenario that CFOs around the world are currently facing. With greater economic uncertainty, cost pressures and business challenges, to say nothing of a more onerous regulatory environment, it is easy to understand why today’s finance executives are only too keenly aware that tomorrow’s juggling act will become even more complex. Traditional skills are now simply the entry ticket to the playing field. To succeed in the future, CFOs need to adapt their abilities to reflect a more uncertain, dynamic and global game. They will also need to balance many new and conflicting priorities, reacting swiftly to emerging issues as soon as they arise. So how will the game change? A recent IMA and ACCA report, The changing role of the CFO, spells out nine key issues and emerging priorities. The first and most obvious is regulation. CFOs have an increasing personal stake in, and accountability for, regulatory compliance. But they will also have the opportunity to shape the future, and perhaps bring the steady accumulation of regulatory burdens to a halt by implementing processes that will negate the need for even more regulation. The second is globalisation. Tomorrow’s CFOs will need to adapt to different rules and regulations if they are to support the expansion of business into new markets. The tactical issues will need to be combined effectively with good cultural and crossborder working relationships. Technology is the next key game changer. Large and complex data – ‘big data’ – provides challenges as well as significant opportunities for analytical insight. CFOs need to be at the heart of this data revolution; that means spending less time on recording and verifying the numbers, and more time on making the data connections and explaining the number implications.

Richard Moat FCCA is CFO of Eircom Group. He has also been deputy CEO and CFO of Everything Everywhere, managing director of T-Mobile UK, and corporate FD of Orange.

Then there is risk management. This is one of the key challenges for the modern CFO: complete risk avoidance is not an option. The board, external investors and other stakeholders will look to the CFO for ever greater assurances over the financial viability of the business’s strategy. Transformation is the next area of change. The imperatives to reduce costs, improve efficiency and become a better partner to the business mean that CFOs will need to ensure that finance is a catalyst for change. Outsourcing and shared services will figure highly in this re-engineered world. Stakeholder management will demand more time. CFOs will increasingly become the face of the corporate brand. Indeed, they already fulfill this role with investors, but they will have a broader circle of stakeholders to please in the future – banks, tax authorities, external auditors and the media. There will also be a greater role to play in strategy validation and execution. Finance professionals will need to make greater connections between the strategy of the organisation and its finance and risk processes. Reporting will expand from the traditional to the ‘triple bottom line’. Financial reporting will be joined with social and environmental metrics – something that can be a balancing act today, let alone tomorrow. None of these changes can be achieved without the effective management of talent and capability. Finding the right people with the right skills at the right time will become increasingly challenging. For tomorrow’s CFO, the skill will lie in balancing the challenges created by the changing rules while anticipating the more fundamental changes in how the game is played. The changing role of the CFO report by ACCA and the IMA (Institute of Management Accountants) was compiled from roundtable discussion with CFOs in Shanghai, New York, Moscow and Zurich during 2012. The report is available at


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accountancy futures: finance transformation CFOs

Jeffrey C Thomson IMA PRESIDENT AND CEO ‘Today’s CFO team is expected to add value well beyond the traditional roles of cost management, controls and acting as the conscience of the organisation. These roles are challenging enough, but today’s CFO is expected to work in collaboration, by serving as the integration hub for key business processes, as a catalyst for change including business transformation, and as a consultant or trusted business adviser in helping to create sustainable growth.’ IMA is based in the US and collaborates with ACCA in the production of the quarterly General Economic Conditions survey. See

The art of finance transformation in Asia Speaking at the first regional ACCA CFO Summit Asia, held in Hong Kong, ACCA chief executive Helen Brand said the modern CFO had become ‘a true brand guardian, the senior business partner extending the reach of finance across the whole organisation’. Her comments set the tone for a day of debate over the critical issues facing finance leaders in Asia. The discussions encompassed pioneering approaches to outsourcing, talent management, risk management, corporate governance and the processes that need to be retooled or overhauled altogether if the finance function is to stay in touch with the changing needs of businesses. In his presentation on driving finance transformation through business analytics, Scott Goodwin, CFO of IBM’s software group, growth markets unit, said that while integration of financial and non-financial information in the organisation used to be minimal, that was beginning to change with analytics-driven tools, processes and organisations. ‘The use of analytics is an important and emerging new

From left to right: ACCA’s head of corporate sector Jamie Lyon FCCA discusses risk management at the ACCA CFO Summit Asia with Patrick Chan FCCA, executive director and CFO of Sun Hung Kai Properties, James Lee FCCA, director of finance at Regent Hotel Singapore, Paul Mok FCCA, group financial controller at Orient Overseas (International), and Marco Swoboda, Asia Pacific vice president and CFO of Henkel.

trend allowing an enterprise to transform, gain insights and optimise based on the analysis of an increasingly large amount of data.’ In his presentation on business and finance analytics, Robert Bergström, executive principal at Accenture, said that one of the key drivers of a business strategy was ‘to develop rich analytic capabilities and be able to prioritise capabilities based on expected value generation’. However, he warned that implementing these was a complex process that must take into account not only technology but also mindsets, organisational complexity, business culture and volatility. Size of organisation was another factor, said Norman Sze FCCA, managing partner, consulting, at Deloitte China, who was on the panel discussing transformation for value. A modest-sized organisation can probably rely on Excel spreadsheets for decision support, he reckoned, but larger companies need analytics programmes for financial, risk and customer data modelling, as well as scenario planning and stress-testing.

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Sze’s fellow panellist, Holger Lindner, former CFO at Daimler South East Asia and now a member of the advisory council of the Singapore CFO Institute, flagged cost-cutting, effectiveness and compliance as critical. ‘As CFOs we have to look at the entire equation of value, which is benefits minus cost,’ he said. In short, he said, cost efficiency at the expense of effectiveness was self-defeating. One answer is business process outsourcing (BPO) and/or insourcing via shared services centres (SSCs). Sze and Lindner agreed that cost saving based on labour arbitrage was no longer a key driver for BPO or SSCs. Lindner said: ‘The key drivers are standardisation, which is one basis for analytics, reducing complexity, increasing efficiency, improving effectiveness – doing things faster, better and with fewer mistakes.’ TALENT IS KING Common to almost every panel discussion and presentation was the importance of talent in transformation. Sze said Asia’s talent pool was still shallow in terms of professional accounting qualifications – and even shallower for the skills and expertise needed to support the CFO. ‘The finance function cannot afford only to look at the best people,’ Lindner warned. ‘We also need to look at the right people.’ In his presentation on finance leadership, Chiew Chun Wee, ACCA head of policy, Asia Pacific, said the CFO had a plethora of duties that required a variety of skills: ‘A CFO cannot afford to be a specialist only; he or she needs to acquire the ability to transform at will.’ Above all, CFOs will have to help deal with the risks spawned by economic uncertainty, not to mention population growth, global warming, currency fluctuations and the risks inherent in managing the business. ‘Among all executives, it is the accountant and finance director who is least a risk-taker,’ said James Lee FCCA, director of finance at Regent Hotel Singapore, because of training, professional standards and ethics, which is the bedrock of accountancy. He was speaking at the panel on risk and reward. Marco Swoboda, Asia Pacific vice president and CFO of consumer goods and adhesives company Henkel, said: ‘The finance function drives risk management through a lot of other tools, starting with the simple accounting concept of provisions.’ Patrick Chan FCCA, executive director and CFO of Sun Hung Kai Properties, added: ‘We have so many policies, procedures, theories, tools and techniques that help us do a good job on risk management but it all boils down to people, more than anything.’ The ethical tone should be set at the top and

More on video To see videos of the presentations at the ACCA CFO Summit Asia, visit www.accaglobal. com/virtual

Brand: ‘Nearly everyone in this room faces the challenges of keeping the finance function in touch with the changing needs of the business world and anticipating how those needs are going to change in the future.’

the board. Paul Mok FCCA, group financial controller at Orient Overseas (International), said: ‘The CFO has a role to play as catalyst. He is also responsible for cultivating the right kind of financial control-minded atmosphere in the organisation.’ ‘Risk management lies at the core of whatever we do,’ noted Clarence Yang, head of corporate governance Asia ex-Japan at BlackRock, during a panel debate on corporate governance. Fifteen years on from the Asian Financial Crisis, corporate governance is still evolving in the region. Panel speakers Kevin Lau FCCA, director at Hin Yan Consultants, and Arnout van Rijn, executive vice president and chief investment officer at Robeco Asia Investment Centre, agreed it should not be a box ticking exercise. Lau pointed out that a company ‘could be punished by investors for not doing enough in maintaining good corporate governance’. In his presentation on the next 10 to 15 years, Ng Boon Yew FCCA, executive chairman of Raffles Campus and chairman of the

ACCA Accountancy Futures Academy, said ‘concepts such as justice and fairness could be incorporated in the reporting system of the business in the future’ as the public and investors sought more evidence for corporate responsibility. His presentation highlighted the key findings of ACCA’s recent report, 100 Drivers of change for the global accountancy profession. Closing the summit, ACCA Hong Kong chairman William Mak FCCA noted that the modern CFO grows both top and bottom line in a highly competitive climate. ‘While these developments present enormous challenges, they also present excellent opportunities for finance leaders and the functions they lead,’ he said. ‘They very much place the finance function centre stage for the business.’


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accountancy futures: finance transformation CFOs

Poland’s market economy architect blasts bailouts Leszek Balcerowicz, who as finance minister was the architect of the Polish transition to a market economy, told delegates at the CFO European Summit in Warsaw in October 2012 that he was hostile to bailouts of crisis-hit countries as they did not solve core problems and at best merely bought time. Financial consolidation and reforms, including the elimination of policies that cause crisis, are required, he said. Fiscal rectitude causing short-term pain, as imposed in the Baltic states, rather than the reluctant steps towards austerity seen in the European Union’s southern countries, can bring sound economic recovery. Balcerowicz also opposes the quantitative easing (QE) and monetisation of public debt practised in the US and the UK. He sees these strategies as delaying reform and the restructuring of the economy, as well as contributing to asset price bubbles. He located the origins of the financial and fiscal crises in mistaken government policies, ranging from politicised credit allocation, expansionary fiscal policy and monetary policy that ignored asset price developments to subsidies for mortgages, and acceptance of the further growth of already large financial institutions, which benefit in good times from low-risk premiums and in bad times from pressure on policymakers to bail them out. When tax revenues inflated by the boom collapsed in the bust, fiscal crisis followed. Raising finance Panellists at the event agreed that capital funding in whatever form – bank loans, share or bond issues or private equity – during 2013 will remain difficult for all but large companies, whose ability to raise funds through bond issues puts downward pressure on the interest rates at which banks lend to them. Western banks have withdrawn €60bn from Central and Eastern Europe since 2008, according to Miklos Kormos, managing director of Deutsche Bank London, although Poland remains attractive for bankers. James Cundy, co-head of the corporate capital origination team at HSBC, said his bank prefers companies that operate internationally and is cautious about those dependent on consumer or government spending. Small and medium companies face greater difficulties in persuading banks to lend or in finding investors for their equity or bonds. Trust is key: funding depends on lenders and investors believing in companies’ strategies. Fewer companies now meet private equity

Above: bailouts at best only buy time, said former Polish finance minister Leszek Balcerowicz. Below: James Cundy, HSBC (left) and Miklos Kormos, Deutsche Bank were among the speakers at the CFO European Summit.

funds’ investment criteria and it now takes them longer and costs more to arrange cofinancing with established partners. The Warsaw Stock Exchange hosted the largest number, though not the greatest value, of initial public offers in Europe both in 2011 (38) and the first three quarters of 2012 (12). It is also slowly developing a market in corporate bonds: in 2009 the face value of bonds traded on the exchange was less than 1% of GDP, whereas now it is 6%. The exchange is also encouraging plans to set up a Polish rating agency, which may begin operating in 2013.

Capital funding in whatever

form – bank loans, share or bond issues or private equity – will remain difficult for all but large companies during 2013

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accountancy futures: finance transformation CFOs

The talent challenge Finance functions are failing to encompass shared services when it comes to talent management, leaving them ill-equipped, says ACCA’s Jamie Lyon Is talent management the Achilles’ heel of finance in a shared services environment? Despite the many advantages, a move to shared services can also have extremely disruptive effects on a business, fracturing process flows and reporting lines. Arguably the greatest disruption, and the most overlooked, comes on the people side. The new environment is very different from the old, vertically integrated model, with its unified culture and straightforward career paths. Face-to-face relationships have become virtual, as functions and finance professionals are dispersed across geographies, timezones and business units. Career paths have become more complex and opaque, with multiple potential routes and difficulty in gaining the experience, mentoring and organisational exposure necessary to progress. A recent ACCA study of 1,200 organisations, with one third representing more than $3bn in annual revenues, reveals just how far businesses are falling behind on this vital front. While there is a clear consensus that talent management is important, over two-thirds believe their own programmes are either nonexistent or not very effective. Not only that, but a similar number say that talent management fails to operate consistently across the entire

Jamie Lyon is ACCA’s head of corporate sector and leads its global research and insights programme on finance transformation.

finance function – from shared services to the retained function. The consequences of this can be a severe lack of cohesion and unity of purpose. The finance function can end up split into silos, each with its own culture and little visibility of each other’s talent pools or mobility between them. This comes at a huge cost: it impacts on the organisation’s ability to engage and retain staff, and this will over the long term reduce its ability to develop and grow its people. To counteract this, organisations need ‘globallocal’ approaches to talent management that allow professionals to pursue careers that span the whole finance function. However, there is also a bigger and more strategic prize on offer. Without this breadth of experience and knowledge, how can the finance function hope to develop the truly global leaders of the future? As the role evolves, the CFOs of the future are as likely to start their finance careers in a shared services environment as in the retained finance function. It is therefore vital that there are support frameworks in place across finance that will enable them to progress their careers in a way that will one day enable them to lead the whole function. But there is hope. Our research shows that organisations do now recognise that getting talent management right is a business imperative. In the shorter term it can improve staff engagement and retention, and in the long term it can help to create a finance function that has the strong internal culture and experienced leaders required to meet the challenges of the future. Talent management in a shared services world: 2012 survey is available at

Sally Fisher partner, Deloitte’s Finance Transformation practice ‘ACCA’s survey findings confirm our own experience that implementing successful talent management consistently across a global finance function is hard to achieve, but is in demand from finance teams. There is significant business benefit from getting it right: reduced attrition, greater business knowledge and insight, finance driving and protecting value more proactively, more effective partnering between shared services and retained finance. The most valued capability development solutions are those that rely on local engagement, such as mentoring, coaching and stretch assignments, which often receive least investment.’

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accountancy futures: finance transformation interview

Embracing diversity For Ernst & Young’s Dubai-based diversity champion Ginnie Carlier, innovation in the business requires a rich variety among its employees


innie Carlier may be the only female partner at Ernst & Young’s Dubai office but she says that she has never felt excluded doing business as a woman in the Middle East. Indeed, she laughingly recounts that the only time she has ever felt discriminated against was during a spell with EY in the US when she was barred from a business lunch in a golf club for being a woman. Carlier moved to the United Arab Emirates in 2008 as an EY assurance partner in Abu Dhabi. Her expertise was the technology industry, but her new client list included almost every sector except technology – from entrepreneurs to public utility companies to sovereign wealth funds. And she had to learn not only about new industries, but also about doing business in the Middle East and how to be a businesswoman in the region. ‘You can’t take your mindset and the way you did things in a developed market, bring it here and expect it to work,’ she says. ‘You really need to put on the hat of an entrepreneur. You need to maintain flexibility, agility in your thinking.’ She admits to experiencing culture shock at the diversity of the UAE, which has an estimated expatriate population of 88.7%, and says ‘the ability to work in a diverse environment and bring that diversity together’ is crucial. While the US may be considered the original melting pot, the differences between EY’s employees in the US are not so stark as they are in the Middle East, according to Carlier. Everyone on her audit team in Cleveland and San José came from the same socio-economic background, for example. diversity is the mother of innovation But she insists that the benefits of a diversified workforce far outweigh the challenges. Diversity is important, she says, because ‘innovation is key to moving forward. We’re in a new norm from an economic standpoint. Without diverse and different thinking, opportunities will be lost if decisions are being made by people who look and think like you.’ Indeed, she says it is crucial that people are educated in what she calls ‘cross-cultural competence’ – that is, understanding, appreciating and respecting differences in the workplace. When asked about the challenges of doing

Ginnie Carlier is EY’s assurance service line people leader for the Europe, Middle East, India and Africa region. She is based in Dubai.

business as a woman in the Middle East, Carlier hesitantly answers that she feels a greater sense of responsibility about being a good role model to other women in the organisation as there are fewer women employed at her level than in some other regions of the world. She has been establishing universal maternity and paternity leave for EY employees in the MENA region but says that while EY does a good job of recruiting women, the firm finds it harder to retain them as their careers advance. This is due to the pressures in their personal lives and, as a result, employee turnover rates for women are higher than for their male colleagues. But for Carlier, the business case for diversity is clear: ‘If an organisation wants to be global, wants to be innovative, wants to grow, wants to succeed, then it has to embrace diversity.’ Interview by Naafia Mattoo, journalist

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accountancy futures: finance transformation outsourcing

Sourcing the future As Sri Lanka strives to become a top BPO centre for accountancy, we talk to Sujiva Dewaraja, chairman of Slasscom, the country’s outsourcing body Q: In the last four years, what significant trends have you witnessed? A: There is a growing interest in business process outsourcing (BPO). Traditionally outsourcing was an IT-driven sector but it now includes accounting, legal, engineering and architectural outsourcing too. We want to expand as there is tremendous potential in terms of knowledge and skills base, but we have a long way to go to achieve our aim of making Sri Lanka first choice in the accountancy sector. Q: Why accountancy services provision? A: We want to leverage Sri Lanka’s large diverse pool of professional accountants. In Sri Lanka professional accountancy is a popular career choice so accountancy services outsourcing could offer young people the innovative career paths they are looking for; instead of simply serving local needs they can be providing reliable services to businesses around the globe. IT and software outsourcing has been happening here for years so we have the experience; accountancy services outsourcing has more potential for future growth.

Q: What are the key challenges? A: Globally, Sri Lanka is still not well recognised as a professional services provider, and this

After qualifying as a professional accountant in London, Sujiva Dewaraja worked in corporate strategy and general management in the private sector and in management information systems in the public sector. He is chairman of Slasscom and executive vice president and head of IT sector at John Keells Holdings. Slasscom (Sri Lankan Association for Software and Services Companies) represents knowledge service exporters and aims to make Sri Lanka a global outsourcing location.

Dr Kemal de Soysa country head, Amba Research Lanka, sri lanka ‘South Asia’s inclination toward quantitative skills and historical exposure to the English language has made it an ideal region for finance and accountancy outsourcing. As a significant proportion of the relevant talent pool holds international qualifications, such as ACCA, foreign companies are comfortable outsourcing their finance and analytics work to Sri Lanka. This provides lucrative employment opportunities for accountancy professionals as the transferable skills gained make them more employable both locally and internationally. Due to the limited import requirements and high skill content involved, this work results in almost 100% value added to the local economy.’

Jehan Perinpanayagam FCCA CEO, Infomate, sri lanka ‘South Asia has experienced a boom in shared services and outsourcing owing to skills and arbitrage. Sri Lanka has a long history in accounting and Sri Lankan corporates have adopted global best practices. We have the experience, the technical know-how, access to accounting talent, the IT infrastructure and a stable environment to be a serious player in the finance and accounting outsourcing industry. My own company has been in this space for over seven years and now handles accounting for the UK and Scandinavia in addition to shared services for the John Keells Group. If we get our strategy right, the industry has great potential to revolutionise Sri Lanka’s economy and create employment.’

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accountancy futures: finance transformation outsourcing

creates a marketing and branding challenge. Until 2009 we had challenging conditions politically with negative perceptions around stability and security. Today Sri Lanka is a peaceful and vibrant country; we need to let the world know that. We are seeing some success but it is a long journey.

Q: What skills are needed? A: To expand our share significantly we need more professional accountants with skills and attitudes pertinent to the BPO and shared services sector. Night working – which is required by the sector – is not common among white-collar workers in Sri Lanka. They must also adapt to working for a very diverse client base. Accounting systems and reporting practices may vary, too. Accountants need to be flexible in their approach to work, communication and application of skills and knowledge.

Q: Has Sri Lanka’s accountancy profession been supportive of Slasscom’s ambition? A: Very much! The major professional bodies are actively engaging with it to build capacity. The profession is very much aware of the untapped potential of this sector and what it means in terms of their growth and creating opportunities for students and members. Q: What are the opportunities for finance professionals in this sector in Sri Lanka? A: They are enormous. Sri Lanka has only a handful of multinational companies, so the exposure of most professional accountants

is limited to the local context. Outsourcing companies enable young Sri Lankan accountants to work according to global standards and practices. Interacting, forming relationships and learning from experience and practices in other parts of the world are transforming the perceptions of finance professionals in Sri Lanka; they have emerged from the back office to the front line.

Q: Have accountants embraced the opportunity? A: Yes, but they can improve their marketing skills. You have to sell your skills because it is through interaction that clients develop more confidence in a service provider.

Q: What are the career paths available to an accountant in this sector? A: They could have a career path within the industry itself, starting as a junior associate or analyst and going on to lead a team before moving to a business leadership level. It is not uncommon to move on to other sectors but the experience gained in the outsourcing sector can be very valuable. All this can broaden perspectives and create future business leaders out of accountants.

Bridge to prosperity: accountancy services outsourcing is seen in Sri Lanka as a sector with more potential for growth than IT or software. A miniature bridge across a river displayed at the Construct Exhibition 2011 at Bandaranaike Memorial International Conference Hall.

Q: What is Slasscom’s 10-year vision? A: To make Sri Lanka first choice for accountancy services provision, so when someone thinks of outsourcing, the only choice is Sri Lanka. Interview by Afra Sajjad, ACCA’s head of regional education, MENASA

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Green challenges for China China’s growth has come at an environmental cost, but it is taking steps to ‘green’ its economy, says ACCA global forum member Anne Copeland


fter three long decades of industrialisation and urbanisation, China has become the world’s second-largest economy and the largest carbon contributor. Development continues apace. By 2015, for example, China aims to have over 230 airports handling 450 million passenger journeys a year. Growth in both China’s population (expected to peak at 1.5 billion around 2030) and its economy has created huge pressure on energy and water supplies, and on the environment. According to a 2012 World Bank report, China’s level of environmental degradation and resource depletion is estimated to be around 9% of gross national income. The government’s position is that China’s per capita emissions remain well below those of countries such as the US and Canada, and criticism from Western, high-consuming nations is unwelcome. Nevertheless, as

highlighted in a recent report commissioned by ACCA, The green economy: pushes and pulls on corporate China, China is making real efforts to curb emissions through a range of policy changes. Momentum begun in the 11th Five-Year Plan (for 2006–10) has continued. The current, 12th Five-Year Plan devotes huge financial resources to decarbonisation, energy-efficiency and water-saving policies aimed at ‘greening’ the currently fossil fuelbased ‘brown’ economy. With brown job opportunities expected to gradually peak and then start to fall, the government also wants to use the brown-to-green transition to create green jobs.

Above: Shuozhou City in China relies on three thermal power plants which emit three million tons of coal ash each year and becomes a huge pollution source. Right: Chinese workers weld a wind turbine tower in Hami City, northwest China.

CARBON CHALLENGE Investment in new energy-related sectors is set to total around US$770bn in the period from 2011 to 2020, including an estimated US$231bn for wind power. Nevertheless, China


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accountancy futures: environmental accountability china

Anne Copeland, a member of ACCA’s Global Sustainability Forum and an independent consultant, has over 20 years’ experience in environmental and social due diligence, sustainability strategy development, implementation, training and reporting, and stakeholder engagement. Copeland has worked for consultancy firms in Hong Kong and Canada, the International Finance Corporation, been a member of the Global Reporting Initiative (GRI) Stakeholder Council, and business and government organisations in Hong Kong. She has lectured at the University of Hong Kong.

will continue developing all forms of power – coal, hydro, nuclear, biomass, solar and wind – in order to meet its huge energy needs and support further economic development. Decarbonising China’s energy supplies will be a challenge. Coal is responsible for 80% of the country’s carbon emissions and, given China’s substantial coal reserves, will continue to be the dominant fuel source for the foreseeable future. China is also planning to exploit non-conventional fossil fuels, such as shale gas and coal-bed methane. Meanwhile, it is importing increasing quantities of fossil fuels and other natural resources in order to satisfy local demand. complementary policies Those policies that complement China’s decarbonising efforts include replacing small, inefficient coal plants with more efficient ones, extending the energy grid, mandating energyefficiency and carbon-reduction targets for industries and provinces, piloting emissiontrading schemes, and reforming energy markets and prices. Coal production could possibly even be capped in the next few years. At the same time, policies are in place to try to encourage ‘green’ transportation; for example,

through the development of hybrid and electric vehicles and the building of rail networks. Alongside energy, demand for water is another key issue in China. The country only has 7% of global water resources, and its per capita water resource is a third of the world average. The lack of clean water supplies for industrial, agricultural and municipal use is a key constraint on development. Improving water management has become a top priority in the current Five-Year Plan, with specific improvement targets set and funds allocated. The Chinese government is pushing Chinese companies, particularly those state-owned enterprises under its control, to improve sustainability practices. The central authorities set the tone and direction of policy, which forms the foundation of regulation and enforcement. Over the past decade, government measures have resulted in: accounting rules on pollution-related costs; opportunities to ‘name and shame’ companies violating environment laws; legal changes to emphasise social and moral responsibility and to hold polluters liable; pressure on companies seeking initial public offerings to improve environmental performance;

* * * *

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procurement policies; * green green lending, credit, securities * insurance initiatives; and


with Chinese stock exchanges * coordination to push state-owned enterprises to publish corporate social responsibility reports. Alongside government-led sustainability practices, multinational buyers of Chinesemanufactured goods are increasingly asking about environmental practices and seeking to ‘green’ their supply chains. Typical efforts focus on reducing energy, water and natural resources consumption, cutting greenhouse gas emissions, increasing the use of cleaner energy sources, decreasing pollution and waste, and treating waste properly. International brands are also aware of the reputational risk associated with low pay and poor working conditions.

Multiple pressures are therefore stimulating the transition of the Chinese economy towards a greener, more sustainable model. While the foundation for change is profound, implementing the changes required to transform China’s economy remains a significant challenge. The accountancy profession has a role to play in helping Chinese business to adapt to the changing operational and legislative landscape. The Big Four firms are already providing sustainability and climate change services to their clients in China, providing assurance over non-financial reports, and factoring environmental and social risks into corporate valuations.

Rooftop farming has become fashionable in China in an effort to increase agricultural areas as farmlands continue to decrease due to booming property development and natural disasters in the country.

The green economy: pushes and pulls on corporate China by Christine Loh is available at

Hannah Routh Director, Sustainability and Climate Change, Pwc, Hong Kong ‘The accountancy profession in China is evolving, developing skills and services to support the corporate sector in meeting the demands and opportunities of the green economy. The Big Four firms’ entry into China was driven by traditional audit and assurance opportunities. Now, although Chinese companies remain typically reactive to sustainability issues and compliance focused, firms see growing interest in sustainability data assurance. Accountants can help clients move up the sustainability maturity curve, towards a situation where sustainability considerations become true value drivers across the business. ‘Substantial client interest is being expressed in due diligence services to manage and mitigate the impact of environmental, social and governance issues in corporate transactions. Historical liabilities related to environmental factors have an increasing impact on company valuations. Tax advisers are also looking ahead, with the anticipated introduction of a comprehensive environmental tax regime likely to trigger client demand for advice on reducing tax liabilities.’

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accountancy futures: environmental accountability global compact

Signed up to progress ACCA has signed up to the UN Global Compact. Roger Adams and Gordon Hewitt explain the benefits for both ACCA and other organisations


n 2012 ACCA became a member of the United Nations Global Compact (UNGC), which aims to promote the development, implementation
and disclosure of responsible and sustainable corporate policies and practices. It is defined as ‘a strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labour, environment and anti-corruption’. More than 8,700 corporate participants and other stakeholders from over 130 countries have already signed up to the Global Compact, making it the largest voluntary corporate responsibility initiative in the world. Participants include leading international companies, service providers, partnerships and professional bodies, including many of ACCA’s key partners. By signing up, ACCA is demonstrating an active commitment to upholding its core values, as well as underlining its longstanding support for sustainable business. The move also brings ACCA into line with many leading companies and organisations, and increases the opportunities for more partnerships with private and public sector organisations.

Roger Adams FCCA is director – special assignments at ACCA. He is a recipient of the British Accounting Association’s Lifetime Achievement Award.

The 10 principles 1 To support and respect internationally proclaimed human rights. 2 Not to be complicit in human rights abuses. 3 To uphold freedom of association and effectively recognise the right to collective bargaining. 4 To eliminate all forms of forced and compulsory labour. 5 To effectively abolish child labour.
 6 To eliminate discrimination in employment and occupation. 7 To support a precautionary approach to environmental challenges. 8 To undertake initiatives to promote greater environmental responsibility. 9 To encourage the development and diffusion of environmentally friendly technologies. 10 To work against corruption in all its forms, including extortion and bribery.

Gordon Hewitt – sustainability adviser at ACCA. He supports ACCA’s sustainability agenda on reporting and disclosure with specific reference to environmental, social and governance issues.

Membership fits well with ACCA’s historical support for initiatives such as the Global Reporting Initiative, the UNCTAD/UNGC Sustainable Stock Exchanges programmes and the agenda of the International Integrated Reporting Council. As part of its commitment, ACCA will be expected to make the Global Compact and its principles an integral part of its business strategy, day-to-day operations and organisational culture, and incorporate them into the decision-making processes of Council and the executive team. It will need to contribute to broad development objectives (including the Millennium Development Goals) through partnerships, and advance both the Global Compact and the case for responsible business practices through advocacy and active outreach to peers, partners and the public. Why should any organisation subscribe to the objectives of the UNGC? Motivations will vary according to whether the organisation is in the private or the public sector. But they may include building closer relationships with governments and non-governmental organisations, showing leadership in corporate responsibility, showing strong commitment to corporate governance, improving feed-through to users of sustainability/integrated reporting exercises, and brand association with the UN. The benefits of joining the Global Compact include improving organisational integration of environmental, social and governance policies, sharing best practice, linking business units and subsidiaries with UNGC’s Local Networks around the world, accessing the UN’s sustainability and development knowhow, and making use of UNGC management tools and resources. With Global Compact membership already approaching 9,000, the initiative’s executive director Georg Kell has ambitions to reach 20,000 by 2020. That ambition will clearly need to be allied to determination and persuasion given the conclusion of the UNGC Corporate Sustainability Forum, held in June 2012, that ‘despite progress, corporate sustainability has not penetrated the majority
of companies
around the world, nor have we seen
the depth of 
action needed
to address the
most pressing

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Capturing natural capital Awareness of the importance of natural capital is growing, but corporate reporting must evolve to meet information needs, says ACCA’s Rachel Jackson


atural capital, derived from biological diversity and ecosystems as well as natural resources such as fossil fuels – has huge importance for business and society. Biodiversity and ecosystems give rise to ‘ecosystem services’; these include access to food and water, protection from threats such as floods and disease, recreational opportunities, and services like photosynthesis that maintain conditions for life on Earth. These benefits have enormous value for society and business. Conserving forests, for example, avoids greenhouse gas emissions worth US$3.7 trillion. The loss of pollination services from bees in Britain could cost the UK economy an estimated £1.8bn. However, as highlighted in a new report, Is natural capital a material issue? by ACCA, KPMG

and Fauna & Flora International, the benefits are rarely considered by companies. This is because of the traditional focus on financial measurement for determining materiality. As a result, biodiversity and ecosystem services (BES) issues are rarely included in annual reports and accounts. CURRENT PRACTICE Some existing financial reporting standards, such as those relating to agricultural or intangible assets and impairment, can be applied to natural capital. However, in practice, many significant risks and opportunities are unquantified, cannot be easily valued and are excluded. The lack of a standardised business case for considering BES issues is another barrier. So, too, is a basic lack of awareness among


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Vincent Neate HEAD OF CLIMATE CHANGE AND SUSTAINABILITY, KPMG UK ‘Businesses will increasingly be held to account for their impact on the natural environment and need to think now about how they will respond. Signs of this trend are already evident. At the June 2012 Rio+20 United Nations Conference on Sustainable Development, the CEOs of 39 financial institutions committed to working towards integrating natural capital considerations into their products and services. As a result, businesses could find that their impact on nature directly affects their credit worthiness, balance sheets and company values within the next five to 10 years, as moves to place an economic value on natural capital accelerate. Urgent work therefore needs to be done to find practical ways to assess and report on the natural capital impacts of business and to use those assessments in formulating future strategy. CFOs and accountancy professionals must be at the centre of this work.’

Mark Rose CEO, FAUNA & FLORA INTERNATIONAL ‘Nature underpins business in countless ways. Yet for many years humanity has failed to place a value on the resources obtained from the environment – fresh water, healthy soils, stable climates, pollination. Our days of securing such resources at no cost are numbered. As biodiversity and ecosystems are degraded, the ecosystem services derived from them decline. Society is increasingly living off the capital of the natural world rather than the interest; basic economic theory suggests this is unsustainable. As the availability of natural capital becomes increasingly material to companies, it will increasingly feature in their risk analyses and disclosures. Measurement and disclosure are key to enabling investors, government and civil society to hold companies to account.’

accountancy and business communities. Nevertheless, there are signs of change. A handful of companies in sectors with high environmental impact are now reporting in substantial detail on BES. In addition, some businesses are exploring new valuation techniques; mining giant Rio Tinto, for example, is testing the use of economic valuation of environmental impacts in informing its business decisions. CALLS TO ACTION Given the importance of BES to business and society, CFOs and accountancy professionals have an important role to play in developing new valuation, accounting and reporting approaches. CFOs, for example, need to engage with experts to understand the extent to which their organisations depend on natural capital – including the degree to which company revenues, costs and going concern status rely on natural capital, directly and indirectly. CFOs should also: ensure that risk and materiality assessments consider natural capital; work with finance teams to develop the skills and capacity for accurate assessment of corporate impact or dependence on natural capital; disclose material natural capital impacts and dependencies, guiding the development of robust disclosure and assurance systems to ensure data quality; educate other board members on the

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importance of BES within key management and strategic decisions; consider whether natural capital can be incorporated into financial accounts, and engage with standard setters on how current accounting standards can be improved; engage with other organisations, such as the International Integrated Reporting Council (IIRC), which want to develop tools to account for natural capital; and consider how tools used by other companies could be applied to their own operations. Accountancy professionals are also encouraged to engage with experts, to follow and track new guidance, and to call on accountancy standardsetters to provide guidance specifically on how to address natural capital within annual reports and accounts and sustainability reports. Accountants could contribute to the development of natural capital accounting methodologies, piloting new approaches with clients and sharing their experiences with regulators. Such work needs to take place now. Biodiversity and ecosystem services are already in decline globally. In the 50-year period to 2050, the costs of cumulative losses of ecosystem services are estimated to be equivalent to 7% of gross domestic product. As the world’s population grows, so the risk of BES losses will continue to increase.

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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 is the staff expert on ACCA’s Global Forum for Sustainability, and represents ACCA on committees and working groups.


Is natural capital a material issue? can be found at


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accountancy futures: environmental accountability australia

Australia: leader or laggard? Ernst & Young’s Matthew Bell explains Australia’s Carbon Pricing Mechanism and discusses where the country stands on the international climate debate


ustralia has an interesting history when it comes to climate change policy. Until a change in government in 2007, Australia and the US were the only two developed nations not to have ratified the Kyoto Protocol. While this didn’t commit Australia to significant emissions reductions targets, it did begin a nearly five-year political struggle to establish a carbon market. The last few years have seen several failed attempts to set up an emissions trading system, and this has led to a change in leadership for both the government and its opposition. Despite this, a carbon price has now been established under the Commonwealth Government’s Clean Energy legislative package. It’s a comprehensive raft of legislation that sets out an emissions trading system and complementary taxation changes that establish an equivalent carbon price adjustment on certain synthetic gases and fuels. So how does it work? The so-called Carbon Pricing Mechanism (CPM) sets an obligation

on operations that directly emit greater than 25 kilo tonnes of carbon dioxide equivalent (CO2e) emissions per annum. It began on 1 July 2012 and liable parties will need to buy a permit to emit (a carbon unit) each tonne of CO2e. For the first three years, these will be at a ‘fixed’ rate of AUD$23 (rising at a real rate of 2.5% per annum). Given the fixed price, popular press has labelled the scheme the ‘carbon tax’, but by 2015 it actually transitions to a flexible price, more akin to the sort of market-based emissions trading systems we’ve seen in Europe. Indeed, recent announcements set out that the CPM will allow the import of European allowances (EUAs) on a like-for-like basis, with bilateral trading established by at least 2018. This announcement was coupled with the government’s decision to remove a price floor associated with this flexible price period (originally proposed to be AUD$15). Alongside the ‘polluter pays’ principle is a scheme to generate carbon units from the agriculture, farming and land-use sectors.

Matthew Bell is a member of ACCA’s Global Sustainability Forum. He is a partner at Ernst & Young and the leader of its climate change and sustainability practice in Sydney, specialising in carbon market advisory and greenhouse gas assurance. A published doctorallevel scientist, he was previously the head of the project office for climate and energy in the government department responsible for the UK’s involvement in the European Emissions Trading System.

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The Carbon Farming Initiative (CFI) has begun in earnest, and the first projects are already being established that will allow the sector (which was excluded from any direct obligation under the CPM) to generate carbon units from carbon abatement activities. Initial trades have set a modest discount against the fixed price, at AUD$22.50, though liquidity is expected to be low for a few years. The CPM is a comprehensive approach to carbon pricing, in that it sets a price for all six classes of greenhouse gas under the Kyoto Protocol, unlike Europe where this remains a longer-term aim. While there are provisions for certain activities that are deemed trade exposed to receive some of their carbon units for free (to avoid those companies moving, termed ‘carbon leakage’), these are also far smaller levels of free-allocation than were seen in earlier periods in the EU. land of plenty Australia enjoys the benefit of some of the richest natural resources the world offers. It is a major exporter of coal and other minerals, it annually increases forecasts on gas and oil reserves, and it consequently houses some of the world’s largest resource companies. Yet its rich renewable natural resources of wind, wave, solar and geothermal energy remain largely untapped due to uncompetitive economics. This conflicting reality has meant a reliance on coal-fired power generation and a relatively low uptake of renewable energy, despite targets to increase renewable energy generation. Whether a carbon market in Australia is sufficient to provide the economic incentive to shift this paradigm has yet to be seen, and whether this can be achieved while maintaining a competitive manufacturing and resources industry is equally difficult to predict. Businesses are already beginning to form carbon strategies that include active and passive positions on the carbon market, as well as identifying opportunities to reduce greenhouse gas emissions at least cost. This initial activity is an indication of the potential the carbon market has to drive a fundamental change in Australia’s carbon future. These are the initial steps in helping Australia to achieve its initial target of reducing the nation’s GHG emissions by 5% by 2020 (based on 2000 levels). Some argue that Australia is

setting itself into an uncompetitive position, where business costs will increase without appropriate environmental benefits. It isn’t enough for some though. Lobbyists that highlight Australia as having one of the highest per-capita emissions globally are also seeking more challenging emissions reductions targets. They make claims that Australia is a ‘climate laggard’, and is ‘doing nothing’ on climate change. With our European counterparts having actively traded carbon markets for a number of years, one might be excused for thinking Australia has indeed been a laggard in the debate. In fact, it’s an unhappy phenomenon that a country is labelled as ‘doing nothing’ when, in fact, the most populous state of New South Wales was responsible for implementing the first greenhouse gas emissions trading scheme anywhere globally, some 12 years ago. So what will the future hold? It’s hard to say. Australia is already running towards another general election, and campaigning from the Opposition is focused on repealing the carbon pricing legislation. Needless to say, there will be some winners and some losers as a result of the CPM. Whether the environment itself will be counted in the former or latter camp may depend on your point of view.

Above: Australian prime minister Julia Gillard speaking during a press conference in Canberra. Australia’s carbon tax legislation was passed by the Senate as far back as November 2008. Left: The Great Barrier Reef – Australia benefits from some of the richest natural resources in the world.

New South Wales was responsible for

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Carbon trading or horse trading? With emissions trading schemes catching on worldwide, Elisabeth Jeffries looks at who the winners and losers will be if the EU template is adopted


inance directors might soon be attracted to some rather tasty bonbons being passed around the world’s boardrooms – permits to big carbon emitters involved in new cap-and-trade schemes. If the EU’s European Emissions Trading Scheme (ETS) is anything to go by, heavy industry could be reaping massive windfalls in the coming years. The EU’s ETS has found imitators in other parts of the world and carbon trading is catching on. How industry fares depends partly on whether new trading schemes copy the EU template and, for instance, supply free emissions allowances in the first few years, and partly on whether emerging regional schemes link up. In Australia, an ETS comes into force in 2015, preceded by a carbon tax introduced in July 2012 (see also article on page 38). Nongovernmental organisations (NGOs) and other campaigners embraced this as a significant moment, but only a few weeks after the scheme began, the federal government approved a A$6.9bn plan for a new coalmine in the Galilee Basin, Queensland. The gassiest coal mines have also been given free allocations, allowing them to pass on costs to customers without losing money and becoming uncompetitive. The mining plan is hardly the sign of an effective carbon penalty. Most emissions resulting from

the new mines will not be covered, as James Lorenz, an Australian Greenpeace campaigner, points out: ‘The carbon price was a good first step in Australia, but it only covers domestic emissions. So the mines, which produce coal for export, will be largely unaffected.’ Nevertheless, investors who put a priority on environmental, social and governance (ESG) factors are given to making dark warnings of new carbon policies that turn positive investment ratios on their head. In a 2009 report, the bank Goldman Sachs, which has invested large amounts in environmental markets, indicated direct or indirect penalties (via subsidies for alternatives) for carbon emissions could grow steadily until 2020 and rise sharply thereafter. Using OECD data, it analysed the cost that needs to be applied to carbon emissions to provide an incentive to cut them in line with the path required to stabilise temperature change. It concluded that US$40 per tonne of carbon dioxide is needed by 2030. The present carbon price is far below that at around €7 per tonne, due to a glut of carbon permits in the EU market. What is clear is that as the first two stages of the European ETS come to an end, the corporate lobbyists have had the upper hand. The aim of a capand-trade scheme is gradually to reduce the


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availability of carbon permits by tightening caps, ensuring scarcity, so that the market retains its value, while at the same time forcing a reduction in the overall level of pollution. But political horse trading has weakened this ambition. Sandbag, an NGO digging out injustice in the EU’s ETS, identified 10 carbon ‘fat cats’ (all steel and cement companies) that could have made a combined profit of up to €4.1bn from free carbon permits negotiated between 2008 and 2010. One way they may have made money from the allowances is by selling them on to others more skilled at cutting carbon. Since they will not have paid for them in the first place, that is an attractive and easy bonus. LACKING MOTIVATION Caps were also set too high, so there was little motivation for saving energy in some industries. This has been partly responsible for the oversupply of emissions allowances. Change is on the way though. Francisco Ascui, director of the master’s programme in carbon finance at the University of Edinburgh Business School, points out: ‘Ten different schemes are expected across the world in the next few years and free allowances are one way of buying political acceptance.’ Three years after talks on a global agreement

After several years reporting on commodities for publisher Reed Elsevier, Elisabeth Jeffries became an independent writer on environmental, science and innovation issues. She focuses on clean energy and lowcarbon issues.

collapsed at the UN summit in Copenhagen, another deal is in the offing. Anti-carbon campaigners, including many ESG investors and progressively managed corporates, are starting to put the pieces back together. Meanwhile, Australia is to link its ETS to the EU’s by 2018. California has linked its own, starting up in 2013, to Quebec’s. Guangdong, China’s most heavily emitting province, drafted a pilot ETS in autumn 2012. As activists weave this web of trading schemes and carbon taxes into place, it seems likely that companies will start to experience more carbon pricing over the long term as the policy holes are gradually plugged. Typically, they wriggle out of regional schemes by claiming they are being unfairly penalised. Emma Howard-Boyd, sustainable investment and governance director at Jupiter Asset Management, argues: ‘The regulatory impact depends on how broadly a carbon price is applied. Policies are fragmented at the moment, but the unintended consequences [of investing in a particular area] are something to be concerned about, so as not to be caught out in different parts of the world.’ On the other hand, a global deal could create a much tighter brace. Different companies would be hit to varying degrees with no escape funnel. The Goldman Sachs report says 15% of total cashflow could


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accountancy futures: environmental accountability emissions trading

be transferred from high to low-emission companies at US$60 per tonne carbon prices. An even more significant cashflow transfer – nearly 20% – passes from the most to the least carbon-efficient companies in the most carbon-intensive industries. So who should be the most worried? Tony Campos, senior executive of ESG at index producer FTSE, explains two main ways companies can be disproportionately affected. The first is by being among the heaviest emitters. FTSE’s carbon strategy index, launched across various regions of the world in 2012, gives different companies different weightings according to their carbon risks. ‘We take an approach focused on the potential impact of how we see further regulations. Those companies most materially affected are the ones most aggressively tilted in the index and can be the most heavily over or underweighted,’ says Campos. flying example Second, companies will be affected according to their operational impact rather than their products and services, such as budget airlines and national carriers. Ryanair seems a pretty safe bet for shareholders at the moment. It was hardly touched by the financial turbulence of 2011 and its net profit rose 50% to €560.4m for the year to 31 March 2012, while easyJet’s profits climbed 32% in 2011. By contrast, International Airlines Group (IAG), owner of BA, reported a worse-thanexpected Q1 2012 operating loss of €249m and expects to break even only in 2012. But a glance at these companies’ carbon exposure reveals a different picture. Campos explains: ‘The airline industry is a stark demonstration of how some business models are better equipped to pass on additional carbon costs. Low-cost airlines struggle to pass them on because they are a greater proportion of the airfare.’ Hence, FTSE indicates the cost of carbon as a percentage of profits for easyJet could be around 15 times higher than for IAG, Lufthansa or Air France. The legal action many airlines have taken against the EU certainly shows they feel threatened. But this rebellion does put carbon risk in a different light. How seriously the risk is taken depends on how effectively companies believe they can pass on the costs and on whether market leaders accept carbon as a competitive differentiator. Discretionary consumer industries or those with a ready substitute, such as from steel to plastics where steel is more carbon-intensive, will find it harder to pass on costs that seem inevitable – as climate changes become more severe, policy u-turns are unlikely.

South Africa – risks and opportunities A report, Dirty Feet, by environmental research firm Trucost has identified the equity funds most and least shielded from carbon risk in South Africa, where an array of new anti-carbon tools is under preparation. These include carbon budgets for large emitters, electricity and liquid fuels suppliers, mining, industry and transport, as well as other carbon-pricing excise taxes and incentives, such as petrol/diesel fuel taxes and an electricity levy. A carbon tax is also planned and an ETS under investigation. The government has set a target to reduce carbon emissions by 34% by 2020, aware the climate is changing. For instance, if rainfall decreases as predicted in parts of South Africa, such as the Limpopo Basin, food production could be damaged. Analysing the risks and opportunities arising from carbon intensities of the 40 largest listed South African companies, Trucost found five sectors accounted for 97% of total emissions: basic resources, oil and gas, food and beverages, industrial goods and services, and telecommunications. Just 3% of emissions came from eight other sectors. It also found that companies in extractive products and services sectors, as well as retail, have the highest level of profit risk from carbon costs. The research firm found that if the companies were to pay the mooted carbon tax rate of R75 (US$8.97) per tonne of CO2e for direct operational emissions globally, carbon costs could amount to almost US$974m. This would equate to 0.2% of revenue or 1% of EBITDA on average across all 40 companies. At a higher future carbon price of R200 (US$23.91), direct carbon costs could amount to more than US$2.5bn globally. This could mean 0.5% of revenue on average across all 40 companies, or 2.7% of earnings. Average exposure to direct carbon costs varies by sector. In the top five sectors, carbon costs at US$8.97 per tonne (R75) would mean between 0.06% of EBITDA on average in the telecommunications sector and 14% for the oil and gas sector. The other four sectors with the highest average percentage of earnings at risk from direct carbon costs are basic resources, retail, industrial goods and services, and food and beverage. Companies could also be exposed to further carbon costs passed on by suppliers. Trucost concluded the carbon footprints of the 10 equity funds analysed varied widely from 387 to 1,151 tonnes of carbon per US$m revenue.

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accountancy futures: risk and reward INTERVIEW


Fraud in the board Sacked by Olympus for his stand against financial corruption, ex-CEO Michael Woodford describes what happened when he blew the whistle

ith three decades working for a Japanese camera giant under your belt, you are rewarded for leading the growth of the European arm with promotion to company president – the first non-Japanese national ever to hold the post. The fact your new role starts on April Fool’s Day does not seem an omen. As you’re finding your feet, an article appears in an obscure Japanese magazine, Facta, making allegations that your company had spent getting on for US$1bn on ‘minuscule’ businesses and writing off the costs in the subsequent year. The magazine also asks questions about the ‘bizarre acquisition’ of a British company at a large premium over its market capitalisation, with US$700m in unexplained advisory fees linked to the deal. But your CEO brushes aside your questions, as do other senior colleagues. Suspicious, you decide to start a paper trail, writing a formal letter to the company’s compliance officer. As you turn up the heat, your new board colleagues get tense. A second article appears in Facta, mentioning ‘anti-social forces’, a euphemism for organised crime. The rest of the Japanese media studiously ignores the story, as do shareholders. You start to fear having an ‘accident’. You suspect you are being followed. Any chance of a proper investigation could be buried with you. Lacking hard evidence and aware of your fiduciary duties not to gratuitously damage the company but unable to ignore potential criminal activity, you start to copy your communications to the auditors – not just in Japan, but their colleagues in Asia, Europe and the US, as well as the audit firm’s global chairman. This might all sound like the start of a fictional thriller but it is in fact the true story of Michael Woodford, the former CEO of Olympus, who in 2011 turned whistleblower on the company which eventually admitted it had hidden losses of some US$1.5bn in corrupt transactions and accounting scams. He has now documented his story in a book, Exposure: Inside the Olympus Scandal. Readable and fast-paced, it details his growing suspicions that something was badly awry at Olympus, his battle to investigate, and the company’s attempt to appease him by briefly appointing him as CEO in September 2011 before unceremoniously dismissing him a fortnight later as both CEO and president. The book then covers his ultimately successful fight to expose what happened despite legal action from Olympus and the enormous travel and legal costs he himself had to shoulder. Talking to Accountancy Futures at his London flat, Woodford has both good and bad to say

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about the role of the various accountants and financial professionals involved in the events. As he worked to build up a picture of the accounting manipulation and transactions that had taken place, he says he worked closely with three accountants in the UK. ‘They were very helpful. They helped me frame and structure the communications I started to write when I felt I needed to formalise and evidence what had gone on. They were very important in ensuring that we framed the questions in a way where they were very specific and left no wriggle room.’ Woodford has not named the three, other than to say they were Olympus employees. ‘They are very ethical and straightforward people and very committed to the company,’ he says. ‘gratuitously hostile’ But those with board responsibility come in for harsh criticism. In the book, Woodford recalls his sacking in a tense encounter with Hironobu Kawamata, the director and executive officer who was in effect CFO. Kawamata demanded Woodford hand over his phones and laptops, and ordered him to leave his apartment. ‘What shocked me is that he was so gratuitously hostile in the minutes immediately following my dismissal,’ says Woodford. Tsuyoshi Kikukawa, the man Woodford had succeeded as president, remained chairman and assumed the new title of CEO. As well as serving as president for 10 years, Kikukawa had been head of the finance department. Kikukawa subsequently admitted filing false financial reports and, along with two other executives, at the time of going to press faces a prison term of up to 10 years. Along with the rest of the Olympus board, Kawamata resigned in February 2012; he was not implicated in the criminal proceedings. In Japan, says Woodford, it is not uncommon to find people in senior financial positions who haven’t had conventional accountancy training because managers are rotated around roles. As his worries grew, Woodford copied his letters to the Olympus board to the Ernst & Young partners globally, which at the time enabled him to share his then unproved concerns with an external party without breaking his fiduciary duty to the company by going public. This transparency also provided some comfort at a time when he felt his safety was threatened. But he adds: ‘I still find it hard to fathom how the auditors missed the fraudulent nature of these bizarre and sizeable transactions.’ EY took on the audit of Olympus in 2009, after the departure of KPMG. Michael Andrew, KPMG’s global chairman, spoke out

in November 2011 on the Olympus scandal, saying: ‘We were displaced as a result of doing our job,’ and ‘It’s pretty evident to me there was very, very significant fraud and that a number of parties had been complicit.’ But Woodford comments in his book, having parted company with Olympus, why did KPMG not shout longer and louder? Second, if KPMG had been so concerned, how could it have signed off Olympus’s 2009 accounts without qualification. Woodford also asks why the issue didn’t come up in its handover of the audit to EY. ‘I was surprised by how such extraordinary transactions did not raise alarm.’ EY declined to comment to Accountancy Futures on its work for Olympus. Since his official resignation from Olympus in November 2011, Woodford has given up on his attempt to take over the company with a new group of directors, and won a £10m settlement for unfair dismissal and discrimination. He has also been travelling the world speaking about the lessons to be learned from the scandal, especially in terms of corporate governance. ‘Many of your readers may not agree with me, but I do believe in the mandatory rotation of auditing firms,’ he says, adding that he favours terms of between seven and 10 years. ‘As human beings, if you know somebody else is going to come along and have another look, then you’d be much more cautious.’ He also has concerns about auditors selling consultancy services. ‘I know this creates loud and heated views, but the trouble is the world keeps seeing scandal after scandal.’ He points out that Japanese companies spend only around half as much on audits as do Western companies, and that some very large companies in Japan use very small audit firms – a ‘red flag’, adding ‘for capitalism to work, you need robust, vigorous external audits’. Woodford also stresses the importance of independent mechanisms for whistleblowers to air their concerns while offering them comfort about their personal situation. Although he is celebrated as a whistleblower, Woodford points out that in fact he was not the true whistleblower who gave the story to Facta. He describes in his book his meeting late in the saga with this unnamed individual over cans of Sapporo beer and Ritz crackers in a Tokyo flat. ‘He or she is the hero of the story. I had a foreign passport. I could get out.’

Exposure: Inside the Olympus Scandal is published by Portfolio Penguin and available from all good booksellers.

media power What shines out from Woodford’s book is that the only effective mechanism for exposing Olympus was the media. Corporate governance procedures, auditors, regulators,

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‘I still find it hard to fathom how the auditors missed the fraudulent nature of these bizarre and sizeable transactions’

Michael Woodford MBE grew up in Liverpool and joined Olympus as a salesman, rising through the ranks to run its UK, European and global operations. In April 2011 he was appointed president and CEO of Olympus Corporation, the first Western salaryman to rise through the ranks to the top of a Japanese giant. As a result of the events described in Exposure he was named Businessman of the Year 2011 by The Sunday Times, The Independent and The Sun and won The Financial Times Mittal Arcelor Award for Boldness in Business.

law enforcers and shareholders all failed. Woodford lavishes praise on Facta but has harsh words for the rest of the Japanese media. Nervous about taking on a Nikkei company, they ignored the story until it had been broken in the Western media when Woodford, the day after his dismissal, called a Tokyo-based Financial Times journalist to give him the scoop of his life. The Financial Times, Wall Street Journal, The New York Times and Thomson Reuters, he says, should be credited with putting significant resources into the story and running with it. Woodford feels sentences for white-collar crimes should be stiffer to discourage corporate fraud. ‘Executives should suffer custodial sentences, rather than just the companies paying fines. White-collar crime does have victims.’ It is clear that Woodford has a love and respect for Japan, and he dedicates his book to his ‘musketeers’: Koji Miyata, former head of Olympus’s medical business, and spokesman and translator Waku Miller, who supported him through the events. But he says: ‘There is a very disturbing side to corporate life in Japan. That’s why I’m very sceptical about its prospects.’ His concerns range from its culture of deference and ‘yes

men’, to the peculiarities of its ownership structures such as the cross-shareholding system in which large companies all own shares in each other. ‘I think that there are probably other Olympuses out there in Japan,’ he says. What about the rest of the world? He says: ‘We’re still not in a position where we should feel comfortable or complacent.’ Woodford says he has not been short of job offers, but has preferred to spend time talking and writing about his experiences and the issues that have arisen from them – not just corporate governance, but deeper issues such as the idea of ‘moral capitalism’. And, of course, he’s been writing the book, which he says nearly killed him. ‘It’s not sanitised and I’m very explicit. I refer to lots of names and people. Three sets of lawyers reviewed the book. ‘I think it will appeal to a lot of people in business, and the finance sector in particular – where you wear a suit and go to work, send emails, go to meetings, work on Excel spreadsheets, and suddenly you find yourself in this John Grisham-like novel.’ Chris Quick, editor, Accountancy Futures


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How to prepare for the worst Economist Tim Harford explains why the lessons that have emerged from industrial disasters should be applied to prevent future financial disasters


he financial crisis was so traumatic that it is tempting simply to conclude that all banking risks should be legislated out of existence, with fancy financial instruments outlawed and banks compelled to hold gigantic capital cushions. But that would take for granted – and threaten – the benefits we now enjoy from banking. The end of error in finance would also be the end of new ideas, and indeed of most banking as we know it.

We’d miss it. In the 1960s, my father-in-law tried to get a mortgage. He couldn’t. He was a dentist, so self-employed – too risky. Property was concentrated in the hands of a narrow class of wealthy landlords who were able to buy it cheap, without much competition, and rent it out to the masses. Immigrants or those with the wrong colour of skin were often the last to be able to get hold of a loan to buy their own home. Let’s not forget that, although we ended up taking several steps too far in making


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mortgages easy to come by, those steps started off as being in the right direction. As in any other sector, some innovations in finance will inevitably fail. And as in any other sector, those inevitable failures are a price well worth paying for innovations that succeed – but only if the failures are survivable. Economist John Kay’s ‘narrow banking’ proposal aims to structure banks in such a way that the financial system can continue to take risks and develop valuable new products, but without endangering the system as a whole. That is the key lesson that emerges from industrial safety. We can make a priority of getting more reliable indicators of what is going on, in a format that might enable a regulator both to anticipate systemic problems and to understand crises as they are occurring. We can get better at spotting latent errors more quickly by finding ways to reward – or at least to protect – those who speak up. We can be more systematic about publicising latent errors, too; the nuclear industry now has a system for recording near-misses and disseminating the information to other power plants that might be on the verge of making the same mistake. But above all, we should look at decoupling connections in the financial system to make sure that failures remain isolated. After those fateful few days in 2008 when the US government let Lehman Brothers fail and then propped up AIG, many people drew one of two contradictory conclusions: either AIG should have been treated like Lehman, or Lehman should have been treated like AIG. But the real lesson is that it should have been possible to let both Lehman and AIG collapse without systemic damage. Preventing banks from being ‘too big to fail’ is the right kind of sentiment but the wrong way of phrasing it, as the domino analogy shows: it would be absurd to describe a single domino as being too big to fail. What we need are safety gates in the system that ensure any falling domino cannot topple too many others. Above all, when we look at how future financial crises could be prevented, we need to bear in mind the two ingredients of a system that make inevitable failures more likely to be cataclysmic: complexity and tight coupling. Industrial safety experts regard the decoupling of different processes and the reduction of complexity as valuable ends in themselves. Financial regulators should, too. Deepwater Horizon After nightfall on 20 April 2010, Mike Williams was in his workshop on a floating drilling rig in the Gulf of Mexico. The rig was a colossal engineering achievement, with a deck 400

feet by 250 feet, and the world record for deep-water drilling to its credit: over 35,000 feet – deeper than Mount Everest is high. The rig’s team had just completed the drilling and sealing of the Macondo oil well, and that very day had hosted executives from the rig’s operator, Transocean, and the well’s owner, BP, to celebrate seven years without a notable accident. But the accident that was about to occur would be far more than merely notable: it was to be the worst environmental disaster in American history. The name of the rig was Deepwater Horizon. Williams first realised something was amiss when the rig’s engines began revving wildly. He did not realise that explosive methane gas had bubbled up from the seabed, a mile below the surface of the water. It was being sucked into the rig’s engines, forcing them to excessive speeds. Alarms sounded; lights glowed so brightly that they shattered; Williams pushed back from his desk just as his own computer monitor exploded. He was then hurled across the room by a far larger explosion – pinned under a three-inch steel fire door that had been ripped off its hinges by the force of the blast. He crawled towards the exit and was again flung across the room by a second flying blast door. Bleeding profusely from a head wound, he finally reached the deck of the rig to see that the crew were already evacuating, not realising that he and a few other crew had survived and remained behind on the rig. With a last thought

Battle for life (opposite): oilcoated plants on the shore of Grand Terre Island in Barataria Bay, Louisiana, following the Deepwater Horizon disaster in the Gulf of Mexico in April 2010. Loud and clear (below): an activist protests in front of the federal court in New Orleans, Louisiana, during the trial of BP in 2012.

This article is an extract from Tim Harford’s book Adapt: Why Success Always Starts With Failure, published by Abacus at £8.99. UK readers can buy the book for an offer price of £7.99; call 01832 737525 and quote offer reference LB 159. Offer ends 30 June 2013. Copyright © Tim Harford 2011.

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accountancy futures: risk and reward learning lessons

Tim Harford writes ‘The Undercover Economist’ column for the Financial Times, and his ‘Dear Economist’ column is published in Men’s Health. His writing has also appeared in Esquire, Forbes, New York Magazine, Wired, the Washington Post and the New York Times. His previous books include The Logic of Life and The Undercover Economist. Harford is a visiting fellow at Nuffield College, Oxford, and Cass Business School, London. He also presents the popular BBC Radio 4 show More or Less.

of his wife and young daughter, and a prayer, Williams leapt from the deck of Deepwater Horizon. Like the few survivors of the Piper Alpha disaster, he faced a ten-storey drop. Mike Williams survived; eleven others died. The exact distribution of blame for the Deepwater Horizon explosion and the gigantic oil spill that followed will be left to the courts – along with a bill of many billions of dollars. Almost five million barrels of oil surged into the Gulf of Mexico just 40 miles from the coast of Louisiana. How did it happen? Blame could possibly be attached to the rig’s operator, Transocean; to the contractor responsible for sealing the well with cement, Halliburton; to the regulator responsible for signing off on the drilling plans; and of course to BP, which owned the Macondo well and was in overall charge of the project. Each party has a strong financial incentive to blame the others. Still, amidst the confusion, the details that have emerged at the time of writing suggest a pattern that will now be familiar. The first lesson is that safety systems often fail. When the boat that picked Mike Williams up circled back to tow a life raft away from the burning rig, it found the life raft tied to the rig by a safety line. Transocean, the rig’s operator, banned crew from carrying knives – so the boat, and the life raft, found themselves attached to a blazing oil rig by an interacting pair of safety precautions. (The safety line was eventually severed and the crew rescued.) Or consider a safety device called the mudgas separator: when the well started to leak, blowing mud and gas onto the deck of the rig, the crew directed the flow into the separator, which was quickly overwhelmed, enveloping much of the rig in explosive gas. Without this device, the crew would simply have directed the flow over the side of the rig, and the worst of the accident might have been prevented. The second lesson is that latent errors can be deadly. BP’s own review of the accident concluded that eight separate lines of defence had been breached. But that is no great surprise; in such disasters, multiple lines of defence are almost always breached. The most noticeable failure was that of the blowout preventer, a massive seabed array of valves and hydraulic rams designed to seal the well in the event of disaster. A congressional hearing has heard that the preventer appeared to be in a shocking state: one of the automatic triggers had no battery power, while another had a

faulty component. The preventer was leaking hydraulic fluid, meaning that when it was eventually triggered by a robot submersible, it lacked the power to seal the well. All this sounds shocking, but failsafe systems such as the blowout preventer are often in a poor state of repair because in an ideal world they would never be used: Deepwater Horizon’s blowout preventer, which operated in extreme conditions a mile under the sea, had last been inspected five years before the accident. The third lesson is that had whistleblowers felt able to speak up, the accident might have been prevented. The well had been unstable for weeks, and for months BP engineers had been expressing concern that the specific design of the well might not be up to the job. The Macondo well’s manager reported problems with the blowout preventer three months before the accident. Meanwhile, Transocean’s safety record had been deteriorating for the few years prior to the accident; the company was showing signs of stress after a merger. On paper, BP has a clear policy of protecting people who blow the whistle with safety concerns. But in practice, the tight-knit community of an offshore drilling rig can encourage conformist thinking, regardless of the official policy. Oil companies, like banks, need to find ways to encourage whistleblowers. Fourth, the rig system was too tightly coupled.

The instinctive answer is to eliminate the errors. This is

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One failure tended to compound another. The rig was designed as the key defence against minor and major spills: the rig contained the mud-gas separator to prevent small spills, and also controlled the blowout preventer. But at the very moment when the rig’s capabilities were most needed to plug the leak, the rig itself was being torn apart by a series of explosions. In an awful echo of Piper Alpha, the blowout preventer could not be triggered from the rig’s deck because power lines had been severed in the initial explosion. A safer design would have decoupled the blowout preventer from the rig’s control room. Fifth, as Tony Lomas [PwC’s lead administrator following the Lehman Brothers collapse] could have attested, contingency plans would have helped. BP – along with other oil majors – was humiliated when it was discovered that their contingency plans for a major spill included measures to protect the local walrus population. This was not actually necessary; walruses typically look after themselves when oil is spilled in the Gulf of Mexico by staying exactly where they are, in the Arctic Circle. The implication was clear: BP and others seem to have grabbed a contingency plan off the shelf, one that was originally designed for drilling in Alaska or the North Sea. The final lesson is that of ‘normal accident’

theory: accidents will happen, and we must be prepared for the consequences. The US government signed off on the Macondo drilling project because the risk of trouble was thought to be small. Perhaps it was small – but the chance of accidents is never zero. As the economy we have created becomes ever more complex, both the engineering that underpins it and the finance that connects it all together will tend to become more complex, too. Deepwater Horizon was pushing the limits of deep-sea engineering; Three Mile Island came at a time of constant innovation in nuclear technology; the burgeoning market in credit derivatives also tested the boundaries of what was possible in finance. The usual response to complexity, that of trial and error, is not enough when faced with systems that are not only complex, but also tightly coupled. The costs of error are simply too high. The instinctive answer is to eliminate the errors. This is an impossible dream. The alternative is to try to simplify and to decouple these high-risk systems as much as is feasible, to encourage whistleblowers to identify latent errors waiting to strike, and – sadly – to stand prepared for the worst. These are lessons that some engineers – both petroleum engineers and financial engineers – seem to have to learn again and again.

Dark days (above): smoke rises from surface oil being burned by cleanup crews in the aftermath of the Deepwater Horizon disaster. Taking a stand (opposite): members of activist group Liberate Tate pour an oil-like substance over a naked man at the Tate Britain museum in London on the first anniversary of the explosion.

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Cultivating a healthy culture In recognising the diversity of risk, how can compensation structures promote sustainable performance, ask Hay Group’s Andreas Raharso and Carl Sjostrom


n July 2012, one of the UK’s leading economists, John Kay, published a report for the UK government that concluded that short-termism of the financial markets is hurting the economy. In his introduction to The Kay Review of UK Equity Markets and Long-term Decision Making, he says that, ‘We must create cultures in which business and finance can work together to create high-performing companies and earn returns for savers on a sustainable basis.’ Sustainability, however, has been going out of fashion for some time. Companies do not last as long as they once did. It has been shown

that the average life span of a company in Japan and much of Europe is a mere 12.5 years, according to a study by Ellen de Rooij of the Stratix Group in Amsterdam. These findings are further corroborated by the declining life expectancy of Standard & Poor’s 500 companies in the US, from 75 years in 1937, to a meagre 15 years in 2011. This increased corporate mortality highlights not only tougher conditions for survival and the ever-increasing search for size through mergers and acquisitions, but also that the performance pursued is not always sustainable.


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accountancy futures: risk and reward remuneration

Risk and reward Kay puts much of the blame of the hunt for unsustainable performance on how people are motivated. Over the past few years, the subject of risk-taking has come to play a large part of almost every aspect of executive compensation for similar reasons. Crises, in particular in the financial services sector, have rightly or wrongly been blamed on flaws in how senior executives are remunerated. The argument has been that incentives have not effectively discouraged unhealthy risk-taking, in fact rather the opposite. Regulators and shareholders have responded by insisting that measures be taken to discourage such risk-taking, for example by deferring a proportion of annual bonuses; by reducing payments of unpaid or even paid bonuses if the initial performance outcome turns out to have been overstated; by adjusting performance targets to take account of the risk built into operations; or even by capping the amount a company is allowed to pay its executives. But will stricter rules and regulations protect a company from excessive risk-taking? Consider the concept of ‘risk homeostasis’. It has been found that if a tool that reduces risk is introduced, people are likely to compensate their behaviour by adding more risk. In a 2001 study by Gerald JS Wilde of German taxi drivers that either did or did not have ABS brakes, there was no observed difference in accident rates because those with ABS took greater risks and those without drove more carefully. We can try to prevent certain risks but we can’t necessarily rely on stricter corporate governance to bring us less risk overall, nor better risk-taking. Furthermore, risk is not a given negative – without taking risk there will be no returns. Risk, however, needs to be understood in its different guises. Risk can be classified in many different ways but for compensation purposes we can narrow it down to business risk, reputational risk, behavioural risk and the individual’s risk. Business risk, as defined here, is what most regulations and investor guidance seeks to address, namely the risk of jeopardising the company’s assets and future income streams by directing resources in such a way that there is a greater probability of failure than stakeholders would like. Reputational and behavioural risks are closely related – we do not want to damage our ability to do business either through how we do business or the way that individuals behave.

Carl Sjostrom is Hay Group’s director of executive reward for Europe and the Middle East. He works with Hay Group’s 26 executive reward practices across Europe to build relations with remuneration committees, and further strengthen the company’s executive reward consultancy offering to corporate boards and not-forprofit organisations.

Andreas Raharso is director of the Hay Group Global Research Centre for Strategy Execution. He leads the generation of state-of-the-art, yet actionable solutions for complex issues in the areas of strategy implementation and organisation effectiveness faced by organisations worldwide. He also directs the centre’s global research agenda.

However, one should also remember that the individual’s perspective is crucial to the success of both the business and the compensation structure. If pay is volatile this impacts behaviour and decision-making too and thus links to all the other risks. Recent research on managerial compensation contracting by Eric Engesaeth of Tilburg University suggests that low pay volatility may help to reduce risk-taking behaviour, but it may also be a hindrance if a strategic shift is needed. High pay volatility may be desired to follow volatile performance but for the pay package to remain competitive, high pay volatility would need to be linked to a higher expected pay quantum. Increasing the individual’s risk through tougher performance conditions or deferred gratification thus has an impact on the company’s risk-taking as well as the perceived value of reward. So if we recognise the diversity of risk – that some of it is desirable and that formal rules will not sufficiently address shortcomings, how can we arrive at compensation structures that promote sustainable performance? The popular answer of the moment is that it has to be done by making reward more longterm and by making it possible to revise the assessment of performance retrospectively. For example, in the financial services industry, the Capital Requirements Directive III states that at least 50% of executives’ incentive payments need to be in equity or similar with significant deferral for at least three years. Lehman Brothers Furthermore, payments in equity need to be retained for at least another six months past vesting and firms should be prepared to withhold reward if performance is not there. Unfortunately much of this is not new. For example, Lehman Brothers’ reward structure for executive directors consisted in 2007 of between 64% and 88% equity-based incentives that were deferred for two or three years and then restricted until five years after award – and there were possibilities to hold back awards if performance was lacking. Still a year later Lehman took on enough risk to, arguably, bring the whole financial system to its knees. Time, ownership and sector specific aspects are important for any compensation structure’s design but again it is not the technical details that matter most. In Hay Group’s recent study of corporate governance around the world, the missing link we identify is the importance of having a healthy corporate culture that supports good governance and sustainable performance.

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nostic Dimensions

Performance Decode Pu r De pose co de

n ti o ica un e mm ecod D


& l gy ate ona Str rati e e d Op eco D

Im ple m Te enta stin tio n g

Incentive Effectiveness

Culture Decode


s scape Dimension

incentive effectiveness review methodology

Culture is for most decision-makers something ‘pink and fluffy’ that is usually ignored – but unfortunately, as Peter Drucker once said, it ‘eats strategy for breakfast’. Therefore when evaluating a compensation arrangement, it is important to recognise that not only does it need to align with strategy but also with a number of factors that are specific to the company, not least the cultural fit. Closing the gap To provide a process for recognising the gaps between how a business is run and how executives are compensated, we developed an incentive effectiveness review methodology. Six aspects of reward arrangements are considered that cover most of the context, or landscape, and design diagnoses required (see illustration above). First, one needs to consider what the purpose is of paying people the way we do, and what it is we should pay for. The answer to this is unique to the company; which means that it is not ‘what everyone else does’. Benchmarking is important hygiene to understand the competitive environment but is not likely to provide every company with a competitive advantage. Equally, performance is what executing strategy results in – not simply profits and share price. Hence it is necessary to consider whether

The Hay Group’s incentive effectiveness review methodology considers six aspects of reward arrangements.

compensation fits with the strategy and the operational framework. Most companies break down their strategy into key indicators but when so doing often overlook both the operational context and how strategy will be executed. When an incentive ties strategy and operational framework to purpose and performance, there needs to be a proper ruler to measure if an executive is doing what matters for the firm’s future. Metrics must be closely tied to the strategic imperatives, such as better innovation, products and services and customer satisfaction. If executives deviate from such basic business principles, then risk inadvertently increases. For example, a firm’s source of cashflows is its customers. Losing customers is often one of the main causes for failing businesses and it is controllable. The duty of executives should still be maximising shareholder value but the interpretation often needs to change – for example from ability to make short-term financial gain towards acquiring and retaining customers. Communication and culture are key But having great purpose will not be sufficient if the incentive does not reach people both as a message and physically. How a company implements and communicates compensation is where the least amount of effort is typically expended – and where most practical problems occur. If, for instance, participants do not understand how they can impact the required performance any resulting payment will simply be a pleasant surprise with a perceived value nowhere near the booked expense. Equally, the more a payment is delayed or delivered in a complex or unwanted format, the less perceived value will be attached. The culture decode is, however, the key to ensuring that the messages signalled through an incentive are understood correctly. Risk needs to be managed and governance needs to be appropriate but a healthy culture is what ensures that both work. In order to achieve sustainable performance we need to support this with a compensation structure that is aligned not only with what we do, but also how we do it. Hay Group’s Taking the pulse: Corporate governance and executive pay can be viewed at Hay Group is a global management consulting firm that works with leaders to transform strategy into reality and to help people and organisations realise their potential. Visit

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accountancy futures: risk and reward management

Risk strategy Accountants need to re-evaluate their approach to risk management, says Adrian Berendt FCCA, chairman of ACCA’s Global Forum for Governance, Risk and Performance


hile the blame for the recent debt crisis has been laid at many doors, accountants have escaped largely unscathed. Is that right, given that numbers and their reporting were at the centre of the crisis? What could we have done differently and how can we can perform better in the future? Risk and risk management are important to accountants, yet a great deal of practice today appears to have flaws. Do we properly address the impact of culture, human nature and biases on perceiving and managing risk? Do existing risk measures – essentially impact and likelihood – help us at all? Similarly, do governance practices, which are evolving into increasingly complicated compliance processes, take proper account of human nature? If not, where is the value? Accountants are increasingly being asked to help predict the future and provide accounts which are both less complex and better able to meet the needs of various stakeholders. As a profession, accountancy is a natural place to engage with risk management to find better ways to measure and report on value creation. And better measures of risk and value creation can help us get smarter in how we look at governance, risk and performance.

Executive director of LCH Clearnet, Adrian Berendt has been a member of ACCA’s Financial Services Network Panel for the past seven years and was its chair in 2010. He has been involved in a number of ACCA initiatives and was also a member of ACCA’s Research and Corporate Governance committees.

As accountants, we have an opportunity to become more active participants in the risk management debate and to move from detailing historic profit to reporting and advising on value creation. In such a way, we can actively contribute to the creation of long-term value and, by saying that, I mean social and environmental value as well as economic value. ACCA formed a Global Forum for Governance, Risk and Performance, which I chair, to look specifically at the links between governance, risk and performance. The forum is now embarking on an ambitious paper to be published next year on how governance and risk management can drive sustainable performance and create value.

More on video Adrian Berendt has more to say about accountants and risk in a keynote speech, entitled Identifying new risks and material issue: how, who and when? given at ACCA’s recent worldwide online Accounting for the future conference. A video of the speech can be viewed at accountingforthefuture

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In the driving seat As the global economy continues to change rapidly, Ng Boon Yew FCCA, chairman of ACCA’s Accountancy Futures Academy, looks at the choices facing the accountancy profession for dealing with the new world order

Mass-produced silicon Pentium processors: inevitable further advances in technology are set to both aid and disrupt the accountancy profession.


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Ewan Willars director of policy, ACCA ‘The accountancy profession is facing a highly complex and challenging decade ahead. There is a very clear sense that the profession needs to work hard to communicate the value that it brings, both in helping to regain public trust and to ensuring it has a strong recruitment brand to attract the best talent. ‘Having said that, the real challenge will be to achieve this against the background of constant disruption and uncertainty. It will be hard work to move from being seen as part of the problem rather than the guardians of integrity, but the rewards for those who do will be high.’


he global economy is in a state of volatility and uncertainty – with little prospect of a return to calm any time soon. Society is undergoing rapid and fundamental adjustments, while environmental changes continue to put pressure on business systems. At the same time, the global accountancy profession is undergoing change, driven both by the wider pressures of the business world – not least the ongoing impact of the financial crisis – and internal demands. To make sense of the continuing turmoil, it is vital that accountancy professionals are armed with the tools they need to navigate a constantly changing landscape. Crucial to this is an understanding of the drivers for change that are having an impact on the profession. From these, it is possible to identify the challenges and opportunities facing business, society and the profession. With this in mind, ACCA’s Accountancy Futures Academy and IMA (the Institute of Management Accountants) has carried out a research study, 100 drivers of change for the global accountancy profession. The study details the factors that experts across a number of fields believe will have the greatest impact on the profession in the short, medium and long term, and outlines a number of key ‘must dos’ that businesses and the accountancy profession must take on board in order to both survive and make the most of opportunities. Broadly, the study reports, the profession should take heed of issues of trust and reporting, regulatory expectations, standards and practices, intelligent systems and

The next 10 years IMPERATIVES FOR BUSINESS Assume and plan for volatility Build your radar Pursue technology leadership Prepare for true globalisation Develop a curious, experimental mindset

* * * * *

IMPERATIVES FOR ACCOUNTANTS Embrace an enlarged strategic and commercial role Establish trust and ethical leadership Focus on a holistic view of complexity, risk and peformance Develop a global orientation Reinvent the talent pool

* * * * *

big data, and the organisational remit of accountants in business. To fully understand the direction of travel of these forces, there will be a need to systematically scan the future, prepare for a wide range of possibilities and develop an ability to see around corners. By assuming there will be volatility, you can plan for it. Technology will both help and disrupt, but by developing a fresh mindset you can exploit new technology, rather than allowing it to exploit you. It will also help prepare businesses for true globalisation that encapsulates a multilocation, multicultural and age-diverse workforce. Critical to this will be the development of a curious, experimental and adaptable mindset. It is important that the accountancy profession embraces an enlarged strategic and commercial role. It should establish trust and ethical leadership, while focusing on a holistic view of complexity, risk and performance.

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Scope of the accountant’s role


Broad organisational remit

Public perception of the profession

Narrow compliance focus



Part of the problem

Like business, it will need to develop a global outlook, embracing technical, language and cultural challenges of cross-border operations. And it must focus on the talent pool, rethinking training and development together with the type of individual to be recruited. These challenges lead us to four possible scenarios for the future role of accountants that combine levels of integrity with width of remit. Combining high levels of perceived integrity with a broad organisational remit going beyond basic compliance work would position accountants as ‘changemakers’ – those who, by 2022, have succeeded in balancing public expectations for responsible financial management with an enlarged and more entrepreneurial stance within the business. It is possible to see these changes already emerging as the CFO’s role evolves. Combining these high levels of perceived integrity with a more narrow focus on compliance

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

positions accountants as ‘safehands’ – those who have succeeded in re-establishing public faith through deliberately focusing on the technical elements of their roles. Where low perceived integrity is combined with a narrow focus, accountants will function merely as ‘survivors’. Those who pursue a broad remit but with low integrity perceptions can be classed as ‘buccaneers’ – an unstable scenario as the drive for profit will be seen as at the expense of sound financial stewardship. While there is clearly no correct position, I would argue the role of changemaker is the most exciting and rewarding. It is certainly achievable, perhaps because of, rather than despite, the turbulent future ahead. 100 drivers of change for the global accountancy profession is available from


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Life, but not as we know it Innovation in robotics, neuroscience and genetic profiling could all transform the commercial landscape over the next decade, says ACCA’s Faye Chua


dvances in science and technology are going to reshape the commercial landscape over the next decade. Exciting, sometimes controversial, opportunities will come with the internet, mobile technology, automation, robotics, virtual reality, emerging industries, neuroscience and genetic profiling. With low-cost smartphones possibly taking the internet to almost every citizen on the planet in 10 years, the web’s true potential has yet to reveal itself. But it is already transforming industry supply chains and threatening to reinvent some industries. At the same time, social media are creating new opportunities to engage the public and expand individual social spheres in a manner once thought unthinkable. The web allows users to rent processing capacity, applications and storage via cloud computing. It also produces electronic assets and spawns virtual currencies. But all isn’t positive. With it come risks, including cybercrime, workplace distraction and shortened attention spans. Mobile devices may increase the geographical flexibility of staff, but also present data security challenges. As automation spreads through every aspect of business and private life, vast quantities of data are being amassed. The ability to exploit big data and infer future behaviours from past patterns offers the potential to transform the cost and effectiveness of processes such as new product development, market targeting and price setting. For the accountancy profession, adoption of intelligent tools that can analyse and interpret large volumes of data could rapidly transform activities such as audit and forensic accounting.

There are other changes afoot too, some of which involve serious ethical considerations. New business sectors include human augmentation, personal genetics, vertical farming, 3D printing and laboratory-grown meat, and all have the potential to become trillion-dollar industries in 20 years or less. Meanwhile, development in neuroscience could lead to the widespread use of brainmachine interfaces that allow information to be directly uploaded to and downloaded from our memory. As a result, businesses may come under pressure to employ staff who have had their mental faculties enhanced so they can ‘out-think’ their competitors. Genetic profiling of the workforce could theoretically enable firms to assess employee health risks more accurately and reduce health and insurance costs. As the above examples suggest, the scientific and technological revolution that is taking place offers the potential for disruptive innovation in every aspect of human life, society and work. For the accountancy profession, the ability to master these developments could be the key differentiator between failure and success.

Faye Chua is ACCA’s head of future research and leads its global research and insights programme that focuses on the future of business and the accountancy profession. She is the staff expert on ACCA’s Accountancy Futures Academy.

Dr Raef Lawson IMA vice president of research ‘The Accountancy Futures Academy’s research emphasises that we are entering an uncertain world where almost every aspect of the economy, business and the accountancy profession will be in a state of flux. The drivers presented in its report highlight critical issues that will shape the global landscape.’

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Time to evolve the limited company? More stakeholders and wider objectives mean corporate structures need reform, says ACCA’s John Davies


ack in 1926 The Economist magazine declared in an editorial: ‘The economic historian of the future may assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution. The genius of these men produced the means by which man’s command of natural resources has multiplied many times over; the limited liability company produced the means by which huge aggregations of capital required to give effect to their discoveries were collected, organised and efficiently administered.’ The Economist was arguing that the invention of the limited liability company should be considered on a par with the great industrial inventions of the Victorian age in terms of their contribution to economic development. Without a doubt, the limited company has over the years provided human society with a great platform for the promotion of economic activity and the creation of wealth. But in the same way as other great inventions of the late 19th century have been refined and developed to be more efficient and enhance the consumer experience, there is every reason why the company structure too should expect to adapt in order to keep pace with the changing business environment. Many of the influences that stand to affect this evolution in the coming years are already making themselves felt. They include the following. The interdependent company There has always been a reasonable expectation that, in return for the considerable benefits that society grants to companies via the attribution of corporate and limited

liability status, businesses should agree to act in ways that are consistent with what society deems to be the ‘public good’. There has, though, been a significant trend in recent years towards a generalised acceptance of the view that companies are not solely commercial vehicles designed to create profits for their investors, but social creatures whose existence and prospects for prosperity are affected materially by a wide range of dynamics; companies should be expected to be responsive to those dynamics, both in their own interests and in the interests of their stakeholders and wider society. The idea of the company as integrally related to and interdependent with the world and the

John Davies FCIS is head of technical at ACCA. He is the staff expert on ACCA’s Global Forum for Business Law.

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society around it will undoubtedly continue to gather momentum, not least given the potentially massive impact on businesses of major developments in that wider world which are discussed in more detail in the article that starts on page 54. The process of reporting will be affected significantly by this evolutionary trend. Companies will come to adopt a more integrated approach to their reporting, presenting material information about their performance and prospects in a more joinedup way to give the reader a fuller understanding of how they create value and are responsive to the risks facing them. Measures of ‘success’ The traditional, finance-based means by which companies assess their performance – and hence their ability to reward their staff and shareholders and invest for the future – is a very efficient way of assessing the health of an enterprise, but it is not the only one. Anthony Jenkins, the new CEO of Barclays in the UK, wrote to his staff last summer to tell them that, as far as he was concerned, success for the bank in future would not just be about promoting and selling its services and products. Barclays staff, it transpired, needed to think more about how their customers ‘feel’. Jenkins wrote: ‘Success will be defined by how our stakeholders think and feel about Barclays. It is about creating an emotional as well as intellectual connection with them. Think about the brands which provoke the strongest positive responses in people and you are probably thinking about “go-to” brands: Google in search, Apple in technology, and Nike in sport, for example.’ John Lewis, the UK employee-owned retailer, has followed this approach since it was set up in 1929. The strategy has as its ultimate purpose ‘the happiness of its members, through their worthwhile and satisfying employment in the company’; a subsidiary aim is to contribute to the wellbeing of the communities where it operates. Social objectives of this kind are often, arguably, a means to a more tangible end, but where they not only help to achieve financial objectives but also actually drive them, a corporate commitment to values can contribute decisively to the achievement of business goals. Harmonisation While there are varying degrees of consistency of approach between different countries, the law as it applies to companies tends to be very largely nationally-based. The

Mark Goyder Director, Tomorrow’s Company ‘Our children will look back with a combination of curiosity and anger at the period when people could unquestioningly claim that the purpose of a business is to make short-term returns for its shareholders or indeed for its employees. Recent experience from financial services and time-honoured research tells us that companies that limit their purpose in this way end up in a descending spiral of selfishness in which their capacity to innovate, their licence to operate, and their employee loyalty suffer a downward spiral. On the positive side, it is becoming steadily more obvious that the only way we will be able to fight poverty and mitigate the damage from our reckless experiment with warming the planet is through harnessing the power of business innovation and investment alongside that of civil society. For all these reasons, the traditional privilege of limited liability will come under increasing challenge.’

Companies are also social

creatures whose existence and prospects are affected by a wide range of dynamics characteristics of a country’s company law regime, as well as its tax regime, are both significant factors that affect the decision of businesses, both domestic and foreign, to set up in a particular country. These factors can therefore have significant potential influences on the wider national and international economies. Given the continuing trend towards internationalisation and crossborder trading, which in certain regions of the world at least is likely to see an increase in the number of SMEs trading internationally, we can expect to see more attention being paid to harmonisation issues, especially in relation to the rights of investors, consumers and creditors. Division of responsibilities Many countries have taken steps in recent years to differentiate between the compliance responsibilities of large and small companies, in the name of proportionate and costeffective regulation, and to legislate to allow the establishment of one-person companies. Yet it remains largely the case that the structure of company law envisages a division of rights and responsibilities between those

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who own a business and those who control it. But where the company is owned and controlled by the same individuals – whether that is one person or more – the rationale for retaining this division of responsibilities is not always obvious. Given that many of the sometimes onerous compliance obligations which cause so much concern to smaller businesses are associated with the principle of accountability of directors to shareholders, the development of a dedicated, streamlined corporate structure for owner-managed businesses would better reflect the reality of the business environment. Subsidiaries and group structures One of the standard characteristics of company law is that each limited company has its own independent existence and is responsible for meeting its own obligations. Thus, when a group operates via a network of subsidiaries, the parent has to go through the process of registering each subsidiary, appointing its directors, implementing coordinated controls systems and planning for profit distributions. Such structures have an obvious commercial advantage in that risk can be contained. But where those subsidiaries are for all practical purposes the operational instruments of an identifiable parent, the question must be asked whether they need always be treated as if they were free-standing companies, and therefore required to observe all the compliance rules which go with that. One idea, currently being pursued by the European Union, is that a simple structure, with common features, could be developed with subsidiary entities primarily in mind which would allow group structures to be formed and which could operate more efficiently. a vehicle for social enterprise Long before the current financial crisis broke, many national governments had been keen to outsource their functions to private sector businesses, in part as a response to the challenges presented by demographic changes. The severe pressures to reduce spending in the wake of the financial crisis has only intensified these efforts in many countries. The accelerating trend towards the outsourcing of public functions is stimulating keen interest in whether companies are constitutionally capable of fulfilling a function which is essentially social in nature. In 2011, a major provider of care home services in the UK, Southern Cross, was forced to cede control of its 750 homes,

Faris Dean ACCA Solicitor, Lyons Davidson ‘The company has been evolving slowly over time to balance the concepts of separate legal entity, limited liability, financial reporting, transparency, shareholder rights and involvement. The recent economic crisis has shown that where the balance lies can shift depending on the wider economic environment. Redefining the balance is no easy task because of the varied characteristics of companies.’ Chair of ACCA’s Global Forum for Business Law

Dermot Madden FCCA Office of the Director of Corporate Enforcement, Ireland ‘Compliance and enforcement action will be more important in the next 20 years as companies will effectively begin to take on the attributes of a natural person, assist countries in complying with treaty requirements on carbon emission levels, and be expected to have highly functioning boards setting new standards in terms of ethics and gender equality. The commitment to this new social role can only be achieved by focusing on the long term and moving away from short termism.’ Member of ACCA’s Global Forum for Business Law

and the thousands of vulnerable patients and residents in its care homes had to be transferred to other providers. The potential disconnect between social objectives and the need of companies to meet the expectations and demands of shareholders for a return on their investment became readily apparent in the process. And earlier this year, the company A4e, which provides welfare-to-work programmes for the UK government, was banned by the advertising authorities from styling itself as a ‘social purpose company’ because the term was held to suggest that it was a non-profitmaking enterprise rather than one that was commercially driven. Behind this decision was a presumption that if a company was motivated to make profits, it could not at the same time achieve social purposes. Given the pressures, which are only likely to increase in the coming years, for many more social functions to be undertaken by private sector enterprises, it will be crucial that governments start to develop corporate structures which are capable of facilitating investment, but which at the same time enable entities to define their vision of success in ways which are customised to their own constitutional objectives.

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accountancy futures: global economy talent

Plugging the brain drain Malaysia’s greatest asset is its people. TalentCorp Malaysia CEO Johan Mahmood Merican explains how the country aims to keep hold of them


ccording to a 2012 global survey by US think-tank Fund for Peace, more Malaysians than ever are looking abroad for a better livelihood. The World Bank put a figure on the size of the brain drain with a 2011 estimate that a third of a million Malaysians were living abroad. To help transform the country into
a highincome, developed nation by 2020, the government set up TalentCorp Malaysia last year. ‘Talent is the driver of transformation,’ says its CEO, Johan Mahmood Merican. He believes teamwork is the way to achieve a successful transformation. ‘TalentCorp can’t do this alone. We need to build networks and collaborations in all our initiatives to be an effective magnet. TalentCorp’s outreach programme is the best example of collaboration. It went to the UK, Ireland, Australia and Taiwan with leading Malaysian employers to meet Malaysian professionals and undergraduates, outlining opportunities in their home country. Interviews were conducted and offers made. ‘It’s best to hear about career opportunities in Malaysia from your peers, not government,’ he says. Then there is the tie-up between Sunway-TES, the University of Malaya and ACCA, which gives accounting undergraduates a fast-track programme for the ACCA Qualification. Johan says: ‘By enhancing school-to-work transition, we are optimising home-grown talent.’ Talent does not need to be physically present to contribute effectively, and he stresses the importance of building networks with Malaysians already abroad in order to tap their expertise. He cites as an example Danny Quah, a professor at the London School
of Economics who has served on Malaysia’s National Economic Advisory Council. Another neglected group is women
who have left the workforce and do not return. According to a 2011 report by McKinsey, 57% of graduates in Malaysia
are female yet the female labour participation rate is only 47%, which is low compared with other Asian countries. The recent announcement by prime minister Najib Razak of incentives for re-employing women
on a career break is encouraging, but Johan says a change of mindset is needed. ‘Companies need to realise that the women agenda is not a form of corporate social

Johan Mahmood Merican was appointed the first CEO of TalentCorp Malaysia when it was set up in 2011. A professional accountant, he has worked in accounting, audit and corporate finance roles, and joined the government sector in 2004.

responsibility or welfare; it is anchored to a business case. If we can’t keep them in the workforce, we lose out.’ He believes that what attracts talent
is the availability of professional opportunities. Incentives and programmes such as the Returning Expert Program (REP), Scholarship Talent Attraction and Retention (STAR) and Residence Pass – Talent are only sweeteners at best, he says, ‘because without opportunities, we would have nothing to sell Malaysia’. The good news is that Malaysia is beginning to see a healthy inflow of talent. According to Johan, Malaysia’s healthcare sector is attracting specialists, particularly the Iskandar Malaysia development area in Johor due to its proximity to Singapore, and Penang for its growing medical tourism industry. Johan says: ‘In the UK and Australia, Malaysians ask me why they should come home now. I tell them because now is a good time. Global economic growth has shifted to Asia, and Malaysia is well placed to leverage that growth. We have exciting opportunities for top talent, given our key sectors like oil and gas, ICT and electronics, finance, and healthcare; and professional services are also growing; and within these sectors, we have Malaysian companies going regional and multinationals establishing regional operations.’ Tan Pin Ping, journalist

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accountancy futures: global economy bhutan

In pursuit of happiness Bhutan MP Jigmi Rinzin FCCA is a prime mover in the small Himalayan nation’s bid to strengthen its financial infrastructure and transparency


hutan is a small Himalayan nation striving to strengthen its financial infrastructure and transparency, while pursuing happiness as an economic policy goal for some 710,000 inhabitants living in a parliamentary constitutional monarchy. For a perspective on progress, Accountancy Futures talked to Jigmi Rinzin FCCA, a hugely influential Bhutanese and Asia accountancy voice. He is a member of the Bhutanese parliament, serving on several committees, including the Public Accounts Committee (PAC). He is also former chief auditor at Bhutan’s Royal Audit Authority (RAA), and secretary general of the Asia Regional Association of Public Accounts Committees (ARAPAC). ‘Insofar as financial infrastructure and transparency is concerned, we have most of the necessary mechanisms in place,’ Rinzin says. He points to a strong legal framework – including the Financial Rules and Regulations 2001, the Public Finance Act 2007, and

‘We need human capital to

implement the legislation’s intentions and enhance economic development’

the Financial Services Act 2010 – to govern Bhutan’s banks, insurers, one pension house, and potential brokers and fund managers. The Royal Monetary Authority Act also facilitates the independent functioning of Bhutan’s Central Bank, which doubles as Securities and Insurance Regulator. ‘Having said this, we do not lack problems,’ Rinzin concedes. ‘We need human capital to implement the legislation’s intentions and enhance economic development.’ He believes Bhutan also needs more laws, including a Trade Act, Investment Act, Enterprise Act, and legislation covering competition policy. These are incorporated in draft legislative plans for 2013 to 2018.

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accountancy futures: global economy bhutan

‘There is apprehension on collaboration and coordination while trying to implement this legislation,’ says Rinzin. Young democratic institutions are still finding their place and there is occasional confusion and conflict in implementing financial laws, he adds. By way of example, the Supreme Court in a 2010 verdict based on a constitutional case filed by the parliamentary opposition removed many of the cabinet’s direct powers of taxation and asked that all major taxes be routed through parliament. The government at the time alleged this would limit revenue raising and slow development. ‘We have the Audit Act 2006, which upholds the principles of the Lima and Mexico Declarations of the International Organisation of Supreme Audit Institutions,’ says Rinzin. Independence for the country’s auditor general is guaranteed by the constitution itself and is further elaborated in the Audit Act. Unlike many developing countries, Bhutan has a strong, professional and respected Royal Audit Authority (RAA), its supreme audit institution, which is sometimes criticised by government and bureaucracy for being ‘too tough’ and issuing too many reports. Bhutan’s RAA, according to Rinzin, is akin to international institutions in that it conducts riskbased auditing and theme-based performance auditing, going beyond traditional compliance and rule-based auditing.

pac mentality ARAPAC was formed by Asian parliaments in 2010 to share knowledge and to complement the regional association for supreme audit institutions such as RAAs. Bhutan assumed the association’s secretary generalship at the outset in recognition of the performance of Bhutan’s PAC. Rinzin says that, in his ARAPAC role, he found some PACs were politically compromised, toothless, or had not presented reports for a long time. However, the only challenge for Bhutan’s PAC so far has been finding time to go comprehensively through

Dawn breaks over the Punakha Valley in Bhutan.

‘All government policies will

have to score an average of at least 66 to pass the gross national happiness test’ annual audit reports, he adds. Bhutan hit the world’s headlines when it adopted ‘gross national happiness’ (GNH) as an economic development goal. Rinzin describes GNH as ‘a hybrid of gross national product and spiritual, environmental and societal aspects’. GNH was coined in 1972 by the former king, Jigmi Singye Wangchuk. It has four ‘pillars’: good governance, sustainable and equitable socio-economic development, preservation and promotion of culture,

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conservation and sustainable environment management. The pillars have a total of nine ‘domains’– standard of living, health, education, time use, psychological wellbeing, community vitality, cultural diversity and resilience, ecological diversity and resilience, and good governance – encompassing 33 indicators in all. As one example, the standard of living domain has three indicators: assets, housing, and household per capita income. screening tools ‘For measurement purposes these indicators are modified into 22 measurable variables or tools to be used as GNH screening tools for approval of government policies,’ Rinzin says. Projects and policies have to demonstrate they are ‘pro-GNH’. Each of the 22 types of variable spread across the indicator categories can carry a full score of four, giving a potential maximum score of 88. A score of one for a variable signifies a negative impact on GNH, two means ‘uncertain’, three indicates ‘neutral’, and four denotes a positive effect. ‘All government policies will have to score an average of at least 66 to pass the GNH screening test,’ says Rinzin. Measurements are made by qualified experts and professionals from different occupations. They must have a sound knowledge of the subject matter and be reliable and recognised

by their peers. The public is involved through regulatory bodies or as service users. ‘This method of policy formulation is fairly new and it is unfair to make any conclusive suggestions at this stage,’ Rinzin says. ‘We have seen only a few policies meeting these rigorous tests and only a few that were rejected.’ He believes the verdict on GNH will be clear only in another eight to 10 years. Rinzin suggests the government should address how to remedy matters for those already affected by issues surrounding the GNH screening process: ‘Further research is needed to draw logical links between the accountability theme and some of the variables.’ He speculates that attempts to align GNH variables with accountancy themes such as sustainability, climate change, carbon trading and integrated reporting would provide ‘juicy’ assignments for accountants. Rinzin feels that the GNH philosophy could be applied globally as environmental and social concerns now affect company reporting more. After all, the limitations of financial reporting have become more obvious as a result of the global financial crisis. Countries such as Brazil, the UK and France are also coming out with their own happiness and social welfare indicators, inspired in part by Bhutan’s GNH, he observes.

As a member of the Bhutanese parliament, Jigmi Rinzin serves on several economic committees, including the Public Accounts Committee.

Tenzing Lamsang, journalist based in Bhutan pg65 edition 06

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accountancy futures: corporate reporting non-financial

Going mainstream The global tide is turning in favour of integrated reporting, says Robert Bruce, and accountants equipped with new skills will help steer it properly pg66 edition 06

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Floating the boat: the sustainability story is not just about reporting but also bringing people in, as shown by these London schoolchildren at a pop-up pool, one of the London 2012 Olympics’ outreach initiatives for promoting health and fitness.

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ery soon,’ says Ernst Ligteringen, chief executive of the Global Reporting Initiative, (GRI), ‘nonfinancial reporting will become mainstream.’ His logic is impeccable and easily understandable. The direction in which corporate reporting has been heading for a long time is that of a narrative, describing the business model, providing specific and material information for an ever widening circle of users and stakeholders. What the world is now focused on is how reporting gets there. ‘Ten years ago,’ says Ligteringen, ‘sustainability reporting was a way for a business to stand out. They were demonstrating they were doing better.’ While non-financial reporting was a relatively straightforward way to differentiate a business, it also struck a deeper chord. And as the world plunged into financial crisis and sought solutions in the aftermath, more people took note. ‘Investors,’ says Ligteringen, ‘were interested in the long term.’ But sustainability reporting must evolve to give markets systematic, reliable information on companies’ risks and opportunities, linked to their overall business strategy. And there is a growing interest around the world in the possibilities and benefits that such non-financial reporting could provide. In June 2012, the UN Conference on Sustainable

Robert Bruce is a UK-based financial journalist who writes regularly for the IAS Plus website as well as Accounting and Business. From 2007, he was writer to the Accounting for Sustainability Project and subsequently a member of its executive board.

Development in Rio de Janeiro produced what has become known as ‘Paragraph 47’. This recognised the importance of corporate sustainability reporting and the need to ‘encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle’. Several countries immediately formed themselves into a Friends of Paragraph 47 alliance to push for this to become universally accepted. At the same time, the International Integrated Reporting Council (IIRC) has developed real momentum in its efforts to create a framework which could reflect the integrated thinking ‘through which’, as the IIRC puts it, ‘management applies a collective understanding of the full complexity of value creation to investors and other stakeholders’. Accountants are now at the heart of a worldwide effort to bring all the elements which affect the strategy of companies into one space. It is small wonder that Peter Bakker, president of the World Business Council for Sustainable Development and now deputy chair of the IIRC, has taken to telling people that it will be the accountants who will save the planet. It is simply a matter of connecting information and then taking action based on what that information tells you.

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‘If you tell the story coherently and precisely,’ says Ligteringen, ‘then there is a chance people will use your report and act upon it.’ Or as Paul Druckman, chief executive of the IIRC, puts it: ‘Corporate reporting is more than a good communications tool. It influences behaviour within organisations and by investors, and it underpins the efficiency and productivity of our capital markets. So when governments, regulators and policymakers talk about creating the conditions for a more responsible and responsive capitalism, rooted in activity that creates and sustains value, that is the business we are in.’ The enthusiasm behind the concept of nonfinancial reporting is tangible. Where the uncertainty remains is among the many different views of how it could be brought about. ‘The investor community can be convinced of the importance of sustainability issues,’ says Roger Adams, director, special assignments, at ACCA, ‘provided that reporters address material issues, take a forward-looking approach and seek to draw a clear link between sustainability drivers on the one hand and the business model, value creation and corporate strategy on the other.’ definitions and actions It comes down to arguments over definitions and then actions. GRI training partner Lodestar, working with Deloitte, GRI and ACCA, organised the first Non-Financial Reporting Conference in London in autumn 2012. At the conference, Richard Scurr, head of group finance operations at global bank HSBC, defined nonfinancial information very simply. ‘It is data not covered by accounting standards,’ he said. And that underlines a central point – the definitions need to be kept simple and, preferably, away from the technically minded. There is a danger here of not seeing the wood for the trees. ‘There are risks that the integrated reporting movement could become over-theoretical,’ says Jenny Harrison, director, sustainability services, with Deloitte. ‘It needs to be about people having a go at better performance management in practice.’ It will be far more important to focus on what the outcomes could be. In the view of David Pitt-Watson, chair of Hermes Focus Asset Management, it is a question of: ‘How do we get ownership back into investment?’ His point is that it is very easy to gather information about short-term performance. The problem arrives when you try to seek out the information which will tell you about where a company is going in the long term. The information which provides that is a long way from being simply the financials.

Jenny Harrison director, sustainability services, deloitte ‘There are risks that the integrated reporting movement could become over-theoretical.’

David Stubbs head of sustainability, london 2012 ‘The sustainability story was not just a way of reporting; it was a way of bringing people in.’

Julie Fitzsimmins director, lodestar ‘We need to demystify and simplify to make reporting achievable for companies.’

Left: a vital part in attracting sponsors for the 2012 Games was played by sustainability projects such as the wildflower meadows sown around the Olympic Stadium, London, to create a colourful setting for the 2012 Games and the legacy of a new park in the area.

What Pitt-Watson and many other global investors would like is something closer to the integrated reporting model where the routine and discipline of reporting non-financial information will have an effect on the longterm performance of companies. And, as he points out, this can already be tracked. ‘Observation changes behaviours,’ he says. ‘Companies performing well on sustainability also have better performance on the financials. Companies that understand this are simply better companies.’ This is probably the most important change being seen around the world, and much of it is down to straightforward principles. ‘It is all about good business sense,’ says Sallie Pilot, director of corporate reporting at consultancy Black Sun. And that broad principle is backed up by people’s experience in the field. There are real practical benefits. Another speaker at the London conference was David Stubbs, head of sustainability for the London 2012 Olympic Games. ‘Corporate sponsors were struck by the sustainability story,’ he said. ‘It was not just a way of reporting; it was a way of bringing people in.’ And in the long term, if non-financial reporting is going to succeed in creating the benefits it promises, it is the accountants – the people who Bakker says are going to save the planet – who will have to work the hardest. ‘The accounting profession will have to change,’ says Ligteringen. ‘It will need to bring in different competencies and change its training. It has a fundamental role to play.’

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accountancy futures: corporate reporting paragraph 47

Post-Rio glow? The Earth Summit pulled its punches on sustainability reporting but the corporate momentum is still strong, as a recent ACCA event made clear


he atmosphere at the Rio+20 Earth Summit was fuelled by high hopes for a binding treaty on sustainability reporting. But while the outcome statement that eventually appeared was considerably watered down, there is, judging by a discussion at ACCA’s Accounting for the Future conference, no loss of momentum on the part of the major players in this arena. The ACCA-backed Corporate Sustainability Reporting Coalition (CSRC) wanted Rio to force companies to think about the sustainability issues that matter to them and to report appropriate measures of their sustainability performance. After a great deal of negotiation, paragraph 47 of the final agreement opted to encourage rather than compel them to do so. But Steve Waygood, founder of CSRC and chief responsible investment officer with Aviva Investors, was not downhearted. He told attendees at the ACCA event: ‘We fell short of getting the treaty, but we did get the clearest message that we’ve ever had from the UN that this matters to them and to companies and to economic value creation. We had 193 UN member states agree to paragraph 47. It was an incredibly important outcome.’ Pietro Bertazzi, senior manager – policy and government affairs with the Global Reporting

More on video

You can hear the ACCA conference discussion in full by visiting www. accountingforthe future and looking for the ‘Reporting developments around Rio+20’ webcast.

Above: flying the sustainability flag at Rio+20, Brazil.

Initiative (GRI), pointed to the creation by Brazil, Denmark, France and South Africa of a group called the Friends of Paragraph 47, which, Bertazzi said, would ‘act in support of the implementation of Paragraph 47, making an inventory of policies on sustainability reporting and developing models for best practices’. Waygood said he had ‘huge confidence’ that membership would swell far beyond the founding four, ‘hopefully to all 193 member states in the UN’. Also at Rio, the Sustainable Stock Exchanges Initiative secured agreement from five stock exchanges (São Paulo, Johannesburg, Istanbul, Egypt and Nasdaq) that they would agree to do more to promote sustainable reporting by companies listed on their markets. Since then, Hong Kong has said that it will, in due course, also make integrated sustainability reporting part of its listing requirements. Exchanges in Malaysia and Singapore have recently issued guidance along these lines and Canada and Germany may follow suit. One of the buzz phrases at Rio was ‘natural capital’. Sarah Nolleth, programme director of the Accounting for Sustainability (A4S) Project, explained: ‘Our economy depends on somewhere between US$33 trillion and US$72 trillion of “free services” that we get from

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nature.’ That is how much money humanity would have to spend to get services such as fresh water, pollination from bees and so on from the eco-system if they didn’t exist. Also known as ‘externalities’, free services ‘underpin a lot of our corporate and national activities [but] aren’t being taken into account in our day-today decision-making and aren’t reflected in our P&L and balance sheet’, Nolleth said. ‘Without that, how will you allocate capital? How are businesses going to make the right decisions that are sustainable in the long term?’ David Pitt-Watson, former chair of Hermes Focus Asset Management and founder of Hermes Equity Ownership Service, said: ‘Putting numbers to what we get from the environment, in some ways, is a funny thing to do. But if you think about this in accounting language, what’s the “going concern” of the world? How would you measure it? I can tell you on a quarterly basis what [a company] is doing. But I can’t tell you whether they might be destroying the planet. That is crazy.’ Lois Guthrie, executive director of the Climate Disclosure Standards Board (CDSB) and technical director to the International Integrated Reporting Council (IIRC), said that a crucial outcome post-Rio was the UK’s recent publication of draft regulations for mandatory carbon reporting. ‘About 30% of UK companies that [will be] affected are already reporting to the Carbon Disclosure Project so they are very well prepared for compliance,’ she said. The UK government has also acknowledged that the climate change reporting framework developed by CDSB can also be used for calculating greenhouse gas emissions. That is useful because, as Guthrie noted, her organisation has been working with the UN Conference on Trade and Development (UNCTAD) as well as the OECD ‘to encourage greater international consistency of reporting on climate change’. Perhaps the three most critical messages to come out of the discussion were, first, that what gets measured gets managed: ‘The invisible hand of the economy can’t guide invisible risk,’ said Guthrie. She accepted that a lot of work was being done on measurement, but said: ‘What we want is for the reporting to translate itself into action.’ Second, this is not just about the environment. ‘It does actually make good commercial business sense,’ said Nolleth. ‘It reduces your risks; it highlights opportunities.’ Finally, accountants have a critical role to play, and need to engage with the process today. ‘Don’t wait for measures and standards,’ said Pitt-Watson. ‘Do something now, so that you’re managing your company better.’

The integrated roadmap Momentum builds with framework draft expected in 2013, says IIRC’s Paul Druckman

Paul Druckman is chief executive officer of the International Integrated Reporting Council (IIRC). His work has included chairing the Accounting for Sustainability Project executive board and the sustainability group of FEE (European Federation of Accountants).

ACCA’s first integrated report The 2011/12 ACCA annual report has been produced as an integrated report following the initial approach set out by the IIRC. ACCA is a member of the IIRC’s pilot programme.

A major trend this century is the shift in economic, social and environmental influence towards major global corporations and away from governments. Recent research has revealed that of the world’s 100 largest economic entities in 2009, 44 were corporations. For some, this trend will be unsettling. The counterbalance to this shift in power is the transformational effect of the current technological revolution. Some 200 million tweets are sent every day and US technology group Radicati is projecting that 507 billion emails will be transmitted each day in 2013. In that kind of world, there is no hiding place for a business that doesn’t want to communicate how it is creating sustainable value. If a business does not tell its story, someone else will. Research also tells us that only 20% of value can be traced through to the financial statements, as other factors such as patents, trademarks and copyrights make up the lion’s share of a company’s value proposition. The goal of the integrated reporting movement is to encourage businesses to tell their value creation story, explaining how the ‘capitals’ (human, natural, social, intellectual, financial and manufactured) benefit the short, medium and long-term viability of the company. We have gained the support of a range of influential business leaders, investors, regulators, standard setters and NGOs. Businesses in our pilot programme include Microsoft, Coca-Cola and Marks & Spencer. Maintaining this engagement as we move towards publication of the consultation draft of the integrated reporting framework in April 2013 is an ongoing challenge. Another challenge is market confusion around the many initiatives and organisations involved in corporate reporting reform. While we believe many of these represent stepping stones towards integrated reporting, businesses and investors need certainty. We therefore intend to play a significant role in helping to set out a roadmap enabling a greater degree of coordination and consistency in this area. Today around 1,000 companies globally are publishing self-declared integrated reports and we hope to build on the momentum we have generated, drawing on the expertise of business and the accounting profession as we develop version 1.0 of the framework in 2013.


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accountancy futures: corporate reporting disclosure

Investors first Zhao Lixin, of the China Securities Regulatory Committee, explains why businesses must put investors at the heart of information disclosure


Zhao Lixin is deputy director general, Department of Listed Company Supervision II, at the China Securities Regulatory Commission (CSRC). He is also a member of the Chinese Accounting, Finance and Business Research Unit at Cardiff University, visiting professor of Management School of Sun Yatsen University, and academic adviser of Post-Doctoral Research Center of Shenzhen Stock Exchange Research Institute.

he capital market is, in essence, a market in information. As such, the operation of that market is little more than information management. That makes an information disclosure system of critical importance for price discovery and effective resource deployment in capital markets, given the huge impact of information acquisition and dissemination on the value of securities.

in meeting a diverse range of demands. Regulatory vs non-regulatory information In order to secure initial public offerings (IPOs) and refinancing, listed companies obviously tailor their information disclosure to address regulatory needs, and pay more attention in addressing those needs in annual reports. This is often insufficient to support investors’ decision-making.

information Supply and Demand Suppliers vs demanders of information Generally speaking, most investors require significant amounts of information to make investment decisions. Information suppliers, on the other hand, are concerned with the costs of information disclosure. Included here are implicit costs, such as the possible emergence of new competitors or copying from current competitors as a result of business secrets, business prospects or new business models being shared through information disclosure. Suppliers are accordingly reluctant to release such information. Traditional means of disclosure vs investors’ diverse channels for information acquisition Legal channels of information disclosure for listed companies include newspapers and websites. However, these may not meet investor demand for the timely supply of information and for dynamic information sharing. While informal information channels such as blogs and microblogs are developing quickly and provide a low-cost and easy medium for investors to access, their accuracy and the completeness of information they supply is often difficult to verify. Discrepancies in demand Naturally, there are differences in the amount and complexity of information needed by different types of investors. Investors’ focus and ability to interpret information are quite different too. Currently, the vast majority of information provided by listed companies is aimed at common users, and may be inflexible

effective, Demand-Oriented Disclosure The direct impact of these challenges is a serious information mismatch between investors and listed companies. Guiding information disclosure towards addressing investor demand will have a direct effect on the better deployment of resources and the efficiency of the real economy. Investor demand-oriented information disclosure is based on four main principles. The first of these is importance. Any information that is critical for investors’ decision-making must be disclosed. The importance of information is determined not only by quantifiable standards but also by the nature of the information itself. Companies should disclose only the most critical information, and avoid obscuring such information with less relevant content. The second principle is relevance. Information disclosure should focus on a concrete discussion of the company’s business, industry/sector, business model and stage of development, rather than irrelevant or out-ofcontext descriptions. The third is dynamism, as addressing the need for high-quality information to support investors’ decision-making requires deep and thorough analysis, and the discussion of key changes in the company’s annual report. The fourth principle is interrelatedness. Effective information sharing is not simply the compilation of information, but should follow a clear and relevant logic, with a clear relation between all contents.

There is a serious

information mismatch between investors and listed companies

the Challenges Complementarity between financial and non-financial information Continuing challenges remain in the ability of financial data to reflect and clarify value accurately, with ‘soft’ information

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such as human resources, sales networks and branding often far beyond financial accounting. Yet such information is crucial for assessing the value of enterprises, especially new economy enterprises. Ensuring complementarity between financial and nonfinancial information confers great benefits for investors’ decision-making. Sector-specific information General information is rarely sufficient on its own to fully capture a company’s sectoral characteristics. However, the latter are of critical importance for investors in accurately assessing the future value of the company. Effective information sharing with investors on both company business as well as sector-relevant issues such as competitive environment, core competitiveness and potential risks remains a practical challenge of utmost importance. Information for long-term planning and forecasting In most cases, Chinese reporting practices encourage companies to release information on long-term future planning. However, companies are often reluctant to release such information given the significant uncertainty and unpredictability of that information. In support of the investor orientation principle, during its recent revisions to regulations on annual reporting by GEM (Growth Enterprise

Complementarity between financial and non-financial information confers great benefits for investors

Market) listed companies, the China Securities Regulatory Commission (CSRC) explored multi-tier information disclosure to different investors as well as differentiated disclosure including general information and sectorspecific information. Format Digitised channels such as the internet should be used to improve the efficiency and convenience of information disclosure as well as to drive down costs. In addition, the transition from uni-directional disclosure (that is, from company to investors) should be facilitated to allow dynamic information sharing between both companies and investors. A recent example of such dynamic information sharing is the Hudongyi (‘easy interaction’) platform at the Shenzhen Stock Exchange. Only with an investor-centred approach and the creation of a public company information disclosure system oriented towards investors’ needs can investors’ demand be fully met and a healthy and efficient capital market ensured.


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accountancy futures: corporate reporting sustainability

Redefining reporting Waqar Malik, as ICI Pakistan chief executive and former president of OICCI and MAP, discusses the country’s changing corporate reporting landscape Q: Have corporate reports changed in the last 10 years in Pakistan? A: Yes, they have. Reports are no longer confined to mandatory financial statements. They are more comprehensive in terms of disclosure of social and environmental indicators and are more integrated across the various functions and dimensions of the business operations. Sustainability reporting by listed companies is becoming common. Q: What are the key drivers of these changes? A: Transparency has been one of the main drivers. The dynamics in which businesses operate today are rapidly changing. Stakeholders today want to know more about businesses’ commitment to sustainable development in Pakistan and they want honest disclosures. They are interested in knowing how a business is contributing to a healthy, educated, ethical society, while at the same time creating sustainable profits. Environmental preservation, resource conservation, upholding human rights, maintaining operational integrity and abiding by regulatory requirements are requisites for having a licence to operate. Sustainability is no longer a ‘fancy word’ or a good thing to do for organisations. It is a matter of survival. As a business, if you want sustained, long-term growth, it is important to innovate to make sure you operate responsibly and that you let your stakeholders know that you are doing it.

Q: How has ICI responded to these changes? A: As a global company, our internal reporting systems and standards have long been in line with international trends. For us to start public reporting on our sustainability performance was simply the next step, as we already had sophisticated internal systems in place to compile the data required for preparing a relevant and reliable sustainability report. The expanding dimensions of annual reports enabled us to showcase and share our successes and challenges, which has helped to enhance the impression of ICI being a transparent organisation.

Q: So transparency has been the key driver in changing ICI’s reporting parameters, even

when there is no compulsion for sustainability reports in Pakistan? A: Sustainability reporting is now a responsibility, not a compulsion. The world is a global market and very competitive. Whether you operate in an emerging or a developed market, your competitors and stakeholders are the same. The pool of resources from which you derive your financial and nonfinancial capital is the same. So even when there is no compulsion to report beyond financial measures, if you do so, the chances of attracting financial capital, human resources, demand for products and social media acclaim beyond national boundaries increases.

Q: What challenges did you face in preparing sustainability reports?

A: It took us time to ensure that everyone was actively buying into the values of accountability and transparency underpinning the sustainability report. As the board of directors was passionate about sustainability reporting principles and standards, it was easier to get everyone enthusiastically involved through engagement, training and awareness sessions.

Q: A key challenge has been perceptions around the reliability of disclosures. How did you overcome this at ICI? A: We made sure we followed international standards – for example, Global Reporting Initiative (GRI) standards – along with ensuring that our reports went through a reliable external (third-party) assurance process. Q: Within an organisation who should be responsible for driving sustainability reporting?

A: Sustainability reporting is more strategic and first has to be owned by the board in terms of strategic direction, setting targets and what the organisation should look like. With report preparation, the finance function can have a responsibility to bring everyone together as a team to prepare a report that is business performance encompassing. ICI has a sustainability council that draws people from all functions and has sustainability reporting stewardship.

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accountancy futures: corporate reporting sustainability

Waqar Malik

As chief executive of ICI Pakistan, which recently won the ACCAWWF Pakistan Environmental Reporting Award for transparency in reporting, Malik spent over 26 years with the group in a range of senior commercial, finance and strategy roles before retiring in December 2012. He is former president of Pakistan’s Overseas Investors Chamber of Commerce and Industry (OICCI) and Management Association of Pakistan (MAP). He sits on the boards of Engro Polymer and Chemicals, IGI Insurance and the Pakistan Business Council. He is a director on the central board of the State Bank of Pakistan and is a trustee of the Duke of Edinburgh’s Award Programme Pakistan. He is also a member of the boards of governors of the National Management Foundation Lahore University of Management Sciences and the Indus Valley School of Art and Architecture. An alumnus of Harvard Business School and INSEAD, Malik is a professional accountant.

Q: How has the finance function’s role changed? A: An accountant of today is seen as a business partner, as someone who drives the business and thus has a significant role in ensuring that the business model supports the realisation of sustainable performance across the three Ps: people, planet and profits.

Q: How has ICI approached integrated reporting?

A: We knew that it was important to integrate financial statements with corporate governance and corporate social responsibility disclosures, along with disclosures of environmental, social and economic indicators. Anyone who reads ICI’s reports should be able to gain a holistic picture of its business performance.

Q: How do you foresee the reporting landscape shaping up in the next five years in Pakistan?

A: Reporting in Pakistan has become more transparent. The regulator has encouraged this and made sure reporting complies with international standards. Encouraged by initiatives like the ACCA-WWF Pakistan Environmental Reporting Awards, there is a realisation that organisations that are consciously reporting community responsibility, people development and environmental resources preservation are more likely to grow. I see reports becoming more inclusive and integrated, showing clearly the bigger picture as to how businesses are contributing to social and environmental development. Interview by Afra Sajjad, ACCA’s head of regional education, MENASA

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accountancy futures: corporate reporting quarterly results

More harm than good? Quarterly reports promote short-termism, are vulnerable to manipulation and can even lead to corporate value destruction – or so the latest thinking goes


t is normally assumed that when it comes to information, investors can never get enough. Transparency is thought a cardinal virtue in financial markets. Yet the idea that companies should be forced to release financial results every three months is coming under attack across the globe. A recent British government report into equity markets attacks the practice for promoting short-term thinking among investors and executives. Lead author and Oxford University economist John Kay says that when it comes to data ‘less may mean more, and more may mean less’. His counter-intuitive claim is supported by a growing volume of research. Some scholars even argue that quarterly reports are more damaging than high-profile corporate frauds, such as Enron. Such concerns appear to be filtering through to politicians. The European Union, for example, is thinking of scrapping the requirement for three-monthly releases. Even in the US an increasing number of academics believe that quarterly reports do more harm than good. THe US model Compulsory quarterly reporting originated in the US. Ever since the early 1970s American firms have had to offer investors these regular financial health checks. Where Uncle Sam has led, many other parts of the world have followed. In 2004 the European Commission compelled companies to publish interim management statements. South East Asian nations have also moved in this direction with only less developed emerging markets trailing. Many still believe the US accounting model is the right one. Annual reports alone make it hard to keep tabs on a company’s performance, advocates argue. Infrequent reporting can also give an unfair advantage to those closest to the company, says Ulla-Martina Bauer ACCA, a senior manager at accounting firm BDO in Germany, and a member of ACCA’s Global Forum for Corporate Reporting. ‘Quarterly reports give the public a better understanding of how the company is performing throughout the year and that might help prevent insider dealing,’ she says, speaking in her personal capacity. If the public suspects that insiders have an unfair advantage, they may eventually withdraw from the market altogether.

Given such compelling arguments, it might seem odd that quarterly reports are falling out of intellectual favour. The most basic charge against them is that they add far less value than is commonly assumed. ‘Companies can employ a variety of accounting tricks to give the impression of smooth earnings, which can sometimes conceal underlying turbulence,’ says Mark Hanson, who follows US energy companies for investment research company Morningstar. The tricks include tweaking allowances for losses or postponing maintenance on buildings or equipment. ‘As a result, the financial aspect of these reports do not always add value,’ says Hanson. short-termism Quarterly reports can also fail to reflect the long time horizons of many businesses. ‘For many companies, investments take years to come to fruition, which makes these shortterm updates often irrelevant,’ Kay says. One example is the oil industry, where a deep sea well often takes over five years to bring into production after its initial discovery. The deluge of information is not just useless but actively damaging, according to Kay. ‘Even investors who know that a piece of information is irrelevant may feel compelled to act on it, especially if they think others will do so,’ he says. ‘As a result there is usually a flurry of activity around the time of quarterly releases.’ And while stock turnover generates commissions for the banks it depletes returns for pension funds and other investment institutions. ‘This is all bad news for investors,’ says Kay. Perhaps more importantly, the requirement for quarterly reports can hinder corporate performance. This goes far beyond the strain that updates place on a business’s accounting function. Since company stocks can slide sharply if quarterly earnings disappoint the market, executives may sacrifice longterm value so they can meet expectations. A 2006 survey of 400 CFOs found that around

‘CFOs appear to be willing

to burn real cashflows for the sake of reporting desired accounting numbers’

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accountancy futures: corporate reporting quarterly results

80% said they would decrease discretionary spending on research and development, advertising and maintenance to hit an earnings target. More shocking still, 55% said they would delay starting a new project, even if that meant sacrificing value. ‘Chief financial officers appear to be willing to burn real cashflows for the sake of reporting desired accounting numbers,’ the report concluded. The main motivation was a belief that even one earnings miss could damage a company’s reputation with the market. Executive heads tend to roll after a few such disappointments. more damaging than fraud The report’s authors, Professor John Graham and Professor Campbell Harvey of Duke University and Professor Shiva Rajgopal of the University of Washington, said this practice destroyed more value for shareholders than headline-grabbing fraud cases such as the implosion of WorldCom. ‘Much media attention is focused on a small number of highprofile firms that have engaged in earnings fraud,’ their paper said. ‘We assess that the amount of value destroyed by firms striving to hit earnings targets exceeds the value lost in these high-profile fraud cases.’ The report put the lost value at around $150bn a year in the US, equivalent to two Enrons. These striking conclusions were backed up by a June 2011 paper by Professor Jurgen

Ernstberger of Ruhr University Bochum. He also demonstrated that companies will forgo long-term rewards to avoid losing face with investors in the short term. His study found examples of companies offering bigger discounts to consumers to lift short-term sales, despite being aware that doing so would damage long-term profitability. A strong case can also be made that investors would not be giving up information of any great value if quarterly releases were abandoned. In October 2011 the European Commission declared that ‘investor protection is already sufficiently guaranteed’ by businesses having to reveal any market-moving information immediately to the market. In the UK alone, for example, there were 133 profit warnings in the first half of 2012, according to Ernst & Young data. Most experts agree that there are some companies and sectors in which frequent updates are essential. The fortunes of a fashion retailer, for example, can shift quickly depending on the appeal of each season’s line. But there is plenty of evidence to suggest that quarterly reporting is counterproductive. ‘If we want an investment culture that really focuses on long-term value, we need to give up the idea that all companies should be forced to update their figures every three months,’ says Kay. Christopher Alkan, journalist based in New York

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accountancy futures: taxation legislation

GAARs go global Both India and the UK are likely to boost tax legislation with general anti-avoidance rules, report ACCA’s Chas Roy-Chowdhury and Jason Piper


Chas Roy-Chowdury FCCA is head of tax at ACCA. He is the staff expert on ACCA’s Global Forum for Taxation. He worked in public practice before joining ACCA.

easures to counter the avoidance of tax are of great interest around the world. Governments are under pressure to maintain a healthy stream of tax revenues. Public interest is also high, with pressure groups and media reports highlighting cases where global brands appear to be paying less tax in some jurisdictions than the man or woman on the street might expect. Against this backdrop, interest in the creation of general anti-avoidance rules (GAARs) is understandable. The appeal of GAAR has grown as tax rules around the world have become more complex, creating more opportunities for advisers to identify potential cash-saving opportunities. But when the economic outcome and the tax outcome of a transaction differ substantially, tax authorities become concerned. Jurisdictions with a civil law system already have the concept of abuse of law, and nearly all have further specific abuse rules for tax. However, this concept does not exist automatically under common law systems, as in the UK, US and Commonwealth countries. Governments

therefore need to find other ways to achieve equity in tax. The US’s response is unusual, in that the judiciary aims to apply an economic substance doctrine – the goal being to assess whether the tax result is roughly in line with the economic outcome. Elsewhere in common law jurisdictions, GAARs are widespread. Some form of GAAR has been introduced in all major Commonwealth countries apart from the UK and India, though in both these countries measures are now on the drawing board. Teething problems Introducing a GAAR in any legal system is not without its challenges. Australia’s first attempt proved ineffective, too broadly drawn to counter particular tax schemes that the Australian government would probably have intended to be caught. The GAAR has therefore been reworded, though its effect remains uncertain. Recent developments in India also illustrate the challenge of introducing a GAAR, particularly in a time of economic pressure. The introduction of India’s tax avoidance laws is set for postponement until 2016, due to

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accountancy futures: taxation legislation

Tom Duffy FCCA consultant, Affecton ‘The purpose of the GAAR is one that most taxpayers would support – to reduce the loss of tax revenues through abusive artificial schemes which have no purpose themselves other than to avoid tax. The problem is how to achieve these ends while preserving clarity and certainty, and leaving taxpayers able to order their affairs in the most advantageous way. Some countries try to overturn transactions that have tax avoidance as one of their main aims. This requires a clear definition of tax avoidance, which in turn leaves the problem that the concept upon which the law itself is based – tax avoidance – is self-referential. In the UK, the Aaronson report overcame this difficulty by focusing on the most egregious schemes and ensured that the GAAR would not overturn the choices made available to the taxpayer by the legislation. The UK tax authority’s approach removes this safeguard and effectively broadens the scope of the GAAR. In our view, this is counter-productive and the GAAR will become a source of uncertainty and additional bureaucracy.’ Member of ACCA’s Global Forum for Taxation

concerns that foreign fund managers were withdrawing investments. The postponement will allow time to clarify the details and, ideally, provide reassurance to international businesses and investors. In contrast, the UK government appears to be pushing ahead with its plan to introduce a general anti-abuse rule in 2013 – specifically, a rule ‘targeted at abusive tax avoidance arrangements’. Draft legislation contained in a June 2012 consultation document establishes the concept of a general anti-abuse rule which is to apply where both a ‘tax arrangements’ test and an ‘abusiveness’ test are met. The UK’s move follows a November 2011 report by a study group led by Graham Aaronson QC, which advised against introducing a ‘broad spectrum’ general anti-avoidance rule. The UK government’s statements have backed that conclusion, noting that broadly drawn rules can cause uncertainty for companies and investors and that a UK variant could potentially undermine confidence in the country as a good place to do business. Mission creep However, despite the UK government’s stated intent to introduce a narrowly drawn rule, ACCA and many professionals are concerned that this is not being evidenced in the draft legislation. Although the Aaronson report appeared intent on targeting only the extremes of tax avoidance, recent signs of ‘mission creep’ have been noted, with fears rising that less extreme cases could fall under the antiabuse rule’s net. The draft legislation will be supported by guidance yet to be developed by the UK tax authority. HM Revenue & Customs could therefore have substantial influence on the application of the new law. So could the Advisory Panel, a group of experts who, under the government’s proposals, will issue non-binding opinions to HMRC and taxpayers

on whether the anti-abuse rule applies in particular circumstances. Another concern is that all UK taxpayers covered by the self-assessment (SA) system will need to understand the anti-abuse rule themselves. The government’s intention is that the antiabuse rule will, as far as possible, operate within existing tax administration procedures, including SA regimes. But is it reasonable to expect an individual taxpayer to know whether their tax affairs have been handled in a way that complies with the intention of Parliament when passing legislation? The UK courts would inevitably play a substantial role in applying the UK’s proposed anti-abuse rule. Over time, as members of the judiciary change, this could result in an evolving interpretation of the rule. Some critics of the government’s proposals fear this could create unwelcome uncertainty over the nature and stability of the UK’s tax regime. Such concerns would appear supported by US research, which tried to objectively assess how tightly existing GAARs around the world were being applied. The evidence suggested that the effectiveness of the GAAR depended more on individual judges than the statute itself. It is also worth noting that even in countries where GAARs exist, they are not always called into play. Ireland, for example, took 10 years to see a case assessed under its rule and another decade before a case reached the Supreme Court for decision, perhaps  an indication of the rule’s effectiveness as a  deterrent. Despite the ongoing debate in the UK about the proposed anti-abuse rule, all the signs are that a final version will be introduced in 2013. Unlike in India, no brakes will be applied. One outcome for advisers could be a new income stream, as major clients seek more detailed advice as to whether particular structures might be caught. But is this the kind of work that advisers really want? The reputational risk from making a wrong call could be significant.

Seeing the light: fireworks illuminate the Commonwealth Games 2010 in Jawaharlal Nehru Stadium, New Delhi, India. Along with the UK, it is the only other Commonwealth country not to have a GAAR, though both are considering their introduction.

Jason Piper is ACCA’s technical manager, tax and business law. He is a chartered tax adviser, with Big Four and niche practice experience.

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accountancy futures: audit and society human rights

Auditing for human rights Some of the most trenchant insights into the ‘soul’ of a company come from finding out how it treats its people. Mazars’ James Kallman explains pg80 edition 06

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accountancy futures: audit and society human rights


on-stop media and social networks have changed the way stakeholders connect with businesses. As well as looking for ‘reasonable’ profits, they now demand transparency in the way the business is actually run. A glossy corporate brochure with green elements will no longer suffice, as professional reporting on corporate social responsibility is also required. And regulators are already taking heed of what the public, the ultimate regulators, want. In California, for instance, all retailers with a presence in the state and total global sales in excess of US$100m have to report their internal processes to ensure that forced or child labour is not associated with any of the goods they sell. In France too, regulators have defined new requirements for extra-financial reporting, covering the full scope of groups of companies, including social, environmental and societal parameters, which are to be certified by an independent third party. Even more demanding are the recent rulings of the US Securities and Exchange Commission (SEC). The first ruling requires US-listed oil and mining companies to disclose all taxes and other fees they pay to foreign governments and is similar in nature to the Extractive Industries Transparency Initiative (EITI) requirements. The second ruling requires companies to disclose to their shareholders and the agency when any portion of their manufactured goods contains minerals such as tin, gold and tungsten mined in the Democratic Republic of Congo; it places companies under an even more powerful microscope. This underlines a growing awareness that traditional financial reporting can only tell us so much of a company’s story – the skeleton of the business. It is an acknowledgment that other types of reporting are also required to flesh out the skeleton and add features to the face of a company.

Labourers making glass bracelets in the Indian city of Firozabad, where there has been a major campaign by the authorities against the use of child labour.

Integrated approach This is obviously leading towards the integrated reporting of financial and environmental, social and governance (ESG) information, human resources and key performance indicators with an over-arching integrated summary report. But such an approach has its own problems. Being exceedingly complex, it could take years to implement due to the lack of qualified auditors and service providers. Also, its complexity may well preclude direct overall comparison and, while some sectors could be comparable, simple conclusions could well be lost in the forests of detail. What is needed right now is additional reporting that augments the bare financial

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accountancy futures: audit and society human rights

figures and provides an insight into the soul of a company and how well it fits into the acceptable environment of today’s world. A comprehensive human rights audit readily fits the bill, for if we know how a company treats the familiar faces of its employees, community, environment and the people it does business with, then we should gain a pretty good idea of how it is likely to treat the numerous other faceless stakeholders whose futures are mortgaged to its operations. In the current climate of corporate scandals, such information is priceless. For audit purposes, an expansive definition of human rights is required that includes the areas outlined in the boxout on this page. The indicators must be set with care, and be benchmarked to all major international and local human rights laws, conventions, protocols and regulations. Once set, however, the areas to test are decided by the auditor based on statistical audit sample and risk analysis, rather than on what the company may wish to report, as is the case with many sustainability reports currently carried out in line with Global Reporting Initiative (GRI) guidelines. Moreover, by carrying this out on an unannounced basis, reliable information can be obtained that is in no way influenced by the company undergoing an audit. The whole audit process is both comprehensive and detailed and can take three to four months or even longer to complete. regional variations The concept of human rights is not as universal as some might imagine but in part dependent on cultural norms. One company in Indonesia, for example, even permits children to join their mothers in the fields after school, which would be a no-no in most western countries. Yet this fits in with the culture in Indonesia with its strong mother-child-family bond, something that is common in Asian society in general. Indeed, human rights in Asia are more focused on the rights of society as a whole, whereas the western model is to protect the rights of the individual within society. It is essential to obtain direct Asian, as well as African and Latin American, input when it comes to setting standards for a human rights approach, as it is important that this not be seen as just another imposition by the western world. Human rights auditing provides an immediate answer to the need for additional information on a company’s performance. It provides valuable knowledge on the relationships between the company and its stakeholders; allied to data on its financial position from traditional audit procedures, this will permit

Defining human rights Human Rights Compliance with the UN’s Universal Declaration of Human Rights. Labour Rights The human right to work, with freedom of association, and without discriminatory, forced or child labour practices.

Leader of Mazars’ human rights audit and advisory practice worldwide, James Kallman is a 30-year veteran of emerging markets. He is president director of Mazars Indonesia.

Environment Conducting environmentally responsible operations to uphold the human right to a healthy environment in which both to live and work. Anti-corruption Combating all corrupt practices, including bribery and extortion, to ensure that only legal payments are made that will ultimately benefit the human rights of the whole of society.

a reasonable diagnosis as to the company’s health and prospects. Moreover, a human rights audit is presented in such a manner as to readily allow a meaningful company-tocompany comparison, something that is not always possible with other approaches. Now that has to be of value, especially from a capital market viewpoint, not only in the short and medium term, but also in the long term, as it must surely form part of any integrated reporting package of the future.

A work by graffiti artist Banksy in London highlights child labour issues by depicting a young child stitching together Union Jacks on an old sewing machine.

The Mazars human rights audit methodology was recognised at the International Accounting Bulletin Awards in March 2012 when it was awarded Audit Innovation of the Year. The judges included ACCA technical director Sue Almond.

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No ethical slipups: promoting fair-trade products at the 2012 Sustainable Living Expo in Vancouver, Canada.

Beyond the numbers The influence of non-financial factors on investment decisions is growing. Ernst & Young’s Andrew Hobbs explores what that could mean for audit

F Andrew Hobbs is an associate partner leading Ernst & Young’s UK regulatory and public policy team.

or anyone interested in looking, there is a wealth of information available about a company’s performance and prospects beyond the annual report and audited financial statements. Some of this additional information is provided by companies themselves, including preliminary reports and quarterly analyst calls. The internet is another treasure trove of corporate information, opinion and gossip. The extent to which all this ‘noise’ influences investors varies but it can and does move markets. When a company loses control of the flow of its financial information, even temporarily, it can have a dramatic financial impact. Reputational damage is one of the non-financial factors that can also force a shift in the public and investor mood. And the fact

that companies themselves are increasingly providing insights about their performance beyond what is in the annual report – for example, on social media or investor teleconference calls – suggests a demand for more than just financial information about companies’ overall performance. With the financial crisis having reduced confidence in the corporate sector as a whole, it is perhaps unsurprising that investors are looking for more information about companies. After all, the less trust you have in something, the more you want to know about it. Directors are obliged to share their views on the principal risks facing the company. But there are a range of non-financial risks that do not come within the scope of financial statements and on which no assurance is


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provided. Risks such as corrupt behaviour, human rights violations, control failures (including data losses and confidentiality breaches) and environmental incidents can all cause reputational damage and have significant adverse financial consequences. This isn’t pie in the sky. A growing body of investors are already looking at these issues and integrating them into their investment strategies. ESG (environmental, social and governance) is a term you may have already come across. Investors are using ESG factors to evaluate corporate behaviour and to determine future financial performance. The Association of British Insurers advises its institutional investors that corporate reports should include information on ESG-related risks and opportunities and how they might impact the business. That’s not to say all risk is bad nor that it is always viewed negatively by investors. Equity is called risk capital for a reason. High-quality risk disclosures by companies allow investors to better judge the company’s risk appetite and whether it is in line with their own. In light of these factors, how might corporate reporting develop to help meet the demand from investors for more information about overall performance? What assurance might be sought on the information provided? Let’s focus on just three examples here: business ethics, sustainability and human capital. BUSINESS ETHICS There is a growing awareness that having the right behaviours within an organisation reduces risk and leads to better outcomes. There have been several recent examples where reports of unethical behaviour in large companies have caused significant reputational and financial damage. It is therefore reasonable to expect that shareholders and other stakeholders will demand more information from companies about how they encourage the right culture in their organisations. Having the right tone at the top is key to developing good behaviours throughout an organisation. The tone from management plays a major role in determining and supporting an organisation’s culture. However, even a great tone at the top does not automatically translate into the right behaviours on the ground. Investors, regulators and other stakeholders will want to know there is alignment between the boardroom and the shop floor. How embedded are the company’s values? Are there controls to deter, detect and deal with unethical behaviour? In short, investors and others want confidence that the company is ‘walking the walk’ and not just ‘talking the talk’.

If companies do not step up here, regulators will feel obliged to act, in ways that may not encourage the ethical behaviours sought and could even create perverse incentives. Public policy responses to governance failures tend to focus on outputs – things that can be measured easily – rather than incentivising the right kind of behaviours which should lead to better outcomes. Indeed, by focusing on excessive risk taking by regulating structures and products, regulatory reform may even encourage compliance-oriented behaviours rather than motivate people to use their judgment and do the right thing. Where there is a low level of trust in a sector, investors and the public are unlikely to take the word of a company in that sector when it comes to its culture. There may therefore be a role for some kind of external assurance. This could involve, for example, reviewing communications throughout an organisation for evidence that the tone from the top is reflected consistently in communications at all levels of the organisation. SUSTAINABILITY AND ENVIRONMENT Stakeholders and the wider public are increasingly looking for more information about a company’s overall performance and how sustainable it is. This reflects not only concern with the impact of organisations on the environment and people, but a growing recognition that a company’s value can be


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is of increasing importance to stakeholders and the public – witness the increasing focus on the diversity of corporate boards and executive remuneration. Investors and others may in the future demand more information from companies about their human capital and evidence that they have robust strategies in place to manage human capital changes. An EY survey conducted in 2011 found that half of investors wanted better reporting of how intangibles such as human capital might affect a company’s ongoing performance. Many shareholders already have a keen interest in succession planning. Other areas related to human capital where investors and others may seek additional information – and assurance – include the approach to equality and diversity. Is the tone from the top matched by the reality on the ground and reflected in the company’s policies and practices on recruitment, training and reward?

affected by issues off the balance sheet, such as its access to natural resources. Sustainability is not just about environmental sustainability. That is why there is increasing enthusiasm and support across a broad range of stakeholders for the introduction of integrated corporate reporting. Integrated reporting allows a company to communicate the overall value it creates – its social, environmental and ethical value as well as its financial and commercial value. A number of companies that already report sustainability information also seek assurance on it. External assurance could play a role in providing confidence to investors and others that a company’s performance is sustainable and to help answer such questions as:  Does the company have a strategy to manage commodity price increases?  Where does the company source its supplies from? Does it use ethical sources? Above all, is the company thinking long term and sustainably?

* *


HUMAN CAPITAL Human capital is another resource that could have a significant effect on the value of a company, particularly for those businesses with little in the way of physical assets, or where an individual or small group of individuals are closely associated with the success of the company. A company’s management of its human capital

Businesses in all sectors are under pressure to report on their wider impacts and business ethics.

CONCLUSION These are just three areas where corporate reporting and related assurance could be developed to provide more information to investors and other stakeholders in the future. Others might include the quality of corporate governance, regulatory risks and compliance, and emerging markets risks. The audit and accountancy profession is well placed to work with preparers and investors to help develop corporate reporting in ways that are of value to shareholders and other users. The profession should challenge itself to think radically about areas of potential demand in corporate reporting and how audit and assurance may develop so that it remains relevant to the needs of shareholders and other users. A number of questions must be answered before the profession can be expected to put ideas into production. For one, is there demand from companies and investors for new areas of assurance? Any new areas of reporting and assurance would also likely require the development of standards to help ensure quality and comparability by users between different organisations. But these caveats should not stop the profession from thinking radically. Indeed, it arguably has a professional obligation to do so. The audit is there to protect investors. Investment decisions are now informed by non-financial factors to a far greater extent than was the case even a few years ago. It is therefore right to ask how the current system of corporate reporting, audit and wider assurance could develop to continue to provide confidence to a more inquisitive and sceptical investing public.


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accountancy futures: audit and society policy development

A time for dialogue Grant Thornton partner Steve Maslin explains how a collaborative initiative by the six large international audit networks is drawing lessons from the financial crisis


he six large international audit networks – BDO International, Deloitte, Ernst & Young, Grant Thornton International, KPMG and PwC – have been working together for more than a decade on key policy issues that impact accounting, auditing and corporate governance around the world. The main vehicle of collaboration is the Global Public Policy Committee (GPPC), which comes together regularly to discuss key policy developments, both among ourselves and with key stakeholders. I hasten to add that we always do so with a competition lawyer present to keep us on the straight and narrow!

Crash and burn: street clashes have accompanied the public austerity campaigns that have been triggered by the global financial crisis and the resulting paralysis in the debt markets.

That we are able to collaborate while still being competitors is a testament, I think, to the global audit profession in general and its desire to ensure that the way in which public interest entities report, govern themselves and are audited continually evolves to meet the needs of users. On becoming chair of the GPPC last July, I was not short of material for setting our priorities for the next two years. The main areas we are currently looking at are:  accounting for the sovereign debt issued by key European financial institutions and the related reporting issues;


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with independent audit regulators * wtoorking continue to build audit quality and

regulators can take at the global level to increase the speed with which actions are taken in particular countries to maintain and continue to build audit quality and ensure consistent high-quality execution.

maintain confidence in audit reports;


 the evolving role of audit.

banks and sovereign debt The first and most urgent priority continues to centre on corporate reporting by banks and financial institutions. On a national level much has been achieved since the financial crisis burst upon the world. For example, in the UK, audit firms worked closely with the Bank of England, the Financial Services Authority and the Financial Reporting Council to form a code of dialogue. This code ensures that for systemic banks there is a regular dialogue between the prudential supervisor, bank and auditor, allowing views on key issues and pressure points to be shared and discussed in advance of each new reporting cycle. The audit networks have an important role in making such national initiatives more widely known to benefit other capital markets. On the international front, the firms and audit regulators are working with the Financial Stability Board to enhance the quality and relevance of disclosures in banks’ accounts. The next task is to embed these ideas into practice. The networks have also been engaging each other in far greater regular dialogue on bank accounting since the crisis emerged. For example, a working group of senior-level professionals meets regularly to discuss the impairment of sovereign debt and related reporting issues by European banks. Debating these issues in advance minimises the risks of substantial differences in the way that key institutions report such instruments. These are important initiatives and for me closer two-way (and three-way) dialogue between auditors and prudential supervisors (and bank management) is the number one lesson from the crisis. However, much still remains to be done. good practice The second priority concerns sharing good practices between the networks and with regulators to reinforce the effectiveness of our international quality assurance programmes. Again, cooperation with other stakeholders is an important lesson from the crisis and work is under way between the International Forum of Independent Audit Regulators and the networks. A key strand of this work is to try to capture recurring themes from independent inspections and the networks’ own inspections around the world. The aim is to see whether there are lessons that the networks and

Steve Maslin is head of external professional affairs at Grant Thornton and chair of its Partnership Oversight Board in the UK. He was the firm’s head of assurance services for seven years and a member of the Audit and Assurance Advisory Panel of Grant Thornton International. He is also a member of the ACCA/IMA Accountants for Business Global Forum. The views expressed here are his own and not necessarily those of Grant Thornton or the GPPC.

the views of stakeholders Third, the networks have been listening to the views of other stakeholders – in particular, investors – on the role of auditors in maintaining and building market confidence. We are looking to learn lessons from the financial crisis for audit and how it needs to evolve to meet current and future user needs. The overwhelming reaction from nearly all stakeholder groups is that the large audit firms play a crucial role in sustaining capital markets and on the whole do a pretty good job. A common theme from investors and other stakeholders is that auditors have vast quantities of information on the strength of individual companies and industry sectors; could this information be shared with investors and regulators to increase market confidence? It is easy to answer yes, but obstacles such as trust, confidentiality and cost cannot be dismissed out of hand. However, effective leaders see obstacles as challenges to be overcome, and there is a huge desire among audit network leaders to continue this debate and find solutions. We must look for ways to move the audit role forward to deal confidently with a world of ever more volatile valuations, business models and financial confidence. There are other issues we must bear in mind. The work by the International Federation of Accountants (IFAC) on public sector accounting standards here seems vital to me. I also believe the fairly routine sharing of good practice, such as making it unlawful to mislead an auditor, would bring improvements in many countries far more quickly than further changes to reporting and audit. Nor should we close our minds to embracing new customs and practices from emerging economies. Enron and all the other scandals of the last decade were a wake-up call and I believe that audit is in a strong state now, the more so for strengthening dialogue with other stakeholders. However, life moves quickly and we cannot rest on our laurels and feel that an audit model that has its roots in the mercantile trade of Europe centuries ago is automatically doing all it can to meet the needs of the future. The financial crisis showed that business is vital to the well-being of everyone in society. As we move forward the debate on evolving our role as auditors, the question ‘what are we doing to benefit society?’ is a useful one to have at front of mind.

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accountancy futures: audit and society exemption threshold

Medium matters Allowing medium-sized companies to dispense with audits could increase their costs of capital and have wider consequences, says ACCA’s Sue Almond


ver the years we have become used to the audit exemption thresholds for small companies being gradually increased. The rise is especially marked when governments are keen to be seen to be cutting ‘red tape’ for small entities. For smaller and owner-managed companies the benefits of an audit may indeed be outweighed by the costs, and it is for this reason that ACCA believes that the audit of small companies should be voluntary rather than mandatory. However, a worrying new development has emerged in Europe in the past 12 months – the proposal to exempt medium-sized entities too from the mandatory audit requirement. The proposal has not progressed, but the seed may have been planted in the minds of legislators, so it is timely to consider the cost benefit equation and the possible impact. First, it is important to define ‘medium sized’. The criteria in the EU are turnover between €8.8m and €35m, a balance sheet total of between €4.4m and €17.5m, and a headcount of between 50 and 250 employees. In many countries, and in large countries within the local environment, businesses of

All sizes: the benefits of audit are not just the preserve of largescale businesses.

this size may well be regarded as large by many people. Certainly, such enterprises may provide significant employment in the area and support a strong supply chain. They may well be involved in international activity, which stimulates trade and awareness of the local area. If such a business were to fail or relocate, there would likely be a serious local impact. These businesses also have a broader impact. As well as their direct tax contributions, they are effectively tax agents responsible for collecting significant indirect taxes – a burden that many businesses are all too aware of. Sales taxes (say 20% of turnover) and payroll taxes (perhaps 40% of payroll cost) result in substantial payments to government. So to what extent is an annual audit a burden on medium-sized business, and what else can it be said to contribute to society? Medium-sized businesses are critical to economies but typically lack the resources to develop the systems or sophisticated finance functions expected of a large entity. Yet they may not be simple owner-managed businesses; often there will be some outside investment, or in the case of a family business there may well

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József Farkas director, Sanatmetal, Hungary ‘Audit helps us with the reliability of our accounting system and analysing our results. It offers us a continuous consulting capability that gives us expert answers whenever we have questions. Onsite audits twice or three times a year are part of our internal control system. Audit also means security for the company owners that the management is handling its capital properly. And banks have more trust in an independently audited balance sheet.’

Arjumand Minai FCCA CEO, Standard Chartered Leasing, pakistan ‘A major consideration while conducting the risk assessment of an SME is the availability of audited statements and quality of reporting. Entities rated by a reputable rating agency attract funding at lower rates, and rating agencies demand audited statements. Audit instils financial discipline and ensures effective governance. The cost of an audit is a fraction of the resulting savings that can be made in the cost of capital and through minimising operational risks.’ Member of ACCA’s Global Forum for SMEs

be non-working family shareholders. Such a business is no longer ‘small’, and has broader stakeholders, and hence responsibilities, than a typical owner-managed business. The underlying concept of the annual audit is to provide stakeholders with assurance on the annual accounts. But the process of providing this assurance has many side benefits to the business and its stakeholders, and ultimately helps to underpin the orderly conduct of the business community. The very fact that ‘the auditors are coming’ provides a timeline and discipline for many businesses to complete the annual reporting process. The pure audit process itself includes the assessment of risk, consideration of controls, discussion of fraud, and consideration of going concern – all areas of intense interest for the broader stakeholder group. The auditor acts as society’s eyes and ears in areas such as bribery and money laundering, and has whistle-blowing responsibilities. The auditing process involves considerable discussion with the business’s managers, which in some cases will be an opportunity to debate the issues facing the business, and to encounter robust and independent challenge on the business plans. While the prompt for such discussions may be audit-related, and there is rightly concern over

Sue Almond is ACCA’s technical director. Her role is to influence 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.

the extent of non-audit services auditors should provide to clients, it is naïve to expect these discussions to be purely one-dimensional. As the auditor typically has a broad client base, the discussion will often include comparative feedback and suggestions from the auditor – to use an unfashionable term ‘business advice’ – that is particularly valued by the business. So what would be the impact if the audit requirement were to be removed? It is tempting to assume that in the short term there would be cost savings on the annual audit. But what we have typically found when small audit thresholds have been raised is that accountants have become more adept at articulating the value of what they bring to the business and have simply repackaged this, rather than relying on the mandatory statutory audit to open the door. So there may in fact be less direct cost saving than may be assumed, although, ironically enough, businesses are happier because the purchase is a voluntary one rather than imposed. But it is the broader, longer-term potential impact that is probably more concerning. There is evidence that a business’s access to finance, and its cost of capital, is impacted by whether or not the financial statements are audited. There are also signs that assurance requirements may be imposed on unaudited businesses via the supply chain. The big question The big, unanswered question is what the response of the tax authorities will be. Many countries are already moving to a more riskbased tax investigation regime, which could be seriously undermined without a statutory audit environment. So it is perfectly possible that the perceived cost savings will simply be a cost-moving exercise – either straight back to the business, or indirectly via the cost of administering the taxation system. It is also important to remember that it is not just about cost. The intangible benefits of regular inspection and dialogue with an independent professional could also be lost. ACCA is clear that there is real benefit for business and society in maintaining the requirement for the audit of medium-sized entities. But we also accept that the current role of audit must evolve to meet changing business needs – whether that is the overall scope of the audit, the quality of auditor reporting or in the development of narrative reporting and integrated reporting. The challenge for the audit profession is to make sure that the audit remains useful and relevant to business – and that we are not shy in articulating the benefits that it brings.

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accountancy futures: audit and society brands

Brand protectors Professional accountants have an important and developing role as guardians and builders of brand strength, argues ACCA’s Neil Stevenson


Neil Stevenson is executive director – brand and is a member of the ACCA executive team. His remit covers marketing and communications, policy, technical issues and publishing. Prior to joining ACCA in 2001 he worked for PwC.

trong businesses have strong brands. We recognise them as customers and, as professionals, we will do business with them. Accountants are very familiar with brands – whether through working with organisations that have strong identities or through developing their own as part of an accountancy practice. However, accountants may not be so familiar with the role they can play in supporting and building great brands. It is a significant opportunity and an area that is set to grow in the coming years as organisations – be they global businesses or more local enterprises – seek to recover from the financial and economic crises of recent years, and restore trust among clients, customers and stakeholders. The importance of brand identity has long been understood by accountancy practices. Where restrictions on the use of brands in marketing initiatives have been lifted, professionals have used branding to differentiate themselves from competitors. But the professional skills and integrity of accountants are central to maintaining and enhancing brand value in the organisations they work for. behind the brand Consumers are increasingly concerned with what lies behind their brands. As we have seen so many times, brand value can be destroyed in an instant through poor management or policies. Professional accountants can play a vital role in assuring the reputation of the company and its brand across the full spectrum of areas that can give rise to poor reputation, such as economic, social and governance areas, the integrity of the supply chain, transparency and ethics. As professionals, we should not shy away from these opportunities, nor dismiss them as a trivial distraction from more serious work. Branding is a discipline that should be seen as enshrining a commitment to quality, integrity and good service. It should be viewed as the means for an organisation to articulate

how customer-centric it is and brings value, quality and consistency and a distinct offering to customers. For ACCA, having a recognised and respected brand is important first and foremost because it is the designation that members carry throughout their careers – it makes them highly respected and sought after. ACCA members are trusted; the ACCA brand reinforces that trust. And the strength of the brand symbolises ACCA’s core proposition: professional, ethical accountants who are technically excellent, create public value, think differently and add value to organisations globally. Of course, it is not a straightforward process – you can’t just design a smart logo. Brand must go to the heart of everything you do. But it does help to understand the key ingredients: a clear identity and image; a distinct and different position in the client or customer’s mind; consistent and long-term values; awareness and recall; a consistent experience; a brand that works across countries and cultures; and a corporate social responsibility (CSR)-focused agenda. Of these, the last is possibly the most interesting and, increasingly, an essential component of branding. Brands that do not address their environmental, social and governance agenda can find their value is destroyed almost overnight. Today, and increasingly in the future, consumers want to be reassured that the brands they choose do not just have an aspirational personality or stand for high value; they want to know about the ethics behind the brand, and its supply chain as well. Accountants can provide assurance on the brand. They can give it credibility, supply the evidence, and champion good governance and ethical performance. And they can do this for their own brand as well: strong ethics, a commitment to a professional, high-quality service and behaviour that reinforces trust will be the future ingredients for a successful professional – this will be the true value of the accountancy brand in the future.

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accountancy futures: public sector creativity

Bright stuff There are tools to help financial managers come up with creative ideas for delivering efficiencies in public services, says ACCA’s Gillian Fawcett


here is a temptation to laugh at the language of creative management tools but they do have a serious side, providing financial managers with a framework for creative thinking to help address challenges, improve solutions and innovate in public services. Processes such as deep diving, thought showers, lateral thinking and synectics can all be learnt and are important aids for thinking divergently. The thought shower, for example, brings a group of individuals together to generate creative solutions to a problem. Then there are Edward de Bono’s ‘six thinking hats’, which separate thinking into six clear functions and roles, with each role identified with a symbolic coloured thinking hat; by mentally wearing one of the hats, you can more easily focus or redirect your thoughts to the challenge at hand. Other creative tools include the synectics technique of ‘springboarding’. An extension of brainstorming, it adds an evaluation process for idea development, building embryonic ideas into new courses of action. Other techniques involve using images. Unimaginative thinkers often don’t go beyond

identifying the obvious. Tools that use images and riddles are helpful in breaking this cycle. There is little doubt that playful use of these techniques can enhance individual and organisational creativity, but financial managers also need to be aware of the wider environments in which they operate. If they are to succeed in innovating in public services, they will also need to develop techniques such as scenario building (analysing possible future events by considering alternative possible outcomes) and future-proofing (a process of anticipating future developments). There is a body of evidence to show that most innovations occur through incremental rather than systemic change, but an age of austerity calls for faster progress to deal with the emerging waves of challenges faced by public services. This will require not only personality types that embrace chaos and uncertainty, but also people who are willing to learn and apply creative management techniques. The idea of hosting a thought shower or applying the ‘knowledge skeleton’ to priorities may sound weird, but such tools can play a valuable role in helping to generate new ideas for delivering financial efficiencies in public services.

Gillian Fawcett is ACCA’s head of public sector and is responsible for developing policy on technical matters affecting public services and monitoring developments. She is the staff expert on ACCA’s Global Forum for the Public Sector.

Ajith Lekshmanan FCCA public sector consultant ‘The pace of change in public service provision and funding is extremely fast and radical, with spinoffs, free schools, and so on. Public sector accountants are directly involved in implementing change as sponsors, project managers, financial advisers, business analysts, service managers, etc. Some have had some training, others have been thrown into the thick of it. Delivering change involves breaking out of established patterns. Many employers specify creativity as a requirement for finance jobs, so accountants need to develop their creativity skills for their career development. At times of austerity in particular, creativity is essential for responding and reacting to the challenges.’ Member of ACCA’s Global Forum for the Public Sector

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Confronting corruption Auditor-generals are waging war on sloppy financial reporting, nepotism and fraud in developing countries’ public bodies


n December 2011 the United Nations unanimously endorsed the importance of auditor-generals as agents of good governance, recognising their role in ‘promoting the efficiency, accountability, effectiveness and transparency of public administration’. The resolution by the UN’s general assembly also emphasised that

Terence Nombembe AUDITOR-GENERAL, SOUTH AFRICA In July 2012, the ACCA-affiliated office of the Auditor-General South Africa published a report into the state of local government finances in the country. It revealed that almost half of the lucrative contracts dished out by its 284 municipalities were given to their employees, local politicians or their families. Meanwhile, two-thirds of municipal councils awarded tenders uncompetitively, almost £300m-worth of contracts could not be audited at all because documentation was missing, and 70% of municipalities couldn’t prove that what they had promised had in fact been delivered. It is up to South Africa’s auditor-general Terence Nombembe and his office to untangle the mess. ‘What is shocking is that we can’t institutionalise the most basic accounting principles,’ says Nombembe. ‘I can’t understand why you can’t get the right reporting and accounting systems in place in government; things like keeping documents and filing properly.’ Nombembe, who is also chairman of the International Organisation of Supreme Audit Institutions (INTOSAI), blames the politicians who are not ‘taking ownership, despite the fact they have accepted that they can’. Uncompetitive practices mean that goods and services are not procured at a reasonable and fair value, and tenders awarded to family and friends means there is no comeback if workmanship is shoddy. ‘There is an argument that there may be bad financial reporting, but service delivery is happening. We are

auditor-generals need to be independent of the entities that they audit and protected from ‘outside influence’. Auditor-generals have a particularly significant function in developing countries where their efforts to expose corruption and improve the quality of public-sector reporting help to bolster confidence in their economies.

arguing against that,’ he says. ‘We have got many instances – 70% of cases where service delivery is said to have happened – where we have found no concrete evidence for that.’ Nombembe says his office is often criticised for focusing exclusively on compliance and not on value-for-money issues. ‘Our argument is let us perfect compliance first, then we can start to look at instances where we dig deeper into scrutinising the value that is received for what is awarded,’ he says. Nombembe has followed a ‘door-to-door’ programme where he visits the leaders of each of the country’s 284 municipalities to tell them how to improve their finances. Staff members who are responsible for auditing those municipalities now pay them quarterly visits to follow up on areas of concern. Nombembe believes it is crucial to instil a culture of accountability and transparency to help vulnerable South Africans ‘who need to be assured that the little resources the country has are improving the quality of their lives’. And it’s a concern throughout Africa. Nombembe meets regularly with his counterparts across the continent, and together they have ‘isolated’ the problem they all face as one of ‘political will’. ‘The first thing people speak about when they speak about Africa is corruption,’ he says. ‘We need to change that perception and it can only be changed if the political leaders within Africa make that part of their language.’ Nicki Gules, features editor, City Press, South Africa


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accountancy futures: public sector accountability

Niyaz Ibrahim ACCA auditor-general, the Maldives Niyaz Ibrahim ACCA assumed the job of auditor-general in the Maldives in May 2011, after rising through the ranks of the country’s Auditor-General’s Office (AGO). ‘My office door is open to everyone, including politicians. But I cannot meet them over coffee or dinner,’ maintains Ibrahim, who joined the then Audit Office as a trainee accounts officer in 2000. ‘I have to not only be independent, but be seen to be independent as well.’ He adds that maintaining political neutrality is equally important for his staff. Ibrahim’s office, in the capital city of Malé, was created in the wake of the country’s democratic multi-party constitution in 2007 and a new Auditor-General’s Bill that Ibrahim is helping to draft should ensure independence and greater protection for the AGO against outside influence in the future. At present, the Maldives does not have a supervisory body to regulate its audit profession, so the AGO issues audit practising certificates to private audit firms and individuals that want to conduct audit and assurance services in the country. Ibrahim believes that the establishment of a legally recognised supervisory body in the Maldives could help to shore up the profession and he hopes to propose a Bill to parliament to this effect. He describes the main challenges facing the public sector as ‘a lack of adequate human resources, a low level of awareness about auditing and weaknesses in some statutes’, while the private sector suffers from

‘the absence of a statutory body to develop and uphold the interests of accountants and auditors in the country, and a lack of laws and regulations that assist the development of home-groomed accountants and auditors’. Ibrahim also believes professional bodies such as ACCA should have a presence in the Maldives. ACCA is already the most sought after professional accounting qualification there and nearly 90% of staff members within the AGO are studying for professional exams, with the majority working for the ACCA Qualification. A definite skills shortage exists at the AGO. ‘We lack expertise in performance audit and information systems audit,’ Ibrahim says. And although the AGO’s main role is not to detect and investigate corruption and commercial crime, suspicious accounts that its officers discover in audit are ‘being investigated to the level that determine the impact of such cases to the financial statements being audited’. The AGO then forwards these cases to the Anti-Corruption Commission and Maldives Police Service for further investigation. Ibrahim says the majority of reports audited so far under his watch are ‘cases of noncompliance with regulation, wastage of funds and financial reporting issues’. These problems have been caused by a poor allocation of responsibility and accountability and he believes ‘systems have to be improved to make people responsible’ and remedial action should follow when they fail. Poorna Rodrigo, journalist

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accountancy futures: public sector health challenges

Pills for the sick bills Dean Westcott FCCA introduces an ACCA report into the financial challenges of healthcare around the world and how they are being addressed


Dean Westcott is immediate past president ACCA and current CFO of West Essex Clinical Commissioning Group, UK.

key challenge for governments globally is establishing an equitable healthcare system that delivers best value for money care in a period of financial austerity. Whether funded through taxation, insurance schemes, out of pocket or charitable donations, healthcare budgets worldwide are being put under intense strain by the need to fund new drugs, technological advances, changing disease patterns and ageing populations, not to mention patients’ ever increasing demands and expectations. ACCA’s report Global perspectives on health challenges, provides greater insight into some of these issues. Based on interviews with 26 ACCA members in senior positions in health organisations around the world, it details the key financial and non-financial challenges

facing each country and the strategies being introduced to meet them. Respondents also describe the critical role played by accountants in ensuring the efficient and effective use of resources and the contribution they make to developing and implementing strategies to transform healthcare delivery. This article reproduces part of the report’s coverage of the financial challenges and what is being done to address them. Global perspectives on health challenges is available at If you would like to contribute to ACCA’s exploration of shared learning between healthcare systems worldwide, email Sharon Cannaby, ACCA head of health sector policy, at

View from: Canada

View from: China

Jayshri Makwana FCCA, director, Vancouver Coastal ‘Our challenges are consumer demand, ageing health facilities and an ageing population. The response is more centralised decision-making structures, shorter hospital stays, and integrating community and homebased care to free up beds.’

Feng Chaojie FCCA, vP, Autobio Diagnostics ‘China’s financial challenges are providing healthcare in rural areas and the lack of health facilities/ personnel there. We are setting up a health insurance scheme for rural populations and reducing drugs costs through tendering.’

View from: Malaysia

View from: Romania

Wee Hock Kee FCCA, cEO, Back To Health (M) ‘A low healthcare budget, rising drugs costs and an ageing population are our challenges. We are meeting them through preventative care, cost-effective generic drugs, traditional Chinese medicine, and health insurance for all Malaysians.’

Cosmin Panaete ACCA, deputy cFO, Regina Maria ‘The key financial challenge in Romania is the ageing population as young people leave the country. The government is trying to introduce an insurance-based system to shift some of the burden of care to private medical providers.’

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View from: Singapore Grace Lim Siew Wah FCCA, CFO, KK Women’s and Children’s Hospital ‘In Singapore the financial challenges are managing staff requirements in a labour-intensive industry, and right-siting patients for best care, standards and pricing. ‘The government has addressed salary issues in a systematic way and provided additional funding to ensure doctors’ pay is competitive. And the full integration of care (through regional health systems, GPs, restructured hospitals, nursing homes) allows patients to be treated seamlessly and appropriately.’

View from: Ghana Samuel Quarshie FCCA, head of ICT, Ghana Health Service ‘In Ghana five financial challenges have been identified: a lack of professionally trained accountants, poor/inadequate automation of financial transactions, the security of financial records, and delays in the generation of financial reports. ‘What we are doing to meet these challenges is to recruit professional accountants, operate a financial management system prescribed by the government, introduce measures to ensure adherence to government financial regulation and install systems to automate financial transactions.’

View from: Australia Trevor Watson FCCA, commercial director, Bupa ‘As in many economies, healthcare inflation is higher than general inflation and the ability/ willingness to pay. Meanwhile consumer awareness and expectations are increasing. Advances in technology and medical science compound the issue. ‘In a landmark initiative, all branding is being removed from cigarette packaging in Australia. Hopefully this will reduce cigarette consumption. Several governments are watching with interest to gauge the impact, with a view to adopting the policy themselves.’

View from: England Mark Millar FCCA, interim chief executive, Milton Keynes NHS Foundation Trust ‘The financial challenges include the difficulty of separating the thing that really matters to patients – clinical care – from the financial pressures, matching clinical advances and patient expectations against limited resources, and patients who are more knowledgeable about the treatments available and more demanding about standards of care. ‘The goal is to find more cost-effective ways of meeting patient expectations, to use performance data that allows comparisons to be made across physicians and hospitals, to make accountability for care more explicit from clinical audit, and to shift care out of hospitals into (cheaper) community settings.’

View from: Wales Martin Turner FCCA, HEALTH SECTOR CONSULTANT AND DEPUTY PRESIDENT OF ACCA ‘Although investment by the NHS in Wales has more than doubled since 1999, this level of growth cannot be maintained in the current economic climate. If the NHS in Wales is to meet pressures within the system, such as an ageing population and increases in the number of patients with chronic conditions, it will need to think more innovatively so that it is able to deliver quality care at a lower cost. ‘The NHS in Wales has made significant use of invest to save, pump-priming funding to tighten its efficiency and transform ways of working. This has helped leverage improvements during a very challenging period.’ Turner is former chief executive officer of the Wales Health Service.

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accountancy futures: small business growth

Small business, big stimulus Delta Economics’ Rebecca Harding examines the challenges for the real drivers of global economic recovery: growth-oriented entrepreneurs


s the world looks for economic growth and recovery, a broad consensus is developing around two key mechanisms for making growth sustainable. The first is that innovative and growth-oriented young businesses will create markets and drive global growth. The second is that growth will not come from European markets but from the highly entrepreneurial emerging markets where there is evidence of a significant increase in demand for Western products, and an innovative culture that thrives on new challenges. A study by Delta Economics and ACCA, Highgrowth SMEs: Understanding the leaders of the recovery, sheds light on the path along which growth-oriented entrepreneurs take their businesses. We compared the fast-developing economies of the BRICSA countries (Brazil, Russia, India, China and South Africa) with the mature major European and US economies in terms of turnover, job creation, access to finance and their growth strategies and patterns. The survey of 2,200 growth-oriented

Rebecca Harding founded Delta Economics in 2006. Her career has included spells as a senior fellow at London Business School, head of UK corporate research at Deloitte, and chief economist at the Work Foundation.

entrepreneurs demonstrates that, in spite of the recession, it has been possible to grow a company rapidly in BRICSA, while those in the West have also shown the ability to grow and prepare for sustainable growth. Globally, flat markets and uncertainty in the eurozone have failed to dent markets. Instead, entrepreneurs who set up their businesses as the downturn was starting have seen their businesses grow and expect this to continue. What is it that is driving this growth? Some of it comes from the fact that these businesses are international and not simply dependent on their domestic markets. Three-fifths of the businesses in the study had some form of international exposure – through foreign exchange, overseas employees, overseas partners and joint ventures, and sales. But this internationalisation is not just about exports. For a small business, exporting is highly risky: the costs are high and the uncertainties of operating in unfamiliar territories manifest. Learning how to operate abroad successfully involves understanding cultural differences

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accountancy futures: small business growth

and building reputation. This is best done through a gentle familiarisation and those that do this from a strong domestic base, building gradually through partnerships, have higher turnover on average and expect faster growth. Growth is also coming from the motivations of the entrepreneurs themselves. We found that the desire to make lots of money is not the only motivation that drives entrepreneurs. Pursuing a market opportunity and following dreams are just as important. self-fund for success In the current climate it would be a mistake to ignore the issue of finance. While entrepreneurs did not see access to finance as the only challenge, it seems that in every country the ability to fund businesses themselves at startup is a precondition of success and growth. Success becomes non-negotiable because personal resources are tied up in the business. It makes entrepreneurs reluctant to seek external finance if they consider it risky, and the majority in the sample, irrespective of geography, were funding further growth themselves or, more importantly, bootstrapping their businesses and not looking for growth finance. These commonalities between entrepreneurs are in some senses more interesting than the differences. However, particularly in China, India and Brazil, entrepreneurs were expecting faster growth in turnover and had bigger turnover businesses. This suggests that these markets are less affected by the downturn than their European counterparts. European businesses, and especially UK ones, need to operate outside Europe if they are to continue on the growth paths that they have witnessed so far. The extent to which these companies are international already, in the broadest sense of the word, suggests that while it may take some time, this is very much on the agenda. So what can we learn? First, the entrepreneurial spirit is alive and well. Companies are growing and believe they can grow. They continue to innovate and, more importantly, expand abroad. Second, this positivism endures because entrepreneurs themselves take risks to make sure that their businesses survive. At the outset they will put up more than 70% of the startup finance on average across the world. As the average growth-oriented UK business requires nearly £200,000 in startup finance, this represents a typical personal investment of £140,000. Therefore, it is little surprise that the story of the recession has been survival at all costs, holding workforces together and belt-tightening in the interests of ensuring that a leaner, fitter business emerges from the crisis.

Ken Lee FCCA Partner, Lee & Lee Associates, China ‘By supplying products that are new, differentiating themselves from the competition or taking new approaches, fast-growth entrepreneurs in China have found a viable route to success. As the wealth of Chinese consumers grows, so companies are investing more in research and development, and that means elevated growth further down the line.’ Member of ACCA’s Global Forum for SMEs

Gabriel Low FCCA CFO (SE Asia), GEA Westfalia, Singapore ‘Singapore’s tiny size has forced small and medium-sized enterprises (SMEs) to look beyond its shores to the South East Asia hinterland for growth and survival. The challenge now is how this model can be perpetuated in home markets where business costs continue to rise, making it impossible for the next wave of SMEs to start up.’ Member of ACCA’s Global Forum for SMEs

Sylvia Banda FCCA director, Sylva Group, Zambia ‘Most of the finance for most African startups comes from self-investment. Entrepreneurs use savings, short-term loans or sell property. There’s not a great deal of external finance. At the African Women’s Entrepreneurship Program, we see many businesses with growth potential hindered by lack of support.’ President, AWEP and member of ACCA’s Global Forum for SMEs

Mark Gold FCCA

Partner, Silver Levene, UK ‘Wherever they are in the world, entrepreneurs usually seek advice from at least one source; it may well be a psychological factor in the setting up of a business. Yet as businesses develop, they increasingly view professional advice as a positive influence. Professional advice is highly valued in all countries but particularly so in the BRICSA economies.’ Chairman of ACCA’s Global Forum for SMEs Finally, entrepreneurs value the advice they get from their professional advisers, wherever they are in the world, simply because they have such a large personal stake in the business which has to be managed in a transparent as well as tax-efficient way. The bond between the entrepreneur and their business is what unites entrepreneurs across the world, but also what makes the advisory role more complex. High-growth SMEs is available



All sewn up: a seamstress in Beijing, China, in her small studio. Entrepreneurs in fast-growing economies are enjoying faster growth and bigger turnover than their European counterparts.

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Value delivered The 56 members of ACCA’s International Assembly at the 2012 gathering were treated to high-profile speakers and a special award presentation


nternational Accounting Standards Board (IASB) chairman Hans Hoogervorst and PwC UK chairman Ian Powell were among the speakers at ACCA’s 2012 International Assembly. Others included: Accounting and Corporate Regulatory Authority (ACRA) Singapore chief executive Juthika Ramanathan; International Auditing and Assurance Standards Board (IAASB) member and former ACCA president Brendan Murtagh FCCA; Lorraine Holleway, head of financial reporting at Qatar Shell and chair of ACCA’s Global Forum for Corporate Reporting; and former vice president of the Shanghai Stock Exchange Zhou Qinye, who was presented with an ACCA Achievement Award.

Islamic finance call The rapid global growth in Islamic finance means action must be taken to ensure that how it is reported financially is harmonised and made more consistent, a report by KPMG and ACCA has concluded. Based on a series of high-level international roundtables, the report calls on the IASB and the Islamic finance industry to work together to develop guidance and standards, and educate the investor community on key issues. The roundtables were held in Kuala Lumpur, Dubai and London, and brought together experts in Islamic finance, bankers and finance professionals in the sector, along with regulatory authorities, academics and ratings agencies. Global alignment: bringing consistency to reporting of Islamic finance through IFRS is available at

ACCA universe in one room: all 56 International Assembly members representing over 40 countries were at the 2012 meeting, held in November in London. The delegates focused on the theme of ‘Delivering value’.

US IFRS inevitable Investors in the US expect the country to adopt International Financial Reporting Standards (IFRS) eventually, although the process will take time and require substantial investment in staff and training, according to an ACCA report. Of nearly 500 US-based investors surveyed by Forbes Insights for the report, 57% expect the US financial regulator to mandate IFRS reporting eventually. And more investors agree than disagree that the long-term benefits will outweigh the costs – 41% against 29%. IASB chairman Hans Hoogervorst said: ‘ACCA’s findings are consistent with anecdotal feedback we hear from the US investor community. They also lend further credence to the argument that the US is well prepared for a successful transition to IFRS.’ IFRS in the US: the investor’s perspective is available at

Research and Insights iPad app explores outsourcing A new release of ACCA’s Research and Insights app explores the subject of finance function transformation, with a particular focus on shared services and outsourcing. Downloading the app allows you to read highlights of ACCA’s research in this area, see what CFOs are doing by using our interactive graphics, and watch videos of leading experts in the field of finance function transformation offering insights. This is the second release of the app – the first covered risk management – and there will be further releases on different issues every few months. To download the ACCA Research and Insights app, visit, 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


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 – a division of Polestar UK Print Limited Paper Antalis McNaughton Group. This magazine is produced on paper that contains certified fibres and is manufactured under strict conditions that allow the grade to carry the EU Ecolabel. The mill operates under the ISO 14001 certified environmental management system. ACCA President Barry Cooper FCCA Deputy president Martin Turner FCCA Vice president Anthony Harbinson FCCA Chief executive Helen Brand OBE

Sue Almond technical director

Chiew Chun Wee head of policy, Asia Pacific

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. 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 2013 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 6 was published in January 2013.

Alvin Chikamba head of policy, sub-Saharan Africa

John Davies head of technical

Dr Afra Sajjad head of education, MENASA

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

Aziz Tayyebi head of international development


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