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EDITORIAL OBJECTIVES

The Accountant’s Digest provides thought leadership articles on accounting, audit, risk, tax, sustainability, forensic accounting, and related fields with a focus on current and emergent issues in the business environment from an accounting perspective. The publication contains a compilation of carefully written articles on subject matter areas that provoke thought on accounting praxis and theory, some with implications for policy and practice.

SCOPE/COVERAGE

The publication coverage includes (but is not limited to) the following topics: • Accounting advisory, regulation, and compliance • Accounting education • Accounting, economic growth, and socio-economic development • Auditing • Corporate governance • Culture, ethnicity, and history of accounting • Forensic auditing and investigations • Integrated thinking and reporting • Internal audit • Management accounting and control • Public sector accounting and audit • Risk management • Tax • Theoretical approaches to accounting.

BENEFITS

The publication presents articles that provide valuable insights into various accounting topics. The digest promotes in-depth knowledge into the role accounting plays within society and provides a platform for the exchange of intellectual ideas that advance accounting knowledge.

KEY JOURNAL AUDIENCE

The publication appeals to a wider audience who are interested in accounting and would like to keep themselves abreast of current developments in accounting, audit, tax, regulation, and governance among other topics. In addition, the publication may also appeal to higher education sector stakeholders (faculty and learners), policymakers, consultants in accounting advisory, audit, and tax, managers of organizations in accounting and finance functions.

The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

A NOTE FROM THE EDITORIAL TEAM

Welcome to the second Volume of the Accountants Digest, a publication of the Accounting Research Group (ARG) which was formed in 2017. The ARG was formed by accounting and finance faculty members at Strathmore University and has engaged in a variety of activities. These include but are not limited to: • presentations and feedback on doctoral-research work by Doctoral Fellows • co-ordination of accounting round tables • participation in academic conferences, locally and internationally Notable examples of conferences where members of the ARG have presented and engaged in include, the African Accounting and Finance Association (AAFA) conference where most of ARG members have participated or assisted in, the African Congress of Accountants (ACOA), the World Congress of Accountants (WCOA) and the International Association of Accounting Educators and Researchers (IAAER). The ARG members have also participated in various forums on tax, audit, including supporting the Professional Accountancy Organization in Kenya, the Institute of Certified Public Accountants (ICPAK) in conducting various trainings in Kenya. It gives us tremendous pleasure to announce that the second volume of Accountant Digest. We are impressed with the growing interest in the publication and we welcome more articles in our future issues. Issue number 2 covers the period from July to December 2020, a year we have experienced a tremendous effect on the operating environment due to the COVID-19 pandemic. Various topics in the accounting and finance field are covered, including but not limited to: accounting education, accounting scandals, and corporate governance. The current COVID-19 pandemic has also attracted some attention in some of the articles you will find herein. More importantly, are articles illustrating: • • • • • • • • •

How corporate purpose can be reframed during and post COVID-19. COVID-19 and accounting practice. The role of Risk Governance in the wake of COVID-19. The effects of COVID-19 on auditing and assurance. Tax and fiscal policy measures put in place by the Government of Kenya in response to the coronavirus crisis. Building resilience in capital markets in the wake of COVID-19. Building resilience through financial inclusion: during and post COVID-19. The impact of COVID-19 on financial markets and institutions. COVID-19 effects on financial reporting.

In case you would like to contribute to the Accountants Digest, please write to our Editorial Office via James Otieno, email: fotieno@strathmore.edu. Enjoy the reading!

Editorial Team of the Accountant’s Digest

The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

TABLE

OF CONTENTS

The COVID-19 Pandemic and its Effects on Accounting, Auditing, and Finance

COVID-19 and Accounting Practice

Sailing through Murky Waters: Role of Risk Governance in the age of COVID - 19

The effects of COVID-19 on auditing and assurance

Tax and fiscal policy measures put in place by the Government of Kenya in response to the Coronavirus crisis

Building resilience in the capital markets in the wake of COVID- 19

Building resilience through financial inclusion: during and post COVID- 19

The impact of COVID-19 on Financial Markets and Institutions

COVID -19 effects on financial reporting

ICT, accountancy, and accounting education

The changing nature of accounting: Accounting education

“The real danger is not that computers will begin to think like men, but that men will think like computers”

The end of accounting scandals reimagined

Embracing the future of the accounting profession: Shape up or Ship out?

A step towards improving corporate governance

Measurement and financial performance

Information series

Acknowledgments

The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

The COVID19- Pandemic and its Effects on Accounting, Auditing, and Finance How can corporate purpose be reframed during and post COVID19-? Dr. Mumbi Maria Wachira Email:mwachira@strathmore.edu

INTRODUCTION

The COVID-19 pandemic has demonstrated the interconnectedness between the global economy and public health. The stress the pandemic has put on public healthcare systems has created an unprecedented global economic crisis ultimately disrupting business operations, curtailing public movement, and placing vulnerable communities under immense strain to survive. In the private sector, business leaders are grappling with how to protect their employees, maintain business continuity, and make decisions in increasing economic uncertainty. As a result, corporations are having to re-examine their impact on society and their responsibility to a broader set of stakeholders. The pressure for a quick private-sector-led response to the crisis is immense, and while there has been some response to some challenges, organizations require a strategic response to the pandemic in order to secure their continuity. This shift towards a more holistic and inclusive way of doing business, therefore, requires a re-think on what purpose means for business.

WHAT IS “CORPORATE PURPOSE”?

Larry Fink, CEO of BlackRock Inc describes corporate purpose as an “animating force” for profitability. So, what then is the purpose and what should it consist of? In simple terms, to define purpose The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

business must ask: “why do we exist?” According to the renowned economist, Milton Friedman, the sole purpose and responsibility of business was to generate profits. However, this stream of thought has changed over time, especially with the advent of stakeholder theory proposed by Edward Freeman, and a growing public expectation on the role business plays in solving societal problems. Some of the questions that businesses should ask as they think and formulate their purpose are: What role do we play in the communities we work in? How do we manage our impact on the environment? Are we providing the training needs necessary for our workforce in an increasingly automated and interconnected environment? How do we make our supply chains sustainable and resilient? Essentially, such questions require an outward focus on how a business works within the environment it is embedded in. As aptly described by the World Economic Forum (WEF) Chairman, Klaus Schwab, “The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders but all its stakeholders – employees, customers, suppliers, local communities, and society at large.” On 1st April 2020, the WEF in collaboration with members of business and community to endorse six stakeholder principles

underpinning corporate responses to COVID-19, namely: to keep employees safe, to secure shared business continuity with suppliers end consumers, to offer full support to governments and society, to maintain the long-term viability of companies for shareholders and to continue sustainability efforts, including to fight climate change.

CORPORATE PURPOSE IN TIMES OF UNCERTAINTY: THE PLACE OF STAKEHOLDERS

What then is the purpose of business in a time of chaos and risk? How can companies use a clearly defined purpose to navigate and survive during COVID-19, while simultaneously providing the much-needed support structures for their stakeholders? First, corporations can consider leveraging their core business assets to meet the most pressing needs in society resulting from the pandemic. Take for example how various businesses have increased the manufacture and supply of personal protective equipment such as surgical masks, respirators, and visors. The popular Denmark-based toymaker Lego has started the mass production of protective visors by re-orienting its molding machines to produce Personal Protective Equipment (PPE). Similarly, in Kenya HACO industries in partnership with EABL has started manufacturing affordable manufacturing antibacterial hand sanitizers. Leveraging the core

business could also mean more resources being put towards R&D and innovation, especially for firms working in the pharmaceutical industry. Another issue business must address is the ways in which their employees are catered for during COVID-19. Given the current state of city lockdowns, mandatory self-quarantines, and restrictions on travel, how can businesses treat their workers equitably? A purpose-driven approach to doing business requires companies to reframe existing time-off policies for employees, which do not work given the current situation. Corporations must also think through agile and innovative ways of supporting their most vulnerable employees. Take, for instance, Walmart providing up to two weeks of pay for full time and part-time hourly employees who tested positive for COVID-19 or who are placed in quarantine. Finally, COVID-19 also provides an opportunity for businesses to think of their priorities after the crisis passes. Global health pandemics are likely to occur more frequently, therefore in what ways can corporations commit to improving health care and public health infrastructure? Apart from public health risks, the threats to public life resulting from climate change are still present. The learnings from the COVID-19 pandemic can strengthen the role the private sector plays in achieving the Sustainable Development Goals (SDGs). What is clear for business is that a new status quo is beginning to take shape.

The Accountantsâ€™ Digest | Volume 2, Issue 2 (July â€“ December 2020)

COVID19- and Accounting Practice Albert Ochieng’ Abang’a Email: aochieng@strathmore.edu

INTRODUCTION

The outbreak of the Novel Coronavirus that was first reported at the end of 2019 in Wuhan, China has caused serious havoc across the globe. In less than two months, the virus had spread all over the world affecting several sectors of the economy such as travel and tourism, the financial sector, entertainment, airlines, shipping, port and airport, Oil and Gas, automobile, and retail among several others. Although some sectors such as Oil and Gas were already facing upheaval before the outbreak due to the drop in demand especially for crude oil; the current crises have fuelled it further. A common factor among all these sectors is the financial loss due to reduced operations of various businesses. The only sector that tends to be relatively better is the social media companies like Facebook and Google that have registered upward revenues . Given the thin line between finance and accounting, this article briefly discusses some of the areas within the accounting practice that may require modification and reconsideration. This is necessary since there is no revision that has been made so far to any accounting standard to address the current pandemic. Accounting has several components that may have been impacted and it is not possible to discuss

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each area in a single article like this. Two areas are discussed which appears to be relatively important: Asset impairment and revenue recognition.

ASSET IMPAIRMENT-IAS 36

IAS 36 describes the impairment of assets and asserts that assets should not be carried at more than their recoverable amount (The higher of fair value fewer costs of disposal and value in use). An asset impairment loss is therefore the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. IAS 36 does not apply to Inventories (IAS 2), Financial assets (IFRS 9), Deferred tax (IAS 12), Employee Benefits (IAS 19), Construction contract (IAS 11), Investment property at FV (IAS 40), Agricultural assets at fair value (IAS 41), Insurance contract (IFRS 4), financial assets that are within the scope of IAS 39 and noncurrent assets held for sale (IFRS 5). IAS 36 applies to Land, Building, and Machinery (IAS 16), Investment property at cost (IAS 40), Intangible assets (IAS 38), Goodwill, Subsidiaries, associates, Joint venture at cost and Assets at revalued amount. At the reporting period, entities are supposed to carry out an assessment to ascertain whether there is an indication that an asset may be impaired. That notwithstanding, there is a group of intangible assets

that even if there is no indication of impairment, must be assessed for impairment annually. These assets include intangible assets with an indefinite useful life, an intangible asset that is not yet available for use, and goodwill acquired in a business combination. The standard details both external and internal indicators of impairment. Readers can refer to the IFRS guidebook 2020 for detailed discussion. Of importance though, is an external indicator that requires an asset to be impaired if there is a significant change in the technological, market, legal or economic environment of the business in which the asset is employed. There is no doubt that COVID-19 has impacted the economic environment of assets of various entities and that preparers of financial statements will have to disclose this information at the reporting period. The assessment made on the fair value of assets in the recent past, for example, may not be valid given the current crises. Such an assessment will no doubt require re-assessment. The challenge that accountants are likely to face is that even if re-assessment is done, the observable market conditions may not provide reliable information that can help in estimating the fair value. The same predicament also applies to estimate the value in use since future cash flow cannot be estimated reliably. These scenarios complicate the task of preparers of financial statements. It is therefore important that assumptions relating to the economic impact is documented, challenged, and revisited because no one knows the shape the economic recovery will take. The economic recovery may take U-shape, V-shape, L-shape, and W- shape . U-shape recovery is characterized by stagnation of about 12 to 24 months before bouncing back. V-shaped recession is like U-shape except that it takes a shorter time before rebounding back. V-shape is the best-case scenario. W-shaped recession begins like a V-shaped recession on false signs of recovery which turns down again. L-shape recovery is the worst-case scenario. It describes a recession that falls quickly but which fails to recover. The more the current environment is uncertain, the more important it is

for the entity to provide detailed disclosure of the assumptions taken, the evidence they are based on, and the impact of a change in any of the assumptions.

REVENUE RECOGNITION IAS 18

IAS 18 prescribes when to recognize revenue and how to measure it. Revenue is defined as the gross inflow of economic benefits during the period arising from the course of ordinary activities of an entity when those inflows result in an increase in equity other than increases resulting from the contribution of equity participants. Revenue should be recognized when it is probable that future economic benefit will flow to the entity and that measurement of such revenues can be measured reliably. There are basically five steps involved in the revenue recognition process: contract creation with the customer, performance obligations, transaction price determination, allocation of prices to performance obligation, and recognition of revenue. The crises have impacted each of these steps. For instance, restriction of movement has made it difficult for people to come together to execute or sign the contract physically especially If the existing policy on the entities involved requires a physical presence to execute a contract. It may, therefore, call for a modification of such policy to allow other methods like emails. Likewise, the performance-related factors may also be affected because it means that the delivery of goods may not be done as scheduled in earlier agreement hence may need negotiation.

CONCLUSION

There has been a war of words between the two globalsuperpowers; the United States of America and the Peoples Republic of China about the origin of the virus . It is not yet clear if COVID-19 is natural or manmade. If it were natural, then a party to the contract might fail to perform its obligation on account that the contract has been frustrated hence becoming void for the time being and may refuse to honor his/her debt obligation. There are no definite answers to these scenarios which may best be handled by Legal experts. Contractual obligations involving long term projects

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may also face challenges. IAS 18 requires revenue to be recognized based on the percentage completion of such projects. The pandemic may have affected the completion of several projects which may have passed recognition criteria, but which remains uncompleted. If a project had passed revenue recognition criteria based on the percentage of job completed but which

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may stagnate for an unknown future period, what alternative is available for the accountants? There must be a discussion on the timings of recognition of revenue arising from such projects. The judgment is not easy and requires management to evaluate and discuss these matters before preparing financial statements that are of high quality.

Sailing through Murky Waters: Role of Risk Governance in the age of COVID - 19

Erastus Mbithi Email: embithi@strathmore.edu

INTRODUCTION

Five months down the line, the infamous coronavirus dubbed as COVID (19) continues to threaten the world's major financial markets and human society with over 187 countries affected. For instance, the stock markets in Europe (France, German, and Spain) went down by the US $ 1.5 trillion in the week ending 28th February 2020. The European Commission anticipates the economy in all the countries to shrink by 7.4%, more severe than the eurozone debt crisis. Similarly, stock markets in the United States lost to nearly US $ 3.5 trillion with major indices such as Dow John’s and S&P 500 losing 12% in the same period. Analysts predict that COVID (19) will trigger the worst recession more than the global financial crisis of 07/08. Africa's financial markets were not spared either, closer home, Nairobi Securities Exchange lost KES 356.05 billion with market capitalization dropping by KES 120 billion when the first infection was reported in Kenya. Major counters such as Safaricom Plc and KCB Bank lost 5.4 % and 7% respectively. However, counters such as Stanbic and Standard Charterd remained stronger surprisingly gaining 3.7% and 1.72% respectively in the same period. As of now, some stocks are still trading below the expected price per share, though analysts expect

companies with stronger fundamentals to bounce back in the short term.

COVID19- AND ITS SPILL OVER EFFECTS

The spill over effects of the virus have started being felt in the other sectors such as tourism and hospitality, education, transport, manufacturing, among others. Further, the inflation rate in Kenya increased by 0.81% to 5.62% in April 2020. A survey conducted to establish the impact of COVID-19 on business continuity reported that 82% of the business leaders anticipate revenue to decrease in the next 6-months. The survey was conducted on 2,750 CEOs across 110 countries from March 10th-13th 2020 by the Young President Organization. The severity of this pandemic to the business world may last longer with cases of new infections growing exponentially, supply chain disruptions, and business shutdowns. This poses a grave concern about the level of pandemic preparedness and quality of risk governance in both governments and organizations. Notwithstanding, the mitigation strategies suggested earlier by the World Economic Forum for organizations to prepare. Equally, the pandemic has exposed flaws in risk governance and reactive approach by organizations

The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

to manage strategic risks. It is unfortunate that businesses around the world could not learn from the lessons of the 07/08 financial crisis despite heavy regulation on governance and risk management. This reactive approach to risk management reignites the need for effective governance through sound risk management. Risks are inherent in every business model and achieving objectives depend on taking risks in a way that does not endanger the interest of critical stakeholders. Sound risk management enables the organization to continuously anticipate the potential risks facing them, understand the risks, and respond in time to ensure business continuity. The board of governance is supposed to oversee the establishment and implementation of an effective risk management framework.

ADJUSTING TO THE NEW NORMAL

Although people have started talking about the postcrisis, experts are warning that the virus may be with us for some time, with Africa still behind and other countries experiencing a second wave of infections. Therefore, businesses are advised to embrace or adapt to the new normal where risks are evolving every day. Therefore, a robust action plan is unavoidable for any business to sail through the muddy waters. The following are some useful steps in developing a robust risk management system adapted from the South African Risk Management Framework. First, identify the potential risks. This involves scanning through the environment to identify internal and external risk factors. A successful risk identification process requires managers to adopt a more inclusive approach where the essential stakeholders are consulted rather than singly relying on input from the top management. Interviews, surveys, workshops are useful in screening through the internal processes, procedures, and consulting with industry experts. The insights generated should be supplemented by conducting sophisticated analysis not limited to historical data analysis, scenario analysis, stress testing, and forecasting. In the current environment, the COVID-19 related risks may include; infection to employees,

The Accountantsâ€™ Digest | Volume 2, Issue 2 (July â€“ December 2020)

productivity decline as a result of social distancing, supply chain disruption, managing remote employee arrangement, cybersecurity risks, reputational risks, and cash flow risks. Identifying the risks will help the management to keep a comprehensive inventory of risks. It is worth noting that this process should be rigorous and continuous because of the dynamic nature of the risk environment. The second step is risk assessment, this involves ascertaining the likelihood and the impact of the risk occurring on the business. The main objective of risk assessment is to help the organization to prioritize the significant risks because the business may not have the resources to deal with all the risks. Successful risk assessment requires the organization to undertake the following; assessing the level of inherent risk exposure in absence of management actions, assessing the residual risk exposure to determine the remaining exposure after management action and the residual risks should be benchmarked against the organization's risk appetite to check if there is need for further action. After risks are assessed a heat map may be useful to give visual details of risks frequent and severe to the organization if they occur. The third step is risk response which involves looking for strategies to respond to the risks assessed. This step involves identifying different alternatives to mitigate risks and implement the best option. If the risk is within the organizationâ€™s control then they may consider accepting the risk, avoiding the risk, transferring the risk among others. If the risk is not within the control of the management then the response strategies should consider measures such as planning. All the mitigation strategies should be properly documented with clear responsibilities of the parties and timelines. The fourth step in risk management is reporting and communication. The information regarding risks should be timely communicated to enable the affected parties to identify, assess, and respond to the risks faced by the organization. The last step is risk monitoring which involves the organization constantly reviewing its risk management framework to ensure it is working

and the changes in the risk environment are updated. Effective monitoring should evaluate whether the responsibilities allocated are executed, the mitigation strategies are effective in achieving the predicted results and there is an association between the improvement in the risk management system and the organizational performance.

CONCLUDING REMARK

Given, the above discussion, organizations will have to invest in epidemic and pandemic preparedness as one of the key systemic risks. The organizationâ€™s ability to ensure resilience and business continuity during the pandemic is dependent on governance ability to oversee the establishment and implementation of a robust risk management system. However, care should be taken when developing the risk management system because no one size fits all.

The Accountantsâ€™ Digest | Volume 2, Issue 2 (July â€“ December 2020)

The effects of COVID19- on auditing and assurance Dr. David Mathuva Email: dmathuva@strathmore.edu

A COMMENTARY

In 2020, the International Federation of Accountants (the IFAC) published a release highlighting the areas of focus in auditing as a result of the COVID19 pandemic. The IFAC acknowledges that the uncertainty and unpredictability of the operating environment which creates real risks of material misstatements in the financial statements. The new or intensified risks of material misstatement are going to impact the work of auditors in various ways. As a results, auditors need to consider the implications of the COVID-19 in planning and executing their work. If the audits were already underway, then the audit plans will need to be revised to accommodate emerging risks given the onset of COVID-19. In addition, auditors will be expected to be flexible enough to study the business continuity of entities being audited so as to make appropriate going concern assessments.

pandemic, to ensure that entities report appropriately. Governments world over may promulgate laws and regulations that may be targeted to certain specific aspects as a result of the pandemic, and auditors will need to pay attention to this. During the pandemic, the manner in which auditors execute their audit assignments will be very critical because of heightened possibilities such as fraud or error, fraudulent financial reporting which call for increased professional scepticism as auditors execute their work. The quality of audits carried out will be overly critical and this calls for complete application of the International Standard on Quality Control 1 and International Standard on Auditing 220. Away from the two standards, other auditing and assurance standards to consider as auditors execute audits during and post-COVID-19 are discussed in brief herein:

Obtaining sufficient, appropriate audit evidence becomes very critical during this time, owing to the difficult times experienced by most entities as they fight to survive the pandemic and its economic effects. More important will be how entities will adjust to the “new normal” when the pandemic is over. Owing to the pandemic, the IFRSs may be revised or better still, new IFRSs developed in the wake of the The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

Auditing standard

Key considerations

ISA 315 (Revised), Ident i f y i ng a nd Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

The COVID-19 has brought with itself new and emerging risks which need to be considered when understanding the entity and its environment. There will also be a need to make a revision of the risk assessments that were made earlier. In terms of understanding an entity’s internal controls, the pandemic may have brought in changes in the control environment and well as the initially performed assessment on planned reliance on existing controls.

ISA 330, The Auditor’s Responses to Assessed Risks

Certain matters affecting the environment in which an auditor performs his audit have changed and may necessitate a change in auditor’s procedures. For instance, the need to obtain sufficient appropriate audit evidence. An example is if the auditor needs to be physically present to conduct certain audit procedures, such as being available for an inventory count or some procedures requiring observation and inspections, the auditor may have to design alternative procures to achieve the objective of the audit. In responding to the assessed risks, the auditor will need to place greater focus on (i) the closure of the financial reporting processes, including any journal postings and other adjustments, (ii) auditor’s evaluation of the overall presentation of the audited financial statements and whether adequate disclosures (including any additional disclosures on say, going concern) that may have come with the pandemic, (iii) auditor’s conclusion on whether he obtained sufficient appropriate audit evidence.

ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures

The COVID-19 pandemic, despite being a health-related pandemic, has had economic implications, and this has affected certain regulatory decisions which may affect accounting estimates. An example would be decisions on receivables such as moratoriums on debt obligations and debt restructuring for distressed customers. The auditor will also need to review the assumptions made by the management as evaluate whether they are appropriate given the circumstances and in line with the applicable financial reporting framework. This covers certain matters such as cashflow forecast preparations, the use of discount rates etc. the auditor will also need to review the effect of changing inherent risk factors due to the uncertainty and difficult business conditions caused by the pandemic.

ISA 560, Subsequent Events

The auditor will be expected to perform a review of subsequent events, paying attention to those events caused by the pandemic. The auditor will need to consider the shifting reporting deadlines and the effect this may have on any subsequent events and related risks. The auditor will need to identify any material subsequent events related to the pandemic and assess whether these have been adequately addressed and disclosed in the financial statements in accordance with the financial reporting framework.

The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

ISA 570 (Revised), Going Concern

The pandemic has exacerbated the going concern uncertainty in entities. As a result, impact of the pandemic on auditors evaluation of management’s assessment of the going concern status of the entity needs to be performed. There is a need to reconsider the appropriateness in the use of the going concern basis in the preparation of financial statements and any consequential modification of the auditor’s report in this regard as appropriate.

ISA 60 0, Specia l Considerations Audits of Group Financial Statements (Including the Work of Component Auditors)

The assessment of group audit procedures and the work of component auditors will need to be performed. For instance, where the component auditors operate in far off jurisdictions, with the lockdowns, the auditor will need to determine other appropriate channels of working with the component auditors to complete the audit. The impact of this arrangement on the sufficiency and appropriateness of audit evidence will need to be assessed.

ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements

To be able to form an appropriate audit opinion, the auditor will need to consider (i) areas requiring management to avail further evidence to support certain assertion owing to the fast-changing nature of the pandemic, (ii) any new uncertainties introduced by the pandemic, including that which affects the accounting estimates of the entity, (iii) the impact of new of revised laws or regulations on the financial statements and related disclosures.

ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report

The auditor needs to assess, where applicable, any new key audit matters that are to be included in the auditor’s report. For example, matters requiring significant auditor’s attention owing to the impact of the pandemic, including how the auditor dealt with the matter(s).

ISA 720 (Revised), The A u d i t o r ’s Responsibilities Relating to Other Information in Documents Containing Audited Financia l Statements

The pandemic may introduce certain events that may affect previously reported numbers. The auditor needs to pay attention to any inconsistencies between previously reported information in the financial statements in the annual report and that contained in other information owing to the impact of the pandemic.

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In summary, auditors will need to evaluate their work and ensure that they perform a review of all ISAs to ensure that the likely effects of the COVID19 pandemic are considered in the audit of financial statements. Auditors may however face some limitation in the scope of their work especially for audits conducted during the pandemic. Some of the limitations may include: performing physical inventory observations, accessing client records, understanding and testing internal control, confirming accounts, forecasting related to going concern, performing subsequent event procedures,

obtaining management representations, other important considerations, the exercise of professional skepticism and financial statement issuance delays. Auditors are however encouraged to anticipate these matters and ensure that they communicate any challenges encountered with those charged with governance as they execute the audit. Source: International Federation of Accountants (the IFAC) (2020), The areas of focus in auditing as a result of the COVID-19 pandemic. IFAC, IAASBâ€™s Staff Audit Practice Alert, March 2020

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Tax and fiscal policy measures put in place by the Government of Kenya in response to the Coronavirus crisis

Dr. Farida Abdul Email: fabdul@strathmore.edu

INTRODUCTION

The world over, government authorities are undertaking varied tax measures to deal with the economic problems of threatened business continuity, massive job losses, and declining incomes of the poor and vulnerable members of the society. This article examines how tax policy measures have assisted the government of Kenya to deal with these economic problems brought about by the Covid-19 pandemic. In the short term, tax policy measures should focus on limiting hardship for the vulnerable groups of the society while maintaining the ability for a quick rebound. Across countries, such tax policy actions have targeted businesses as well as individual households.

MEASURES TARGETING HOUSEHOLD

In general, measures targeted at this group at the global level have focused on enhancing household cash flows as well as supporting consumption. This has been done through both tax and non-tax measures as follows: a) Tax measures • Reduction of tax rates paid by households; • Extension of tax filing deadlines (e.g France); and • Tax payment deferrals (e.g Brazil which has The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

extended the payment of income tax from AprilJune until September 2020). b) Non-tax measures • Deferral of household fixed costs mainly loan interest payments (typically on a case-by-case basis); • Wage subsidies to other specific groups of individuals. • One-off or temporary “new” cash transfer; and • Wage subsidies for individuals that have to stay home to take care of children Other measures that have targeted at enhancing consumption include a reduction in VAT rates as well as reduction and/or waiving of import duties.

THE CASE OF KENYA

In line with the above global trend, the government of Kenya has adopted several measures to enhance both cash flows and consumption for households. These include both tax and non-tax measures as follows: a) Tax measures • Introduction of a 100% tax relief for persons earning a gross monthly income of up to KES 24,000. • Reduction of PAYE rate for any amount above KES 57,334 from 30% to 25%. • Expansion of PAYE tax bands for employment income and increment of personal relief from KES

1,408 to KES 24,000; • Expansion of tax bands in respect of payments or withdrawals from the pension; and • Reduction of VAT rate from 16% to 14%. b) Nontax measures • Appropriation of KES 10 billion through cash transfers to the vulnerable members of society; and • Temporary suspension of listing with credit reference bureaus for persons who default on their loan obligations with effect from April 1, 2020 Some of the above measures targeted at households have not been effective as expected. For example, most Kenyans have been complaining that a reduction in VAT from 16% to 14% has not resulted in any significant decline in prices. The prices of several essential goods have remained the same even or gone higher even with the reduction of the VAT rate on those goods due to several reasons such as distribution problems and shortages. While the reduction of PAYE has had a slight positive effect, only a small percentage of the workforce in Kenya is on the formal PAYE system with the majority being employed in the informal sector. For example, according to the Economic Survey 2019, jobs in the informal sector constituted 83.6% of total employment in Kenya in 2018. The informal sector employs approximately 15 million persons, most of whom are not on the formal PAYE system. In addition, most of the individuals who were previously on formal employment prior to the outbreak of the COVID-19 pandemic have been forced to either to take huge pay cuts or sent on unpaid leave. As such, reduction in PAYE has not benefitted individuals working in the informal sector and those on unpaid leave. These individuals, who form the majority of the Kenya population, are still expected to meet their rent payments at the end of each month as well as meet other upkeep expenses. Based on the above, the government should focus on measures aimed at directly benefiting individuals in the informal sector and those pushed out of

employment by the Covid-19 pandemic. These measures may include but not limited to: • Reduction of tax on rental income from the existing 10% on gross income paid by landlords and then require the landlords to reduce rent by the amount of savings or a higher amount. • Subsidize the production of essential goods such as maize, flour, and milk to make them more affordable to the common citizen. • Enhance the efficiency and coverage of cash transfer to vulnerable members of the society to ensure all the targeted individuals benefit from the system. While the government of Kenya has effected cash transfers to most vulnerable households among the poor, only 250,000 households are targeted. Distribution and access difficulties for vulnerable households can be achieved by using money transfer services such as MPESA. It is however important to point out that developing and emerging countries have lower fiscal space and are thus less active in fiscal policy measures such as direct transfers to the employees in vulnerable sectors such as tourism which have been more affected by the pandemic.

MEASURES TARGETING BUSINESS

Short term tax policies targeted at businesses have focused on reducing exposure to solvency and liquidity risks during the crisis. The measures introduced to support businesses have been similar across countries. The most common type of tax measure to enhance business cash flow among OECD and G20 countries has been the deferral of tax payments. Some of the measures put in place by various authorities across the world include: • Extension of deadline for filing tax (e.g., India, Rwanda, and the USA). • Deferral of tax payments. • Changes in the calculation of the advance tax payments to reflect current rather than last year’s tax liabilities. • More flexible tax debt repayments, including waiving of interest and fines in case of late

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payments. • Enhanced tax refunds (VAT and other taxes). • Reductions in business tax rates; and • Refund tax credits.

THE CASE FOR KENYA

The government of Kenya has adopted the following measures through the Tax Laws (Amendment) Act, 2020: • Reduction of the Corporation Income Tax (CIT) rate for resident companies from 30% to 25%. • Reduction of the Value-Added Tax (VAT) rate from 16% to 14% effective 1 April 2020. • KRA to expedite the refund of verified VAT refunds claims; and • A reduction of Turnover Tax from 3% to 1% of gross revenue for all Micro, Small, and Medium Enterprises (MSMEs). Further, the revenue criteria of classifying MSMEs has been increased from KES 5 million to KES 50 million; and • Scrapping-off of presumptive tax. The proposal for VAT refunds is most welcome and will be effective in injecting cash flows to ease liquidity problems for businesses. Businesses who have faced cash flow issues as a result of COVID-19 pandemic such as exporters would benefit from a VAT refund. A reduction in TOT will also be very effective in conserving cash flows for businesses mainly in the informal sector. It is important to note that TOT was re-introduced in 2019 and has had very low coverage. Maybe the reduction in TOT rate to 1% will attract more business taxpayers and enhance compliance.

decline in revenues, these branches may be forced to probably lay-off more staff or effect pay cuts. In addition to the above measures, it is concerning that the government has also done away with the 30% electricity rebate to manufacturers that came into effect in January 2019. This move will increase the cost of doing business for the manufacturers in Kenya forcing some of them out of business. The government has removed preferential tax rates for newly listed companies which ranged from 20% to 27.5%. Any newly listed company that used to pay CIT at a rate of between 20% and 25% will pay CIT at 25%. This is a huge disincentive given the fact that most of these companies are at infant stages of development. In conclusion, while the government of Kenya has introduced some significant tax measures to cushion businesses and individuals from the impact of the COVID-19 pandemic, more can be done. The government of Kenya can still introduce more tax administration measures that can provide immediate cash injections for businesses such as the abolishment of withholding tax and withholding VAT systems for local payment. Adoption of the tax deferral measure used by most countries would also serve as a significant tax measure. This would ease cash flows for business and will ideally have an immediate impact. * The views and opinions above are those of the author.

Scrapping off of presumptive tax, which was calculated as 15% of the license fee payable by MSMEs in Kenya, is also a welcome move as it will have a direct impact. The reduction of the CIT rate from 30% to 25% will have a positive impact on the cash flow of firms. However, in the wake of the COVID-19 pandemic, most businesses have been in a loss-making position. The government has done very little to address this problem. In addition, the CIT taxes on branches of foreign companies has remained at 37.5%. Due to the The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

Building resilience in the capital markets in the wake of COVID- 19 Noah Keya Otinga notinga@strathmore.edu

INTRODUCTION

The attention paid to financial markets globally points to one thing; that their role in an economy can only be wished away but it cannot be taken away. Financial markets collectively provide a platform on which countries are able to raise capital to support production and productivity in their economy. In the wake of the global coronavirus pandemic, the financial markets have not escaped the pervasive effects of the pandemic just the same way we have seen human lives facing the wrath of the unforgiving disease. A medical condition that began from a small town in China as a health issue christened by Donald Trump as Chinese flu has exponentially grown to become a health and economic issue leaving the financial markets adversely affected and the policymakers in shock. All the major stock market indices have lost value and most governments are coming up with rescue packages in an effort to resuscitate the choking economies. Regulators in the different sectors of the economy have decisively come up with a raft of measures aimed at reducing the overall effects.

COVID19- AND IMPLICATIONS OF FINANCE AND MARKETS

Vibrant capital markets remain to be an issue of great concern at this time when several securities markets in the world are experiencing a downward

trend in the level of activities as well as returns. This has been attributed to the negative market sentiment caused by the fear of impending capital losses. In the same vein, governments are still grappling with the issue of whether to go local or international for borrowing. So what is causing the panic and what can the policymakers do to try and reduce the effects of the pandemic? Three things come into mind; market sentiment, investor confidence, and market participation. In behavioral finance, investors are predominantly believed to be risk-averse, and therefore any signs of a reduction in returns will make them cringe and offload their investments, this is a mirror reflection of the current situation across global financial markets. Based on the evaluation of the prevailing economic conditions, investors have expectedly withdrawn or scaled down their investments, which has greatly and adversely affected the market sentiment such that investors have a very low opinion of the overall market potential level. This calls for the market regulators to come up with a more pragmatic way of enhancing investor confidence. Shielding the markets from the influence of foreign domination will be critical at this time. Arguably increasing local investor participation will give a sense of belonging to the local investors which can help to improve perception both in the short and long term.

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Participation in capital markets in emerging markets has been a big issue long before the coronavirus pandemic. However, it gets worse when we have such a shock in the market. For example, the Nairobi Securities Exchange is predominantly controlled by foreign investors, and given the fact that the emerging markets have not been spared, there was a significant reduction in the level of activity so much so that trading on the bourse had to be halted on two different occasions. So where do the policymakers come in in such a situation? Regulators in this sector have been criticized for not focusing on the needs of the investing public. This has led to an increase in apathy with regard to market participation. Some of the reasons cited include the lack of awareness, low level of returns, and stringent regulations. However, all is not lost amidst the pandemic, the regulators can come up with initiatives that will encourage and increase the level of local investor participation in the market and reduce the overdependence of the markets on foreign investors. Participation will only be encouraged when the people are fully informed of what they are getting into. And

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with increased participation securities markets are likely to experience an increase in the level of returns as well as other companies are likely to consider the options of listing. As expected developed and more efficient markets have considerably managed it differently and in a better way as compared to emerging markets.

CONCLUDING REMARKS

In conclusion, one of the basic rules of investing in the securities market even though not a rule of thumb is to invest when prices are low. Globally, the prices have taken a deep, and it presents a perfect opportunity for regulators to leverage on to promote participation. However, the initiatives should not be at the expense of foreign investors since they are equally important in enhancing liquidity in the markets. Local participation should be focused on ensuring that we have an element of stability in the markets during such a period when some counters are recording minimal activities, or when the government isnâ€™t in a position to raise money to support some economic activities among others.

Building resilience through financial inclusion: during and post COVID- 19 Noah Keya Otinga notinga@strathmore.edu

A COMMENTARY

Low-income households across the globe are particularly prone to shocks and more often than not are least prepared when the shocks hit. Existing empirical research indicates that well designed financial products and services can play a significant role in increasing low-income families' resilience by enabling them to prepare for risk as well as reduce the overall risk exposure, increase investment in the face of risk and respond to risk when the shock occurs. Interestingly the role that financial products and services can play in increasing resilience, as well as the most effective design and delivery mechanism toward that end, is not fully understood. COVID19 began as a medical condition but its effects have been felt across all the other fronts, particularly on the economic front. Governments all over the world have been forced to come up with strategies to try and cushion their citizens from the negative effects. For example, in Kenya, the government came up with a raft of measures such as reducing the VAT from 16% to 14 %, tax exemption for those who earn up to Kes.24000 among others. Safaricom, the listed market leader in the telecommunication industry zero-rated the cost of the transaction of sending money up to Kes 1000 and so did commercial banks on transfer money from banks to mobile wallets. These are indeed great initiatives aimed at cushioning the citizens particularly those who are directly affected.

However, as authorities strive to protect households, risk preparedness is as important as dealing with the effects of the occurrence of the risk. With the advent of financial technology and the need to increase access to financial services, a number of risk preparedness strategies can be adopted this includes; Liquid accounts, savings groups, and behavioral nudges which may enable households to build precautionary savings that lead to consumption smoothing aftershock. This calls for increased awareness of the benefits of taking up some of the available options such as commitment savings on the various platforms. Equally, households can reduce overall risk exposure by adopting risk mitigating technology. Kenya has been globally recognized for mobile payments. Its level of financial inclusion has been put at 88%. Given this high level of digital financial inclusion, it would be expected that households are able to deal with the effects of the pandemic by leveraging on some of the facilities offered by the digital platform, however, COVID-19 is idiosyncratic shock and therefore households are affected differently based on risk preparedness. As the authorities cushion the households through the pandemic, they should consider doing it in the long run since it may encourage households to adopt higher-risk, higher-return income-earning strategies. Without appropriate financial tools, households are

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often forced to engage in suboptimal coping practices such as cutting food consumption, reducing human capital investments, selling productive assets, or even engaging in risky or welfare-reducing behavior, such as transactional sex or child labor. These coping strategies have a detrimental effect on the welfare and can reduce income in the long-run. Resilience

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is a means but not an end in itself. This leaves policymakers with a number of critical questions that should be addressed; can policymakers ensure that the potential benefits of digital financial services are evenly distributed? How can financial products be tailored to meet the differing needs of low income?

The impact of COVID19- on Financial Markets and Institutions John Kamau Waweru Email: jkamau@strathmore.edu

INTRODUCTION

Currently, the COVID-19 has spread to over 170 countries around the world and this has had significant economic impacts on these countries. Countries have been forced to take short-term strict quarantine policies in order to reduce the spread of the virus and the effect has been reduced economic activities. These measures are likely to have longer-term consequences such as mass unemployment and business failures. The effects of the virus are also going to be felt in the financial sector with financial institutions and financial markets being affected greatly.

EFFECTS OF COVID19- ON FINANCIAL INSTITUTIONS

The COVID-19 is likely to have an adverse effect on financial institutions such as banks and insurance companies. In the case of banks, it is important to note that they are vulnerable in times of economic downturns. This is because of the likelihood of an increase in non-performing loans. During this period a number of people have lost their jobs which has reduced their ability to repay their loans. Some businesses have been adversely affected due to the pandemic which will also make it difficult to service their loans. There is also a possibility that in extreme cases that the banks might experience bank runs. This can be attributed to the fact that people might need to

pay for individual treatments and hence forcing large scale withdrawals. Previous evidence has shown that rural financial institutions are faced by bank runs during events such as floods and crop failure and this is expected to be replicated during this period. It is also expected that a large number of banks and microfinance institutions that are lending to the poor will be pressured during this pandemic since all the members of the group will be pressured by the aggregate shock. There have also been calls for banks to suspend the interest that they are charging on loans issued to different business for some time since some of the businesses have closed during this period and hence are not able to pay their monthly installment which comprises a portion of the principal amount and the interest amount. This will most likely have a negative effect on the financial performance of banks. There are concerns about the effect of COVID19 on the insurance industry. This is because it is debatable whether this pandemic is a black swan (an unpredictable or unforeseen event with extreme consequences) and hence not insurable or it should be insurable. For example with the declaration of COVID-19 as a pandemic, many existing travel insurance policies have been rendered ineffectual and left many others in grey areas in relation to claims.

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It is expected that there will be a significant volume of insurance disputes arising from the COVID19. Moreover, in times of crisis such as the Global financial crisis in 2008, local and global obligations of insurance companies and banks sparked defaults which induced a credit crunch in the market.

COVID19- AND FINANCIAL MARKETS

The financial markets have been affected in a dramatic way with the spread of COVID-19 around the world. The spread of the virus has created an unprecedented level of risk, which has caused investors to suffer significant losses in a very short period of time. Due to the uncertainty of the pandemic and its associated economic losses, the financial market has become highly volatile and unpredictable. When WHO declared the disease a global pandemic, financial markets around the world started to tumble. For example, the S&P plunged from 3386.15 to 2237.40 which represented a fall of over 30% within one month. The standard deviation which is the measure of risk also increased significantly during this period. In a study conducted by Zhang, Hu, and Ji (2020) on top ten 10 lists of countries with confirmed cases showed that the risk of stock markets in these countries increased substantially in the month of March when WHO declared the disease a pandemic. Sentimental factors of the investors play an important role in the increased risk. Social media amplify the market sentiment in response to the outbreak which then stimulates trade activities and causes extreme price movement. It is thus clear that the pandemic has a strong influence on stock markets. The COVID-19 has also brought about a period of uncertainty. In periods of uncertainty, investors prefer to invest in government-issued securities as compared to other securities since they are considered to be less risky. This results in a high demand in governmentissued securities which in turn results in a low return from this type of investment. As mentioned earlier, investors during periods such as this prefer less risky investment and they, therefore, tend to remove their money from corporate bonds which are riskier since The Accountantsâ€™ Digest | Volume 2, Issue 2 (July â€“ December 2020)

businesses can get into bankruptcy and fall to pay back. Other than risk, a major event such as the COVID-19 outbreak affect stock market returns. An outbreak like this one affects investment and business environment. A study conducted by Al-Awadhi .et.al (2020) on Chinese stock markets showed that there was a significant negative effect on stock market return. Stock return reduced with the increase in the daily confirmed cases and deaths due to the Coronavirus. The pandemic also affected the return of different sectors differently. For example, the sectors such as the information and technology and medicine manufacturing sectors were performing better than the market, while share returns of air transportation, beverages, and water transportation performed significantly worse than the market during the COVID-19 outbreak. High market capitalization stocks showed a higher significant negative effect on the returns in comparison with low market capitalization stock. The other segment of the financial market that is likely to be affected by the COVID-19 is the foreign exchange market. It is important to note that the foreign exchange market is related to trade and transactions of products and services denominated in foreign currency. If unexpected changes were to occur to this cash flow of these operations, it might hurt the counterparties. Unexpected events such as the COVID-19 are also likely to increase the risk of the foreign exchange market. There is also the possibility of financial contagion because of the trade links in global markets. This is because a currency that is devalued might trigger a speculative attack in the reforming equilibrium exchange rate due to the reduced trade competitiveness of other countries.

COVID 19- effects on financial reporting Fredrick Otieno Email: fotieno@strathmore.edu

A COMMENTARY

The COVID-19 pandemic is an unprecedented situation that has seen some countries such as China, the US, Spain, Italy, and Germany going into complete shutdown. Governments and individuals across the world are working tirelessly towards flattening the curve to minimize the impact of the COVID-19 pandemic. To cushion the economy from the negative impact on COVID-19 the Kenyan government has implemented the following measures to boost cash flows: a 100% tax relief for a gross income of up to KES24,000 per month, reduced the highest PAYE bracket reduced to 25%, a reduction of the Corporation Income Tax (CIT) rate from 30% to 25%, a reduction of the Value-Added Tax (VAT) rate from 16% to 14% effective 1 April 2020, the KRA is to refund verified VAT refunds, and Reduction of turnover tax from 3% to 1%. Since the onset of the COVID-19 pandemic, the corporate sector has been accelerating the process of finalizing its financial statements and getting the auditors to sign the audit opinions. There may be a risk that companies are not thinking through some of the key risks such as low product demand and how these will impact the sufficiency of their disclosures. The challenges of working remotely and client interruptions may mean that audit firms had insufficient time to complete their audit work.

Additionally, audit firms have to now perform additional audit procedures to assess the going concern of companies before issuing their audit opinions. They would need to consider the risk of loan covenant breaches, reduced demand for products, and simply the inability to operate effectively. Regulatory guidelines on submission audited financial statements have not been extended in light of the COVID-19 pandemic implying that there is a possibility that audit firms may not have sufficient appropriate evidence on some components of the financial statements and may have to issue qualified opinions. On the other hand, companies have had to revise their forecasts, they may have to perform line-by-line analysis of their balance sheet and assess whether the current uncertainty may impact any of the amounts presented at 31 December 2019. This implies that there may be more disclosure on account balances that may be impacted by the COVID-19 pandemic. Some companies in Kenya such as EABL have issued profit warnings The primary focus of companies and Saccos alike has been the expected loss considerations and the proper application of IFRS 9. Accounting regulators around the world have issued statements and commentary on their expectations of the accounting considerations that banks should consider when applying IFRS 9. The COVID-19 situation where there is a decrease in economic activities implies

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that there will be an increase in loan loss provision for most if not all companies. Concerning IAS 16 real estate bodies, landlords and governments all over the world have been devising ways to relieve tenants from some of the burdens arising from the Covid-19 pandemic. In Kenya, some landlords have completely waivered rent for tenants while others have reduced the rent, however, the majority still havenâ€™t revised their rent. This implies that real estate bodies may have to disclose more on the impact the COVID-19 will have on their business.

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It is difficult to predict the full impact the COVID19 pandemic will have on economies all over the world; however, companies have a responsibility to stakeholders to disclose in their financial statements that the COVID-19 will have on the going concern. Additionally, auditors have a responsibility to issue appropriate audit opinions to help stakeholders make better decisions regarding companies. Regulators as well have a responsibility to ensure that they accord companies the necessary support in terms of policy formulations to whether the storm that has been brought by COVID-19.

ICT, accountancy, and accounting education The changing nature of accounting: Accounting education Mercy Atieno Email: matieno@strathmore.edu

A COMMENTARY

Quality education is a global phenomenon previously prioritized in the millennium development goals and is currently the fourth key goal included as part of the sustainable development goals (SDGs). Education is envisioned in the SDGs as a means for ensuring lifelong learning, a mechanism to eradicate poverty, and a powerful tool for problem-solving. In solidarity with this agenda, educational institutions and their stakeholders are continuously striving to improve the quality of education. One of the key aspects being discussed is how to bridge the gap between students learning experiences and the actual working environment. Accounting education stakeholders are keen on how the accounting profession can endure current educational challenges such as; rampant change in technology, hence, how to educate technosavvy students or the so-called net-generation, how to incorporate ethical, social and environmental aspects in the accounting curriculum, henceforth address issues such as global warming through sustainability or integrated reporting. Adopting a comprehensive curriculum and applying student-centered pedagogy is fundamental in inculcating core competencies that are required for the job market. It is also arguable that the students learning orientation have greatly changed. There is a lot of focus on the students passing the exams. Passing

exams has been seen as an end and not a means to the end. For quality learning to take place students have to; accept more responsibility for their learning, seek knowledge for the love of knowledge and not only as a means to passing exams, take educational risks in class through actively participating, collaborate/ work in teams with other students especially from other faculties. These activities will help us achieve the role of university education and prepare students to improve the world. Apart from the change in student’s orientation, accounting education may be influenced by historical, societal, economic, cultural, or political context. These factors have fragmented and heterogeneously created different pedagogical approaches when teaching accounting. Thanks to institutions like international accounting reporting standards board (IASB) that focuses on standardizing accounting practice. Currently, the accounting society is captivated by integrated reporting. Questions have arisen as to whether different continents, countries, or organizations are ready to adopt integrated reporting. Literature has discussed broadly the challenges of adopting integrated reporting yet they acknowledge the fact that a good integrated report could be the best thing in financial reporting. Integrated thinking is inevitably a key component of integrated reporting. “Integrated thinking is about connecting performance

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with purpose. It involves identifying, executing, and monitoring business decisions and strategies for longterm value creation. Integrated Thinking builds on the need to reconcile competitiveness and sustainable growth within the context of inclusive business models to take advantage of the opportunities and face the challenges of the market” (CIMA). Accounting educators play a key role in this process. Global influences impacting the profession have highlighted weaknesses in existing accounting curricula towards responding to societal needs and global changes. In teaching accounting; students, faculty, curriculum (knowledge/syllabi), Pedagogy, and the employment industry play vital roles in ensuring the process of training accountants is successful. Whether we focus on the core competencies and skills required by the industry, faculty development, curriculum reviews, or different pedagogies, our aim should focus on making accounting more relevant towards addressing the current societal needs. Accounting education is, therefore, an evolving multifaceted concept that is key in determining the

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success of business education. However, it is key to note that the technical and computational accounting knowledge is still vital, though, when complemented with other approaches that will inculcate integrated thinking and other soft skills then the academic experience would make the students ready to address the changing societal needs. To achieve this, it is key to question the extent to which the curriculum is addressing the current needs and what pedagogical interventions can be used to achieve the desired graduate’s attributes. Institutional challenges such as; Large class sizes, heavy teaching and preparation loads, lack of technological support, increased administrative tasks, limited time and support for research, faculty lacking formal teaching experience, knowledge and development opportunities, lack of incentives and rewards structures and lack of understanding the importance of sound pedagogy, should not derail us from achieving the key goal. It would be interesting to adopt pedagogy such as lifecycle teaching approach, the community of practice, integrative learning, case study approach, action research, video classes, flipped classroom approach, and challenge-driven education approach when training accountants.

“The real danger is not that computers will begin to think like men, but that men will think like computers” Jelina Nashupae Email: nashupae.lekiyai@strathmore.edu

A PERSONAL REFLECTION IN LIGHT OF THE FOURTH INDUSTRIAL REVOLUTION (4IR)

I choose this quote following the many misconceptions that technology will ultimately replace the accounting profession among others as argued by some arguments in support of the fourth industrial revolution (4IR). At first, I had the same thought as many of my friends who were of the opinion that technology is becoming rampant and, in few years, to come, accounting roles will be done using machines including (and not limited to) the books of accounts prepared by accountants. This, however, was the case until I came across the aforementioned quote that made me curious to uncover what the quote really means. I realized that it is not that technology is going to replace these professions, but rather that people should have a mastery of computers to perform their work better. The question arising is what should be done to ensure individuals who work in accounting and finance have mastery of these skills? The question might sound ambiguous, but it is a necessary and relevant one facing the world today. In my own point of view, I think accounting and finance should embrace the change since it’s

inevitable. Now that Kenya has introduced a new education system and use of laptops at the lower level of education, I think this should be a stepping stone for the accounting profession since those having passion in accounting and finance have that opportunity to develop their skills and knowledge in the field at a tender age. I think developing skills in accounting and finance at a tender age is beneficial not only to the individual but to the profession at large, but I think the skills acquired in the lower level should, therefore, be reinforced at a higher level of education so as to prepare undergraduates for the job market.

WHAT SHOULD BE DONE THEN?

Time is money and therefore most managers need a simplified form of their performance in a more simplified form. What came to my mind was a representation in the form of a graph because it is easy to interpret it as opposed to many final accounts that might be prepared in an organization. I think therefore it’s the high time for the high learning institutions to impact such skills on how to use graphics to represent their data to students to ensure that not only do the students know how to do the computation but also know how to represent that information in a more simplified manner in preparation to the job market.

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And since computers have come to simplify our work it is therefore important for high institutions to introduce a bit of programming in graphics into accounting and finance professional courses to give the student a mind-set of what is expected of them in the job market that is embracing the technological changes. This will, therefore, bring a handful of advantages since it saves both time and resources and hence economic growth.

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The end of accounting scandals reimagined Albert Ochieng Email: aochieng@strathmore.edu

A COMMENTARY

In the year 2002, there were a number of big firms that collapsed due to poor ethical and moral values. The lists included Enron, WorldCom, and Tyco. The aftermath of these corporate collapses has seen reforms in regulations being made such as Public Company Accounting Reform & Investor Protection Act of 2002 and the Sarbanes Oxley Act 2002 that impose tougher sentences on corporate fraud (Comunale, Sexton, & Gara, 2006; Low, Davey, & Hooper, 2008). Professional bodies such as the Institute of Certified Public Accountants of Kenya (ICPAK) have also come forward to recommend a code of conduct for their members in a bid to encourage transparency and integrity. However, there is still doubt whether such reforms have made or will make any meaningful change. Low et al. (2008) argues that corporate and accounting scandal have no end due to the capitalistic nature of the society. Consequently, reform crusades are merely a reaction meant to make investors and society in general to have confidence and credibility of accounting service providers. The study further notes that in a world dominated by money and legalistic cultures, reforms to accounting and financial reporting standards will not address this persistent menace adequately. In the case of Enron, there was a blatant failure by Arthur Andersen; the auditing firm hired by Enron to

audit its books to protect investors and it engaged in accounting improprieties with full knowledge that it was engaging in an unfair practice. The question that needs to be addressed here is” Why accountants with moral awareness would decide to make an unethical decision?” The obvious answer is greed. Further attempts to cure the menace have been academic reforms to provide an educational curriculum in accounting that is integrated with an ethics coverage that will inﬂuence graduates’ thinking. The argument is that their thinking is more important and not regulation. While it is a good step to incorporate ethics into an educational curriculum to stem the vice, that alone may not be helpful. In the words of Woldring (1996) as cited by Low et al. (2008), he notes: The answer is not simply to implement a new business ethics unit here and there but to radically overhaul the narrow vocationalism of many business schools. The priority should be not just to train accountants and computer programmers – valuable as that is – but rather to graduate informed business managers and professionals who are sensitive to the importance of values as well as techniques, who are aware of the responsibilities of leadership as well as the tasks of management, and who are capable of confronting the long-term ethical dilemmas involved in their

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businesses as well as the short-term pressures of the financial bottom-line. This means that there is a need to have upright personal and moral values among corporate managers and heads of educational institutions. But how can a person acquire upright and moral values? Social Norm theory offers insight into this question (Elster, 1989). This theory asserts that the behaviour of a person might be influenced by the social norm where the person operates. This view is further emphasized by Boahen and Mamatzakis (2016) who argue

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that the environment where one operates has a greater influence on his or her values and norms. It, therefore, means that accountants that operate in organizations or are trained in an institution that strictly adhere to ethical values are more likely to make ethical decisions. As a new beginning of a world of free scandals, organizations have a responsibility to go beyond mere writing ethical values espoused in their charters, daily routines of writing voluminous rules, and ensure the inculcation of moral values into daily life as a culture created and modeled by top management.

Embracing the future of the accounting profession: Shape up or Ship out? Erastus Mbithi Email: embithi@strathmore.edu

INTRODUCTION

The best way to predict the future is to create it, according to management guru Peter Drucker. These sentiments have brought to the fore the role accounting will play in an increasingly dynamic and uncertain future. Change is the only constant thing the profession cannot run away from. The late John Kennedy puts it better, that change is the law of life and those who lock themselves to the past or present are certain to miss the potential benefits of the future. The long-anticipated disruptions dubbed as the 4th Industrial Revolution synonym to Industry 4.0 is a reality we have to contend and live with, at least now if not forever. Technological buzzwords such as blockchain, automation, artificial intelligence, internet of things are the necessary diet that will spice the profession. Nonetheless, the term Industrial Revolution is not a new concept. In fact, if you ask the historians and cultural anthropologists, they will tell you more with chronological reference dating back all the way to the 1st Industrial Revolution, the 2nd Industrial Revolution, and the 3rd Industrial Revolution and now the 4th Industrial Revolution on our doorstep.

THE EMERGENCE OF THE FOURTH INDUSTRIAL REVOLUTION (4IR)

The 4th Industrial Revolution is built upon the 3rd Digital Revolution, which in turn relied on the 2nd Electricity and Telecommunication Systems Revolution. The idea of Industry 4.0 is an initiative that emerged from Germany around 2011 and focused on the integration of information technology and automation in the manufacturing sector. In the year 2016, Klaus Schwab, the World Economic Forum Founder used the term in his book entitled “The Fourth Industrial Revolution”. Since then, the term has been a subject of debate and fear across all the sectors with professionals questioning their roles in a new and increasingly digital environment. The accounting profession is not immune and the change represents a significant shift from the traditional manual routine tasks to automation and standardization of accounting processes right from the source documents, ledger accounts to the preparation of financial statements. This means that the role of a professional accountant will shift from bookkeeping function to quality assurance and consulting functions. While technology will simplify the preparation of financial statements in real-time, human intervention will still be required to enhance the reliability of the reported information. The reliability of the accounting records is important and

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rests on conceptual principles namely: recognition, measurement, and classification which require human intervention. Further, with automation, repetitive tasks will be eliminated and professional accountants to thrive in the new landscape must shift from numbercrunching to providing value-adding services such as analyzing, interpreting financial statements for business to grow and sustain customers. According to the South African Institute of Professional Accountant 2019, this new role may be enhanced through the four main ways namely, creating value, enabling value, preserving value, and reporting value. In creating value, professional accountants should be able to use both financial and non-financial information to help management in strategic planning. Similarly, in enabling value, professional accountants should help management in cost controlling and budgeting at the operational level. Equally, in preserving value, the accountants should be able to use financial reports to assist management in risk management, both identifying, assessing risk the company is exposed to, and designing mitigation strategies. Last but not the least in reporting value,

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the accountants should be able to provide services beyond compliance services such as problem-solving and analysis.

CONCLUSION

From the above discussion, although Industry 4.0 will disrupt the traditional accounting function, the professional accountants will still be needed. However, for them to survive in the digital environment, they will have to reinvent and evolve with the changing technology. This calls for continuous learning through innovative teaching and learning where learning is not only confined within the classroom mastery of concepts but also engages the mind of learners in analyzing and applying accounting information. Institutions of higher learning should be able to address the skills set gap required by industry. This may be achieved by designing revolutionary programs for the future. Further, the curriculum should focus on developing professional soft skills such as communication skills, presentation skills, application skills, and cultural sensitivity skills among others which cannot be replaced by technology.

A step towards improving corporate governance Albert Ochieng Email: aochieng@strathmore.edu

A COMMENTARY

The need for quality corporate governance has dominated the policy agenda for government, a non-profit organization, and business practitioners alike. The heightened focus on the quality of corporate governance has been as a result of various accounting scandals, misleading disclosures, excessive compensations, and corporate frauds. In both theory and practice, strong and sound corporate governance provides many benefits to the organization's concern such as improvement of financial stability and access to funds. Interestingly though, the construct “corporate governance” (CG) has been understood differently in different contexts. Some scholars attribute these differences in the connotative meaning of corporate governance to different theoretical viewpoints of the writers. While the social scientists continue to debate on the best definition of corporate governance, the practitioners have not paid much attention to it, only pushing forward to its practice; a situation that makes it difficult for any meaningful policy recommendation and improvement.

documented that corporate governance construct may fall into two broad perspectives; stakeholder and shareholder orientation. If the perspective of corporate governance is not understood within a context, it may be difficult to know what constitutes its quality. The authors argue that the quality of corporate governance depends on the perspective of corporate governance. As such, there is a need for writers to explicitly state their perspective of corporate governance so as to develop a common framework for evaluating the quality of corporate governance under each perspective. This way, the practitioners will be better placed to come up with a policy recommendation that fits their organization’s needs.

The situation is further complicated by writers who do not explicitly state their perspective on corporate governance in their writings ultimately meaning a variety of inferences can be made concerning its meaning. Despite corporate governance is a complex construct with multiple definitions, it is also

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Measurement and financial performance Joseph Kuria Email: jkuria@strathmore.edu

INTRODUCTION

Two of the earlier inventions of mankind are the wheel and the other one, amazingly is the doubleentry bookkeeping system. The double-entry bookkeeping system was initially pioneered by the Romans and largely in Jewish society during the early medieval times. Some developments would occur in 70 AD when some terminology was assigned to it as “tabulae rationum” where on one side of the table disbursements were captured while receipts were reflected on the other. This would be taken to reflect more or less what happens in most life situations. In 1494, Luca Pacioli commonly referred to as “the father of double-entry system” would publish a formal manuscript that would form the basis for application and subsequent studies on double entry. The double entry system forms the basis for the fundamental accounting equation which outlines the relationship between the assets, liabilities, and equity. At the end of the reporting period, an entity is required to provides the carrying amount of the assets and liabilities. Measurement is determining the carrying amount of the assets and the liabilities with the change in the accounting balances reported as income or expenses which is reported in the statement of the profit or loss. In determining the carrying amount of the assets and liabilities the entities need to use the best practices by selecting and applying The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

the appropriate method depending on the situation. Selecting and applying wrong measurement methods results in an error (omission or misstatement arising from failure to use or misuse of reliable information). Most business failures can be attributed to applying wrong measurement methods that are unsuitable

REVISITING THE MEASUREMENT OF THE FINANCIAL PERFORMANCE OF AN ENTITY

Financial performance is usually measured in terms of profit or as the basis for other measures such as return on investment or earnings per share. The elements directly related to the measurement of profit are income and expenses which result from the measurement of assets and liabilities. Income results from inflows (change in bank balances) or enhancements of assets or decreases of liabilities that result in increases in equity and this exclude the contributions from the shareholders. Expenses result from outflows (change in bank balances) or depletions of assets or incurrences of liabilities that result in decreases in equity and this excludes the distributions to the shareholders.

MEASUREMENT OF FINANCIAL PERFORMANCE AND THE PRINCIPLES APPLIED

Some of the accounting principles applied in measuring an entity’s financial performance include, inter alia: • Objectivity: Financial statements must provide information about the value, mostly the value of company assets and liabilities including the various transactions and events entered by the entity that can affect the values for those assets and liabilities. The economic value of the entity’s assets and liabilities should reflect the fair value especially the expected future cash flows based on solid evidence. It is better to examine measurement in terms of the market versus entity-specific measurement objectives. The market value measurement objective has important qualities that make it superior to entityspecific measurement objectives, at least on initial recognition. • Matching concept: State that all expenses must be matched and recorded in the accounting records and reported in the financial statement in which the revenue relates to. In practice, matching is a combination of accrual accounting and the revenue recognition principle. • Consistency: It requires the entity to select and apply its accounting policies consistently for similar transactions, other events and conditions unless an IFRS specifically requires or permits categorization of items for which different policies may be appropriate. If an IFRS requires or permits such categorization, an appropriate accounting policy shall be selected and applied consistently to each category. • Revenue recognition: Revenue should be recognized when realized or realizable and earned. Realized is when it results with receipts of cash or its equivalent and realizable is when it results with claims for assets. Earned is when the entity has performed its duties and responsibility relating to that contract with customers. Premature or delays in recognition of revenue distort financial information regarding performance.

METHODS APPLIED IN MEASURING FINANCIAL PERFORMANCE

The methods an entity can apply to measure financial performance reliably include: • Historical cost: Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the number of proceeds received in exchange for the obligation, or in some circumstances, at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. • Current cost: Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently. • Realizable (settlement) value: Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business. • Present value: Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

CONCLUDING REMARKS

Before evaluating the entity's financial performance, it is better to evaluate the method(s) that has been used to measure the entity’s assets and liabilities. If the method selected and applied by the entity does not meet the principles of measurement it can lead to inappropriate financial information which will lead to

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wrong decisions being made. Consistency application of the principles and methods in measurement enhances the comparability of financial performance. Sources: https://www.dbsa.org/Infrastructure%20Guidelines/GAMAP%20Attachments.pdf, IASB Conceptual Framework for Financial Reporting: https://www.ifrs.org/groups/international-accountingstandards-board/

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Information series UPDATE: DO YOU KNOW THE ELEMENTS OF AN INTEGRATED REPORT?

How well do you know the elements and the 6 Capitals and other elements of an integrated report? The International Integrated Reporting Council (IIRC) released a framework for integrated reporting <IR> in 2013. The <IR> framework provides the principles and concepts that guide the preparation of an integrated report by an organization. Among the elements include: 1. 2. 3. 4. 5. 6. 7. 8.

Organisational overview and the external environment under which it operates Governance structure and how this supports its ability to create value Business model Risks and opportunities and how they are dealing with them and how they affect the company’s ability to create value Strategy and resource allocation Performance and achievement of strategic objectives for the period and outcomes Outlook and challenges facing the company and their implications The basis of presentation needs to be determined, including what matters are to be included in the integrated report and how the elements are quantified or evaluated.

The integrated report is expected to highlight the various forms of capital that assist an entity to achieve its strategy. These are the 6 capitals which include:

Type of capital

Description

Financial capital

The traditional yardstick of performance, this capital includes funds obtained through financing or generated by means of productivity.

Manufactured Capital This encompasses physical infrastructure or technology pertainig Intellectual Capital

This accounts for the intangibles associated with brand and reputation, in addition to patents, copyrights, organizational systems and related procedures.

Natural capital

This includes resources such as water, fossil fuels, solar energy, crops and carbon sinks, which cannot be replaced and are essential to the functioning of the economy as a whole.

Human capital

The skills and know-how of an organization’s personnel, in addition to their commitment and motivation — which affect their ability to fulfill their roles.

Social and relationship This encompasses the relationships – and attendant resources – between an organization and all its stakeholders, including communities, governments, suppliers and customers. Source: IIRC, Ernst and Young: https://www.ey.com/Publication/vwLUAssets/ey-ccass-integratedreporting/$FILE/ey-ccass-integrated-reporting.pdf

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Acknowledgments We thank the support of the ARG members and authors who contributed their articles to this inaugural release of the Accountant’s Digest.

EDITORIAL TEAM

Executive Editor Dr. David Mathuva Strathmore University Business School, Strathmore University, Nairobi, Kenya dmathuva@strathmore.edu Editorial Assistant Fredrick Otieno Strathmore University Business School, Strathmore University, Nairobi, Kenya fotieno@strathmore.edu Associate Editors Dr. James Boyd McFie, Strathmore University, Kenya Dr. Farida Abdul, Kenyatta University, Kenya Dr. Mumbi Maria Wachira, Strathmore University Business School

Accounting Research Group Members Dr. James Boyd McFie – Strathmore University Dr. David Mathuva - Strathmore University Dr. Farida Abdul – Kenyatta University and Strathmore University Dr. Mumbi Maria Wachira - Strathmore University Ferdinand Othieno - Strathmore University Geoffrey Injeni – Strathmore University Joseph Kuria - Strathmore University Fredrick Otieno - Strathmore University Albert Abanga – Strathmore University Erastus Mbithi - Strathmore University Moses Nyangu – Strathmore University Simon Musyoki - Strathmore University Titus Mweta, Technical University of Kenya/ Strathmore University Teresa Githiaka - Strathmore University Cosmas Mwalya – Strathmore University Carol Ger – Strathmore University Mercy Atieno – Strathmore University Jelina Nashupae - Strathmore University Disclaimer: The views expressed in this publication are those of the authors, and not of any institutions cited in this document.

Content Editor & Publisher Fredrick Otieno, Strathmore University Business School

The Accountants’ Digest | Volume 2, Issue 2 (July – December 2020)

BUSINESS SCHOOL

The Accountants’ Digest Volume 2, Issue 2 (July – December 2020)