Accountancy Futures_Edition 08_2014 by Accountancy Futures_ACCA

ACCOUNTANCY FUTURES I EDITION 08 I 2014

ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 08 I 2014

FROM ALGORITHMS TO ACTIVISTS

CORPORATE REPORTING AND THE DIVERGING DEMANDS OF INVESTORS

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PLUS: INTEGRATED REPORTING PIONEERS I PEARSON CFO INTERVIEW I BIG DATA I DIVERSITY I TIM HARFORD I STANDARD CHARTERED ASIA FINANCE CHIEF I SME FUNDING I TAX AND TRUST I TOMORROW’S CFO CAREER PATHS I STOCK MARKETS AND SUSTAINABILITY I FUTURE OF AUDIT

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ACCOUNTANCY FUTURES

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PG02 EDITION 08

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Accountancy Futures Edition 08 was published in January 2014. Accountancy Futures® is a registered trademark of ACCA. All views expressed in Accountancy Futures are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2014 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566.

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ACCOUNTANCY FUTURES

What do investors want from corporate

reporting? Given that a modern investor might be anything from an algorithm-driven hedge fund to a shareholder activist to a pension fund, there is no single answer. But some are asking for more information about a company’s strategy, risk profile, and how it plans to create value over the long term, including through its approach to sustainability. For some, this is part of a greater emphasis on their stewardship role. There are also demands for faster reporting. In this edition we explore the challenges all this presents to CFOs and other finance professionals, and responses such as integrated reporting. Along the way we hear from leading players and thinkers such as Pearson CFO and chairman of the UK’s influential Hundred Group Robin Freestone and Harvard reporting expert Bob Eccles. Chris Quick, editor You can find out more about ACCA’s research and insights activities at www.accaglobal.com/ri

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

Accountancy Futures Academy Chair: Ng Boon Yew FCCA

Accountants for Business Global Forum Chair: Richard Moat FCCA

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

Global Forum for Business Law Chair: Faris Dean FCCA

Global Forum for Audit and Assurance Chair: Robert Stenhouse FCCA

Global Forum for the Public Sector Chair: Stephen Emasu FCCA

Global Forum for Corporate Reporting Chair: Lorraine Holleway FCCA

Global Forum for SMEs Chair: Rosanna Choi FCCA

Global Forum for Sustainability Chair: Andrea Coulson

Global Forum for Taxation Chair: Tom Duffy FCCA

(Top row from left to right)

(Bottom row from left to right)

Executive chairman, Raffles Campus

Executive director, LCH Clearnet

Director, national accounting and audit, Deloitte UK

Head of financial reporting, Qatar Shell

Senior lecturer in accounting, University of Strathclyde

CFO, Eircom Group

Solicitor, Lyons Davidson

Public financial management expert, IMF

Partner, CWCC Certified Public Accountants

Consultant and partner, Affecton

PG03 EDITION 08

PG01 COVER PG02 CONTACT DETAILS PG03 WELCOME PG04 CONTENTS PG05 PG06 CORPORATE REPORTING PG07 PG08 PG09 PG10 PG11 PG12 PG13 PG14 PG15 PG16 PG17 PG18 PG19 PG20 PG21 PG22 PG23 PG24 PG25 PG26 PG27 PG28 PG29 PG30 PG31 PG32 RISK AND GOVERNANCE PG33 PG34 PG35 PG36 PG37 GLOBAL ECONOMY PG38 PG39 PG40 PG41 PG42 PG43 PG44 PG45 FINANCIAL LEADERSHIP PG46 PG47 PG48 PG49 PG50 CORPORATE REPORTING PG06 INVESTORS With share owners now as diverse as the information they are interested in, no one reporting size fits all PG10 PEARSON CFO The challenge of not giving too much or too little information PG12 LONG TERM ACCA’s Neil Stevenson on changes in investor engagement PG13 SMART TRADING Individuals trying to beat the market should consider behavioural finance PG16 CHINA The CICPA’s Dr Yugui Chen on the benefits of using international standards at the local level; Professor Wang Hua on investors

PG42 MAGNUS LINDKVIST The futurist says we all have a part to play in shaping the future FINANCIAL LEADERSHIP

PG20 BOB ECCLES How to get investors interested and engaged in integrated reporting PG22 STOCK MARKETS Stock exchanges in emerging markets could take the lead on sustainability reporting, says Corporate Knights’ Doug Morrow PG24 CARBON Investors must account for the risk inherent in carbonintensive assets PG27 SOUTH AFRICA How far has mandatory integrated reporting transformed business in the country? PG30 THE CROWN ESTATE An interview with FD John Lelliott on the UK property business’s award-winning adoption of integrated reporting

‘Often there is more

RISK AND GOVERNANCE PG32 INTERNAL AUDIT Objectivity, independence and ethics PG34 CORPORATE GOVERNANCE A tick-box approach to governance will not create long-term value; it’s time to start again PG36 COMFORT FACTOR Risk reporting in Pakistan that delivers value GLOBAL ECONOMY PG37 POLAND CFOs at ACCA’s European summit in Warsaw heard that growth will remain below 4% PG40 DIGITAL DARWINISM Ten tech trends that will change the way business is done forever

commonality between preparers of accounts and investors than there is between preparers and regulators’ PG10

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PG45 CFO PATHS Must-have experience and roles for future high-fliers PG50 WIDER VISION CFOs need to look beyond traditional roles, ACCA’s International Assembly heard PG52 ASIA Standard Chartered’s Julian Fong on investing in people PG54 NEUSOFT CFO Guaranteeing business survival through overall budget management PG56 RISK There is a better way of measuring the performance of working capital, says Professor Wang Zhuquan PG58 EIRCOM CFO Richard Moat on how 4G technology is creating business opportunities for telcos

PG60 SHARED SERVICES Global business services are the next phase in shared service models PG62 BIG DATA Working out what’s important and what’s not is a key skill finance professionals have to offer PG64 AFRICA KPMG’s Dr Claudius Williams-Tucker on the need for more professional accountants in Africa PUBLIC SECTOR PG66 REPORTING Public bodies need to embrace integrated reporting to keep up with the private sector AUDIT PG68 FUTURE Regulators, standardsetters and investors are all driving change, but not all of it is joined up

PG51 PG52 PG53 PG54 PG55 PG56 PG57 PG58 PG59 PG60 PG61 PG62 PG63 PG64 PG65 PG66 PUBLIC SECTOR PG67 PG68 AUDIT PG69 PG70 PG71 PG72 PG73 PG74 PG75 PG76 PUBLIC VALUE PG77 PG78 PG79 PG80 TAX PG81 PG82 PG83 PG84 SMALL BUSINESS PG85 PG86 PG87 PG88 PG89 PG90 PG91 DIVERSITY PG92 PG93 PG94 PG95 ECONOMICS PG96 PG97 PG98 NEWS IN BRIEF PG99 ACCA NETWORK PG100 BACK COVER TAX PG80 TRUST The accountancy profession must respond effectively to how the public views taxation of corporates PG82 AUSTRALIA A review of the country’s new taxpayer-centric tax and transfer system SMALL BUSINESS

PG71 QUALITY What do Australian CFOs believe is the crux for audit quality? PG74 TALENT A survey of audit staff in three Asia Pacific countries finds high levels of dissatisfaction

PG78 STRUCTURE An organisation must ensure that its ownership and accountability structure supports its values and principles

PG84 FUNDING Innovative forms of finance are now coming on stream as mainstream bank lending remains scarce for smaller firms PG88 BRIBERY How corruption affects small businesses and what accountants can do to help

PUBLIC VALUE PG76 CSR Corporate social responsibility efforts must produce real results if they are to be sustainable, says PwC US’s Shannon Schuyler

‘We have that international

dynamic. It’s good for the team; it creates a richness and breadth of experience and a communality’ PG91

DIVERSITY PG91 NEWS CFO An international dynamic is important for forwardlooking organisations such as Australian News Channel, its CFO says PG92 INEQUALITY The prosperity of an increasing number of working women is down to a largely female underclass ECONOMICS PG95 CASH Leading economist Tim Harford on why the

decision by two musicians to burn £1m might not have been as crazy as it seems PG98 IN BRIEF Rise of the CFTO, career survey, honorary members, syllabus change, admission to AEG

ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

From algorithms to activists ‘We want it all and we want it now!’ New ACCA research looks at investors’ changing demands and the implications for corporate reporting

or decades, there has been lots of discussion about who financial reporting is for and therefore what information it ought to be providing. In 1975, the UK’s Accounting Standards Steering Committee’s groundbreaking work, The Corporate Report, concluded that financial reports were for the benefit of a range of ‘users’ – what we would today call stakeholders: equity investors, loan and debt providers, employees, suppliers, customers, government, the general public, and others. In one sense, nothing has fundamentally changed: financial reporting is still aimed at a range of stakeholders, with investors still arguably ranking as first among equals. What has changed, perhaps, is that the corporate

for a turnaround situation. A defined-benefit pension scheme might totally ignore the price drop, being heavily invested in fixed-income bonds to match its scheme liabilities. Since the 1970s the domination of markets by pension funds and insurers has been eroded by greater international ownership of companies, and the emergence of players such as hedge funds and private equity firms, with shorter-term investment horizons. The investment community can no longer be treated as homogeneous; different investors want different information. Short-term investors, such as hedge funds, may not want or need the same information as longer term investors, such as pension funds. So who are investors these days – and what

annual report now competes with many more sources of information – many available instantly. Thanks to internet news feeds, Twitter

information do they need from corporate reports? ACCA’s Understanding investors is a four-stage project looking for answers to these questions and an insight into how the investor landscape in the UK and Ireland has been shifting and how companies are already changing to meet investors’ information needs.

The investment community

can no longer be treated as homogeneous and the like, it is now possible to watch a company’s reputation disintegrate before your very eyes, its share price falling in tandem. Another difference is that we now have a much more nuanced view of who investors are. Today, that share price plummet might be perceived as a simple sell signal by an algorithm-driven hedge fund that only bought the shares five minutes ago, as a warning of an adverse impact on future dividends by an insurance company reliant on yield to compensate for a shortfall in premium income, or as a buying opportunity by a shareholder activist looking

PG06 EDITION 08

THE CHANGING LANDSCAPE The financial crisis has had a huge impact on the investor landscape. Low growth and ultralow interest rates are boosting active asset management and risk-taking as the search for returns becomes ever more desperate. At the same time, but running counter to this theme, regulatory developments such as Solvency II, which will affect the insurance sector, could see a lessening of risk appetite and a preference for fixed interest securities. With greater risk awareness (separate from risk appetite as such) comes a reduction in investment time horizons and the resurgence

ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

of short-termism. Technology is feeding that development as, according to one report, up to 40% of stock trades now come from algorithmic trading systems (187 algorithm trading funds were launched in 2011 alone). Society itself focuses on near-term gratification with a seeming inability to concentrate on more than 140 text characters at a time. Another factor is the decline of trust (quite understandable in the circumstances), so more emphasis is put on the here and now rather than vague promises about distant futures. What’s more, there is a deluge of information available which perhaps creates a demand for even more frequent, more immediate data. But Financial Times columnist Professor John Kay, author of a review into the effect of UK equity markets on the competitiveness of UK business, questions the value of all that information: ‘Much of the data that flashes across screens is simply noise, although commentators constantly endeavour to attach significance to it.’ There is some pushback against short-

A view on audit ‘The audit can take months, which is a substantial and frustrating delay. At some point, you do need assurance that the figures you are getting are correct, but the fact is that the market is quite a leveller and market prices tend to move way ahead of the fundamentals. By the time you’ve got your assurance, the market is priced on something else. Information gets out. You may not get it from the company itself, but you’ll get it from the customers or suppliers.’ Samantha McConnell, chief investment officer, IFG Pensions, Investments & Advisory Services, Ireland termism. ‘We would prefer to move away from quarterly reporting,’ says Iain Richards, head of governance and responsible investment at Threadneedle Investments. ‘The whole reporting framework seems to be heading towards feeding information to high-frequency traders, something we’re not keen on at all.’ At the same time, though, there is a growing

Robert Talbut CHIEF INVESTMENT OFFICER, ROYAL LONDON ASSET MANAGEMENT AND CHAIRMAN OF THE INVESTMENT COMMITTEE AT THE ASSOCIATION OF BRITISH INSURERS ‘As an industry, we have become part of a trend towards shorter-term horizons, in line with other changes in society. The news media is shorter term, politicians are shorter term, consumers are shorter term, and management and investors have become shorter term. One of the lessons from the financial crisis is that we should actually be thinking afresh about how to reverse these trends. Shareholders like us, and others, are trying to encourage a fight-back to develop longer-term thinking for companies and their investors.’

David Smith HEAD, CORPORATE GOVERNANCE, ABERDEEN ASSET MANAGEMENT ASIA ‘We invest for the long term, and so our perspective on corporate reporting is viewed through this lens. ‘One of the issues we face is that corporate reporting can at times appear to be a compliancedriven data-dump, devoid of any colour or insight from management. Ideally, corporate reporting should involve a report from management on the state of the business, rather than a few anodyne comments from management serving as a prologue to reams of data that can at times appear to be designed for those constructing models rather than for those interested in owning businesses. ‘To that end, and at the risk of being misquoted, we would probably prefer greater brevity in terms of financial statements, coupled with greater depth in terms of management commentary around the way management is looking at the business and the broader competitive landscape, and the way it is managing risks – not just financial risks, but business model risks.’

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ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

Will integrated reporting be a valuable development? Seemingly so, according to more than 90% of investors

Real-time reporting If companies are going to be proactive rather than waiting like sitting ducks in a rapidly changing world, management itself increasingly needs access to information in ‘real time’, according to the findings of Understanding investors: the road to real-time reporting. More difficult, however, is the notion that companies should provide information continuously. Tony Cates, the head of audit at KPMG, has concerns. ‘If you’re getting numbers all the time, there’s a pressure to keep reading, interpreting and explaining the figures to investors,’ he warns. ‘That’s time-consuming and distracting.’ Yet Ankita Tyagi, an analyst at Aberdeen Group who has written a report about real-time reporting, says: ‘In today’s environment, business agility is just as important as a long-term strategy.’ Real-time information would improve investors’ understanding of corporate performance and their ability to react quickly. Investors may also regard a company that can provide good-quality information almost immediately as one that must have robust controls and governance – giving them confidence in what they’re being given. While many CFOs appreciate the benefits of real-time reporting, they are wary about the implications from a competitive standpoint. ‘You don’t want to disclose too much or too little,’ says Tyagi. ‘You want to give people a sense of transparency without showing all your cards.’

PG08 EDITION 08

trend towards something more like real-time reporting. Good companies can generate information almost immediately so that they can evaluate their performance and take action ahead of rivals. Now, a growing number of investors want access to that information so they can make their own decisions. WHAT I REALLY, REALLY WANT The Understanding investors study looked in detail at what type of information investors want, how they like to receive it and their level of trust in it. Part of it is based on a survey of 300 institutional investors in the UK and Ireland, plus a dozen in-depth interviews. (The UK is the second-largest market in terms of funds under management, while Ireland is a growing centre for asset management. Investment funds in both countries are very international in outlook and investment portfolios.) It’s clear from this study that the annual report

ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

remains at the core of investors’ information needs, but that it is competing with other communications from companies – quarterly or interim reports, one-to-one conversations, investor roadshows and so on. ‘The report is the opening of a conversation,’ says Jonathan Pitkänen, head of investmentgrade research at Threadneedle Investments. ‘It provides information and raises questions that need to be answered, which enable investors to form an opinion about a company.’ In fact, while almost two-thirds of investors told the ACCA survey that the annual report is among their most valuable sources of information, many also placed great value on information generated outside the company. They are concerned, however, about how long it takes to get information published after the relevant period end, and about the frequency of reporting. Oddly, though, while four out of five investors say quarterly reporting is still valuable despite its flaws, almost half would like to see mandatory quarterly reporting scrapped. Bland or overly complicated reports come in for criticism. Investors see risk reports, for example, as covering too much and winding up saying nothing useful at all. At the same time, the balance sheet is nowhere near transparent enough, with pension liabilities, debt and leases being particular areas of criticism. Will integrated reporting – the structured collation of financial and narrative information on strategy, operations, risk and environment, social and governance (ESG) disclosures – be a valuable development? Seemingly so, according to more than 90% of investors. But while the process sounds cumbersome, perhaps it needn’t be: ‘It shouldn’t be too complex to understand the key drivers of your business – that’s exactly what an integrated report is,’ says David Blood, founder of sustainability investor Generation Investment Management, ‘It should have the metrics that are accurate, consistent and easily accessible, but most of all, material to the business.’ THE CFO RESPONSE According to Understanding investors: the CFO perspective, CFOs recognise that a key watchword is ‘faster’. They have been working to close their books more quickly and will continue to do so. Partly, that’s because it’s good for the company to do so. Andy Chard, director of financial reporting at AstraZeneca, says: ‘By closing faster, we can free up resources in our finance department, and they can move on to other important priorities.’ Most CFOs even support the move towards real-time reporting, though they remain

David Gerald PRESIDENT/CEO, SECURITIES INVESTORS ASSOCIATION (SINGAPORE) ‘In order for financial reporting to achieve its objective, the investor must understand the report easily and it should be transparent. As Warren Buffet said: “If I pick up an annual report and I can’t understand a footnote, I probably won’t, no, I won’t invest in that company because I know that they don’t want me to understand it.” The financial report must not be loaded with too much unnecessary information to avoid discouraging the investor from reading it.’

David Stewart CHIEF INVESTMENT OFFICER, SANTANDER ASSET MANAGEMENT UK ‘If you ask investors in isolation would they prefer short-term clarity rather than uncertainty, they are going to say they prefer short-term clarity – even the ones that view themselves as long-term investors. But I don’t think there’s any doubt that quarterly reports are something of a distraction. The sales force and senior management look at the quarterly or monthly performance figures, whereas most fund managers’ investment strategies are focused on what will happen over the next one to three years.’ concerned about commercial confidentiality. They are also concerned about the quality of what’s published and it is notable that there is little appetite to cut audit fees if that would pose a danger to audit quality. Over half are adopting a wait-and-see approach to integrated reporting – hardly surprising as the model is only now being developed – but a large minority expect to be publishing integrated reports within three years. But here’s a question: as CFOs work to report more information in a more integrated fashion and with the right level of audit quality, will anyone read the output in detail? Or will it simply be a reference document dipped into when particular questions arise? Whatever the answer turns out to be, the trends and pressures seem irreversible.

You can view a discussion on understanding investors at ACCA’s Accounting for the future conference at www.accaglobal. com/ab46

Andrew Sawers, former editor of Financial Director magazine and a former stockbroker The four Understanding investors reports – The changing landscape, Directions for corporate reporting, The road to real-time reporting and The CFO perspective – are available at www.accaglobal.com/reporting

PG09 EDITION 08

ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

The Goldilocks dilemma Pearson CFO Robin Freestone explains the problems corporates face in striking the right balance between too much and too little investor information

company with a US$8.2bn turnover and operations in over 70 countries. Three different businesses, each facing tough market conditions and hard-to-predict changes in customer behaviour driven by a technological revolution. A complex deal involving a much-loved brand name that is not quite a divestment but not quite a merger. And listings on two stock exchanges, each with its own forest of rules and requirements. Welcome to the world of the multinational finance chief – specifically that of Robin Freestone, CFO of education and publishing giant Pearson, owner of the Financial Times and, until last July, of Penguin Books. Such issues are common to big-company CFOs, as is the Herculean challenge of describing the activities, performance, risk and strategy of huge and complex businesses to investors. It’s no surprise then that communication with investors is a big issue for the FTSE 100 and large private company CFOs in The Hundred Group, an influential UK networking forum and lobbying group. Freestone took over the chairmanship of the group in December 2012 for a two-year stint. ‘We spend a lot of time at The Hundred Group talking to investors,’ he says. ‘Often there is more commonality between preparers of accounts and investors than there is between preparers and regulators. Regulators will often say investors want to know about this or that particular issue, but when you ask investors, they don’t really. The investor community is often quite selective in what it wants to know about.’ Freestone says big companies take investor requests for information very seriously. He gives the example of including a net debt figure in the accounts even though it is not required under International Financial Reporting Standards (IFRS). ‘Every company produces a net debt figure because investors say they want to know it,’ he points out. But things become more complicated when regulators or non-governmental organisations (NGOs) suggest including things in the annual report that companies are not sure investors actually want. ‘Sometimes it’s easy to do and legitimate; sometimes it isn’t that easy, it’s costly and it’s probably only going to add to the volume without any great usage of the data.’

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Robin Freestone Robin Freestone is chairman of the UK’s The Hundred Group of finance directors and has been CFO of Pearson since 2006, two years after joining as deputy CFO. Previously he was group financial controller of Amersham (now part of General Electric) and held senior financial positions with ICI, Zeneca and Henkel UK. For users, he says, annual reports are not in great shape. They are too long, and would fill over 1,000 pages by the end of the century were they to continue growing at the same rate as over the last 30 years. The more you add, the harder it is for users to find the stuff they really want to know about, he says. ‘I heard someone liken it to being told by the airline pilot exactly what every gauge is showing. Most passengers just want to know everything is fine.’ There is a balance to be struck between reporting every gauge reading and just saying everything’s OK, but it might be different for different investors. All investors should be treated equally, says Freestone, but the really valuable ones are long-term investors who have got to know the company and will voice any concerns before taking a decision to sell. Freestone agrees that the banking crisis has led to a greater recognition that too shorttermist an approach is in no-one’s interest, but doesn’t believe there has been a dramatic change in the approach of investors. ‘Both parties – investors and management – recognise they have to think about the long term.’ He quotes former CEO of GE Jack Welch, who said that it’s easy to run companies for the short term and it’s easy to run companies for the long term but the difficulty is that you have to do both. ‘If you start to regularly miss your short-term guidance, your credibility as a management team will be lost. But if you forget about the company’s long-term future, you are not doing any good, so that isn’t sustainable either.’ Investors have short-term pressures of their own, he says. ‘They might have pension funds who say if you don’t improve your performance we’ll take funds away from you.’ Everybody recognises, he says, that the key requirement is long term but they get drawn back to the short term very quickly. The annual report, Freestone points out, is only one part of a company’s communication

ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

with its stakeholders. Pearson’s website, for example, offers summaries and highlights for time-pressed investors, analyst presentations with audio and slides, and words, pictures and video about the company’s various activities. For those wanting the numbers in the format of Pearson’s main market, North America, there’s the 150-page SEC Form 20-F, a dry-looking document with a lengthy section on risk. Similar information is produced in a more engaging way in the annual report and accounts. Its 188 pages are dotted with pictures, graphics and links to videos by Freestone, new chief executive John Fallon and chairman Glen Moreno. To prepare and maintain all this information is a massive task. And from a company’s point of view, the goalposts are constantly moving. Freestone reels off a number of new reporting developments exercising the minds of The

Hundred Group CFOs: new annual report requirements in the UK; leasing and revenue recognition changes under IFRS; pressure for more disclosure on tax payments; and a greater emphasis on narrative reporting. The wider role of business, says Freestone, is an increasingly important area for companies, especially in light of the growth of antibusiness sentiment that has developed in the wake of the financial crisis and the focus on tax avoidance. Integrated reporting, he says, is something that can help here. ‘It is fundamental to ask what your organisation is really contributing. You’ve got to be doing a lot more than just profit these days. There has to be a wider agenda and doing some form of good. The most successful companies already tend to be thinking in that sort of way.’ Chris Quick, editor

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ACCOUNTANCY FUTURES: CORPORATE REPORTING INVESTORS

Engaging investors ACCA’s Neil Stevenson argues that investors increasingly want to engage for the long term and identifies underlying shifts that could accelerate the process

Neil Stevenson is ACCA’s executive director – brand, and a member of ACCA’s executive team. He sits on the working group of the International Integrated Reporting Council (IIRC) and on the steering committee of the UK’s Professions for Good initiative.

e have all read the caveats. Investors are not a homogenous group. They don’t necessarily have a deep grasp of accounting issues. They are only interested in short-term financial information. But to continue to make these assertions masks underlying shifts. Many investors do want to engage – if we take ideas to them and explain their benefits. This was first put forward in a 2012 ACCA/Grant Thornton report, Putting investors at the heart of the financial system. The increasing number of investor sounding boards is evidence that this insight is now being put – successfully – into practice. There are a number of significant changes affecting investors and companies which the accountancy profession is already responding to. WE INCREASINGLY TALK NOW ABOUT THE FINANCIAL ECOSYSTEM Many participants contribute to responsible capital markets. This goes much wider than auditors and professional bodies and includes regulators, stock markets, investors and fund

We need to work harder

to provide evidence that changes lead to enhanced long-term performance managers, ratings agencies and analysts. This is thinking that is well articulated by the Audit Oversight Board in Malaysia, to take a good example. The key point is that isolated action by one player may not hit the spot in terms of improved performance of the system, but concerted action can make the difference. This thinking surely requires closer collaboration with investors. INVESTORS ARE STEWARDS TOO The financial crisis has taught us that capital markets are not immune from the drive towards responsible business. Investors too need to embed corporate social responsibility (CSR) into their own business models and they are in a prime position to influence companies to adopt good environmental,

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social and governance (ESG) practices and focus on long-term value creation. The UK Financial Reporting Council’s stewardship code provides an example of a framework for good practice. And some investors and stock exchanges are providing genuine leadership. The Aviva Investors-led Corporate Sustainability Reporting Coalition, now seeking to embed reporting as part of sustainable development goals, or those stock exchanges responding to Paragraph 47 of the Rio +20 Earth Summit, are good examples. COMPANIES HAVE A SOCIAL PURPOSE ALONGSIDE THEIR COMMERCIAL IMPERATIVE As thinking from environmental law organisation Frank Bold suggests, this can be thought of as ‘re-incorporating society into corporate purpose’. Corporate activities cannot be carried out in isolation from wider social and economic considerations (especially given the speed of consumer response via social networking). Social capital does matter to companies and their investors. EXPLAINING CORPORATE DECISIONS Investors and wider stakeholders want to know not just about decisions and outcomes but the rationale, assumptions, processes and impacts: there is a need more than ever to demonstrate the ethical company, to articulate the risk appetite, to explain the decision-making. Assurance will increasingly be required. GOOD REPORTING REQUIRES GOOD GOVERNANCE Investor views are increasingly being sought to identify information needs. Asking the consumer can only be a good thing. But we are also making closer links between good governance and management practices and better reporting, to enhance market confidence. These changes all have potential to redefine our approach to accountancy. However, in relation to engaging investors in the process, we need to work harder to provide evidence that changes in regulation and accounting lead to enhanced long-term performance. And we also need to present better the benefits of changes – in terms that investors will see as benefits – if we really want to engage investors for the long term.

ACCOUNTANCY FUTURES: CORPORATE REPORTING BEHAVIOURAL FINANCE

Attacking the net Trying to beat the stock market, says Professor Meir Statman, is like playing tennis against an opponent who turns out to be Rafa Nadal

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ACCOUNTANCY FUTURES: CORPORATE REPORTING BEHAVIOURAL FINANCE

t a dinner party some years ago, a fellow guest, an engineer who had learned I was a professor of finance, wanted to know where he could buy Japanese yen. ‘Why do you want to buy Japanese yen?’ I asked. ‘Because its value is sure to zoom past the US dollar,’ he said. He proceeded to list the American budget deficit, its trade deficit, and other indicators of the advantage of the Japanese yen over the American dollar. I wanted to tell him quickly and gently that, while his thinking was normal, it was not very smart. ‘Buying and selling Japanese yen, American stocks, French bonds and all other investments,’ I said, ‘is not like playing tennis against a practice wall, where you can watch the ball hit the wall and place yourself at just the right spot to hit it back when it bounces. It’s like playing tennis against an opponent you’ve never met before. Are you faster than them? Will they fool you by pretending to hit the ball to the left side, only to hit it to the right? ‘Think for a moment. You’re on one side of the net, thinking the yen will go up. Your opponent is on the other side, thinking it will go down. One of you must be the slow one. Have you considered the possibility that the yen seller might be Goldman Sachs, Barclays, Bank of Tokyo-Mitsubishi UFJ, or another of the many traders in the yen market who have offices in both Tokyo and New York and know more about both the Japanese and US economies than you can learn from your morning’s Wall Street Journal?’ Yet there is more to investing and tennis than faulty thinking. My fellow guest wanted to make money on his yen trade, but he also wanted to feel the thrill of winning when the yen zoomed. He wanted to express himself as a player in the market rather than an onlooker. And he wanted to be a member of the investing community, the community of people who observe financial markets, trade in them, and share their experiences with each other. We are intelligent people, neither irrational nor insane. We are ‘normal smart’ at times and ‘normal stupid’ at other times. We do our best to increase the ratio of smart behaviour to stupid, but we do not have computers for brains, and we want benefits that computers cannot comprehend. We want high returns from our investments, but we want much more than that. We want to nurture hope for riches and banish fear of poverty. We want to beat the market. We want to feel pride when our investments bring gains and avoid the regret that comes with losses. We want the status and esteem of hedge funds, the warm glow and virtue of socially responsible

PG14 EDITION 08

funds, and the patriotism of investing in our own country. We want good advice from financial advisers, magazines and the internet. We want to be free from government regulations yet protected by regulators. We want to leave a legacy for our children when we are gone but nothing for the taxman. The sum of our wants and behaviours makes financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and at other times popping them. UTILITARIAN, EXPRESSIVE AND EMOTIONAL The benefits of a job come in packages, and we face trade-offs as we choose between them. A lawyer who wants to earn money but is also passionate about public advocacy can choose a public advocacy package with little money and much passion or a corporate law package with more money but less passion. Investments are like jobs, and their benefits extend beyond money. Investments express parts of our identity, whether that of a trader,

Remember: there is an idiot in every trade – are you sure it’s not you?

a gold accumulator, or a fan of hedge funds. Investments are a game to many of us, like tennis. We may not admit it, we may not even know it, but we are willing to pay money to play the investment game. This is the money we pay in trading commissions, mutual fund fees, and software that promises to tell us where the stock market is headed. And investments are about what we would do with the money we make and how it makes us feel. Investments are about a sense of security in retirement, the hope of riches, joy and pride in raising our children, and paying for the college education of our grandchildren. Investments, jobs, products and services have benefits that enhance wealth, well-being, or both. These include utilitarian benefits, expressive benefits and emotional benefits. Utilitarian benefits are the answer to the question, what does it do for me and my wallet? The utilitarian benefits of watches, for example, include telling the time; those of investments are mostly wealth, enhanced by high investment returns. Expressive benefits convey to us and to others our values, tastes and status. A stock picker says, ‘I am smart, able to pick winning stocks.’ A Goldman Sachs client says, ‘My status is high enough to be selected to invest in the hottest IPOs.’ Emotional benefits are about how something

ACCOUNTANCY FUTURES: CORPORATE REPORTING BEHAVIOURAL FINANCE

Meir Statman Meir Statman, the author of award-winning book What Investors Really Want, is the Glenn Klimek Professor of Finance at Santa Clara University. His research into behavioural finance attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. He is interested in the aspirations of investors, their cognitive errors and emotions, how financial advisers can help them, how they form portfolios, the nature of risk and regret, the determinants of stock returns, and how successful socially responsible investors are. His research has been published in many academic and professional journals and won many awards. Investment Advisor magazine named him as one of the 25 most influential people. Professor Statman was the guest of honour at a joint ACCA and CFA Society Czech Republic event in Prague in October 2013. makes you feel. Insurance policies make us feel safe, lottery tickets give us hope, and an offer to be among the first to own Facebook shares makes us proud. WANTS VS SHOULDS We are not embarrassed to admit that we want our investments to support our retirement years, our children or our favourite charities. But some of what we want from our investments is embarrassing. Status is one. We might want to mention our investments in hedge funds, because they are available only to the wealthy and so signal high status. But a loud expression of status, like an oversize logo on a Gucci bag, can bring embarrassment rather than an acknowledgment of status. Wants are also difficult to acknowledge because they often conflict with ‘shoulds’. You might want a new red sports car, but know you should buy a used sedan. Investment advice is full of such shoulds: save more, spend less, diversify, buy-and-hold. Wants are visceral while shoulds are reasoned. Wants emphasise expressive and emotional benefits while shoulds emphasise the utilitarian ones. Wants often drive us into stupid investment choices, while shoulds drive us mostly into smart ones. INDIVIDUALS AND SOCIETY The first question I ask myself, as an individual, is, what do I want from my investments? The second is, how can I get what I want? You might wish to ask the same questions. Do you want enough money for a secure retirement, help for your children, and perhaps a contribution to your university? Do you enjoy tinkering with your mutual funds as others enjoy tinkering with vintage cars? Do you care about the status conveyed by your hedge funds as others care about the status conveyed by luxury cars? Trade-offs are as common in investments as in all of life, and most wants are reasonable – if pursued in moderation. Heavy trading

of investments is more likely to shrink your portfolio than expand it, but light trading might add to your enjoyment more than it detracts from your comfort in retirement. Yet trading retirement comfort in a vain hope for investment profits higher than the risks is just foolish. Remember: there is an idiot in every trade – are you sure that it’s not you? The question I ask myself as a member of society is, should regulation lean toward libertarianism, freeing us to invest as we wish, or toward paternalism, constraining choices to protect us from ourselves and from others? Should government protect home buyers from the cognitive errors and emotions that lead them to sign mortgage documents before they have read them because the stack of documents is too high and the emotional pull of home ownership is too strong? And should the government protect us, the neighbours of foolish and emotional home owners, from the consequences of their likely defaults? Changes in regulations over time reveal our continuing attempts to find the right balance in the tug of war between the libertarians and the paternalists. That tug of war goes on because we cannot agree on the perfect balance. The awkward balance between them is reflected in governments that provide both social security and lotteries. The first is paternalistic, forcing us to save when we are young, and saving us from poverty when we are old. The second is libertarian, giving adults the freedom to spend as much as they want in the hope of capturing riches. Investments are about life beyond money, and we should be able to enjoy all the benefits of investments – utilitarian, expressive and emotional. We can enjoy these benefits ourselves, indulging in a few luxuries, or we might enjoy them with family, friends and people in our neighbourhoods and on faraway continents. But, in the end, we cannot take our investments with us.

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ACCOUNTANCY FUTURES: CORPORATE REPORTING CHINA

Reaping the real benefits The CICPAâ&#x20AC;&#x2122;s Dr Yugui Chen presents a Chinese perspective of the benefits of using international standards at the local level

onvergence of practising standards (accounting, auditing and ethics) for professional accountants is a significant initiative to promote global economic development, to improve comparability of financial statements across jurisdictions and to stabilise global financial governance and security. China has been an advocate for convergence and our continuous efforts have enabled us to advance our profession swiftly.

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People gather in The Place in Beijingâ&#x20AC;&#x2122;s Central Business District.

Convergence has also highlighted several challenges and emerging issues specific to local application of international standards. GLOBALISATION OF CHINESE STANDARDS Chinese practising standards went through three distinct stages: selective application, radical conversion and substantial convergence, from reform and exploration to steady promotion, and eventually leaps in quality. Convergence

ACCOUNTANCY FUTURES: CORPORATE REPORTING CHINA

has brought a significant transformation to the accountancy profession in China. Perseverance in convergence over the past years has taught us much and offered valuable insights. First and foremost, maintain an interaction between accounting and economic reform. It is both sound and imperative to integrate accounting reforms with economic ones. Economy and accounting go hand in hand: accounting reform should support and follow economic reform, yet accounting reform also pushes economic reform forward. Second, drive accounting development through global cooperation. We have learned the need to closely follow the trend in the developments of the global accountancy profession and to leverage international cooperation. Third, create a ‘Chinese convergence’ model

and establish a continued convergence mechanism. The establishment and internationalisation of accounting and auditing standards is a driving force in the development of a market-oriented economy and will enhance global cooperation. In consideration of the legal background, linguistic habits and the progress of market-oriented economy, we applied a ‘Chinese convergence’ model and used international standards as the basis for setting domestic standards. Fourth, domestic standards should be developed in conjunction with the supporting enforcement mechanism. CHALLENGES OF LOCAL APPLICATION The major obstacle in achieving the internationalisation of accounting and auditing standards is how to translate the ‘exotic’ nature of international standards into the daily practice of millions of accountants. Difficulties arise from linguistic diversity International standards are written in English. For economies where English is not the lingua franca, it is highly likely that there will be a divergent understanding of the standards. The language barrier is likely to be a major challenge to assimilating international standards and in achieving implementation consistency. Distinction of ‘substance’ versus ‘form’ A core principle of the accountancy profession globally is that ‘substance’ takes precedence over ‘legal form’. However, due to differences in legal systems, history, traditions and many other factors, there will be diverse types – or combinations – of transactions in different places, with the biggest variance between developing and emerging economies. It is essential to implement IFRS with a firm grasp of the objectives and underlying principles to be able to identify the appropriate substance of a transaction. The impact of traditional culture In Chinese culture, relationships such as family, friendship and other relationships play an important role in influencing social and business relationships. For instance, immediate family is an important concept in the International Ethics Standards Board for Accountants’ Code concerning independence. The Code defines the immediate family as spouses or dependants. This definition reflects the cultural background of western society, but it seems to be too narrow in Chinese cultural and therefore, Chinese Code expanded the definition by defining it as ‘parents, spouse and children’ without an emphasis on ‘economically relied relationship’. The impact of professional judgment International standards are principle-based

Dr Yugui Chen, deputy president and secretary general of the Chinese Institute of Certified Public Accountants (CICPA), is also head of the Office of CPA Examination Committee of the Ministry of Finance, People’s Republic of China. He is also deputy president of the China Association of Trade in Services, and a board member of the International Federation of Accountants.

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ACCOUNTANCY FUTURES: CORPORATE REPORTING CHINA

and respect professional judgment. Their application relies on professional judgment being applied by accountancy professionals. However, in many regions, professional accountants are more familiar with a ‘clause-type’ legal tradition, which leads to professionals relying more on legal guidance than on professional judgment. Implementation of international standards relies heavily on one’s ability to use professional judgment. As this relates to a way of thinking, it is inherently more difficult than merely translating the international standards. USING INTERNATIONAL STANDARDS IN LOCAL SETTINGS To international standard-setting bodies The bodies should not make exclusive reference to the context of English-speaking and/or developed economies. Emerging economies or countries whose economy is in transition also need to be borne in mind, concerning their difficulties and demands in understanding and implementing international standards. International standard-setters also need to pay attention to the relevance of clauses, level of involvement and degree of difficulty on implementation of new standards as they are developed in different regions. To national/regional standard-setting bodies For any given country, region or economy, much importance should be attached to the local application of IFRS. A convergence strategy’s fundamental objectives must be to improve the quality of auditing and accounting information, and allow IFRS to take root in the local setting, instead of merely adopting the literal words.

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Shoppers walk along Nanjing East Road, a pedestrian street and one of the main shopping districts in Shanghai, China.

Defining the strategy and the specific mode for adopting international standards is essential, as well as ensuring local application guidance and training is made available. Even for jurisdictions where IFRS are being adopted directly, it is essential to consider the level of understanding and acceptance by indigenous accountants and regulators of the language, objectives and principles in international standards. Particular responses thereto will be required. To regulatory bodies First, there should be a principle-based supervision, which focuses on the analysis of the specific business transactions and avoids a clause-based approach to compliance. Second, it is important to respect and value professional judgment in the supervision of the work of both accountants and auditors, by avoiding dictating the outcome. Third, the accountancy profession’s legal and regulatory framework will need to be enhanced on a continuous basis, with supervision respecting the rules of the market economy. To the accountancy profession Qualified accountants depend on their capability to apply professional judgment. This is also the precondition for internalisation of both accounting and auditing standards. Accountants should, therefore, recognise that they are deemed to be experts with a duty to make professional judgments. It is essential they develop the confidence to make sound judgments, and never cease to improve this skill through continous self-development. Finally, accountants need to ensure they maintain self-discipline at all times.

ACCOUNTANCY FUTURES: CORPORATE REPORTING CHINA

A justified cost Professor Wang Hua explains why it is important for companies in China to provide a diverse range of investors with relevant and real-time information The financial report helps investors and potential investors to keep abreast of a company’s financial situation, operational revenue and cashflow as well as related information that can help them make investment decisions. The capital market in China has developed from being relatively chaotic and closed into a more orderly and open market, and investors have accordingly started to act rationally and maturely rather than opportunistically. With the improvement in professional knowledge and knowledge of the capital market, potential investors now have higher expectations of financial reporting. First, they care about not only financial information but also non-financial information and pay more attention than before to the trends in a company’s development. The information provided by the traditional financial report is therefore not enough. Second, potential investors focus on the possible risks a company may face and its capacity to control those risks. Third, they hope that the amount of irrelevant information that flows between the company and themselves will be kept to a minimum, and that the company can provide all its different investors with information sufficient to meet their demands. Last but not least, in the big data era, quality potential investors expect direct and real-time information from the company in order to make their investment decisions. To keep investors’ requirements at the forefront is the basic principle in the compilation of financial reports. Potential investors are paying greater attention to the pertinence of financial information to the investment decision, and how to make it relevant has become the key to improving financial reporting. There are several instances of contradictions between information need and provision, such as that between the traditional financial report and the diversified channels from which investors can gain information, the report providing

Wang Hua is a professor of accounting and doctoral supervisor of accounting at Jinan University, and current president of Guangdong University of Finance and Economics. He is also executive director of the Accounting Society of China, vicechairman of the the Accounting Education Committee, deputy director of China Commercial Accounting Institute and a consultant in the Accounting Academy of Guangdong and the Guangdong Institute of Certified Public Accountants.

The challenge is to change

the information content to keep pace with developing investor requirements

financial information and the investors’ need for more non-financial information, as well as the disclosures required by supervisory bodies and the information demand of the investors for the investment decision beyond these rules. Especially in the big data era, the financial report is faced with the challenge of changing the information content to keep pace with developing investor requirements. The financial report will be more comprehensive as a result of these trends. Investors will want to consider a range of factors alongside conventional financial data when making investment decisions. They will be looking for information on the company’s development such as corporate governance structure, future plans and perspective, operation modes and key performance, external relationship management, internal control systems and risk management, community responsibility, environmental policy, etc. COSTS AND BENEFITS Undoubtedly, the cost of providing this information to an increasingly diverse range of investors will lead to increased costs for companies. Simple or complicated, general or detailed, comprehensive or specified, in a traditional way or using modern technologies, the company will have to choose whether to keep the costs of compiling the financial report low, or to spend more in order to meet the information demand of future investors. In fact, the financial report should be in accordance with the cost-benefit principle. In my opinion, the cost here includes the manpower, material and financial resources for compiling the report, while the benefit is about making good use of unique financial information to win the favour and interest of potential investors, who can become the loyal shareholders of tomorrow. To meet potential investors’ demands for diversified information and to make them more confident with the company is the sustainable driving force for the development as well as the foundation of the cost-benefit principle. What’s more, it is increasingly important for a public company to establish a healthy corporate culture that takes sincerity and authenticity as primary principles and applies them through the whole process of compiling the financial report.

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ACCOUNTANCY FUTURES: CORPORATE REPORTING INTEGRATED REPORTING

The investor conundrum Companies already practising integrated reporting complain that investors show little interest. So what is to be done, asks Professor Bob Eccles

he recent publication of the International Integrated Reporting Council’s (IIRC) international framework marks a milestone in integrated reporting. Many people and groups – including investors – have helped create the framework, which can be used by companies to ‘improve the quality of information available to providers of financial capital to enable a more productive and efficient allocation of capital’. While financial capital can take many forms, the main target audience, at least initially, is equity investors. So, how excited are investors about the framework? Or, to ask the question in a more cynical way, will they even notice or care? Some will – particularly the big pension funds that have a long-term investment horizon given the long tail of their liabilities since the framework aims to promote in companies ‘actions that focus on the creation of value

standards for information on such things as intangible assets and environmental, social and governance (ESG) performance. The US Sustainability Accounting Standards Board (SASB) is making progress on this front but is still at the very early stages. Logically, companies should practise IR out of self-interest because of the benefits in doing so. The IIRC argues that IR fosters integrated thinking, which facilitates integrated decisionmaking, leading to better resource allocation decisions for short, medium and long-term performance. This begs the question of whether the market will recognise the value implications of these resource allocation decisions. Many executives are rightly sceptical that it will given the market’s short-term focus and obsessive attention to financial performance metrics like earnings and revenue growth. Yet it is a company’s responsibility to make the case to its investors for the value to them

The conundrum is this: while investors are defined

as the main audience for integrated reporting, their level of interest is modest at best. Little evidence exists that they will be a driving force any time soon to encourage companies to adopt integrated reporting

over the short, medium and long term’. These pension funds are asset owners. The asset managers hired by asset owners typically have a much shorter timeframe often because of the way they are evaluated and compensated by the asset owners, typically on an annual basis. Sell-side analysts have even shorter timeframes, about a quarter. So, much as I would like to believe otherwise, I don’t expect the market today will be a driver for voluntary IR adoption without regulation. This is what has to change. Although regulation has happened in South Africa, for a variety of unique historical reasons, it is not likely to happen in any other country any time soon. In places like the US, it is hard to imagine the Securities and Exchange Commission (SEC) transforming the 10-K annual performance summary to conform to the framework’s guidelines. And even if IR were mandated, it would likely result in a box-ticking approach given the lack of

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in their own investment decisions of the information provided in an integrated report. Companies believe they have to do this for such things as major acquisitions or mergers, entry into high-risk/high-opportunity markets, and expensive R&D and product development efforts. Why shouldn’t the same be true for investments that build intellectual, human, social, and relationship capital? Up until recently, and somewhat immodestly, I had thought that there was no question about IR I hadn’t heard before. Then I interviewed a fellow academic, who said that one of the companies he’d investigated in his research had told him it didn’t support IR ‘because it’s the investor’s job to figure out the things that are supposed to be in the integrated report’. Apparently, the company didn’t want to explain its strategy because that would tip off its competitors. I’ve heard variations on this for years and think it’s a silly or naive point of view and not worth

ACCOUNTANCY FUTURES: CORPORATE REPORTING INTEGRATED REPORTING

addressing here. The more interesting issue is the company’s assertion that it is not its job but the investor’s to figure out everything that should be in an integrated report. I guess the argument here is that investors, as either asset owners investing on their own account or as asset managers paid by an asset owner, have a big incentive to seek out information that reveals market inefficiencies in a company’s stock price. Thus the company needn’t provide an integrated report and can trust the market to ferret out relevant information to ascertain its true value. And all the while companies complain that their stock is undervalued! So where does that leave us? If investors don’t care about IR and companies believe it’s the investor’s job to pull together the information that would go into an integrated report, does that mean all the work of the IIRC is for naught? The answer to this must be an emphatic ‘no!’. What this conundrum means for me is that the work of the IIRC goes beyond the important benefits of better resource allocation decisions by both companies and investors who have a long-term view. The IIRC’s work shines a spotlight on the duplicity of both companies and investors. Companies should quit complaining about the lack of investor interest or saying that investors should figure out for themselves

how the company is creating value without the benefit of the company’s point of view. It is the company’s responsibility to make the case for its decisions if it truly does have a longterm view and wants to attract investors who do as well. Investors, in turn, need to take greater responsibility for shaping the corporate reporting environment. They must recognise that their competitive advantage lies less in finding information that other investors haven’t, and more in developing the deeper insights that can come from more holistic reporting. Yes, regulation has a role, but it will be most effective when companies and investors alike recognise that markets work best when they want them to and take responsibility for this.

The pioneer professor Robert G Eccles is professor of management practice at Harvard Business School. He has been studying and working to change corporate reporting for 25 years and was awarded honorary ACCA membership in December 2013. His books on corporate reporting include One Report: Integrated Reporting for a Sustainable Strategy (with Michael P Krzus). He is a member of the IIRC steering committee, chairman of the SASB, and co-founder of the Innovating for Sustainability social movement. www.facebook.com/innovatingforsustainability

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ACCOUNTANCY FUTURES: CORPORATE REPORTING STOCK MARKETS

Closing the disclosure gap Listed companies in emerging markets are catching up with those in developed companies on sustainability reporting, says Corporate Knights’ Doug Morrow

he reporting practices of publicly traded companies have evolved dramatically over the past 20 years. While the foundation of the balance sheet, income statement and cashflow statement remains intact, today’s listed companies supplement these core documents with a diverse body of information and data covering corporate policy, strategic plans, business targets and accounting policy, as well as forward-looking information. The broadening scope of corporate disclosure is being driven to a large extent by tightening regulatory requirements, as well as a result of the growing demand among investors for more comprehensive company-level information. It is against this backdrop that the recent explosion in corporate sustainability reporting should be viewed. Sustainability reporting – loosely defined as the practice of providing information about a company’s environmental, social and governance risks, opportunities and management capabilities – is the latest innovation in this trend towards expanding corporate reporting and transparency. Sustainability reporting may not always move the market, but it can provide a fascinating window into corporate strategy and behaviour. How companies perform on such indicators as annual greenhouse gas (GHG) emissions over revenue, CEO compensation over average

Sustainability disclosure ranking 1 BME Spanish Exchanges, Spain 2 Helsinki Stock Exchange, Finland 3 Tokyo Stock Exchange, Japan 4 Oslo Stock Exchange, Norway 5 Johannesburg Stock Exchange, South Africa 6 Euronext Paris, France 7 Copenhagen Stock Exchange, Denmark 8 SIX Swiss Exchange Switzerland 9 Athens Stock Exchange Greece 10 Euronext Amsterdam, Netherlands Doug Morrow, a member of ACCA’s Global Forum for Sustainability, joined Canada-based Corporate Knights Capital as vice president, research in 2011. He has served as lead author of the Global FT500 Carbon Disclosure Project report and has worked with several institutional investors integrating sustainability metrics into investment decision-making.

Sustainability reporting can provide a fascinating window into corporate strategy and behaviour employee salary or lost-time injury rate can provide rare glimpses into their strategy for managing costs, their approach to motivating employees and their operational effectiveness. On a look-ahead basis – with complex systemic challenges such as climate change, resource depletion, urbanisation, population growth and rising fossil-fuel prices on the horizon – it is hard to imagine sustainability reporting becoming less useful to investors. It is for these reasons and more that Corporate Knights sought to analyse the general state of

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corporate sustainability reporting across the world’s equity markets with our recent report, Trends in Sustainability Disclosure: Benchmarking the World’s Stock Exchanges, 2013. The report was the second in the series, following up on our inaugural study released in 2012. METRICS ANALYSIS In the most recent study, launched in October 2013, we were interested in figuring out which markets were home to the world’s most advanced sustainability reporters. In order to make some sense of the admittedly wide-ranging nature of sustainability reporting, we focused our analysis on a set of seven specific metrics: employee turnover, energy use, GHG emissions, lost-time injury rate, payroll, waste produced and water consumption. By looking at the proportion of companies on each exchange that discloses these metrics, we effectively ranked the world’s stock exchanges on the sustainability disclosure practices of their listed companies. BME Spanish Exchanges, based in Spain, received top billing in the 2013 ranking, moving up from fourth position in 2012’s assessment. The top five were rounded out by the stock exchanges in Helsinki, Tokyo, Oslo and Johannesburg. Our most noteworthy finding was that stock exchanges based in emerging markets are rapidly closing the ‘disclosure gap’ between themselves and stock exchanges in the developed world. This is a reflection of the surge in sustainability reporting that we are witnessing by listed companies based in emerging markets, including Brazil, India and South Africa. Our analysis indicates that emerging markets-based stock exchanges are on track to overtake their developed-world counterparts in terms of the proportion of their listings that disclose the

ACCOUNTANCY FUTURES: CORPORATE REPORTING STOCK MARKETS

seven ‘first-generation’ sustainability metrics reviewed in the study. While this ‘catch-up’ process is the result of many different factors, one of the primary drivers has been an influx of reporting mechanisms implemented by stock exchanges and other regulatory actors. Celebrated examples include the decision of the Securities and Exchange Board of India to mandate the inclusion of business responsibility reports in the annual reports of India’s 100 largest listed entities based on market capitalisation. Sustainability reporting can be viewed as the latest manifestation in the more general

Johannesburg Stock Exchange has been ranked fifth among the world’s stock exchanges for its sustainability disclosure practices.

trend towards expanding corporate disclosure practices. Future milestones on this pathway include integrated reporting and the provision of more granular and standardised nonfinancial information. In addition to facilitating a more complete picture of a company’s social and environmental impacts, sustainability reporting gives investors an additional source of data that can be mined in the context of portfolio management. Trends in Sustainability Disclosure: Benchmarking the World’s Stock Exchanges, 2013 is at http://tinyurl.com/corporate-knights

Steve Waygood CONVENER OF THE CSRC AND CHIEF RESPONSIBLE INVESTMENT OFFICER, AVIVA INVESTORS ‘The United Nations’ Sustainable Development Goals (SDGs) – which will replace the Millennium Development Goals (MDGs) in 2015 – should matter to investors. They offer a significant opportunity to enhance corporate sustainability disclosure and to demonstrate clearly to governments, business and civil society the linkages between corporate transparency and sustainable development. ‘Aviva Investors convened the Corporate Sustainability Reporting Coalition (CSRC) in 2011 around the Rio+20 Earth Summit to advocate a global convention on integrated sustainability reporting. It represents investors with assets under management of approximately US$2 trillion and includes organisations as diverse as ACCA, the Global Reporting Initiative and the Carbon Disclosure Project. ‘The last set of MDGs failed to engage the private sector effectively, instead focusing on the role of aid and foreign direct investment, missing out on the potentially transformative effect the sector could have in delivering the goals’ vision. ‘We were delighted that the reports that have so far fed in to the SDGs’ development process have all recommended the promotion of integrated reporting as part of the goals, including the High-Level Panel chaired by UK prime minister David Cameron. ‘It is vital that the SDGs recognise the importance of good corporate governance in delivering the goals and in channelling private finance to the most sustainable and productive uses in our economy. The opportunity the SDGs presents now should not be missed.’

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ACCOUNTANCY FUTURES: CORPORATE REPORTING CARBON

Bursting the carbon bubble Fossil fuel companies should start accounting for the risk that their vast reserves may ultimately end up as stranded assets, says ACCA’s Rachel Jackson

here is growing attention focused on the threat posed to future economic stability by the risk of carbon assets being ‘stranded’ by the imposition of carbon budgets designed to limit climate change. Assessment of such risks is likely to become an increasingly important element of investors’ capital allocation decisions. The Generation Foundation, which is dedicated to supporting sustainable capitalism, makes a strong case for investor action in its October 2013 white paper Stranded Carbon Assets: Why and How Carbon Risks Should be Incorporated in Investment Analysis. It warns that failure to account properly for the risk inherent in carbon-intensive assets will cause the ‘carbon bubble’ to grow until the artificially high valuation levels can no longer be sustained. It encourages investors to take steps such as engaging company boards on their plans for

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Rachel Jackson is ACCA’s head of sustainability. She is the staff expert on ACCA’s Global Forum for Sustainability, and represents ACCA on committees and working groups.

mitigating and disclosing carbon risks, and divesting fossil fuel-intensive assets in order to reduce or eliminate carbon-related risks. The need for investors to become more ‘climateliterate’ is also highlighted in a recent report by ACCA and Carbon Tracker, Carbon avoidance? Accounting for the emissions hidden in reserves, which focuses on the extraction sector. It finds that companies typically do not disclose material information on carbon risk. This is despite the existence of multiple standards and regulations covering financial statements, industry reserves reporting, listings rules and greenhouse gas (GHG) emissions reporting. Existing reporting frameworks therefore need to be enhanced and aligned so that companies are required to provide the information and commentary that investors need. A review of the financial statements of companies in the extraction sector shows how substantially

ACCOUNTANCY FUTURES: CORPORATE REPORTING CARBON

their current disclosures vary in terms of the quality and quantity of information they provide on GHG emissions and climate change. Some are experimenting with integrated reporting and beginning to link current and future company performance with sustainability issues, but the implications for the reporting and valuing of reserves are not being pursued. Current strategies laid out in annual reports talk of growth that is incompatible with emissions limits and there often seems to be a lack of balance in the consideration of future corporate viability. Even companies that claim to support action on global warming do not always articulate how their business model is adapting to the changes required in the energy sector. ACCOUNTING ACTION REQUIRED From the financial reporting perspective, reserves accounting is a key area needing improvement. Although fossil fuel reserves are often recognised in financial accounts, this is typically on the basis of associated costs rather than current value. The approach assumes the future will repeat the past, not allowing for declining demand for fossil fuel products. Impairment tests are applied in the attempt to identify where the expected value of an asset may not be realised, with ‘reasonable assumptions’ being applied. However, the expectation that demand for energy-intensive energy sources will be sustained appears increasingly unreasonable. The assumption of impairment therefore needs to include prudent analysis of factors such as national and global policies to limit climate change, and trends in technology that support environmentally friendly energy generation. Financial reporting standard-setters could take action to address these weaknesses. The International Accounting Standards Board (IASB) could, for example, issue guidance to interpret existing standards so that preparers of reports and accounts consider the need to include information on the carbon viability of reserves. They could also investigate how the use of fair value accounting could reflect the potential impact of carbon-constrained markets on the value placed on reserves. MULTI-PRONGED EFFORT Achieving the necessary change isn’t the sole responsibility of financial reporting standardsetters. The potential also exists to strengthen oil, gas and mining industry standards, under which reserves are primarily assessed on geological and economic viability. Other factors such as environmental considerations may

Greens see red over black stuff: environmentalists protest in Warsaw against the 2013 World Coal Summit organised by coaldependent Poland.

also be taken into account, but the key issue of emissions limits affecting the market for products is not explicitly included as yet. There are weaknesses in the carbon reporting requirements of stock market regulators and listing authorities. They could require disclosure in annual reports and prospectuses of the emissions potential of reserves, and the

The approach assumes the

future will repeat the past, not allowing for declining demand for fossil fuel products assumptions made about future emissions in determining corporate strategy. There is scope to improve GHG reporting standards too. GHG metrics, for example, need to deal with material, forward-looking issues around the stocks of carbon being built up, as well as the annual flows of GHG emissions from industrial activity. The continued development of integrated reporting could also improve the linkage between carbon risk, business strategy and corporate performance. Companies must play their part in meeting investors’ carbon-risk information needs, not just focusing on achieving basic compliance with standards and reporting requirements, but going beyond the minimum through understanding investor needs. For example, information that shows reserves and resources converted into potential carbon dioxide emissions would help investors understand future risks. So would sensitivity analysis of reserves levels in different price or demand scenarios. Investors would also benefit from companies providing clear discussion of the implications of such data when explaining their capital expenditure strategy and the risks to the business model. Senior executives within industry, particularly accounting professionals, are encouraged to work in tandem with all the standardsetters and other key parties shaping the reporting frameworks that support financial markets. An integrated effort is required to ensure that reporting requirements – whether financial, listings-based, industry-linked or GHG-focused – fully meet market needs. The ultimate aim must be to provide investors with information to help them assess carbon risks before determining capital allocations. The Carbon Avoidance? report is at www.accaglobal.com/ab35, and the Stranded Carbon Assets white paper is at http://tinyurl.com/stranded1

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ACCOUNTANCY FUTURES: CORPORATE REPORTING CARBON

Unmask the risk The accountancy profession must take the lead in ensuring that the carbon risk in fossil fuel reserves is reported on, says IFAC president Warren Allen

he ‘carbon bubble’ that is associated with what may ultimately prove to be unburnable carbon in fossil fuel reserves leads to a reporting challenge for fossil fuel companies and a valuation challenge for the stock exchanges they are listed on. For these companies, it is not only the scale of operational emissions that is the strategic challenge, but the emissions associated with burning their fossil fuel reserves. We need to consider how better to understand and reflect the potential carbon footprints of reserves with the existing approach to reporting and disclosure. From an accounting perspective, the historical link between emissions and revenues has not been considered in predicting cashflows or valuing assets. Making the implicit carbon in financial statements more transparent can help investors assess their exposure to fossil fuels and carbon risk, and invest in companies preparing for a low-carbon future. Higher-quality business reporting and disclosure are needed to reflect the climate change uncertainties facing companies better. This information is required by both companies and their investors in order to take appropriate action. To start improving the current situation, companies need to commit to material climate change-related

disclosures. To understand the potential environmental impact of carbon stocks, companies must measure uncalculated stores of greenhouse gas (GHG) emissions within their fossil fuel reserves and account for them. As more climate change-related regulation appears, and the world’s energy mix changes, reporting frameworks, accounting standards and assurance will also need to encourage companies to reflect how they are adapting. The accountancy profession can and should take the lead in ensuring the carbon in reserves can be assessed and reported on. Where necessary, accounting rules and treatments should be reviewed to support greater transparency and understanding of asset values. One approach is to state coal or oil reserves at current values. This can help companies and investors respond better to climate change uncertainty. Improving this area of disclosure can only be in the public interest. Integrated reporting is a significant initiative involving the global accounting profession. It should complement accounting standards by providing companies with a structure to highlight relevant and forward-looking information, particularly on climate risk and uncertainty, making it more accessible and understandable, and connected to the company’s strategy and business model.

James Leaton RESEARCH DIRECTOR, CARBON TRACKER ‘Our research has demonstrated that the coal, oil and gas resources which listed companies have an interest in exceed the emissions that can be released to achieve climate change targets. This was confirmed by the International Energy Agency in its World Energy Outlook series. ‘There is a growing patchwork of regulation, technological advances and pricing shifts which are changing our energy mix. A transition to low-carbon energy is already occurring in some markets, resulting in the coal sector declining in the US and Australia, for example. We need to ensure that the financial markets and the accounting standards they use are ready to pick up these signals, to avoid a sudden adjustment at a later date. ‘Investors are starting to voice their concern. A group of 70 institutional investors with over $3 trillion in assets have started engaging with 45 companies with exposure to carbon asset risks to get them to stresstest their assets against a range of price and demand scenarios. This will help investors understand whether the business models of these companies are compatible with a low-carbon future. Corporate disclosure needs to evolve to reflect these new kind of risks, continue to meet the needs of shareholders, and deliver orderly markets.’

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Warren Allen became president of the International Federation of Accountants (IFAC) in 2012 after serving as deputy president for two years. He was a partner at EY in New Zealand.

ACCOUNTANCY FUTURES: CORPORATE REPORTING SOUTH AFRICA

Way ahead South Africa’s pioneering introduction of integrated reporting has had far-reaching consequences. It has also paved the way for businesses globally

ver the past three years, South African companies have experienced a radical shift in thinking, brought about by the introduction of integrated reporting to the country’s code of corporate governance. Integrated reporting is now a requirement for listing on the Johannesburg Stock Exchange (JSE). It has had far-reaching consequences, forcing companies not only to report – but to think – in an integrated way. They now have to disclose information they would never have dreamed of making public a decade ago. South African companies have had a head start with integrated reporting after a decade of putting sustainability in their annual reports, says Ian Jameson, Johannesburg-based senior

South African mining companies now seek to disclose the business risk presented by such non-financial issues as this 2012 strike at a Gold Fields mine.

project manager at the International Integrated Reporting Council (IIRC). ‘South Africa has been very much placed on a pedestal in the development of this framework, with Professor Mervyn King being the chairman of the IIRC and of our local integrated reporting committee. So we’re well positioned as a country in terms of taking up integrated reporting,’ he explains. Karin Ireton, director of group sustainability management at Standard Bank, says that sustainability reporting is already entrenched in South Africa: ‘The thinking about the nonfinancial risks and sustainability was quite well developed. So for us it was quite straightforward to assess the most material aspects that could be pulled into an integrated report. It is still a challenge to manage the statutory financial

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ACCOUNTANCY FUTURES: CORPORATE REPORTING SOUTH AFRICA

reporting requirements and the need for more succinct, readable integrated reports. ‘For many companies that’s been an advantage. Especially for JSE-listed companies, there has been quite a depth of experience around sustainability reporting that has caused people to already think through non-financial issues in some detail. But there is still a long way to go.’ The heroes of South African integrated reporting are an unlikely bunch. Among them is Eskom, a state-owned electricity generator which has been criticised by environmental groups as a less-than-clean power producer. Before 2008 when the country was hit by an electricity supply crisis that resulted in rolling blackouts, Eskom appeared interested chiefly in short-term gain and made poor provision for

Aspects once regarded as ‘soft’ or ‘non-financial’ are in fact highly material, hard financial issues

infrastructure maintenance or increasing power generation capacity. Now, the company is one of the leading lights of integrated reporting. The 2008 power crisis, explains Jameson, who left his position at Eskom last July, presented an opportunity. ‘It allowed a complete rethink in strategy. It is a lot easier for a state-owned company like Eskom to disclose forwardlooking related information – particularly about some of the challenges associated with it – than for a listed private company, because of the competitive advantage-related issues. The fact that we had at the time a R300bn shortfall – I mean, if any listed company had to say that in the market it would not be around the next day!’ What followed was a new strategy as well as the development of systems and control manuals to support the reporting towards that strategy. An integrated reporting steering committee was set up. ‘Today, Eskom is seen as a world leader in terms of reporting,’ says Jameson. LABOUR UNREST DISCLOSURES Another champion of integrated reporting in South Africa is miner Gold Fields, which has been praised at the EY Excellence in Integrated Reporting Awards and PwC Building Public Trust Awards for its reporting on risk. Its corporate affairs manager, Sven Lunsche, was quoted in the IIRC’s pilot project yearbook as saying there had been a culture shift in recent years as mining companies have come under pressure for their social and environmental performance. Half of Gold Fields’ risk relates to non-financial issues, including labour

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strikes, which the company aims to report on in a more transparent and critical way. Integrated thinking by management is now very much in evidence. ‘Mine managers have to be as accountable on social and environmental as on financial issues,’ says Lunsche. ‘We have an integrated management approach to running mines and our quarterly reports reflect this. Integrated reporting essentially builds on our practical experience and reflects how we manage the company.’ The experience of Gold Fields and other miners, such as Anglo Platinum, point to just how critical non-financial factors are to their fortunes. Local institutional investors are now also coming to understand that aspects once regarded as ‘soft’ or ‘non-financial’ are in fact highly material, hard financial issues. Environmental issues such as acid mine drainage – the toxic water building up in abandoned mine shafts and threatening to spill over into sensitive river catchments – is a problem that will cost at least R30bn to fix. That’s by no means a soft issue. Jameson says investor organisations have been very involved in engaging with integrated reporting over the past few years: ‘There are a lot of things in the investor space which are talking to the same concepts in integrated reporting, in terms of making information more accessible, more relevant, more material for decision-making for investors. The investor community is encouraged to see integrated reporting. Investors do see it as a value-add.’ One of the investors that critiqued reports, including those in the IIRC’s pilot programme, was the Government Employees Pension Fund of South Africa, which agreed with other investor organisations that integrated reports provided ‘a more holistic view of performance and better insight into risk, strategy, the business model, the operating context and governance’, according to the IIRC yearbook. ‘They also appreciated having a contextual foundation to interpret and analyse results.’ Rachel Jackson, ACCA’s head of sustainability, says in terms of integrated reporting, South Africa has ‘paved the way for everyone else. It was the first country to introduce mandatory integrated reporting. It has definitely been the leader, the country out in front which everyone is following, and it is using the King III code as a building base for the international code.’ However, there remains plenty of room for improvement. Professor Ben Marx FCCA of the University of Johannesburg, who also sits on South Africa’s IIRC working committee, says the new integrated reporting framework will help bring about that improvement. ‘It provides guidance and a benchmark of what integrated reporting should cover and, in

ACCOUNTANCY FUTURES: CORPORATE REPORTING SOUTH AFRICA

my opinion, will also standardise integrated reporting as it provides solid guidance on what the report should cover.’ Institutional investors in South Africa also want improvements to integrated reports. They suggest making them more succinct, less complex and less cluttered. Other suggestions include greater engagement with institutional investors on the content of integrated reports, more effective stakeholder engagement, the greater involvement of boards of directors in their production, and more focus on broader stakeholder accountability rather than an exclusive focus on shareholders. As to whether or not it has changed the behaviour of listed companies in South Africa – or that of their investors and stakeholders – Marx says: ‘In my personal opinion, no, not yet. Although hopefully it will.’ Leigh Roberts, project director of integrated reporting at the South African Institute of Chartered Accountants and a member of the IIRC technical task force, is more optimistic.

Eskom is adding much needed generation capacity by building new power stations.

‘Three years down the line, it’s safe to say that we’re better off with integrated reporting – all thanks to King III, which smartly assigned responsibility for the integrated report to the board.’ She says that companies talk about their internal reporting systems having widened to include material sustainability issues, strategic KPIs have filtered into employee scorecards and remuneration systems, strategic projects are being assessed with a new lens, and packs for board meetings now incorporate strategic non-financial information. And the big advantage for investors, she says, is that it can offer them more certainty about the future of the company they’re invested in. Many investors believe compulsory integrated reporting has significantly enhanced South Africa’s reputation on global financial markets. Whether it has also enhanced its economic fortunes is something that only time will tell. Nicki Güleş, assistant editor, City Press, South Africa

Karin Ireton DIRECTOR OF GROUP SUSTAINABILITY MANAGEMENT, STANDARD BANK ‘Companies looking at the King III code have been starting to wrap their heads around social and ethics committees, integrated risk committees, and managing societal and environmental risks. Integrated reporting is taking it a layer further. ‘The forward-looking aspect is a challenge for many organisations because they’re quite comfortable saying this was the year that was. But they are not all that comfortable in projecting forward and saying, at quite a high level, what they look forward to in 2015 and how they intend to manage issues that might be risks. ‘For the financial services sector there is quite a lot happening fairly rapidly, a lot of regulatory change that we need to reflect as both a risk and an opportunity.’

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ACCOUNTANCY FUTURES: CORPORATE REPORTING INTEGRATED REPORTING

Jewel in the crown The Crown Estate is a pioneer of integrated reporting. FD John Lelliott explains why the approach makes sense

he Crown Estate is a UK business that is steeped in history yet has its sights set far into the future. Back in 1760, King George III handed over the crown’s lands to the UK Treasury in exchange for a fixed annual payment that later became known as the Civil List. Fast forward 250 years and The Crown Estate is a commercially run property business with a diversified £8.1bn portfolio covering urban and rural areas, about half of Britain’s coastline and almost all of the surrounding seabed. Assets include London’s Regent Street, 15 retail parks, Windsor Great Park, three marinas, numerous harbours and 17,000 moorings. It’s a misconception that The Crown Estate also owns the royal palaces, but that is not the case and the monarch does not have any power over the organisation. The Crown Estate is managed on behalf of the nation with profits going to the Treasury (£253m last year). With a high public profile and responsibility for the careful stewardship of such extensive and valuable public assets, it is perhaps not surprising that sustainability is at the organisation’s core. Finance director John Lelliott FCCA says it’s about a lot more than looking at the socioeconomic and environmental impact. He reels off examples such as ensuring that rural tenants have land management plans; avoiding obsolescence and protecting the ability to adapt; evaluating the impact of severe weather conditions; support for maritime wind and tidal power development, and much more. ‘If you don’t nurture and invest in your land and buildings, you will compromise long-term value and the potential rental income that can be realised from them,’ Lelliott says. The bottom line, he adds, is the need to hand over the property portfolio to the next generation in a better state. The Crown Estate is therefore in the vanguard of developments in renewable power and sustainable land and buildings management. It is also in the vanguard of developments in corporate reporting, having become one of the earliest adopters of integrated reporting with the publication of a multi-award-winning integrated report for 2012/13. Lelliott says that it felt like the natural thing to do after the appointment of a new chief executive

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– Alison Nimmo, in January 2012 – prompted a fresh look at the organisation’s strategic direction and the role of sustainability. It was a move that Lelliott, who had long been at the forefront of sustainability reporting, embraced with enthusiasm. As a long-standing member of HRH The Prince of Wales’s Accounting for Sustainability Project and The Crown Estate, Lelliott was already a member of the International Integrated Reporting Council’s (IIRC) pilot programme. This confluence of factors, says Lelliott, led them to take the plunge. ‘Looking at the aims of the IIRC and our aims, there was a lot of convergence. One of the key things that the integrated reporting framework wants you to articulate is how you create value and what your business model is. It’s a great way of communicating what the business does.’ EXPLAINING TO STAKEHOLDERS Lelliott emphasises that The Crown Estate is run very much on commercial lines and benchmarks itself against leading UK property

‘Producing our integrated report

was a tremendous challenge but also a fantastic way of telling our story’ companies, but adds: ‘Unlike a plc, which has shareholders and analysts, we have myriad stakeholders to whom we have to explain how we operate, how we create value and what our strategy is.’ And so The Crown Estate embarked on a threeyear plan to integrate its reporting. Introducing the concept in the report, Lelliott wrote: ‘This, our first integrated report, helps to explain our business in a concise way and starts to explain the interconnectivity of resources and relationships upon which our business depends.’ The report also highlights the organisation’s wider contribution, pointing out that it indirectly supports 94,000 jobs and that each employee adds £709,000 to the UK economy. In the first year, Lelliott and his colleagues focused on the business and the material issues that affect it; they listed 14, ranging from attracting commercial partners and the effect of climate change, to government

ACCOUNTANCY FUTURES: CORPORATE REPORTING INTEGRATED REPORTING

policy and creating amenity value. Integrated reporting, he says, forces accountants to look forward much more than they do with traditional reporting. Moving forward, he says The Crown Estate will focus more on the six capitals listed in the integrated reporting framework: financial, manufactured, human, intellectual, natural and social. ‘CONNECTIVITY’ He explains: ‘An integrated report is not one where you’ve just merged your normal and your sustainability report. It’s about much more than that. The beauty of integrated reporting is the connectivity of it all. By creating the business plan and working out those material issues, and linking it to risk and governance, it has become the framework of our business planning.’ Putting the report together, says Lelliott, was very much a team effort that required a lot of hard work and dedication. But he says that the benefit of it became more and more apparent to team members as they worked on it. So will others follow The Crown Estate’s lead? ‘Some of our FTSE 100 rivals have been asking us how we’ve done it,’ Lelliott

says. ‘The underpinning principle is about demonstrating how you create value and the issues that affect your business, so it’s just as relevant to any organisation – be it public or private – as it is to us. ‘Some industry sectors lend themselves much more easily to it than others, but more and more people are seeing the benefit of it and the investor community is starting to come round and demand more and more information.’ Support from the top, he adds, is a critical success factor. And it is vital that the finance director is not only on board, but is the champion of integrated reporting. The Crown Estate has won plaudits for its integrated report, winning two categories in the coveted PwC Building Public Trust Awards. Commenting on the wins, Lelliott concludes: ‘Producing it was a tremendous challenge, but also a fantastic way of telling our story.’

A member of the ACCA Global Forum for Sustainability, John Lelliott FCCA joined The Crown Estate in 1985 and became finance director in 2001. He is also a member of the Accounting for Sustainability Project CFO Leadership Network. He is pictured above in an office space now let to Twitter in The Crown Estate’s recently completed sustainable Quadrant 3 development in London.

Chris Quick, editor The Crown Estate’s 2013 integrated report is available at www.thecrownestate.co.uk

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ACCOUNTANCY FUTURES: RISK AND GOVERNANCE ETHICS

Principle partners When ethical dilemmas are encountered, finance leaders can turn to internal auditors for help and support, says IIA president and CEO Richard Chambers

he global economic crises at the turn of the century and again a decade later stemmed in part from myriad professional ethics breaches, ranging from outright greed and corruption to a lack of transparency, conflicts of interest and due diligence shortcomings. In response, initiatives on organisational ethics have shifted their focus from rules – traditional compliance programmes – to behaviour that builds economic value. Empirical evidence shows that organisations built on strong ethical foundations outperform organisations where ethics is not a main driver of business. The key long-term benefits of ethical business practices, according to Stephen Henn’s 2009 book Business Ethics: A Case Study Approach, include a reduction in the regulatory burden and better financial performance, image and brand recognition, customer satisfaction and loyalty, employee productivity and satisfaction, and even improved access to capital. Finance professionals face ethical dilemmas through what they have to do and what they see others do, and fully recognise the importance of professional ethics. Indeed, ACCA has identified professionalism and ethics – understanding and acting in accordance with

Richard Chambers is president and CEO of the Institute of Internal Auditors (IIA). He currently serves on the COSO (Committee of Sponsoring Organizations of the Treadway Commission) board of directors and the International Integrated Reporting Council.

Internal auditors likewise recognise the central importance of ethics. We are transforming our role along an ethics continuum from traditional corporate referee (citing an infraction, throwing a flag or pulling a card, and giving a penalty) to being a part of the conscience of the organisation. Ethical internal audit leaders are honest, courageous, accountable, empathetic, trustworthy, respected and proactive. Internal auditors are uniquely positioned to be part of the corporate conscience and to support CFOs and other finance leaders in navigating ethical dilemmas. In addition to offering the benefit of independence within the organisation, good internal audit professionals embrace certain principles common to finance professionals, apply sharp interview and investigation techniques, develop recommendations that yield insight, and successfully evaluate the robustness of remedial action plans.

techniques, business acumen and the ability to get to root causes are needed

COMMON PRINCIPLES Internal audit professionals share principles and similar perspectives on professional ethics with other finance professionals. Through their professional bodies, they have codes of ethics that promote integrity, objectivity, professional competence, confidentiality and principled behaviour. Both insist on the importance of forming balanced judgments that set aside any undue influence from other parties. And both stress the need to follow the law and make the disclosures expected by the law and the profession, and avoid engaging in acts that are discreditable to their profession.

fundamental principles of ethical behaviour and personal ethics, and ensuring the implementation of appropriate corporate ethical frameworks – as one of the 10 key competencies needed by finance professionals in the corporate sector. In ACCA’s survey The Complete Finance Professional 2013, CFOs ranked professionalism and ethics as the second most essential competency for newly qualified finance professionals. As the global economy recovers, finance professionals are likely to come under increased pressures and challenges related to individual and company performance. Many of these challenges will involve ethical dilemmas.

INTERVIEWS, INVESTIGATIONS AND INSIGHTS Right versus wrong situations can typically be decided by applying an organisation’s code of conduct, but addressing the most challenging ethical dilemmas and grey areas requires high-level interview skills and investigation techniques, business acumen and the ability to get to root causes. As a catalyst for improving an organisation’s effectiveness and efficiency by providing insight and recommendations based on the analysis and assessment of data and business processes, internal audit can provide finance professionals with critical support in developing the optimal and ethical resolution of issues.

High-level investigation

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ACCOUNTANCY FUTURES: RISK AND GOVERNANCE ETHICS

ACTION PLANS In some situations, information and insights may point to a clear path for moving forward to implement the solution. More complex situations may require creating formal action plans that take into consideration the impact on competing interests of various stakeholder groups such as employees, shareholders, boards, regulators, financial markets, communities and society at large. Other governance functions such as compliance, ethics and risk management may also contribute to developing the action plan,

relying in part on internal auditâ&#x20AC;&#x2122;s interviews, investigations and insights. Finally, internal auditâ&#x20AC;&#x2122;s role, experience, independence and objectivity can help to move ethical leadership forward through a unique ability to assess that an action plan sufficiently addresses the cause, condition and recovery of an ethical dilemma. Finance executives and chief audit executives can and should partner to be the ethical vanguards of the company. The Complete Finance Professional 2013 is at www.accaglobal.com/complete

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ACCOUNTANCY FUTURES: RISK AND GOVERNANCE VALUE

Adrian Berendt FCCA is chair of ACCA’s Global Forum for Governance, Risk and Performance and is former executive director of LCH Clearnet. He is an active member of ACCA’s Financial Services Network Panel and has been heavily involved in ACCA initiatives on issues relating to the credit crunch.

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he surgeon emerged from the operating theatre and pronounced the operation a complete success: ‘Er, the patient has died.’ In reading the annual reports of many large companies, I find them equally successful in complying with corporate governance codes, with many succumbing to financial or other problems. This misses the central point of corporate governance: creating long-term value. Modern corporate governance started under promising circumstances with the UK’s Cadbury Report of 1992. Since then it has suffered so many ‘improvements’ that reporting in most countries is little better than useless and is no longer fit for purpose. It is difficult enough for board members and other ‘insiders’ to recognise good governance; it is far worse for outsiders. The examples below are mere symptoms of a wider, global problem. Solutions seem few and far between, although we have hopes for the King III code in South Africa. NOT SO CO-OPERATIVE In November 2013, under questioning by the UK parliament’s Treasury select committee, Paul Flowers, the Co-operative Bank’s ex-chairman, did not know its profit, balance-sheet size or the number of loans – the major asset. When asked if he knew roughly how many loans and advances the bank had, he replied: ‘No, because it was not my function as the chair of the board to have all those details. They would be details supplied to the committees, and in particular to audit, risk and exposure committees.’ Although it is unclear to me how he could lead the board strategically without this knowledge,

my concern is more with the organisation itself. The Co-operative Group’s 2012 annual report reads: ‘The Board of the Co-operative Group is committed to the highest standards of corporate governance and recognises that good governance helps the business to deliver its strategy… It believes that good governance is essential to the success of the group and should be focused not only in the boardroom but across the entire business.’ In reading the select committee’s report and knowing how the bank had suffered nearterminal financial losses and reputational damage in 2013, I wondered how these words could be justified. The answer is straightforward: like too many other companies the Co-op complies with the letter of corporate governance, but does not place enough emphasis on its spirit. The boilerplate text in its reporting conveys little of value. Particularly worrying is that the Co-op prides itself on its ethics and its responsibility to a broad group of stakeholders. If this represents compliance, what does non-compliance look like? Let’s look at the 2012 annual report of Panther Securities, an investment property company listed on the London Stock Exchange. The report is a model of clarity and conciseness and unashamedly states the purpose of the company: ‘Each board member has responsibility to ensure that the group’s strategies lead to increased shareholder value.’ This expresses perfectly in one sentence the purpose of the board. The firm openly acknowledges that it does not comply with the UK Corporate Governance Code in three respects: the chairman is

ACCOUNTANCY FUTURES: RISK AND GOVERNANCE VALUE

Resuscitation required Corporate governance codes are often inappropriate to individual organisations, and a new approach is needed, argues Adrian Berendt

also chief executive; the performance of the board, its committees and individual directors are not subject to specific evaluation; and two non-executive directors have served for more than nine years. However, there is a clear and reasoned explanation of why the company has chosen not to comply. Further, chairman and CEO Andrew Stewart Perloff manages to explain, clearly and succinctly, how the organisation is governed, how it mitigates risk and the impact of its activities on local communities. What is more, he does so despite accounting and disclosure requirements, commenting: ‘Every year we are obliged to provide shareholders with more information and each year it becomes less understandable to you and slightly harder for me to explain what is happening in our accounts.’ TIME TO START AGAIN These two contrasting examples show how inappropriate corporate governance code provisions are for many companies. On the one hand, we have a company that prides itself on corporate governance but has significant shortcomings; on the other, a chairman who questions the value of reporting but is transparent about what the company is doing. I think I prefer non-compliance. What is the solution to this conundrum? Clearly not the current corporate governance codes. In a soon-to-be-published consultation, ACCA head of corporate governance and risk management Paul Moxey and I suggest that the time has come to start again. We need to remove the check-box approach and ensure that governance is appropriate for each

organisation individually. This boils down to one question and one instruction: The question: is the way in which the organisation is being governed adding value for the benefit of all stakeholders? The instruction: the board of directors must explain how its governance adds value and where it could do better. This approach of application and explanation contrasts sharply with the ‘comply-or-explain’ regime, which allows an organisation to use boilerplate text without actually explaining how it is governed or the risks it is running. We suggest a new accountability framework to help institutions perform by informing and by being held to account. The framework applies in three places: between board and management; between shareholders and board; and, most importantly, between individual shareholders and those who manage their investments. Statements of compliance with a code tell us little about the quality of governance in an institution. Addressing the challenge is complicated and requires us to start by recognising the seriousness of the problem. Is the purpose of governance, as we believe, to create sustainable long-term value? If so, we need an informed debate among investors, boards, regulators and others about how better to assess whether governance is delivering on ensuring companies create sustainable value. ACCA is seeking responses to the consultation paper with a view to producing a considered paper on the link between corporate governance and value creation in mid-2014. Go to www.accaglobal.com/risk

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ACCOUNTANCY FUTURES: RISK AND GOVERNANCE PAKISTAN

Comfort factor Syed Faraz Anwer of AF Ferguson explains how businesses in Pakistan can rise to the challenge of risk reporting that delivers value to investors

Syed Faraz Anwer is a partner for risk advisory and business improvement services with AF Ferguson, the PwC network member firm in Pakistan.

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ith risk and return so inextricably linked, investors have every reason to want businesses to give some indication of the risks they take on in their operations. Yet risk barely figures in the typical corporate report. In Pakistan, though, the banking industry has been encouraging the development of a risk reporting that respects business confidentiality while giving investors relevant facts. Syed Faraz Anwer, partner for risk advisory and business improvement services with AF Ferguson, the PwC network member firm in Pakistan, says: ‘Banks and regulators have been mindful of the financial crisis and what could go wrong in Pakistan as well,’ he says. This has made banks there the frontrunners in risk reporting. They have to address a number of different stakeholders – not just investors via annual reporting and internal reporting to boards and annual committees, but also the regulators and the ratings agencies. ‘The problem is that the information provided is detailed yet vague, making it difficult for audiences to derive any meaningful conclusions,’ says Anwer. He points out that while institutional investors attach a great deal of importance to risk disclosures, smaller investors – who make up the majority of the investor population – are not as aware of a risk report’s benefits. ‘This makes it very difficult for organisations to decide how much information to disclose and how to disclose it,’ he explains. ‘They also have concerns about how investors will perceive this information. Sometimes they feel that if there is more risk information, then there is a perception that there is more risk.’ As a result, some reports contain little more than extensive generic commentary on risk, which generally covers those aspects already known to sophisticated investors. Anwer believes that information should be put more simply and its potential impact on investors assessed before it is shared. To be relevant to investors, risk reports need to be practical and institution-specific, which requires a high level of board sponsorship. Anwer says: ‘Some information will be very sensitive and in that case invstors would expect the organisation to provide information about how they manage risk in general,’ he says. That covers the number of times the risk

model is internally evaluated and validated, the role of the audit committee and the role of the risk management committee. Similarly, when it comes to disclosing the overall appetite for risk, there are aspects of, for example, capital management strategies that no organisation would wish to disclose. Anwer says: ‘Sharing how you define your risk appetite can provide a lot of comfort.’ Again, a specific, practical and relevant risk response is of more value to an investor than a generic response. ‘If you write that you have all the required methodologies and principles and accepted best practices, the investor will not be able to relate to that,’ he says. ‘But if you say, “for capital calculations I have this risk engine and for market management I have that risk engine and for the data requirements I have this type of data warehouse,” then this information is not confidential – your competitors will know it – but it will let investors know you are investing in technology and are forward-looking.’ An organisation should be aware that its investors are often not so well informed as its competitors because they don’t have the same resources and information sources. ‘If your competitors already know something, then it’s probably a good idea to share it with your investors and give them more comfort about the way you will be doing business in the future.’ Mick James, journalist

ACCOUNTANCY FUTURES: GLOBAL ECONOMY POLAND

Brakes are still on Indebtedness and continued deleveraging will keep growth below 4%, the recent ACCA CFO European Summit in Warsaw was told

FOs should not expect a return to pre-crisis rates of growth, warned Andrzej Olechowski, chairman of Citi Handlowy and former Polish finance minister and foreign minister, at the CFO European Summit organised in the Polish capital of Warsaw by ACCA in October 2013. According to the General Economic Conditions Surveys conducted jointly by ACCA and IMA (Institute of Management Accountants), the belief of financial professionals in global economic recovery is growing. But the fragility of business confidence, which is improving faster than the underlying fundamentals would suggest, justifies the caution expressed by the speakers at the conference.

Panel personnel, from left to right: James Calladine of HSBC (a summit partner), Patrick Healy of Cordea Savills, Krzysztof Radziwon of KPMG Poland, Waldemar Wojtkowiak of Euler Hermes (a summit partner), and Adrian Berendt, chair of ACCA’s Global Forum for Governance, Risk and Performance.

Three factors point to lower medium-term growth, said Olechowski. In the financial sector deleveraging still has a long way to go, managers and supervisors have yet to capture all risk, and ways to assure competence and integrity remain to be found. Technological change has become less transformational and the productivity growth of advanced economies has slowed. With medium-income countries rejecting the ‘Washington consensus’ policy mix for development and opting for a greater role for the state, a tumultuous revision of the international system may be on the cards. Nenad Pacek, president of corporate consultancy Global Success Advisors, said CEOs have become chief explanation officers,

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ACCOUNTANCY FUTURES: GLOBAL ECONOMY POLAND

Risk alert: James Calladine, HSBC’s chief risk officer for continental Europe.

In numbers The 2013 CFO European Summit was the sixth of its kind to be organised in Warsaw by ACCA Poland. Some 140 finance directors and managers, most but far from all of them from Poland, attended the event, which took place at the Hotel InterContinental. ACCA’s partners in organising the summit were HSBC and Euler Hermes.

The solution doesn’t lie

with more detailed rules. The key is to recognise that the aim of governance is to create value sustainably

explaining to boards why Central and Eastern Europe (CEE) has underperformed expectations. Growth of 3%–4% a year is sustainable for the area as a whole, said Pacek, but only after deleveraging is over and bankers’ greed returns. He said that his clients are reporting low growth and reshuffling their product portfolios as customers moved to cheaper brands. CREDIT COLLAPSE Pre-crisis growth was based on an unprecedented credit bubble, but credit growth has now dropped – in Poland from 30% a year to 3% – to a negative figure in most of CEE. Foreign debt must fall from its 70% of GDP in the area to nearer the 39% of Latin America. The private sector is heavily indebted, making it harder for governments to cut borrowing, but in the region only Hungary is talking of

stimulation. With exports, manufacturing and consumer confidence picking up, Pacek expects Poland, which has kept growing during the crisis, to outpace CEE and eurozone averages and to grow by 2.5%–3% in 2014. Before the crisis, loans were being made without sufficient cashflow to repay them or assets to secure them. The blame for that lay with badly worded regulations, inappropriate risk management or bad culture – in short, with poor corporate governance, said Adrian Berendt FCCA, who chairs ACCA’s Global Forum for Governance, Risk and Performance. Governance has been evolving for two decades since the publication of the Cadbury Report in the UK, but the results have been disappointing. Regulation hasn’t created a healthy corporate culture or effective boards, performance measures are unreliable, boards’ ability to control managers has been overestimated and symptoms have been dealt with rather than root causes. The solution doesn’t lie with more detailed

Proactive, not reactive The CFO is stronger than ever and in a position to influence business in a fundamentally different way, says Ashton Dallsingh, Cisco Systems CFO for Europe, Middle East, Africa and Russia, where the company has sales of over US$50bn. He gave CFO Summit delegates his views in a platform interview. Dallsingh said the continuing questions for today’s companies were how to grow, where to grow, how fast to grow, how to do more with less – and how to do so with the pressure on all the time and not just for one or two tough quarters. Providing financial support is one thing, but CFOs must now go beyond that and give financial leadership in answering those questions. He pointed out that CFOs are much more than Excel whizzes and should aim to be partners to executive managers and other financial managers in their companies. And since the macro environment cannot be changed, they should take up the challenge of building talent throughout their organisations so they can react to change. Dallsingh’s three tips for CFOs are: figure out how to be ‘positively disruptive’ and provoke change for the better talent, talent and once again talent – 50% of success comes from building the right team keep thinking about the difference between financial support and financial leadership.

* * *

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ACCOUNTANCY FUTURES: GLOBAL ECONOMY POLAND

rules, Berendt told the summit. The Basel I accord on bank regulation was 30 pages long; Basel II’s 347 pages were overwhelmed by the crisis; post-crisis Basel III has 616 pages. National regulations have likewise exploded in size, and Berendt praised the Bank of England’s Andrew Haldane for saying that simple rules are needed. Key, said Berendt, is to recognise that the aim of governance is to create value sustainably. The relationships between savers and institutional shareholders, between the latter and boards, and between boards and managements must all be designed to inform, to hold to account and to perform – to create value. Contributing to a wide-ranging discussion of risk management, James Calladine, HSBC’s chief risk officer for continental Europe, cautioned against seeking precise measures of risk. Value at risk calculations rely on historic data and tempt managers to calculate numbers rather than go through a complex process and make a judgment. Learn from managers who deal with risk daily, advised Euler Hermes CFO Waldemar Wojtkowiak; prepare for future and not past risks by drawing up unfavourable scenarios and consider how your company will fare in them through stress tests. Calladine also favoured reverse stress tests – considering what scenarios would kill the company. A show of hands showed that few of the audience were using such tests. CFOs are increasingly called on not only to provide financial support in budget optimisation, analysis and reporting, but also to help forge strategy. They are more proactive than before, contribute more to decisionmaking and are less likely to be overruled. And increasingly the path from CFO to CEO is more travelled, with CEOs recruited from candidates with financial experience. TALENT PATH A panel discussion at the summit saw differing views expressed about that path, but all speakers agreed that there are distinct features to the CEO’s role and the skillset and character needed to succeed in that role. As Mark Forkun, CEO of upmarket confectioner Blikle, put it, CEOs need ‘a passion to drive, mentor and inspire people’. He said they must nurture the talent hidden in people to meet their own and corporate needs. Like CEOs but unlike other specialists, financial managers take an overall view of a firm’s operations. And CEOs, with their performance measured by financial results, need to understand the numbers. However, there are other abilities that would-be CEOs

Recommendations of Global Forum for Governance, Risk and Performance 1 T here should be general acceptance that the purpose of governance is to create value sustainably. 2 G overnance policies should be assessed on how well they help companies perform, inform shareholders and other stakeholders, and on how well they help shareholders hold companies to account and boards to hold management to account. 3 C ompanies and investors should develop and report using more suitable measures of performance and value creation. 4 P olicymakers and institutional shareholders should address the asymmetry in the risk/reward ratio between management, shareholders and other stakeholders. Ways should be found to enable savers to hold institutional investors to account. 5 E xamine ways to give investors incentives to favour companies that create long-term value for themselves and for society. Creating value through governance, www.accaglobal.com/risk Above: Andrzej Olechowski, chairman of Citi Handlowy, and former Polish finance minister and foreign minister, outlines three factors that constrain mediumterm growth.

must cultivate. Direct experience of other parts of the business can broaden a skills portfolio and the best asset you can have is a sponsor in the firm. But a CEO’s job is not for everyone, warned talent consultancy Korn Ferry’s Warsaw MD Krzysztof Nowakowski. He said Polish managers are typically very ambitious and may aspire to roles that are not right for them. ‘Does not wanting to move out of finance or Poland prevent professional development?’, one participant asked. ‘No,’ replied Nowakowski. ‘Staying in Poland is a credible option, for in the new Poland a CFO plays much more than the old, conventional role.’ John Presland, consultant

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ACCOUNTANCY FUTURES: GLOBAL ECONOMY TECHNOLOGY

Technology’s mighty juggernaut ACCA’s Faye Chua lists the 10 technology trends that will force finance professionals to change the way they do business – or go out of business

he world has entered an era of ‘digital Darwinism’, with technology evolving too fast for many to adapt. Underpinned by the internet and affordable broadband, it has democratised knowledge, moving power from the hands of the few to the fingertips of the many. New research drawing on input from ACCA’s Accountancy Futures Academy, analysts, management consultancies and members of ACCA and IMA (Institute of Management Accountants) aims to highlight the emerging challenges and opportunities, and offer insights to help accountants and businesses prepare for this new world of possibilities. It focuses on 10 technology trends with the potential to reshape the business landscape significantly. We list them here, ranked in order of importance. 1 MOBILE Even before many organisations have met the challenges of bring your own device (BYOD), a much more significant trend has emerged – BYOX, or bring your own anything. Employees have moved beyond using their own smartphones and tablets to connect to the corporate network and are now choosing which apps they use for work – corporate data will follow. Neither ‘smart dust’ (tiny chips embedded in all sorts of everyday objects to collect and transmit data) nor the ‘internet of everything’ (the connection of all devices and objects to the internet) is so very far away. 2 BIG DATA Around 90% of the world’s data has been created in the past two years. ‘Big data’ describes the vast amounts and many types of data being produced – barcodes, phone signals, personal location records, online

searches, radio frequency identification tags, social data, etc. Exploiting this huge nexus of contextual relationships, information and data will demand people with analytical and interpretation skills, who can sift the data haystack for patterns of value to businesses. 3 ARTIFICIAL INTELLIGENCE AND ROBOTICS Forget R2D2, it’s software ‘bots’ that matter here, automating complex and repetitive processes and tasks, and using stored knowledge to guide users. Accountants increasingly rely on this built-in expert knowledge to work efficiently and effectively, while banks are using bots to automate account closures, direct debit cancellations and other processes. Within five to 10 years, much more will follow suit. 4 CYBERSECURITY There is ever more data to steal and ever more connected devices that it can be stolen from. Over the next five to 10 years, the criminal threat is expected to grow, along with the use of nanotechnology. Beyond 2025, biotechengineered bacteria may even be able to host electronic circuitry. Unless the security industry can find ways to test for and detect this new type of biological pathogen, concepts such as privacy and security could become a distant memory. 5 EDUCATIONAL TECHNOLOGIES Games and social tools are making learning more fun, simulations and augmented reality are making it more immersive, and intelligent algorithms are personalising the process and tracking achievements. In 20 years’ time, accountants may not need to spend three or four years training. The accountant of the future might ultimately be an ‘augmented’

Chris Gentle PARTNER AND HEAD OF RESEARCH, DELOITTE ‘As new digital technologies emerge and converge they will reshape business. The future will not be like the past. The direction of travel is clear, the details less so. The profession must supplement its technical expertise with a broad understanding of these technologies.’ Member of ACCA’s Accountancy Futures Academy

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Faye Chua is ACCA’s head of future research and leads ACCA’s global research and insights work that focuses on the future directions of business and the accountancy profession across a range of subjects. She has over 10 years of experience in research across different sectors of the economy and has worked in North America, Asia Pacific and Europe.

ACCOUNTANCY FUTURES: GLOBAL ECONOMY TECHNOLOGY

person, uploading data to a brain chip with all the required technical expertise and using this in combination with artificial intelligence to make professional judgments. 6 CLOUD Third-party providers in the cloud will be taking over many more business processes over the coming decade, including HR, operations and sales, and finance and accounting. It will take longer for them to displace traditional accountants but as the cloud converges with technologies such as mobile and big data and they become more mutually reinforcing, unanticipated changes will arrive. 7 PAYMENT SYSTEMS Analysts predict increased dependence on a new type of mobile device app, the digital payment adviser (DPA), which recommends the most appropriate payment product for a purchase. DPAs will encourage the purchase of day-to-day products and services using alternative currencies, such as loyalty points and social currencies. 8 VIRTUAL AND AUGMENTED REALITY By 2020 simulated virtual environments will permit active engagement with data. So rather than drilling into a spreadsheet’s cells, smart

software agents will assemble simulated environments, allowing users to manipulate virtual representations of the underlying data. 9 DIGITAL SERVICE DELIVERY As more services are provided digitally by all sorts of entities – from government departments to small accountancy firms – and more electronic data is exchanged, there may be a disintermediation of the accountant’s role in compliance. The systems of businesses and regulators could become so interconnected that they can exchange information automatically after it has been verified and validated by smart software.

See Faye Chua talking about ACCA’s 100 drivers of change for the global accountancy profession report at www.accaglobal. com/ab27

10 SOCIAL As enterprise social functionality improves, social tools will become more useful to finance. In an ideal world, collaboration software will develop a situational awareness and contextualise processes and the roles and relationships of participants. In finance, it will offer automatic understanding of the difference between general exchanges and any that must be tightly controlled – such as between tax and finance departments. The Digital Darwinism report is available at www.accaglobal.com/futures

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ACCOUNTANCY FUTURES: GLOBAL ECONOMY CHANGE

Where are we heading? We all have a part to play in shaping the future, says futurist Magnus Lindkvist, and creativity is a surer bet than competitiveness in delivering progress

The Bund Sightseeing Tunnel in Shanghai, China. Our journey into the future may not be so brightly lit.

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ACCOUNTANCY FUTURES: GLOBAL ECONOMY CHANGE

‘D

oes Satan worship affect property value?’ This is not a line from a Monty Python sketch but a news headline on the front page of the Los Angeles Times on 8 October 2013. You would think the newspaper had better things to write about with the country in the middle of a government shutdown. Then again, we live in an age of infobesity that bombards us with messages in news outlets (of varying quality), inboxes and social media channels and what grabs our attention isn’t always what matters, as the Los Angeles Times headline illustrates. Infobesity makes us prisoners of the present. We are mired in dialogues about the here and now that blind our view of what lies ahead. It’s worth looking at how we could, perhaps should, think about the future to make better decisions and create a different tomorrow. THE LONG VIEW The British Archive of Criminology has data showing we are about to run out of murder in society. If that strikes you as preposterous, bear in mind that its statistics stretch as far back as the 1400s, when killing someone was a common way of settling disputes. Since then, the homicide rate has dropped by around 98%. Why, then, are people gloomy when asked about the present? Because pessimism is a defence mechanism. Sensitivity to danger – real or perceived – has proven a more useful survival tool than optimism. But in this one-eyed view of the world, we can lose important, underlying stories about where the world is heading. So where exactly is the world heading? WHERE THE FUTURE COMES FROM The future sometimes comes from the side. The megacity of Shanghai, for example, is built using innovations tried in many other countries previously – skyscrapers, high-speed trains, capitalism. The current globalisation of accountancy standards is another example. This is horizontal change where the future comes at us from the side. For the enterprising mind, horizontal change represents a great business opportunity as you simply have to R&D – rip-off and duplicate – to implement a new idea in your local market. However, isolating the future to a horizontal remix between East and West can lead us into a zero-sum mindset where all we can do is divide up markets that already exist. Globalisation is often seen as a zero-sum game in which one side will get all the jobs, where cheaper accountants will outcompete their

more expensive peers and all the resources will be gobbled up by the rich world. Before the year 1850, this was what our world looked like: a cyclical, stagnant society where you could not make things, only take them by means of plunder, taxation or something similar. Progress – the idea that the future can become better – is a relatively new phenomenon. What began in 1850 was a transition to a society where change is the

Infobesity makes us prisoners of

the present, and we are mired in dialogues about the here and now norm. Today we expect our children to live longer, possibly better, lives than us. We expect technology to bring us new things on a regular basis. We expect life as we know it to be different in the future. This is vertical change, where something previously impossible and unfathomable becomes a reality. Science fiction writer Arthur C Clarke once said that a sufficiently advanced technology should be indistinguishable from magic. Telepathy was considered magic 10 years ago; today, we call it Twitter. If we want to keep on living in a progressive world, vertical change is a lot more important to think about and create than mere horizontal reshufflings. In other words, technology and how it will change accountancy is a more important discussion to have than globalisation, rule harmonisation and compliance. Yet technology disrupts and undermines, transforming the previously

Magnus Lindkvist is a trendspotter, futurologist and author of When the Future Begins: A Guide to Long-Term Thinking. A graduate of Stockholm School of Economics, in 2008 he created Europe’s first academic course in trendspotting and future thinking, together with Stockholm School of Entrepreneurship.

Future imperfect Our ability to think ahead is half-baked and we tend to make the following mistakes when predicting what tomorrow might hold: FALLACY: THE FUTURE WILL HAVE MEANING We tend to reduce the future to a moral fable where good or bad people will win. In reality, we often cannot judge what morals will be like in the future. The future isn’t binary. FALLACY: IF ONLY… We frame the future as a place where problem X is solved by solution Y or gadget Z and we will live happily ever after. In reality, it is just ‘one damned thing after another’, to paraphrase Arnold Toynbee. FALLACY: A ONE-DIMENSIONAL FUTURE We view the future as about one thing – carbon dioxide, the EU – but in reality it will be as cluttered and contradictory as the present. FALLACY: EVERYTHING CHANGES Yet most of us still enjoy barbecuing meat and drinking beer when relaxing on the summer vacation. Just like they did in the 1500s…

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ACCOUNTANCY FUTURES: GLOBAL ECONOMY CHANGE

smooth, straight path to the future into a fogridden, treacherous and turbulent journey. THE FOG OF THE FUTURE We used to think the future would bring us flying cars. Instead, we got Gangnam Style. In other words, there’s a gap between expectations and reality and there are Gangnam Style-like events in every industry today. Things that could not be predicted a few years ago are suddenly topping management agendas. At a recent conference for global tax lawyers in Madrid, the moderator stated that none of the topics discussed in 2013 was around a decade ago. The future often takes us by surprise and the issue is how to work and excel in an unpredictable environment. In a world without crystal orbs, the most important tool is mindset. There’s a choice between two paths in life and business: to compete or to create. Competition is about beating rivals by being faster, cheaper or better; creation is about undermining the present solutions and challenging the status quo. A successful, competitive company tends to make money and win awards; a successful creative company tends to make enemies and critics. Yet if we want to keep on living in a progressive world – as opposed to a cyclical, Game of Thrones-like world – someone, perhaps you, will need to create. HOW TO CREATE Most management literature deals with competition; creation is a neglected area of study. To find some clues to what it takes to be a creative enterprise, I conducted a study while at Stockholm School of Entrepreneurship to look at how companies had survived great shifts historically. Not economic shifts – the boom-bust cycle is a part of everyday business – but more fundamental geopolitical shifts (the market opens up with the fall of the Berlin Wall), technological shifts (the rise of the internet) and existential shifts (the founder dies, leaving the company lost and confused). What I found was those rare companies that survived and excelled in turbulent times – and less than 20% of them did – had three important features in their corporate culture. Number one, they had a culture of experimentation, and encouraged a trialand-error approach. Such companies wasted sustainably; the failures (and there were plenty of them) were cheap. Number two, they had a culture of failure recycling. The status quo does not like to lose its status, so new ideas often fail. Furniture in flat packs, for example, was invented in 1940

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by Stockholm department store Nordiska Kompaniet. It was a flop – Swedes didn’t have cars – but it was recycled by IKEA a decade later and became a worldwide success. Recycling failures is about tweaking the execution of an idea that was good in theory but failed in practice. Number three, and particularly challenging in turbulent times, was patience. Challenging because markets tend to be impatient today. From quarterly capitalism to Silicon Valley mantras, speed is worshipped. Yet when it comes to shaping human behaviour and building new practices, patience is not only a virtue but a requirement.

See Magnus Lindkvist on business trendspotting for dummies: http://tinyurl. com/lindkvist

The future often takes us by

surprise. In a world without crystal orbs, the most important tool is mindset WHEN WILL THE FUTURE BEGIN? We should not take progress for granted. New, disruptive ideas are frequently met with scepticism, even hostility. Dr Ignaz Semmelweis, the Vienna-based doctor who first proposed that doctors should wash their hands to avoid spreading infection, was angrily criticised by other doctors who argued that frequent breaks to wash hands would be wasteful in terms of time and money. Similarly, we face numerous impractical insights in our world today that would generate friction and waste resources in the short run but create a better world in the long run: more female leaders, more immigration in ageing European and Asian economies, technology’s potential to simplify bureaucracy, the automation of accounting, etc. We tend to deal with such ideas either by shrugging them off as impractical or hoping that someone else will solve the challenge at a later date. Faced with the choice of a comfortable life or one of conflict, most people choose the former. It was once said that whereas historians give a voice to the dead, futurologists give a voice to the unborn. Think for a moment about what your grandchildren will ask one day. Where were you when we needed to change our profession? Where were you when there was a crisis of confidence and trust in the corporate world? What did you do about the lack of diversity in accountancy? How did you welcome new ways of working and use technology to change things for the better? Let us hope that many of us will be able to say we were there, on the barricades, when the future began in the 2010s – a time that will be known in the future as the Age of Change.

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP FUTURE CFOs

New routes to the top The traditional career path is no longer enough. ACCA’s Jamie Lyon outlines the new must-haves for high-fliers, and today’s CFOs offer their advice

re all bets off when we consider what the future CFO role will look like and what career experiences tomorrow’s CFOs will need? ACCA and IMA (Institute of Management Accountants) explore this question in one of the largest ever global studies of current and future CFO career paths. The conclusions are set out in the report Future pathways to finance leadership, which traces the career routes that current finance leaders have taken and addresses the critical question for those seeking to join the next generation of CFOs: how do I get there? More than 750 CFOs, FDs and C-suite finance leaders took part in the survey. The bottom line is that optimal career experiences are already being defined, a reflection of the changing role of today’s finance leader, as well as broader technological, social and economic trends impacting business and the finance function: faster business change, rebalancing growth across markets, the changing footprint of the finance organisation, and the proliferation of information and data. Traditional linear routes through the finance function to CFO are less important and new stepping stones are emerging. As the CFO role rebalances between its traditional stewardship responsibility and the need to help the organisation create value, so the capabilities, experiences and skills required will change. Not that the finance leadership rulebook needs to be entirely rewritten: our research reveals a story of evolution, not revolution. So what are the words of wisdom from current CFOs on the career experiences that aspirant finance professionals should get under their belt? FOCUS ON FUNDAMENTALS Future CFOs will still need a strong financial understanding and should target career experiences that give them just that. As many as 95% of current CFOs agreed it was important that future CFOs have experience in financial and management accounting. Almost half of them have had six or more finance roles during their career. The finance fundamentals are not changing, but the context is.

Today’s ‘classic career’ Previous role? Internal or external recruit?

31% CONTROLLER 60% EXTERNAL

Emerging market role?

75% NO

International experience?

73% NO

Role outside finance?

61% NO

Moved industries?

74% YES

More than five finance roles?

56% NO

Moved businesses

80% YES

First role?

42% BUSINESS/INDUSTRY

ost CFOs started their career in audit firms or finance functions * M and have never had a role outside the finance function. 40% began their finance careers in accounting firms, while * Some 42% started in a finance role in business. he majority (61%) have never taken roles outside the finance * Tteam. This represents an ongoing challenge for finance leaders in developing their commercial acumen and understanding, and suggests much of the necessary learning takes place in situ as CFO, rather than during the career journey. Only just over a quarter of the current CFOs in the sample had spent time in an overseas role. Financial director and financial controller roles remain the prior destination of choice for those with their sights set on the top finance job.

* *

GET STRATEGIC The future CFO role in supporting strategic growth is more valued. Current CFOs cited strategy formulation and execution as the most important area in which future CFOs should have experience. Over the next decade the business landscape will be entirely reshaped by market volatility, globalisation and transformational innovation, and deep business understanding will be highly prized. ANALYTICS WILL BE BIG How organisations regress, correlate and extrapolate data to drive better decision-making is the next big opportunity for tomorrow’s finance team as data grows and the multiplicity

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP FUTURE CFOs

Helen Brand CHIEF EXECUTIVE, ACCA ‘Finance professionals now have to bring a much broader range of skills to the table so the finance function can excel at everything from managing risk in the business to developing effective strategies for growth and driving financial insight, as well as maintaining levels of control and ensuring compliance. ACCA has identified the 10 key competencies for today’s complete finance professional and the ACCA Qualification comprehensively covers these abilities and behaviours.’

Jeffrey Thomson PRESIDENT/CEO, IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) ‘Today’s CFO faces many challenges and these will only increase in the areas of globalisation, technology, consumer sophistication and competition, among others. They need to have multiple lines of sight – oversight, hindsight and foresight, balancing technical skills with leadership skills and running the business with growing the business initiatives. Now, more than ever, the CFO is at the forefront of value preservation and value creation activities – no small balancing act.’ of information presents challenges to business decision-making. Today’s CFOs see insight and analytics as a key priority for how finance can add value moving forward. RISK EXPERIENCE Current CFOs said experience in risk management was the third most important area for future CFOs to address, and risk management challenges were seen as the second most important factor influencing the CFO’s future role.

CONFIDENTLY COMPLIANT Regulation was cited as an important influence on the future CFO role. Future chiefs need to be confident operating in a regulated environment and adept at managing legislative and tax requirements. We can also expect a rise in integrated reporting, more involvement of finance in reporting on corporate performance, greater use of financial and nonfinancial data, a recalibration of investment assessments to account for environmental or social impacts, etc.

BECOME A DEALMAKER Merger and acquisition (M&A) activity was cited by current CFOs as the fourth most important experience area. As well as experience in structuring deals, such activity can also help expand skills in change and project management. Funding, capital market experience and investor relations are core future finance capabilities for CFOs of larger businesses too.

WELL CONNECTED Tomorrow’s CFOs need to be technologically adept and to understand how solutions can drive better finance delivery and workflow. The convergence of social, mobile and cloud technologies may revolutionise practices. Other developments include plug-and-play technology and access to real-time information that allows CFOs to cut data many ways to gain an instant integrated view of business performance.

KNOW YOUR STAKEHOLDERS CFO aspirants need roles that broaden their stakeholder engagement and they must seek to cultivate relationship management skills. But the emerging powerhouse stakeholder in an age of brand disloyalty is the customer. Therefore, the future finance organisation will need to cultivate a customer-centric culture.

A BIGGER FOOTPRINT The future CFO will need to manage the different demands between mature and emerging markets, and align strategies accordingly. They will need to be adept at working in the global business environment, leading teams that are diverse and virtual across mature and emerging markets. Cross-cultural, cross-market business and finance experience will be highly valued.

CRUCIAL SKILLS While next-generation CFOs will need a wide range of skills, a number of standout management capabilities are needed. The top four skills identified in our survey were leadership, communication, strategy and change management.

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The Future pathways to finance leadership report can be found at www.accaglobal.com/ transformation. All quotes in this article are extracted from interviews published in Accounting and Business magazine

Jamie Lyon FCCA is ACCA’s head of corporate sector, leading its research and insights work on the CFO agenda and finance transformation.

Interviews with CFOs in China can be viewed at www. accaglobal.com/ ab19 A discussion on future CFO career paths at ACCA’s Accounting for the future conference can be viewed at www.accaglobal. com/ab46

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP FUTURE CFOs

Chia Nam Toon FCCA CFO AND GROUP ASSISTANT CEO, ASCENDAS, SINGAPORE ‘Aspiring CFOs need to be commercially oriented and able to connect business performance to financial performance. The numbers must sing and dance for you, and you must be able to influence fellow business managers. You have to develop your ability to think and deliver in order to stand out. You must want constantly to better yourself and have the courage to act. A leader also needs to find ways to persuade colleagues and gain their support to make things happen; this requires a fair bit of influencing – it’s the biggest challenge in most organisations.’

Gu Feng CFO, SAIC MOTOR, CHINA ‘The CFO’s focus is shifting from basic financial management to providing more support to the company’s decision-making and participating in strategy formulation. Strategic thinking, simply put, means adopting a long-term point of view. How to allocate financial resources? How to deal with projects that are not profitable in the short term? To answer those questions, the CFO must adopt strategic thinking at the company level. The CFO’s role has changed from that of “accounts keeper” to team manager and company leader.’

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP FUTURE CFOs

Johan Idris PRESIDENT, MALAYSIAN INSTITUTE OF ACCOUNTANTS ‘As trite as it sounds, young accountants have to strive to be the best they can. Your rewards will depend on how much you invest in your own training and skills, and how hard you push yourself. That means you have to be ready to seize opportunities and do the best job. And as you progress, you have to constantly build trust and integrity with your clients, and ensure good rapport and relationships with your colleagues so that you will have their support – something you can achieve only through mutual respect.’

Liz Legge UK AND IRELAND CFO, NESTLÉ ‘For aspiring CFOs to be successful, it is important to build a strong cross-functional network to gain a broader understanding of the overall business context. Accountants play a key role in identifying business risks/challenges and developing plans to support the business. Therefore professional qualifications are very important; but accountants also need to develop strong analytical skills. Learn from your mistakes; if something goes wrong, make sure it doesn’t happen again! Finally, on principles stand like a rock and on processes bend like a willow.’

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP FUTURE CFOs

Paul Pomroy FCCA CFO UK AND NORTHERN EUROPE, McDONALD’S ‘The ACCA Qualification has been a massive help to me, especially moving into a retail environment and having that breadth of knowledge to rely on. As I’ve gone through my career there’s learning you can still look back on that helps you think in a different way. It helps you understand the business in a way that gives competitive advantage. Always make sure you are ready for the next opportunity, and continue to develop yourself and understand the business, so that when opportunities come, your name is there.’

David Wood FCCA CFO, SOCAN (SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA) ‘Finance can go beyond the numbers with strong diplomatic and deal-making skills. You have to be moving traditional not-for-profit thinking into the age of revenue generation and keeping your public presence and profile up to date with the times. For those finance executives seeking out a career niche, I would advise you to follow your personal interests and you’ll always be motivated and challenged. Personally, what’s brought me this far are skills such as decisive decision-making.’

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP CFO ROLES

Entering a new world CFOs must prepare themselves and their teams to look beyond their traditional roles, said finance leaders at ACCA’s recent International Assembly

s businesses face increasingly complex global and competitive markets, so the demands that they place on their CFOs and finance teams are increasing. Businesses require high-performing finance teams and CFOs who can play leadership roles, managing their multiple responsibilities as both steward and business partner. These themes emerged strongly during ACCA’s International Assembly in London in November 2013, attended by senior finance leaders from around the world. ‘Increasingly CFOs have to deliver on a wide range of fronts, and the role of today’s CFO and the finance organisation is under significant scrutiny,’ said ACCA president Martin Turner. Globalisation has, he said, resulted in a more complex, volatile and competitive business environment, and sustainable growth is often hard to find. The risks that organisations face have increased, while a wider range of stakeholders are applying greater scrutiny of organisational performance. ‘The role of today’s CFO is focused on supporting the strategy of the organisation and creating sustainable wealth,’ Turner said. Yvonne Yang FCCA, finance director for Asia Pacific MSC Software Corporation, agreed that professional accountants must adapt to meet changing business requirements. ‘Accountants are still seen as technical finance experts focusing on their core accounting and finance responsibilities, and reporting is typically retrospective,’ she said. ‘But in this new world, as CFOs we need to be more forward looking, aware of

the broader risks the business faces. And we need to be more outward looking, aware of developments outside the organisation and understanding how they may impact us. We need to understand the evolution needed to bring greater value to the organisation and help it create sustainable wealth in the future.’ WIDER VISION As CFOs evolve ‘from the bean counting to the bean sprouting’, they need even wider vision, said Jeffrey Thomson, president and CEO of IMA (Institute of Management Accountants), ACCA’s global strategic partner. ‘In their expanded role in strategy and sustainable growth, the CFO’s line of sight is fourfold: hindsight, oversight, insight and foresight.’ Hindsight, he explained, involves ‘looking back to learn from history’ – understanding past financial results, for example. Oversight is ‘a traditional CFO role in terms of financial performance and resource monitoring and ensuring a healthy financial profile,’ while insight involves a ‘move into the expanded skillset that we as professional associations must help address’. Finally, foresight is where the CFO plays a leading role in helping to shape a successful future through developing a ‘curious and adaptable mindset’. In order to meet the increasing demands on them, Yang noted, CFOs and their finance teams need a broader range of skills – especially soft skills. Yang identified technical, commercial and technology, as well as stakeholder management ability and strong communication and influencing skills. She said

‘As CFOs we need to be more forward looking,

aware of the broader risks the business faces. And we need to be more outward looking, aware of developments outside the organisation and understanding how they may impact us’ Yvonne Yang

‘It’s critical that we take strategy, change management

and leadership very seriously – because those are the key components that put you on a different path to success and give you the opportunity to be a strategic partner to the business’ Teuta Bakalli PG50 EDITION 08

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP CFO ROLES

‘Sustainable growth remains hard to find. There is also

much greater scrutiny on organisational performance from stakeholders. The role of today’s CFO is focused on supporting the strategy of the organisation and creating sustainable wealth’ Martin Turner

‘CFOs are asked to be business partners to corporations,

but that doesn’t mean that we can cross the line of our independent fiduciary responsibility. That’s why business partnering sounds easy but requires an appropriate level of maturity and skill’ Jeffrey Thomson

that communication and influencing skills are particularly important as individuals rise to senior finance roles and need to communicate with fellow professionals in the business and with external stakeholders, particularly investors. ‘How well they can communicate an understanding of the organisation’s strategy and operation, and can influence these counterparties, is crucial,’ she said. DIFFERENT DYNAMIC Teuta Bakalli FCCA, former CFO of financial services business Pepper Europe, identified one trend that has changed the skills required: the development of shared and outsourced

Clockwise, from top left: ACCA president Martin Turner, IMA president and CEO Jeffrey Thomson, and finance chiefs Teuta Bakalli and Yvonne Yang.

services. Offshoring creates a different dynamic in the way that people interact. ‘Managing a team when you are not in the same room or the same location requires a different skillset,’ she said. ‘Technical skills are always necessary; they are our bread and butter and I don’t think we can ever move away from that. But [outsourcing] creates new challenges in terms of how you integrate your team when people are based in different time zones, with different language barriers.’ Effective communication is the only ‘silver bullet’ for such situations, she said. Encouraging high performance from finance teams is also a priority for Bakalli. ‘It’s about trying to energise them, introducing passion,’ she said. She highlights the need to focus not only on key performance indicators but also on key risk indicators: ‘Always think of a threedimensional box,’ she suggested. ‘We have to be a strategic partner and help the business in growing the top-line revenue, but equally [our role is about] managing risk and profitability.’ Organisations are recognising the need to develop new capability to ensure that the finance team adds value. ‘We have seen a much greater focus on ensuring finance professionals have access to the right development opportunities in many businesses, to coaching, mentoring and experimental learning programmes,’ Yang said. ‘And we have seen a better understanding of the importance of developing transparent career paths across the organisation so that professional accountants understand how they can develop their careers and the necessary skills and capabilities they will need to develop.’ The importance of succession planning and knowledge transfer across the organisation is also being recognised, as Yang concluded: ‘To be successful, we need to have broad experience, working across regions, across different cultures, in order to add value to the organisation.’ Sarah Perrin, journalist

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP EMERGING MARKETS

Small world Standard Chartered Bank’s impressive growth in China has come from an investment in people, says Julian Fong

tandard Chartered Bank has been turning in record profits for a decade. At the heart of that success is a focus outside Europe and the Americas. ‘Our strategic focus is to be in Africa, Asia and the Middle East,’ points out Julian Fong, CFO Asia and global head of country finance at the bank. The approach has, he says, enabled Standard Chartered to become the ‘most local of international banks and the most international of local banks’. Headquartered in London, the bank is regulated by the Bank of England but has a minimal UK presence. Approximately 90% of its income is earned outside of countries that belong to the Organisation for Economic Development and Cooperation (OECD). Standard Chartered has been operating in some markets longer than most local banks. For example, it opened its first branches in India and China in 1858 and has had a presence in Malaysia for almost 140 years. In 2003 it launched a new strategy that allowed it to leverage its history, its local knowledge and its presence in fast-growing markets across the globe in return for rapid growth. Fong believes that the markets in which Standard Chartered operates have several years of rapid growth ahead of them, particularly the smaller and emerging markets in South East Asia where the bank has recorded double-digit growth. ‘It is the diversity and the combination of the network that gives us our strength,’ he says. ‘It is not just the countries that we look at. One of the strengths of Standard Chartered is that it is a network business. Our customers want to go across borders; we go with them.’ When Fong left Royal Bank of Canada (RBC) for Standard Chartered in 1991, RBC was one of the 10 largest banks in the world, while the latter did not even figure in the top 100. ‘Fast forward 20 years and Standard Chartered has a balance sheet almost the same size as RBC,’ says Fong. ‘We are focused on economies that are growing at 4%, 5% or 8% of GDP as opposed to Europe, which is negative.’ Standard Chartered is now the 26th largest bank in the world, with a market cap of US$60.76bn as at the end of April 2013. Even in China, given the sheer size of the competition, growth has been nothing short of spectacular.

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DEVELOP CAPABILITIES Ongoing growth in emerging markets and the unique combination of local and international business present another challenge for Standard Chartered: providing staff with the right combination of skills to fuel the organisation’s growth. Over the past 20 years, the bank’s staff has grown from 20,000 to 89,000-plus people globally. ‘I’m only as good as my staff and the only way I can keep doing what I’m doing is to develop their capabilities,’ says Fong. ‘Some of this is through on-the-job learning, but increasingly, with the ever changing regulatory environment that we are in, we need to keep up to date and that is why organisations like us train and develop people.’ In most markets, recruitment tends to be local. ‘It’s not that we have to hire local, it is that we are local,’ says Fong. In Hong Kong, for example, where Standard Chartered has large and growing operations, most staff are Hong Kong Chinese. CORE STRENGTHS The bank focuses on what Fong describes as its ‘core strengths as an international bank, providing services to companies and high-networth individuals operating across borders’. Standard Chartered also has a strategic alliance with Agricultural Bank of China, in which it has a 5% stake. ‘We are a very focused bank,’ says Fong. ‘By local bank standards we have a small market share. We have to focus on the customer segments that give us international business and we focus our local business on middleclass or high-net-worth individuals. That is our differentiator.’ While Standard Chartered has been in China for more than a century and a half, the real growth has been most visible in the last five years. In 2007 it became one of the first four international banks to incorporate locally. Profits in China are not always easy to come by, though. For Standard Chartered, they are derived from wholesale banking services, rather than consumer banking, which requires ongoing and relatively rapid investment. But because the bank is looking at medium or long-term profits – at least 10 years into the future – the investment is worth it.

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP EMERGING MARKETS

‘CHANGING DYNAMICS’ With an evolving banking industry, training requirements are also changing. ‘Increasingly, with the changing regulations and the changing dynamics of the industry, our people need to keep up with new rules and new regulations,’ Fong says. ‘What we have recognised is that we need to establish more formal training programmes.’ Within its finance function Standard Chartered is developing a learning curriculum across six key areas: external reporting, balancesheet management, tax management, risk and controls, regulatory compliance and performance management. ACCA will play an increasingly important role here. In January 2013, Standard Chartered was awarded global accreditation as an Approved Employer from ACCA for the support it provides employees working towards their accreditation. The bank plans to take this even further. ‘We are taking one step forward. If we want to hire someone in the future they will have to have minimum designations, of which ACCA

Julian Fong In 2010 Julian Fong became Asia CFO of Standard Chartered Bank and global head of country finance, with CFOs from every one of the bank’s geographical units reporting to him. After graduating in chemical engineering from the University of Loughborough in the UK in 1974, he went on to gain an MBA in finance and accounting from McGill University in Montreal, Canada. In 1980 he joined Royal Bank of Canada in Toronto as a business analyst focused on finance systems, before moving to Standard Chartered in 1991 as manager in the business information unit of the finance division, based first in Singapore. will be one,’ Fong confirms. The bank is also willing to work with staff already on the job to get their ACCA designation by helping with fees and support. These training efforts are part of an emerging companywide philosophy to develop more focused training and help staff keep on top of their roles and, in turn, oil the engine of growth. ‘At the end of the day,’ says Fong, ‘people are your most important resource.’ Alfred Romann, journalist

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP OVERALL BUDGET MANAGEMENT

Survival tool Overall budget management is a way to guarantee an enterprise’s survival. Neusoft Group’s CFO Zhang Xiao’ou explains how it works in practice

n the industrial city of Shenyang in northeastern China, three entrepreneurs emerged from university in 1991 with a dream. Some 20 years later, with courage, wisdom and a little luck, they have built Neusoft Group into one of the country’s leading IT solutions and services providers. Through the years, the group has built up a customer-oriented organisation, goal-oriented strategy execution, excellence-pursuing business processes and a lasting valuecreating customer management system. Neusoft’s rules of survival have embraced not only open innovation in technology and business, and an effective sales organisation, but also its operation and management system. And overall budget management is an integral part of the company’s entire management system. In China’s emerging IT market, there are about 50,000 software companies. Sometimes it is mere details that determine the difference between success and failure. In this context Neusoft’s overall budget management system is invaluable. It can help the group optimise its global allocation of resources, improve operational quality, strengthen risk management and control, and facilitate strategic development and operational goals. In essence, it acts as the guarantee of survival for the group. THE GREAT INTEGRATOR Management expert David Otley once declared: ‘Overall budget management is one of the few management control methods that are able to integrate all the key issues of an organisation into one system.’ Overall budget management is a modern enterprise management method that combines systematic, strategic and human-oriented concepts. It is increasingly gaining attention and is widely used by Western companies. A lot of outstanding companies regard overall budget management as their tool of choice for maintaining vitality and creating core value. But combining the management philosophy with a company’s own characteristics is a huge challenge. After years of practice, Neusoft has found a way to align overall budget management with its organisational structure, creating multidimensional and

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dynamic strategic management thinking, and set up the overall budget management system and framework for budget preparation, implementation and evaluation. DYNAMIC STRATEGIC THINKING Neusoft has created three dimensions for the dynamic strategic thinking of overall budget management: time, space and value. And it achieved the overall operational planning and dynamic control of the company, enhanced its strategic management capability, realised efficient use of resources, effective monitoring and evaluation, and improved its ability to manage operational risks and to make profit, through paying attention to three factors: the budget cycle, the organisation of budget, and budget resources. In the time dimension, strategic goals and values are classified as growth stage, medium

The overall budget

management system acts as the guarantee of survival for the group

term or short term, and KPI (key performance indicator) targets are set for all the business units according to the stage (initial, growing, maturity stage, restructuring) they are at. In the space dimension, the company’s businesses are divided by vertical business line, horizontal regional line and customer, forming a multidimensional matrix and matrix nesting. The complex, multidimensional and multilevel business structure produces deeply tangled levels of organisational interests that are highly correlated with each other. Because of their shareability and complementarity, the whole is bigger than the sum of the parts. In the value dimension, strategic plans are broken down in the value chain of every business process in terms of operating budget, investment budget and financing budget. And the operational indicators that relate to production, research and development, sales, management, etc, are refined. The company’s operation objectives and its resource allocation are quantified and realised through budgeting, using a scientific management model.

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP OVERALL BUDGET MANAGEMENT

SYSTEM AND FRAMEWORK Overall budget is a management system that involves all staff, all businesses and all processes. On the basis of the business environment and internal targets, Neusoft defines its corporate strategy and takes effective measures to realise its strategic goals and performance targets, and to complete the preparation, execution, modification and improvement of the budget. Neusoft fully considers all the changes and develops a flexible budget, paying close attention to the tight connection between the budget system and the operational system, making sure that the budgeting is always strongly connected to the company’s strategy. It also focuses on the design of strategic resource allocation, while combining cost control with budget and linking incentives with performance indicators. Neusoft took into consideration its own characteristics, and built the framework of its overall budget management, with forecasting, programming, planning, budgeting, reporting and performance appraisal closely connected and coordinated through the target system. Under the framework, the budget targets, from macro organisations to micro organisations, are broken down and the economic responsibilities assigned to every department and link, or even every team, project and person, forming a comprehensive budget execution responsibility system. ANNUAL BUDGET The preparation, execution and evaluation of the annual budget helps Neusoft guide the business operation for every fiscal year. The company has drawn up an annual budgeting process guide that clearly defines specific aspects such as budget preparation, execution and evaluation, as well as how the different business aspects relate to and interact with each other and form a business cycle, achieving effective control over the overall economic activity of the company. Neusoft’s overall budget management starts with setting marketing strategy and goals. This lets the company optimise the allocation of production resources according to the marketing plan, strengthen the implementation, and adhere to a global operational tracking system that pursues excellence, forming a systematic tracking and guarantee mechanism for budget management. Combining its annual plan with budget and rolling production and sales plans, and using quarter, month and day for measurement, Neusoft analyses and evaluates the performance of each budget unit according

to their corresponding targets, and studies the reason for any divergence between actual performance and the budget. It then tries to iron out the difference in the future by making timely adjustments to operational activities, achieving a dynamic control through appropriate budgetary controls. Neusoft has a budget management chain made up of responsibility centres and the company’s decision-makers. Through variance analysis and a summary of forecast data, Neusoft can make budget decisions, allocate resources and assess different responsibility centres according to the related indicators. Neusoft’s overall budget management system is an all-around management model that puts all business units, personnel and links into one system. It is also a guarantee system that can dynamically integrate the logistics flow, cashflow, information flow, and HR flow in multiple dimensions.

Zhang Xiao’ou joined Neusoft Group as finance director in April 2000, becoming senior vice president and financial operating officer in 2008 and senior vice president and CFO in 2012. He has an MBA from the Northeastern University and an EMBA from China Europe International Business School.

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP WORKING CAPITAL

Risk redefined Professor Wang Zhuquan outlines a more effective model for measuring the performance of working capital and assessing an enterprise’s financial risk

ith the increasing frequency of cross-border flows of capital and commodities, the operation of working capital has become just as important a business activity as the goods and services it underpins. An in-depth change in business and financial concepts is now brewing, and the concept of working capital and the related performance assessment system need to be reviewed. The unpredictable economic environment also requires businesses to pay great attention to the financial risks related to working capital, and the change in the concept of financial risks will drive innovation in the assessment models. REDEFINING WORKING CAPITAL An enterprise’s economic activities can be divided into operating, investing and financing activities. Traditional finance and accounting theory classifies these activities as operating (procurement, production, marketing, etc) or financial (investing and financing). This classification reduces the concept of working capital mainly to such operating activities as inventory, accounts receivable and payable. Yet operating and investing activities both create value by using the company’s funds. The scope of business activities should therefore be broadened to be value-creating activities through the use of funds, including the two categories of operating and investing activities. Likewise, all a company’s economic activities should be classified as business activities or financing activities. The former involve using the company’s capital, the latter refer to the funding that underpin these business activities. Using this broader concept, working capital not only refers to the balance between current assets and current liabilities in operating activities (or total economic activities), but also to the balance between current assets and current liabilities in a company’s business activities. Because a company uses its capital either for operating or investment activities, the current assets in business activities should refer to the total current assets. Therefore: Working capital = current assets in business activities – current liabilities in business activities = current assets – current liabilities in business activities

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Professor Wang Zhuquan is vice dean of the Management College of Ocean University of China and dean of the accountancy department, director of China Business Working Capital Management Research Center and candidate president of the Education Branch of the China Accounting Society. He is mainly engaged in research on working capital management and stakeholder accounting.

PERFORMANCE EVALUATION With the broadened business concept, the capital allocation efficiency decides how capital is split between operating activities and investing activities. Currently, the commonly used working capital management performance evaluation indicators are days inventory/sales/ payables outstanding (DIO, DSO, DPO), days working capital (DWC), cash conversion cycle (CCC), etc. These indicators reflect neither the management philosophy of the integration of operation and finance, nor evaluate the performance of investing activities. In the future, working capital for operating activities should be classified according to its relationship to the supply chain or channels as ‘working capital for marketing channels, production or internal operating channels, and procurement channels’. To help improve working capital performance by optimising the supply chain and to better reflect a working capital philosophy that integrates operation and finance, we must design a channel-based performance evaluation system. Its major indicators would be the working capital cycles of marketing channels, production/internal operating channels, and procurement channels. Marketing channels working capital cycle = marketing channels working capital ÷ (operating revenue / 365) Production or internal operating channels working capital cycle = production or internal operating channels working capital ÷ (operating revenue / 365) Procurement channels working capital cycle = procurement channels working capital ÷ (operating revenue / 365) Operating activities working capital cycle = marketing channels working capital cycle + production or internal operating channels working capital cycle + procurement channels working capital cycle New indicators should also be set to reflect working capital performance in investing activities. The performance evaluation for investing activities should overcome the

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP WORKING CAPITAL

limitations of using operating revenue as a measure of capital turnover. We should use cashflow indicators such as cash received from investment recovery and from investment income as the measure for the turnover of investing activities working capital. Namely: Investing activities working capital cycle = investing activities working capital ÷ [(cash received from investments recovery + cash received from investment income) / 365] NEW RISK MODEL Existing risk assessment studies have narrowly interpreted financial risks as the enterprise’s solvency. Thus liquidity ratio, quick ratio, debt ratio, financial leverage and other indicators have become the common measures of financial risk. But all financial failures are ultimately reflected in breaks in the funding chain that result in operating difficulties – the company can’t amass enough working capital to support its business activities. Accordingly, the core meaning of financial risks should focus on the uncertainty of the ability to guarantee the needs of working capital. We should therefore develop a new model for the assessment of financial risks to remedy the defects of the old solvencyfocused model. If we define the corporate financial risk assessment as the ability of funding activities to guarantee the working capital needs of the

enterprise, then we can examine the corporate financial risk assessment according to the quantity and quality of guarantee. ‘Guarantee quantity’ refers to the amount of funds raised while ‘guarantee quality’ refers to the sustainability or stability of those funds. If the balance between a company’s current assets and all its current liabilities is called the ‘working fund’, then: Working fund = current assets – current liabilities = long-term liabilities + owner’s equity – non-current assets Working capital = current assets – current liabilities in business activities = working fund + current liabilities in funding In other words, working capital equals the sum of the funding-related current liabilities and the working fund; the former represent the working capital received from short-term funds (short-term loans), and the latter the working capital raised from long-term funds (long-term liabilities and owners’ equity). Therefore, the guarantee quality of a company’s funding activities can be measured by the proportion of the working fund in its working capital. The higher the proportion, the better the guarantee quality and the lower the financial risks because long-term fund sources are more sustainable and stable than short-term financial liabilities.

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP TURNAROUND

Answering the call As CFO of Eircom, Richard Moat is helping to bring the good times back for Ireland’s once faltering telecoms provider

martphones are near ubiquitous, demand for broadband and wireless is surging, and the growth of the cloud has been explosive. With so many following winds, you could be forgiven for thinking telcos are having it all their own way these days. Yet cut-throat competition, disruptive technologies and a customer base conditioned to expect more for less – if not everything for nothing – present a range of headaches to even this most strategically well positioned of sectors. In telecoms, perhaps more than any other industry right now, yesterday’s cash cow can quickly become tomorrow’s white elephant. Nevertheless, while the challenges are numerous, the future is certainly bright: data consumption remains on a trajectory of exponential growth and the roll-out of fourth-generation (4G) technology is creating a host of business opportunities that service providers are keen to exploit. ALL CHANGE Irish telecoms provider Eircom has been more harshly exposed than most to the downsides of this often challenging environment. First floated on the stock exchange in 1999, Eircom experienced numerous changes of ownership, burgeoning debt and declining market share before bowing to the inevitable in March 2012 and entering examinership (a protected insolvency period for business reconstruction in Ireland similar to Chapter 11 in the US). It emerged 100 days later with debts written down from €4.1bn to €2.4bn, while a new management team, led by CEO Herb Hribar and CFO Richard Moat FCCA, was installed that September. The malaise at the heart of Eircom was, Moat says, relatively easy to diagnose: ‘In simple terms, it had taken on too much debt. Successive sets of owners took more cash out and put more debt in. There had to be a restructuring for the business to be viable. Some debt holders got written off entirely, as did all of the equity shareholders, but those who remained have been very supportive on the whole and have provided us with the ability to make the investments that are necessary to ensure the future stability of the business.’ While Eircom needed some ‘serious and rapid attention’ to stem the decline in its customer

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base, Moat is clear that turning things around hasn’t been about applying sticking plasters: integral to the new beginning is a five-year plan centred on investment in new services and a reduction in costs. Moat explains: ‘There were a lot of areas that needed real operational focus and hadn’t been getting it. We are investing €1.5bn over the five years of the plan and €450m of that will be spent in the roll-out of fibre. We have just launched 4G and our new TV offer, something that had been talked about a lot in the past but never done. We also have a new billing system, which means we can offer all our services with one bill to our customers. We can start to be seen as the leaders rather than the followers in terms of technological advance.’ The new eVision TV service sees Eircom go head to head with rivals UPC and Sky for control of the Irish living room, and its ‘quad play’ offer of landline, mobile, broadband and TV generated considerable attention in Ireland when launched in October 2013. Rightsizing headcount is also integral to the plan, and in 2012 Eircom announced plans for 2,000 voluntary redundancies by June 2014. While the 2012-13 financial figures, which showed revenue falling by 8% and earnings by 10%, may have been ostensibly disappointing, Moat says that the performance actually put the company €22m ahead of target. Significant achievements included almost doubling the level of earnings before interest, taxes, depreciation and amortisation (EBITDA) in the Meteor mobile business, which had seen an unprecedented decline over the previous three years. ‘We performed ahead of expectations over the year, and we have seen two consecutive quarters of EBITDA growth,’ explains Moat. ‘Obviously, there’s a lot of work to be done to ensure we stay on track, but I think that the shareholders are pretty pleased with how the business has progressed over the last 12 months.’ INVESTMENT CHALLENGES Moat has been critical in the past of regulators not recognising the investment challenges facing the sector. He says: ‘This is a heavily capital-intensive industry. The margins are now substantially less than when I first started in the business and are reducing all the time because

Richard Moat FCCA is CFO of the Eircom Group and chair of the ACCA/ IMA Accountants for Business Global Forum. He was previously deputy CEO and CFO of Everything Everywhere, managing director of T-Mobile UK and corporate finance director with Orange.

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP TURNAROUND

People walk past central Dublin graffiti depicting recent financial turmoil. The Irish economy is finally emerging from a five-year slump triggered by a huge property crash in 2008.

of increasing competitive pressure, so I think people need to be cognisant of that. Some of the latest proposals coming out of the EU are not necessarily investment-friendly and we want to make sure, along with many other operators, that we get our point of view across.’ A year into the role and Moat says things have ‘panned out pretty much as I expected them to. My role as CFO is a very operational as well as financial one. In the first six months, I managed the mobile side of the business, and that level of involvement stretches across all operations.’ Nevertheless, the core financial responsibilities of the job remain in focus. In May 2013 Moat oversaw the company’s €350m high-yield bond. ‘That gave us access to the capital markets again, which a lot of people were surprised about, because that was only nine months after we exited examinership.’ As chair of the ACCA/IMA Accountants for Business Global Forum, Moat has been a thought leader on the changing role of the CFO. He believes ‘there is definitely a more active partnering role than 20 years ago. People expect a lot more of finance and the CFO, in terms of getting involved in operational

decision-making and not just adopting a historic, backward-looking stance.’ Moat says he has tried to reflect this viewpoint in the structure of finance in Eircom. ‘We’ve got quite a decentralised finance operation. I have four finance directors who sit in the main operational units with finance units under them. They partner very closely with the managing directors of the operational units, so they are really active participants in the operational side of those functions. That not only gives me a great perspective on what’s going on, far better than if the finance function was centralised, but it also provides an excellent level of support to the MDs of those operations. I think we have good balance between empowerment and centralisation and it seems to be working very well.’ On his relationship with CEO Hribar, Moat stresses the partnership element, too. ‘On all major issues, Herb and I have established a very close alliance. It doesn’t mean to say we’ve agreed on everything, but that’s not the role of CFO. It’s a question of putting across your point of view where it’s necessary.’ Donal Nugent, journalist

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP GLOBAL BUSINESS SERVICES

GBS: friend or foe? It’s the next big thing in back-office transactional functions. Deborah Kops explains what global business services is and why the CFO should care

ssentially, global business services, or GBS, represent the next phase in outsourced or shared service models. GBS aggregates key functions such as finance, HR, IT, customer care, property and facilities – and sometimes vertical business processes such as claims processing – into one organisational structure and governance model, providing business support across the entire enterprise. It sounds like the mother of all shared services arrangements and in a sense it is. Whether delivered through internal operations or outsourcing relationships, GBS becomes the corporate back-office entity. With a single governance structure and reporting lines that span all functions, feeding into one corporate leader often with a seat at the management table, it turns the responsibility for delivery of finance upside down. In a mature GBS model, processes take precedence over functions. Traditional functional silos are broken down and transactional processes are managed end to end. CFOs may react in one of two ways to news of the ‘next big thing’ in finance delivery – by

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Resetting the career arc

GBS could have very significant implications for finance career paths. Because GBS should provide better data and one ‘version of the truth’ across the business, the retained team may see a shift in focus from managing processes to business partnering, and move away from managing single functions to managing across functions. John Ashworth, global head of finance transformation at Pearson, says: ‘The retained team will deliver a very pure form of business partnering. But it means finance becomes a narrow specialist/highend discipline and the rest of finance disappears or is subsumed under a process.’ For GBS to work as intended, the barriers between company processes will have to be broken down. That means finance professionals must develop influencing skills and the ability to compete for and manage resources in other functional areas. Colm D’arcy, former director of finance operations at Hertz, says: ‘The move to a GBS model is very significant in terms of a cultural change for the finance organisation.’ Clearly, deep finance skills will no longer be enough for finance professionals because finance activities under GBS are delivered horizontally and linked end-to-end with key tasks in other functions. Yet it’s as much about possibilities as it is a challenge. Liz Ditchburn, relationship leader at Kimberly-Clark, says: ‘I believe GBS represents an opportunity for finance professionals – you are building this cross-functional organisation where everyone can play to their strengths.’

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP GLOBAL BUSINESS SERVICES

Deborah Kops is the founder of SSO consultancy Sourcing Change. She was also a founding partner of a global business processing outsourcing (BPO) unit, CMO of an offshore BPO, and managing director of FleetBoston (now Bank of America) Services Group.

Listen to a webinar on Global business services: a game changer for CFOs and the finance function? at www. accaglobal.com/ ab47

punching the air in delight or rolling their eyes in exasperation. But for CFOs in organisations with the aspiration to move to a GBS model, their ability to harness shared service and outsourcing models has become a doubleedged sword. Given the evolution of the finance function compared to other corporate functions (more than 70% of Fortune 500 companies have already consolidated some part of the finance function at a country, regional or global level), finance becomes a key GBS building block. Look under the covers of the majority of GBS organisations, and youâ&#x20AC;&#x2122;ll find that the transformed finance function serves as the foundation. The model is predicated on the realisation that finance not only touches every aspect of the business, but has been taken to the next level through consolidation and transformation. At the very least then, CFOs should understand how the GBS model works and its implications. With this in mind, we have produced an ACCA report, called Global business services: a game changer for the finance organisation?, that discusses GBS and its potential impact on the finance function. IS IT WORTH IT? The overarching question for the CFO is whether GBS is worth doing. The advantages of finance moving to a GBS model are that it may be just the opening for the CFO to prove how finance touches almost every corporate function, and may deliver hitherto unimagined insights to enhance business performance across the enterprise. In a mature GBS model, finance resources are unleashed and refocused to perform higher-level tasks, giving greater business impact through crossfunctional collaboration. GBS makes it conceivably possible to harness the power of analytics through a more collaborative, end-to-end process delivery model at scale, linking, for example, finance data to customer and sales data. No longer is finance positioned as the bill payer or rules maker, but is a real source of insight that drives business growth. In theory, GBS will deliver more business model agility, quicker market entry and business integration. With better insights, organisations should also be able to increase efficiencies that show up in the bottom line. And thereâ&#x20AC;&#x2122;s no arguing with a streamlined administrative cost structure, with all enabling functions linked together and housed in one corporate organisation. The downside of moving to GBS is that it could become an expensive and time-

consuming distraction. It may also mean an uncomfortable rethink of the finance function, calling into question what the CFO must control and what finance can consume as a customer of GBS. Since the GBS leader, not the CFO, is directly responsible for finance process delivery, some processes that have traditionally fallen under the finance remit may no longer be considered part of finance under a new model. GBS also represents an enormous cultural shift for finance, particularly for those organisations that have not moved to shared services or outsourcing models. It will change the way the finance function operates at almost every level and place new demands on finance professionals. In the GBS construct, retained finance interacts closely with other functions, which requires finance professionals to be adept at working cross-functionally with a broad business perspective. GBS demands that finance professionals think differently and deploy a wider range of business skills than many have at the moment. The use of finance delivery models as a basis for GBS by many organisations begs the question: to whom should GBS report? The knee-jerk answer is the CFO, given his or her track record of successful transformation via shared services and/or outsourcing. But would GBS, which is essentially the organisationâ&#x20AC;&#x2122;s enabling factory, be better placed under an operations leader such as a COO, or even a chief administrative officer? The GBS model will not be right for everyone. It represents a major organisational change and investment. Some organisations are simply too small to benefit, while others will find that moving to GBS is too big a political challenge. But for organisations that have embraced process delivery through shared services or outsourcing, or a combination of the two, the trend toward GBS will be difficult to ignore. The question is whether these organisations would be better served by extending their investment in shared services or outsourcing, or by embracing GBS. It is early days for GBS, but it could be a game changer for finance, finally providing a leadership opportunity to add demonstrable strategic value beyond risk management across the enterprise. It remains to be seen how many organisations will take the leap. Each CFO will have to answer the question: is GBS the friend or foe of the finance function? Global business services: a game changer for the finance organisation? is at www. accaglobal.com/transformation

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP BIG DATA

The filter kings Finance professionals have the skills to analyse vast datasets and distil information, thus providing a critical new business service, says Ng Boon Yew

ize matters. The amount of data the world produces is growing so fast that we will soon run out of words to quantify it. Each day our photographs, personal location records, phone signals, online searches, social data, video clips and other digital output expand the total by an estimated 2.5 quintillion bytes. And as the technology needed to collate, manage and analyse all of this becomes increasingly accessible and affordable, big data is starting to transform the business landscape. A recent ACCA and IMA (Institute of Management Accountants) report, Big data: its power and perils, which draws on input from ACCA’s Accountancy Futures Academy, demonstrates how it’s also starting to transform the finance profession. While the new technology can commoditise some traditional aspects of the profession, it also provides an opportunity for finance professionals to move upstream to a more strategic, decision-making role within businesses. The earliest exploiters of big data were some of the world’s largest and most innovative technology companies. Big data is behind Amazon’s targeted product recommendations and Google Mail’s ability to progressively reduce the amount of spam that finds its way into your inbox. Now venture capital is flying in the direction of tech start-ups that are creating tools to help big and small organisations in all sectors to explore and exploit the possibilities. SEARCHING FOR PATTERNS Innovative organisations and individuals are already using big data to unlock value from vast data sets, to innovate in business models, products and services, to support, automate and improve decision-making, to boost operating margins, to identify and reduce risks, and to gain competitive advantage. Analytics for big data is also being built into the software that accountants are used to having at their fingertips, such as accounting and finance systems and business intelligence tools. So the next phase of exploitation seems likely to take big data into the mainstream, as businesses seek ways to use this new resource both tactically and strategically. But getting this right will be as much about

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Finance’s new role Ian Betts, data manager upstream and projects and technology at Shell, says: ‘Shell is moving towards managing information and data in an ever more integrated way. This requires control and assurance skills that sit naturally with the finance function. ‘A key part of our role is to explain the value of good-quality data for all of our business processes. We work on the basis that correcting a data error costs about 10 times as much as getting it right first time. Our vision is for the finance function to provide efficient and effective data quality assurance that unlocks business value at appropriate cost.’

Ng Boon Yew FCCA is chair of ACCA’s Accountancy Futures Academy and chairman of Raffles Campus, Singapore.

people as it is about bits and bytes, because exploiting big data will demand individuals with data mining and interpretation skills, who know which questions to ask to gain insight and appreciate that high-quality data is as important as access to vast amounts of it. Accountants could play a valuable role here. The structural and analytical skills commonplace in accounting can be used to great effect on big data. Finance professionals are well placed to distil vast amounts of information into actionable insights, and make big data smaller. Members of the profession wanting to reposition themselves to take advantage of the big data bonanza will need to embrace change. The report from the Accountancy Futures Academy predicts that the most successful will be those who differentiate themselves by adding new skills, developing new ways of thinking and forming new collaborations and partnerships. NEW SKILLS To differentiate themselves and turn big data to their advantage, accountants and finance professionals will need to: develop new methods and services for valuing data – and extend their role in compliance and internal control to encompass the ethical and effective stewardship of data assets use big data to offer more specialised decision-making support – often in real time – and decide when data can most usefully be shared with internal and external stakeholders or monetised as new products use big data tools to identify risks in real time, improve forensic accounting and evaluate the risks and rewards of long-term investment in new products and markets.

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP BIG DATA

What is big data? The vast amounts of structured and unstructured data that we now refer to as ‘big data’ are being heaped up by the shift to digital, converging trends such as cloud computing and social technologies, widespread mobile device adoption, and the increase in internet-connected systems and devices. Big data already comprises a massive amount of contextual relationship, information and raw data. As more physical objects connect to the internet (to create what is often called the internet of things or the internet of everything), so their ‘exhaust data’ will increase the amount by unimaginable proportions. Big data is not just about data. It has three main characteristics: the data itself, the analysis of that data, and the presentation of the results of the analytics – plus the associated products and services. Market intelligence firm IDC defines big data as: ‘A new generation of technologies and architectures, designed to economically extract value from very large volumes of a wide variety of data by enabling high-velocity capture, discovery and/or analysis.’ Because big data is part of a more fundamental technology-driven shift in business trends and practices, the term probably has a limited shelf life and will fall out of use, as our understanding of it evolves and it is supplanted by new words for more specific technology-driven processes and applications. The accountant’s role will be increasingly important, as more companies look for ways of developing new products and services from data they generate and own, particularly given growing concerns about privacy and ethical data usage. Accountants are already responsible for integrity in reports and accounts and ACCA members are bound by a code of ethics, so their role in stewardship and quality control may grow. As the scale of collection, storage and trading of sensitive data ramps up, individuals, organisations and entire countries are recognising the dangers and risks of data misuse. Accountants may need to step up and act as custodians of large non-financial datasets and ensure that the information in them is robust and reliable, as well as valuable and marketable.

PREPARING FOR THE DOWNSIDE However, technological change is a doubleedged sword. It has the potential to replace or devalue traditional skills, while also having the potential to develop new ones. Big data will, over the next five to 10 years, create new opportunities for accountants and finance professionals to take a more strategic, more future-facing and proactive role in organisations. These opportunities offset the risk that the finance function will be downgraded as smart tools and technologies commoditise skills. ‘Business as usual’ is no longer possible for accountancy and finance professionals. Big data: its power and perils is available at www.accaglobal.com/futures

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ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP AFRICA

A sound investment Professional accountants can play a key role in enabling African countries to realise their potential. KPMG’s Dr Claudius Williams-Tucker explains how

he challenge of overcoming the corruption that has become a way of life in many African countries is much debated. Anti-bribery and corruption laws around the world try to tackle the problem by making companies and senior executives potentially liable for any such illegal actions of their businesses. Another way, however, is to encourage the spread of professional accountants whose qualification equips them with an ethical compass as well as sound technical and business skills. Dr Claudius Williams-Tucker, president of the Institute of Chartered Accountants in Sierra Leone and head of tax, regulatory and people services at KPMG Sierra Leone, suggests that if professional accountants can take the helm of financial management in government, then the transparency of government finances and probity in financial transactions should increase. ‘Africa is a continent where corruption is seriously embedded,’ he says. ‘I wouldn’t

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say that corruption might be completely extinguished by bringing in professional accountants, but I am confident professional accountants would not be party to any corrupt practices, so this is a way to reduce corruption in government circles significantly. ‘Professional accountants command a higher salary, but you counterbalance that by the savings you might make through a reduction in corruption. Governments need to make this kind of investment – it’s one worth making.’ The experience of Sierra Leone shows what can be done. ‘In the past five to 10 years, the UK government and the EU have been trying to bring professional accountants into the government service,’ Williams-Tucker explains. ‘The notion is that professional accountants have a high level of ethical behaviour; and the things that non-professional accountants can do, professional accountants won’t do. So we pay the premium to bring these professionals into the government service and

ACCOUNTANCY FUTURES: FINANCIAL LEADERSHIP AFRICA

that has helped to sanitise the government’s accountancy unit.’ The impact is being felt, with the Sierra Leonean government’s accounts to 2012 now being written up and audited. ‘Previously nobody knew how much the government was spending,’ Williams-Tucker says. ‘People were writing cheques without cashiers, but now we have professional accountants. The accountant general is ACCAqualified. The team that works with him are all ACCA-qualified. The auditor general and his department as well are ACCA-qualified. So ACCA members have helped to sanitise the Sierra Leonean government accounting structure. They have done a tremendous job.’ Williams-Tucker has applied his own training to the challenge of building up KPMG’s Sierra Leonean tax practice from scratch. It is now the fastest-growing part of his local firm. ‘I am not only proficient in what I do as a

Dr Claudius Williams-Tucker FCCA Elected president of the Institute of Chartered Accountants of Sierra Leone in 2012, Dr Claudius Williams-Tucker will be holding office until May 2014. He became a partner in KPMG Sierra Leone in 2007, having joined the firm to set up its tax practice in 2002. In 2010, he was a leading member of the committee that formulated Sierra Leone’s goods and services tax. Before joining KPMG, he was assistant finance manager at Unipetrol Sierra Leone. He gained his ACCA Qualification in 2001 after studying in Sierra Leone and then London.

‘ACCA members have

helped to sanitise the Sierra Leonean government accounting structure’

professional accountant, in the tax and the accountancy sides of our firm, but I also see the business from a holistic point of view,’ he says. ‘That helps me to develop a proper business strategy and grow the business, as well as helping me with challenges such as talent management and people retention.’ He is keen for young qualified accountants following behind to build successful careers in Sierra Leone and across Africa as a whole. To do so they clearly need to be numerically competent, he says. ‘But you also need to have good analytical skills, because accountancy now is not about number-crunching – you need to make sense of the numbers you have.’ Strong interpersonal and communication skills are vital too. ‘To be a successful accountant you need good writing skills because accountancy has moved away from just figures,’ he says. ‘You need to write reports and communicate clearly so that you can respond effectively to issues that come to your table. In Africa, and in Sierra Leone in particular, writing skills are a problem. There has been a deterioration in English writing skills.’ Williams-Tucker believes professionals such as accountants have a role to play in ensuring young people receive the quality of education they need. ‘We should help nurture people coming through our education system by going down to schools and universities to ensure the

level of education is up to standard,’ he says. English is the first language in Sierra Leone and widely spoken, but ambitious professionals should learn French too, he suggests. ‘If you want to be an international professional, you should learn at least one foreign language. In Africa, English and French are dominant. If you can communicate in both it makes life easier for you.’ International experience is also valuable, he believes, because working in a different environment exposes individuals to new processes and attitudes. ‘It’s a big learning experience,’ he says. The ability to work in a team is another essential. ‘No man is an island,’ Williams-Tucker says. ‘You cannot work in isolation. You have to work in a team environment and contribute to the success of the team. As you grow in your role you realise you need to develop that skill. You also need to be passionate about what you do. It helps your career if you love what you are doing.’ GIVE SOMETHING BACK More experienced professionals can help younger colleagues through mentoring and coaching. Williams-Tucker was and still is mentored himself – by Cyprian Kamaray, former accountant general in Sierra Leone’s ministry of finance. ‘When I had difficulties in my studies I would sit down with him,’ Williams-Tucker recalls. ‘From time to time he would advise me on how I could progress my career. It’s important to have a mentor, someone you can rely on and discuss things with, and who will guide you. You need someone who has blazed a trail in the profession.’ Williams-Tucker does what he can to help those following in his own trail who ask for his support. He maintains an open door policy for all KPMG staff in his office and mentors a ‘quite huge’ number of people. ‘It’s difficult to turn people down, so I do try to accommodate them – to find time to talk to them and advise them on their career. It’s a challenge, but something I have to try and do.’ Sarah Perrin, journalist

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ACCOUNTANCY FUTURES: PUBLIC SECTOR INTEGRATED REPORTING

Keeping up The public sector should embrace integrated reporting, or risk being left behind by private companies, says ACCA’s Gillian Fawcett

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

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he sustainability challenges of today are unprecedented. Expenditure on public services is significant, with government spend accounting for more than a third of GDP in most countries. Globally, public services are rapidly changing and the demands on them are growing, together with the tax bill. In the case of some western countries, government debt exceeds GDP. At the same time, governments around the world are wrestling with a number of difficult and complex challenges – an aging population, healthcare costs, reform of welfare support, provision of quality education, the environment and climate change – in which strategic reviews of services need to take account of the changing world. So it is not surprising that taxpayers and citizens want to know how governments are addressing these issues. Given that longlasting improvements are increasingly being sought in accountability and transparency of public funds, the introduction of integrated reporting may well offer a way of providing more meaningful reports to citizens.

The International Integrated Reporting Framework for private companies launched by the International Integrated Reporting Council (IIRC) in December 2013 aims to help companies demonstrate how their strategy, governance, performance and prospects work together to create value. Although the focus is on the private sector, there are many benefits that are just as relevant to the public sector. Integrated reporting could provide national governments with an opportunity to show how – in both their thinking and actions – they are dealing in a holistic way with social, economic and environmental challenges. The business of government around the world is complex as reflected in the myriad of financial and non-financial reports they compile. More often than not reports are compiled in silos, for example by individual government ministries and individual divisions within ministries. Also reports can be at different stages of maturity depending how advanced reporting is within a particular county and the level of openness and transparency of reporting. For example, a recent global survey conducted by

ACCOUNTANCY FUTURES: PUBLIC SECTOR INTEGRATED REPORTING

Stephen Emasu FCCA Best foot forward: Chinese firefighters march across Tiananmen Square, Beijing

PwC identified that in 54% of 110 countries – mostly developing countries and emerging economies – governments were still reporting on a cash or cash-modified basis. Clearly, a key challenge for these countries is to move towards producing a balance sheet in the foreseeable future. The lack of advancement in financial reporting makes the introduction of integrated reporting for these countries less likely in the short-term. There are some subtle differences in reporting between the private and public sectors, for example, with sustainability reporting. These differences will have to be accommodated as an integrated reporting framework is developed for the public sector. The motivation for sustainability reporting is different in that private sector reporting is generally driven by legal requirements and industry standards, whereas public sector reporting by national governments is often driven by domestic political pressure, international agreements, trading relationships, targets and the need to cut costs. In the private sector, sustainability reporting frameworks have relied on

PUBLIC FINANCIAL MANAGEMENT EXPERT, IMF Integrated reporting for the public sector has the potential to assist governments and public bodies with producing concise, transparent and meaningful reports which fulfil the information needs of all stakeholders. Public bodies around the world should seek to embrace it. Chair, ACCA Global Forum for the Public Sector considerations of supply chains and whole-life cost models and focus on the direct impact on the environment, society or the economy. The public sector’s conceptualisation of sustainability is somewhat different, as it considers sustainability in a holistic way, capturing existing reporting on actions, identifying the gaps and how it can contribute to the organisation’s central purpose. But sustainability reporting by governments has remained patchy, with some countries, such as Mexico and Sweden, including it in their national accounts and sustainable development strategies. Others, such as the UK, have taken a narrower stance, reporting on only environmental factors. But given the public sector context and the drive around the world for more transparency and for placing more data into the public domain, the introduction and the future development of an integrated reporting framework for the sector couldn’t be timelier. Governments and public bodies have a myriad of stakeholders, deliver complex services and continue to strive to report on service outcomes. Integrated reporting has the potential to instil a more holistic, disciplined and consistent approach to reporting on non-financial information and introduces new thinking on how to do business differently. The public sector should not be left behind by the private sector. A good example of how an integrated reporting approach can be applied is The Crown Estate, a pilot public body for the IIRC (see interview on page 30). However, it must be seen in the context that it is a body in a highly developed economy. Phillipe Peuch-Lestrade, deputy to the chief executive officer at the IIRC, quite rightly pointed out at ACCA’s International Public Sector Conference that for many public bodies in developing economies there is a lack of proper means to implement the necessary changes. The future adoption of integrated reporting will pose the biggest challenge for these countries. However, in both the developed and developing world there needs to be a shift in order to pass from a purely compliant, past-based reporting towards prospective reporting. This shift will allow for greater public understanding.

ACCA’s International Public Sector Conference featured the IIRC’s Phillipe PeuchLestrade and the World Bank’s Zinga Veener, along with many other speakers. You can view it at www. accaglobal.com/ ab37

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ACCOUNTANCY FUTURES: AUDIT FUTURE

The shape of things to come With regulators, standard-setters and investors all driving major changes to audit, the effects are being felt around the world, says Robert Bruce Unilever Group, which operates the biggest ice cream factory in Europe, moved an audit contract that had been held for 26 years by PwC to KPMG in anticipation of mandatory auditor rotation.

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ost-financial crisis, the world resembles nothing less than a vast jigsaw of regulators, auditors and investors seeking to bring about intricate, and not always connected, change. The European Union is moving to limit the length of tenure of auditors. The International Auditing and Assurance Standards Board (IAASB) is talking about changes to the audit report and the idea of disclosing more information on how audits are performed. The UK Financial Reporting Council has been either bold or jumped the gun, depending on your point of view, in saying that companies should put their audits out for tender every 10 years. In the US the Public Company Accounting

Oversight Board is consulting on audit reform including discussion of what it calls critical audit matters. India is looking at measures to provide for auditor rotation. At the end of 2013, accountancy firm KPMG picked up the audit of global giant Unilever from its rival PwC partly because the company, with its UK/ Dutch roots, was anticipating a forthcoming 2016 rule change in the Netherlands forcing a regular switch of auditors. The pace of change and the interconnecting consequences of the changes are influencing behaviours right around the globe and are likely to do so for years to come. â&#x20AC;&#x2DC;The biggest change is the exposure draft from the IAASB,â&#x20AC;&#x2122; says Shariq Barmaky, audit

ACCOUNTANCY FUTURES: AUDIT FUTURE

Sue Almond ACCA TECHNICAL DIRECTOR ‘The next few years will see enormous changes in the audit market. We are already seeing regulatory change bringing rotation of auditors and more tendering for audit appointments. But it is important to ensure that this results in greater effectiveness and not just an extra cost for business. Amid all this regulatory change, we must not lose our focus on audit quality and keeping audit relevant. The real challenge ahead is to achieve global collaboration in the development of audit, including in emerging economies where, in my experience, the value of audit is well recognised.’

Alex Fawcett WORLD BANK CENTRE FOR FINANCIAL REPORTING REFORM ‘Personally, I believe the confidence in the world of audit has gone. There is a need for a rethink on the audit report. Do we have to have one every year? Why not every three years? ‘To some degree the issue of rotation of auditors is cosmetic. Public interest entities will get closer to their auditors. The audit won’t be an annual statement; it will be a continuous process – little and often, rather than one big event. And that will push companies to report on a regular basis rather than pushing earnings to the one point in time, as many do now.’

Shariq Barmaky AUDIT PARTNER, DELOITTE SINGAPORE AND SOUTH-EAST ASIA ‘We need to look at the value of audit and how it will evolve. Currently it is an audit of historical financial statements; in future it may well go beyond that. In numerous jurisdictions we have quarterly reporting and I think in the future that will become continuous information or a very frequent basis of reporting. Stakeholders will demand this and we need to understand what the role of the auditor will be. ‘With audit thresholds rising, smaller companies are not in the audit band. We need to discuss what kind of assurance should be provided.’ Member of ACCA’s Global Forum for Audit and Assurance partner with Deloitte Singapore and SouthEast Asia and a member of the ACCA Global Forum for Audit and Assurance. ‘The proposed revisions to auditor reporting change the extent of reporting and communication.’ The changes echo calls from stakeholders. Brendan Murtagh FCCA, IAASB member and past president of ACCA, says: ‘There have been lots of calls for improved transparency and a greater level of understanding.’ BOTH SIDES OF THE EQUATION More information is likely to help both sides of the audit equation. Users should have much more meaningful information to work with. Auditors will be able to explain their concerns and the nature of their workload. Barmaky says: ‘Users will be able to see the most important matters which have been discussed with the auditors and that will help bridge the expectation gap. Users will see more issues than they have seen in the past.’ This should help the auditor community around the world.

The trick, as ever, will be making the information useful. Murtagh says: ‘The real challenge will be in years two and three of this degree of disclosure. After the initial implementation the next few years can be seen to be simply the same stuff and then it becomes boilerplate.’ The effects are being felt all around the world. Consistency, though, is not. Murtagh warns: ‘If we don’t have global convergence in standards there will not be commonality or comparability and to be without that would be very damaging.’ And there is the timing as well. The time that it takes to come up with a standard which can be accepted around the world is a lengthy one. Partly this is down to the complexity of markets and companies, but partly it is down to the process itself. Murtagh says: ‘One of the problems is the length of time a standardsetter takes. It needs to be timely enough. But it is a very big challenge indeed.’ And the degree of difference around the world can seem extraordinary. In one sphere there is

Robert Bruce is a financial journalist who writes regularly for the IAS Plus website. From 2007, he was writer to HRH the Prince of Wales’s Accounting for Sustainability Project and subsequently a member of its executive board.

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ACCOUNTANCY FUTURES: AUDIT FUTURE

a demand for assurance on non-financial work – introducing integrated reporting will prove a challenge, for example. And at the other end of the spectrum audit itself is under pressure. DEATH OF AUDIT Alex Fawcett, a team member of the World Bank Centre for Financial Reporting Reform, speaking in a personal capacity, says: ‘The auditing profession is dying in many countries of the world. When you look at medium-sized enterprises, those which are not public interest entities, the whole issue of pushing up the level of audit exemption combined with a high level of CPD is seen as a huge challenge along with the scale and cost of audit technology and software. In many countries we will see the audit profession disappear. State bodies will take over and the process then becomes compliance rather than pursuing a true and fair view.’ But the demand for credible, trustworthy information is set to grow exponentially. ‘There is a demand for continuous information,’ says Barmaky. ‘We are in a world of social media. In Singapore we already have quarterly reporting and it will become continuous or very frequent reporting.’ What gives people confidence is information on a regular basis, adds Fawcett. The audit world may think it has enough change on its plate already. But there could be much more to come.

Keeping watch on the horizon Scanning the horizon is an activity that comes high on the list of priorities for David Barnes, UK managing partner for public policy at Deloitte. Barnes (pictured above) is also chairman of the Policy and Reputation Group (PRG), a UK body that looks to ensure that public interest issues are at the heart of what the larger accounting firms think about and do. PRG represents the largest six UK firms, and admits representatives of accountancy bodies and the mid-tier firms as observers at its meetings. ‘It is a forward-looking body,’ Barnes says, ‘and it is there to help the largest accountancy firms to identify and respond to public interest issues. We try and look at the firms through the eyes of external stakeholders.’ It has been a turbulent time for the big firms with both the UK investigating the market for audit services and a European Union initiative to shake up competition in the audit business. Barnes says: ‘If you look back two years there was a lot of focus on those two initiatives. These processes have already resulted in enduring change in the audit profession with, for example, a clear increase in the number of tenders coming to market. Although the EU debate is still ongoing, I believe we now have an opportunity to move on. We are looking ahead at issues involving audit, tax and ethics, and also more broadly at the business and societal contribution that the big six firms make.’ On audit this will include contributing to the project which the UK Financial Reporting Council (FRC) has launched on the future of audit. ‘I recognise that the FRC needs to lead this project, but we have a lot to contribute to that debate,’ Barnes says. ‘We will be looking at both input measures like training and at external measures such as formal feedback from stakeholders like the chairs of audit committees on audit quality.’ Ethics is a large part of all this. ‘All the firms have the highest level of ethics but we need to ensure that this comes across in the ways we act and be able to explain this to the man on the Clapham omnibus.’ Barnes also wants PRG to do more work on what he refers to as societal interest. ‘The big six firms on average employ a new graduate every two hours. But we also need to look at what we can do about social mobility and so we are working to support initiatives on improving social mobility and the use of apprenticeships.’ And out on that horizon they need to be constantly looking out for issues which could affect the profession more broadly. ‘Our role is to ensure that we not only shape current thinking but also act as a catalyst to develop new thinking,’ he explains.

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ACCOUNTANCY FUTURES: AUDIT AUSTRALIA

Driving audit quality Professor Nonna Martinov-Bennie and associate professor Alan Kilgore of Macquarie University describe Australian CFOs’ perceptions of audit quality

he reputation of the audit profession has suffered over the past decade. Maintaining audit quality and restoring trust after the global financial crisis and corporate collapses has thus become a priority, with regulators introducing reforms aimed at re-establishing confidence in the financial reporting system. Policymakers have sought to improve the effectiveness – and perceived effectiveness – of audit (and auditors) with the introduction of regulatory changes such as the SarbanesOxley Act (SOX) in the US, the UK Corporate Governance Code and CLERP 9 in Australia, as well as reports such as the International Auditing and Assurance Standards Board’s (IAASB) A Framework for Audit Quality (2013); the Financial Reporting Council’s (FRC) The Audit Quality Framework (2008) in the UK; and Audit Quality in Australia – A Strategic Review (2010) from the Australian treasury. Research has shown that stakeholders’ perceptions of audit quality are critical to maintaining effective and efficient capital markets, and to building confidence and trust in financial reports which, in turn, is crucial for

the economic success of both established and emerging companies. It is also important for firms to deliver high-quality audit; it protects brand name, reputation and, importantly, the ability to attract new clients and retain existing ones. CFOs’ perceptions of audit quality are particularly important as recent research suggests that management continues to be the driving force behind auditor appointments and terminations. This makes the views of key members of the management team, particularly CFOs’ perceptions, very important. PURPOSE AND METHODOLOGY To examine what drives audit quality from the perspective of CFOs we conducted an online survey focusing on 10 audit quality attributes identified in prior research. These are summarised overleaf. The survey was conducted between May and June 2013 with Australian CFOs sourced from ACCA’s database. This interactive survey was designed to elicit CFOs’ ranking of the relative importance of each attribute in their assessment of audit quality.

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ACCOUNTANCY FUTURES: AUDIT AUSTRALIA

AUDIT QUALITY ATTRIBUTES AND THEIR OPERATIONAL DEFINITIONS Attribute Operational definition Audit firm size Big Four/mid-tier/local firm Audit partner tenure Duration of auditor-client relationship Provision of non-audit Percentage of NAS fees to audit services (NAS) fees Audit firm industry experience Industry specialisation Audit quality assurance review Audit quality control review Partner/manager attention Activity level of partner/manager to audit Communication between audit Nature and frequency of team and team and client management communication Partner knowledgeable about Years of experience in client client industry industry Senior manager/manager Years of experience in client knowledgeable – client industry industry Very knowledgeable audit team Years of experience in accounting and auditing

The relative importance of each audit quality attribute is measured by a relative importance score (RIS). RIS is a ratio indicating that an attribute with a score of 10 is twice as important as an attribute with a score of 5, so the higher the RIS, the more influential, or ‘valued’, the attribute. The results are shown graphically in Figure 1 (see opposite).

Professor Nonna Martinov-Bennie is director of the International Governance and Performance (IGAP) Research Centre at Macquarie University. She is a member of the Auditing and Assurance Standards Board (AUASB). Martinov-Bennie is also joint editor of Managerial Auditing Journal and associate editor (assurance and governance) of Australian Accounting Review.

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KEY FINDINGS Audit firm size This attribute is perceived by CFOs to be the most important driver of audit quality (RIS 15.13). A number of different explanations have been offered for the strong association between audit firm size and audit quality, namely that large firms: have a greater reputation at stake, which gives them an incentive to be more independent are able to give their clients’ financial statements a higher degree of credibility have greater resources at their disposal and so can attract employees with superior skills and experience, hence are better able to detect errors and generally provide a better service. Partner/manager attention to audit This attribute (RIS 12.50) concerns the level of control exercised over the audit process by the responsible partner. It was perceived by CFOs to be second only to firm size regarding its importance as a driver of audit quality. These results demonstrate that the majority of CFOs believe that close monitoring of the audit process by the audit partner has a beneficial effect on the audit team and hence on the quality it delivers.

* *

Provision of non-audit services (NAS) NAS is commonly regarded, at least by regulators, as a potential threat to audit quality because of its perceived effect on auditor independence. This attribute scored the third highest RIS (12.19), indicating that CFOs regard it as having the potential to influence audit quality significantly, and believe that when a higher percentage of fees are derived from non-audit services, a threat is posed to audit quality. Audit partner knowledge about client industry CFOs also attached importance to this attribute (RIS 10.21), ranking it fourth among the 10 attributes investigated. The positive association between this attribute and audit quality is consistent with the FRC’s Audit Quality Framework, which identifies the skills and personal qualities of audit partners as an important driver of audit quality. Communication between audit team and client management CFOs ranked this attribute fifth in importance (RIS 10.03) suggesting that CFOs perceive it to be of some significance for audit quality. Since the audit process frequently involves negotiation between auditor and client it is not surprising to find communication between audit team and client management being accorded some significance by CFOs as a driver of audit quality. Audit firm industry experience With an RIS of 9.98, this attribute received a middle-order ranking of its perceived importance. This result, to some extent, reinforces the results of prior research that industry experience enhances audit quality. The proposition here is that industry experience gives an auditor a better knowledge of the relevant industry, with consequent beneficial effects on their judgment and hence on the audit quality that they are able to provide. Audit manager knowledgeable about client industry This attribute (RIS 9.64) was perceived by CFOs to be less important for audit quality than the attribute ‘Audit partner knowledgeable about client industry’ (RIS 10.21). An explanation may derive from CFOs’ greater proximity to, and awareness of, the audit process, and the fact that they have direct dealings with both the audit manager and the audit partner. Very knowledgeable audit team CFOs ranked this attribute only eighth (RIS 9.13) among the 10 attributes investigated. These results indicate that CFOs in general attach only modest importance to this attribute and again reinforces the notion that this may be because of CFOs’ greater

ACCOUNTANCY FUTURES: AUDIT AUSTRALIA

proximity to, and awareness of, the audit process and more direct dealings with the senior members of the audit team, namely the manager and the partner. Audit partner tenure This attribute has the second-lowest RIS (5.96) – a clear indication that this is perceived by CFOs as relatively less important for audit quality. This is an interesting and significant result given the recent changes introduced by regulators and standardsetters in numerous jurisdictions. For example, the International Ethics Standards Board for Accountants Code requires that audit partners be rotated after a prescribed number of years, usually restricting a partner’s association with a particular client to seven years. This is an important finding, since CFOs are close and astute observers of their firms’ audit arrangements. Audit quality assurance review This refers to the perceived effect on audit quality of mandatory regular inspections by bodies such as the Australian Securities and Investments Commission and the Public Company Accounting Oversight Board in the US. The intent behind these external inspections is to reinforce public confidence in audit quality. Since these inspections are costly to audit firms, it is important to establish whether they are effective. This attribute received the lowest RIS, which suggests that initiatives of this kind are perceived by CFOs to be of relatively limited value.

The emphasis on ‘audit quality

IMPLICATIONS The CFOs’ perceptions of the importance of the surveyed attributes have significant implications for regulatory and professional bodies engaged in policymaking and should prove useful in informing regulatory and professional bodies when formulating future policies for promoting audit quality. First, audit quality assurance reviews are generally emphasised in regulatory frameworks as an attribute with significant

study suggests that making other attributes, and especially audit partner attributes, more publicly visible to existing and prospective clients may be a highly effective means of demonstrating and signalling audit quality. By emphasising these attributes, audit firms may be better able to differentiate themselves in the eyes of audit market participants.

consequences for audit quality. However, the CFOs surveyed perceived ‘Audit quality assurance review’ as the least important of the 10 attributes examined. The emphasis on this attribute by regulatory bodies may be misplaced, and should be reconsidered given the associated significant cost to audit firms. Second, regulators usually place the length of the audit partner’s tenure high on the list of attributes with a significant impact on independence and audit quality, but ‘Audit partner tenure’ received the second lowest RIS score, suggesting that CFOs perceive restricting tenure length to have relatively little importance. Third, the finding that, while the surveyed CFOs perceive both firm and team attributes to be significant drivers of audit quality, they place more importance on team attributes than firm attributes. The team attributes ranked in the top five are ‘Partner/manager attention to audit’, ‘Partner knowledgeable about client industry’ and ‘Communication between audit team and client management’. Finally, the findings of this study may also be of interest to firms wishing to promote themselves to potential clients. Despite the fact that audit market participants tend to rely on their assessment of quality attributes they can observe (for example, firm size), this

Associate professor Alan Kilgore is deputy head, department of accounting and corporate governance and deputy director, International Governance and Performance (IGAP) Research Centre, at Macquarie University. He is a member of the editorial advisory board and a guest editor of a special issue of Managerial Auditing Journal.

assurance review’ by regulatory bodies may be misplaced and should be reconsidered

FIGURE 1: AUDIT QUALITY ATTRIBUTE RELATIVE IMPORTANCE SCORES (RIS) Audit quality assurance review Audit partner tenure Very knowledgeable audit team Senior manager/manager knowledgeable Audit firm industry experience Communication between audit team and client Partner knowlegeable about client industry Provision of NAS Partner/manager attention to audit Audit firm size 0 2 4 6 8

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ACCOUNTANCY FUTURES: AUDIT ASIA

Happy to be here? A study of audit staff in Asia Pacific reveals dissatisfaction and lays out how firms can recruit – and retain – talent. ACCA’s Chiew Chun Wee explains

I Chiew Chun Wee is ACCA’s head of policy, Asia Pacific. He has worked in audit methodology and policy for a Big Four firm and has more than a decade of experience in public accounting in Singapore.

t’s not at all uncommon to find external auditors in many parts of Asia Pacific putting in long hours at work, and the profession is generally not expected to enjoy great work-life balance. In a few extreme cases, young professionals have reportedly died of overwork. As a result, the attractions of an audit career are not necessarily obvious to the new generation of talent with a different outlook in life. The motivation and quality of audit staff fundamentally affect audit quality, so talent management understandably ranks high among audit firms’ priorities. It was against this backdrop that ACCA undertook the largest and most in-depth survey of audit staff in three Asia Pacific countries in collaboration with the audit regulators in the respective markets – the Accounting and Corporate Regulatory Authority (ACRA) in Singapore, the Audit Oversight Board (AOB) in Malaysia and the Securities and Exchange Commission (SEC) in Thailand. The results of the three surveys provide audit practices with cross-firm and cross-market comparisons. They also offer a blueprint for actions for audit firm management for shaping their talent attraction and retention strategy.

HIGHLY VALUABLE CAREER In all three markets, staff see an audit career as valuable in professional development because of the extensive learning experience it offers. Auditors are given a ‘licence to be nosey’. Their work gives them an in-depth appreciation of the inner workings of their clients, and they rapidly acquire business knowledge in a range of markets and industries, identifying best practices as well as weaknesses in process and controls. In addition, audit staff clearly enjoy a great sense of comradeship with their colleagues (‘suffer and reap the fruits of labour together!’). In fact, in Malaysia, 86% of external auditors who responded to the survey said they enjoyed the nature of audit work. Yet only a low proportion of respondents said they were satisfied with their career in audit, and many intend to leave in the near future. In Singapore, for example, only 38% of staff were satisfied, with 65% planning to move on within three years. Many want to see fundamental changes.

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THE WHYS Much of the dissatisfaction stems from workloads outpacing rewards. Staff’s passion for audit has to compete with frustrations with work-life imbalance. Respondents felt their high workload was clearly and strongly connected to clients’ need to strengthen their financial reporting capabilities, and to pay fees that reflect the true value of an audit. Competition among audit firms is fierce, reducing auditors’ bargaining power. The knock-on effect is that audit clients sometimes get away with producing sub-standard work. This ultimately costs auditors time and effort and significantly impacts their productivity, motivation and job satisfaction. There is no silver bullet for this deep-rooted issue. Audit staff believe – and we agree – that the entire reporting ecosystem of preparers (clients), regulators and accounting industry at large needs to coordinate and work with the audit profession to raise the quality of reporting. And that game raising needs to start from the source – the preparers. From the perspective of the audit firms, engagement management needs to enforce the ethics of the profession up to the highest level. Constant communication between an audit firm’s engagement management and its clients is crucial to eliminate obstacles and prevent misunderstandings. Encouraging clients to improve their accounting practices and their understanding of financial reporting standards will expand clients’ competencies and raise the quality of financial reports. Audit staff also crave even greater involvement and leadership from engagement management throughout audits.

ACCOUNTANCY FUTURES: AUDIT ASIA

THEIR GREATEST ASSETS A common slogan of audit firms is that their people are their greatest assets. The assets think differently. When asked if they thought their superiors would try to understand their concerns and work to retain them if they decide to go, only 62% in Malaysia and 56% in Singapore answered ‘Yes’. Audit firms need to move beyond slogans and take concrete steps to show they value staff and are genuinely concerned about their wellbeing. Well-received initiatives include flexible working arrangements, sponsorship of further studies and professional qualifications, as well as recreational corners, bring-your-child days and gym access. The outsourcing of administration and routine tasks would enable audit staff to focus more on core, significant tasks. It would reduce working hours, raise productivity and alleviate work pressures. Other initiatives that are seldom available but yearned for by staff are 360-degree feedback and more structured and frequent job rotation within a firm’s different divisions. However, nothing is more critical than allocating jobs equitably and providing sufficient resources for each assignment. One major bank was recently reported to have put in place a no-work-on-Saturday rule for its junior bankers. This kind of move sends out an unmistakable message from the top that long hours are not encouraged, and that top management, in a word, cares. HAVE WINGS, WILL FLY In today’s globalised economy, a clear premium is attached to international experience, and audit staff get that opportunity by going on secondments. Secondment benefits include diversified work experience in terms of culture, working styles and an entirely different set of client portfolios. Some survey respondents thought a prolonged overseas stint would improve their communication skills, broaden their horizon, and enhance their CVs. In Singapore, almost all the male respondents under the age of 25 were keen on an overseas posting. In Thailand, 75% said they would take up such an opportunity, although some staff at mid-tier firms did not see such opportunities as being available to them. Firms would be better able to give employees what they want and to enhance their own attractiveness to talent by working more closely with overseas affiliated offices to explore more international staff exchange, including shorter-term arrangements. Only a fifth of respondents across all three markets said they aspired to make partner. The proportion dropped to a tenth for female

respondents in Singapore and Malaysia. The female-to-male ratio of audit staff is roughly 6:4 from entry to managerial level, but at partner level changes hugely to about 2:8. The relatively low proportion of audit staff aspiring to make it to partner could be in part a consequence of the profession’s worklife challenge. However, for those with the capability and will to attain the Holy Grail of the audit profession, firms should address what respondents saw as unclear partnership pathways and admission criteria. As regards the gender imbalance at the top, firms should consider whether their work arrangements are

conducive to family commitments (a factor that is equally applicable to male staff). Some respondents suggested showcasing female role models in a more pronounced manner and offering more targeted mentoring to earmarked female candidates. COMMUNICATION Audit firms need to create an engaging and open culture where employees have the confidence to talk about their well-being as well as career satisfaction. They need to ensure that staff concerns are dealt with transparently so that even if they are not completely satisfied, staff know those concerns are not merely swept under the carpet. The talent issues highlighted in the survey reports provide a good starting point. Talent management policies need to progress with time and be subject to rigorous fieldtesting to ensure they are fit for purpose. All efforts will pay dividends in time in the form of reduced staff costs and the elevation of audit quality. Read the Talent attraction in audit reports at www.accaglobal.com/ab45

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ACCOUNTANCY FUTURES: PUBLIC VALUE CORPORATE SOCIAL RESPONSIBILITY

Taking CSR forward Corporate social responsibility efforts must produce real results if they are to be sustainable, says PwC US’s Shannon Schuyler

obel-prize winning economist Milton Friedman once wrote that ‘the social responsibility of business is to increase profits’ and that any broader philanthropic goals were ‘hypocritical window-dressing’. It’s a view now shared by a shrinking minority. CSRHub, an organisation that compiles data on the issue, says that nine out of 10 companies worldwide with revenue exceeding $100bn a year now publish details of their social impact along with more traditional financial metrics. That’s a dramatic increase from a decade ago when just a handful of corporate giants did so. While the practice of corporate social responsibility (CSR) has gained significant visibility and acceptance as a core part of business strategy, it is still likely to expand, develop and change considerably over coming years, according to Shannon Schuyler, the leader on such issues at professional services firm PwC US. One possible development is that reporting will become even more prevalent. However,

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while Walmart, Microsoft and PwC are already on board, far fewer companies with revenues under $1bn attempt to document their impact on society and the environment. There are also geographical gaps. According to the European Commission, less than 10% of the largest companies in the region regularly produce sustainability reports. Moves to force more companies to do so are proceeding slowly in Europe. Even so, it is likely that many companies will decide to do so without prodding from government. ‘There is a growing appreciation that it is helpful for firms to catalogue their effort to have a positive impact on society,’ says Schuyler. PwC’s corporate responsibility reports, for example, document its progress in trimming its greenhouse gas emissions and report on its financial donations to charities and creation of a culture of giving. Staff are given the flexibility and opportunity to support their own causes as well. The methods by which companies seek to help society are also evolving, with technology presenting new opportunities. One focus at

ACCOUNTANCY FUTURES: PUBLIC VALUE CORPORATE SOCIAL RESPONSIBILITY

PwC US, for example, is encouraging financial literacy. The firm has set itself the five-year goal of providing $60m and a million volunteer hours to develop the financial competency of more than 2.5 million young people and educators. One current model for offering advice and tuition over the internet is Khan Academy, which provides thousands of free internet lectures on everything from maths and science to finance and art. The emphasis of CSR is also shifting from measuring just inputs – such as financial donations and volunteering hours – to attempting to verify how far these efforts genuinely help recipients. ‘The more you can measure these outcomes, the more you can fine-tune programmes to make them more effective,’ says Schuyler. In the case of its Earn Your Future financial literacy initiative, PwC collects data on which teaching approach and materials work best. More companies are embracing this approach. Lloyds Banking Group, for example, recently commissioned a consultancy to evaluate how far its CSR programmes actually helped communities and what the bank could do to make its money go further. ‘Corporate social responsibility isn’t just about making donors feel good,’ Schuyler says. ‘Unless these efforts are producing real effects, they are not sustainable.’ Unless companies can prove their efforts yield real results, they are vulnerable to Friedman’s critique that CSR is just window dressing. What’s more, measurement can build support for CSR initiatives from even the most sceptical financial manager. A paper by Harvard business professor Michael Porter, for example, showed how chemical company Dupont saved $2bn from making cuts in its energy use between 1990 and 2006. Meanwhile, the role of CSR chiefs within companies is likely to become more important. ‘So far this role within companies is relatively new,’ says Schuyler. ‘Over the coming years, it should become more integral to the way companies operate.’ In the same way that a CFO is involved in many key decisions across a company, the CSR officer should also play a more active role. For example, decisions on where a company buys its supplies have a financial component but they also have social and environmental implications. On the negative side, sourcing can damage a company’s reputation if the vendor employs environmentally destructive practices or neglects its employees’ welfare. By contrast, buying goods or services can also promote good practices or assist underprivileged communities. PwC, for

Shannon Schuyler Shannon Schuyler is PwC US corporate responsibility leader of the Americas and an officer of the board of the PwC Charitable Foundation. She graduated with an English degree from the University of Michigan and in 1997 was hired as a lead recruiter by the Chicago office of Coopers & Lybrand before it merged with Price Waterhouse to form what is now known as PwC. In 2005 she was appointed managing director in charge of alumni relations. In 2007 she wrote an internal white paper on the need to rationalise the firm’s philanthropic and ecological initiatives. A few months later she was appointed to her current position, coordinating the firm’s CSR projects. She spends part of her time advising the firm’s clients on socially responsible business operations. This consulting work has also led to her involvement in public policy as well as speaking engagements at the Social Innovation Summit and other conferences. example, has increased its spending with minority-owned suppliers and collects scorecards on the environmental records and conduct of its suppliers. One implication of this is that companies are developing a mutual monitoring network – with larger businesses putting pressure on suppliers to raise ethical standards. In addition, more companies are seeing CSR as a valuable tool in recruiting and retaining staff. ‘Staff turnover can be hugely costly for companies,’ Schuyler says. ‘More businesses will realise that CSR efforts can relieve this burden on human resources departments by fostering staff loyalty. Corporate responsibility touches on most areas of how a company operates. This importance will only grow in coming years.’ Christopher Alkan, journalist based in New York

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ACCOUNTANCY FUTURES: PUBLIC VALUE BUSINESS STRUCTURE

Matching form to function The ownership structure and accountability arrangements of a business must support the values and principles it professes, says a new study

unning a successful business, whatever its size, has always required a number of key proprietorial talents – a vision of the ultimate goal, an ability to design and deliver attractive and good-quality products or services, and the knack of keeping existing customers happy and attracting new ones as you go along. But according to a new report by UK thinktank Tomorrow’s Company, co-sponsored and supported by ACCA, a new factor has emerged that requires more attention, and that is the need for the business’s form and structure to be consistent with its activities. Businesses require a clear and inspiring purpose that employees and stakeholders can identify with. To make sure this vision is evident in all that the company does, selecting the most appropriate business form from a growing range of options is a critical decision. For the purposes of the Tomorrow’s Business Forms report, business form goes a lot wider than simply deciding whether to set up as a partnership, sole trader, limited company or something else. It is a combination of several elements: legal status, ownership structure, governance arrangements and accountability. Mark Preston, group CEO of property development and fund management group Grosvenor, says: ‘All too often business form is taken for granted. It’s not something companies think about or realise they need to make a decision on rather than taking it as a given.’ Problems can arise when purpose and form are not closely aligned. When UK care home operator Southern Cross collapsed following an aggressive push for growth financed by the sale of leases on its homes, many questioned whether a heavily geared private company structure was the most appropriate form for an organisation set up to provide long-term care for vulnerable people.

Then there is the growing public distaste for what are seen as the excesses of corporate life. A 2013 Ipsos Mori poll for the Institute of Business Ethics found that just 5% of British adults believe British businesses behave ‘very ethically’; 37% think they act ‘not very’ or ‘not at all’ ethically. Consumers increasingly want to feel that the companies they spend money with behave in a way that matches their professed values. There is a growing diversity of business forms in the UK. The John Lewis partnership model, where all staff of the retail chain have a financial stake in the business, is a wellknown alternative business form, but there are plenty of others. They include employee or family ownership, mutuals and co-operatives, private equity ownership, limited liability partnerships, social enterprises, trusts and listed companies. Sir Charlie Mayfield, chairman of John Lewis, says: ‘While no single form of ownership is right for every business, encouraging a greater plurality of ownership is a positive step in promoting staff engagement and longterm decision-making.’ A CHANGE OF FORMAT Grosvenor had been privately owned for over three centuries until it switched in 2000 to a devolved structure of wholly owned subsidiaries. The aim of the change was to motivate staff to make a lasting contribution in the countries Grosvenor invests in, in line with its commitment to a long-term approach. Belu Water was set up as a social enterprise in 2004 to use its profits from selling bottled water in the UK to fund clean water projects in developing countries. Similarly, Scotland’s Isle of Skye ferry is run by a limited company for the community rather than shareholders.

John Davies HEAD OF TECHNICAL, ACCA ‘The choice of business form is becoming an issue for a number of reasons. One is the process of globalisation, which is leading to demands for structures that facilitate crossborder activity. Another is the economic crisis, which is leading many national governments to look for ways to contract out the delivery of public services. Another still is the increasing level of interest shown by many consumers and stakeholders in how businesses organise and conduct themselves. This increasingly dynamic landscape is creating new interest in how form and structure help or hinder a business in achieving its objectives.’

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ACCOUNTANCY FUTURES: PUBLIC VALUE BUSINESS STRUCTURE

Utility Anglian Water is owned by a consortium of four investors. It emphasises collaboration to operate as efficiently as possible. ‘We have lots of stakeholders who all have different agendas and it’s all about how we respond and work with these entities,’ says Richard Boucher, business change and strategy director. Business forms can be chosen to motivate particular behaviours at work. TTP Group was set up by engineers and scientists to tackle client projects and speculative developments. All staff are shareholders, and TTP offers a range of schemes and loans for staff to buy shares. Group chairman Gerald Avison says: ‘This is not about incentivism. Rather it’s to do with sharing our strategy – it mirrors what we want people to do, which is to work as a team with a common goal.’ The B Corp concept, which originated in the US, offers independent certification for companies that meet rigorous standards of social and environmental performance, accountability and transparency. So far 850 companies worldwide have been verified by the scheme, including the UK’s global sustainability advisory firm One Stone. The B Corp is a public declaration that a business is meeting its wider responsibilities to society. Government is also encouraging different business forms for delivering public services,

Christmas spirit: window display at department store John Lewis in London. The UK retail chain’s partnership model gives all staff a financial stake in the business.

including public sector mutuals run by National Health Service (NHS) staff, and hospitals funded and operated by a mix of public and private partners. Care minister Norman Lamb says: ‘Government is making a real contribution to the debate as a regulator, as a provider of services and as a purchaser. What we need to see now is raised awareness of the diversity of business forms out there.’ NO GOOD VERSUS BAD David Hawley, Deloitte’s UK director of public policy, says: ‘There is no good versus bad model. It is what fits best with the business purpose.’ A lot depends on circumstances, and form needs to be kept under review. As a business changes, management needs to consider new structures to reflect how it operates and interacts with its stakeholders. Preston adds: ‘The aim is to put the question of business form high on the agenda for boards and government. It should be part of the language of good corporate governance and stewardship. Advisers, including accountants, should make sure they are showing clients all the options.’ Pat Sweet, journalist Tomorrow’s Business Forms can be found at www.tomorrowscompany.com

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ACCOUNTANCY FUTURES: TAX FAIRNESS

Tax and trust Taxation of corporates is in the good citizenship spotlight, says ACCA’s Chas Roy-Chowdhury, and the accountancy profession must respond accordingly

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

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usinesses are being pulled in opposite directions over corporate tax. On the one hand, directors have a duty to act in the best interests of shareholders, which is traditionally interpreted as maximising returns to them and keeping down costs, including tax costs. On the other hand, society expects businesses to pay a ‘fair’ share of taxes, not least to help restore the health of the public finances in the wake of the global financial crisis. Governments around the world are looking harder at the tax payments companies make and whether these seem appropriate in light of their profits. Business leaders therefore have to balance the demands of commercial reality and corporate social responsibility. They need to build profitable, sustainable businesses while understanding that the social responsibility profile of large companies is increasingly identified with their attitude to tax. Overly aggressive approaches to the minimisation of tax liabilities are not well received. Walking this tightrope is complicated by the complexities of accounting and tax concepts, and their interaction with modern business practices, particularly internet-based activity. Business transactions can often be interpreted in ways that result in very different tax outcomes. The difficulty businesses face in

working out whether a particular position reflects the law is exacerbated by the way governments increasingly try to blur the boundaries of acceptable behaviour. The tax environment is complicated yet further by the fact that businesses are increasingly global while tax authorities are national. CORPORATE TAXPAYERS’ RESPONSE Boards need to view their tax obligations as part of the process of building a sustainable business. They should not pursue aggressive tax avoidance – artificial arrangements with no clear purpose other than to avoid tax by complicated schemes. Although companies have a commercial imperative to maximise profits, they also have a wider responsibility to be good corporate citizens. Some approaches to tax may be technically legal, but may not be widely viewed as ethical. Decisions on tax policies need to be taken in the broad strategic context of what is best for the business in terms of sustaining its long-term value – and this includes issues of public perception. Greater transparency on how decisions on tax are made would also be useful. It could help defend corporate reputations from attack, while educating stakeholders, including the general public, in the complexities that surround corporate tax payments.

ACCOUNTANCY FUTURES: TAX FAIRNESS

Companies could review the disclosures they make about their total tax contribution. Businesses face a range of levies and taxes, direct and indirect, as well as corporate taxes. They also act as unpaid tax collectors, withholding and paying over significant employment and consumption taxes on behalf of tax authorities. Such activities contribute to the public good but are not widely recognised. THE ROLE OF TAX ADVISERS As the public and press criticism of businesses’ tax-paying record has grown, so their tax advisers have also come under scrutiny. Public perception is often that professional advisers must at least be complicit in the minimisation of corporate tax, and quite possibly the prime movers behind such behaviour. Tax advisers therefore need to consider their role, and the advice they provide to companies, carefully. Professional tax advisers have a duty to advise their clients on the full range of options for maximising profits. This recognises the fact that businesses are under no obligation to pay tax beyond the requirements of the law. However, professionals also have a clear duty to advise their clients on the risks associated with any tax policy – including the risk of reputational damage due to perceptions of unethical behaviour. Not to do so could expose professional accountants and tax advisers to accusations of professional misconduct. Tax advisers therefore need to apply their judgment and provide balanced advice. This should take account of the fact that tax is a cost to the business that needs to be managed alongside other factors affecting business success or failure. Tax liability will affect any business’s profitability and hence its ability to create sustainable value for shareholders.

Professional input is essential to ensure that tax decisions form part of the overall strategic management of the organisation. MOVING POLICY FORWARD There is an urgent need for policymakers to update tax laws to reflect modern business activity. Today’s tax rules struggle to capture the substance of economic activity in the calculation of tax liabilities. Policymakers should consider whether corporation tax can be made to work at all in the new global and digital business environment – or whether other ways of taxing businesses need to be developed. Policymakers in different countries need to coordinate their efforts to modernise the corporate tax system. The Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting, published in July 2013, looks at whether taxable profits can be allocated to locations other than those where the business activity takes place. The challenges raised by the digital economy are specifically being addressed. OECD members and G20 countries are participating in devising a workable tax system for global companies. Whatever the outcome of this project, policymakers should aim to develop tax laws that are clear, simple and certain. Businesses need certainty to plan future business activity. Tax laws that require extensive judicial interpretation are unpopular with businesses and advisers alike. Taxpayers also have rights, which must be recognised and respected. Above all, the tax laws that policymakers frame need to reflect the ethical framework that society wishes to have in place. Without this starting point, generating fair corporate tax revenues and rebuilding public trust will remain unachievable goals.

Tom Duffy FCCA PARTNER, AFFECTON ‘Tax is very often discussed in the abstract from wider company policies. It can also become a very complicated debate, based on technical discussions around interpretations of tax law. And of course it can be emotive, based on perceptions of what is a fair contribution. But taxation of corporates should be seen as part of a wider discussion on the economic value companies bring. In this world, companies have a purpose and a mandate to provide goods and services for their customers and by doing so create long-term value for society, their employees, themselves and their shareholders. But how they do this should reflect their remit to be good citizens and bring a wider value to society. Their approach to tax should be part of an overall strategy to enhance social and other capitals, taking into account the need to maximise financial capital. This means we should see tax alongside other meaningful contributions to society – employment, intellectual capital, a good environmental record, fair prices, etc. Boards of directors should ensure their tax policies are consistent with the values and reputation that the company wishes to embody. We also need to ensure that professional standards and ethics in accountancy keep pace with developments in tax practices. Business also needs to partner with policymakers to ensure tax laws help to sustain a business-friendly and competitive international economy while working for today’s global business models.’ Chair, ACCA Global Forum for Taxation

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ACCOUNTANCY FUTURES: TAX AUSTRALIA

Tax returns without toil ACCA’s Lei Xu reports on initiatives by the Australian Tax Office to improve the customer experience with a taxpayer-centric tax and transfer system

ustralia’s Future Tax System Review, informally known as the Henry Review, was published in 2010 to guide tax system reforms over the next 10 to 20 years. A key recommendation was to improve the client experience by introducing a citizen-centric design that allows taxpayers to deal with taxes and transfers at a time and in a way that suits their preferences and needs. Traditionally the tax and transfer systems operate separately and are regarded as overly complex. The citizen-centric design aligns the tax and transfer systems with those systems that taxpayers use for their own business purposes to generate the information required automatically. In 2013 the Australian Taxation Office (ATO) announced a series of initiatives recommended in the Henry Review. Combined with greater use of technology and better integration of processes, these initiatives should empower taxpayers to better understand and engage with the ATO in their tax and transfer affairs. E-TAX APP First released in 1997, E-Tax is a free ATO software application for preparing and filing individual tax returns online. In the 2010/11 tax year, 12.6 million Australians lodged income tax returns and 2.5 million of them used the E-Tax app – a 10% increase on the previous year. In 2013 the ATO spent A$5.2m to enable Apple Mac users to file their tax returns online for the 2012/13 tax year and over 300,000 Mac users did so. An ATO spokeswoman has confirmed that a future development will be a web-enabled online tax return service that could be accessed by most computer operating systems. In May 2013 the Australian Financial Review reported research that found nearly twothirds of Australians own a smartphone – an ownership rate higher than most other developed nations. In 2013 the ATO launched its first tax app for smartphones and tablets, ATO Tax Time 2013, to provide easy access to a range of services such as filing and tracking the progress of filed tax returns. This app is available free from the App Store and Google Play. The ATO

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is also planning to launch a superannuation app and more apps are to follow, especially in the small business area.

Lei Xu ACCA is technical manager at ACCA Australia and New Zealand. She represents ACCA on the Tax Practitioners Board Consultative Forum.

‘PUSH’ TAX RETURNS The Henry Review recommended that prefilled individual income tax returns be provided to most individual taxpayers as a default method. In 2011/12, there were around 12.4 million individual income taxpayers and income taxes levied on individuals in that tax year represented 39% of total tax revenue. In 2013 the ATO announced its intention to offer a ‘push’ tax return to as many as 1.4 million taxpayers from 2014. The ATO will send the return directly to the taxpayer with information routinely collected from third parties such as employers, financial institutions and share registries, and ask the taxpayer to confirm the information in the return (by ticking ‘Yes’ or ‘No’) and to put in any additional information. The push return reduces the complexity involved in filing a tax return as well as the expense of using a tax agent. The ATO estimates the push return will liberate around 4.5 million taxpayers from any significant response burden at tax time. Australia is not the pioneer of the push tax return. The OECD Tax Administration 2013 report indicates that in 2011 seven countries, including New Zealand, already provided a capability for most individual income taxpayers to generate a fully completed tax return. For example, since 2008 taxpayers in Denmark have received an assessment notice that lets them access online the detailed tax return data used to set their tax liabilities, and must advise the revenue body of any necessary adjustments. ONE ACCOUNT The Henry Review indicated that Australians want streamlined, integrated service delivery in their financial relationship with government. It suggested that an integrated tax and transfer client account would offer individuals convenient access to information about all their tax and transfer affairs, including income earned from various sources, taxes withheld and transfers received.

ACCOUNTANCY FUTURES: TAX AUSTRALIA

In May 2013, the government launched MyGov, a single online portal for social welfare services and other key services provided by the federal government. From early 2014, Australian taxpayers will be able to manage some simple tax affairs through this portal. The ATO estimates that around 1.4 million individual taxpayers could use MyGov to access a streamlined tax return for the 2013/14 tax year.

Paul Glover TAX PARTNER, PITCHER PARTNERS, AUSTRALIA ‘The ATO’s investment in technology and processes to improve its interaction with taxpayers should be applauded. The prefilled tax return in particular could save many taxpayers significant time and tax agent costs each year. However, a standard deduction for work-related expenses and the cost of managing tax affairs is required.’

Allastair McGillivray FCCA ASSOCIATE DIRECTOR, RBC CAPITAL MARKETS ‘It is good to see the ATO embrace modern technology in dealings with taxpayers. However, as well as manage resources to keep pace with technology, there is the challenge of managing the possible perception of taxpayers that it is using technology to take an increasingly Big Brother approach to their financial affairs.’

STANDARD BUSINESS REPORTING SBR is a government initiative to reduce the regulatory reporting burden on business. It provides a single reporting language, a single secure log-on for business, and the SBR online gateway to allow two-way flow of information between government and business. Businesses can use SBR-enabled accounting software with automatically filled-in information to prepare and file reports with government agencies. In Australia, SBR has been available for business use since 2010 with the initial implementation focused on financial and payroll reporting. SBR simplifies the process for SMEs to meet their tax and reporting obligations as the standard chart of accounts will automatically generate the required information. By using XBRL (eXtensible Business Reporting Language), which allows data to be re-used internally for value-add activities of analysis, review, reporting and decision-making, SBR also provides opportunities for large businesses to improve their internal reporting and realise internal efficiencies. Practitioners such as bookkeepers and business activity statement (BAS) agents have been early adopters as SBR can eliminate the rekeying of data from clients and reduces input errors from manual entry. In the 2012/13 tax year, there were nearly 150,000 filings through SBR, about seven times more than the previous year’s total. In 2013 the ATO introduced standards for all superannuation transactions, boosting the use of SBR. Between July and September 2013, there were more than 750,000 transactions, the vast majority of which were superannuation transactions. SMALL BUSINESS ASSIST Small Business Assist is an online service launched in July 2013 for both new and established businesses on a broad range of topics. It is available 24 hours a day, seven days a week. If taxpayers type in a query, a tailored response is automatically provided in real time displaying all requested information, including articles, ATO videos and calculators.

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ACCOUNTANCY FUTURES: SMALL BUSINESS FUNDING

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ACCOUNTANCY FUTURES: SMALL BUSINESS FUNDING

Info trove: Chinese online giant Alibaba extends loans to businesses that use its e-commerce platform, assessing the credit risk by analysing the payment data they generate in their trades.

Open sesame! As bank financing for small and mid-size businesses has dried up, so a slew of innovative funding models have appeared. Rosanna Choi explains PG85 EDITION 08

ACCOUNTANCY FUTURES: SMALL BUSINESS FUNDING

nstability is the mother of invention and the years since the global financial crisis have seen a burst of innovation in the way that funding is channelled to small businesses. In part, this reflects the welldocumented problems in the banking systems of developed countries. There are, though, other factors that have resulted in an unusually fertile period for financial innovation. They cover everything from the spread of affordable technologies for distributing financial products to the greater availability of new sources of creditworthiness data on companies and the growth of private electronic payment systems. In an effort to better understand the range of developments that are under way in different parts of the world, ACCAâ&#x20AC;&#x2122;s Global Forum for SMEs commissioned UK-based researcher Andy Davis to examine a range of emerging

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Rosanna Choi FCCA is chair of ACCAâ&#x20AC;&#x2122;s Global Forum for SMEs, an ACCA Council member, former chair of ACCA Hong Kong and a partner at CPA firm CWCC.

innovations in SME finance. As well as describing some of the new models, the report examines the main trends and obstacles. The innovations come in many forms. Some, like the lending operation set up in 2010 by the giant Chinese e-commerce platform Alibaba, tap into a range of important trends. Alibaba offers loans to merchants that sell via its platform, using its extensive cash resources to fund businesses excluded from conventional bank lending because of a lack of collateral and an absence of adequate credit data. Because Alibaba operates its own payment system, it is able to assess credit risk by using the payment data generated by potential borrowers as they trade via its platform. The proprietary payment data is combined with sophisticated analysis to turn an unbankable group of small businesses into

ACCOUNTANCY FUTURES: SMALL BUSINESS FUNDING

a new lending market, which to date has seen more than US$2bn advanced. Alibaba is an example of a large non-financial company moving into SME lending as an extension of its main business. Elsewhere, retail investors have started to lend directly to companies and take equity stakes via online crowdfunding or peer-to-peer platforms â&#x20AC;&#x201C; essentially web-based matchmakers that bring savers and borrowers together. A large number of these businesses are launching across Europe and the US as the regulation that governs their operations becomes clearer and investors search for higher yields than bank deposits and bond markets offer. The key innovation that underlies these new matchmakers is their creation of online marketplaces in which loans and investments are assembled from multiple funders who

The growth of private electronic payment systems is one of the wider trends that underlie the innovations in SME financing. Here a man is performing a transaction using his mobile phone at an M-Pesa service outlet in Kenya.

compete to advance funding. For companies in the UK, platforms such as Funding Circle (loans) and Crowdcube (equity) offer new ways for SMEs to raise finance. SMEs benefit further from the competition such platforms stimulate among would-be investors and the ability to diversify the risk inherent in an exclusive relationship with a single finance provider, whose loyalty cannot be guaranteed. The ability of such innovators to find a market depends on the willingness of borrowers to transact online rather than face to face. This trend provides a foundation for much current innovation and has its precedent in the markets for such standard financial products as sales of car insurance in some countries. While supply chain finance (SCF) practices have been in place for over a decade, innovative structures have emerged. In addition to buyer managed platforms and bank proprietary platforms, multibank platforms have drawn growing interest. On multibank platforms, SMEs that are accredited suppliers to big buyers can offer their invoices for sale to a panel of financial buyers in return for immediate access to working capital. Tools are also emerging to make this financing technique more easily deliverable in practice â&#x20AC;&#x201C; for example, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the International Chamber of Commerce launched the new payment method under the Bank Payment Obligation (BPO) standard in April 2013 to make crossborder SCF transactions easier to undertake for banks. Together, tools and techniques like these have great potential for improving access to finance among SMEs but, as with all the innovations our report considers, there are barriers to be overcome before the full benefits will be felt. Chief among these is the general lack of financial education among SME owners and managers. Many are unaware of the range of options now available to them to fund their businesses and how they work in practice and whether they might be appropriate. Also, uncertainty around the regulatory treatment of financial innovations is another important barrier. Access to finance is an issue of pressing importance for SMEs. The current surge of financial innovation is gathering momentum and small businesses need to be able to keep up, both in terms of awareness as well as financial literacy, to ensure compliance with the relevant rules and regulations. Innovations in access to finance for SMEs is at www.accaglobal.com/smallbusiness

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ACCOUNTANCY FUTURES: SMALL BUSINESS CORRUPTION

The cost of bribery ACCA’s John Davies and Rosana Mirkovic investigate how bribery affects SMEs and how accountants can help them to manage the risk

ribery is a long-standing feature of human society that occurs in all countries, business sectors and walks of life. It is, however, almost everywhere a crime and not, as some would argue, a victimless crime, especially since it affects the poor disproportionately. Recent research by the anti-corruption think-tank Transparency International has found that: In seven countries in sub-Saharan Africa, 44% of parents had paid illegal fees for schools that were legally free to their children. In several developing countries, the urban poor were found to be paying between five and 10 times more for their water supplies than the rich were paying for piped water. In Pakistan, 43% of respondents reported receiving demands for bribes when dealing with local government, 69% when dealing with the judiciary, and 84% when dealing with the police. Bribery and corruption worldwide are clearly deeply rooted and substantial in scale. And, in common with other forms of financial crime, the incidence of both is widely considered to have increased in recent years because of the harsh economic conditions in much of the world. Companies and individuals experiencing very challenging business conditions may be motivated to engage in practices they know to be wrong so they can stay in business or stay in their jobs. According to a survey by EY published in 2013, nearly half of workers questioned across Europe, the Middle East, India and Africa think that bribery and corruption are acceptable practices to survive an economic downturn. The issue has a special resonance for the accountancy profession, which stands for transparency in the financial management of enterprises. The financial statements that businesses produce for shareholders, regulators, banks and others, and which are invariably prepared by accountants, are expected to reflect fairly and accurately a business’s assets, liabilities and transactions over the period under review. The function of auditors in reporting on a set of financial statements is to provide an expert independent opinion on whether they have been properly prepared on that basis.

John Davies FCIS is head of technical at ACCA. He coordinates ACCA’s policy positions on technical matters and has a special interest in business law and financial crime issues. He is the staff expert on ACCA’s Global Forum for Business Law.

Rosana Mirkovic is head of SME policy at ACCA. She is a member of the Enterprise Diversity Alliance and the staff expert on ACCA’s Global Forum for SMEs.

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* *

They also have obligations under technical standards and the law to take remedial action when they come across signs of criminal behaviour. Accountants too have a professional obligation to comply with ethical standards in the course of their work and to work in the public interest. Governments in several countries, including the UK, have acted to deter and prosecute acts of bribery by introducing stricter legislation. The UK’s Bribery Act 2010 made companies of all types and sizes liable for prosecution if they don’t introduce effective internal procedures and controls to prevent individual acts of bribery being committed by any employee, subsidiary or agent, wherever in the world they commit those acts. This means companies that do business in the UK, and UK businesses that trade internationally, are obliged to ensure their group structures and supply chains are equipped to resist pressures to pay or receive bribes. STIFF SANCTIONS The introduction of tighter legislation has been accompanied by a greater commitment on the part of regulatory authorities to impose heavy sanctions against those individuals and companies found guilty of bribery. In the biggest case of its kind so far the German engineering company Siemens was fined $800m by the authorities in the US. To the financial cost of being found guilty in such cases can be added the likely cost of longterm damage to the company’s reputation in the marketplace. While a significant amount of attention has been devoted to the problem of bribery and corruption in the public sector and large private company sector, ACCA has identified a lack of focus on the SME sector, which nevertheless makes up the major part of the economy in all countries. As a result, we still have a very limited picture of how the issue affects SMEs. When ACCA published its original research on this topic in 2007, it was clear that the evidence was patchy, yet interest was nevertheless high due to the legal developments at both global and national levels. International organisations, such as the Organisation for Economic Cooperation and Development (OECD) and the United Nations,

ACCOUNTANCY FUTURES: SMALL BUSINESS CORRUPTION

as well as numerous national governments were keen to address the needs of the sector more explicitly. Despite this, six years on and a major global financial crisis hopefully behind us, we are still largely in the dark on how bribery affects SMEs, how small business owners perceive this threat, and, ultimately, how they cope with it. To improve awareness and understanding, in July 2013 ACCA surveyed its members across the world who work as accountants or general managers in SMEs or in public practice providing them with professional services, and received 915 responses. Some of the headline findings certainly justified our interest in this area. The majority (62%) of respondents believe that SMEs are likely to encounter the risk of bribery and corruption in the course of their business dealings, and that this risk has increased in recent years. And one-third believe that the global financial crisis has left

businesses more prepared to misstate figures in their annual accounts. Despite this, our findings also reveal a concern that many SMEs are not taking the right steps to mitigate the risks of exposure to bribery and corruption. And there may be good reason for this as less than half of our respondents believe that SMEs generally understand the legal definition of bribery and corruption in

Police stand guard at a peaceful protest against bribery in Tunis in 2012.

The majority of respondents

believe that SMEs are likely to encounter the risk of bribery and corruption their jurisdiction. When considering that many SMEs conduct business across borders in multiple legal environments, this uncertainty can have a big impact on how they are able to cope with the risk. Our survey respondents

Alison Hubbard PARTNER, PINSENT MASONS, DUBAI ‘A key challenge for businesses operating globally is compliance with a myriad of regulatory regimes – both of their home jurisdiction and the jurisdictions in which they operate. The US Foreign Corrupt Practices Act and the UK Bribery Act have become global benchmarks, and are forcing businesses to tackle the issue head-on in some challenging environments. Beyond these benchmarks, businesses operating in the Middle East also need to be mindful of local anti-corruption laws as local governments take steps to meet international standards.’

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ACCOUNTANCY FUTURES: SMALL BUSINESS CORRUPTION

in Central and Eastern Europe appear to have most confidence in SMEs understanding the legal definition. This confidence was lowest in the UK, with less than a quarter of respondents believing that SMEs generally understand the legal definitions of bribery and corruption, despite the introduction of the Bribery Act in 2011, and significant efforts to raise awareness of its implications by policymakers. The lack of legal certainty may account for so many respondents (44%) saying they are not convinced that the risk of sanctions deters SMEs from doing business with some sectors or countries, while one-third believe it is not a deterrent at all. And this brings us to one of the most interesting findings in our survey: SMEs support a legal framework that applies the same standards to all organisations in combating bribery, and want no truck with modified anti-bribery legislation for SMEs. Coupled with the finding that over three-quarters of respondents believe highprofile prosecutions would be most effective in helping SMEs to reduce their exposure to bribery and corruption risk, it shows that a strong legal framework, visibly enforced, is viewed as a priority by SMEs in the interests of a corruption-free business environment that works for businesses of all sizes. ADVICE NEEDED This leads us to some important conclusions. Despite recognising that bribery poses great challenges to them, many businesses in the SME sector feel vulnerable and in need of advice on protecting their interests. As in other aspects of business life, SMEs will rarely if ever have the in-house resources to produce their own customised solutions to issues such as this. There is a role here for accountants in public practice to advise their clients on how to manage bribery risk. The report offers some broad guidance to SMEs (and practising accountants) on how they can put in place compliance programmes at minimal cost. The clear majority of accountants working in the SME sector appear to accept that there is a sound business case for adopting policies

Bribery: distorts fair competition, penalising honest businesses and perpetuating inefficient business practices unfairly diverts funds that rightly belong to shareholders or citizens into private hands risks jeopardising economic growth by deterring businesses from investing in or trading with particular markets and sectors (a survey of 350 businesses worldwide by Control Risks found that 35% of companies had been deterred from an otherwise attractive business investment opportunity because of the host country’s reputation for corruption).

and practices that aim to combat bribery. A business that is committed to the adoption and implementation of anti-bribery policies and practices, and is able to demonstrate that it has done so, will be in a better position to do business with those large companies and public sector bodies that are obliged to follow such policies and practices throughout their supply chains. While there were some regional differences in the responses on this particular issue, respondents overall feel that SMEs should not be subjected to more lenient expectations on this issue than larger businesses. That said, the report makes the point that the controls adopted by smaller businesses to combat bribery need not be as all-encompassing and expensive as those adopted by larger businesses and should aim to be proportionate to the risks that the business actually faces. National governments need to take a strong lead in demonstrating to businesses that a culture of bribery damages the commercial reputation of a country, deters investment and allows inefficient business practices to continue. Where laws exist to criminalise and prosecute bribery, these should be enforced rigorously. Where they do not, serious consideration should be given to introducing them. The survey suggested significant support too for the introduction of whistleblowing arrangements to provide channels for those with information about wrongdoing to be able to pass that information on. The full restoration of trust and confidence in the business sector can be achieved only when stakeholders believe that business is being conducted fairly and transparently. By adopting a values-based approach, businesses can help themselves and, indirectly, help to achieve the wider goal of enhancing confidence in the business sector as a whole. Accountants, who have twin responsibilities to give best advice to their employers or clients and an obligation to act in the public interest, have a major part to play in this process. The full results of ACCA’s survey can be found at www.accaglobal.com/ab44

Chama Kamukwamba FCCA MD, MSI MANAGEMENT CONSULTANTS, SOUTH AFRICA ‘Lowering anti-corruption standards for SMEs would be tantamount to saying if you do not like my principles, then I have others… ‘Bribery and corruption damage lives and deprive generations of their fair share of economic prosperity simply because they have no respect for merit, remove incentive for innovation and discourage hard work, which are all necessary for economic development. ‘Corruptor and corruptee are two sides of the same offence. Applying different regulations based on an entity’s size is discriminatory and counterproductive in combating the scourge.’ Member of ACCA’s Global Forum on Business Law

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ACCOUNTANCY FUTURES: DIVERSITY AUSTRALIA

International dynamic Diversity brings a richness and breadth of experience to the team and fosters a sense of community, says Sarah Alder FCCA, CFO at Australian News Channel

arah Alder FCCA, CFO at Australian News Channel and responsible for Sky News Australia’s financials, sees herself as a translator for the business, understanding what the business wants to do before translating it back into financials. At board level, she says, ‘you move it back into words to get your ideas across. Accounting is the bloodstream of the business and I am a kind of doctor, taking the pulse.’ To do that, she heads a team of seven. In the past, it was not always easy to recruit the right staff: ‘The qualification and skillset were not always commensurate with what you were having to pay.’ Since then the availability of candidates has improved dramatically, thanks to Australia’s strong economy. ‘A lot of Australians who were working in London have returned and, since many people are suffering from the economic doldrums in Europe and the US, plenty of talented people decided to do something different and come to work in Australia.’ Being based in one of the strongest economies in the world, companies such as Sky News do not have to offer special packages to lure people to Australia. ‘We have great food, great weather, great beaches, low-density population and people value that,’ says Alder. As a result, Alder has mainly hired locally so far. Recruiters might advertise abroad but Sky News does not because it’s simply not necessary. Nevertheless, Alder’s diverse team includes staff with French, British and Chinese backgrounds and who have worked in Europe, the US and in Australia. ‘We have that international dynamic,’ she says. ‘It’s good for the team; it creates a richness and breadth of experience and a communality.

Sarah Alder Once an opera singer, now CFO of Australian News Channel, Sarah Alder FCCA moved from the UK to Australia in 2002. In the UK she had been working as an auditor in insurance and investment management at PwC, London. Her first job in Sydney was as a financial accountant at Lumley Life, followed by a stint as internal auditor at Australian wealth management company AMP. Between 2004 and 2006 she led an IFRS (International Financial Reporting Standards) implementation project at News Limited’s head office. She became CFO of Australian News Channel in 2006. The company is an equally owned joint venture of Nine Digital (a division of Nine Entertainment), Seven Media Group and British Sky Broadcasting.

That, by the way, is typical of Australia.’ She has had nothing but good experience with such candidates in the past few years, she says. Alder arrived in 2002 from London. ‘I assimilated very easily, even if the Australian workplace can be a bit more direct. Alder has a lot to say about the local ‘no nonsense, get the job done’ attitude. ‘In accounting, calling a spade a spade helps enormously.’ Life and work are good in Australia, Alder feels. And even if Julia Gillard [former Australian prime minister] had to give her famous speech on sexism and misogyny in Australia, she herself has never run into gender-based trouble. ‘I don’t see myself as being defined by my gender.’ She adds: ‘While there is clearly still a current issue with the level of representation of women in business at a senior level, particularly on boards, there are good men out there who do support women in business. I believe that with this type of support, along with women believing in themselves because of what they offer as individuals, things will continue to change.’ Barbara Bierach, journalist based in Sydney

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ACCOUNTANCY FUTURES: DIVERSITY INEQUALITY

Pay levels and pecking orders At the top of the salary pyramid, women are closing in on pay equality, but their prosperity is often built on a largely female underclass of domestic workers

here is good news and bad when it comes to the equal treatment of women at work. The good news is that elite females have been catching up on their male counterparts – including in professions such as accountancy. The bad news is that this has been made possible only by the reinvention of the ‘female servant’, according to Alison Wolf, author of The XX Factor and a University of London professor. ‘There has been a great deal of ink spilled about the gap between the 1% and the rest in recent years,’ she says. ‘But it has gone largely unnoticed that the best-educated women have been pulling away from their less fortunate sisters.’ Not all agree that women have been making strides towards equality. Overall, in the US women still earn only 81% of the median male salary, according to the Bureau of Labor Statistics. An imposing gap also remains in the UK. At the very apex of the earnings spectrum, women are also still in a small minority. Sheryl Sandberg, Facebook’s chief operating officer, has pointed out that women still account for less than a tenth of America’s best-paid executives.

The long journey: commuters in New York’s Grand Central Station.

‘The greater freedom

and prosperity of this top tier has been possible only because of an expanding underclass of modern servants’ Still, these crude figures conceal considerable progress, Wolf believes. While women haven’t fully secured equal footing in the C-suite, they do now account for half of the top 2% of US earners. Wolf says: ‘A large overall wage gap conceals a far narrower difference for younger women. Salaries of older women in top professions still often reflect the negative impact of years of discrimination. Educated younger women, however, are entering the labour market on a far more equal footing with men.’ This trend is reflected in the accounting profession. The IMA (Institute of Management Accountants) reckons that women in their 20s

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earned 90% as much as men last year, while women in their 50s earned just 77% as much. Even so, it appears that the wage gap is narrowing for all age groups. Lee Shiffel, a professor of accounting at Valparaiso University who led the IMA survey, says: ‘Compared with two years ago, the total compensation is larger by US$8,500 for women and by US$7,500 for men.’ Sue Almond, technical director at ACCA and a former partner at accounting firm Grant Thornton, says: ‘It is hard to describe how much the profession has changed over the past decades. Not only are women better represented in the profession, many of the skills at which they often excel are more recognised. Accounting no longer just rewards the more macho tasks of winning new business, but also the softer skills like team building.’ PARTNER COUNT MOUNTS Women have also made progress in the top ranks, with the share of female partners climbing from 1% in 1989 to around 20% at present, according to the American Institute of CPAs. ‘There still needs to be greater representation of women at the top,’ Almond says. ‘That means more mentors for young women coming up the ranks. Even so, a lot of progress is being made on that front too.’ There are also more female role models in broader financial roles. Safra Catz, CFO and president at Oracle, was the best-paid female executive in 2012; she took home an imposing US$51.7m – about five times more than chief executive of BP Bob Dudley, for example. And Irene Rosenfeld, CEO and chairman of Mondelez International, took home US$28.8m in 2012. More broadly, women have been seeing a bigger boost to their earnings than men. The median salary for college-educated females in the US, adjusted for inflation, is up 28% since 1979, compared with a rise of 17% for men. There is, however, another side to such encouraging and overdue developments, Wolf believes. ‘The greater freedom and prosperity of this top tier has been possible only because of an expanding underclass of modern servants. These women have taken over the duties of caring for children and the elderly as well as performing other domestic chores.’

ACCOUNTANCY FUTURES: DIVERSITY INEQUALITY

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ACCOUNTANCY FUTURES: DIVERSITY INEQUALITY

Around 97% of workers employed in childcare are women, research by the Carsey Institute at the University of New Hampshire shows. And the pay and conditions of such workers has been falling behind. One result of this is that women are twice as likely as men to be earning no more than the minimum wage, figures from the Congressional Research Service show. On its own, growing female inequality might not translate into broader social inequality. ‘If more men were staying at home while highearning spouses brought home the bacon, then the overall income gap might not be

Sheryl Sandberg, chief operating officer of Facebook, speaking during Reuters’ Global Technology Summit, has pointed out that women still account for less than a tenth of America’s bestpaid executives.

While the number of

house-husbands is increasing, less than 4% of US families have stay-at-home dads rising so fast,’ explains Wolf. ‘In reality, there is not much sign that this is happening.’ While the number of house-husbands is increasing, less than 4% of US families have stay-at-home dads, the Census Bureau calculates. The result is that the incomes of high-earning families are supercharged – with two big and growing salaries. There is increasing concern that this growing gap between rich and poor is economically damaging. For a start the rich tend to save more of their income and spend less. ‘Lower consumption often means less employment and slower economic growth,’ says Bob Williams, an economist at the Urban

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Institute in Washington DC. ‘A partner at a Big Four accounting firm, for example, will usually be spending a far lower share of their income than a school teacher.’ Meanwhile, a glut of savings risks inflating asset bubbles – leading to excessive volatility in equity markets, commodities or house prices. Economists like Williams also fear that high-income inequality is becoming selfperpetuating, leading to a less meritocratic society. ‘Wealthy couples are increasingly able to put their children at a huge advantage relative to equally talented and intelligent children from less affluent families,’ he says. There is no simple solution to such problems, Wolf admits. ‘Until we have a childcare robot, we will need an army of workers to take care of the offspring of elite women,’ she says. ‘Not everyone can be engaged in higherearning professions.’ That said, she believes that governments can mitigate income inequality. ‘Better education for all won’t reduce the number of women in low-paying jobs,’ she says. ‘But it does help ensure that it is not just the daughters of wealthy families who have access to the highest-earning jobs.’ Meanwhile, higher taxes on the rich could fund better social services to make life easier for women in less remunerative professions. As gender inequality narrows, the irony is that governments may have to work even harder to prevent a further widening of the gap between rich and poor. Christopher Alkan, journalist based in New York

ACCOUNTANCY FUTURES: ECONOMICS CASH

Money, money, money Economist and broadcaster Tim Harford explains why burning a million pound notes isnâ&#x20AC;&#x2122;t necessarily the senseless waste it might at first seem

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ACCOUNTANCY FUTURES: ECONOMICS CASH

n 22 August 1994, two retired musicians, Bill Drummond and Jimmy Cauty, flew to Jura, in the Inner Hebrides off the west coast of Scotland. They brought with them a cameraman, a journalist (Jim Reid of the Observer) and 20,000 £50 notes, bundled and tightly wrapped in plastic bags. A million pounds. (It’s worth about £1.5m or $2.5m in today’s money.) Drummond and Cauty had, it is said, emptied their bank accounts to put the money together. In the early hours of the next morning, the four men travelled to a remote boathouse, and with the rain hammering down outside, Cauty and Drummond made a small pile of these bundles of notes while the others acted as witnesses. Drummond and Cauty stripped out a £50 note each, lit them with a cigarette lighter, and set the rest of the money ablaze. When the dense blocks of cash would not catch, they pulled out the notes three or four at a time, crumpled them and threw them on the fire. The whole job took a couple of hours. WHAT A WASTE! You think so? Plenty of others thought so, too. Drummond and Cauty, formerly of the hugely successful band The KLF, caused outrage. They saw their action as an artistic statement. The art world didn’t seem to agree. What most people did agree on was that whether motivated by art, a desire for attention, or some rock-and-roll sense of excess, Cauty and Drummond had committed a dreadful waste of resources. The Observer article in which Jim Reid described what he witnessed finished with a list of what £1m could have bought, including

Tim Harford is a senior columnist for the Financial Times. His writing has also appeared in Men’s Health, Esquire, Forbes, New York Magazine, Wired, the Washington Post, the New York Times, the Guardian and the Sunday Times. His previous books include The Logic of Life, The Undercover Economist and Adapt, Why Success Always Starts With Failure. Harford is a visiting fellow at Nuffield College, Oxford. He also presents the popular BBC Radio 4 show More or Less and Pop Up Ideas.

They pulled out the

notes three or four at a time, crumpled them and threw them on the fire ‘RWANDA – 2,702 kits which will feed a total of 810,810 people’ and ‘HOMELESS – B&B accommodation for 68 families for one year in London or 106 families outside London’. When Drummond and Cauty appeared as guests on a television chat show, Ireland’s The Late Late Show, hosted by Gay Byrne, they got a hostile reception as they discussed their ‘art’. There were sharp questions from Byrne, and the studio audience were furious at the senseless destruction. Couldn’t the men have given the money to a good cause instead? Drummond protested: ‘If we’d gone and spent the money on swimming pools, Rolls-

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Royces, I don’t think people would be upset. It’s because we’ve burned it that people are upset. And I know that this is a kind of corny thing to say and it doesn’t really stand up but seeing as you’re talking about the charity angle ... us burning that money doesn’t mean there’s any less loaves of bread in the world, any less apples, any less anything. The only thing that’s less is a pile of paper.’ At that point, Byrne challenged Drummond and said that there could have been more apples or bread in the world if they’d used the money wisely. The audience applauded Byrne and jeered Drummond as he tried to continue. YOU’RE GOING TO TELL ME BYRNE WAS WRONG AND DRUMMOND WAS CORRECT. AM I RIGHT? You are indeed. The simplest way to see that is to ask how much it would have cost the Bank of England to print £1m to replace what Drummond and Cauty incinerated. Based on what I can glean from the Bank of England (who are slightly coy but say it’s ‘a few pence’ per banknote) and from information published by the US Federal Reserve, the cost of printing 20,000 £50 notes would have been no more than £2,000. When Drummond said that his own argument ‘doesn’t really stand up’, he was mistaken; it stands up perfectly. And when he said that he hadn’t destroyed bread or apples, only paper, he was absolutely right. All he and Cauty had destroyed was £2,000 worth of paper. In fact, far from committing a senseless waste of resources that could have gone to the needy, Drummond and Cauty had made a little gift to every one of their fellow countrymen. Instead of being outraged, people should have been thanking them. THANKING THEM? FOR WHAT? Think about what happens every time the Bank of England prints extra banknotes. If there’s not enough demand for goods and services to match the potential supply (and if sticky prices prevent adjustment), then the extra money should mean more demand for existing resources at the same price. But if people are already demanding everything that’s being supplied in the economy, then prices will have to rise instead. Flip the scenario round. If Drummond and Cauty were burning money in an economy already suffering from deficient demand then they were making a bad situation worse. (Even then, the Bank of England could push a button at any time and reverse the damage, at a printing cost of a couple of thousand pounds.) But if, as is more likely, Drummond and Cauty were burning money in an economy

ACCOUNTANCY FUTURES: ECONOMICS CASH

where supply and demand balanced out, the resulting effect is simple to describe: average prices in the economy would drop. They wouldn’t drop much, it must be admitted. Drummond and Cauty burned £1m at a time when there were £18,000m of notes and coins in the hands of private individuals and companies. That number fluctuated by hundreds of millions of pounds from month to month. So the effect of Drummond and Cauty’s ‘art’ was probably undetectable. Still, it was there in principle: something that cost £180 would, on average, have its price lowered by one penny as a result of the money burning. By shrinking the money supply by £1m, Drummond and Cauty had effectively given £1m away, in the form of slightly lower prices, to everybody in the world who owned some British pounds. WHAT A SHAME DRUMMOND DIDN’T CALL YOU FOR SOME MEDIA TRAINING I doubt that would have helped – it’s a counterintuitive case to make. The fundamental problem is that when we think about money,

This article is an extract from The Undercover Economist Strikes Back (Little, Brown). UK readers can buy the book at the special price of £10.99; call 01832 737525 and quote LB181. Offer ends 30 June 2014.

we instinctively think about individual purchasing power – about all the things that we could buy if we had that money. But from the point of view of society as a whole, things don’t work like that. Drummond and Cauty destroyed £1m worth of their purchasing power. But they didn’t destroy £1m worth of society’s resources. Logically speaking, if you destroy your own purchasing power, but not society’s purchasing power as a whole, then you must have given your purchasing power away – which is exactly what Drummond and Cauty did. If you’re going to be in charge of an economy, you need to get out of this instinctive habit of thinking about ‘money’ as being equivalent to ‘things you could buy with the money’. For an individual, it is; for a society, it’s not. As PJ O’Rourke once said, micro-economics is about the money you don’t have, while macro-economics is about the money that the government is out of. And that’s a different kind of money altogether. Copyright © Tim Harford 2013

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ACCOUNTANCY FUTURES: NEWS IN BRIEF

Rise of the CFTO

Honorary members

Greater reliance on technology could lead to the rise of the chief financial and technology officer (CFTO) in 2014, said ACCA and IMA (Institute of Management Accountants) at the start of their CFO month in January. The annual campaign aims to champion the work of the CFO role, as well as raising awareness of the challenges and opportunities CFOs face now and in the future. Helen Brand, ACCA chief executive, said: ‘ACCA and IMA’s futures research in 2013 has pointed to greater technological involvement for CFOs across the world. Their involvement in big data (see page 62) and technology (see page 40) trends is critical to business growth and profit. As CFOs take on a more strategic and globally-focused outlook within business, technology will loom larger in their remit. ‘Cyber security, cloud technology, virtual and augmented reality, digital service delivery and even artificial intelligence and robotics are featuring more and more in business strategy. CFOs are agents of change within today’s businesses. Who would have thought 10 years ago that these trends would become part of the CFO role? They are and will continue to be so. We could see the rise and rise of the CFTO as a regular seat on the board.’

ACCA has made two significant awards of honorary membership. Ian Ball, former CEO of the International Federation of Accountants (IFAC) and Professor Bob Eccles, senior lecturer at Harvard Business School, were presented with their honorary memberships at a joint ACCA Council and International Assembly dinner at the Royal Society of Arts in London. ACCA president Martin Turner said that Ball gained the honour for his contribution to the development of the global profession and championing the cause of improving financial management in the public sector. Eccles gained his award for his contribution to developing the thinking behind integrated reporting (see page 20). Turner said: ‘Both Ball and Eccles have made significant contributions to the development of the profession around the world. They have progressed and promoted the profession, while also forging ahead with new thinking on accountancy and business.’

Access articles, reports and resources on the role of CFOs at www.roleofcfo.com View the CFO month video at www. accaglobal.com/ab49

Council in Dubai The ACCA Council, comprising senior members from around the world, will be holding its annual meeting in March 2014 in Dubai – with additional meetings in Bangladesh, Pakistan, Oman and Sri Lanka to further ACCA’s relationships and partnerships across the region. Issues of discussion will include the demand from employers in MENASA for complete finance professionals – accountants who can work along the financial value chain who are well placed to be strategic leaders, ensuring organisational stewardship and compliance. Developments in corporate reporting and women in finance will also be high on the agenda. A MENASA edition of ACCA’s Accounting and Business magazine will be available from March at www.accaglobal.com/ab

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Professor Bob Eccles (top) helped to develop integrated reporting while Ian Ball (above) has championed public sector financial improvements.

Syllabus changes Improvements have been made to the ACCA Qualification to meet the needs of employers through updating the content of the global syllabus and ensuring newly qualified members have the skills and knowledge to be complete finance professionals. A wide range of changes have been made across the syllabus in areas such as professionalism and ethics, strategy and innovation, and financial management. Integrated reporting will be included from December 2014. For more on the changes to the syllabus, go to www.accaglobal.com/ab40

Admission to AEG ACCA has been admitted to the Business and Industry Advisory Committee’s Associated Experts Group (AEG), the voice of the business community in the Organisation for Economic Co-operation and Development (OECD). The BIAC acts as an independent international business association devoted to advising government policymakers at the OECD and related forums. ACCA is committed to engaging and advising policymakers at national, EU and international level on a broad range of global issues.

ACCOUNTANCY FUTURES Editor Chris Quick chris.quick@accaglobal.com +44 (0)20 7059 5966

ACCOUNTANCY FUTURES

Editorial board Stephen Heathcote

Managing editor Lesley Bolton Sub-editors Dean Gurden, Peter Kernan, Jenny Mill, Eva Peaty, Vivienne Riddoch Design manager Jackie Dollar Designer Robert Mills Production manager Anthony Kay

Executive director – markets

stephen.heathcote@accaglobal.com

Jamil Ampomah Market director –

Sub-Saharan Africa jamil.ampomah@accaglobal.com

Sue Almond technical director sue.almond@accaglobal.com

Europe kathy.grimshaw@accaglobal.com

May Law Market director – Asia Pacific

chunwee.chiew@accaglobal.com

John Davies head of technical john.davies@accaglobal.com

Andrew Steele Director – corporate development andrew.steele@accaglobal.com

ACCA offices* *

afra.sajjad@pk.accaglobal.com

* *

Aziz Tayyebi head of international development aziz.tayyebi@accaglobal.com

* *

Dr Afra Sajjad head of education, emerging markets

stephen.shields@accaglobal.com

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

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Andrew Leck Market director – Americas

Stephen Shields Director of global

employer relationships

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

Lucia Real-Martin Market director – emerging markets lucia.realmartin@accaglobal.com

may.law@accaglobal.com

andrew.leck@accaglobal.com

Chiew Chun Wee head of policy, Asia Pacific

Electronic and iPad versions of Accountancy Futures are available at www.accaglobal.com/futuresjournal

stuart.dunlop@accaglobal.com

Kathy Grimshaw Acting market director –

Stuart Dunlop Market director – MENASA

*ACCA HEADQUARTERS 29 Lincoln’s Inn Fields, London, WC2A 3EE, UK +44 (0) 20 7059 5000 PG99 EDITION 08

ACCOUNTANCY FUTURES I EDITION 08 I 2014

ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 08 I 2014

FROM ALGORITHMS TO ACTIVISTS

CORPORATE REPORTING AND THE DIVERGING DEMANDS OF INVESTORS

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